Hi, and good afternoon. I'm Sharon Zackfia, with William Blair. I want to thank everyone for joining us. Really happy to have with us from Planet Fitness today, Craig Benson, Interim CEO and Franchisee, and Tom Fitzgerald, CFO. You know, I think, I want to start actually by talking about the fundamentals of the business, and then maybe delve into the development landscape. So you obviously announced, record memberships year-end. Can you talk about what you're seeing and actually the appeal of the concept? You know, where new members are coming from, and you know, how the underlying health of the business is at this point?
Yeah, sure. Thanks, Sharon, and hey, everybody. So I think we reported 18.7 million members by the end, at the end of the year. Added 1.007 million across the year, so it was a good year for us in line with our expectations. You know, for context, the next biggest gym operator in the U.S. probably has 2 million members, so we have a pretty sizable lead. And our job, our mission is really to get people off the couch, to start their fitness journey. We're not necessarily trying to steal members from other concepts, 'cause only about 20% of the U.S. belongs to a gym. We're really trying to get the 80% who don't belong to a gym to start their journey. They usually make up about 40% of our joins.
New members are people who have never belonged to a gym in their life. Another 40% used to belong to Planet at some point in their life, and came back. So, in terms of the drivers of that membership growth, we're fortunate that, unlike many retail brands and some I've been associated with, where the average age of your customer or member goes up every year, ours it actually comes down, because we're penetrating the younger generations more so than we did the Boomers and the Gen Xers. So just to set the stage, about 3% of all Boomers belong to Planet, about 6% of all Gen Xers in America belong to Planet.
But about 9% of all Millennials and 9% of all Gen Zs who are of age belong to Planet, and Gen Zs and Millennials now make up over 60% of our membership base. So, it's great that we can see that kind of traction with the younger membership. And what we saw with Millennials is, while they're 9%, of members... of Millennials belong to Planet now, several years ago, that was 6%. It tends to grow as they see more ads, and we build out more stores, and we become more convenient for them to work out. So we like those trends, and, excited about it.
One of the elements that we offer a couple of years running now is a High School Summer Pass, where over the summer, any high schooler in America can come in and join Planet for free for the summer and work out. Has a lot of benefits for them. We know the struggle kids are going through, in their lives, exacerbated by the pandemic, but it's at virtually no cost to us, and we get over 500,000 joins, new members from that, last year, and we expect good results, that we'll report here on that shortly.
Great. I want to delve into, maybe, a big topic amongst investors, which has been kind of the lagging franchise development and that challenging landscape.
Yeah.
If we could maybe set the stage on what has caused those challenges, and then delve into some of the initiatives that you're testing to help spur that development.
Yeah. So, inflation has changed a lot, and in new construction, especially, inflation has hit hard. In addition, interest rates have gone up, so borrowing to satisfy the higher demands for cost in building is, it's double whammy. So we realize that, and what we are doing to deal with this, we've come up with this thing we call the New Growth Model, and we've asked franchisees to participate, and actually we asked them to make mention of whether they'd be doing it or not by December 31st, and we're overwhelmed by how many people want to participate in it. And what's part of it is changing some of the things that we've done in the past. So we've extended our ADA from 10 years to 12, giving a longer time for a return.
We've also done a change in our remodel requirements, so we're the most aggressive remodeler in the industry. We've relaxed it a little bit. We've gone from 10 to 12 years. And then re-equips. We re-equip our gyms quite often, every 5 and 7 years pre-pandemic. It's now gonna be 6 and 7. And it doesn't sound like a lot, but these are big capital investments, and by changing those criteria, it changes a lot. And so what do we ask for in return? Well, we used to get 70% of our joins online, which we got $5 join fee from. We've gone to across the board, all joins are gonna pay a join fee back to Planet, so that's a give by the franchisees. The biggest one is, we ask them to go from cure period or grace periods to cure periods.
The grace period's 12 months, a cure period's 6 months. So shorten it up, so we had clear definition of what was coming up in the pipeline, and that's to catch up with their development requirements. So there's give and take on both sides, and by doing what we're doing, again, we're overwhelmed with how many people want to move to the New Growth Model, so...
And with that, lesser capital intensity and the change in the development grace period.
Mm-hmm.
How quickly can that actually impact the development that we see for 2024, 2025, 2026?
I mean, it's changed. It used to be 6-9 months to do a club. It's now 12-14, for a number of reasons. A lot more bureaucracy at the local levels to get permits and okays to do things. It's harder to find retail space. The amount of retail space that's been developed over the last number of years has gone down dramatically. And while there still is retailers that are in trouble, like Bed Bath & Beyond, the demand for retail space is still fairly high compared to what's out there. And so it's a challenge, for a number of reasons, not just the cost. And so, to be able to predict anything in the short term is hard.
We put out in the third quarter, we'd open 150-160 stores. We did 165, and that was at the end of the third quarter, so we didn't have much more to go. And that'll tell you how much variability is still in the system for getting things going, especially when it comes to permits. But there's still some challenges. We need to find spaces, especially, and part of the New Growth Model is using our scale. We're the third biggest consumer of retail space in the country, to work with bigger landlords, to get them to make us a partner and let us know what's going on before space hits the market. And by doing that, we'll have privy to more opportunities than we currently have.
Sharon, if I could just build on that for a second.
Please.
So I think back to your question about the pace of growth, right? And where it was before. We know there's a lot of exogenous variables that Craig talked about, inflation and so on, so we can only control what we could control. So we wanted to take a long-term change and approach to really help our franchisees ultimately develop more units than they would if we didn't make a change. And so, by making the changes we made, we don't think it's necessarily gonna affect 2024. We'll provide our outlook on that. 2024 is probably more of a transition year, and we can update that here in six weeks on our earnings call.
We think as we think about the long term, lowering the CapEx, lowering the initial build costs that Craig has the team working on, and making changes as we speak, will take returns. So if you look at a Planet Fitness pre-COVID, an unlevered IRR was probably 30-ish%. But here recently in 2023, because of the higher cost to build, et cetera, it's probably closer to 20%. By making these changes, we get it back in the 25% range, so we probably close half of the gap, and as we continue to find more ways to get the initial cost down, that will improve. If we do anything with pricing that's accretive, that will improve. So we think we made a meaningful stride in these changes without significantly impacting our P&L.
I think the other, major initiative and test is, the pricing.
Mm-hmm.
Right? And I think through the life of your public company existence, we've always talked about pricing with the Black Card.
Right.
We've never talked about pricing with the other card.
Mm-hmm.
So can we talk about what you're testing, why? I know you're early in the journey, but perhaps how long you need to test before you feel like we've got a good understanding of what this does to member acquisition? Because I think generally, we would all expect that price is gonna have some, you know, boomerang impact on the other side of the equation.
Yeah. So let me start-
Please, yeah.
You're doing the testing. So we have two classes of membership: a White Card, which is a membership exclusively at the club you join, and a Black Card, which has a number of different amenities you can use within that club, but it also allows reciprocity with our other 2,575 clubs. So you can go use any club with that membership. And Sharon has mentioned, we have moved the Black Card, the higher card, a couple of different times from $19.99 to $22.99, $24.99, where it is now. But the Classic Card, the White Card, has always stayed at $10, 30 years. $10 is not what it used to be 30 years ago, so we are now experimenting with different price levels for that entry-level Classic Card.
And so we have three tests going, one at $12.99, one at $15, this is per month, and then a third one at $14.99. The two $12.99 and $15 dollar cards tests started in August, and the second one in September, 100 clubs each with a matching control group. We're still assessing what's going on there. Our pricing's different because our pricing isn't one and done, our pricing is ongoing. So you join and hopefully stay joined for a long period of time. So it's not just getting people to join that's the trick, it's also getting them to stay that's the trick. And so pricing has a bearing on how long they're willing to stay, theoretically, at least. So we've got those tests going September and August. In December, we started a test in New York. But let me go back.
The $12.99 and 15 would go back to $10 when the White Card, Classic Card was on sale. So it would shift to a sale price at the appropriate times. Now, fast-forward to New York. Our whole New York DMA is now at $14.99, starting December 13th, and that will not go back to $10. That stays at $14.99, so there will be no $10 sale on that card. And so we have those three different tests going. Again, we just started the one in New York, where we'll see what happens. The whole idea is to model this with Tom and his group is doing, and to see... We're gonna make a lot of different price tests go, because we need to be testing and innovating to see what works and what doesn't.
I'm hopeful that some fail, because if we're not failing, we're not trying enough. And so, Tom, if you want to talk about some-
Yeah, no, I think it's good. And I, I think we're coming from a position where we're not trying to fix anything, we're trying to enhance what we have, which we think is pretty good. You know, almost 9% same-store sales growth for the year, about 70%-75% of that is member growth, the rest is dues growth. So we wanna just amp that up if we can. If we if one of these tests works, we'll roll it. If they don't, we'll continue to challenge ourselves to find something that beats what we do today. But it takes a while to, unlike a QSR or retailer, it takes a little while to read our tests, because they are a subscription.
You have to see not only how people behave differently on the way in when they're joining, but also, to Craig's point, how long they stay. And honestly, what happens in August and September or November, excuse me, isn't necessarily predictive of how people will react in January, which is, you know, our big time of year. You, you all may know, of the 1.007 million new members that we added last year net, about 60% of that comes in Q1, and about 40 of the 60 comes in January. So if we didn't spool up this test in the New York DMA, we'd almost have to wait another year to be able to replicate that. So we're trying to learn as much as we can, as quickly as we can, as I said, to see if we can find something that beats what we have today.
We expect to read those through the better part of Q1 and then make our determination, and then we'll-
Yeah
... discuss it publicly when it's appropriate.
I remember a few years ago as well, there was a lot of talk about... Well, I shouldn't say a few years ago. It was pre-pandemic-
Yeah
... so that was now more than a few years ago.
Yeah.
A lot of talk about how to increase member engagement, because it seemed as if-
Yeah
... you know, not going to the club is number 1 risk factor for somebody to leave the club.
Mm-hmm.
I haven't. And I know member engagement has been good, and you've talked about member engagement, but I'm not aware, and maybe there are some initiatives that are being trialed as well to improve engagement, as you're also thinking about these price point levers.
Yeah, so we are at a high point now for engagement. It continues to get better. I think part of that is because a lot of our younger members are much more intuitive when it comes to using technology to guide their workouts. So they come in prepared to understand what they need to do and come in better educated than an older member might. And again, I'm not picking on different age groups. But when they come in prepared, they know exactly what to look for and what they're trying to do, and so on and so forth. So I think technology has helped us in general. And then what we've done within the clubs is to make it more and more convenient by having more locations, and make it easier so you don't have to drive 15, 20 minutes.
Maybe it's now five minutes away from you. I know we've located a lot of clubs close by to each other for proximity purposes, and so it's little things that matter. We have a lot of initiatives that I think we need to do to still take some of the stigma out of joining a gym. And Tom talked earlier about some of these weight loss drugs. There's a stigma to now you're gonna start your journey with weight loss drugs, what else do you need to do to make it more effective? And I find people that are on weight loss drugs are more cognizant of what they eat. They're also more cognizant of what they do for exercise.
Tom also mentioned, you do get a fair amount of muscle loss from these drugs, so they have to be prepared to deal with that sort of issue as well. So all these things, I think, are starting to play to our benefit. The one thing that I would also like to mention is, we talked earlier about people that rejoin. 40% of our members are rejoins. We have a sizable population of former members that we need to target differently than the general population. They already know Planet, but we need to talk to them in a different way, and that's something we haven't done as much as I think we should.
To get them to engage with Planet as a former member, knowing us, they'll know some of what they're walking into and be a head start, but we have to take them to the next step. And then we still need to talk to the general population. So there's some different marketing angles to this, too.
Sharon, if I could add one thing.
Of course.
We have a program called Perks, which we need to-
Mm, great
... we're in the process of rebranding. And it's a program kind of like AAA. You join, and you get a whole bunch of savings from other brands as a member. And so we have that, and as we've grown our membership, we've become more and more attractive to bigger brands. So it used to be brands like Reebok, 1-800-Flowers. We love them. We've been with them for years, but now we're also getting folks like Garmin and Nike and Verizon. So as a Black Card member, or sorry, as a member, some discounts are deeper for a Black Card member, but all members get them, some level of discount. Even if you're not using the gym, using your Planet, you still have benefit from your membership to save on purchases.
Crocs, it's a long list of attractive brands that are now featured on our site. Puma, I could go on and on. We just keep getting better and better quality, not just quantity, of brands that wanna work with us.
Thank you. So last year, end of 2022, we had eight partnerships.
Yeah, yeah.
This year we have 50, so the program is growing dramatically.
Yeah, we now have to categorize them, so you can easily navigate it on the-
Yeah
... which is good. It's a good problem.
There aren't a lot of brands that get younger as the brands get older.
Yeah
... so that's a positive.
Yeah.
I mean, I've never heard that be a negative.
Yeah.
But it strikes me that, you know, I haven't, in the time that I've known Planet, seen a lot of changes in the layout-
Mm-hmm
... of the club and the, you know, cardio versus strength mix.
Yeah.
Can you talk about, I mean, does Gen Z use the club differently than Gen X? What changes might you need to make?
Yeah
... to be increasingly relevant to this younger customer?
Well, and so clubs that were built, I don't know when the last time you were at a Planet, they have that remodel-
Probably not the most recent.
Okay, that's fine. Come back anytime. They're laid out at a certain point in time when they're built, and then they're remodeled right now at 10 years, so things shift.
Mm-hmm.
But we've also changed the mix of cardio and strength. It's now more strength-based than cardio, and that's been ongoing. It started about 1.5 years, 2 years ago, to really shift that mix out, because, to your point, people are more interested in weights now than they were years ago and less interested in cardio, so to have the mix. In addition, we never had dedicated stretching, and we're starting to deploy those and some other functional areas within the clubs to deal with the new demands from a younger generation of members-
Mm
... to be able to work out and feel comfortable. This is an ongoing process. It's constantly remodeling the model to reflect all the different things. I mean, years ago, Curves was huge place to work out. It's out of business now because fitness changes, trends change, and so we need to reflect that in our boxes. The good news, they're big enough where we can remodel them on the fly to some extent and highlight different things, so it's not fixed in time when it's built. But it is a challenge for anybody to be able to-
Mm
... understand the types of things we need to do.
It also helps on the build-out. Strength is cheaper than cardio, and stretching is even cheaper, stretching areas, so it helps on bringing down that initial cost-
Yeah
... to the franchisee.
You know, obviously, we have new leadership on an interim basis right now-
Mm.
And I know the CEO search is ongoing. But during the duration of the company's public existence, I've been impressed by the discipline of not adding a lot of complexity to the box. You know, there's been no smoothie bar, there's been none of this other stuff that can really make operations much more difficult. I mean, I follow restaurants, too, so I'm aware of how much more difficult that business is. I know that you have experience as a restaurant franchisee, then operating a Planet. But I guess now with maybe new leadership, is there anything that now might be back on the table in terms of add-ons within the clubs that perhaps historically was not an option?
Look, I think we have to stay within our lane to some extent. And that's not to say we don't get better at friendliness and cleanliness and, and making sure that we make members feel included and, and welcome at all times. But Good to Great tells you that you can't be great at everything, and you have to focus on the things that you can be good at and, and really exploit the heck out of them, and that's the model our Planet's had for a really long time, and we don't plan on changing that. To your point, complexity adds challenges. It adds to disappointment 'cause you're bound to let somebody down somewhere along the way, and you end up hurting yourself.
We know what we're good at, and we're going to keep executing on those things, and we can get better at some of those things, but I don't see us adding to the challenges we have. It's, it's a simple business model, but it's a very effective business model.
Can we maybe? I know we have just a few minutes left, maybe end on kind of where you think the ultimate club potential is in the U.S. at this point? And along those lines, also talk about, you know, I think as of the last Analyst Day, you're actually growing the industry, or growing faster than the industry, right? So you're, you are the industry growth. Do you think that's something? Well, I'll just leave it there, and when you talk about the number of clubs you think you can have, maybe if you can draw the inference as to how you get to that calculation.
Yeah. You want me to start that?
Go ahead.
Sure. So, pre-IPO, we went public in 2015. The company did some work with a company called Buxton, that's well known in the industry, to assess the store potential in the U.S. And, this would be kind of the center of the plate, Planet Fitness, which is about 20,000 sq ft in an area that has the population to support that. And at the time, the outcome was that we would have 4,000 store potential in the U.S. over time. And we haven't refreshed that work since. And we were going to do it, then COVID hit, so we're probably in the seventh or eighth inning of wrapping it up.
We used Buxton again to come back and who did the original work, and then the company we currently use for our market planning, a company called Tango. So they're doing the work in parallel, and we'll compare the outcomes. We have to believe. We feel strongly that the number will be north of 4,000 store opportunities in the US. Because of the generational cohort trends that I mentioned earlier, those were not really as prevalent as we see them today. In addition, you know, there were 41,000 gyms in the US, from boutiques that had a couple of hundred members to big Life Time Fitness stores. 41,000 gyms, 25% of them have closed permanently due to the financial hardships of COVID. Planet Fitness had zero closures in that period.
Testament to the model, testament to the strength of the franchisees. But with fewer units in the market, we have to believe that that is also a tailwind to the calculation of where we can be. So we think when we report that sometime in the first half of 2020, of this year, that, we'll definitely be talking about a number north of 4,000. There are also smaller market infill opportunities that Craig has the team working hard against to come up with smaller formats that can serve smaller communities. That's additive to that number, so we feel really good about where that's headed.
Great. Want to thank everyone for joining.