Good afternoon. My name is Gabriel, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Planet Fitness 4th Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Mr. Brendan Frey, you may begin your conference.
Thank you for joining us today to discuss Planet Fitness' 4th quarter 2018 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 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 to you to the disclaimer regarding forward looking statements that is included in our Q4 2018 earnings release, which was furnished to the SEC today on Form 8 ks 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 as 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, Brendan, and welcome to Planet Fitness' Q4 earnings call. 2018 was another banner year for Planet Fitness and I am extremely pleased with the strong results we delivered. We rounded out 2018 with a fantastic 4th quarter highlighted by double digit same store sales increase of 10.1% for a 3 year stack comp of 32.2%. This also marks our 48th straight quarter of posting positive same store sales comps, which is truly incredible. Adjusted net income per diluted share grew 42 percent to $0.34 compared with $0.24 in the prior year period.
And for the quarter, net member growth contributed to over 70% of the increase in system wide same store sales, reinforcing that our differentiated and affordable approach to fitness continues to resonate with consumers. For the full year, comps increased 10.2% for the 2nd year in a row and we added approximately 1,900,000 net new members to end 2018 with approximately 12,500,000 members system wide. What is remarkable about these figures is that we believe our affordable and non intimidating approach to business is expanding the overall health and fitness market, evidenced by the fact that 35% of our new member joins identify as first time gym members. Even with our tremendous success over the past several years, we are confident there is still a long runway for growth well into the future. We are continuing to thoughtfully and aggressively expand our presence and we still have the opportunity to more than double our domestic store footprint.
In 2018, we opened 2 30 new stores system wide, which included selling and placing equipment in a record 228 new stores. This growth is led by our passionate, improving, well capitalized franchisees who continue to reinvest in their businesses by opening stores in both new and existing markets. Of the 230 new store openings in 2018, 226 were franchise stores and 4 were corporate stores and we ended the year with 1742 stores system wide. The makeup of our franchise system is also a competitive advantage for us With more than 90% of our growth coming from existing franchisees opening more stores, we know that they understand and believe in the model and can run our playbook and are strong operators. We also have more than 10 franchise groups who have partnered with private equity to accelerate their growth, build out their systems and leadership teams as they scale their businesses.
The sophistication of our franchise system combined with our franchisees' passion for our mission and both growth plans continues to set us apart from other franchise brands. Looking ahead, real estate trends appear to remain in our favor as many bricks and mortar retailers continue to close stores and landlords are increasingly looking to Planet Fitness as key tenants to drive traffic to their centers. In addition, we are also working with a variety of retailers who are looking to downsize their boxes in markets where we are looking to expand our presence. An effort to better capitalize on our growing availability of real estate, we have hired a handful of our own in house real estate brokers to work with our franchisees locally on sourcing and securing premium sites. Based on our investments we've made and our franchise support team, the strength of our business model and our franchisees increasingly bullish growth plans combined with favorable real estate trends, we are increasing our new equipment sale and placement target in 2019 to approximately 225, up from the roughly 200 we've targeted at the start of the past few years.
Also fueling our confidence in the future is our large and growing advertising budget. Through our national and local advertising funds. We spent approximately $175,000,000 on our collective marketing efforts to highlight our unique judgment free environment that caters to casual and first time gym goers versus avid exercises like traditional gyms, up from $130,000,000 in 2017. 2% of every member's monthly dues is allocated to the National Ad Fund, while 7% goes towards local marketing. With every new incremental member, our marketing machine gets bigger.
This is a huge competitive advantage for us and allows us to run our memorable and television ads nationally, explore new brand partnership opportunities and continue to sponsor marquee events like the Times Square Iconic New Year's Eve celebration for the 4th year in a row. New for 2019 New Year's Eve celebration, we expanded our presence on both coasts in New York City and LA with increased branding and celebrity integrations. I had the pleasure of attending the event in person this year and I can tell you that the rain did not put a damper on the celebration. Times Square was a sea of purple and yellow and 1,000,000 revelers on-site and a billion viewers TV worldwide were exposed to our brand. Speaking of exposure, results from our annual brand health survey continue to show Planet Fitness ranking number 1 in brand awareness in the gym category.
Our market efforts remain focused on reaching new consumers and engaging existing customers. Currently, millennials make up our largest demographic and we believe we are well positioned to capitalize on opportunities with Gen Z, an even larger generation that follows millennials and makes up approximately 26% of the U. S. Population according to Nielsen data. Teen Summer Challenge pilot program, which allowed New Hampshire high school teens ages 15 to work out free all summer was extremely successful and helped introduce members of Gen Z and their parents to our brand, build loyalty and affinity.
Providing youth with free access to fitness not only addresses the important societal need to help teens get active and increase their overall health and wellness, we believe it is also a great opportunity for our brand in the long run. And we look forward to potentially expanding this program nationwide this summer. Switching gears now to an update on our connected equipment test from our 3 suppliers in 15 stores. The plan is to implement the initial test learnings ahead of expanding the test to additional locations later in the year. Early member feedback includes a desire for enhanced fitness functionality.
For example, the ability to attract progress over time, receive recommendations of what to do next and to see how the results stack up against others. While many have logged on to watch TV, having access to Amazon, Facebook, Netflix, etcetera has not been a top priority. In the Q2, we'll begin launching our new proprietary Planet Fitness app, which will give us the opportunity to influence the mobile member experience via enhanced functionality and design. Release 1.0 will include streamlining existing functionality, including members' digital key tag, workout tracking and the ability to find a club and join, along with several new features. We also recently completed our 1st member segmentation study to look at usage and membership insights to learn more about our members' behavior at the gym.
At the same time, we conducted customer journey mapping work to better understand the needs and desires of our members within each segment and how Planet Fitness can deliver against them. The intersection and outcome of this work will help to shape the delivery and increased personalized member experiences. We are encouraged by the first steps we have taken towards delivering a more personalized and connected fitness journey to our members via our equipment enhanced mobile app, which we believe will further differentiate our concept and strengthen our offering with casual and first time gym goers. Finally, we continue to support additional brand partnership opportunities outside of the store that could provide discounts to members on a wide variety of products and services. With approximately 12,500,000 members, we believe we can leverage our size and scale to provide additional value and further enrich our members' lives.
In closing, 2018 was another very successful year for Planet Fitness. On top of the strong financial results we achieved, I'm very pleased that the hard work of our franchisees, club staff and corporate employees continues to be recognized by leading publications such as Newsweek, which named Planet Fitness number 1 in customer service among fitness clubs. We also placed 7th in Entrepreneurial Magazine's annual franchise 500 ranking, the highest of any fitness concept. FFBE4 has there been so much opportunity to Planet Fitness brand and our low cost high value offering. Our platform is built to support multiple growth vehicles, including more than doubling our U.
S. Footprint to 4,000 stores, developing an enhanced digital offering to enhance members' experience and expanding our affinity network. With our great group of franchisees, passionate teams throughout the organization and growing marketing machine, I'm confident as ever that the company is strongly positioned to continue to grow the overall health and fitness market for years to come. Board of Directors is also extremely confident in our future evidenced by the decision to increase our buyback authorization to $500,000,000 last August, which we acted on aggressively through the $300,000,000 accelerated share repurchase program we entered into November. With that, I'll turn the call over to Dorvin.
Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing the details of our 4th quarter results, highlights from 2018 and then discuss our full year 2019 outlook. For the Q4 of 2018, total revenue 30.1 percent to $174,400,000 from $134,000,000 in the prior year period. Total system wide same store sales increased 10.1 percent. From a segment perspective, franchisee same store sales increased 10.1% and our corporate same store sales increased 9%.
Approximately 70% of our Q4 comp increase was driven by net member growth with the balance being rate growth. The rate growth was driven by a 30 basis point increase in our Black Card penetration to 60.1% compared to 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 300 basis points of the increase in same store sales. Our franchise segment revenue, which beginning in 2018 now includes national advertising fund revenue was $56,600,000 an increase of 41.4 percent from $40,000,000 in the prior year period. Let me break down the drivers for the quarter.
Royalty revenue was $38,500,000 which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $27,100,000 in the same quarter of last year, an increase of 41.8%. This year over year increase had 3 drivers. 1st, we have 210 more franchise stores since the Q4 of last year. 2nd, as I mentioned, our franchisee owned same store sales increased by 10.1%.
And then third, a higher overall average royalty rate. For the Q4, the average royalty rate was 5.8%, up from 4.8% in the same period last year, driven by more stores at higher royalty rates, including stores that amended their existing franchise agreements to increase the royalty rate instead of paying certain fees and commissions, as I will discuss below. At the end of Q4, we had approximately 86% of our store base no longer on the commission structure compared to approximately 60% in the prior year period. Next, our franchise and other fees were $3,500,000 compared to $6,400,000 in the prior year. These fees are received from processing dues to our point of sale system, fees from online new member sign ups, fees paid to us for new franchise agreements and area development agreements, as well as fees related to the transfer of existing stores.
The decrease was primarily due to the number of stores that have amended their existing franchise agreements to increase the royalty rate instead of paying these fees just mentioned. In addition, the change in how we recognize ADA and FA fee revenue was about a $700,000 headwind in Q4 of this year compared to the prior quarter. As we outlined previously, we now recognize these fees over the life of the agreement versus at the time the related franchise agreement and lease is signed. Also within franchise segment revenues are placement revenue, which was $3,800,000 in the 4th quarter compared to $4,000,000 last year. These are fees we received for assembly and placement of equipment sales to our franchise owned stores.
Our commission income, which are commissions from 3rd party preferred vendor arrangements and equipment commissions for international stores was $1,600,000 compared with $2,500,000 a year ago. The decrease was primarily attributable to the number of stores that have amended their existing franchise agreements to increase the royalty rate instead of paying these commissions as just discussed. Finally, national advertising fund revenue was $9,200,000 compared to 0 last year as the new GAAP rules related to how we account for NAF contributions went into effect on January 1, 2018. As a reminder, prior to this year, the NAV contributions really only had an impact on our balance sheet. Due to recent accounting changes, we now recognize these contributions as revenue and record the expenses associated with the National Ad Fund as marketing expenses.
Our corporate onshore segment revenue increased 28.4 percent to $36,200,000 from $28,200,000 in the prior year period. Of the $8,000,000 increase, dollars 4,500,000 was driven by the 10 franchise stores we acquired in Long Island and Colorado earlier in the year, dollars 1,600,000 was due to primarily the 4 new corporate stores we opened in late 2017 and to a lesser extent the 4 new corporate stores opened in the second half of twenty eighteen and $1,900,000 was driven corporate owned same store sales increase of 9% as well as increased annual fee revenue. Turning to the equipment segment, revenue increased by $15,800,000 or 24 percent to $81,600,000 from $65,800,000 The increase was driven by higher replacement equipment sales to existing franchisee owned stores. For 2018, replacement equipment sales were 44% of our total equipment sales compared to 38% for the prior year. Our cost of revenue, which primarily relates to the direct cost of equipment sales to franchise owned stores amounted to 60 $2,500,000 compared to $50,900,000 a year ago, an increase of 22.9%, which was driven by the increase in equipment sales during the quarter as discussed above.
Store operation expenses, which are associated with our corporate owned stores increased to $19,900,000 compared to $15,300,000 a year ago. The increase was driven primarily by cost associated with the 10 new stores we acquired in 2018 and the opening of the 4 new stores in the second half of twenty eighteen, including preopening expenses. SG and A for the quarter was $20,400,000 up 15.5% compared to $17,700,000 a year ago, driven by incremental payroll to support our growing operations and higher variable and equity compensation. National advertising fund expense was $9,600,000 more than offsetting the aforementioned NAF revenue of $9,200,000 we generated in the quarter. Our operating income increased 24.8 percent to $52,700,000 for the quarter compared to operating income of $42,300,000 in the prior year period.
Operating margins decreased approximately 130 basis points to 30.2% in the Q4 of 2018. This decrease was driven by the gross up on the income statement from the NAF revenue and the NAF expense mentioned earlier, which negatively impacted operating margins by approximately 170 basis points compared to a year ago. On an adjusted basis, excluding certain one time costs and the impact of NAP revenue, adjusted operating income margins increased approximately 10 basis points to 32.5%. Our GAAP effective tax rate for the 4th quarter was 15 point 6% compared to 99.8% in the prior year period. As we have stated before, because of the income attributable to the non controlling interest, which is not taxed at the Planet Fitness corporate level and any discrete tax items recorded during the period such as the impact of tax reform or state tax rate changes and appropriate adjusted income tax rate for 2017 was approximately 39.5% if all the earnings of the company were taxed at the Planet Fitness Inc.
Level. For 2018, following the passage of tax reform in late 2017, an appropriate adjusted income tax rate would be approximately 26.3%. On a GAAP basis, for the Q4 of 2018, net income attributable to Planet Fitness Inc. Was $24,800,000 or $0.29 per diluted share, compared to a net loss of $3,500,000 or $0.04 per diluted share in the prior year period. Net income was $28,800,000 compared to $800,000 a year ago.
On an adjusted basis, net income was 32,500,000 dollars per diluted share, an increase of 38.1 percent compared with $23,500,000 or 0 point 24 prior year period. Adjusted net income has been adjusted to exclude non recurring expenses and reflect a normalized tax rate of 26.3 percent and 39.5 percent for the Q4 of 2018 2017 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 non cash and other items that are not considered in the evaluation of ongoing operating performance increased 21.6 percent to $62,300,000 from $51,200,000 in the prior period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release.
On an adjusted basis and excluding the impact of NAF revenue, adjusted EBITDA margins decreased approximately 50 basis points to 37.7%. The year over year decrease in adjusted EBITDA margin had 3 drivers. 1st, the higher SG and A expenses mentioned in my earlier comments. 2nd, higher losses from foreign exchange rates reducing margins by approximately 25 basis points. And third, higher net NAF expense as a result of the timing of NAF expense exceeding NAF contribution revenue, reducing margin approximately 25 basis points.
By segment, our franchise segment EBITDA increased 21.1 percent to $38,800,000 driven by higher royalties received from additional franchise owned stores not included in the same store sales base and an increase in franchise owned same store sales of 10.1 percent as well as a higher overall average royalty rate. Excluding NAP revenue, our franchise segment adjusted EBITDA margins increased by approximately 100 basis points to 82.1%. The increase in adjusted EBITDA margin was due to the 18.4% increase in revenue, excluding NAF, partially offset by the higher SG and A costs discussed above and the net NAF expense reducing margins by approximately 90 basis points due to the timing mentioned above. Corporate owned store segment EBITDA increased 29.4 percent to $14,600,000 driven primarily by the 9% increase in corporate same store sales, higher annual fees, the 10 franchise stores we acquired in 2018 and the 4 stores we opened in late 2017. Our corporate store segment adjusted EBITDA margins decreased approximately 20 basis points to 42.5%.
The decrease in margin was 2 fold. 1st, the impact of the 4 new stores opened in 2018 decreased margins by approximately 100 basis points as a result of the expected new store ramp and second, higher losses on foreign exchange rates, which reduced margins by approximately 120 basis points. Partially offsetting these reductions were increased margins of approximately 200 basis points across the remaining stores due to the increase in same store sales of 9%, increased margin from the 10 acquired stores of approximately 10 basis points and increased margins from the 4 new 2017 stores of approximately 30 basis points due to their expected ramp. Our Equipment segment EBITDA increased 27.3 percent to $19,000,000 driven by higher replacement equipment sales to existing franchise owned stores versus a year ago. Our equipment segment adjusted EBITDA margins were 23.3%, up 60 basis points from 22.7% a year ago.
Turning to the full year, let me quickly summarize the highlights for 2018. Revenue increased 33.3 percent, system wide same store sales were up 10.2% on top of a 10.2% increase in 2017. Our average royalty rate for the year increased 136 basis points to 5.61 percent. Corporate store same store sales increased 6.5%. Equipment segment revenue increased 25.3 28 new shore equipment sales.
Our adjusted EBITDA increased 20.8% to $223,200,000 and our adjusted net income was up 45.3%. Now turning to the balance sheet. As of December 31, 2018, we had cash and cash equivalents of $289,400,000 and undrawn borrowing capacity under our variable funding note of $75,000,000 During the Q4, we entered into a $300,000,000 accelerated share repurchase agreement with Citibank. To the terms of the agreement, we retired approximately 4,600,000 shares, which is approximately 80% of this year as we expect to repurchase under the ASR. We expect the ASR to be completed by no later than the Q2 of this year.
As of 2018, approximately excluding deferred financing cost was $1,200,000,000 at the end of Q4 consisting solely of our whole business securitization, which includes $575,000,000 of 4 year notes due in September of 2022 with a fixed interest rate of 4.262 percent and $625,000,000 of 7 year notes due in September of 2025 with an interest rate of 4.666%. Let me discuss our CapEx for the year. With respect to cash used in investing activities, our total net spend in 2018 was approximately $86,000,000 which included approximately $46,000,000 for the 10 franchise stores we acquired in Long Island and Colorado, driving $4,500,000 of additional revenue in 2018. Additionally, we incurred approximately $10,000,000 for 4 new corporate stores, dollars 3,000,000 for replacement equipment of our corporate store base and $5,000,000 for a building and land purchase related to an existing corporate store. We incurred approximately $9,000,000 on IT infrastructure investments and the remaining expenditures were primarily associated with corporate store renovation projects.
Now to our outlook for 2019. For the year ended December 31, 2019, we currently expect the revenue to increase approximately 15% over 2018 levels, driven by same store sales growth in the high single digits and the sale and placement of equipment in approximately 225 new stores. We anticipate that replacement equipment sales to be slightly under 50% of our total equipment sales in 2019. While the number of new store equipment sales and placements for 2019 is projected to be similar to 2018, the quarterly cadence will be different. Based on the current timing as we see today, we expect to see an increase in the number of new store equipment sales and placements during the first half compared with last year, particularly in the Q1 and a decline in the second half with the biggest reduction on a year over year basis coming in the Q4.
Overall, we see good continued momentum coming into 2019. With respect to profitability, we currently expect adjusted EBITDA to grow approximately 20%, adjusted net income to grow approximately 18% with diluted EPS increasing approximately 25% based on a fully diluted share count of 92,400,000 shares. For 2019, we anticipate CapEx to be approximately $50,000,000 including approximately 5 new corporate stores. Compared to 2018, our 2019 spend includes approximately $10,000,000 of additional expenditures on corporate owned stores and approximately $5,000,000 of additional expenditures on IT infrastructure investments. I'll now turn the call back to the operator for questions.
Thank
you. First question comes from the line of Oliver Chen of Cowen. Your line is open.
Thank you very much. Congratulations. Given the momentum that you've seen, how are you thinking about growth and the new unit growth opportunity, particularly as you see such great real estate availability? And also, there's some clubs that are probably very saturated in terms of number of members. Just would love your thoughts there.
And Chris, you mentioned membership segmentation and customer journey mapping. As we align that with our financial models, how do you think that will play into the comp store sales or the shrink in terms of turnover that would be great to get your views? Thank you.
Great, Oliver, it's Dorvin. I'll take the first part of that and Chris can add to it and then take the segmentation question. I would say that as we discussed back on the last 2 to 3 quarterly conference calls, the trends from a real estate perspective continue to be in our favor. As our scale gets bigger, as we get more stores in markets, the presence of the brand, the landlords that are looking at either vacant real estate. We know them, we know the major landlords and regionally end markets, we know the national big of landlords.
We meet with them regularly, and they're looking for to fill those to fill little boxes and then including stores that are going to be coming off lease, whether it's the next 12, 24, 30 6 months. And we've also said that we continue to talk to some of the major retailers that are looking to downsize their real estate, some of their boxes. I know we've talked about whether it would be Kohl's or someone else like that. And I think that we're the perfect tenant for that because we do drive the traffic and we drive the traffic early in the week as opposed to the end of the week when maybe some of the other tenants are driving traffic to their centers. So I would say, if you look, our results for the quarter came in just slightly ahead of where we had guided the Street 2 at the end of Q3 based on a full year and pretty healthy increase over 2018.
And then our guidance reflects very similar number of new units in 2019 as well. So we continue to see really good favorability on the real estate front. And then as Chris made some comments on his first part, our franchisees now are with their size and scale and sophistication are willing to put the capital work when those opportunities come up. And so in the past, maybe they were only going to do 3 or 4 a year. Well, now if real estate comes up, they might do 8 or 10 a year.
And so that's what happens when you have franchisees that are sophisticated with market planning and have the talent in place to keep their pipeline in development mode. So I guess I'd summarize by saying, I think real estate trends are as good as they've ever been. And we are a tenant that a lot of these guys look to. And we see, as I made in my prepared remarks, we see good trends coming on into 2019
as well. Hey, Oliver, it's Chris. With the customer member segment study as well as the journey mapping, it's still too early to tell as we just wrapped it up. But for the first time now that we've done this now to figure out the segments that our members fall in, what's the right way to communicate with them, connect with them in the channel of preference and how we interact with them as well as the customer journey mapping, what each of those segments really like and what's their experiences that they really want from our brand. So it's still early to tell, but I can only imagine it's only move the needle as we learn how to communicate with these people better.
Okay, very helpful. Just last question. One question we get is your approach to Black Card pricing. You're really offering a compelling value with black card pricing. But what's your framework for thinking about future potential increases?
And Dorvin, as we model the comp in the year ahead, do you expect that ratio of pricing versus member growth to be seventy-thirty, just would love parameters around that? Thank you.
So October of 2017 was when we moved it last. And that was that $2 increase which we've talked about. That was the first time we've moved it in essentially forever. So and the reason for that one was reciprocity, which we had backed in by 5,000 stores. Now we're north of 1700.
So it does beg the question that as we get more stores can the reciprocity by itself push more price and I think there's some opportunity there for sure as we continue to open more stores. On top of that, as we look at the Planet Fitness experience and the technology we're rolling out with the new app that's coming out in Q2 and more functionality for the members, where there's content inside and outside the club, maybe some nutrition components in the future, just more options for them and services to Black Card option could also push price or acquisition or both. So that's definitely top of mind for us. So I do think there's room probably in the future for MVMT for sure.
Yes. I think on comps, Oliver, we set our guidance high single digits. I think the pricing impact in 2019 ought to be in 150 bps range that we'll continue to see some of the benefit that we obviously got in 2018. But I'd say $150,000,000 is probably a kind of a good target as to the impact on same store sales this year.
Thank you very much. Best regards. Congrats.
Thank you. Thanks, Oliver.
Your next question comes from the line of Jonathan Komp of Baird. Your line is open.
Yes. Hi. Thank you. First question, obviously, the comps look good at the system level, but the company comps acceleration to plus 9 stands out. It might be the highest I can recall in the model.
So any more color on what's driving the sequential improvement there for the company comps?
Yes, John. It's as we talk about the maturity of stores that go in comp in the comp base. Obviously, we have a smaller number of total stores, but we had 4 new stores that came into comp in Q4 that opened up in the previous year. So that's a good piece of that. But I will say is, if you can go back and look at Q1, Q2, Q3 comps, there's been continued momentum in our kind of corporate fleet base, but a good pickup in Q4 with respect to the 4 new stores coming in.
Okay, understood. And then Dorvin, I want to follow-up on the unit outlook for the year. I can't ever recall a year that's been front weighted in terms of the openings. So I wanted to maybe dig in a little bit more and understand why you see that as being the case this year. And there any opportunity?
I know there's a fairly short lead time, but as you look to the second half openings, is there any potential to sustain some of the momentum you're projecting in the first half?
Yes, it's obviously we got a line of sight into the nearer term. I've always told you guys that roughly speaking, getting on the lease and negotiating lease, if you take kind of the opposite ends of spectrum out is probably 5, 6 month time period. It depends on turnover from the landlord, but probably a good timeframe is about 3 months, about 90 days give or take on if you get a good plain vanilla box and the town is not too restrictive on permitting, etcetera. So what we've always said is we have pretty good line of sight into, call it, the next 4 to 6 months, knowing there'll be some fallout, there'll be some delays and then there could even be some that might hit the stride and come in on the shorter end of the timeline. But I think that I'll go back to part of my question that I and my answer to the question earlier is that we've got enough of large franchisee groups today where it's not just the franchisee that's running the store, running the back office, doing real estate deals, etcetera.
And so a lot of these franchisees are extremely talented management team and have built out various functions, including their real estate and development teams. So and as you know, John, a lot of the bigger guys have multiple ADAs maybe across different states. So their level of really working their pipelines and the private equity guys that got in, they're not looking to slow down growth. And so they're obviously working with their teams as well. So you have all these larger groups that are working the development side and sometimes it's just pure timing.
You're working on 2 or 3 sites and you hope 1 or 2 come together and 3 or 4 come together at the same time and maybe a market, etcetera. So we got good line of sight into the front end of the pipeline here and the franchisees are very excited and continue to invest their cash flow in the business, lesser into the back end. But when you have franchisees that are building a higher percentage of their required number of development stores in the first half of the year, it depends on how they kind of fill out the back end pipeline as well. But we feel good about that, call it, 225 that we mentioned in our guidance. But we see that being more front end loaded than back end and especially Q1, which is it just shows you that the trends are good and taking advantage of the real estate with our great development franchisees out there.
Okay, excellent. And then maybe last one just for Chris. I wanted to ask specifically about some of the marketing spend opportunities that you see. And I guess, first of all, is there any more initiative to make sure that the local advertising requirements are being spent by the franchisees? And then secondly, any updated thoughts on if you might go to the franchisees and look at that national versus local mix at some point?
Yes. So we have initiated what we call the spend tracker. I think it was earlier last year, which we're now getting the spends from the franchisees. So we now have visibility on their spending at club level. So that's good that we know now what they're doing.
So but I think to that question, we get that a lot is if and when we'd be able to say, okay, it's said 9% in total, right, 2% national, 10% local. Could we actually flip that in the future? And I think we will get economies of scale if we were to do that in the future. I think as we continue to develop stores here in the Northeast where we're almost 6% of the population is a member, but we're a lot less penetrated out West. So I think as we get more coverage and more national advertising can play a bigger part, I think then you're right.
I think we can start slipping some of that over, for sure.
Okay, great. Thank you very much.
Thanks, John.
Your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is open.
So two things. If you think about the 2019 marketing spend, right, which will be north of 200,000,000 dollars What would be different this year, if anything, 1 or 2 things compared to a year ago in terms of how you spend that money, different focuses, etcetera? And then, Chris, you said potentially expand the Teen Summer event. Is there anything holding that up? Or is it just a question of how broadly you want to expand it?
Not too much really holding up just making sure all our ducks in a row on the Teen Summer Challenge with all the franchisees. So we have all the right levers to push so that we can get the big splash work we're intending. And to your first part of the question, again, that's another initiative that will be part of that marketing spend increases. How do we launch that teen summer challenge? If you extrapolate that nationwide compared to results in New Hampshire, it would be over 1,000,000 teens that would be active over the summer.
So it is definitely a good way to build a profanity as well as introduce the younger generation to fit some wellness hopefully for the first time. More digital this year is also we're doing more digital each year. I think back in the IPO we've talked about we were barely starting to do digitally at all back 2.5 years or 3.5 years ago now. So definitely more digital spend as far as the marketing is concerned.
Secondly, if you think about when we've talked about the non club Black Card opportunity for
a long
time, are you starting to get with 12,500,000 members more interest from other potential partners, right, who see that as big enough where it's worth their while and yours?
Yes. So we've run-in Roger Chack was the Chief Commercial Officer last summer, which is a much broader role than just a Chief Marketing Officer. So that's part of his plan and we actually have somebody now in charge the work under him that is in charge of just partnerships. Another one on top of like we did the 800 flowers we've done for a couple of years. The Audible, Amazon Audible we did and then recently we just launched with the Black Card members where they get discount vacations through ILG, the InterVille group.
So again, leveraging our size and scale to gain partnerships to give more value to that Black Card membership or even all memberships for that matter. Okay. Thank you. Thank you, John.
Your next question comes from the line of John Ivankoe of JPMorgan. Your line is open.
Hi. Thank you. Firstly, just a clarification, if I may. Are the legacy Black Card pricing members or Black Card members still locked in at that $19.99 price point or is there some flexibility that's being taken market by market?
Yes. They're grandfathered and we let them stay at their older rate. The one thought there also was, which we haven't seen an increase just yet, but does that help some stickiness with the older generation members in the sense that if they cancel that membership, they never get that break back. So we haven't seen any real significant change there in the retention of those people. But yes, they are grandfathered in the system when they joined.
And I think the percentage of Black Card, it is ticking up maybe a little bit, but year over year, I think it's within 100 basis points or so. Are you surprised at this point in the Q4 of 2018 that the contribution of comp from Black Card pricing is, I mean, if I heard it correctly, is still up 300 basis points, because that would assume some very large churn in the Black Card member base year over year if the legacy members are still locked in at that $19.99 original price point?
Yes, John, it's Dorvin. You're right, that was the impact in Q3. I don't think it necessarily surprises us. I mean, it's close to what we said back at the beginning of the year that we thought the impact could be and we've reported that each quarter. And then I mentioned it's going to be call it 150 bps in 2019.
Our attrition with respect to the 2 different memberships really hasn't changed in terms of that mix in the last several years. When you go back and look at the data, because we get the question a lot, there's someone that's paying the higher price churn at a faster rate than the $10 price point that it's not. And any seasonality is pretty consistent across the memberships. But it's a matter of canceling out some members at the $19.99 and picking up slightly more the members at the $2,199 I mean, at the end of the day, that's the math, but no, it really didn't surprise
us. Okay. And so that leads me into the next question and maybe the most important one is what your customer segmentation study is telling you about that churn. It did seem at one point we were talking about maybe churn that was ticking down. But as you kind of have gone back and understanding at a more data driven level versus what you maybe have believed to be true a little bit more anecdotally, what can the brand do at this point in terms of reducing churn at this point?
And I guess for a gym club membership like this, I mean what do you think the optimal level of churn is that you'd like to achieve over time?
I think the thing that I looked at which is interesting to me is when we launched the premium consoles for example with the manufacturers and they had the Netflix and the Hulu's and the Spotify's, it was an assumption that the members would have wanted that. And the interesting thing that we found is they wanted more education around fitness and wellness and nutrition. And that they want to be able to collect their data back on their app. That's which is kind of good because that's the role we were going down to begin with that. They want to leave the gym and have their data there to be able to compare how they did last week or last month.
And also challenges with their fellow and friend Planet Fitness members, to see how they stack up against their friends. So it's interesting that they really wanted more fitness component and not distraction, I guess is the way to put it from the fitness or exercise they were doing. So I think that was not what we expected to see. So now it's how we act on that. What you think if that's what they're into that should only help with their results longer term as opposed to watching TV.
So that was probably good learnings.
And in terms of where you think churn level could be, I mean, are there any really distinct differences regionally, for example, that's different in churn or maybe even on a DMA or Citi basis, where there really are differences or is that something that's a more common level across the system?
It's very consistent across the system. There may be minor outliers, John, but you can go back and look at our business for several years and the trends are pretty consistent. I think it's because we're going after the 80% of the population. And I mean, people work out about the same number of times they've always worked out. And we have people that that'll take off a couple of weeks or take off a month and then they come back.
And so and we've talked about that publicly in the past that it's affordable and it allows for people to be able to do that. And we're working out is not the highest priority amongst a lot of our members. And so it's family, it's kids activities and things like that. But we haven't seen a regional based issue and we haven't seen anything in terms of any major trends looking back over the last 3 years or so.
Thank you.
Thanks, John.
Your next question comes from the line of Peter Keith of Piper Jaffray. Your line is open. Peter Keith of Piper Jaffray. Your line is open.
Sorry about that. Thanks for taking my question and congrats on the great results guys. I wanted to follow-up on some of the technology warranty questions. Chris, could you help us understand maybe what the roadmap looks like with the app integration you're launching version 1.0? Do we have to wait maybe a full year until 2.0?
And are you going to wait a full year and see how that plays out, see if you expand it? And following on it, is it just Black Card members that will be able to use the app and use the fitness collection data? Thank you. Sure.
Yes. So 1.0 will not necessarily have that, but it gives us the opportunity to pipe in all that data. Our current app is a off the shelf 3rd party, app product that doesn't give us any flexibility, which is the reason why we had to move to a new platform here. It really does give us the platform to be able to pipe in anything we want to do. And I think that back to that customer segmentation study, what they want data for and they want to track what they did and how to recommend what they do tomorrow and as well as challenge their friends.
So I think it's definitely what the app will do in the future as well connect with the cardiovascular equipment and the wearable. So right now, unlike your wearable attracts steps, you get off a treadmill, it doesn't go anywhere with anybody. It doesn't fall anywhere, it just goes away and disappears. So in time as the premium consoles and all that data collection works in and we can pipe that back to the member, makes a lot of sense. It's not going to be Q1, it'll probably be 2.0 or 3.0, but it gives us the ability.
As well as I think content, which is important in that education piece that we learned, that they want to learn and they want content. So how we can pipe in that, whether it's through a third party partnership with a different brand that's piping into them, so they get better experience, whether it's in the club or outside the club. And that'd be also interesting for us to see is that somebody who's club for 3 months, well is that because they're not working out or because they're doing something at home or running outside. So I think that's all good for us to be able to watch and monitor so that we're providing value to the member and hopefully drive retention longer term.
Okay. Thank you. Just to make sure I understand or just to maybe put a little timing around it. The data collection for version 2.0 or 3.0, do you see that as a 2019 event? And again, are you envisioning that would just be for Black Card members or is this for all members?
Yes. Black Card members probably to begin with, but again, if we can show better retention, you can make a case that you open it up to everybody if it pushes enough. It's not just price, it's actually driving longer tenure. But I wouldn't say 2019, I see longer term next 2, 3 years. It depends on where it's coming from because the cardio components take longer because it's only in 15 clubs today and it's going to be retrofitted over time.
So but as far as wearable data is concerned or other app collection that pipes into it could be sooner than the cardio piece.
Okay. And maybe then it's a good segue to the cardio piece on the new technology equipment. So it's 15 gyms right now. Is there a thought to then opening that up to all new gyms or allowing those that want to replace it at a faster rate begin to get some of that more advanced equipment?
Yes, we're going to launch a next section, the next group of pilot clubs this year, later this year with what we learned about all that data collection and challenges and stuff and get rid of or clean up I guess some of the other apps and Facebook and other things where they were on there that weren't getting any traction. So we're going to retool the interface that is on the cardio today and the new clubs going forward to see how that interaction is with the members. And then after that, depending on how that plays out would be how do we start rolling it out to the system and or retrofitting to the current cardio that we're selling today can be retrofitted. So you don't get to replace the whole treadmill, you just replace the screen. So that's better as opposed to waiting for the re equip timing.
Okay. Thank you very much and good luck.
Thanks, Peter. Thanks, Peter.
Your last question comes from the line of Dave King of ROTH Capital. Your line is open.
Thanks. Good afternoon, guys. Good morning. First on the high single digit comp guidance, how should we think about the comp for just the corporate owned piece, if you can?
And then with the
growth in corporate owned greenfields and acquired locations, what do you see as the optimum mix of system line revenue longer term?
What was the last part of your question, Dave?
With the growth in the corporate owned greenfields and the acquired locations that you've had over the last year or so, what do you see as the optimal mix of that longer term? Yes, got it.
We don't break out our guidance in terms of a breakdown between franchise and corporate stores. I'll go back to kind of the earlier question and then historically our corporate same store sales has always been lower because we have a much more mature fleet of stores. We opened 4 last year. It will be probably in that 4 or 5 this year or so. A lot of it depends on timing and just back to my earlier comment on real estate and when deals come to fruition, but kind of in that 5 range.
I think 5 to 6, 4 to 6 a year is probably where we would be at least let's just say in the next call it 2, 3 years or so. We will we have the opportunity on a ROFR when any of the transactions come about. And we usually look at it strategically, does it fit within our existing current fleet, synergies, geographical synergies, etcetera. And I think if you go back and look at what we've done, all the transactions we've done have fit within that. So I don't know I doubt that we would get to a point of where it's going to be a meaningful percentage change in total development, whether it's our own corporate store development or even an acquisition here or there, just because our franchisees are building at such a faster rate than we are.
So we are predominantly a franchise model. I think we'll continue to be that in the near term, albeit our corporate store segment is a significant driver of both our revenues and profits and a very important piece of our business. But it's we don't look to really accelerate a faster growth of that than we've had in the past.
Understood. I guess that last comment is the reason for the question. Just it feels like with you opening more corporate owned stores, even though it's small as a piece of the overall development, it feels like that could be a material driver of revenue in terms of comps.
The fact that
you can do a 9% comp there versus mid single digits historically, It feels like that could be a driver going forward. But in terms of Chris, just a question for you real quick. In terms of the New Year's promotion, any effect on sign ups versus prior years? Anything to share in terms of significant success of that this year? Anything to share on California versus the New York piece?
Thanks.
Nothing overwhelming surprising. I mean, it constantly is a big splash for us. I mean, it's not really a call to action per se. So it's hard to really directly tie membership sales that night to New Year's Eve, but we continually remain number 1 in unaided brand awareness. And that started when we first did New Year's Eve and has maintained that status ever since.
So I think it's a great splash for us. It gets all the highlight. I mean, there's so many viewers. It blows the Super Bowl away and it's all us for 4 hours. So it's a great thing that we plan on doing hopefully for many years to come.
Okay. Sounds great. Thanks for taking my questions. Good luck with 2019. Thanks, David.
Thank you.
We have no further questions at this time. I'll now turn the conference back over to the presenters.
Well, thank you everybody for joining us today for our Q4 2018 year end earnings. We had a great year, looking forward to continue this momentum in 2019 and a lot of good initiatives and learnings today in this past year from customer segmentation and member journey and technology that's coming up in our app launch. So a lot of good stuff happening and looking forward to 2019 in the Q1 earnings. Thank you.
This concludes today's conference call. You may now disconnect.