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Edited Transcript of PLNT earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Planet Fitness Inc Earnings Call

Newington Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Planet Fitness Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Rondeau

Planet Fitness, Inc. - CEO & Director

* Dorvin Donald Lively

Planet Fitness, Inc. - President & CFO

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Conference Call Participants

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* John Edward Heinbockel

Guggenheim Securities, LLC, Research Division - Analyst

* John William Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Jonathan Robert Komp

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Joseph Nicholas Altobello

Raymond James & Associates, Inc., Research Division - MD & Senior Analyst

* Jungwon Kim

Cowen and Company, LLC, Research Division - Research Associate

* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

* Peter Jacob Keith

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Rafe Jason Jadrosich

BofA Merrill Lynch, Research Division - Associate

* Randal J. Konik

Jefferies LLC, Research Division - Equity Analyst

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

* Sumit Sharma

Joh. Berenberg, Gossler & Co. KG, Research Division - Former Analyst

* Brendon Frey

ICR, LLC - MD

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Presentation

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Operator [1]

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Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Second Quarter 2019 Earnings Call. (Operator Instructions) Thank you. Brendon Frey with ICR, please go ahead.

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Brendon Frey, ICR, LLC - MD [2]

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Thank you for joining us today to discuss Planet Fitness' second quarter 2019 earnings results. On today's call are Chris Rondeau, Chief Executive Officer; and Dorvin Lively, President and Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Planet Fitness' website at planetfitness.com.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Planet Fitness' judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness' business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our second quarter 2019 earnings release, which was furnished to the SEC today on Form 8-K as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements whether a result of new information, future events or otherwise.

In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today.

With that, I'll turn the call over to Chris Rondeau, Chief Executive Officer of Planet Fitness. Chris?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [3]

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Thank you, Brendon, and thank you, everyone, for joining us today. We delivered another quarter of strong results, highlighted by system-wide same-store sales growth of 8.8% and adjusted earnings per share of $0.45, an increase of 32.4% over the prior year period. Our same-store sales performance was once again primarily volume-driven as approximately 75% of the increase came from net new member growth. On a 2- and 3-year stack basis, comps are up 19% and 28%, respectively.

Planet Fitness' judgment-free, affordable approach to fitness continues to resonate with consumers. We added approximately 400,000 net new members during the second quarter to end the period with more than 14 million members, an increase of approximately 16% over last year. We also opened 53 new franchise locations in Q2, ending the quarter with 1,859 stores system-wide as our group of sophisticated, well-capitalized franchisees continue to successfully execute their expansion plans.

Planet Fitness continues to leverage its size and scale and capitalize on current real estate trends and dominate the markets where we operate. A perfect example of this is our partnership with Kohl's. We are tracking to open 5 new Planet Fitness stores adjacent to existing Kohl's locations by the end of 2019 with more to follow in 2020. Four of the 5 stores are set to open this year are franchise locations while 1 is a new corporate store.

One highlight from me from the second quarter was the kickoff of the Teen Summer Challenge. I could not be more pleased with the results we've seen since nationally rolling out this initiative, which invites teens ages 15 to 18 to work out for free in our 1,800-plus locations in the U.S. and Canada from May 15 through September 1. On top of our 14 million members, approximately 900,000 teens have signed up for this program and completed over 4 million workouts. Not only have we introduced members of Gen Z to our brand, we believe we have also made meaningful impact on making teens healthier this summer at a time when teens' physical activity significantly declines due to decreased access to organized sports and fitness. Providing youth with free access to fitness not only helps teens get active and increase their overall health and wellness, we believe it is also a great opportunity for the long term to build brand loyalty and affinity with this demographic.

In addition to introducing teens to Planet Fitness, the Teen Summer Challenge has also enabled us to introduce their parents to our brand with approximately 75% of teen sign-ups coming from non-PF households. And from mid-May through July, more than 30,000 parents have joined Planet Fitness with limited marketing efforts. With a few weeks left of summer remaining, we look forward to encouraging as many teens as possible to keep up the great work and supporting them in their fitness journey.

Now for a brief update on our technology initiatives. We plan to officially launch version 1 of the mobile app this month. We have soft launched it internally within our system and segments of our member population over the past few months with significant positive feedback on the enhanced features of functionality, such as ability to upgrade our classic White Card membership to Black Card membership, workout tracking and new features like custom workouts. We look forward to building upon that functionality in future releases and continue to enhance our members' experience.

Looking ahead, in September, we have our system-wide franchise conference with more than 1,300 franchisees and team members expecting to attend. We conduct these meetings biannually and between our smaller franchise gatherings as an opportunity to strengthen our relationships with our franchisees and harness our collective momentum; get our system excited about our strategy and what lies ahead for the brand; to engage on a variety of topics, including marketing, development, technology, operations, training, recruitment and more. It always proves to be an educational, fun and inspiring event, and I look forward to spending time with both our franchisees and our team members on the front lines of our business each and every day.

In closing, it's been a strong first half of 2019 with Q2 marking our 50th consecutive quarter of positive same-store sales. More Planet Fitness locations opened during the first 6 months than any year in our history. Our passionate franchisees are increasingly eager to reinvest in expanding their footprint, evidenced by the increased in projected new store openings to a range of 250 to 260, up from our previous outlook of approximately 225. We've added close to 1.5 million net new members since January 1. We've provided free fitness to approximately 900,000 teenagers to date across the country. At the same time, we delivered significant top and bottom line growth and generated significant free cash flow which provides the company with great financial flexibility.

I am proud of the tremendous work being done across our system by our franchisees, our corporate staff and store team members. Their efforts have me excited about what's in store for Planet Fitness over the remainder of 2019 and the longer term.

I'll now turn the call over to Dorvin.

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [4]

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Thanks, Chris. Good afternoon, everyone. I'll begin by reviewing the details of our second quarter results and then discuss our full year 2019 outlook. For the second quarter of 2019, total revenue increased 29.3% to $181.7 million from $140.6 million in the prior year period. Total system-wide same-store sales increased 8.8%. From a segment perspective, franchisee same-store sales increased 9% and our corporate store same-store sales increased 5.8%. Approximately 75% of our Q2 comp increase was driven by net member growth with a balance being rate growth. The rate growth was driven by a 100 basis point increase in our Black Card penetration to 61.5% compared with last year, combined with the $2 increase in Black Card pricing for new joins that was put in place system-wide on October 1, 2017. During the quarter, the increased Black Card pricing drove approximately 200 basis points of the increase in same-store sales.

Our franchise segment revenue was $71.8 million, an increase of 23.5% from $58.2 million in the prior year period.

Let me break down the drivers for the quarter. Royalty revenue was $48.9 million, which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $38.3 million in the same quarter of last year, an increase of 27.7%. This year-over-year increase had 3 drivers: first, we ended the quarter with 239 more franchise stores compared to the second quarter of last year; second, as I mentioned, our franchisee-owned same-store sales increased 9%; and then third, a higher overall average royalty rate. For the second quarter, the average royalty rate was 6%, up from 5.5% in the same period last year driven by more stores at our current royalty rate, including stores that have amended their franchise agreements.

Next, our franchise and other fees were $4.2 million compared to $4 million in the prior year period. These are fees received from online new member sign-ups, the recognition of fees paid to us for new franchise agreement -- area development agreement and the transfer of existing stores and fees received from processing dues through our point-of-sale system. Also within franchise segment revenue is our placement revenue, which was $5.1 million in the second quarter compared with $3.1 million a year ago. These are fees we received for the assembly and placement of equipment sales to our franchisee-owned stores within the U.S. During the second quarter of 2019, we placed equipment in 50 new stores compared with 38 in the year ago period. Our commission income, which are commissions from third-party preferred vendor arrangements and equipment commissions for our international new store openings, was $1.1 million compared to $1.6 million a year ago. And then finally, our national advertising fund revenue was $12.5 million compared to $11.2 million last year.

Our corporate-owned store segment revenue increased 15.9% to $39.7 million from $34.3 million in the prior year period. The $5.4 million increase had several drivers, including the 12 stores opened or acquired since the first quarter of last year, corporate-owned same-store sales increase of 5.8% and increased annual fee revenue.

Turning to the equipment segment. Revenue increased by $22 million or 45.7% to $70.2 million from $48.1 million. The increase was driven by higher replacement equipment sales to existing franchise-owned stores and higher new store equipment sales versus a year ago. Our cost of revenue, which primarily relates to the direct cost of the equipment sales to the new and existing franchise-owned stores, amounted to $54.4 million compared to $36.7 million a year ago, an increase of 48%, which was driven by the increased equipment sales during the quarter.

Store operation expenses, which are associated with our corporate-owned stores, increased to $20.2 million compared to $18 million a year ago. The increase was primarily driven by costs associated with the 12 stores opened or acquired since the first quarter of last year.

SG&A for the quarter was $18.9 million compared to $17.2 million a year ago. This increase was primarily related to incremental payroll to support our growing franchise operations and our infrastructure. National advertising fund expense was $12.5 million, offsetting the aforementioned NAF revenue we generated in the quarter. Our operating income increased 33.7% to $65.3 million for the quarter compared to operating income of $48.8 million in the prior year period, while operating margins increased approximately 120 basis points to 35.9% in the second quarter of this year.

Our GAAP effective tax rate for the second quarter was 22.2% compared to 23.3% in the prior year period. As we stated before, because of the income attributable to the noncontrolling interest and not tax at the Planet Fitness corporate level, an appropriate adjusted income tax rate would be approximately 26.6%.

On a GAAP basis, for the second quarter of 2019, net income attributable to Planet Fitness, Inc. was $34.8 million or $0.41 per diluted share compared to net income attributable to Planet Fitness, Inc. of $25.9 million or $0.29 per diluted share in the prior year period. Net income was $39.8 million compared to $30.4 million a year ago. On an adjusted basis, net income was $42 million or $0.45 per diluted share, an increase of 26.6% compared with $33.2 million or $0.34 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude nonrecurring expenses and reflect a normalized tax rate of 26.6% and 26.3% for the second quarter of 2019 and 2018, respectively. We have provided a reconciliation of adjusted net income to GAAP net income in today's earnings release.

Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain noncash and other items that are not considered in the evaluation of ongoing operating performance, increased 31.1% to $76.5 million from $58.4 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release.

By segment, our franchise segment EBITDA increased 24.5% to $49.9 million driven by royalties received from additional franchisee-owned stores not included in the same-store sales base and an increase in franchise-owned same-store sales of 9% as well as a higher overall average royalty rate. Our franchise segment adjusted EBITDA margins increased by approximately 20 basis points to 69.7%.

Corporate-owned store segment EBITDA increased 23.7% to $18.1 million driven primarily by the 5.8% increase in corporate same-store sales, higher annual fees, the 4 franchise stores we acquired last August and 4 new stores opened in 2018. Our corporate stores segment adjusted EBITDA margins increased by approximately 180 basis points to 46.5%.

Our equipment segment EBITDA increased 46.4% to $16.8 million driven by higher replacement equipment sales to existing franchise-owned stores and higher new store equipment sales versus a year ago. Our equipment segment adjusted EBITDA margins increased by approximately 10 basis points to 23.9%.

Now turning to the balance sheet. As of June 30, 2019, we had cash and cash equivalents of $330.5 million compared to $147.8 million on the same date last year, an increase of 123.7%. Total long-term debt excluding deferred financing cost was $1.2 billion at June 30, 2019, consisting solely of our whole business securitization.

Now to our full year 2019 outlook. For the year ended December 31, 2019, we are adjusting our guidance as follows: total new store equipment sales will be in the range of 250 to 260 new stores, up from approximately 225, including approximately 25 international new equipment sales; same-store sales will be approximately 8%, in line with our previous guidance of high single digits; total revenue will increase by approximately 18%, up from approximately 15%; total adjusted EBITDA will increase by approximately 22%, up from approximately 20%; adjusted net income will increase approximately 20%, up from approximately 18%; and adjusted EPS will increase by approximately 26%, up from approximately 25%.

Now we will turn the call back to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from John Heinbockel with Guggenheim.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [2]

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So a couple of things, Chris. Let me start with you guys for a while there had purposely held unit growth down, I think because you thought real estate was going to get better. Clearly, the system can handle more openings, right, financially and operationally. Is this sort of a shift in the algorithm, right, where the 250 to 260 goes 270, 280 and then to 300 and so on? Or is this a blip that you don't see repeating?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [3]

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I think I'd answer that and Dorvin can add to it. I think from our last call in Q1, I think as we continue to say, the sophistication within the franchise system, whether it's private equity involved or just more sophistication within the current franchisees adding to their own infrastructure, with the 230 we opened last year and the 225 we approximated this year, I think we're seeing more of that benefit.

Is this a little bit more than we probably would have expected? Yes. But I think it's evident by the commitment to the brand and the model and really the sophistication they've built that it's -- they couldn't be more excited about the brand, and I think it's a great momentum that we're seeing for sure.

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [4]

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Yes. I think, John, the other thing I'd add is that we've talked about over the last -- probably in the last 12 months or so how we've added incremental resources to really assist the franchisees. And that's -- it's kind of in all facets. But one thing which I've mentioned on different calls is how we put real estate people in the field where we're not -- if you go back maybe 3 or 4 years ago, we were basically letting franchisees bring sites to us that we would approve. And in many cases, we would decline sites. And you've heard us talk about that.

I'd say over the last 12 months or so, under the leadership of Ray Miolla, our Chief Development Officer, we start to -- we've put more boots on the ground where we're working with the commercial real estate brokers for the landlords, REITs, et cetera. And at the same time then, the franchisees, to Chris' point, have invested more resources as well because many of these guys are larger and they have territories kind of spread out.

And so I think it's the collective efforts of all 3 groups. It's us, it's the franchisees and then, just frankly, it's the brand awareness of the national brand where you have people like Kohl's, which we've talked about in the past, and others that reach out that 4 or 5 years ago, they weren't. We weren't the #1 call on the list when something was coming up. So I think it's a combination of those. The private equity-backed guys as well as some of the larger guys clearly have the capital to be able to invest. And a lot of it is timing. It's coming down to finding those great locations. But the environment's as good as it's ever been in terms of finding real estate. And we feel good about the pipeline.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [5]

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And just as a follow-up to that. How do you guys think about the balance between you -- or the franchisees, right, between densifying some of these markets, driving more total membership and maybe accepting a little bit of cannibalization of existing clubs. That trade-off, obviously, that drives system-wide sales and the marketing flywheel. I assume that's a good trade-off, right? And you're okay with a step-up in cannibalization, is that fair?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [6]

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I think what we're seeing and the franchisees are seeing with more analytics and data is that -- and we keep kind of using the same thing, is the more we open, the more we can open. And in markets that we expected more cannibalization years ago that we may have not approved a site, call it 3, 4, 5 years ago, today, we look at very differently than we had back then in the sense that we've learned a lot more in the last few years. I figure we'll open upwards of almost 500 stores. In the last couple of years, we've learned a lot when we approved every site and have a data on every site. So I think the franchisees as well as us are just more comfortable densifying these markets.

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Operator [7]

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Your next question comes from Randy Konik with Jefferies.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [8]

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So I just want to kind of come back to the densification of the markets. When you look at the data, is there any kind of way to think about potentially instead of thinking about -- traditionally, the thought process has been opening more stores near each other, there's more potential cannibalization. But if we've learned something from, I don't know, Starbucks or other names, the idea has been more about the closer you're to the consumer, where they work or live, you actually kind of grow the market. So ex, I guess, the New Hampshire market, is there kind of evidence to kind of suggest that, that you're almost actually gaining more consumers that would potentially go to your box because they're -- you're that much more closer to where they potentially live or work. Any kind of evidence or data you're seeing on that dynamic?

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [9]

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Yes. I think, Randy, it's -- we're still early in the game in some markets versus in others, to your reference of maybe New Hampshire or maybe even like Massachusetts where we have a lot of stores and started up in this area. But there's clearly markets where -- you've heard us talk about it where we might have 4% or 5% of the market penetration today in a decent metropolitan area. But in other markets, we may only be at 2.5%.

And so it's a combination then of literally getting closer to people as well as then building out, I guess, I would say, in markets where -- we're not at 80% or 90% of it, but we're getting more in the market from a market planning perspective that then provides for more opportunities for Black Card usage, the reciprocity, et cetera. And so then there is some of that kind of home or work or meeting your friends to work out, et cetera. But it's still a combination of both. I mean there are markets where we're sitting here realizing there's still a lot of stores that can be built where there's a significant amount of population that we're not within a 12-, 15-minute drive time because still you have 80% of population don't have a gym membership.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [10]

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That's helpful. And if we think about amenities, one thing that has started to kind of pop up on the radar is it seems to be there's more and more announcements of partnerships between Planet and other third parties, if you will, where there's all these benefits that Black Card or even all Planet Fitness members can kind of share. And so what are the learnings of -- any kind of statistics or data that show that's increasing in engagement or utilization on a more frequent basis of the Planet gym? I guess what I'm trying to get at is are you starting to see the increase of amenities? I'm sure you're getting a lot of inbounds of people want to work with you, third-party brands that want to associate with Planet. It seems like there's an opportunity to increase that engagement, further reduce potential churn over time. Just curious on how you're trying to think about strategically utilizing these partnerships to either increase that engagement or reduce churn over a long period of time.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [11]

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Yes. We've looked on some studies that there's one thing that members are looking for is content to what is in club, out of clubs, that stuff we are investigating and with the launch of the app this week actually. We'll get the ability to pipe in that ability.

But you're right on like we just did a recent partnership with Interval where Black Card members get a discount on vacations, which is outside of really fitness and wellness, but it is giving a Black Card member other benefits and perks just for being a member (inaudible) like AAA; 3-month trial on Audible, which you've seen once in a while as well; and Reebok discounts we've done a long time.

So we are getting a lot more inbound calls. And I think it's our size and scale now just opening more and more doors for us, which is great because it's something the competition is so far behind that they're not going to have -- probably have that ability. So I think any way we can give our members more experience and more benefits, the better for value.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [12]

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Okay. Last question, I guess, for Dorvin. One question we get a lot of is people thinking about the differential in return characteristics on the, I guess, the smaller-box format versus the regular box. Kind of anything can you share on any differentials you see and any learnings from some of these different box sizes that you can share? As I think the market can get really comfortable about these smaller boxes really taking hold, it really gives the market potential thought process of many more thousands of units being able to be put through the system both domestically and even potentially internationally. Just curious there.

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [13]

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Sure. I mean we have a number of locations that -- and some of them are older stores that we've had for a while, but clearly in the last couple of years or so where we've gone into cities that are, call it, under 40,000 to 50,000 in population within a 15- to 20-minute drive time versus kind of the traditional, more metropolitan, suburban locations that have a lot of population. And one of the initiatives we're working on is can there be a different size box in some of the smaller towns and then, therefore, less capital invested, more than likely fewer members per store but yet still get that economic return that someone's willing to invest the money to build out those stores.

And I think that what we're seeing is that the return is there. And it will be obviously dependent upon over time on whether -- what's the right size of box. Because we want the brand that we put out there today as a Planet Fitness store that's got the reciprocity benefit, it's got the other things that we think drive value, particularly in selling our top membership. We want you to be able to still have some of that look and feel albeit maybe in a smaller box. And I think in some cases, population and size could drive it to a point of where maybe it doesn't represent the brand we want it to be.

So that's what we're working on today and looking at some different size configurations. Most of all of our boxes we've built in the last couple of years in the 20,000-square-foot box, but we've built some smaller than that. We've built some in the 15,000 range. We've built some even smaller than that.

I think at the end of the day, we'll probably circle around -- somewhere around 10,000-square-foot box is probably on the small end. And you're probably going to need in that, call it, 30,000 to 40,000 population to be able to drive that -- or to be able to drive the kind of return. And the one thing that's different is drive times because if we're in a suburban Atlanta or Chicago or Dallas, we'd be looking at, call it, a 12-minute drive time, whereas you get into some of these outlying smaller towns, it may be a 20- to 30-minute drive time that makes it work because people are driving 25, 30 minutes to go to a grocery store or go to a drugstore.

So those are the things we're looking at. And the franchisees that are building those stores, and we have a couple of corporate stores, the returns are -- they fit the profile of someone wanting to invest in it. I guess I'll put it that way.

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Operator [14]

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Your next question comes from Sharon Zackfia with William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [15]

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A couple of questions. I think you were testing an increase to the Black Card pricing and just wondering what you saw from that and whether or not you're planning on rolling out any kind of increase to new members later this year or early next.

And then secondarily, on equipment, Dorvin, if you wouldn't mind letting us know kind of what percent was replacement versus new units. And I think at one point, you had said that you expected equipment revenue to be down in the fourth quarter. I didn't know if that was still the case.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [16]

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Sure. Sharon, this is Chris. On the Black Card price test, yes, we're testing $1 increase, so $22.99. We're testing that right now in virtually the same 100 stores that we did the last test, which was 2 years ago. We're going to play it out the rest of the summer and then probably make a decision towards the end of the summer here. So far, it's been very promising. The acceptance of the increase has been virtually the same results as the last time. So no pushback and it's been -- as far as the Black Card percentage acquisition as well as adopting the $1 increase.

So you're right, it would be new members going forward. I don't see anything now that doesn't say we probably won't move forward second half of the year, but we're still evaluating it in the next week or 2.

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [17]

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Yes. Sharon, on the equipment, so for the quarter, I mean we -- I think I'd be remiss to say that our franchisees are -- they continue to believe in this brand and really reinvest. And we think that's a key differentiator that we've had. And you've heard us talk about it. And for the quarter, 60% of our total equipment revenue was from replacement equipment. So it shows you that -- and we had a good quarter on new equipment sales as well.

We still expect the full year, which I gave -- when I gave guidance for the year, I said it would just be a bit shy of 50%. We still think it'll be a little bit under 50% on a full year basis even with our updated guidance on equipment sales. But it continues to show that they'll be willing to invest on the equipment side. The way we're thinking about the balance of the year is still a bit similar to the way it was back earlier in the year. It looks like that probably our year-over-year, Q4 over Q4, the equipment revenue will be down a little bit versus where it was last year. One, given just kind of where we're at year-to-date; and then just the cadence between Q3 and Q4 to get up into that 250 to 260 range. But we do believe it'll be down slightly in the fourth quarter.

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Operator [18]

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Your next question comes from Rafe Jadrosich with Bank of America Merrill Lynch.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [19]

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I was wondering if you could talk a little bit about the mix of your online sign-ups versus in-store and then how that's changed over time.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [20]

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Right now it's about 30% join online. And it was about 25% in the past year. So it's up slightly from a couple of years ago, I'd say.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [21]

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Okay. And then in terms of -- can you just give us an update on international in terms of the trends you're seeing in Mexico and Latin America? And then are there any new markets that you're looking at going forward?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [22]

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So in Mexico, we had 1 store open. There's a couple slated to open the remainder of this year. In Panama as well, we opened that 1 store about 18 months ago, and there's 3 or 4 there now. Still the same result, there have been high demand for them. As [I might have] mentioned, in South America, the bigger -- the hurdle that we figure out and work through is more EFT and how that translates in the banking world down there. A few blips here and there, but they figured it out and it's working relatively good.

So for now, just really focusing on Mexico and getting that rolling, and we'll be looking for more international in the future. But for right now, really focus on the U.S. growth and Canada and getting Mexico off the ground.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [23]

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Okay. And then I think you finished the buyback authorization in the quarter. Just going forward, how are you thinking about capital allocation? And then are there any changes to your approach to leverage or the priorities for cash?

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [24]

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Yes. On a net of cash basis, we're at about 4.6x leverage at the end of Q2. We have the $1.3 billion outstanding on the securitization. I think that in terms of where we're at with respect to our longer-term strategy, it's the same. We believe that our model is strong enough to continue to generate a lot of cash flow and return cash to shareholders. We chose the share repurchase plan last year as a way to do that. We have about $150 million or so left under the $500 million approved repurchase plan by our Board. And I think we'll continue to work with our Board over the balance of the year as we continue to delever down to look at ways to return cash to shareholders.

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Operator [25]

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Your next question comes from Jonathan Komp with Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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First question, I just wanted to ask about the same-store sales outlook and a very strong first half, above 9% on the system comps. I just want to ask and clarify, to get down to 8% for the year, I think, implies closer to 7% in the back half. And that's very good, but maybe on the slower end of what you've seen in the last few years. So I just want to maybe ask about your confidence there and what you see as the ongoing same-store sales drivers.

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [27]

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Sure, Jon. As we hit guidance for the full year and then kind of reiterated that at the end of Q1, we saw our comps coming in, in the mid-single-digit range, kind of that 7% to 9% range. Given we're halfway through the year, we decided to narrow that to, say, at approximately 8%. So still within the range.

I'd say there's 2 or 3 things that go into the way I would describe your call. You're right in that with -- given where Q1 and Q2 are and then a full year kind of guide to 8% implies that the back half would be a -- moderate in the first half. And if you go back at the beginning of the year, in fact, that's the way we gave our guidance. We said that it assumed that growth would moderate throughout the year and I think I said quarter-by-quarter.

So a couple of things on that. One is, as I've said in the past that the older, mature stores, they comp in that kind of low- to mid-single digits. And the base of those stores just continues to grow into that more mature state, and you start to see a lessening impact from the newer stores over time. Now that's been somewhat offset if you go back certainly last year and even, frankly, first couple of quarters this year. That's been somewhat offset by the fact that we had the $2 price increase that took effect back on October 1.

And so just to give you a sense for that, so Q1's impact on same-store sales in terms of the Black Card pricing was about 240 basis points and the 2Q impact was about 200 basis points of this year. And that's down about 50 bps from last year's Q2. It was about 250 last year in Q2. And as we look at Q3 and Q4, we see the Black Card pricing continue to decline as we continue to cycle. And all of this assumes there's no incremental pricing to the question earlier on the call.

But as an example, last year's Q3 drove about -- and Q4 drove about 300 basis points of same-store sales in Q3 and Q4, whereas this year, it's going to be more in the 190 range for Q3, probably 170 range for Q4. So you're starting to see over 100 bps plus and increasing. Yes, as I just mentioned from Q1 to Q2, we dropped about a 40 bp increase just quarter-to-quarter.

And then finally, I guess, I'd say just -- I think our new joins in the first half of the year have been just a touch lighter than what we would have forecasted and what we thought for the year. But still when you sit back and think about it, given an 8% comp, we're still in that kind of high single-digit range and really pretty much in line with where we thought we would be back at the end of Q1 when we last talked about comps.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Yes. Understood. And when you think about the drivers going forward of the new joins, any thoughts, Chris or Dorvin, just as you look to the marketing plans and the set of drivers that you have lined up, what we should expect going forward as you look out a few quarters?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [29]

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Yes. I think in hindsight, looking at -- you might recall early this year, we had mentioned that we increased our digital marketing spend by about 50% over the previous year. And I think as the National Ad Fund has grown, I think maybe a disproportionate amount had been put into digital, which I think maybe over-digitized our marketing where traditional marketing really is what drives -- where we're seeing more volume. So I think there's probably some changes we'd look to retool, some this year and for 2020 as well going forward.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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Okay. Great. And then if I could follow up. On the Black Card penetration, it's reaccelerated pretty nicely the last couple of quarters. Any thoughts -- does that inform kind of your thoughts on what the ultimate pricing ability is? And I know you're testing the $1 increase. But now that you're back adding more than 100 basis points of Black Card penetration year-over-year, it seems like if anything, you have quite a bit of pricing power. So just curious to get your thoughts more broadly on that.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [31]

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Yes. I mean I think the reciprocity was the reason that this begged the question, they may move again as -- even in a couple of years, we already added 400 or something more stores here. So it's quite a big increase just in the last 2 years, which is why we decided those dollars. So I think as we continue to provide more service and open more stores, whether it's either content or more amenities within the store or just more locations for reciprocity, that it's probably a lever that we'll always have in our back pocket to constantly look to see if it gives us the ability to raise.

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Operator [32]

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Your next question comes from Oliver Chen with Cowen and Company.

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Jungwon Kim, Cowen and Company, LLC, Research Division - Research Associate [33]

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This is Jonna on for Oliver today. Just a quick question. How do you think about the competitive landscape as you open more stores and other concepts are also riding the health and wellness trend? And have you seen any noticeable change in the churn rate that you've noticed recently?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [34]

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Yes. No, nothing's happened with churn at all. I mean as we've mentioned in the past, attrition is slightly better -- a little bit slightly better the last couple of years. I think if anything, Jonna, I'd say that although you see more specialized boutiques that have kind of popped up and different concepts come around, I think if you look at more of the, I guess, lower-cost, high-value clubs like us, like whether it's Retro or Youfit or so on, the only one that's really grown at any amount would be Crunch, which is -- I think last year they grew 50 or 60 stores. So [and that --] the next closest after that, where Youfit hasn't really grown at all, Retro hasn't really grown at all. So I think on the lower-cost one, I haven't seen anything changed there at all.

And even more, I guess, the mid-box, midsized box, like the LA Fitnesses and the 24 Hour Fitnesses, haven't really seen them grow at any clip either. They've been kind of stuck at that -- LA Fitness has been at that 700 mark give or take for a while, and 24 Hour Fitness has been at that 450 or 500 for 5-plus years.

So I think inside the boutique world where different concepts come up, I haven't seen anything change in that realm, which in a lot of ways, those boutiques where they're higher priced and a very different consumer.

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Operator [35]

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Your next question comes from John Ivankoe with JPMorgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [36]

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The question earlier was asked about range of square footage per box, and I'd like to re-ask that maybe in a different way. What was kind of the range of square foot by box for fiscal '19? What was it in '18? If there's an average gym per square foot that you look at between the 2 years.

And I guess as we think about 2020, as you begin to narrow things in and have a different range of experience, I mean what do you think the appropriate return on investment range that you're going to give the right amount of service to the designed amount of customers? I mean what is that level of box that you think you're going to hone in on as we think about in fiscal '20 relative to the previous years?

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [37]

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I would say, John, that in '18 and even this year and probably '17, the size of the box really hasn't changed a lot. I mean you think about it, we're opening, call it, the last 3 years, 200-plus, counting this year. It's going to be in -- right between probably 19,500 and 20,000 square feet.

Now there's a few little outliers to that because it happened to be a box in a certain place that you wanted to put it and it was 16,500 or something like that. You've heard us talk about the store we built -- corporate store in Berlin, Vermont. It's about 15,500 in a very small town up there. We opened a small store down in -- small town in Texas of just shy of 8,000 square feet last year. But that's a big outlier.

So the far majority of all the stores, 17, '18, '19, are right around 20,000. And we have some over that, so that helps in terms of the average. But far majority bread-and-butter right down the fairway is 20,000.

What I was trying to allude to, to the question earlier, at least the way I thought the question was being asked, was as we get more and more penetration in the markets and open more and more stores, and then as franchisees start to kind of look towards the fringes, let's say, of their area development agreements or -- and just frankly, more rural states, maybe how small can small be and then will they build them and get a return on it. And that's where I was alluding to us looking at anywhere from, say, 10,000 to 15,000 square feet. If it's a small enough market, then we're looking at that and saying, can that drive the return? And I think affirmatively I said yes.

Clearly, there is no doubt that the far majority of all of our franchisees is if there's enough people there, they're going to put that 20,000-square-foot box because it can -- and we've said this before, I mean it can handle anywhere from, call it, 5,500 to 6,000 members in maybe a more cheaper real estate environment in some markets all the way up to 12,000 to 15,000 members in some markets, too. And we believe that, that brand and the size of the box and the usage patterns of our members can handle that. But if it's in markets where we have not saturated the market with a maximum number of stores, it's most likely going to be a 20,000-square-foot box. Even in markets, John, where we want a box and there's enough people and there's no real estate, we're building some -- I say we on the system, we're doing some ground-ups and we're doing 20,000 square-foot because we think that's the right profile that gives us the best perception from a customer, the best layout, the right mix of equipment, et cetera.

And then when you get out to that fringes of, okay, it's just a small town and maybe I can't drive the same type of membership to drive the economics, I think the way that most people are looking at this is if they can get that on the low end, 20% kind of cash-on-cash returns, they're willing to do it. And clearly, anything above that, they're willing to do it. And so far, we haven't had that kind of a problem of trying to struggle to get to that 20% cash-on-cash returns.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [38]

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Yes. Of course. Maybe even more succinctly, I mean it sounds like you're not expecting a material change in square foot per boxes certainly in '19 or '20. And if it is, it would be so slight to not even be worth mentioning. I think that's...

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [39]

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Absolutely. Perfect.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [40]

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Okay. That's the important point. And then secondly, just talking about the Black Card pricing. Obviously, you had it at $19.99 for a long time. You went to $21.99 in October of '17. Certainly, in restaurants, there's always kind of the big philosophical debate of you're taking pricing when you have to because there's cost pressure and the franchisees are really asking for that or keeping pricing basically what it is because you have such an excellent value perception, the amount of member growth can maintain at a fairly high level. So I mean I guess as you think about taking that price, I mean what is kind of the balance between the franchisees are asking for it because they want more profitability and they want to cover some of their cost increases maybe in labor versus, hey, we keep pricing like it is and we just keep the flywheel of member growth really going? I mean what's -- I mean I guess at this point, you're not really driving that need. And maybe the answer is, hey, you know what, it's profitability and shareholders love that, and that's the answer just in and of itself.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [41]

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Yes. I think it's -- we look at -- we still only really solely advertise the $10 membership, which is really the sacred get-you-off-the-couch and curiosity factor. And still a large portion of our members are the $10 members, and that's what they want to pay and that's what they're willing to pay.

So I think the Black Card membership is pretty unique in the sense it's not really giving more or less access to fitness, more or less access to our Black Card spas and benefits that are kind of outside of a treadmill, if you will. And some people are just willing to pay more for that price. So I think it's something that we'll look at in the future as well. But I think you're right too, as I think it's -- you definitely -- the one thing I'd never want to do is use that to mask another issue.

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Operator [42]

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Your next question comes from Peter Keith with Piper Jaffray.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [43]

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Good results, guys. I wanted to maybe follow up on one of the earlier questions just regarding the step-up to the overall unit growth. I guess you probably don't want to guide us to next year, but it seems like all the tools and assets are in place to maintain a run rate of this 250 to 260 going forward. Is this potentially maybe at least kind of a rough baseline in how we could think about the total number of absolute openings at least for the next couple of years?

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [44]

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I don't think we want to get into giving any early guidance into 2020. But the -- we have over 1,000 still in the pipeline that are -- under area development agreements are committed.

Just to reiterate what Chris and I were saying earlier, the franchisees are clearly committed to deploying capital. We've got a good pipeline of sites in place that are either being negotiated on or certainly getting close to firming up from early 2020. I mean we're still a few months out from locking and loading all of stores even in Q1. But there's clearly sites that are -- leases are signed and things in terms of whether it's architectural drawings or whatever that are in place for early 2020.

And we feel good about what our franchisees are doing and how they're not only reinvesting in their existing fleet, but continuing to really beat the ground in the markets they're in to try to find the best locations, be the first to market if it's in a kind of a newer market than maybe some where there's -- it's a little bit more mature.

And then in the -- my prepared remarks I made a few minutes ago, I said that out of that 250 to 260, about 25 of those would be international locations. And just as a data point, I think, last year, it was 13. So we're close to doubling the number of sites albeit small. But out of the 2 -- call it 250 for a minute, out of that, about -- we think about 25 of those will be international locations as Chris was talking about earlier, between Canada and Mexico, et cetera. But in any event, we feel really good about where we're at right now. And clearly, we'll give more intel towards 2020 when we get to next year.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [45]

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Okay. Fair enough. And maybe also following up on another question from before just regarding the equipment sales. So the growth in replacement equipment was quite strong. And I'm curious if you're seeing any faster refresh rates beyond the normal 5 years for cardio, 7 years for strength for whatever reason franchisees are seeing a good return on that or if it's just maybe a timing dynamic with Q2 that caused that strong growth.

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [46]

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Yes. It's always been a bit lumpy. And we've talked about that with you guys over the quarters since we've been public. I'd say two points. One is Q2 is always a good time to do it just because it's a lower usage time period within the gyms. Although we added a little bit incremental usage this year with the success of the Teen Summer Challenge. But it's a good time to do it.

But no, I'd say they're doing it -- you go all the way back to when we first -- we kind of laugh about it when we first started calling up franchisees and saying you've got to replace the equipment, and it was -- you may not have to replace the equipment and all the way until today that they just do it on their own. And we've also talked about the fact that when you look at the new stores that have opened up over the last, call it, 5 years now, so that kind of that first year cardio coming up, the volume of the 2 to 3 years prior to that is significantly less. So what you got is now more and more stores that are going to be coming up on their first cardio and first strength. And then you've got others rolling into that, that's doing their second or third time around. So although I said it would be about 50% this year or just shy of 50% replacement, everything else being equal, that's going to grow at a much faster rate.

And I want to say it again, I think it's what differentiates our brand. And you go into clubs that are 8, 9, 10 years old, and they don't look like a 10-year-old club. And it's a testament to the franchisees willing to continue to reinvest in their business.

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Operator [47]

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Your next question comes from Joe Altobello with Raymond James.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [48]

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So first question, Dorvin, I just want to go back to something you mentioned earlier. You said that you thought membership growth was a bit lighter than you thought and part of the reason why you're seeing a little bit lighter comps, I guess, in the second half of the year. If we look at membership growth in the last few quarters, it's been in that 15% to 18% range, and it's right in that range this quarter. So I guess first is what were you expecting? And maybe second is if it was a bit lighter than you thought, why do you think that is?

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [49]

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Yes. A couple of things. One is -- and I said -- I think I might have used the term it's a touch lighter. So it wasn't a significant huge driver in Q2, but it's just another factor that, as we kind of look over the balance of the year, where maybe we were just a tight -- light or maybe our budgeting was a little bit aggressive. But -- so that's point one . But point two, I'll go back to Chris' comment in that if you look at our spend of marketing maybe with 20/20 hindsight, maybe we shifted -- on a percentage basis, the total marketing spend, maybe we shifted a bit more towards digital spend as opposed to some of the more traditional media that clearly in the past has been successful in driving new joins. But it's something that we're continuing to look at the data, and we'll look at that as we plan our 2020 marketing campaigns.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [50]

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All right. That's helpful. And then maybe secondly, of the 400,000 new members you signed up this quarter -- or net new members, I should say, how many of those do you think came from the Teen Summer Challenge?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [51]

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Well, we have the 30,000 parents had joined so far since May 15 with no real -- very little marketing efforts at this point. Now with this August here, we're rolling up our summer, we'll start to target both them and the teens at this point. So we'll just see what happens with that in the future. But it was great to just see these people finally actually getting in to join after their kids have this pre-exposure.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [52]

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And is this something you're going to do next year as well?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [53]

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Yes. I don't see why we wouldn't be -- something that we -- we're known for it, quite honestly. I think it's a great thing. It's great for society. It's the right thing to do. And for the brand, longer term, I think it will pay dividends in the future. So I think it's just a great thing to do. And over 2 billion impressions, it was just -- the amount of media exposure we had over this whole thing was just truly remarkable, not to mention the amount of stories that came through this office with emails and letters to us from parents. It was just -- it's a great cause, and I think it makes sense for us to be involved in this way.

If you think about too, we had the 900,000 kids. Put that in perspective for a quick second is that we've been here for 27 years and we have -- of the entire Gen X population in the country, 5% are members of Planet. Of the 15- to 18-year-old teenagers, we achieved 5% penetration of them in 60 days. I mean that's just -- you just can't make that up.

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Operator [54]

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Your next question comes from Michael Kawamoto with D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [55]

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First, can we just get an update on how the tests are going in the 15 stores you placed the connected equipment in and maybe your plans to expand that going forward?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [56]

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Yes. The test is still going into those 15 stores. I mentioned in my last call that we're working with Matrix at this point to retool the, I guess, experiences and platform that -- from what we learned from a lot of segmentation studies and member consumer studies. And in the fourth quarter, we're going to roll out some of the Matrix equipment in new stores with a complete kind of retool platform and experience based on what we've learned.

Out of all the stuff that's on this current screen today, although we talked about Hulu and Spotify and Netflix and so on and so forth, Netflix was the most used out of all those, but only 9% of members used it. So I think there's almost too much clutter in some ways in more streamlined stuff of what the members wanted to do while they run the cardio. And so through some of the -- a lot of consumer studies, what was surprising is they wanted to use that cardio time for educational purposes around how to exercise better or get more results in nutrition. So we're going to try to retool some of the newer stuff in the fourth quarter to satisfy those demands and see if they get more interaction.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [57]

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That's helpful. So on the 3 vendors, are you going to continue to work with all 3 of them? Or is Matrix the one you're choosing?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [58]

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We are working with all 3 of them. But just for this test, instead of like getting all 3 going down a different road, we're going to just focus on Matrix at this point.

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Operator [59]

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Your last question comes from Sumit Sharma with Berenberg Capital.

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Sumit Sharma, Joh. Berenberg, Gossler & Co. KG, Research Division - Former Analyst [60]

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I think a lot has been discussed already on the real estate, but just to get a sense on how this is being effectuated, I guess. Who's -- what's the sort of development structure you have? I mean is it like a traditional developed sale-leaseback kind of deal, the last majority that we're looking at or more leasing situation where you or franchisee gets bigger allowances from the landlord because of your volume and your sort of nationwide tenancy?

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Dorvin Donald Lively, Planet Fitness, Inc. - President & CFO [61]

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Yes. It's more of the latter. Most of our franchisees just lease the equipment directly from the landlords or the REITs across the country. You have a few franchisees that will -- they'll buy the building or they'll buy land and build a building. And it's a little bit of a -- kind of a combined real estate play with owning a gym business that goes along with it. But the far majority of all the stores are just leasing situations.

And you bring up a good point because the beauty, I guess, of where we're at today versus retail in general is that particularly in that box size we're looking at -- think about it this way: It's generally kind of the Toys "R" Us, Staples, OfficeMax, Office Depot, those kinds of boxes, Old Navy, Circuit City. As you go down the list, I mean if you go back and take the last 5 to 10 years and you add up all those stores that those retailers have closed, there's a lot of those boxes out there that we're in today. And there's some more we'll go into. But a lot of those landlords are -- they're trying to find a way to fill that space.

And in particular, in centers where they're really trying to take an old center that is maybe -- that's got a lot of vacancy and try to revitalize it and do things like that, and we drive a tremendous amount of traffic to a center. We'll do about 5,000 workouts a week. And so we're bringing people into a shopping center that in all intents and purposes, it may not have ever gone to that shopping center. So that makes us attractive for that. So they are getting tenant improvement allowances. I mean it's not unheard of. If you're going to build a store -- a typical store today, it varies from region to region a bit, but you're talking for a 20,000-square-foot box, you're kind of in that $2 million range. It's not uncommon to get $250,000, $350,000, $400,000 in tenant improvement allowances. And so you can -- it certainly helps on the return on the cash with time, value and money on the ROI, et cetera. So -- but to answer your question, it's mainly lease.

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Operator [62]

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There are no further telephonic questions at this time. I'll turn the call back to Chris for any closing remarks.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [63]

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Thank you. I appreciate everybody's time today. Couldn't be more pleased with our results for the first half of the year and the second quarter as well as the commitment by our franchisees and the support of our corporate staff to help them achieve these great results. And really look forward to the second half of the year and carry the momentum.

So thank you. Have a good evening.

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Operator [64]

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This does conclude today's conference call.

You may now disconnect.