Planet Fitness, Inc. (NYSE:PLNT) Q4 2023 Earnings Call Transcript
Planet Fitness, Inc. (NYSE:PLNT) Q4 2023 Earnings Call Transcript February 22, 2024
Planet Fitness, Inc. beats earnings expectations. Reported EPS is $0.6, expectations were $0.58. Planet Fitness, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Planet Fitness Q4 2023 Earnings Conference Call. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Stacey Caravella, VP Investor Relations. You may begin your conference.
Stacey Caravella: Thank you, operator, and good morning, everyone. Speaking on today's call will be Interim Planet Fitness Chief Executive Officer, Craig Benson; and Chief Financial Officer, Tom Fitzgerald. Both will be available for questions during the Q&A session following the prepared remarks. Today's call is being webcast live and recorded for replay. Before I turn the call over to Craig, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during this call. Our release can be found on our Investor website along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now I'll turn the call over to Craig.
Craig Benson: Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q4 earnings call. Before I review our fourth quarter results, I want to take a moment to discuss the announcement we made today that Tom Fitzgerald, our CFO, has decided to retire at the end of August 2024. Since joining Planet Fitness four years ago, Tom has been a tremendous asset to our team, bringing 40 years of corporate finance and executive leadership experience to the business. Now I'm going to turn it over to Tom to discuss his decision.
Tom Fitzgerald: Thanks, Craig. It's been a privilege to serve as CFO of Planet Fitness and work alongside such a dedicated and passionate team. I really can't think of a better way to end my career than working for a brand that does so well and also does so much good. After 40 years in business, I've made a decision to retire at the end of August 2024 and focus on some of my interest outside of work. I look forward to handing over the reins to new leadership that will guide Planet Fitness' next chapter. I am proud of the work we have done during my time at Planet Fitness to deliver value to our franchisees and our shareholders. I know that we have a lot more work to do. And over the next several months, I will be focused as I always have on our key strategic and financial objectives and on ensuring a smooth transition to new leadership. So with that, I'll turn the call back to Craig.
Craig Benson: Thank you, Tom. Just two months into his role, the pandemic hit and all gyms closed temporarily, which presented an unexpected and once-in-a-lifetime challenge for a newly appointed CFO. Tom embraced this challenge head on with steadfast leadership. He dove in immediately and spent a considerable amount of time speaking with bankers, lenders, investors and franchisees, reassuring them that our strong balance sheet would get us through the depths of the crisis, even when all our gyms closed temporarily. We ultimately expanded our capital allocation strategy to include the acquisition of one of our largest and best-performing franchisees, which doubled our corporate store footprint overnight. During his time at Planet Fitness, Tom has also helped build a talented financial team that will ensure a smooth transition to the next chapter of the company's financial leadership.
He's also been a great partner to me in my role as Interim CEO. On behalf of everybody at Planet Fitness, I would like to thank Tom for his many contributions to our company. And now let me turn to the CEO search. The CEO search remains a top priority for the Board and the search committee. After considering several dozen candidates and having interviewed 13 very qualified finalists, the search committee will be sending a shortlist to meet with the whole board. We look forward to updating you when a final decision has been made. We expect to announce a new CEO prior to identifying our next CFO. Tom's commitment to remain through the summer will provide an extended transition period, allowing the new CEO to be involved in the CFO search process.
Now to the results. We ended 2023 with 18.7 million members, system-wide same-store sales growth of 8.7%, primarily driven by new member growth, and a 19% adjusted EBITDA growth. Our system opened 165 new Planet Fitness locations globally and keeping with our mission to make fitness accessible in a clean, safe and welcoming environment for anyone who walks through our doors. On an annual basis, we experienced an improved cancel rate, and we continue to see overall higher visits per member as well as all age groups visiting more frequently year-over-year. We saw significant increases in penetration levels across all generational groups since the end of 2022. Gen Z now makes up more than 25% of our members, and they continue to lead the way in terms of membership growth.
This was driven in large part by our successful High School Summer Pass program in its third year and second consecutive summer with more than 3 million teen participants and our conversion rate to paying customers was above the 2022 level. We aim to be the brand that Gen Z think of when they are ready to join a gym and this program further strengthened our appeal. Our business is unique in the retail sector as the gym membership isn't a frequently purchased item. With 40% of our new joins being first-time gym goers, we need to ensure that we are achieving the correct balance of messaging and pricing. We are exploring whether we have an opportunity to take price on our classic card. Last fall, we started testing two price points of $15 and a $12.99 for the [Technical Difficulty] in about 100 stores each.
Both go back to $10 during the national sale periods and the advertising communicates a call to action to join before the sale expires. We added an additional test in December to include the New York DMA where we are keeping the price at $14.99 regardless of national sales. As we are a recurring revenue model, we plan to continue to run these tests at least through the first quarter to fully understand the impact that increasing price as on - average units volumes by evaluating the impact of the rate of joins cancels and change in Black Card member mix. We're actively navigating today's economic environment and taking a disciplined data-driven approach to determine the optimal outcome for us and our customers. We look forward to sharing more on these results of the test.
Now to 2024 and beyond. Our significant size and scale advantage has enabled us to deliver consistent reliable growth for more than 30 years and we're focusing on expanding our lead against our high-value, low-price competitors even further. To do this, we're adapting to the post-pandemic macroeconomic environment with the development of our New Growth Model, which we announced to our franchisees in the fourth quarter. As a reminder, our plan is focused on enhancing our already strong new store economics and reducing capital requirements for opening and operating a Planet Fitness franchise location. This includes making changes to the franchise agreement, adjusting the timing for cardio and strength reequips based on usage and committing to reducing CapEx for new builds and remodels while also looking for ways to reduce operating expenses.
We believe the new model balances improving store returns without significantly impacting our P&L. It's a win for the franchisees and for us as the franchisor. And by the end of 2023, all but two franchisees, both of whom are single-store owners have opted into the plan. We are now in the planning and executing phase. We believe the change we made to the model will free up a significant amount of capital for our franchisees, providing them with additional flexibility to build their store portfolios for years to come. We expect 2024 to be a transition year because it will take time to see the results on our new store pipeline as the average time to build the new location from site approval to opening was between 12 and 14 months last year, up from 6 to 9 months pre-pandemic.
We're already rolling our tests to change design elements in our store as part of our commitment to decrease the cost to build the gym without compromising the member experience. For example, we're testing the reimagined lobby and workout areas, and we're also encouraging franchisees to work directly to source more of the materials for the build themselves instead of relying on general contractors, who charge a markup on those materials. Finally, I'd like to share some very encouraging results from the third-party studies we conducted on our long-term domestic store opportunity. Based on the results, we now believe we can have 5,000 gyms in the U.S., up from 4,000 at the time of our initial public offering in 2015. And this doesn't even contemplate several other factors that could potentially increase the number, including: first, a smaller store footprint, which could enable us to infill suburban areas as well as enter geographies that don't need our standard population requirements; and second, our historic ability to continue to achieve even greater penetration in each successive age generation.
And this is only the domestic opportunity. We're excited to announce that we're entering Spain and expected to open a store by the end of the year. Only 10% of the population currently has a gym membership and we believe we have a meaningful opportunity to expand our brand outside the U.S. and can democratize fitness in a non-intimidating environment as is evidenced by our recent development progress in Mexico and Australia. Finally, we recently took actions to reduce the size of our headquarters workforce and realigned our resources towards key growth initiatives to better position us to succeed in 2024 and into the future. At this time, we will not be reissuing a three-year outlook given several factors, including: first, continued macroeconomic uncertainty; second, our franchisees are still incorporating the changes from the new growth model into our long-term plans; and last, we'd like for our permanent CEO to have the opportunity to weigh in on our targets.
We have very promising opportunities on the horizon as we continue our pricing tests and execute our new growth model. We are capitalizing on our strong momentum, along with our proactive forward-thinking mindset to drive enhanced value for shareholders. Now I'll turn it back over to Tom.
Tom Fitzgerald: Thanks, Craig. We believe that we are operating from a position of solid financial and balance sheet strength as we continue to break down fitness barriers for first timers and casual gym goers. Today, I'm going to address four things: first, our entry into Spain; second, potential plans to refinance the tranche of our debt in 2024; third, our Q4 results; and lastly, our 2024 outlook. Starting with Spain, we believe we have an opportunity to build on the success we've had internationally to expand into Europe. Spain is an attractive market in which we believe we could have more than 300 Planet Fitness locations over time. In order to accelerate our presence, we plan to open and operate a small initial set of corporate-owned stores in the near term and expect to eventually refranchise them.
This is an example of us using our balance sheet to drive growth at a faster pace in exciting new markets as we continue to position Planet Fitness for sustained growth and value creation. Importantly, we continue to believe in our asset-light, highly franchised model, and we reiterate our strategic intent to own approximately 10% of our fleet. Now to our debt. We have an approximately $600 million tranche of debt that comes due in September of 2025, which we anticipate refinancing in the middle of this year, subject to overall market conditions. Based on indicative pricing, we believe our weighted average interest rate would still be below 5% when we refinanced that tranche. Next, I'll cover our fourth quarter results. All of my comments regarding our quarter performance will be comparing Q4 2023 to Q4 of last year, unless otherwise noted.
We opened 77 new stores compared to 58. We delivered same-store sales growth of 7.7% in the fourth quarter. Franchisee same-store sales grew 7.6% and corporate same-store sales increased 8.7%. Nearly 80% of our Q4 comp increase was driven by net member growth with the balance being rate growth. Black Card penetration was 61.9%, a decrease of 60 basis points. The decrease primarily reflects the continued increase in our Gen Z membership growth. For the fourth quarter, total revenue was $285 million compared to $281 million. The increase was driven by revenue growth across our franchise and corporate owned segments. The 13% increase in franchise segment revenue was primarily due to increases in royalties, web join fees and the national ad fund revenue.
The royalty increase was primarily driven by same-store sales growth, royalties on annual fees and new stores. For the fourth quarter, the average royalty rate was 6.6%, up from 6.5%. The 15.9% increase in revenue in the corporate-owned store segment was primarily driven by same-store sales growth as well as new and acquired stores. Equipment segment revenue decreased 25.5%. The decrease was primarily driven by higher reequipment sales in Q4 2022, which ran seasonably high due to the supply chain issues that pushed equipment deliveries from the second quarter to later in the year. We completed 67 new store placements this quarter compared to 66 last year. For the quarter, replacement equipment accounted for 43% of total equipment revenue. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to $57.5 million compared to $73.8 million.
Store operation expenses, which relate to our corporate-owned store segment increased to $65.6 million from $57.6 million. SG&A for the quarter was $31.2 million compared to $28.7 million. Adjusted SG&A was $29.5 million. This includes a $1.2 million adjustment for CEO transition-related expenses. National advertising fund expense was $17.6 million compared to $15.7 million. Net income was $36.8 million, adjusted net income was $53.1 million and adjusted net income per diluted share was $0.60. Adjusted EBITDA was $114.3 million and adjusted EBITDA margin was 40.1% compared to $106.1 million and adjusted EBITDA margin of 37.7%. By segment, Franchise adjusted EBITDA was $68.1 million and adjusted EBITDA margin was 69.2%. Corporate store adjusted EBITDA was $45.6 million and adjusted EBITDA margin was 39.1%.
The equipment adjusted EBITDA was $16.8 million and adjusted EBITDA margin was 23.8%. Now turning to the balance sheet. As of December 31, 2023, we had total cash, cash equivalents and marketable securities of $447.9 million compared to $472.5 million of cash and cash equivalents on December 31, 2022, which included $46.3 million and $62.7 million of restricted cash, respectively, in each period. In 2023, we used $125 million to repurchase approximately 1.7 million shares. Total long-term debt, excluding deferred financing costs, was $2.0 billion as of December 31, 2023, consisting of our four tranches of fixed rate securitized debt that carries a blended interest rate of approximately 4.0%. Finally, moving on to our 2024 outlook, which we provided in our press release this morning.
As Craig noted, we believe 2024 is a transition year for new store development as our system absorbs the new growth model. We expect between 140 and 150 new stores, which includes both franchise and corporate locations. We recognize that modeling our equipment segment business can be difficult, so we're going to provide more insight on it today. Let me address placements first. We expect between 120 and 130 equipment placements in new franchise stores, which on a percent basis, we expect will play out similar to last year across the quarters. For the full year, we expect that reequipped sales will make up approximately high 60% of total equipment segment revenue. We expect that this year will look more similar to 2023 in terms of the quarterly cadence for those sales as it is a more typical year versus the prior three that were impacted by COVID.
Now as a reminder, the shift to more strength equipment versus cardio will bring down overall sales on a per store basis, but we are committed to maintaining our profit dollars, so therefore, our margin rate will increase. We do not expect the reequipped extensions as part of the growth model to impact our P&L until 2026. We expect system-wide same-store sales growth to be between 5% and 6%. Now all of the following targets reflect growth over fiscal year 2023 results. We expect our full year revenue to grow in the 6% to 7% range. We expect that our full year adjusted EBITDA will grow in the 10% to 11% range. We expect adjusted net income to increase in the 9% to 10% range and we expect adjusted earnings per share to grow in the 10% to 11% range.
We also expect shares outstanding to be approximately 88.0 million, which is inclusive of the repurchase of 1 million shares over the course of the year, the minimum amount we committed to back at our Investor Day in November of 2022. And we expect our net interest expense to be approximately $70 million, which assumes we refinanced the tranche I mentioned earlier at 6.5%. We will update our net interest expense guidance pending the completion of the anticipated refinancing transaction in 2024. Lastly, we expect CapEx to be up approximately 25% with the increase driven by our entry into Spain and remodels and relocations for our U.S. corporate stores. We expect D&A to be up between 11% and 12%, driven by the increase in CapEx. As Craig mentioned earlier, we are not updating our three-year outlook today.
In the meantime, our teams are working with franchisees on their development, remodel and reequip plans as they determine their near- and long-term capital requirements and future growth plans. We believe that the changes we recently made will further improve returns for all of our stakeholders as we enhance our model to deliver long-term sustainable value for many years to come. I'll now turn the call back to the operator to open it up for Q&A.
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