Good day and thank you for standing by. Welcome to the Planet Fitness Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your host, Stacey Caravalla, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you, operator, and good afternoon, everyone. Speaking on today's call will be Planet Fitness' Chief Executive Officer, Chris Rondeau and Chief Financial We also have Dorvin Lively, President of Planet Fitness on the line, who will be available for questions during the Q and A session Today's call is being webcast live and recorded for replay. Before I turn the call over to Chris, I'd like to remind everyone that the language on forward looking statements included in our earnings release also applies to our comments made during the call. Our release can be found on our website, investor. Planetfitness.com, along with any reconciliation of non GAAP financial measures mentioned on the call with their corresponding GAAP measures.
Now I'll turn the call over to Chris.
Thank you, Stacy, and thank you everyone for joining us today Let me start by welcoming Stacy Caravalla as our new VP of Investor Relations. We are very excited to have her join our team. We are very encouraged by the steady improvement in overall sentiment we witnessed in the U. S. During the Q1 and the corresponding impact it's had on our business.
Americans appeared cautiously optimistic early in the New Year as COVID-nineteen vaccines began to slowly roll out to healthcare professionals, frontline workers and mailroom. As the quarter progressed, national active case counts started trending downward, states began to ease restrictions and the vaccine availability increased. At the same time, the momentum we experienced in January accelerated as Americans began to feel more comfortable returning to regular activities they enjoyed pre pandemic, including going back to Even in the early stages of emerging from COVID, it's clear that health and wellness are essential. We are pleased to announce that we experienced Sequential net member growth in each month of the quarter, ending March with 14,100,000 members, up From 13,500,000 members at the end of 2020. The positive headline news on COVID-nineteen vaccine availability seems to have driven a seasonality shift in our membership trend, as March membership growth in mature stores exceeded March 2019, reinforcing our belief that people are eager to get back to our gyms, With our continued emphasis on our cleaning and sanitization standards.
In fact, in March, 30% of overall joins were prior plans to its members Versus 21% in March 2019. While our cancers remain at similar levels to 2019 on a monthly basis, we're seeing the percent of cancers related to COVID In an effort to capitalize on the shift of seasonality, we added a flash sale in April and are currently running a May sale is 40% from our highest membership levels in Q1 2020. Research continues to show the importance of fitness. Results from a recently published study by Kaiser Healthcare found that just 22 minutes of activity per day can reduce the risk of severe COVID outcomes and Additionally, a recent poll by the American Psychological Association showed that more than 50% of adults experienced weight changes due to the pandemic with the average American reporting That they gained approximately £30 and nearly 50% of parents saying that their stress levels have increased during the same time period. Americans are waking up to the fact that their overall loans needs to be a top priority and we offer them a judgment free business option at an incredible value Existing and new members seeking a non intimidating environment, today we have nearly all our stores open with approximately 30 clubs still closed in Canada.
Regionally, the Midwest and South are leading the way in terms of performance metrics, having been reopened since May June of last year. Usage in the stores in those regions is nearly 90% of 2019 levels, while nationally usage trending up during the quarter ending March At more than 80% of March 2019 levels, usage for all these groups is trending upward with Gen Z leading the We believe that as more and more Americans receive the COVID vaccine, usage in the club will continue to climb. Now to our digital strategy. App adoption continues to accelerate with nearly 50% of our total membership base having the plant in its app, up from 40% last quarter. Our app is another channel to engage with, provide service to and motivate our members inside or outside of our gyms.
For example, it provides the ability to upgrade to the Blackguard, The crowd needed to help plan your visit and content videos on how to use the machines on the gym floor and do virtual workouts. We also continued to SPF Plus, Our digital only subscription for $5.99 per month, more than 30% of PF Plus members joining Planet Fitness locations after subscribing is demonstrating our digital as a gateway to bricks and mortar strategy. This is up from 20% in Q4. Additionally, 65% of our members who have time, we have visited our core bricks and mortar offerings since subscribing. Beyond just being a gateway, more than 80% of the total Plus subscriber base are members, Today, consumers can come with a wide variety of individual apps at all different prices for workouts, wellness, nutrition and mental health.
Our goal is to provide a holistic offering at an incredible value with a differentiated contract geared towards breaking down the barriers for casual first time gym goers all in one app, Along with the ability to visit our gyms, to this end, we plan to pilot PS Plus in a limited number of stores to test price elasticity With bundled offerings for both our Classic and Black Card memberships, we expect to run these tests for the balance of 2021 and look forward to sharing more on conference call, to underscore our commitment to our digital strategy, today we announced that we have deepened our current partnership with iSt Health and Fitness by taking a minority stake in the business. This enables us to accelerate our current digital content offerings To our members, we'll also explain complementary mind and body wellness categories. I believe that the future of the fitness industry is truly about bricks with clicks. The powerful combination of providing people with a high quality in person fitness experience coupled with the ability to engage I've come back to the fact that we are purpose led brand with help at the heart of who we are. We are on a mission to chase people's lives for the better.
We're in the fitness business, but we're also about providing a point of community to our members and this is what people are seeking right now, connections with others. The membership and usage trends that we are time, we are optimistic for the long term growth and I truly believe we are on the verge of a fitness boom. According to the Industry Trade Group's IRSA, Approximately 17% of the U. S. Gyms have closed due to the financial impact from COVID and it projects that it could eventually be upwards of 25%.
We believe that our value proposition, we can take more than our fair share of the people looking for a new gym. The role of fitness has never been clearer with nearly 80% people hospitalized for COVID being overweight or obese according to the CDC and 90% of the deaths from COVID were in countries with the highest obesity rates
Thanks, Chris, and good afternoon, everyone. I'm going to cover 3 topics before I get into our Q1 financials. The first is the state of the franchisees balance sheets and their desire to reinvest into their Planet Fitness store portfolios. The second is our recurring revenue model and how it ties to our net membership growth and third, our outlook for 2021 and beyond. On the first topic, we just completed business reviews with nearly all of our top 30 largest franchise groups that own the majority of our stores.
The overall sentiment from the reviews was that our franchisees are very encouraged by the trends they are seeing across their stores And are eager to get back to our historical store growth levels. Almost all of the top 30 have debt, the majority of which stripped and building back their stores profitability to the point where lenders make their development lines of credit available again. In some cases, that's already happened. In other cases, it will take more time because their stores were closed for a longer period of time. However, some of those franchisees are able to fund CapEx with cash from their balance sheet.
The good news is franchisees and lenders are call, collectively becoming more bullish on expansion, the longer the gyms are reopened and membership trends continue to move in the right direction. We expect franchisees to capitalize on the industry consolidation and more favorable real estate opportunities that are starting to emerge. With the pace of vaccine rollouts, we believe that the chances of a temporary shutdown on a national scale are less When we reported our 4th quarter earnings in February, adding to our confidence in our projection of 75 to 100 openings In Q1 this year, 22 new stores were open compared to 39 in Q1 last year. On to the second topic, our recurring revenue model. Beginning with our September sale last year, we have been focused on getting our marketing flywheel going again.
At any point, it's a function of what happened to our membership levels over the trailing 12 months in our comparable stores. We capitalized on the tailwinds that Chris talked about earlier and ramped up our membership acquisition driven marketing throughout the Q1 of 2021. We ended March with approximately 14,100,000 members, up 600,000 from where we ended 2020. And as Chris noted, it was our 3rd consecutive month of sequential net membership growth. While an encouraging trend, it's hard to predict what the balance time, the year will look like for membership growth as this is the first time that we've experienced this type of seasonality shift With the economy growing and more and more states and municipalities lifting restrictions, we believe that there is positive momentum behind people wanting to become more active.
As I mentioned, our system wide same store sales growth is a function of membership levels over the trailing 12 months. So while we are seeing signs in the near term of month over month net membership growth, our membership levels in our comparable stores are level, where they were in Q1 of last year when we hit an all time high. As a result, same store sales in the first quarter were down 14 time, we have franchised down 14.7% and corporate owned down 18.2%. The decline was largely driven by the $1,400,000 decline in membership levels year over year, slightly offset by an increase in average rate, As a reminder, we will not be reporting same store sales figure in Q2 due to the majority of our store base being closed during Q2 last year. Lastly, I'd like to update our thoughts on guidance.
On our Q4 call, we've conveyed that we were not providing the typical metrics we guide on due to the continued uncertainty caused by the pandemic and feel that is still appropriate today. We did provide our new store development projections of between 75100 new stores for the year. And as we announced last May, we provided franchisees with a 12 month extension on all of their development requirements and equipment placement obligations. In December, we extended the reequipped commitments by an additional 6 months to a total of 18 months from the original due date. We want to give more insight into how we see those areas as a percentage of our total equipment revenue this year.
Using the range of 75 to 100 new store openings this year, we expect that equipment replacement will be approximately 50% time, we continue to provide membership As the year progresses and the effects of the pandemic start to wane, Now on to our financial results. For the Q1, total revenue was $111,900,000 compared to $127,200,000 In the prior year period, the $15,400,000 decline was primarily driven by the lower equipment revenue, which was the result of the extensions that we provided to our franchisees. Additionally, we deferred $24,600,000 of revenue out of Q1's results last year due to the temporary closure of all of our stores as of mid March. Moving on to a review of our segment revenue results, franchise segment revenue was call, we recorded $54,100,000 compared to $58,500,000 in the prior year period, an increase of 9.5%. Let me break down the 4 components.
1st, royalty revenue, which consists of royalties on monthly membership dues and annual membership fees, was 40 Drafted was 6.3% consistent with the same period last year. Note that the prior year period's royalty Revenue was negatively impacted by a $14,100,000 revenue deferral related to monthly membership dues collected in March Next, our franchise and other fees were 4,800,000 The recognition of fees paid to us for franchise agreements, area development agreements and the transfer of existing stores And fees received from processing dues. The decrease was primarily driven by lower Total online join fees in the quarter. Also within the franchise segment revenue is our placement revenue, which was $800,000 in the first quarter compared to $2,000,000 a year ago. These are fees we received for the assembly and placement of equipment sales to our franchise quarter compared with a year ago.
I will further discuss the number of new equipment placements later when I discuss equipment revenues. And finally, national advertising fund revenue was $11,600,000 compared to $9,200,000 last year. Similar to royalty revenue, the prior year period's NAF revenue was negatively impacted by 4,600,000 Deferrals related to monthly membership dues collected in March shortly before stores closed. Our corporate owned store segment revenue was $37,900,000 compared with $40,500,000 in the prior year period. The $2,600,000 decrease period, partially offset by a $5,900,000 of deferred revenue that was collected but not recognized In the 3 months ended March 31, 2020, as a result of COVID-nineteen store closures and the opening of 5 new corporate owned stores since January 1, 2020.
Turning to our Equipment segment, revenue decreased $18,200,000 or 64.7 percent to $9,900,000 from $28,200,000 The decrease was driven by both lower new store Sales in Q1 were $1,100,000 compared to $10,600,000 in Q1 last year. In the first quarter, we had same store equipment placements, which was down 12 from the prior year period. Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amounted to $8,000,000 compared to $21,800,000 a year ago, a decrease of 63.4%, In line with the equipment revenue decrease previously discussed, store operation expenses, which are associated with our corporate owned stores decreased time, we closed the call to $25,900,000 compared to $26,200,000 a year ago. The slight decrease was primarily driven by lower payroll and operating This is partially offset by higher rent and occupancy costs associated with the higher store count and marketing expense. SG and A for the quarter was $22,500,000 compared to $17,000,000 a year ago.
The increase was opening of Jim's and expenses to promote our mobile app. The California and mobile app expense Investments that we believe set us up for continued growth in both an important market as well as in our Bricks with Click digital strategy. National advertising fund expense was $12,800,000 compared to $15,200,000 in the prior year period. Adjusted EBITDA was $43,700,000 compared to $46,500,000 in the prior year period. Adjusted net income was $9,100,000 and adjusted net income per diluted share was $0.10 or a decrease of $0.06 per diluted share.
Now turning to the balance sheet. As of March 31, 2021, we had total cash and Cash equivalents of $503,900,000 compared to $515,800,000 on December 31, 2020. This was comprised of cash and cash equivalents of $445,600,000 compared to $439,500,000 With $58,300,000 $76,300,000 of restricted cash respectively in each period. Total long term debt excluding deferred financing costs was $1,790,000,000 as of March 31, 2020 Our securitized debt structure is covenant length. We have 2 maintenance covenants, a debt service coverage ratio and a total system wide sales threshold.
Both are tested quarterly, calculated on a trailing 12 month basis and reported roughly on a 2 month In our most recent debt covenant reporting period of March 5, 2021, we had a 17% and a 93% We believe we have sufficient headroom for our 2 maintenance covenants, especially now with the majority of our stores open. 2 9 months last year and we did not have a single permanent closure due to COVID. Additionally, during our franchise business reviews, Franchisees have reported that while their store EBITDA levels has decreased, many of them still have EBITDA percent margins in the stage, I believe that as we emerge from the pandemic, our investment thesis has only been strengthened with the critical And we believe our competitive moat will continue to widen as we begin to come out of and get to the other side of this awful pandemic. I'll now turn the call back to the operator to open it up for Q and
please standby while we compile the Q and A roster. Your first question is from the line of Randy Konik from Jefferies. Your line is open.
Hey, great. I want to ask a couple of questions. But my first question, Chris, for you. Can you give us some perspective on the impact of on the Cali churn impact on weighing down Yes, the nice net member growth you saw in the quarter, it seems as if that would have held back the numbers a little bit That inflected in the quarter. And then the other thing is, can you give us maybe some perspective, while you said, I think all workouts were up Is there something where the millennials were leading the way in terms of new joints, but We could have had some still hesitation from the older age cohorts that we're still waiting for vaccines and what have you that could be An area of new member joint opportunity going forward, just want to get your perspective on that CALI impact and how you think about each cohorts going forward.
Thanks.
Yes. Thanks, Freddie. Hi, this is Chris. Yes, the calendar impact would be some, but pretty minimal. There's only 150 or stores in that market compared to the entire base.
So it would have some impact, but not that substantial. I mean, at this point in the game here with All U. S. Stores open now and the only stores that we closed now are in Canada, about half of those roughly. The pent up cancels that we saw all of last year that we talked about are pretty much weeded through now.
So our cancellations now are normalized. And that we saw in January was the joint volume was not quite the snuff like we normally see in January, although positive. As my opening remarks, what we saw in March of this year, on mature stores, March over indexed 2019 April was basically on parter April 2019 as well. So and in April of 2019, we actually had a 10 day national sale, which we did not This year, just a 3 day flagship. So you can see now that although January was lower than we normally see, as we've talked about what we kind of Assume what would happen as the vaccines are rolled out is we're having an unseasonable change in volume.
And then to your question on the cohorts, Zs, even since even during COVID, were over indexing all along. They were coming in faster than we had ever seen in the past. Millennials were on par slightly less and Gen X and boomers were certainly down, especially boomers as you'd expect. And what we're seeing now is they're all starting to go the right direction. Zs are We've seen in the past, but the boomers now, which is a good point to point out is now going in the right direction.
Although not the last year's or 2019's levels, They're now going the right direction, I think, because the vaccines are out there and they feel uncomfortable.
Understood. And With the investment announced this afternoon, it's clear that you're kind of moving and thinking through the company in an omni way, maybe just give us some perspective on what is your longer term vision for The business and how you think about addressing omni both on your in people's pockets on their phone with the app, but in the gym as well. And just Give us some perspective of what you think is the future for this company on from an omni perspective.
Yes, that's a great question. So When you look at this industry and up until the world of technology, now the apps, this industry had no way to service our members outside of our 4 walls. So they pay us month in and month out and whether they walk through the front door or not, we have no way to service them unless they walk through. So to Think about that now for a minute, how do we provide service outside our 4 walls, whether it's the workouts that we're currently providing and continue to increase that library? Do we get into meditation and diet, nutrition, for example?
So how do we get to offer service whether or not using the 4 walls, which At the end of the day, it can only drive retention, I would assume, right? I mean, if you're giving something to our members, whether they're in store or not, they're And for our members, as you know, Randy, these are casual first timers and 40% of our members have gone through German their entire life. And that still holds true today. So they're still choosing bricks and mortar at the same rate they ever have even post COVID. These people don't even know where to start, right?
They're having to go find their workout app or find their nutrition app or find another app and knowing where to go, what's the right source or what's the right avenue to go Why not handhold them and just close that circle and just not make it a la carte, let's just give it all to them so they won't have to go, go find on their own and try to piecemeal it together And really just make it easy and seamless for them to hopefully guide them on the wellness journey, which will drive results, right? And do they have to get results? That too will drive sticking this longer term. So I think it's how do we handhold our customers so that they get a better service and better experience and better results.
Your next question is from John Heickinbockel from Guggenheim. Your line is open.
Hey, Chris. Let me start with time, how do you think about the cadence of marketing this year, right, if seasonality is going to be a bit different than before, right, in terms of staging your sales, Not just your sales, but also your electronic marketing. And then also as part of that Teen Summer Challenge, haven't seen much on that. Is that Is there any kind of hybrid or modest approach to that this year or that's going to be a 'twenty two
issue? Yes. It seems like a challenge. Unfortunately, we did postpone it and probably relaunch it next year, Mostly to the fact that under occupancy limitations with the clubs, we didn't want to fill a seat with A free member as opposed to a paying member that couldn't get in. At this point, luckily, we're about 50% of our stores at 0 occupancy level.
So they're Wide open, which would be great, so but still at the percent that do. So we want to postpone that until next year. On the sale cadence, So as I just mentioned, the March and the April numbers, the mature stores were ahead in March of 2019 and also on par April 2019. So what we did do so far, the rest of the year is right now pretty normal. But what we did do to your point is a normal April national sale was just a 3 day flash sale and we pushed that big national sale into May, which we're right in the middle of right now, Because we felt we do feel that as longer this year goes in and the more vaccines get rolled out, that the unseasonable volume that I think that we'll see is there.
So We're going to hopefully test and see that through this May national sale, which was normally in April.
Okay. And then maybe secondly, right, back to the What you're doing with I fit. So when you think about bundled pricing, right, obviously, I don't think you want to tack $5.99 onto a black card. So is the idea really apply that to it's a black card benefit. The per month pricing goes up A buck or 2 or 3 something like that.
Because I know you've also noodled with the idea that I assume it will not apply to the white card. And do you really want to I guess when you think about getting The people there are solely at $5.99 there will be some of those, but I think you really want to convert them to Black Card numbers, correct?
Yes, absolutely. And you're right. So now that we've had the pilot with the plus 599 gigabytes of subscription And we've talked about this for a couple of years now that my envision was to have a bundled digital offering with the block card to help drive some price or acquisition. So now with The $5.99 price out there for just digital only, it sets that perceived value. So you're exactly right.
So now with the Black Card, We add a couple of bucks to it. The member thinks they get the Blackhawk at $24.99 they're getting really quite a good deal because the $5.99 would be by So now the black card pricing is in the 19s again. So that's exactly the idea. And with the white card, as we've always talked about that $10 price point, it's sacred. It's our advertising go to price gets you to come in and gets you off the couch and we're still getting upwards of 60% acquisition on Black Card.
So that's really where we're Try to get you when you come in and see all the perks you get with the black card. Although we'll probably we'll test some sort of white card add on to get digital on top So we'll definitely try a few things out this year and definitely report more next year. But the beauty with the digital component as an add on or as a bundle of the Black Card in club now is that in the past, the franchisees would have to build tanning rooms and CapEx would have to renovate 2,100 locations. The beauty with this is it's a flip of a switch. So after we test it in a bunch of stores here and see how it works, if we decide to roll it out in a bundle, Overnight, all 21 plus 100 stores will have the ability to start selling the option.
Okay. Thank you.
Thanks, Joe.
Next question, we have Jonathan Kaff from Baird. Your line is open.
Yes, thank you. Just I want to follow-up on the membership trends you're seeing, which seem quite encouraging. But I know you mentioned some of the markets where usage is coming back faster. I don't know if you've taken a look at membership trends in those same markets and if you're seeing any difference there. And then also when you look forward kind of the better than normal seasonality you've seen, I mean, how are you thinking about The chance that that continues, I don't know if you've talked to the puts and takes or following up on the marketing, any proactive tactics you're taking to help
Yes, sure, John. The usage, as I mentioned in my opening remarks, In Midwest where they were open longer back from May June, they're definitely their usage now is over 90% for member workouts, and their cancellations normalized Earlier on than the New York State California opening. So, as we've talked for ever since this all started happening, the ones that Well, clubs are open the longest since reopening, are actually the most normal. So there's no reason why the rest of the country as they get Further into this reopening resurgence, they shouldn't see the same kind of results going forward. Yes, the seasonality side of things, it's It's hard to say.
March was a great example and so was in April, but it sounds like 2 months we can bet on a trend just yet. But As we get through May June here, we start to see the same sort of abnormal seasonality trend that we start being on par over indexing April of 2019 in those months, that would definitely lead to me to believe that the seasonality changes is probably going to be the rest of the year, Which then begs the change is the direct change in the marketing schedule that's set today, which time will tell. There's no way to guarantee that yet, but we'll have to wait and
Hey, John, it's Tom. Maybe one thing just to build on Chris' first answer there. I think to tie it to your membership question, the stores that reopened the
Great. And then a follow-up, I don't know if you have an updated view on when you could see the system get back to pre COVID membership per club, I know you've talked at a high level before. But related to that, assuming the trend continues and you mentioned Strong franchisee profitability, how do you think the operators are balancing repairing the balance sheet still in 2021, but Not falling behind from a competitive standpoint looking out to 'twenty two in terms of unit growth and going back on offense.
It's hard to predict exactly when we get back to pre COVID levels, but I think it's pretty astonishing that we've gotten back just Here in 4 months, 40% of our peak last year. In just 4 months, we've made it back. So it's a great trajectory. Let's just Keep working on that and keep it going that direction. When and if we get to the point where we're back to pre COVID, I don't think it will be this year, Definitely, we're heading in the right direction, which is promising.
Yes, John. And on the franchisee side, I mean, as I said In my opening remarks, they're all at different places, but talking to the largest ones here in the franchise business reviews, They are bullish and they certainly bolstered our confidence in the range that we provided of 75 to 100 new store openings this year plus doing the
re equip. So if you
think about to your question about competition, anecdotally, We don't see any competitors marketing beyond some social media. So the franchisees in their markets and certainly we're seeing it in our markets, They're not taking any real positions in traditional mass media. We certainly don't expect And I've heard anecdotally again that they're not reequipping their stores where our franchisees are, which is another sign of their financial wherewithal and strength. Because not only do we want to open new stores, we want to make sure that the current stores we have and the current members we have in those stores have the best experience possible. Our franchisees are aligned with us that it's not only about the new capital for new stores, it's also about capital for the existing stores.
So and again anecdotally, we've heard that some of the high value, low priced players who are going to enter markets or broaden their or increase their presence in existing markets have largely pulled back on their store development plans. So we believe our store growth From last year and this year combined and more importantly net store growth since we've closed 0 as a result of COVID unlike others, will
Next question is from Joe Altobello from Raymond James. Your line is open.
Thanks. Hey, guys. Good afternoon. So first question on the Bill, you mentioned you opened 22 new stores in Q1. Would you still expect Q4 to be the heaviest in terms of new store openings As it has historically, given the 6 to 9 months left lead time, it would seem like you guys would have pretty good visibility into that cadence throughout the year.
As Tom said in his prepared remarks, We feel confidence in our range of $75,000,000 to $100,000,000 You're right in the sense that historically a lot of the new store bills tend to have been weighted in Q4, the back half of the year. So we have franchisees looking for locations kind of going Out of the end of 2020, knowing that some things are opening up, certainly some of the states that we've referred to that opened up earlier And less risk of those closing down, obviously, other states like California and some others where either we weren't open or A lot of risk of potentially closing down a lot less activity out there in the market to try to build a pipeline for that. But We've opened some stores in Q1 as we reported and we expect to open some stores throughout the year as well.
Okay. That's helpful. And maybe on to membership, You mentioned that 17% of gyms have closed permanently and that number probably goes up. How are franchisees marketing to those members whose gyms have closed? Are they buying member lists, for example, from those closed gyms?
Yes. In some instances, they are, Joe. This is Chris. If they get known ahead of time that there's a struggle there or that owner is not open, they will reach out and try to buy the member list from them. And it's Pretty seamless deal.
Generally, how they work from a high level is they basically take the members and they service them and they make it there's no financing involved. They just basically pay They've paid the club owner a portion of what they collect for a period of time and that's their payout and then they get the membership 100% of it going forward. So it's a pretty seamless Integrated takeover in that sense. But in most cases, I'd say probably 80% of the time, it's really just a matter of Marketing in and around that closing club, whether it's billboards and postcards and so on driving them to the Planet location. So that's pretty much how they capitalize on that.
On a lot of the national chains like a 24 Hour Fitness, for example, in most of those cases, those members weren't abandoned like a mom and Most of the time in those situations, the big national chain or like UFED, they would just dump their members at their from the closed clubs into their open clubs. So, it would be a slower cancellation transition as people say, I don't want to drive that far to the next available club to use. So, it's more of the mom and pops, which As you know, we talked about it is highly fragmented. You have to take all the us and all the big chains together, there's still 36,000, 37,000 mono pops out there.
Next question is from John Avingahl from JPMorgan. Your line is open.
Hi, thank you. A couple of questions, if I may. I'm sorry, I'm multitasking with another company that also reported. So I apologize if I mean that's something that's already been answered. First, I think I heard something about this that I wanted you to clarify.
The clubs that had been most recently opened, California, for example, how have the trends been in those markets, For example, after the annual fee was charged. I know that was an issue that we kind of dealt with in 2020 that people didn't cancel immediately. Is that an issue in California or any other markets that you guys have?
Yes. So the California stores, so the cancellations in that sense weren't as bad and it's the reason why is because in California because they were closed essentially until 2021. We didn't want to build their annual fees upon reopening because then they would essentially have 2 annual fees in the same calendar year. Does that make sense, John? So we We thought it was the right thing to do for the it was a lot of revenue for the franchisees, but they agreed that we wouldn't want to hit them in January or February once they open and then hit them again in June when they would do.
So we decided to waive them, which I think has probably helped a little bit on the cancellation side in California. Is there a wave
Annual fees in California that we should be sensitive to? Or is it going to be evenly distributed throughout the year based on whatever their initial Truckload? Yes. Just the initial contract, there's not going
to be a big balloon there because there wasn't I was just waving them to the
full period. Okay. I understand. Thank you for that. Covering restaurants, I mean, I've seen a lot of companies that You pulled advertising, reduced promotions, not done as much on the discounting side, much like grocery stores.
In other words, If you think you have the demand, why advertise like crazy to bring people in? They're going to come anyway. And it's interesting to juxtapose What is very obviously an aggressive May promotion, 1 month free, dollars 10 a month, no commitment, what's your belief? It's like, hey, there's going to be a wave of fitness Because people have gained weight or don't feel good or mentally or physically, what have you. I mean, can you kind of explain the thought of having one of your most aggressive promotions ever with your belief of, hey, this is going to be a wave of fitness of people kind of coming back to the gym and being together.
Yes. So I think I'd say probably 3 of the things. One is market share grab, right, as 17% of the industry is currently closed and As more close, we want to make sure that we are front and center. And even though we're number 1 in brand awareness, we didn't advertise most of last year, so our brand awareness slipped First time in many, many years, it actually went backwards, although we're still number 1. So it's important for us to be top of mind.
So when they Feel comfortable without working out again, they come to plan it, don't choose a competitor or current members leaving looking for a new gym because their club closed. I think those are probably 2 big points. And I think it's really too when you think about the media has tarnished the industry a little bit, I'd say, with just how they kind of put us in this corner of Jims were dirty in their petri dishes over the last year. So I think the cleanliness message of what we've been saying, in the commercial with The sanitization stations that we have and the social distancing, I think it's important for people to see real time that it's safe to come in. And you break down those barriers There's basically no reason not to try fitness.
We're $10 a month. The 1st month is free. There is no commitment canceling in time. We basically took every excuse token
I saw the commercial yesterday for the first time By accident, quite frankly, on TV, it's awesome. So congratulations on that spot. It definitely gets a lot of attention. And the final question, You mentioned the commitment to your 2021 development. Is there a thought on 2022?
I mean, how pipeline is building, how your franchisees are feeling. I mean, even if it's just how many people are in the field looking for sites, maybe how many LOIs, for example, that had been signed. It's obviously an essential part of your story kind of longer term if you can kind of think about. We still have enough time to really make a decision on 2022, but in the conversations that you're having with your bigger well capitalized How they're feeling about getting stores in the ground in 'twenty two?
Yes, John, it's Dorvin. Obviously, we're not prepared to talk about 'twenty two yet, but I think that from your point about conversations with franchisees, a lot of them are stages, some have been open a good chunk of 'twenty and now in 'twenty one, whereas like the guys in California that Just reopened recently. So they're all at different stages from rebuilding the balance sheet back to You're seeing some growth here in the 1st 4 months of the year that we've talked about. But I would say that The general sentiment is that they really like the trends they're seeing. They're very bullish On the opportunity ahead, the combination of just the trends we're capitalizing upon where we're at within the industry, our mo Vis a vis the competition, knowing that as opposed to maybe a QSR when you got to get somebody to come in and buy the burger, we didn't It's not like we lost all the members and we had to get our way back that 1st month we started billing.
And so the store's cash flow deposit, the minute it opens back up, The margins are still good that as Tom talked about earlier, but there is that timeline to the point I made earlier, 6 to 9 months really to get something going. So at this point, here we are, we haven't gotten to the midway point yet of Of 'twenty one, by the time we get into late summer, early fall, we're certainly going to have a clear picture into the balance of this year and quite frankly, I think we'll see what kinds of activity is The last factor I'd say is that we still don't have a real good feel where real estate land is going to be. In some markets, there's quite a bit of availability. In other markets, there's not as much availability yet. Landlords are trying to hold on to rents As much as they can generally from what we're hearing, in some cases, they're putting more TI money on the table upfront than they maybe did pre COVID.
There's a little bit of wait and see on that because if you think you can sign a 10 year lease with a couple of 5 year options and it might be just a little bit cheaper because comes available here in another month or so. I think those there's been some hesitation because of that too. But I guess the net net, Don, it's still a little too early at this point, but all of the franchisees are very bullish about the future.
That's great guys. Thanks for all the time.
Thank you, John. Thanks, John.
Thanks, John.
Next question is from Simeon Sibal
Members, how do you think about the timing of the market share grab opportunity that you mentioned from Shutter Jim's as we think further out? And do you have a view on what percentage of the members That you recaptured through the recent trough that our new members versus reactivated? Thank you.
Yes. About 4% of our joins right now are coming from their Clubs that are permanently closed, so again about 4% right now of our current joins are from that. And my guess is that we'll continue to grow in the future. And I think the other important piece is, I mean, the average club in the U. S.
Only has about 1200 locations. All of this market share grab, it's not like we've got a 7,000 member gym across the street that's going to close that we capture a bunch of them. So there's definitely some upside there. But I think also longer term, when you think about a market and we've had this even in pre COVID world for 20 years where We're in a market and there's 2 or 3 competitors and 10 years later with the last guy standing. It's really that month over month over month of just increased joints because there's just no other place to shop, And that's really where a lot of the benefit does come from in the future.
But pre COVID, there's about 60,000,000 members in the U. So if 17% is closed and it couldn't go as high as 25%, I mean, there's definitely some members to be had that have been looking for a new gym. And we're essentially now in Every neighborhood, every DMA you can think of, with that price point, it's pretty hard to beat.
Great. Thanks. And then the furthering of
the iFIT, I mean, that's obviously very exciting. Congrats. You guys have done a really nice job going digital. So as you think about what that ultimately looks like, does the relationship with Ifit stretch further? Any color there would be helpful.
Yes. I mean, I think they've been in their industry in fitness as long as we have, right? They've been around for 30 years at So I think it goes back to home fitness. They're definitely pioneers in that space. And I think it was a great partnership to make And to deepen it just to, hope that's to capitalize on our expertise to drive the business forward.
And I think outside of the content, they do a lot of other things. They do have home gym equipment, they do have meditation and cooking classes. They have a lot of stuff that they do that as we broaden our involvement with them, just has a lot more opportunity than just strictly a digital So time will tell, but it's definitely I think a good partnership and 2 big we're 2 of the biggest leaders, right? Biggest in the health club, For some more space, they're the biggest in the essentially in the home fitness space. So it's a great partnership.
That's right. Well, congrats on that. Best of luck for the rest of the year. Thank
you. Next question, we have Sharon Zackfia from William Blair. Your line is open.
Hi, good afternoon. I guess two questions. So on the equipment sales, Obviously, the franchisees are rebuilding their balance sheets as you alluded to and you've got kind of moratorium or extended leeway on the equipment replacement, I'm just curious in 2022 as we think that through, Is there some sort of pig in the python when it comes to equipment replacement sales at that point? Or is it just everything was deferred, so we get back to kind of Like $100,000,000 plus in replacement, but it's not kind of above that, if that makes sense. And then secondarily, the SG and A line is you guys referred was pretty big this quarter for a couple of reasons.
Do you have an underlying SG and A number kind of what the quarterly run rate would be ex stock comp and what you were doing in California with the app.
Yes, Sharon, it's Tom. So on the equipment piece, there is no catch up or picking the python thing. It's really more all dates For both strength and cardio re equipped were pushed out 18 months. Now in some cases, franchisees have done it ahead of that time because either they thought it was the right thing to do for their customer based on the shape of their equipment or there might have been Who was coming in town and they wanted to have fresh equipment to compete head to head. But yes, so there's no catch up.
So essentially, I think maybe to your question, 2022 starts to look like a pretty normal year in terms of those obligations because all dates have moved Back from when we originally gave the extension in May of last year. On the SG and A side, yes, so twenty 'twenty, there was no incentive comp. There was just a lot of sort of kind of things in there. We took some pay reductions More in Q2, but that's coming up that we're going to anniversary. So it is hard to compare, which is why we've said 2019 is a better indicator Where some of that noise wasn't happening.
So if you take 2019 and factor in We think those are the right things they were the right things to do strategically in California in an effort to Get the local authorities to think about gyms differently. So it's really kind of a very different campaign than our And then when Jim's reopened, if they could at least get to a higher status so The maximum occupancy could be higher than it would be otherwise. So that was kind of the intent behind
it. Can So the Q1 SG and A was like $4,000,000 higher than the Q1 of 2019. Is that the one time investment, Chug?
Some of that is the marketing investments and some of that is the incentive comp that didn't exist
last year. Okay.
Great. Thank you.
Next question, we have Peter Keith from Piper Sandler. Your line is open.
Hi, thanks for taking the question and nice work on navigating a difficult environment. I had another follow-up question on So understanding there's an 18 month push out, also hearing an argument out there that it may not The property have a one size fits all approach. And so maybe thinking about James' like in California that just opened, haven't When did gyms open and therefore pushing out a little further?
Hey, Peter, it's Tom. Yes, it's a good question and the short answer is no. The 18 month was meant to capture closure periods, reduced usage, etcetera. And And frankly, some of the stores in California are among the highest membership levels we have. So they get a lot of usage.
So you could argue Almost for an accelerated re equipped cycle under normal circumstances. So, but the good news is our franchisees are completely aligned with what we're doing. I think maybe some concepts that we've heard anecdotally are pushing more for new store growth and completely walking away from Rea Quip and that's just
Okay. Yes, so maybe kind of a
follow on that. If a franchisee Push back, I can re equip or I could build, but I've got capital to kind of do 1 or the other. It's your choice now to push with the reequipped and keep those older gyms looking new?
Yes. I mean, I'm pretty clear that the fact I'd rather have 2,000 palaces out there than 4,000 pieces of junk. So We're pretty set on that. And the franchisees agree. We don't want to be out nude and we want to protect our home turf before we go find new turf.
When you think about the other side of it too is these area development agreements that they had that they have to build under, eventually they will have to build out. So they do have to do that. They don't want to lose their area development agreement. So it all shake out and all grow together and they're happy with the way the business performs. They share our excitement with how this March April went, so I think we're This is
Bob. Yes. And Peter, maybe just one last thing to build on Chris'. So implicit in your question is, is it an or and our
And our last question is from Oliver Chen from Cowen. Your line is open.
Hi, thank you. The usage data has been quite encouraging. Do you expect that to be volatile Going forward and to regionally continue to be different or converge. And then Chris, On advertising and marketing, in the past you had some creative changes. Are you feeling good about where you are with positioning In terms of who you're partnering with there.
And the last question is on the mobile app. Other investments ahead, just would love your thoughts on the key opportunities to continue to improve that. You've done a good job innovating the app quickly. Thank you.
Sure.
Thanks. Yes, I believe the usage I don't think it will be volatile. I think we will continue week to week and month to month improving for the better. I think the longer opening stores will always probably be ahead of the older, but eventually I think they'll all be back 100% once we get there. So I don't see any reason why it should be volatile.
I think it should all go in the right direction as the vaccines are more distributed. Yes, I think the advertising, I think the creative messaging, especially around the cleanliness standards, which I think for any industry going forward or any public place will be probably important For the near future years, people will want to make sure they're sure that they're in a safe place, they're in a safe place and that they can feel okay. So I think that's That will probably keep in ours forever. Even though we've been meticulously clean for decades, I don't we never really featured that. We always thought it kind of goes without saying, but we're really highlighting those I believe it's working.
I think that's even driving current members that have seen the commercials that haven't yet to use the stores, see the sanitization And the increased signage that we put in clubs and the social distancing and stuff, I think that's probably driving some of the workouts along with the vaccine. So we'll continue with that. And I think I think it's John Ivankoe's you saw the commercial, I think it's a really catchy commercial. I think the breaking down the barriers that we have in that commercial will definitely do well for us. Yes, the mobile world, it's exciting.
It's hard to believe that we ran this business without mobile 3 years ago, 4 years ago. It's kind of hard to believe we didn't service the members or give them ways to contact and we're really engaged them outside our 4 walls. So as we continue to build out our library of content and look to meditation possibly and nutrition and diet and Other things that we can use that platform for, it's really now the platform is built, but we can test and can Driving more engagement with our members. So it's and that's I think with the partnership with iFED allow us to speed that process up as opposed to trying to
There are no further questions at this time. Now I'll turn the call back over to Mr. Chris Randell, CEO.
Well, thank you everybody for joining the call today. We're really, really happy with our Q1 and the acceleration that we talked about from March April and look forward to This may sail and to see how the trends hopefully continue. I think I couldn't be more bullish on the brand and the business and the industry. I think we couldn't be in a better spot coming out of COVID and this post COVID world. As hard as this was to go through, I think we're going to have some experience some Serious tailwinds that we can capitalize on here as a brand and look forward to reporting Q2.
So have a good afternoon. Thank you.
This concludes today's conference call. Thank you again for participating. You may now disconnect.