Sharon Zachary with William Blair and Company. Really happy to have with us today, Chris Rondeau, CEO of Planet Fitness, and Tom Fitzgerald, CFO. As many of you are aware, am I not live? I am not doing that. Those of you on the webcast, I'm sorry, but there are people here from Planet Fitness, so I'm just kidding. We have Chris Rondeau, CEO, and Tom Fitzgerald, CFO. For those of you who've been following Planet since its IPO, this is a company that's completely disrupting the fitness club industry in the US and potentially soon to be globally, actually growing the market every time they open a club, which we think is pretty interesting and gives them more control over their own destiny than I think the vast majority of consumer companies that you could invest in in the public markets today.
I do need to tell you before handing the mic over, colloquially speaking, that we have a complete list of research disclosures and potential conflicts of interest at williamblair.com. Chris and Tom are going to go through a presentation, and then we're going to do a fireside chat in this room as well. Thank you.
Actually, we don't have a presentation. We're just fireside chat.
Oh, just doing the fireside chat?
Yeah.
Okay. I will pivot to fireside chat immediately. I guess, let's start off with you had a management departure that was announced last week. Your President, that I think joined in December of last year. Can you talk about what led to that departure? I think you're not refilling the position, if I understand correctly.
Right, yeah.
The decision behind that would be helpful.
Sure, yeah. Good question. Yeah, he started in December. About five months he was here. It became pretty evident relatively quickly that, although he had, coming from Jiffy Lube, some franchise experience for sure under his belt, that coming from a very old industry, being parent of Shell, also a very regulated industry, working for Planet in the culture being so fast-paced and an industry that's still very new in comparison to Shell, for example, that the fit just was not really right for him or us. I think also what had transpired leading up to even him coming on board, Dorvin, the former president, was on his way to retirement for quite a long time. He was down to one direct report. The management team at that point had already taken on a lot of extra duties here and ran with it, quite frankly.
Really, when he came on board, there really was not a lot of shoes to fill. The management team that is in place had been with us for many, many years. The President of Corporate Stores, the President of Franchising, Tom here, the CFO, and many others, Chief Brand Officers have been there for over 20 years, that there really was not a lot for him to do, quite frankly, to really leverage any substance in growth here to continue to drive the business forward. We decided to make the change here and continue to run the business.
I think something that might be helpful, just in lieu of a slide presentation, is the pandemic obviously was harder on the fitness club industry than a lot of other industries. The clubs were closed down, depending on the state, for an extended period of time. Can you give us an update on kind of your membership recovery now that I guess we're officially in a post-pandemic world? How the clubs, particularly that opened before 2019, how membership levels look there relative to pre-pandemic levels?
Sure, yes. Right now, about 50% of our clubs now are at pre-pandemic membership levels or more. Revenue is about 60%. Revenue is slightly higher and revenue higher than that. The overall average is about 1% down. It is not very vast. It is very, very tight there. What's interesting, though, is if you look at mature stores, Sharon, and that were mature previous to COVID. They already had their three-year ramp. They are considered mature at three years. First quarter, just so you all know, first quarter was responsible for about 60% of net member growth for the entire year. Think about this, first quarter was the first time we've had a first quarter in four years.
If you look at stores that were mature prior to COVID, had their three straight first quarters in a row, those stores, on average, are all above pre-COVID numbers, membership and revenue. It's these stores that were affected on their three-year ramp, either opened during COVID or just previous to COVID, that just had a slower ramp because maybe they've only had one first quarter in four years or two first quarters in four years. Those are the bucket of clubs that are still going to take longer to ramp to technically a mature level. If you look at newer openings now, newer openings are ramping because of this first quarter. Newer stores are ramping close to really 2019 levels. In all, the member trends are good. Members are working out more than they used to. They're canceling less than they used to.
Black Card percentage, which is our higher tiered membership, $24.99. The Black Card membership take rate is staying right about on par to a normal year. So the member's healthy, for sure.
Can you talk about, in terms of the membership growth, kind of the percent of your members that have never belonged to a fitness club before, if that's similar to what it was pre-pandemic? There's been talk that potentially you would benefit from the number of competitors that closed during the pandemic, whether you've seen any pickup in members from clubs that permanently closed, and then just rejoin levels, how those look.
Sure, yeah. Even historically, about 40% of our new joins are first-time gym members. Literally, we are the first gym they have ever joined in their life. That still holds true today. Our rejoin levels are about 30% of our joins are rejoins, which historically was only about 20%. Not only are our members coming back, they are coming back faster than they ever have, which is a great sign. Back to the whole thing that home fitness is a new trend, which is not the case, for sure. As far as the different generations, we have now penetrated back to above all pre-COVID penetration levels. Boomers are now above. Gen X, millennials, and Gen Zs are far above. Gen Zs are the younger cohort that are joining like wildfire.
It's almost like they learn more from COVID than anybody else because they're joining quite a bit faster than anybody else. Everybody's working out more. Like I said, they're working out about six and a half times a month. Before COVID, it was about five.
Sharon, maybe one thing to add on that. We currently, and pre-COVID, had about 3% of all boomers in the U.S. were members of Planet Fitness. About 6% of Gen Xers, about 9% were millennials. Sorry, I'm now quoting current numbers. About 9% of all millennials belong to Planet Fitness. If you look at, and that was more like 6% earlier on, but as they got more exposed to advertising, we penetrate even further. Gen Zs were currently about 9% of those who are old enough to join belong to Planet Fitness. We think the strength in each generation being more inclined to participate in fitness, and we get more than our fair share of that. We feel good about that. We expect Gen Z, like millennial, will continue to grow beyond the 9% as they get more and more exposed to our advertising.
Can you talk about the competitive dynamic? I mean, now that we're in a post-pandemic world, on paper, I always get the question, Planet looks like it would be easy to operate. Like, why is nobody else doing this? Why is there not competitive infringement in the U.S.? It might just be a matter that now you've got so much scale, right? I'd be interested to hear, I mean, Chris, particularly, you've been with the company for a long time, why you think you've been able to get to this level without kind of meaningful competition? What has been the secret sauce where we've been able to get people off the perpetual couch and into the gym?
Sure, yeah. I can't underemphasize the importance of a judgment-free zone. People would think that price is what really is the key to our success. Judgment-free is really the key. The price is the added benefit that people are willing to give it a shot because it's cheap, right, and inexpensive. When you look at low-cost competitors in the U.S., and this Crunch is about 400 stores, give or take, where we're at 2,400. There are some other small regionals that might have 60 stores or 70 stores peppered throughout the country. What's interesting, when you look at their low-cost model, they're more like what you consider a Gold's Gym at low cost. They have the 120 lb dumbbells. They have the Olympic benches. They have the squat racks. They have the power racks. They have the classes or the pools or the basketball courts.
In a lot of cases with those heavier freeweights, they're really catering to the fit getting fitter, right? They're not getting that 40% off the couch that have belonged to a gym before, which is really why we have so many members per store, right? That holds true whether we're in the U.S. or we're in Mexico or we're in Panama, or that these people never had access to fitness. Price is important, but judgment-free is that important. I worked out at a low-cost competitor. Vasa is actually one of them. It's like going back in the Gold's Gym days in the 1980s. I mean, it's scary. I'm in shape, and I was like, these people are animals. My girlfriend was with me, and she was like, and she had never belonged to any other gym but planet t rue story.
She wanted to leave because she was like, she did not know this existed. I am like, oh yeah, it exists. That is what we speak to, is we advertise. You are right. Now we are so much larger. You think about every incremental member, 9% goes into marketing to get another person off the couch, right? We have 18.1 million members. We added 1.1 million during the first quarter. At the low point in COVID, we had 13.5 million. Think about that. We have added 5 million, give or take. Every incremental member is another 9%, which gets more people off the couch. What is interesting is the marketing budget of a single store in a single market, our same store sales was 9.9% in the first quarter, majority is member growth, and it has always been a majority member growth, right?
That same store has spent more money on marketing this year than it did last year, than the year before that. It goes back in history. There are always more people to get off the couch, and they are more exposed to marketing. A little bit to your point now is the low-cost competitors, they try to beat us, but not all the way. The moat is just so wide, and we are just so far ahead. How do you break through the marketing and the brand awareness? I would not want to. I know what I do, and I would not be able to do it.
Can you talk about membership trends being so strong, but franchise development is still on an annual basis kind of below where it was pre-pandemic? Can you talk about kind of the pushes and pulls on franchise development in the near term? Last November, you had talked about 600 new clubs over the next three years. If you looked at the pace this year, you're kind of below that run rate. What gives you the confidence, or do you still have the confidence in hitting 600 clubs over the next three years?
Yeah, so I'll start with that one, Sharon, and then wind back to where we were versus our peak. At Investor Day last year, we committed to, or we said we're very confident that we can deliver 600 new units over the coming three years. If you do the simple average of 200 a year, we said 2023 being the first year we would be below that. We put out an updated investor presentation today where, like on our last earnings call, we reaffirmed our outlook for franchisee placements for 2023 to be approximately 160. Now you have to take that and add corporate store growth to essentially get the proxy for total store growth. Last year, we said we would do about what we did in corporate store growth this year as we did last year. Call it 15.
That takes the total for the year to 175. Again, we always said this year would be below 200, and it would ramp over the three years to total 600. If you look at our franchise agreements where we exist today, what we said in the 10-K is in existing markets, you add them all up, it's over 500 for this year and the next two years. That is 500 to that. You have to add corporate store growth, which you want to think about. We have 230-plus corporate stores. You want to think probably mid to high single-digit growth in stores per year. We're going to enter some new international markets. We're building out the team. We've talked about that even before Investor Day. Adding new markets into that will be added to that tally we're building up here.
Lastly, pre-COVID, our franchisees in 2018 and 2019 built approximately 15%-20% of the new units for the year. They were ahead of their development obligations. They were building faster than they needed to. This year, we said they are basically on par with their development obligations for headwinds that I'll get to in a second. We see over this three-year horizon that that number will tick up again to where not back to 2018 and 2019 levels, but we do believe they will be ahead of their obligations to some degree over that three-year horizon. That is how we still feel comfortable with 600. The headwinds are the headwinds, which is why this year is still well off our peak from 2019. Primarily, cost of construction is up. It is up for everybody.
Anybody building anything at the same spec today, we know that we are and they are paying more than in 2019. Our costs are up about 20%. I think we were one of the first brands, just given our size and our scale, to flag that a while ago, a couple of years ago now, that HVAC supply was an issue. It's gotten better, but it's marginally better and moving at a glacial pace. We expected it would be better by now. It's not. Our lead times there went from four to five weeks, typically with the big three carriers, to it got up to 40-plus weeks, and now it's 30-ish, ones inside of 30, but it's not still anywhere close to where it was before.
In that case, franchisees are committing to HVAC units before in many cases they sign the lease, which is tricky because HVAC is not fungible. It very much has to be configured to the box you take. These couple of things really are the primary factors, Sharon, that I think are causing franchisees, particularly on the cost side, to say, you know what, why do I need to be ahead of my obligations? If I think costs may come down, I'll just wait it out. I'll stay on my obligation path now and maybe get ahead of it as costs come down. It's really idiosyncratic. We can't describe our entire franchisee base of about 115 with one statement. They're all in very different situations. We still feel good about the amount of space we're taking down.
We looked at last year, if you take the total gross square footage that we took down as a system with the new units we built, we're in the top five from what we can see. A couple of the dollar brands, TJX. We are still taking down a tremendous amount of space. We are not taking down 2,000 sq ft, 3,000. It is 20,000 on average. We still feel good about the growth. I think to Chris's point, the model is very strong. Same-store sales growth of 10% basically in Q1, building on what we've delivered, most of that being member growth. Corporate store segment is doing well. Franchisees are seeing, as we are seeing in our corporate stores, the margins improving, the margin rates improving, the four-wall margins. I think all things bode well for the future.
It's just these couple of headwinds I think are impacting us.
Can you on that note compare and contrast new unit returns for franchisees today versus 2019 and the margin levels that they're seeing post-royalty and ad?
Yeah, we do not see their economics when they are doing new stores. We see our own. I sit in on those meetings every month for our corporate segment. The returns are good. They are very good, whether that is in our legacy markets, mostly in the Northeast and the U.S., where we operated our stores for years. More recently, our Sunshine markets. We acquired Sunshine Fitness, one of our largest franchisees, February of last year. They are predominantly in the Southeast. Different cost structures there, but the returns are attractive in both markets as we look at new store opportunities. Depending on the market, they may be a little higher in this market, a little lower in that market, but generally very attractive. I think we are hearing the same thing from our franchisees.
Question?
Oh, yeah, sure.
Just a quick question related to that. How are your higher interest rates impacting your franchisee returns? How's that flowing through in discussions?
Thank you.
Yeah, so again, one can't describe all our franchisees in one fell swoop, but the vast majority of them are smaller. They're not onesies, twosies, but call it less than 10 stores. They may or may not have debt. If they do, because the cash flow of the business is so strong. The four-wall margins pre-COVID for a franchisee were high 30%-low 40%. Many of them are north of that. It is just tremendous cash generation. It is a very low OpEx model, essentially. Any new member they add, they pay us royalty, they pay marketing, and they get $0.84 of every dollar is flowing through to the bottom line. It is quite strong. As franchisees, as you move up the ranks and they get a little bigger, they may have debt. Generally, they're very conservative.
Rates likely are impacting them, but not to a degree that is significant. As you get a little further up, there may be some private equity firms. Again, you can't talk about 10% of our franchisees have some private equity investment. You can't talk about them in one fell swoop either, right? Some are more conservative. Some are a little more aggressive. Sunshine Fitness, the one I mentioned earlier, was backed by TSG, who originally invested in the company and took it public. Just as an example, their covenant ratio when we acquired them was just inside of four. Not where they were, but where their covenant was. I would consider that fairly modest leverage.
It's hard to talk about it in one fell swoop, but what our franchisees do know is regardless of their capital structure, they have to meet their obligations because the value of the franchise is significantly greater if you have pipeline than if you do not. If you exit, you're going to exit our system at a nine-times multiple. If you have pipeline, you're going to exit at a five-times multiple if you do not have pipeline. Making sure they're staying on their obligations is critical to them.
Can you talk about initiatives around making it easier to cancel, so click to cancel and so on? I know you're in some areas where that's already kind of the rule of the land. What does that do to your business? How do you view that as a risk, if you will, going forward?
Yeah. If you were to ask me that question five years ago, I'd say it was high risk. I'd say I think now we have experience with it in about seven states. It was actually law in California even pre-COVID. It became law right before COVID hit. What we see in the states when we turn it on, click online, cancel online, is we'll see a slight uptick in cancels that runs for some run five weeks, some run 10 weeks, and then they normalize to what we see in a normal state that doesn't have online cancel. The thing that's a little different, though, in the first states that did it is they're all a little different. What I mean by that is some of the laws are if you cancel, if you joined online, you have to be able to cancel online.
Only those are some are when this law went into effect, if you joined before that date, this does not apply to you. A little bit all over the place. Tennessee is the first state that just put it in on December 29 that regardless of how you joined or regardless of when you joined, you can cancel online. That one went in effect December 29. Again, it upticked slightly like we saw. It has not quite normalized just yet, so we are waiting to see how that happens. I am inclined that once we see how Tennessee pans out, which is basically full bore, right? There are no hurdles there, that I envision us just proactively making it nationwide. I think it is the right thing to do from the customer. I think especially today's world with the younger generation joining our clubs, sending a letter is probably not something you have ever done before.
The thing we also see in those states that have the online cancel is their rejoin rate is slightly higher than the rest of the systems. I think people see that's easy to come, easy to go, that they're not realizing that they jumped through hurdles to cancel. That makes them more inclined to start it again. More to come as we see how Tennessee pans out, but I imagine us actually rolling it out nationwide.
I want to make sure we go back to the white space potential in the U.S.. Chris, I do not even remember how many years ago the IPO was at this point. I know it was before the pandemic. Is it 2018?
2015, yeah.
2015, yeah. I mean, at that time, you talked about 4,000 clubs in the U.S. I don't think you've ever updated that. My guess is your demographic penetration, particularly among younger groups, is higher than you would have thought at that point. How do you think about the white space potential now in the U.S.? Is there any market like New Hampshire or so on that you can look at and say, if we extrapolate New Hampshire to the rest of the country, this is what our white space looks like?
Yeah, I mean, we are just starting the process now with our third-party market planning company. Hopefully by the end of this year, we'll have something to announce on the 4,000-unit potential. A little bit at the investor show we had, we talked about certain markets. We showed how Houston we thought would fit X number of clubs. We fast forward five years. From what we know from the join and penetration rates, we can actually add more than that. We did it again. We could add more than that. It seems as the more we open, the more we can open. The more we open, the more marketing dollars, the more we get more people off the couch. You're exactly right. Like 10 years ago, we wouldn't have thought millennials would be at over 9%.
Gen Zs were infants, right? In every new generation, we see we continue to penetrate higher. Also, the boomer penetration continues to grow. It just does not grow as fast as the younger generations. In five years, Gen Alpha comes into the mix, which if all trends hold true historically, they will be higher than 9%. By the time Gen Zs all age in, that will be higher than 9%. That just means what people are going to be working on, the more exposed to it. More to come on that when it is finally the end of the year. If you look at New Hampshire, we are opening, I think, two more stores this year. In New Hampshire, which brings New Hampshire, there are only 1.3 million people in New Hampshire. It has not grown really much in 20-something years.
It'll be our 22nd or 23rd club in New Hampshire on 1.3 million people.
I think something that has changed more recently has been, I guess, notable breakthroughs in weight loss drugs, where it seems like that will be kind of more prevalent and more readily accessible as supply develops over the next few years. How do you think about appetite to work out, particularly with the 40% that have never belonged to a fitness club before, if they're given the option of, take this drug, lose GBP 20 fairly safely? How as an organization do you prepare for that? Do you think about that? Do you view it as a threat at all?
Yeah, I actually look at it as a positive. I think first, working out is not just about weight loss, right? The money or the things that does relieve stress, helps you sleep better, makes you stronger, helps osteoporosis. I mean, you could go down the list. Weight loss is just one component. I think like any supplement, usually pair it with other things. I think also, especially for first-timers or somebody who's really obese, this might be their first step to get off the couch, right? Now they think they can, not even with judgment free, maybe this is their stop. They say, now I feel comfortable enough to go to a club for the first time. I think it's, I don't think it's necessarily a bad thing, as long as it doesn't hurt the supply chain for people who really need it.
I'm sorry, Sharon, there's a question here.
Sure.
How many units do you have that are in downtown office areas that might be people not going back to work in the downtown? Or are you more suburban generally?
We're more suburban. We have one block, you can see from the room here. And we have them in Manhattan. We have them downtown Chicago. We have them downtown Miami, LA, for example. Generally speaking, we're more suburban and rural in that matter.
For those downtown units, are you seeing the stress? Does it just all matter?
I'd say it's slow to come back, but I don't think there's any big, not a big difference, generally speaking, though.
Go ahead.
One question I had was, as the store base matures and the three-plus-year stores become more important, how should we think about the comp growth of those three-plus years? I appreciate the first three years of the accelerated growth. What about the three-plus-year growth?
You want me to take that?
Yeah, sure.
So pre-COVID, we would say that mature store, call it four years and on, would generally grow low to mid-single digits. We really have been with other multi-unit brands and you guys follow. We really do not have a cannibalization problem. To Chris's point, every new store we open is going to generate more marketing dollars to get more people off the couch. Today, despite the fact that we have 18 million members, there are 140 million people who live within 10 minutes, 10 miles of a Planet Fitness who do not belong to a gym. There is still a large population of folks that we can go after. Having said that, our same-store sales growth typically was aided quite a bit by those new ramping clubs because we consider a store comp once it gets to month 13.
Here with our, and that's when we were adding 200+ new units a year on a smaller store growth, a store base, right? Now with the store growth that we've had, which we think is still pretty impressive coming through the pandemic over the last three years, it is having less of an impact on same-store sales. We just, as we talked about, posted low double digits last year, essentially 10% in Q1. The mature stores are actually growing faster than they have historically. Whether that continues or not, don't know, but we see the mature growth probably being in that low to mid-single digit, maybe a little bit better over the coming years. Yeah.
Can you talk about the economic vulnerability or defensiveness of Planet Fitness? I know back in 2008 and 2009, you guys kind of cruised through it. You're bigger now. You've got greater geographic exposure today than you did then, probably a bigger demographic bandwidth. How do you view, just given the choppiness that we hear about in consumer, where you're placed and how you would expect to fare if we see a sustained downturn?
Yeah, I think we do not have a lot of data that proves it out, but anecdotally, they get a lot of trade-downs from people that are not going to necessarily stop working out, but they may not need the eucalyptus towels and the basketball court they never use. They trade down. I mean, our equipment, I think it is important to know if you have not been to a Planet. I mean, our equipment is the same stuff you are going to find in a $150 a month club, same treadmill, same workout machine. You are not jeopardizing your workouts in that sense. You are using a top-tier manufacturer like Life Fitness or Matrix Fitness. I think they get some trade-downs. I think, generally speaking, people do not—I think maybe anybody at the very, very low demographic, you might lose a little there.
I think you gain from the top demographic that's being smarter with their buying decisions in that sense. If you're already working out, I don't think you're going to jeopardize, especially if price is $10 a month, you're going to not work out because of that. I think we benefit from it. I don't think we get hurt by the lower recessionary talks or inflation in that sense. I think with our member growth the way it is in the same-store sales and the 84% flow-through, it continues to drive the store performance. We're not, and I think it's important to note because what we do is all dues revenue, or 98% of our revenue with the store model is dues, right? Where most gyms in this model are ancillary revenue. They're trying to sell personal training for $1,000 training packages.
They're using the daycare. They're selling $9 juice bar drinks. You're down the list. I think those things you might scale back. Their top-of-the-line revenue starts to depreciate because people might hold on to their membership, but they're not buying the stuff and spending an extra $80 a month in the store.
If I could add one thing, Sharon, or maybe two things. I think we've said we've had a lower cancellation rate than the prior year in each of the last seven quarters. That's in the face of people getting strained by higher costs, not affecting people leaving Planet. I'd say the second thing, and we talked about this on the Q1 call, the 9.9% same-store sales growth, Black Card mix would typically go up. It didn't go up year on year this year, but that's primarily because we had the High School Summer Pass participants from last year convert as members. About 10% of them converted as members, but they converted $10. They're not buying the Black Card membership, which is $24.99. They're buying the $10 membership. If you back them out, year on year, all the other membership, Black Card mix was up year- on- year.
That's after taking a $2 price increase in May of last year. In the face of inflation, at least in our membership base, the members are paying more. Members are paying more for the higher-priced membership if you back the teams out.
We have time for one last question, really quick. On international growth, Canada, Australia, Panama, I mean, are there any where you're at now, are there any markets you're particularly excited about? How do we think about the pace of international near and long-term?
Sure. Yeah, we just happen to say we just, we've been announcing it here for a few weeks. We just brought on a VP of International from a very large QSR, international QSR chain. We'll announce that in a few weeks to help spearhead our international development. Before, we always did it kind of if the phone call was reactive, we'd take the call and we'd investigate and maybe open. Now, more of a proactive approach. Did some market studies on certain markets we're looking to. Asia's interesting. Some European markets are also interesting. Instead of doing one maybe every year or one every two years, probably more looking at one to two every year. Not going to go out and just pepper the world with one unit here and there.
We're going to be very well planned out, get a good foothold in the market, and then go on to the next. Probably one to two a year.
Great. All right. See everyone on the break.
Thanks.