Good afternoon. My name is Connor, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Third Quarter 2018 Earnings Conference 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. Brendan Frey, you may begin your conference.
Thank you for joining us today to discuss Planet Fitness' Q3 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 the Investor Relations section of Planet Fitness' website at planetfitness.com. I would like to remind you that certain statements we will make in this presentation are forward looking statements. These forward looking statements reflect Planet Fitness' judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness' business.
Accordingly, you should not place undue reliance on these forward looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward looking statements that is included in our Q3 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' Q3 earnings call. We had a fantastic quarter highlighted by another strong financial performance. Before Dovin walks you through the details, I'd like to quickly mention a few notable achievements. System wide same store sales in Q3 increased 9.7 percent on top of a 9.3% gain a year ago. Adjusted net income per diluted share grew 47 percent to $0.28 compared to $0.19 in the prior year period.
And for the quarter, net member growth contributed to 70% of the increase in system wide same store sales, reinforcing that our differentiated and affordable approach to fitness continues to resonate with consumers. The Planet Fitness brand is also experiencing strong momentum both in new member growth and new unit growth. In Q3, our member base was 12,200,000 members at the end of the quarter, up from 10,500,000 members a year ago. We opened a total of 40 new franchise locations in Q3, ending the quarter with 1573 franchise stores in the U. S, Puerto Rico, Canada, Dominican Republic, Panama and Mexico.
And on the corporate store front, we opened 1 new corporate store in New Hampshire and acquired 4 franchise locations in the Denver market, while the franchisee continues to focus and operate in other markets. This brings our total corporate store count to 73 at the end of the Q3, up from 58 in the prior year period and brings our total system wide store count to 1646. With one corporate location in the Denver market prior to our 4 store acquisition, this acquisition allowed us to strategically maximize our marketing efforts and leverage operational efficiencies and is in line with our previously discussed plans to acquire and develop corporate stores in locations that make strategic sense. In Q4, we plan to open 3 additional corporate stores to round out the year. The Planet Fitness brand is truly firing on all cylinders with enhanced leadership on both the real estate front and marketing front.
I'm extremely excited about the work being done in these new areas. From a marketing perspective, our efforts have become more and more sophisticated via enhanced research and analytics, continuing to set Planet Fitness apart from the competition. From a real estate perspective, we are also leveraging enhanced analytics and data for more precise site selection. Our well capitalized franchisees continue to invest in expanding their footprints and are taking advantage of the pressure being placed on many bricks and mortar retailers from the increase in digital commerce to secure A sites in various markets. Landlords and REITs looking to fill these vacant spaces are continuing to turn to Planet Fitness as a tenant to drive traffic to their centers.
At the same time, we are having conversations with retailers that are downsizing their stores and are turning to us to take over extra square footage. Another positive trend is the number of private equity groups continuing to invest in our existing franchisees. We now have over 10 private equity groups in the system, including our former sponsor, TSG Consumer. Importantly, the franchisee from whom they purchase these clubs are staying on board to lead their day to day operations and are focused on driving further development. With the increase in private equity groups, it's bringing enhanced systems, processes and marketing and analytics to the franchisees.
Shifting gears a bit, want to quickly recap the Teen Summer Challenge pilot program we executed in our 17 corporate clubs in New Hampshire this summer that allowed high school teenagers in the state to work out for free from June 1 to September 1. I cannot be more pleased with the final results as thousands of teenagers took part of the program. What was particularly exciting to me was the number of teens activated their free membership combined with a number of workouts that remain steady throughout the summer. This program is a great opportunity to help teens introduce fitness into their daily lives and is also opportunity for Planet Fitness to build brand affinity and loyalty with Generation Z, which is the largest audience segment of the population today, making up approximately 26% of the U. S.
Population according to Nielsen data. We look forward to potentially expanding this initiative nationwide next summer. While I'm extremely pleased with our consistently strong financial performance today, I'm even more excited about the bright future ahead and the many opportunities for continued growth. Industry trends continue to be positive and more and more people strive to achieve healthier lifestyles. In fact, a recent national study published in October showed that not exercising is worse for your health than smoking, diabetes and heart disease.
Heightened awareness of the importance of a healthy lifestyle for your physical and emotional health will continue to benefit our industry and we are well positioned to capture additional share of the existing market and attract new market entrants, thanks to our welcoming non intimidating environment affordable price point. I look forward to closing out 2018 with a strong Q4, typically our busiest period of the year in terms of new store growth. And ringing in 2019 watching Planet Fitness yet again take over Times Square on Dick Clark's iconic Rockin' New Year's Eve celebration viewed by over 180,000,000 people in the U. S. And 1,000,000,000 people worldwide.
Thank you. I'll now turn the call over to Dorvin.
Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing the details of our Q3 results and then discuss our full year 2018 outlook. For the Q3 of 2018, total revenue increased 40.2 percent to $136,700,000 from $97,500,000 in the prior year period. Total system wide same store sales increased 9.7 percent. And from a segment perspective, franchisee same store sales increased 9.9% and our corporate store same store sales increased 6.1%.
Approximately 70% of our Q3 comp increase was driven by net member growth with the balance being rate growth. The rate growth was driven by a 40 basis points increase in our Black Card penetration to 60.5% compared with last year combined with the $2 increase in Black Card pricing for new joins that was put in place system wide on October 1, 2017. During the quarter, the increased Black Card pricing drove approximately 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 $54,800,000 an increase of 54.2 percent from $35,600,000 in the prior year period. Let me break down the drivers of our fastest growing revenue segment.
Royalty revenue was $36,000,000 which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $22,000,000 in the same quarter of last year, an increase of 63.3%. This year over year increase had 3 drivers. 1st, we have 199 more franchise stores since the Q3 of last year. 2nd, as I mentioned, our franchisee owned same store sales increased by 9.9% and then third, a higher overall average royalty rate.
For the Q3, the average royalty rate was 5.7%, up from 4.3% in the same period last year, driven by more stores at higher royalty rates, including stores that amended their franchise agreements. Next, our franchise and other fees were $3,500,000 compared to $7,000,000 in the prior year period. These fees are received from processing dues through 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 sale and 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 $2,500,000 headwind in Q3 of this year compared to the prior year quarter.
As we outlined previously, we now need to recognize these fees over a 10 year period versus at the time the related franchise agreement and lease is signed. Also within franchise segment revenue is our placement revenue, which was $2,500,000 in the Q3 compared to $2,400,000 last year. These are fees we received for assembly and placement
of
commissions for international new store openings was $1,400,000 compared to $4,100,000 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 commissions as just discussed. Finally, national advertising fund revenue was $11,400,000 compared to 0 last year as the new GAAP rules related to how we account for NAF contributions went into effect on January 1 this year. As a reminder, prior to this year, the NAF contributions really only had an impact on our balance sheet. Due to the recent accounting changes, we must now recognize these contributions as revenue and record the expenses associated with managing the national ad fund as marketing expenses.
Our corporate owned store segment revenue increased 24% to $35,400,000 from $28,600,000 in the prior year period. Of the $6,800,000 increase, $2,900,000 was driven by the 6 franchise stores in Eastern Long Island we acquired in January, dollars 1,400,000 was due to the 4 new corporate stores we opened in late 2017 and $1,700,000 was driven by corporate on same store sales increase of 6.1% as well as increased annual fee revenue. As Chris mentioned, we acquired 4 franchise stores in Colorado in August, which contributed approximately $800,000 to 3rd quarter revenue. Turning to our equipment segment, revenue increased by $13,100,000 or 39.1 percent to $46,400,000 from $33,400,000 The increase was driven by higher replacement equipment sales to existing franchisee owned stores and 15 additional new store equipment sales in the U. S.
Versus a year ago. For the quarter, replacement equipment sales were 49% of our total equipment revenue compared to 51% a year ago. Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amounted to $36,900,000 compared to $25,800,000 a year ago, an increase of 43%, which was driven by the increase in equipment sales during the quarter. Store operation expenses, which are associated with our corporate owned stores, increased to $18,800,000 compared to 15.6 $1,000,000 a year ago. The increase was driven by costs associated with the 6 stores acquired on January 1, 2018 and the 4 new stores opened in Q4 last year.
In addition, we experienced increased costs associated with the 4 Colorado stores acquired in August, one corporate store opened in the current quarter and additional corporate stores planned to open by the end of the year. SG and A for the quarter was $17,200,000 compared to $14,100,000 a year ago. The increase was primarily related to incremental payroll to support our growing operations and infrastructure and some recent senior level hires versus the prior year, as well as higher variable and equity compensation. We expect the year over year percentage growth in SG and A to come down in the 4th quarter compared to the growth experienced in the 1st 3 quarters of this year. National advertising fund expense was $11,400,000 offsetting the aforementioned NAP revenue we generated in the quarter.
Our operating income increased 28.3 percent to $43,600,000 for the quarter compared to operating income of $34,000,000 in the prior year period. Operating margins decreased by approximately 300 basis points to 31.9% in the Q3 of this year. 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 2 90 basis points compared to a year ago. So on an adjusted basis and excluding the impact of NAF, adjusted operating income margins increased approximately 10 basis points to 35.9%. Our GAAP effective tax rate for the 3rd quarter was 26 percent compared to 25.7 percent in the prior year period.
As we've stated before, because of the income attributable to the non controlling interest, which is not taxed at the Planet Fitness corporate level, an appropriate adjusted income tax rate for 2017 was approximately 39.5 percent if all the earnings of the company were taxed at the Planet Fitness Inc. Level. For 2018, following the passage of tax reform late last year, an appropriate adjusted income tax rate would be approximately 26.3%. On a GAAP basis, for the Q3 of 2018, net income attributable to Planet Fitness Inc. Was $17,500,000 or $0.20 per diluted share, compared to $15,300,000 or $0.18 per diluted share in the prior year period.
Net income was $20,500,000 compared to $18,900,000 a year ago. On an adjusted basis, net income was $27,700,000 or $0.28 per diluted share, an increase of 47.9 percent compared with $18,700,000 or $0.19 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude non recurring expenses and reflect a normalized tax rate of 26.3% and 39.5% for the Q3 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 24% to $53,800,000 from $43,400,000 in the prior 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, adjusted EBITDA margins decreased approximately 160 basis points to 42.9%. The decrease in adjusted EBITDA margin was primarily the result of having 47% of the $13,100,000 of our growth in revenue, excluding NAV, coming from our lowest margin segment, our equipment segment. By segment, our franchise segment EBITDA increased 23.9 percent to $37,100,000 driven by higher royalties received from additional franchisee owned stores not included in the same store sales base and an increase in franchise owned same store sales of 9.9% as well as a higher overall average royalty rate. Excluding NAP revenue and expense, our franchise segment adjusted EBITDA margins increased by approximately 150 basis points to 86.6 percent. The increase in adjusted EBITDA margin was due to the 22% increase in revenue excluding NAF, partially offset by higher SG and A costs discussed above.
Corporate owned store segment EBITDA increased 26 0.8% to $15,300,000 driven primarily by the 6.1% increase in corporate same store sales, higher annual fees, the 6 franchise stores we acquired in January and the 4 stores opened in late 2017. Our corporate store segment EBITDA margins increased approximately 50 basis points to 44.8%. Our Equipment segment EBITDA increased 25.6 percent to $9,700,000 driven by higher replacement equipment sales to existing franchisee owned stores and higher new store equipment sales versus a year ago. Our equipment segment adjusted EBITDA margins were 20.9% compared with 22.7% a year ago. The 180 basis points decrease in margin was mainly due to a one time impact as a result of how we account for equipment discounts and rebates that are handled differently under the new current contract.
We still expect equipment margins to be in the 22% to 23% range for the full year and going forward. Now turning to the balance sheet. As of September 30, 2018, we had cash and cash equivalents of $572,700,000 and undrawn borrowing capacity under our variable funding note of $75,000,000 During the Q3, we repurchased approximately 824,000 shares of Planet Fitness' Class A common stock for a total cost of $42,100,000 As of the end of the third quarter, approximately $458,000,000 remained of the $500,000,000 share repurchase plan that the Board approved in August. Total long term debt, excluding deferred financing costs was $1,200,000,000 at the end of Q3, consisting solely of our whole business securitization, which includes $575,000,000 of 4 year notes due in September 2022 with a fixed interest rate of 4.262 percent $625,000,000 of 7 year notes due in September 2025 with an interest rate of 4 point 666%. Now to our full year outlook.
Based primarily on better visibility into the timing of scheduled equipment sales approximately 33% year over year, up from our previous guidance of approximately 26%. Adjusted EBITDA is now expected to grow approximately 19%, up from 16%. We now expect adjusted EPS to grow approximately 43%, up from approximately 33%. This new guidance assumes we will sell and place equipment in approximately 225 new stores compared to our previous outlook of approximately 200 stores. We now expect system wide same store sales to increase approximately 10% at the high end of our previous guidance in the 9% to 10% range.
I'll now turn the call back to the operator for questions.
Your first question comes from the line of Oliver Chen with Cowen and Company. Your line is open.
Hi, great quarter. Regarding the comp store sales composition, as you start to lap the pricing increase, will we see a different mix in terms of the member growth contribution versus pricing? And Dorvin also on your helpful comments about raising the full year outlook. Could you just elaborate on what greater visibility you had into the equipment sales timing? It sounds like that was one of the key factors.
Yes, Oliver. On your first question regarding kind of I guess, the 2 drivers driving comp, as I stated a few minutes ago on the call that about 300 basis points was related to the pricing. We still expect some price impact next year. It will be less than this year given that we put that in place in Q1 of 'seventeen. So we've now had a full 12 months.
We'll continue to have some, but at a much lower rate. So I would expect that if you compare kind of the mix of volume versus rate in Q3 and year to date, you probably see some change on that next year, everything else being equal. And then in terms of kind of the visibility on equipment, I think you guys have heard me say a few times, particularly when we kind of start the year, when we talk about where we expect the full year to be and then frankly Q1 and Q2, the lifecycle of a site from identifying a location, finding a lease, maybe a couple of locations that you start to negotiate lease on, ultimately get a lease signed. And then that's when we tend to have more visibility into the timing. Obviously, the delivery of the box itself can have an impact on that.
If you get a just a plain vanilla box, it's going to be a quicker time period. We tend to usually say it's about 3 to 4 months to get to that point. So take it back now, go back to the Q2 call, we had some insight into kind of the next 2 to 3 months. But as you know, a lot of our new store openings, certainly the equipment sales side of that happens in November December. So we really just have more visibility into the fact that we know how many leases are signed, how many are currently scheduled at the moment for placement.
And then what the GCs and the franchisees are saying, what the last 3 weeks of December looked like. So that's really the cadence of how it looks and how we have visibility into the development side.
Okay, great. And Chris, you've had a lot of interesting things happen with on the technology front with the technology ecosystem that you're building and the services you're adding as well as your relationship with manufacturers. Could you update us on what you're seeing lately and what you're thinking about what's possible? And the last question, Chris and Dorwin, was just about as we look forward to the holiday period and the next this holiday period, what are some key factors in terms of marketing and demand creation programs, which are different versus last year? Thank you.
Sure. On the
cardio front, especially with the premium consult, we're still capturing all the data here. Nothing new to really report, although we have hired a consumer research firm to help us analyze the data that we're capturing, as well as put together some consumer focus groups to help refine the offering and experience and plan on probably rolling out in some more test stores in 2019 from the learnings, coupled with more conversations with possible wearables integration as well in next year launch of our version 1 of our new apps. So it's kind of all coming together, but next year should be a prime order report. As far as the holiday period, and actually we all gear up for the 2019 New Year's Eve celebration really kicks off, our January sale that we do annually and a lot of more integration here. We've got the LA integration as well.
We also have one of the major billboards that's just below the ball itself, which will have some great exposure, where it's right underneath the ball itself. So it's a new integration there. And we also have some possible celebrity integration and a dance group that's from a TV show that might be we can't disclose yet that will also be performing for us in Times Square.
Thank you. Best regards.
Okay. Thanks, Oliver. Thanks, Oliver.
Your next question comes from the line of John Heinbockel with Guggenheim Securities. Your line is open.
So a couple of things. Let me start with the equipment installations this year. Is that just a timing issue? Or does it actually reflect the potential for more openings than 200 next fiscal year? And then along with that, where do you guys stand now with possibly going into taking over some space from the mass retailers?
Is that a non linear opportunity for 2019?
Yes, John. It is just to kind of tack on to the comment I made a minute ago to Oliver. When we give guidance as to where we think that number will be, obviously, we're taking into consideration the timing of way things have happened in the past. And clearly, there are shifts that can happen both ways for stores that either we or the franchisees think are going to happen in December and they get shifted for various reasons, construction delays, permitting, etcetera gets into January, but at the same time, sometimes you have franchisees that are able to get their permits faster, able to just get some of the construction done earlier, be able to get in and at least get the equipment in, although the store might not open then until January is an example, and we've had that in the past. I think that the way kind of looking backwards is a little bit of both.
There's some timing there in terms of stores that we thought probably would happen next year and then just some of the franchisees trying to accelerate to get things done earlier and get it in and be ready for January 1, etcetera. In terms of next year, we'll obviously give full guidance in when we report Q4. But I think the momentum of where our business is and just the drive of some of the private equity groups from a development perspective or they're out there trying to find as many locations as they can. And we've said in the past that you might be negotiating 1 or 2 or 3 sites in a town, you might end up with 2 or you might end up with just 1 depending on what's going on from an availability perspective, which kind of ties into your last question. And we continue to have conversations with a lot of retailers and given all the public news that's out there of some of the guys that are either downsizing, carving off some excess space or just going under closing some stores, whether it be the like the OSH stores out in California or Kohl's has mentioned, they would downsize some and then the other Toys R Us sites, etcetera.
So a lot of those clearly are continue to be in our favor as long as we don't already have a store down the street or nearby. So we're continuing those conversations and we expect that we'll be able to be able to get in some of those boxes.
And then just secondly, you've added both buying franchisee locations and opening up some greenfield. You've had kind of a spurt here, right, in the corporate segment. So what's the thought philosophically in terms of growing that business? And is the idea that some of these do you ultimately see refranchising Denver or some other markets or that's a segment you actually do want to grow
a little bit? Yes, I think John, this is Chris. I think more of it's just to do the stores where we're already corporately have franchise clubs. Like in Denver, for example, we had one store. So we've got payroll, we get the taxes going, we've got a manager on the ground that's running the area, but only one store.
So to get the economies of scale and the efficiencies there to open more stores or to actually just buy the franchisee that's in and around our stores, which is easy and that franchisee has gone on to use this capital to build more somewhere else. So that made sense for us. And the last one was the one on Long Island, which we had the rest of the island and this was the most eastern tip of the island that this franchisee was retiring. Just made sense for us to own it as well as open more stores on Long Island, more so from a franchisee have to do it, be cannibalizing our corporate stores. We might as well just do it ourselves and continue to build out the rest of that area.
Yes. The only other thing I'd add John is to kind of greenfield. Obviously, with both of those acquisitions that Chris is talking about, be it Long Island or be it in Colorado, not a ton, but there is some runway there, which most likely we would take advantage of obviously. And then just in our existing territories where we had our, let's call it our older mature stores, some of those markets have the opportunity to continue to be able to develop. So the question comes down to do we sell that off to a franchisee, which there's going to be some cannibalization to that in some instances, or do we build out a new store ourselves.
And a lot of those situations, we've made the decision to do that. I don't see this being a 15, 20 store a year, at least here in the near term development. But this year, we'll do 4, next year, we might do 5, 6 or so. But this is it's kind of a, I guess, a pace of building out some of those ADAs where we already have stores, good markets and we have
Thanks, John.
Your next question comes from the line of Jonathan Komp with Baird. Your line is open.
Yes. Hi. Thanks, guys. I wanted to ask about the same store sales. Obviously, you raised to the high end again and quite a bit above where you thought you would be coming into the year.
So just wanted to maybe hear more about what you think is driving the strength and the sustainability as you look forward?
Yes, John, I would say that a couple of things. One would be that clearly the pricing impact, I mean, we didn't know exactly where that would come out when we had 1 quarter under our belt last year as we entered the year on that. So to know kind of where Black Card would go, would the percentage stay the same, would it increase, would it come back a little bit. Obviously, we had to test, which we've talked about, but we didn't know that. And so I think that it's been positive to us that one, we've been able to increase the overall penetration rate slightly, but to be able to get the lift on that.
And then I think the second thing and we've talked about this on a couple of calls that albeit not just huge changes, but there have been slight changes, improvements on the attrition side. And I think I attribute that to the brands bigger. We have more locations. The opportunity for the black card usage is bigger. I think our newer clubs are better.
I think our effectiveness of our marketing is better. And so I think it's a combination of all those things that kind of lead into that. But so from a guidance perspective, there were kind of the 2 things that we took into effect. 1 would be just what's the overall growth rate look like? And then 2, what would be that rate impact as we knew it would have an impact quarter by quarter, which we obviously either told you exactly what it was in this case the 300 basis points or where we thought it would come out for the year.
But I think those are the 2 things. But you talk, Chris and I, we meet a lot with franchisees here or out in the field. And the guys are as excited today as they've ever been. The private equity guys are coming and investing in the business. And so the model continues to be a very robust model.
And I think that when you get right down to the what it delivers, we've been able to kind of hit or exceed the top end of our range.
Yes. I think the only thing I would add to that is on top of the ever expanding marketing budget, we talk about all the time just because it's every incremental member is additional marketing dollars every day is back to the private equity and some of the sophistication of the bigger franchise groups as we as our system matures, they're just bringing their own CMOs in and more infrastructure on the marketing front. So just like us with Roger Trach, our Chief Commercial Officer, which is really just getting under the hood now and he's already been really impressive with some of the stuff he's pulled off already that I think there's a lot of good stuff to happen in the future from both sides, franchisees and corporate.
Great. And then my other question related to the buyback and the store $40,000,000 that you completed in the quarter. Could you maybe give a little more color, how that was executed kind of open market versus other arrangements? And then how should we think about the repurchase opportunity going forward, especially anything that you've been able to complete quarter to date here?
Sure.
Those purchases in Q3 were all just in open market purchases. We had talked about when we increased the buyback plan, the Board authorized back at the beginning of early in Q3 that we intended from time to time to be in the market and execute against that program. I think I made the comment that most likely any significant acquisition of shares more than likely would come through an ASR. So we continue to evaluate our options on that. But nothing else at this point in time to report on that.
Okay, understood. Thank you.
Thanks, John. Thanks, John.
Your next question comes from the line of Peter Keith with Piper Jaffray. Your line is open. Peter Keith, your line is open.
Sorry about that. Hi, guys. Congratulations on a good quarter. I just want to get a little bit of clarity on where you think you would land with total openings. It sounds like placing at 225, but maybe not opening 225, where you think you would actually shake out for full year?
Yes, Peter, we really only guide to that placement side and it's kind of because of the comment I made. I mean, I could go back to every year now, the last 3 or 4 years when we've been public that you're going to have stores that are going to we're going to get the equipment. We recognize revenue when the equipment gets placed. And there's a combination of things is you can actually place the equipment in some locales without the CO to be able to come in and open up for business. And so you can have instances think about this that in a lot of cases municipalities will let their employees on vacation between Christmas and New Year's.
So if your contractor just gets it ready to go, you get the equipment in and the staff is trained and everything turned on ready to go, but the inspector is on a vacation till January 2 or 3rd, then you're locked out. So it goes both ways. It's usually not a huge number to be honest with you. But if you think about it, the stores that are where we place the equipment, the lease is signed, the buildings there, they got the equipment in. So obviously, they're going to open.
And whether it's 3 or 4 days or a week or so, it's not a big deal in terms of the number of EFT dollars or certainly, as you know, we draft our revenue on 17th of each month. So if a store opens on December 29th or January 4th, it doesn't impact what we get really on a revenue basis at all. So the guide is to the number of placements that we will put into the stores. And obviously anything that we get placed here in the next 4 or 5 weeks will most likely open. It's just that last week, 10 days of the year and as I said, it's usually the municipalities on the inspections.
Okay, that's very helpful. Also, I just wanted to follow-up on the last comment that you made, Dorvin, I believe it's Dorvin anyway on the improvement on the attrition side. I think you guys have spoken about maybe attrition rate of like 1.5% to 2% with members over 12 months. Could you just dig into that a little bit more for us? Is it that percentage rate coming down or is Yes
Yes, you're right. We've said it's usually in that 1.5% to 2.5% a month. And what I was alluding to is a slight improvement over time obviously helps, right, even if it's just a small amount each month, etcetera. But other than that, that's really the only kind of guidance we've given and marginally, I'd say over the last 12 months, 18 months, it's improved slightly. But I think that's a combination of to the caller's earlier question on what could be driving some of these comps that might have been higher here over the last 4 or 5 quarters, let's say, or if you look at 2017 2018 as to how we kind of guided, we tend to have delivered over that guide in all those quarters and a small piece of that has been a slight improvement in attrition.
Okay. That's helpful. Thank you very much.
Your next question comes from the line of Randy Konik with Jefferies. Your line is open.
Yes, thanks guys. I guess, Chris, I want to, I guess, dive deeper on the teen summer challenge for a second. You talked about success of the program. It seems like a really smart strategy to build brand affinity, but also a feeder system for future consumers and customers and members. So could you just give us maybe some perspective on potential conversion of people that signed up for the program post the end of the program.
I guess you said it ended in it was from June to September or something to that in that regard. And it seemed like you were working with the Governor of New Hampshire on building awareness of the program. So I'm just curious on how you think about not only the conversion of looking back on the program in New Hampshire, but also how you're thinking about potentially nationalizing the program and building out awareness for it because it seems like a very big opportunity into next summer to build a future customer base for next fall and beyond. So I'm just kind of curious of how you're thinking about this program from a nationalized perspective, but also on an ongoing basis, marketing and then again the statistics around what you'll learn from the program in its 1st year in New Hampshire?
Yes, great question. It's really encouraging to me, especially when I look about how we can leverage them in the future. So in New Hampshire alone, we had about 2,600 students activate it and did about 12,000 workouts in that 3 month period. A couple of statistics there were pretty cool, out of the 2,500 kids that activated, 2,000 of those were from households that the parents weren't already members. So not only do we affect the 2,500 kids and introduce them to Planet, those parents had to come in and activate their kids' membership.
So they had exposure parents had exposure to the brand as well, which is encouraging for future joins as well. Through September 1, we had about 90 joins off of that. So that's through September 1. So next, we're going to retarget those. And I think going forward, you think of the Generation Z population, they are the largest generation, even bigger than the Boomers.
And I look at the millennials, for example, which we've talked about, which are almost 45% of our 12,000,000 members. And when you think about we started this brand in the 90s, they were just barely toddlers and barely being born at that point. And now they make up almost half our 12,000,000. So there's been reports that disease are more active than millennials. And they're just barely turning 21.
And we look at our member base, the joining rate is really at that 21 year old, 22 year old, when people start really joining at a pretty good clip. So you look at the huge pipeline of Zs that are just starting to turn 21 and there's 86,000,000 of them is really a feeder system. So it makes sense for us to get ahead of that, introduce them to the brand early, introduce them to fitness early, and to be there when they're ready to be the 1st club.
That's helpful. And then I want to switch gears to the Black Card program for a second. So the Black Card program penetration rounds just under, I guess, under 61%. It looks like on the website, there's some additional partnerships, I guess, if you join, there's some sort of benefit with Audible Plus. I think there's also an existing member benefit with Reebok for percent off on purchases.
I don't think that you even have to be a Black Card member. But do you guys it must be getting a lot of inbounds from other types of companies, one that kind of partner with you given your strong membership base. Do you think about how do you think about that impacting the business either having the ability to raise the Black Card price further or potentially introducing even a 3rd tier of membership Black Card Plus Plus or something where for a little incremental more, you get extra benefits as a member into other programs or companies that have an affinity or partnership with you going forward? How do you kind of think about that?
Yes, you're right. We have a couple of the Reebok one. We have the audible thing we're doing now. With Roger as a Chief Commercial Officer, he's really looking at a bigger picture than just coming out with the next funny commercial and driving just new sales is how you drive more value for car members or acquisition of Black Car for example. I think maybe higher Black Car penetration or rate or both would probably be our main objective.
And as Roger builds out as a team, we actually have people in charge now, new hire that's basically what they're looking for is only job is look out for commercial partners and corporate membership stuff. So I think you'll see more in that. It's really interesting because it seems like in the last probably 12 months, we've talked about affinity programs like this. I think Randy, you probably remember since the IPO even couldn't really get a lot of traction, but it seems like in the last 12 months, the amount of times our phone rings now is quite a bit different than it was 12, 18 months ago. So I think we're at that tipping point of size and scale where we're being noticed.
Your next question comes from the line of Brennan Matthews with Derenberg. Your line is open.
Hi, thank you very much for taking my question. I actually wanted to ask about Mexico, which I think you opened your first location there to the Mexico next year?
Yes, the franchisees that are in that club is doing great and they're in the process of looking for other markets to go into in that Greater Monterey area. They want to do a couple 2 different demographic areas other than what they're in now. So they kind of can try 3 different economic demographic areas to see how it all works and so we can then figure out market size in the future. In Panama, again, we have got to open the one last December has already got 2 more, 3 more open and 1 more coming down the pike here, which are all been great.
Okay. That's great. And then I just had one other question and I want to try to phrase this correctly, but we've been seeing kind of some more inflation, even such things as like kind of freight, like higher freight costs. And looking more at your equipment segment, I mean is that something that is passed on to the franchisees? Is that something that your vendors are having to kind of that's impacting all of your vendors?
Or is that something that you guys are going to have to kind of deal with as well? How should we think about that?
Yes. So we, corporately, we acquire the product, the equipment from the manufacturers. And in most cases, take title of that equipment from their dock to the franchisee location. And then a lot of instances then it's our team that actually assembles equipment, places in the club based on the architectural drawings, etcetera. So we build the franchisee for the freight.
So when we build them for the full cost of the product, that includes freight. We haven't seen any significant freight prices pricing issues to this point. Some of the franchisees or I'm sorry, some of the manufacturers make their product here in the U. S, some of the others imported. But at this point in time, in terms of kind of actual cost, let's call it inflation, we haven't seen anything significant.
Okay, perfect. Thank you so much.
Sure. Thank you.
Your next question comes from the line of John Ivankoe with JPMorgan. Your line is open.
Hi, thank you. Two separate questions, if I may. Firstly, when you guys start to think about G and A metrics maybe over the next couple of years, are there any benchmarks that you're using or beginning to hone in on whether on a per store basis or as a percentage of system sales or percentage of revenue that we can maybe think about as you think about the business in terms of how optimized that G and A number could in fact be over time?
Sure, John. Obviously, and you know this business well, there's not a lot of gym businesses that we could do on an apples to apples basis. So frankly, the best comps that we look at on a multiple KPIs would be the QSR guys and obviously you're familiar with those. But you got the huge guys like a McDonald's or Wendy's or so and then you got some really small guys that maybe only have 50 or 100 stores. So it's always hard to find something that would say, okay, well, what's the right amount where we're at.
And you try to dig in it deeper and I've tried to do this and really haven't had a lot of luck to say, okay, from a franchisor perspective, what's the right kind of cost to manage a franchising system? So we obviously have, call it 1600 stores and whether it's a Dunkin' or Pick 1, 1, it's hard to get that kind of data out of some of these other public companies. And so at the end of the day, you basically just have to kind of look at total SG and A. Sometimes you can look at kind of an HQ expense versus ops and try to figure that out. On a store level basis, it's a bit easier.
And so we've done some of that on kind of our corporate stores to some of the
other systems that have stores. But what I would say
the net of it, the way I think about it, call
it 3 to 4 years ago, maybe right before we went public or
right before we went public or right before we went back, we went back, call it 3 to 4 years ago, maybe right before we went public or right after we went public, we had a significant base of stores with a large pipeline and I think we were probably underfunded in terms of how we were supporting the franchisee base. And I'll give a couple of examples that I would point out. 1 in particular would be training, where in this kind of business, just as in the QSR business, you're going to have a lot of turnover. And in a I mean, on the benefit side with the fixed cost model, obviously, you don't have the kind of the raw material cost and other things. But at the same time, if you're staffing for, call it a 12 person to 14 person team 20 fourseven and you're having a lot of turnover, you're going to be paying a lot of overtime, a lot of soft costs for training, etcetera.
And then just on the pure operations side for the bigger guys today that 3 years ago had 3 stores and today they have 15 or 20 stores, really helping them develop the processes, really playbook type of stuff. And we've invested a lot in that and continue to invest, not as much as we did back then in building it, but we continue to do it to make it better. So that would be one example. The second one would be, which I think has been allowed us to continue to go back 4 or 5 years ago where we were doing 120 to 150 stores a year to where we're at today and finding smarter better locations would be investing on the real estate and the development side in the field. So 2 years ago, we didn't have anybody in the field.
Today, we do. 2 years ago, we frankly didn't have many operation folks in the field. Today, we do. We believe those are worthwhile investments. And so the way I kind of think about kind of so where are you today really and where can the business go?
I mean, we'll continue to invest as long as we continue to see the kind of growth we're having and we'll invest in primarily those areas. So I think that the headquarters side of the business 3 years ago, we didn't have some of the executive team leaders we have in place today. We feel really good about our leadership team that we have now. And then secondly, I think that we've also talked about the fact that we really didn't have a full incentive comp program in place when we went public. We now have that in place.
We're about to get to the point that we've now and it's a 4 year vest. So we're now kind of layering it to where it's not a new brand new incremental layer. So a lot of our cost over the last, call it, 4 to 6 quarters or so have really been on the payroll side, both some HQ in the field and then on the incentive comp plans that we've put in place today. I think our growth rate in SG and A will continue to grow, but at a slower rate when I think about the next, call it, 4 to 8 quarters or so. The last piece would be and Chris kind of alluded to it earlier on the question about technology.
I mean, we really believe that we have the ability to do some pretty special things on the technology side, particularly in the digital area. And so some of that technology investment will require some incremental kind of SG and A over time. But that's the way I think about kind of the key drivers of our business from a pure SG and A perspective.
And that was definitely a great answer and thank you for And it actually dovetails I think perfectly into my second question, which is sometimes covering QSR in restaurants, you see brands that are growing very quickly and even comping very well, but they can begin to see signs at the store level that guest satisfaction scores aren't necessarily being maintained, maybe because of or despite those increase in the number of stores being open and then the increase in comp. So talk about how you guys are looking at what you think are the most important reasons why people stay members of Planet Fitness or join Planet Fitness, things like cleanliness or equipment quality or availability, what have you, coming to the staff, whatever it is. As you kind of look at this very rapidly growing system, the controls that you put into place to make sure that every single year the customer is getting a better experience despite that rate of growth?
Sure. Yes, John, this is Chris. You're right, Clay, this is definitely a huge point of it from a member standpoint, which is one of the things we have the brand excellence crews on the ground, then we have the AMMs, which is area marketing managers on the ground to make sure the message is correct and that's on brand as well. But the equipment replacement, I can't under emphasize the importance of that. And I even come back to I mentioned, I went on that road show on the road trip with the family this past summer in August when 8,000 miles went to planets all over the country And I couldn't even tell if I was 8 years old or 2 years old.
And there's not many brands of even QSR that can say that. And I think the beauty of that as well on top of that is the fact that almost all of our openings last few years with the existing franchisees. So it's not a 1 D2 D franchise system. And when you have a franchisee that has 20 clubs in the market, they themselves want all their clubs to be shiny, nice shiny penny. So they don't have any clubs out there that are falling apart and making their other clubs look bad.
So it's really the power of the system we have. The multi club operators, the re equipped keeping the clubs new. I have a phrase that we never want to be out nude by competition. So don't be out nude is what we say. So they're constantly renovating and keeping the stores up to date.
And this industry has never really seen a chain that has done that. Typically, you go into a 10 or 20 club year old store, the club is 10 or 20 years old. And that's what happened with Bally's and a lot of the current larger chains that are out there today. And it's hugely important and our franchisees are as honestly as passionate as we are.
And maybe there's an internal or external guest satisfaction score that's empirical that we can begin to talk about that measures something like 'nineteen versus '18 or 'eighteen versus 'seventeen because it has been, I think, shown in a lot of different cases to be kind of a leading indicator of comps and profitability in a number of different things. So that's really where I'm going with the question if you're prepared to talk about it in that way.
I think the only thing it probably is when I look at same store sales it's all cohorted year stores are all comping positive. So it's not like the older stores are not doing anything and the newest stores and the ones that are pulling it. It's granted they're comping a little slower than a 2 year old store, but they're still comping positive. So we're constantly just digging deeper and deeper into that 80% of the population that doesn't have a gym membership.
The other thing I'd add to that John is that we control the customer service side of it here. So we get calls, as you can imagine, with 12 plus 1,000,000 members, we get a lot of calls. But we're able to with that then kind of know where it's coming from, what the issues are and either try to deal with it here if need be or push it down to the location of the franchisees. But I think Chris really hit an interesting point in that and you've seen it from our results where the replacement equipment side of our business continues to grow and grow as a percentage of our total and to be able to have new equipment in there. And then with the Planet Fitness teams be it the franchisee or corporate stores, etcetera, to constantly monitor the cleanliness, kinds of comments you get and to do the inspections that we do, both us doing them here from a corporate franchisor perspective and many, many of our Zs do their own secret shopping inspections as well, because they're trying to protect this big investment that they continue to invest in.
That's perfect. Thank you.
Thanks, John.
There are no further questions at this time. I will turn the call back over to the presenters.
Thank you. Thanks everybody for joining us today for the Q3 call. It was really a great quarter. I look forward to a really strong Q4 ending and year end. So thanks for taking the time today and look forward to talking to you soon.
This concludes today's conference call. You may now disconnect.