Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Q2 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, if you would like to ask a question over the phone lines, please press star then one on your telephone keypad. To withdraw your question, press the pound key. In the interest of time, please limit yourself to one question and one follow-up question. At this time, I would like to hand the call over to our speaker today, Brendon Frey from ICR. Please go ahead, sir.
Thank you for joining us today to discuss Planet Fitness' Q2 2020 earnings results. On today's call are Chris Rondeau, Chief Executive Officer, Dorvin Lively, President, and Tom Fitzgerald, Chief Financial Officer. Following Chris and Tom's prepared remarks, we will open the call up for questions. 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 Q2 2020 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?
Thank you, Brendon, and thank you everyone for joining us today. Before we share our Q2 results, I want to express my sincere appreciation to our dedicated employees on the front lines of our stores, at our corporate headquarters, and our franchisees for how they have supported our business and our members during this unprecedented time. COVID-19 pandemic continues to present challenges for our business. As we previously communicated, in mid-March, we temporarily closed all of our stores due to health and safety of our employees, members, and communities we serve. As we planned for successfully reopening our stores, we enlisted global medical expertise and worked closely with franchisees to develop a robust COVID-19 operations playbook that outlines enhanced safety and sanitization policies and procedures.
This includes measures such as personal protective equipment for all staff, enhanced cleaning efforts using disinfectant on the EPA list as effective against COVID-19, touchless check-in, physical distancing measures whereby certain pieces of equipment are marked out of use to ensure additional space between members, and much more. More recently, as a leader in the industry, we took additional steps and implemented a standard universal mask policy requiring everyone to wear a mask inside of our stores except while actively working out and in accordance with the local and state restrictions. We'll continue to proceed cautiously until there is greater certainty on when conditions will return to normal. For the 1,490 stores that were open by the end of the Q2, overall joins outpaced prior year levels, even as we executed reduced levels of local and national advertising, nearly offsetting total cancels for the period.
As a result, we only saw a modest decline in membership across our open stores through the end of June. The number of visits per store continued to climb consistently across stores the longer they were open, with visits in some stores reaching levels comparable to prior year period. Upon reopening our stores in early May, we had approximately 15.4 million members. At the end of the quarter, total membership was down a little over 1% to 15.2 million. As the Q3 got underway and consumer sentiment began to shift with the uptick of COVID-19 cases across the country, we are seeing a pent-up demand taper off and joins starting to stabilize as clubs have been open longer. For July, joins have been generally flat to prior year, except when we were up against the July sale period.
At the same time, we also saw an uptick in cancels, with much of the increase concentrated in states that experienced a resurgence of COVID-19. Usage has remained strong, particularly in stores open the longest. After growing consistently each week, usage has plateaued at about 60% average compared to prior year. To date, we have 1,477 stores open in 46 states, D.C., five provinces in Canada, and Australia. 1,426 of these stores are franchisee locations, and 51 are corporately owned stores. Total membership is now 14.8 million, a 4% decrease from the 15.5 million members we ended with Q1. We continue to focus our marketing efforts on the robust cleaning and sanitization policies and procedures to instill confidence and reassurance that Planet Fitness is doing everything we can to keep our employees and members safe.
Supporting and engaging members in their fitness journeys, both in our stores and at home, also remains a top priority for us. We continue to host free live United We Move workouts on Facebook, which have been extremely well-received, totaling more than 20 million views from 36 countries around the world. In the quarter, we also accelerated our digital offerings on Planet Fitness App with our recent partnership with iFIT, a leader in streaming home workouts and a pioneer in interactive connected fitness. We continue to see encouraging usage of our iFIT digital content, which is enabling a new avenue for us to engage with existing and prospective members in helping to inform our long-term digital strategy. In fact, 24% of Planet Fitness digital content users were not existing members.
Our accelerated digital strategy, while still in its early stages, is proving to be a great engagement tool for existing members and for potentially acquiring new members. Adoption of our mobile app was at an all-time high in Q2, with nearly 60% of new joins downloading the app in the quarter. During the month of June, we saw more in-app joins than during January 2020, which is pretty remarkable given January is our busiest new member sign-up period, and was prior to COVID when 100% of our stores were open. We also recently released new features and functionality, including in-app messaging, allowing us to communicate to our members via the app, and a Crowd Meter, which gives members the ability to check the capacity of their club before they get to the gym. We believe this is particularly reassuring for members who may want to work out in less busy times.
The overall health of our franchisees remains a top priority for us. In an effort to continue to support them throughout this time, we have provided a 12-month extension on new store development obligations, re-equips, remodels, and a 15% discount off equipment placed by the end of this year. We opened 21 new stores in the quarter. A handful of these locations were originally scheduled to open in Q1 but were delayed due to COVID-19. As we previously said, we expect there to be reduced development over the next couple of quarters as franchisees focus primarily on training and supporting staff on new policies, procedures, and successfully reopening our stores, keeping our members engaged with our brand, and rebuilding their cash positions, which were reduced during this period. Health and wellness is more important now than ever.
We see ourselves as an integral part of the healthcare delivery system and part of the solution to COVID-19. Fitness plays a key role in positively impacting the overall mental and physical well-being, in addition to combating COVID-19 risk factors such as obesity, heart disease, lung disease, and diabetes. We look forward to reopening more stores in the future as states and municipalities allow to further provide our communities with much-needed access to health and fitness. While the near-term operating environment is likely to remain volatile and negatively affect our near-term revenue and profitability, I am confident in the long run, once this pandemic is behind us, that Planet Fitness will be able to significantly widen our competitive moat for several reasons. First, the incredible strength, sophistication, and diversification of our franchise system, where 75% of our stores are owned by franchisees who own and operate locations in multiple states.
Second, we are well-positioned to capitalize on the industry consolidation as many of our competitors struggle to survive financially. Third, the real estate market will be even more attractive in terms of availability of prime locations and lower rent costs, and enhanced landlord incentives for our system, because not many brands will be adding hundreds of locations in the coming years. Fourth, the encouraging early results of our opportunity we're seeing as a result of the accelerated digital content strategy, focusing on the needs of first-time and casual gym users. Finally, the overall increased focus on health and wellness, which we believe will emerge over the next several years. This will further enhance the tailwinds in the category, and we believe our value proposition is second to none. I'll now turn the call over to Tom.
Thanks, Chris, and good afternoon, everyone. As we outlined in our Q1 call in May, and as Chris just discussed, COVID-19 has significantly disrupted our business. With the health and safety of our members and employees as our primary focus, we temporarily closed all Planet Fitness locations in mid-March. It wasn't until early May that we slowly began the reopening process following our expansive COVID-19 store reopening playbook and adhering to health authority guidelines. As we mentioned on our Q1 call, 1,875 of our 2,039 stores drafted monthly membership dues in March and then closed shortly thereafter. Those members who were drafted and collected in March had a 30-day credit to utilize once their home store reopened. I'm going to walk through how this dynamic, among others, shaped our results, and then provide color by segment.
For the Q2, total revenue was $40.2 million compared to $181.7 million in the prior year period. The biggest driver of our Q2 top and bottom line was the decline in royalty revenue and corporate store revenue related to monthly membership dues that weren't collected as the result of our decision to freeze member accounts while stores were closed due to COVID-19. To be more specific, there were 297 stores that drafted in May and 1,357 that drafted in June. However, due to the issued credits, only three stores had a full draft in May and 340 had a full draft in June. Partially offsetting this decline was the recognition of $11.2 million in deferred revenue related to monthly membership dues collected in March before stores closed, made up of $9.4 million from franchise royalty and $1.8 million from corporate-owned stores' monthly dues.
We also recognized $3.1 million of NAF contributions in the Q2 that were also deferred from Q1. In addition, our year-over-year performance was significantly impacted by the decline in equipment sales as we were unable to move forward with planned new and replacement equipment sales due to COVID-19. We did place equipment in 14 stores in Q2, some of which were originally scheduled to be placed in late March but were delayed until the Q2. We had replacement equipment sales of $2.7 million in Q2. Before I get into the specifics of same-store sales, let me spend a minute on our same-store sales definition.
When stores are closed and we don't draft monthly membership dues or don't execute a full draft upon reopening because members have credits to utilize from prior periods, they are not included in the comparable store base and therefore are not included in the same-store sales calculation for that month. Because none of our stores drafted in April and only a portion of stores drafted in May and June, we are not reporting a same-store sales figure for the Q2. That said, we do want to share the results and provide some color for the comparable stores that had a full draft in June and walk through the key drivers. For some context, we reported 53 consecutive quarters of positive same-store sales before COVID-19 hit in March and shut down all of our stores.
Our recurring revenue model and historically strong same store sales results are built on the ability to continue to grow net membership levels across our store base month-over-month, and therefore, year-over-year. Additionally, in our recurring revenue model, our same store sales performance at any point in time is a function of what happened to our membership levels over the trailing 12 months. The way our recurring revenue model works is that if the net membership growth rate per store in the current period falls below the growth rate for net membership per store in the same period last year, then our same store sales will grow at a slower rate and could even decline. Our comps are not based on what happened in the last month, but based on what's happened in the last 12 months.
When the majority of our stores were closed for two to three months as a result of COVID-19, that created an interruption in our membership growth cycle that cannot be offset in a given month. When our stores shut down due to COVID, we were unable to grow net membership levels in our stores, and as a result, have seen a slowdown in same-store sales growth. Of the 340 stores that had a full draft in June, 279 were in the comp base. These stores had a same-store sales increase of 4.4%, with approximately 80% of the increase due to net member growth and the balance being rate growth. For comparison purposes, these stores delivered same-store sales growth of 9.3% in Q1 of this year, 490 basis points higher than June's results.
Of the decline in growth in June from Q1 levels, approximately 85% was due to a drop in net member growth, and the balance being a decrease in rate growth. To explain this change further, membership per store in the 279 comp stores dropped by approximately 1%, or 70 members, in Q2 of this year, whereas in last year's Q2, membership per store increased by approximately 3%, or 190 members. This factor contributed approximately 400 basis points of the difference in comps between Q1 and Q2 of this year. The remaining gap in our comp performance compared with the Q1 was due to the decline in Black Card penetration, which we attribute to the fact that we were unable to repeat a Black Card national promotion in mid-March due to the COVID-19 store closures.
Our system-wide Black Card penetration rate in Q2 was 61.1%, a 40 basis points decrease compared to the prior year period, while in Q1 we saw a 30 basis points improvement year-over-year. As Chris discussed, across the 1,490 stores that were open by the end of the Q2, membership levels remained relatively flat at the end of the Q2 versus the membership levels when the stores reopened. Joins over-indexed compared to prior year due to overall demand early on after reopening, and cancels also indexed higher than the prior year.
However, since mid-June, the combination of the resurgence of COVID-19 and corresponding media coverage and increased consumer concerns in general regarding the virus, and the resumption of the billing of monthly and annual membership dues, joins are now in line with prior-year levels for stores that have reopened, and cancels have continued to index above prior year. Moving on to a review of our segment revenue results. Franchise segment revenue was $21.0 million, compared to $71.8 million in the prior-year period. Let me break down the components. First, royalty revenue, which consists of royalties on monthly membership dues and annual membership fees, was $14.9 million, compared to $48.9 million in the same quarter of last year.
The $14.9 million of revenue includes $9.4 million of deferred revenue recognized from the March draft from stores that were closed in March as a result of COVID-19 and reopened during the quarter. The average royalty rate for the Q2 for the stores that drafted was 6.4%, up from 6% in the same period last year, driven by more stores at higher royalty rates compared to the same period last year. Our franchise and other fees were $0.5 million, compared to $4.2 million in the prior year period. These are fees received from online new member sign-ups and the recognition of fees paid to us for franchise agreements, area development agreements, and the transfer of existing stores, and fees received from processing dues. The decrease was primarily driven by lower online join fees in the quarter as a result of the store closures.
Also within the franchise segment revenue is our placement revenue, which was $0.9 million in the Q2, compared to $5.1 million a year ago. These are fees we receive for the assembly and placement of equipment sales to our franchisee-owned stores within the U.S. The decrease reflects the lower net store placements we executed in the quarter compared with a year ago, as I just outlined. Finally, National Advertising Fund revenue was $4.7 million, compared to $12.5 million last year, as NAF revenue is not collected unless stores are open and draft monthly membership dues. The NAF revenue in the current quarter includes $3.1 million of deferred NAF revenue that was collected in March but not recognized until Q2. Our corporate-owned store segment revenue was $9.4 million compared to $39.7 million in the prior year period.
The $30.3 million decrease was due to lower membership fees due to the closure of our corporate stores. Since the majority of our corporate stores were still closed in Q2, the $9.4 million of revenue includes the recognition of annual dues previously collected and $1.8 million of revenue deferrals from stores closed after the March draft due to COVID-19 and recognized in the Q2. Turning to our equipment segment. Revenue decreased $60.3 million- $9.8 million from $70.2 million. The decrease was primarily due to lower replacement equipment sales to existing franchisee-owned stores, as well as lower new store equipment sales. Replacement equipment sales in Q2 were $2.7 million, compared to $42.5 million in Q2 last year. In the Q2, we had 14 new store equipment placements, which was down 41 from the prior year period.
Beginning in Q2, we launched a 15% discount offer on all equipment orders to support our new store development and replacement orders. This offer applies to all equipment purchased and placed by the end of 2020. Included in the equipment revenues for the quarter was a decrease of $1.8 million related to the additional discount. Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise-owned stores, amounted to $8.5 million compared to $54.4 million a year ago. A decrease of 84.4% in line with the revenue decrease as previously discussed. Store operation expenses, which are associated with our corporate-owned stores, decreased to $14.7 million compared to $20.2 million a year ago.
The decrease was primarily driven by cost-saving measures taken while stores are closed, including lower payroll, marketing, and operating expenses, partially offset by higher occupancy expense associated with the seven new stores opened and 16 stores acquired since the end of the Q1 of last year. SG&A for the quarter was $15.9 million compared to $18.9 million a year ago. The decrease was driven primarily by reductions in variable compensation, temporary executive salary reductions, lower equipment placement expenses, and various administrative expense reductions related to COVID-19. National Advertising Fund expense was $10.9 million compared to $12.5 million in the prior year period. The decrease in expense was due to reduced advertising and marketing expenses as a result of COVID-19. The difference between NAF expenses and revenue this quarter primarily reflects lower NAF contribution revenue due to COVID-19.
Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation, and amortization, adjusted for the impact of certain non-cash and other items that are not considered in the evaluation of ongoing operating performance, was a loss of $9.3 million compared to earnings of $76.5 million in the prior year period. Included in this quarter's adjusted EBITDA is approximately $14.3 million related to the recognition of deferred revenue previously discussed. A reconciliation of adjusted EBITDA to GAAP net income or loss can also be found in the earnings release. By segment, franchise adjusted EBITDA was $3.6 million, corporate store adjusted EBITDA was negative $5.9 million, and equipment adjusted EBITDA was $1.3 million. Adjusted net loss was $27.9 million, down $70.0 million from a year ago, and adjusted net loss per diluted share was $0.32, a decrease of $0.77 per diluted share. Turning to the balance sheet.
As of June 30th, 2020, we had cash and cash equivalents of $423.6 million, compared to $547.5 million on March 31st, 2020. In addition, we ended the quarter with $86.4 million of restricted cash, compared to $63.2 million at the end of Q1. Based on the current situation and our focus on preserving liquidity, we announced in March that we were halting our share repurchase activity for the time being. We also took additional measures to reduce our monthly cash burn, including the previously announced compensation reductions for our leadership team and our board of directors. Total long-term debt, excluding deferred financing costs, was $1.80 billion as of June 30th, 2020, consisting of our three tranches of securitized debt and $75 million of variable funding notes. Our securitized debt structure is covenant-lite . We have two maintenance covenants, a debt service coverage ratio, and a total systems sales threshold.
These are both tested quarterly, calculated on a trailing 12-month basis, and reported on a roughly two-month lag. In our most recent debt covenant reporting period of June 5th, 2020, we had a 120% and a 170% cushion to the first triggering event for our debt service coverage ratio and system-wide sales covenant, respectively. Similar to our liquidity position, we believe we have sufficient headroom for our two maintenance covenants. Given the uncertainty surrounding the evolving nature of the pandemic, we are continuing to refrain from providing guidance. While the near term is difficult to predict, we believe that in the longer term, our business will be well-positioned to widen our competitive moat and create value for our shareholders and our stakeholders. I'll now turn the call back to the operator for questions.
At this time, if you would like to ask a question over the phone lines, please press star then one on your telephone keypad. As a reminder, please limit yourself to one question and one follow-up question for the sake of time. We will now pause for a moment to compile the Q&A roster. Your first question comes from the line of Jonathan Komp of Baird. Your line is open.
Yeah. Hi, thank you. I want to just ask, firstly, the recent trend you highlighted in the membership, with more of the headlines impacting the business in July here. Just curious to get your thoughts. Any perspective on whether what you've seen in July, you have reason to think it might continue here in the short term? When you think about marketing plans in the H2, is there any plans that you have in place that you think could really restart the new joins and the trend there that you're seeing?
Sure, John. This is Chris. As you know, the billing date for our members is the 17th of the month, and we started opening up beginning of May, and most of these clubs did have a month credit. We started billing a good portion of our members in June 17th would've been the first go-around of a smaller number, and then the larger bill date would've been July 17th. After that June 17th billing, we begin to see that spike. We've seen historically, forever, in and around bill dates, before and slightly a few days after, cancellations spike around that. There's a lot of noise because also with the same timing around the California re-shutdown, Arizona re-shutdown, and then the news and the surging states. A lot of noise is going on.
Based on what we see, we definitely think that there's more to do with billing cycles and the kicking in and restarting of the billing of the members. We had the June 17th, then the July 1st annual fee, then July 17th billing, which is a big chunk of clubs of that 1,400, which we believe is driving most of those cancellations that we saw come through. Also in July last year, we had an annual sale in the first week of July, which didn't occur this year. To your marketing question, as of now, we have three-quarters of the stores open.
Hopefully, the next 500 or so will get the green light shortly, which time will tell, and it's very fluid at this point on those that the H2 of the year, as of now, we're collecting the NAF again, which is the 2% on EFT. We're lining up to probably start the first national sale come September. Time will tell on that. I think the one thing I would add to this that I'm extremely happy about and proud of is that the franchisees collectively with us and with the Independent F ranchise Council, we got together to look at the H2 NAF and the LAF mix and have agreed to slightly change that mix and increase the NAF slightly for the rest of the year to help kick in that flywheel here as we hopefully get a sense of some normalcy in the world.
Okay, that's great. Maybe just one broader question on the health of the system. I know you certainly mentioned the potential to see consolidation across the industry. When you think of your system, and we can see the pressure on your own company segment, just any perspective on the pressure that your franchisee base is feeling today and any updated statistics you can share around the health of the system within the Planet system?
Sure. I'll go quickly on the competitions and then let Tom fill in on the. We're doing franchise business reviews with all the franchisees now. We're going through them as we speak here, so we've got some good financials and updates there. Competition, besides the ones that everybody probably on the phone has heard between the Gold's Gym and the 24 Hour Fitness, there's almost now about 40,000 different independent gyms out there that you don't see the mom and pops or hear about them at the national level of closures or not reopening. We have franchisees in most markets now, even some corporate stores, that have been reached out by a competitor that just decided not to open.
It is going to be, I think, probably a six or 12-month timing of which people are either going to try to open or just not reopen, just based on a financial standpoint. I think there's definitely some opportunity there for us from a Planet Fitness system, for sure, in that world. Tom can probably build on the franchise business reviews.
Yeah. Hey, John. As Chris said, we've been in touch with our franchisees, as we said all along, but more recently doing franchise business reviews, as we call them. Also reaching out in certain situations like in California where the gyms closed and talking to all those franchisees who are affected. I think we're fortunate in, as Chris said in his prepared remarks, 75% of our stores, our franchise stores, are owned by franchisees who operate in more than one state. They're geographically diversified so that if they do have some stores in one state that are closed, they may have stores in other states that are open to help sort of with the economic pressure.
I think the only other thing I'd add is we've talked about before, we've been in touch with lenders and through these franchise business reviews to the extent that a franchisee had really a modest amount of debt from a leverage standpoint, given the store closures caused those debt levels to increase when they would have otherwise still remained modest. The lenders across the board have said they are being accommodating. We've talked to them directly, as I said, and the franchisees are obviously in touch with them. For the most part, they're waiving as long as the stores are closed, and then they're going to revisit the metrics upon reopening, which the franchisees share with them for their own stores. We feel like they're going to come out of this, but thankfully, in good shape.
As we've said, no one through all of these discussions has raised their hand and said, "I need financial help" or, "I don't think I can make it." They're all financially sound, working with lenders who are being accommodating and once the stores reopen, then they can start to build back their cash and their balance sheet and then start to look forward to development. It's in that sequence and that seems appropriate given where we are.
Great. I appreciate the color. Thank you.
Thanks, John. You bet.
Your next question comes from the line of John Heinbockel of Guggenheim Securities. Your line is now open.
Hey, can you guys hear me?
Yes, sure do, John. Yep.
Hey, John.
Chris, let me start with, if you look at the six or 700,000 reduction in members from where you were in the 1Q, have you been able to parse out demographically, how that breaks out among your key demographic groups and then geographically? Is there anything to learn from that?
I'd say from a high level, the Boomers are proportionally higher than what we normally see, as well as Gen Xers, where Millennials and Gen Zs are not. In some of the higher spiking states, we're seeing some higher index in joins. Like the Texas's, the Florida's, Arizona, for example, those also skew slightly higher than their peers here throughout the rest of the country. In Canada, which is very different, Canada has had increased joins and less cancels and a heck of a lot more usage up there than the U.S. stores.
Okay. Secondly, when you think about what plans you've started to put together for New Year's Eve heading into January, I guess you would assume that you'd have the vast majority of the clubs open. What's your early thought on how you attack your typical busy join season, and what's more the focus this year, the joins or trying to limit the cancellations in your marketing?
Yeah, cancels first and foremost, we want to make sure people start using the club. The reason the cancellation is generally people aren't using the workouts or facilities. We want to make sure that people begin to work out and get some benefit there for sure. I think driving demand is definitely going to be a big piece of what we need to do. I guess the question on the demand piece, which we're seeing here from customer sentiment, that a lot of it's going to be reassurance as opposed to strictly a dollar down. I think the financial piece, our membership's at $10 a month anyway, so that's always really affordable. I think now what we're seeing is this reassurance that we're clean, that the members are going to be safe.
All our surveys we've done so far on our side have shown that people are extremely happy with everything we've put in place, and the employees as well. Even corporately, we've had about 85% retention of our employees as they've come back from furlough. People are excited to get back in and see what they're seeing. I think too that, as we've said in the past, our average member works out five to six times a month, and that same usage pattern is holding true. Of the people using the store, they're using the same amount, which is great to see. New Year's Eve, yeah, they're still in play. They still plan on having it.
Hypothesis is that they're thinking because this is, government been still here or there's some social distancing or issues going to bars or nightclubs, that maybe viewership could be up because people are stuck at home. I still think we'll get a lot of airplay out of it with the message and get people hopefully to get 2021 off to a better start.
Okay. Thank you.
Thanks, John.
Your next question comes from the line of Simeon Siegel of BMO. Your line is open.
Thanks. Hey, guys. Hope you're doing well through all this.
Thanks, Simeon.
Chris, any way to quantify gross adds versus cancellations and how you're thinking about that trajectory? Just given the color on the current members, any thoughts more that ends the quarter and the year? Sorry if I missed it, do you give any differentiation in Black Card versus Classic for the reopened gyms or cancellations? Thanks.
Yeah. For Q2, we were about 58% Black Card acquisition for Q2, the system there. I think the adds question, I think the bigger question now is back to what I just mentioned here is from an acquisition standpoint, are we going to be able to drive a lot of high acquisition join on expiration dates, for example, or is it just more rebranding and reassurance messaging, which is yet to be seen. I think back to my previous question from the first-
Jon Komp is that we believe that most of these cancels we've seen today are draft related. The question is, now that these people have gone through their first or second round, does it get back to more of a normalcy, right? Because they haven't been drafted for three or four months, which we've seen. We always have cancels around draft day, we just playing catch up at this point as we're billing, which time will tell. The next couple of drafts here, August, September, for example, do we start to see people going down their second or third draft now they're back to the normal attrition.
Great. Then Tom or Dorvin, what's the right way to think about your ability to flex SG&A and store ops at various levels of revenue for the rest of the year?
Yeah, I'll start, and Dorvin, feel free to add. I think from a store standpoint, we've continued to furlough our store associates, except the club manager, where the stores are closed, and we'll continue to do so until we get the green light. We're continuing to work with landlords, as are our franchisees, around rent deferrals while the stores are closed. I'd say more broadly, just at this point, any sort of spending or investments that we don't need to do, we're not doing. Now, clearly digital is a focus, we're prioritizing that and some other things, when it comes to HQ, if there's a project that was in motion that we just don't feel we need to do at this point, that's where we're really pulling back. Plus all the other stuff we've previously mentioned and put in place.
Great. Thanks. Best of luck for the rest of the year, guys.
Great. Thanks, Simeon.
Thank you.
Your next question comes from the line of Randal Konik of Jefferies. Your line is open.
Thanks a lot. Can you hear me?
Sure can. How are you?
All right, great. Thanks, guys. I guess, Chris, I just want to get your perspective on how do you think this environment for your competition looks versus the great financial crisis of 2008, 2009, or 9/11, stuff like that? Just any other kind of periods of time that you can compare this to that give us some perspective on how much of these competitors can collapse, how quickly they can collapse versus prior periods. What does it feel like, or what is it looking like to you and any kind of color you can provide on what you're hearing about the non-usual suspects in the industry on how they're doing financially, meaning like not the chains, more the mom and pops. Just curious on your thoughts there.
Mom and pops, as I mentioned earlier, definitely we're getting the franchisees of the [Kong], the onesie, twosie guy. Even corporately, we've had a couple here call us saying that, "I have a competitor down the street," or they call us directly, say they're not going to open, so they want to sell the membership to us or if we're interested in a location. There's a lot more smaller one-off scenarios, but there's a lot more of those than there are national chains, right? As we've always talked about, if you take us and L.A. Fitness and 24 Hour Fitness and put them all together, you're lucky if you get to 3,000 or 4,000 stores. There's still another 35,000 mom and pops out there. I think there'd be a lot more of those than we realize.
I think you look at our franchisees. Tom mentioned earlier, the diversification. Our average franchisee has 20 locations. They're in multiple states. 75% are in multiple states. They might not have all their stores open, but they've got half their portfolio open. They're able to weather the storm a heck of a lot longer. I think the probability of this model, which as you know is extremely profitable, where if you look at Crunch Fitness, for example, and their FDD, their EBITDA margins per store is almost half of ours. The strength of those franchisees getting through this system and also a very newer franchise system. I look back in 2009 when we had this happen. We were much smaller back then. The average franchisee probably had three locations.
Luckily, we were low cost, so we get a lot of people trading down from higher priced clubs. The sophistication in our system at that point, it was a lot harder to weather that kind of storm. Now, this situation is even worse, right? To weather this kind of closure period. We would never close back then, right? I think you look at the EBITDA margins of our stores, the veteran ownership in our system now doing this for almost 20 years in franchising, it's just a much stronger system as a whole to get through this. The thing is, once we open, it's a different story. We have clubs that aren't opening, but when people are getting deferred rent, they're getting deferred lease payments on their equipment leases and so on and so forth. Now, deferred, that means they still have to pay them.
Now when you reopen your doors and you're paying 1.5 times rent and 1.5 times lease on your equipment, your expenses are 25% or 30% higher per store. It'll be tough for a lot of these guys that don't have as big of margins as we do.
Okay. That's super helpful. Just kind of try to parse out a little bit of the geographic differences you're seeing. Are there any states to call out that you say to yourself, "Wow, that particular state or states looks really like business as usual." What are those states and what are anything to kind of call out there? In contrast, states that look like they're really not business as usual and anything that stands out there as well.
From a high level, it's definitely states that we see less in the news.
Yep
25%, 30% of our stores, they had zero mask policy. Zero, nothing at all. We saw a lot of customer sentiment and even staffing that there was some angst there about being careful walking in when the state didn't even demand anything. Some states look at it very differently, but people are still somewhat concerned. Those states definitely have a little less angst, I guess, in the world than probably Florida or Texas, for example, or Arizona or California.
Yep.
I wouldn't say that the spread is that drastic.
Got it. Okay. Very helpful. Thanks, guys.
Great. Thanks, Randy.
Your next question comes from the line of Oliver Chen of Cowen. Your line is open.
Hi, Chris and Tom.
Hey, Oliver.
Regarding the cancellations that you're seeing, what would you say is ahead that's most within your control to manage that? Are there any comparisons that we should know about as we model going forward in terms of what you're up against last year? A follow-up. You have a number of strategies to help the franchisees, whether that be equipment or development delays. Which of those have the franchisees taken most advantage of? Thank you.
Sure. I'll talk about the joining the cancels, and then, Tom, you can fill in on the other part there.
The cancels, because I think it's billing related, I think we really have to get through that bill cycle that I mentioned, that once a couple of months of these go through, which is, I think, what we're seeing bigger part of the increase. Remember, though, the other 500 stores that are open, those 500 stores have to go through that same process of starting that back up. I think, unfortunately, the longer that they're probably closed, we'll be able to see what happens with that. These stores now, the stores in North Carolina, for example, if they open tomorrow, they're not billing their first bill cycle till September. We got to get through that 500 clubs as well.
I believe that we'll start seeing the cancel side of things on the existing stores that are open by September, October. This is now their second, third, or fourth draft in a row that you've probably gone through some of the bumps we're seeing today. Time will tell, as long as you don't have more closures like California and Arizona, and that doesn't seem to ramp. It's so fluid, as we all see on TV, just day by day, it changes based on reports of the day.
I think more or less it's going to be just how can we drive the messaging and the marketing because not only is it reassuring potential members, it's a current member at home that says, "Geez, look at all this cleaning stuff that's done and the protocols in place." In the advertising, you're kind of talking to both members and non-members, I think, in the advertising in the H2 of the year.
Yeah, Oliver, this is Dorvin. Just one other thing to add on Chris's comments on the cancellations and the fact that we went for basically three months without billing, and as you mentioned, we billed a few clubs in June and then a significant number more clubs in July. The other factor in there is that the last time we had billed the annual fee was on March 1st. The April annual fee, the May, and the June, those fees did not get billed to the members. The long-term fee did not get billed until basically in July, we did a catch-up, in other words, those months that we didn't bill the members. You had a lot of members that got billed their annual fee for the first time in over a year because they didn't get their April, May, and June annual fee.
There's always been historically a higher spike of cancels around an annual fee time period. When you go back years ago, we only had two months we billed annual fees. It was June and October. A few years ago, we changed it to where an annual fee can be billed for a member based on when they join a membership with Planet. That's another factor that really occurred during this time period of July as well.
Yeah. Oliver, I think the things the franchisees have taken advantage of, they all essentially got the 12-month extension on new store development and re-equips. The reason we did that, one, was to just alleviate the pressure that their lenders might have had or put on them to potentially experience a default if they weren't in compliance with our agreement. Pushing those dates out just alleviates the pressure from the lender. Essentially, everybody took advantage of that. As we mentioned, we did offer a 15% discount if equipment was ordered and placed by the end of the year. Folks who are able to execute that, it's a little incentive for them to do that. We essentially cut our margins in half, but we thought that was the right long-term thing to do.
Got it. A quick follow-up, the Black Card penetration going forward. Should we expect that to be a headwind or the comp when we do year-over-year? I would love any color there to the extent that you can provide it. Thank you.
It's one quarter. The other thing I think to note there is in June last year, we had a Black Card flash sale, which we didn't have in this Q2. Even though we were 15% of the Black Card, I'm not sure that that's necessarily going to be the norm, I suppose. We're 60% across the system, I think it was more probably impactful because we didn't have a Black Card sale in that quarter.
Which was the same thing that happened in Q1. We were up against the Black Card sale from last March, and we didn't execute it. I think as long as our promotional windows can line up based on what's going on in the world, then it should not follow the same trend that we just discussed. It's just a matter of what makes sense from a marketing calendar based on what's going on.
Yeah. Which plays in part to what I mentioned earlier on the NAF last little change we did with the franchisees on changing that mix slightly here for the remainder of the year to get that flywheel back going.
Yeah.
Yeah. Thank you very much. Best regards.
Thanks, Oliver.
Thanks, Oliver.
Our next question comes from line of Sharon Zackfia of William Blair. Your line is open.
Hi, good afternoon.
Hello.
Hi. I may have missed this, but did you indicate if you're profitable at 72% of the clubs open? Secondarily, what is the response then to the equipment discount? What are you seeing in terms of any uptick in planned replacements or new club openings in the back half?
Sharon, I want to make sure I understand the first part of the question. When you say, are we profitable, do you mean Across the stores that are reopened, are they now profitable? Is that what you're asking?
No, at a corporate level. 72% of stores open, is that enough to cover all of the corporate G&A and so on with the organization?
From an EBITDA standpoint, we were negative. I'm not sure if that.
I'm asking as of July. In July, I think you indicated you have 72% of stores open at this point. I'm just wondering at that level, I understand the June quarter. At the current run rate, are you profitable?
I'm with you. Yes.
Okay.
At that level, we would be profitable. Sorry about that. I misunderstood.
No, that's okay. No problem.
Yeah, from an equipment standpoint, it's hard to understand the what would've been, because as things have evolved, franchisees, new store development, and Dorvin, feel free to add, has shifted as well based on whether a state has remained closed or in a couple of cases has reclosed. We believe that at the end of the day, we'll do more placements. We'll make a little less money than we would have otherwise and probably end up being margin dollar neutral to what would've been without the incentive.
Yeah, thanks, Sharon. What I'd add to that is that Tom makes a good point in that states like California where clubs are shut down or even states where we haven't been able to open again, like in North Carolina as an example. Those franchisees are being very cautious about going out and either re-equipping the club or certainly starting construction on a brand-new site because with really not knowing what the potential end game would look like. The flip side of that is you do have franchisees that are in good financial shape. They got a territory where they're seeing this as an aggressive opportunity to double down against the competition, and they're out there looking for sites. It's clearly a mixed bag, and there is a lot of wait and see because of just the news of COVID and the spike states as well.
There will be some that will take advantage of the discount program for sure.
Okay. Thank you.
Thanks, Sharon.
Your next question comes from the line of John Ivankoe of J.P. Morgan . Your line is open.
Hi. Thank you. I apologize if I missed this. Can you say how many units are actually in some form of either signed lease or groundbreaking for the H2 of 2020 from a company and a franchise perspective in terms of the new gyms and new placements that we could actually expect? I did hear excuse me. I did hear in the prepared remarks comments about getting better lease terms from landlords, more sites coming available, more flexible terms, what have you. I guess, what do you think in terms of what's happened to the near-term market opportunity? I know it's a really hard question, but assuming that I think a lot of people think we get a vaccine at some point by early 2021, mid 2021, maybe at the latest. What do you think that could really mean for development in 2021 and 2022?
Do you think we can get back to 2019 levels? This really is and I guess the biggest and most important part of the question at this point, what the overall appetite is for opening stores. I guess that's making the assumption that you believe that proposition is true.
Yeah, John, this is Dorvin. What I'd say is that we don't disclose how many leases are signed and at what stages they're at in the construction phase. We opened stores in Q2, and we'll open stores over the balance of the year. Some of that is to my last comment is literally in timing in that there's sites sitting out there that franchisees are waiting till they know that their clubs are going to be able to be open and they'll be able to continue the construction site and get it closed. There are clearly franchisees that are sitting and waiting and saying, given that we're going through this pandemic time when it seems to be spiking and no one knows exactly when it's going to cool off or calm down a bit or to get the vaccine.
There's also some that are saying they're just going to wait and see. Some of that, quite frankly, is to build back up their cash reserves. If you go through a period of three, four months or longer for close to 600 stores that are closed. They're going to take a time period to try to build back some of their cash reserves before they start really plowing back into it in a big way. There are others that either are in a better financial balance sheet position or see this as an opportunity to really get aggressive. We've had a conversation just this last week with one such franchisee that he's out there aggressively in his markets believing this is an opportunity to go after the competition.
To your point on the real estate availability side, I don't think we've seen the full fallout yet as to what real estate availability is going to look like. I think that the consensus by the franchisee and their real estate teams, and what we're hearing from the broker communities, are that there's going to be a lot more space available. I think Tom may have made a comment in his remarks a little bit ago that one of the issues at the moment is that landlords are spending a lot of their time dealing with franchisees in our business and other businesses that pushed them hard on abatements and deferrals, et cetera. They're dealing more with the immediacy of that than they are out there trying to re-lease space. That's got to take a little bit of time to work its way through.
I guess, net-net, as we said earlier in the year, we believe this year could be as much as 50% or more down over the 2019 level. In terms of longer term, I think the moat's going to be greater. I think the real estate availability is going to be more plentiful than it was. I believe our franchisees will be just as aggressive at building as they had been in the past. The only question is how long does it take to get there? That's just really, at this point, John, it's just still too much of an unknown.
Yes, I understood. I certainly at least wanted to hear your perspective on that, which is very helpful. In terms of some of the new gym performance, some of the gyms that did open, for example, in the Q2, maybe into the third, what is the performance of attracting new members to new gyms? Which I would imagine would be kind of a very different proposition than basically maintaining existing members at existing gyms.
Do you want me to take that?
I'll take that. Earlier in the year, our stores that we opened up were performing just in line with the way stores had performed in the past. Typical average store, how it opened up in its first month, second month, third month, et cetera, was doing very similar to the past. Once we got into the pandemic, and all stores closed, you had an impact not only from stores that were going through pre-sale, because that's a big deal for us. You've heard us talk about we typically open a gym with over 1,000 members when the gym opens, and it starts to ramp up for that.
When you throw the pandemic in during a time period of where you're in the middle of a pre-sale and you maybe can't even finish it, close down, then you open back up, you didn't really get kind of that initial bump. You've got the issue of just the virus and the pandemic. There's clearly been a bit of a slower pace on ramping post-COVID, and that really doesn't concern us in a big way, particularly because earlier in the year, we were seeing our performance of our business similar to the past. I think it still comes back to a lot of the comments that we've been talking about, and that is that there's still demand out there. There's still people that want to join the gym. There's a hesitancy for workouts. Workouts have been down, as Chris talked about earlier.
We don't see that as a detriment to our overall four-wall store model.
Thank you.
Yeah, thanks, John.
Thanks.
Thanks, John.
Your next question comes from the line of Joe Altobello of Raymond James. Your line is open.
Thanks. Hey, guys. Good afternoon. There was a question, I want to go back to usage for a second. You mentioned that the average across the store base that's open is about 60%, but I think you mentioned that some stores are actually approaching usage levels that you saw at this time last year. I'm just curious, what's the key difference or differences in those stores that are approaching 100% usage index? Is it largely geography? Are these more rural stores? Is it the average age of members within those stores? Is there something unusual about those stores where the usage index is about 100% of last year?
Yeah, those were the earlier stores that opened up. There's definitely a key piece is the longer they've been open, and in most cases, the longer ones have been open are also the ones that the states are less, I guess, full of COVID. The people have less angst. Those clubs definitely, the longer they were open, were getting up into that 80-plus and some are actually almost on par with last year. The thing, though, what happened in July, we just started seeing the re-closings and more of the hype of the resurgence. Things kind of just went flat where we were saying before how every week it was going up 5, 10 points in usage, and then it kind of got to 60% and just kind of stayed there, and it hasn't really progressed since the resurgence in some of the states.
I think it's just more of that angst out there that's kind of held it where it's at right now, I think. I think we just got to wait for the consumers to get a little bit more comfortable here to begin to venture out and start to work out again. I worked out this morning in my local store here in Seabrook, New Hampshire, and I thought it was totally fine. People were cleaning the equipment down more than they ever did. They walked around. They stayed away from each other. Problem is you got to get in to see it. Then once you see it, you're like, "Oh, this is no big deal." I think that's probably more of it, is just getting them in there that initial first time.
Got it. That's helpful, Chris. Thank you. Just secondly, in terms of the help of your franchisees, have you had any discussions regarding acquiring stores from any struggling franchisees, or have you facilitated any transactions between franchisees on that front?
Yeah, I'll start.
Yeah, I'll take that one. This is Dorvin.
Sorry. Go ahead.
One of the things, and Tom's talked about it in our model.
Joe, is that because of the returns of the investment of the model and the margins that these four walls threw off, even with some contractions or stores being closed for a period of time. Although it always hurts to not have revenue coming in, we haven't had any franchisees that's come to us that says, "Would you buy us?" We have not had to broker any transaction between one franchisee and another franchisee because somebody had to get out. I think that speaks to some of the comments that Tom made earlier in terms of just the overall financial condition of franchisees, is that they've been able to weather the storm up to this point, and with 70% plus have stores in multiple states. They've got some diversification there.
That's not the case in our scenario because our average franchisee probably has 15+ stores or so, with many having significantly larger. They've done the same things that Tom was talking about that we did with our corporate stores. In most cases, they furloughed all their team members except for managers. They took a hard look at their headquarters SG&A and started cutting expenses there. They've been really very financially prudent during this process, leading up to where we are today.
Yeah, I think the only thing I'd add to that is, somewhat extended an olive branch to be sure that if there's anybody out there that is waving the white flag or nervous, to give us a call, let us know, or even other big franchise groups privately backed that have reached out on their own. I think back to Dorvin's earlier point, the franchisees are bullish to get a sense of normalcy and then to begin to develop again, because nobody's taking us up or anybody up on that scenario. They're bullish about the future, so they're kind of hanging in there, just waiting for this to pass.
Got it. Great. Thank you, guys. Appreciate it.
Thanks, Joe.
Thanks, Joe.
Your next question comes from the line of Rafe Jadrosich of Bank of America. Your line is open.
Hi. Thanks. Good afternoon. Thanks for taking my question, guys.
Hey, Rafe.
Yeah.
The first question I have is just, can you just remind us, I know you're providing a 12-month extension for the club opening requirements and the replacement equipment. Can you just remind us of the commitments that your franchisees have over the next couple of years as you look a little bit further out in terms of what's in the ADA pipeline that they're committed to?
Yeah, Rafe, this is Dorvin. As we've said in the past, franchisees have over 1,000 committed under their area development agreements. At any point in time, if you go back and look now over the past three, four, five years or so, generally about half of those are required to be developed over the next three years. What we did is we, in essence, just said, we give you an extra 12 months and just pushed everything out 12 months. The commitment is sort of the same. It's just been pushed out an incremental 12 months.
Okay. You're not seeing any pushback or change to next year or the outer years of that commitment?
Yeah. I don't think what we're going to see is that if a franchisee had five stores this year and five next year, we pushed it out. What he has the ability to do is just to do five next year and then five the following year. In some cases, franchisees, we'll see where, as we've been talking about kind of the normalcy, what it's going to look like. Many of our franchisees have been ahead of schedule. They technically, in the past, and we've made comments about it, could have slowed down their development because they were ahead of what they had to do, but kept building, redeploying their cash. We don't know what will happen in this case.
Once we kind of get past some of these issues and get all of our clubs up and running again, it could clearly be the franchisees might do some catch-up and get caught back up on what they were going to do this year versus what they would be required to do next year. I think it's still going to take a little bit of time to get kind of to the other side of this to see how fast they might try to get their development schedule back up and running.
Okay. Thank you. The second question is just, was there any additional revenue deferrals in the Q2 that'll be recognized in 3Q or later on in the year?
Hey, Rafe, it's Tom. No, there weren't any additional ones. It's more what was deferred from Q1 in March hasn't fully been recognized. That'll just get recognized whenever those stores reopen.
Do you have a rough I think it was $20 million, and then I think you mentioned on the Q1 call, and you recognized $11 million of that. Is that roughly the right amount?
Yeah, there's about $12 million left to be recognized.
Okay, great. Thank you.
Thanks.
That is all the questions we have time for today. At this time, I turn the call back over to the presenters.
Great. Thank you, everybody, for taking the time today and listening in on our Q2 call and some small updates from the beginning of Q3. Looking forward to getting through this here and get the rest of these stores open. Excited about the H2 of the year. Hopefully, we can get things back on track and get these franchisees, take care of them, and make sure that the staff and members are all happy with all our cleaning and things we're doing. The one thing that I always like to reiterate, and I've heard me on my few calls recently with some interviews, is that we're definitely the solution here to this and not the problem. I think what the industry is lacking is representation.
I think one thing we've got to work as a team here from Planet standpoint is that if you think about it, we're really a key integral piece of the healthcare distribution process. To close gyms is just really counterproductive in my view. If 20% of the U.S. has a gym membership, you make a case if the other 80% did, we probably wouldn't be here. A lot of upside here for this industry, and I think Planet is well-positioned to take full advantage of all of it. I think it's a good spot. We just got to get through this together. Thank you, everybody. Have a good day.
This concludes today's conference call. You may now disconnect.