Planet Fitness, Inc. (PLNT) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Deshaun [ph], and I'll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness First Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Brendon Frey, Managing Director of ICR. The floor is yours.

Thank you for joining us today to discuss Planet Fitness' first quarter 2017 earnings results. On today's call are Chris Rondeau, Chief Executive Officer; and Dorvin Lively, President and Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Planet Fitness' Web site at planetfitness.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Planet Fitness' judgment and analysis only as of today, and the actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness' business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risk and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our first quarter 2017 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today. With that, I'll turn the call over to Chris Rondeau, Chief Executive Officer of Planet Fitness. Chris?

Thank you, Brendon, and thank you everyone for joining us today. 2017 is off to a great start. During the first quarter, we added over 1.2 million net new members to surpass 10 million members system-wide, and delivered adjusted earnings per share of $0.19. Our strong performance was a direct result of the hard work put in by our great group of well-capitalized franchisees and the passionate Planet Fitness staff that support them and manage our corporate-owned stores. It was a true team effort. As pleased that I am about our recent results, I'm even more excited about the trend our results show across our key growth drivers. Starting with store expansion, 54 new franchise stores opened in Q1, up from 48 in the same period last year. More importantly, pipeline of new stores remains robust. After opening 200 stores at this time last year, we continue to have over 1,000 mid [ph] stores in the pipeline based on current area development agreements, specifically, we have approximately 1,000 stores scheduled to open over the next five years, including 500 in the next three years. At the same time, we continue to sell area development agreements throughout the country as new franchisees are eager to expand their businesses to new markets, and add to their growing portfolio of Planet Fitness locations. Q1 membership trends in stores were strong. System-wide same-store sales increased 11.1%, marking our 41st effective quarter of positive same-store sales and our third consecutive quarter of double-digit growth. There are a number of factors fueling our comp performance, including what we believe are some significant competitive advantages. It starts with our welcoming non-intimidating environment featuring high-quality branded cardio and strength, the fact that we are able to offer our differentiated superior in-store experience for only $10 per month is incredibly compelling to our target audience of casual and first-time gym users. As we did in 2016, we continue to survey new members to determine if they've ever belonged to a gym prior to joining Planet Fitness. Based upon responses from approximately one million new members in Q1, or 40%, are new gym users. We believe we are clearly growing the overall market by successfully targeting the roughly 80% [ph] of the U.S. population and Canada that currently does not belong to a gym. Another critical component to our success is the level of investment by the company and our franchisees toward growing the brand awareness and educating consumers on the differences between Planet Fitness and stereotypical gyms. Every month, 2% of members [ph] contributed to the National Ad Fund, which allows us to participate in high-profile events such as our sponsorship of the Times Square New Year's Eve Celebration, and T.V. and digital advertising that runs nationally during the year. On top of this, franchisees are required to spend another 7% on local and regional marketing programs aimed at driving awareness and member sign-ups. Between national and local programs, we estimate that almost $100 million spent on marketing our brand and highlighting our welcoming non-intimidating environment in 2016, a figure that far outpaces the competition, and should continue to increase in 2017. An equally important point of differentiation is the capital spent on keeping Planet Fitness' store fleet fresh and up to date. This is anchored by a disciplined equipment replacement cycle that ensure a consistent store experience regardless [ph] number of visits a store that opened this year or a decade ago. In 2016, Replacement Equipment sales represented approximately 30% of our total equipment revenue, underscoring the system-wide commitment to this important endeavor. Finally, we, along with much of the fitness industry, are benefiting from the current health and wellness trends. There is a growing awareness among all demographics about the importance of exercise as it provides a variety of benefits from weight loss, to stress relief, and more. With healthcare [indiscernible] living healthier lives will only get stronger among our target audience. The growth in members at our existing stores and from new stores opening is driving robust revenue and earnings gains in our high margin franchise segment, and contributing significantly to our company's strong cash flow generation. With approximately 192 of the franchise stores schedule to open this year, and with each new join adding incremental dollars to our overall advertising budget, we are confident we will continue to attract large numbers of first time and casual gym users to Planet Fitness and solidify our leadership position. Talk about our growth prospects in the U.S. and Canada, there's significant untapped international opportunities for our brand. Later this year, we will open our first store in Panama, a market primed for Planet Fitness model as more than 98% of the population does not currently belong to a health club according to industry data. We will leverage the learning in this market and to inform our broader strategy for successfully penetrating Central and South America in the medium term, and potentially other regions of the world longer term. Another future growth driver is the increased royalty rate, our monthly dues and annual fees, which we introduced in our recently filed Franchise Disclosure Document. Dorvin will walk through the change in more detail, but we've taken the common royalty rate from 5% to 7%. While beginning to move away from commissions we have historically received on certain franchise purchases from our preferred lenders, the net affect of the royalty rate change and an increase over time of 41 basis points on royalties from new ADAs in the related franchise agreements, new franchise agreements that don't have the contractual right to a lower rate and from renewals of expiring franchise agreements. Finally, as noted in the press release, I'd like to congratulate Dorvin on his well-deserved promotion to President and CFO. In his newly created role his extended responsibilities will include overseeing technology in the real estate development functions as well as our corporate stores, in addition to his ongoing oversight of all finance-related functions. Since joining the company in 2013, we have more than doubled the footprint, and delivered strong financial results to our franchisees and shareholders. Dorvin has played an instrumental role in our continued success, and his promotion will allow me to increase my focus on brand growth, franchisees and shareholder returns and our long-term strategy. Our passion for the Planet Fitness brand and my commitment to bring affordable and non-intimidate health and fitness to millions of people has never been stronger, and I look forward to our exciting future ahead. In summary, membership and growth trends remain very strong, and there are significant opportunities to take these numbers much higher. I'm very confident that we have the right leadership, franchisees, staff and strategies in place to successfully achieve the long-term targets, we have established for this business to return increased value to our shareholders over the years ahead. I will now turn the call over to Dorvin.

Thanks, Chris, and good afternoon everyone. I'll begin by reviewing the details of our first quarter results and then discuss our full year 2017 outlook. For the first quarter of 2017, total revenue increased 9.3% to $91.1 million from $83.3 million in the prior year period. Total system-wide same-store sales increased 11.1%. From a segment perspective, franchisee same-store sales increased 11.5% and our corporate store, same-store sales increased 4.5%. Over 90% of our Q1 comp increase was driven by an increase in members. At the same time, our Black Card membership penetration was 59%, up 140 basis points over Q1 last year. Our Franchise segment revenue was $36.8 million, an increase of 33% from $27.7 million in the prior year period. Let me break down the drivers of our fastest growing revenue segment. Royalty revenue was $20.9 million, which consists of royalties on monthly membership dues and the annual membership fees. This compares to royalty revenue of $14 million in the same quarter of last year, an increase of 49.1%. This year-over-year increase had three drivers. First, we opened 201 new franchise stores since the first quarter of last year. Second, as I mentioned, our franchisee owned same-store sales increased by 11.5% and then third a higher overall average royalty rate. For the first quarter, the average royalty rate was 3.9% up from 3.58% in the same period last year driven by more stores at the 5% royalty rate. Next, our franchise and other fees were $7.3 million compared to $5.4 million in the same quarter a year ago an increase of 34.7%. These fees are received from processing dues to our point of sales system, fees from online new member sign ups as well as fees paid to us of association with franchise agreements and their development agreements. This increase is driven by additional stores and an increase in same store sales as compared to the prior period. Also within the Franchise segment revenue is the replacement revenue which was $2.1 million flat with the prior period. Finally our commission income, which is made up of commissions from third party preferred vendor arrangements and equipment commissions for international new stores was $6.5 million compared to $6.2 million a year ago. Our Corporate-owned store segment revenues increased 5.2% to $27 million from $25.7 million in the prior year period. The $1.3 million increase was driven by the increase in corporate on same store sales of 4.5% and increased annual fees. Turning to our Equipment segment, revenue decreased by $2.7 million to $27.3 million from $30 million; the anticipated decrease was driven by a difference in timing of new store equipment placements versus a year ago partially offset by an increase in replacement equipment sales to existing franchisee on stores. As we discussed at year-end, we have some stores that we placed equipment in Q4 but those stores did not open until Q1. Our replacement equipment sales as a percent of our total equipment sales was 37% in Q1 with strong purchases about franchisees reequipping their clubs during the quarter. Looking ahead we expect new store placements in Q2 to be higher versus the same period last year and we continue to track towards our stated guidance of 192 to 200 new store placements for the full year. Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise-owned stores amounted to $21.1 million compared to $23.6 million a year ago; a decrease of 10.6% which was driven by the decrease in equipment sales, I just mentioned. Store operation expenses, which is associated with our corporate-owned stores increase slightly to $15.2 million compared to $14.7 million a year ago. SG&A for the quarter was $13.8 million compared to $11.8 million a year ago. Both periods include non-recurring expenses, last year these were severance-related cost and this year they were primarily cost incurred in conjunction with the March secondary offering. Excluding these non-recurring expenses, total SG&A increased by $1.7 million or 15.2%, this increase was primarily to support our growing franchise operations. Our operating income, inclusive of the aforementioned non-recurring expenses increased 29.1% to $33.19 million for the quarter compared to operating income of $25.6 million in the prior period. On an adjusted basis, taking into account the one-time items I just mentioned, are adjusted operating margin was 37.8% this quarter versus 31.4% in the prior quarter, an increase of 640 basis points. This was primarily due to revenue growth and higher margins from our Franchise segment, where we have leveraged the cost infrastructure in our fastest-growing segment. Our earnings before taxes, inclusive of the aforementioned non-recurring expenses increased 27.2% to $25 million for the quarter compared to earnings before taxes of $19.6 million in the prior period. As a result of our fourth quarter 2016 amended credit facility and the increased term loan borrowing, the company incurred approximately $2.4 million and higher interest expense in the first quarter of 2017 compared to the prior year period, and will incur higher interest expense of approximately $10 million at today's LIBOR rate for full-year 2017. Our GAAP effective income tax rate for the first quarter was 28.5% compared to 16.8% in the prior period. As we've stated before, because of the income attributable to the non-controlling interest which isn't taxed at a Planet Fitness, Inc level, an appropriate adjusted income tax rate would be approximately 39.5%, if all the earnings of the company were taxed at the Planet Fitness, Inc level. On a GAAP basis for the first quarter of 2017, our net income was $17.9 million or $0.14 per diluted share compared to net income of $16.3 million or $0.09 per diluted share in the prior period. On an adjusted basis net income was $18.4 million or $0.19 per diluted share, an increase of 21.2% compared with $15.2 million or $0.15 per diluted share in the prior period. Keep in mind that Q1 included higher interest expense of $2.4 million as a result of the Q4 refinancing. Adjusted net income has been adjusted to exclude the impact of the March secondary offering and several other non-recurring costs, and to reflect at a normalized federal income tax rate of 39.5%. We have provided a reconciliation of adjusted net income to GAAP net income in today's earnings release. Adjusted EBITDA which is defined as net income before interest, taxes, depreciation, and amortization, adjusted for the impact of our Franchise segment increased 34.5% to $32 million driven by higher royalties received from additional franchisee-owned stores, not included in the same store sales base, and an increase in the franchise-owned same store sales of 11.5%, as well as higher commissions and other fees, our Franchise segment adjusted dividend margins increased by approximately 200 basis points to 88%. Corporate-owned store segment EBITDA increased 5.2% to $10.7 million, driven primarily by 4.5% increase in corporate same store sales and higher annual fees. Our Corporate store segment adjusted EBITDA margins decreased slightly by 20 basis points to 40.1%. Our Equipment segment EBITDA decreased 3.5% to $6.1 million driven by lower equipment sales. For the quarter Equipment segment adjusted EBITDA margins increased 130 basis points to 22.4%, and is in our stated range of 21% to 23%. Now turning to the balance sheet, as of March 31, 2017, we had cash and cash equivalents of $60.2 million compared with cash and cash equivalents of $40.4 million as of December 31, 2016. Borrowing capacity under our revolving credit facility stood at $75 million as of March 31, 2017, our total bank debt was $714.9 million excluding deferred financing cost consisting solely of our senior term loan which bears interest at LIBOR plus 350. During Q1, we purchased incremental interest rate caps to effectively hedge against changes in interest rates on 50% of our outstanding debt. As of March 31, 2017, our term debt has a spread of 350 basis points, plus the applicable LIBOR rate. And 27% of our debt is capped at a LIBOR rate of 1.5% and 23% is capped at a LIBOR rate of 2.5%. Before I move to our outlook, I want to walk through the recent change in our royalty rate in more detail. As Chris stated, we announced in our franchise disclosure document filed last month that we've taken the royalty rate on monthly and annual due from 5% to 7%. It is important to understand that the increase in the royalty rate includes the shift from commissions to royalties, which represents approximately 1.59% of the 2% increase for an average store. The remaining 41 basis point change represents an incremental royalty rate increase. We believe the shift from commissions to royalty better aligns our interest with our franchisees' interests compared to the existing model where we as a franchisor make commissions as a result of purchases made by our franchisees. This shift to an all-in 7% royalty rate applies to all new ADAs sold since filing our most recent FDD. Franchisees have the option, if they choose, to amend their existing ADAs and franchise agreements to increase their current royalty rate by this 1.59%. Now to our outlook, for the year ended December 31, 2017, we still expect revenue to be between $405 million and $415 million. Based on our quarter 1 results, we now expect adjusted net income to range from $73 million to $76 million, up from our previous guidance of $71 million to $74 million, with an adjusted EPS between $0.74 and $0.77, up from our previous guidance of $0.72 and $0.75. Adjusted EBITDA is now expected to increase between 15% and 18% to a range of $173 million to $178 million for the year. We now expect system-wide same-store sales increase to be between 7% and 8%, up from our previous guidance of 6% to 8%. We still anticipate selling and placing equipment into approximately 190 to 200 new stores. Finally, as a reminder, our 2017 guidance now assumes approximately $37 million in interest expense, compared with $27 million in 2016, with the increase attributable to our Q4 credit facility amendment and the higher term loan borrowings associated with the Q4 special dividend. I'll now turn the call back to the operator for questions.

[Operator Instructions] And your first question comes from the line of John Heinbockel from Guggenheim. Your line is open.

So, Chris, two related things. When you think about what you're going to spend more time on strategically what are one or two of those items that you think could have the most impact on the business? And then kind of related to that, I think you've had some thoughts about potential clubs in different countries. When you think about Central and South America more broadly, have you guys yet penciled out what you think that potential is?

Sure, yes. I'll you two things from a focus standpoint would be the brand evolution, which I something that we -- that I've been involved with for nearly 25 years today, in our blocks [ph], in our model today has changed over the years, but I think the important thing is to be careful that we stay disciplined to where we came from. So we don't stray and end up being just like everybody else. So I think it's the disciplined approach to evolving the brand, which ultimately should drive revenue. So my focus is about that, member growth and revenue. So that's where my increased attention will come from. Central and South America, still somewhat preliminary, I mean some findings have told us 300 in Mexico. But again, there's been nothing concrete in any of those larger countries. Again, we just did that Panama deal, we're in Dominican Republic at this point.

And then maybe as a follow-up, when you think about the opportunity, talking about brand development, something that you've thought about for a while is kind of a consumer products opportunity, and putting the Planet brand on different products that are not out there today. Where does that rank in importance to you?

We'd mentioned in the previous call that we did look into a company that looks into licensing for us. Nothing has transpired that was of substance that we'd like to bring you [ph] direction. I'm still investigating that. Nothing is concrete there either. But I do believe, now with over 10 million members, that our brand is a brand outside our four walls, that there could be something there that we can capitalize on.

Okay. Thank you.

Thanks John.

And your next question comes from the line of John Ivankoe with JP Morgan. Your line is open.

Dorvin, I wanted to get some clarification on the change in the royalty rate. So it goes from 5% to 7% for new stores and new agreements. But yet, you lose the 1.59% for commissions, correct?

That's correct, John.

So is there any type of transition where the commissions fall off for existing stores before they sign up at the new 7%. And I just wanted to see if this is going to be a seamless transition from one revenue form to another revenue form and still have it on a quarter-to-quarter basis be at least neutral or really additive to the overall business model.

Sure, John. As you pointed out, it applies to new area development agreements that we sell, as well as any new franchise agreement -- single franchise agreement we would sell post our FDD filing. And then those examples [indiscernible] it would be 7%. And then these product and services that they purchase at a store level that we receive rebates or commissions on today would go away. And that, for an average store, is about 1.59%. Existing franchise agreements, so say our 13,000-plus stores that are open, they have the option to be able to amend their agreements if they so choose, and would go from their existing royalty rate, whatever that rate is, up by that 1.59%, and then by a cost, like a new franchise agreement would. It's too early. Obviously we just filed this, so it's too early to know whether FTU [ph] or how many of those might do that. I think the way that we think about it internally, and the way we've had conversation with franchisees now for a long time about this in terms of that alignment, that we make profits when they grow their top line, is that -- and when we don't make it just when they're purchasing something that's more of an operating expense in their store. In reality, it should equal on all set, but as far as in terms of the transition of that, if they chose not to amend then it would take some period of time obviously to see how that impact would start to offset each other.

But if they chose not to amend, Dorvin, then they would continue to pay that 1.59% commission and whatever their legacy royalty rate was, correct?

That's correct.

Okay, I just wanted to make sure. And you kind of do bring up a symbolic issue, I guess I'll say, of you want to make money off of the franchisees' top line, and top line is going to be most indicative of their bottom line. So certainly I understand you starting to disaggregate yourself a little bit from the commission side. But is there any thought to rethinking some of the equipment, not necessarily placements, but the equipment sales that you do? I mean is this kind of an issue that the franchisees are saying to you, that they want you to be a pure franchisor and not be involved in commission or equipment revenue?

As you know, we have talked about that on some previous calls. And I mean, in the ideal state, I think that's what we'd love to have. The franchisees have clear transparency into exactly what our cost is. One, because they have to negotiate the three-year contract that we have with our primary supplier, but we felt like that at this point in time making this change because these are just ordinary normal operating expenses that hit store-level P&L month-to-month, as opposed to day zero, you go out and buy brand new equipment for a store, and then you don't start replacing it till like year five and six, et cetera. So, maybe over time, but I think at this point it was too big of a pill to swallow to do all of that. But that would be a more perfect alignment.

Thanks.

Sure.

Thanks John.

And your next question comes from the line of Sharon Zackfia with William Blair. Your line is open.

Hi, this is Tania Anderson for Sharon. Hi. This is the question, you talked the development pipeline at the beginning, and it sounds like it's good, but can you just kind of discuss the decline in deferred revenue? It came out in your 10-K, and then there were some questions and concerns on it. So how do we look at that and read through development pipeline there. Thanks.

Yes, sure. There's a number of items that are in that deferred revenue. One of the things that was in there at year-end, so if we got some questions about comparing the 12-31 financials -- '16 with 12-31 '15, and the majority of that change, that reduction was really related to the equipment discount which we had negotiated with the sellers of the eight Hudson Valley clubs that we acquired at the end of Q1, in 2014. That was about a $1.7 million of the change. And that was related to the fact that that discount was expiring at the end of Q1, this Q1 we just ended. And so, in the end of December, we looked at that and said they're not going to be able to use all that discount, so we reduced that and it flowed through income at the time. The balance of the others really relate to membership fees or annual fees, et cetera, that set up and get deferred over -- they're not recognized immediately; quarter from year-end to now, so from December 31 to March of '17, the balance went down slightly, about a couple of $100,000, so no significant change.

Okay. And then your royalty rate, so the new ADAs are switching to 7%. So, not counting the existing ones that might change, amend their agreements, when do the new ADAs that, say that someone signed today at 7%, when does that start to flow through into your P&L, the royalty rate when they start opening clubs and you get that?

Sure. So when we sell -- let's say we sell a new ADA today, [indiscernible] ADA, $10,000 fees, we receive $100,000. We set that up as deferred revenue. A franchisee has a development schedule. It may be they have four years to develop 10 stores, as an example.

Okay.

They go out, look for -- they have a defined market, a very specific market that is the only place that they can open up stores. They submit sites. We get to approve all sites. Once we approve the site, they negotiate a lease. And then they sign a franchise agreement, typically simultaneous with signing that lease. And then there's a period of time, depending of if they're getting it, [indiscernible] box, or if it's going to require a significant amount of construction cost to get that store open. That whole process I just outlined could -- it could take a period of three or four months to find a lease or longer, and then it could take three to six months to get a store open. So, we don't expect the new [indiscernible] that we would sell this year under our franchise disclose document to have any material impact this year. But as you stated, it's only those new stores under the ADAs. Now, we might get a small handful open by the end of the year with the new ones that we've sold or that we sell here in the next 30-60 days. Once we get past June or so it's very difficult to sign an ADA and then get a store opened in the current year.

Okay. It's kind of what I thought, but I just wanted to check. Thanks.

Sure. Thank you.

Thank you.

And your next question comes from the line of Jonathan Komp with Robert W. Baird. Your line is open.

Yes, hi. Thank you. A couple of questions, maybe the first one just on the same-store sales momentum that you're seeing, looks like the franchise performance accelerated even though the comparison was a little bit tougher sequentially. So I'm just wondering if you could maybe give an update on what you think is driving the strength. And then as more than 1.2 million members added, how much visibility does that give you in the full year?

Yes, I'd we were hitting it from a few different angles, whether it's strong sales, and then cancels as low as -- involuntary cancels, which is more billing cancels. I think we're hitting it from all angles, which is driving the performance as well. Just our ad budget just seems to grow, which is pushing what we're seeing today.

Yes, I'd say, John, just to add to that, we certainly were pleased with our growth in the quarter. As we had stated back when we gave our guidance back in late February I think it was, that our easiest comp would be earlier in the year, and then it gets harder sequentially. If you go back and look at our last-year comp, so kind of that two-year stacked comp would be easier. And therefore, that's why we said we'd be in that kind of low double-digit range for Q1. So we're pleased with where we're at, as I said in my earlier remarks a few minutes that the very high percentage, a little over 90% of that comp store growth came from member growth, which we like because I think it speaks to the health of the brand and to the effectiveness of our marketing. So we feel pretty good about our business.

Okay, great. And then if I could just clarify. Dorvin, did you give the number of placements during the quarter?

We did not. In total, I think we had 31 placements in Q1, down from last year, as I stated in my remarks also that that was planned. And I think I had said our Q1 Equipment revenue number would be down year-over-year. And then the cadence of that will be fairly similar to our cadence in Qs two, three, and four, last year, to get into that 190 to 200 range which we're still comfortable with from a guidance perspective.

Okay. And the shift, the timing shift, was that all backwards into Q4 or was it some of that forward into Q2 on the placements?

Mostly Q4, yes, because we had about 20 store openings or so that got placed in Q4 that opened in Q1. We always have it from quarter to quarter, a bit higher last year than the year before.

Okay. And then last one from me. I understand there's always various tests throughout the system. But a couple of that look interesting just on maybe testing some different pricing structure for the Black Card, and then also some new rewards planned kind of incentive-based with the rewards card. I'm wondering if you could comment on either of those two.

Yes, sure. Both of them are still in pilot or test phase, if you will. The test of the Black Card at $21.99, I guess one good thing is we've never really referred to the Black Card as our 9099 members. It's always been a $10 membership in our Black Cards. So, you may have flexibility, and I think as we talked about many times in the past is, how we changed the black card to black card spot so they're much nicer. So we're kind of testing to see the less [technical difficulty] the weak demand for that number. It's too early to tell what we end with, as far as is it the right move, the wrong move, or can we do it more or less. Early read is favorable, I'll say at this point. Yes, there's a PS [ph] purchase rewards again. Too early to tell if it's going to drive either -- I guess there're two ways to look at it, we're looking at it now does it drive just more referrals leads for new joins, and/or does it help retention, and still yet to be determined.

Okay, thank you.

And your next question comes from the line of Randy Konik with Jefferies. Your line is open.

Hi guys, this is John [indiscernible] on the line for Randy. Thanks for taking our question. I guess just to start off could you give us an update just on what you and your franchisees are seeing on the real estate front? Obviously there has been retail bankruptcies that have been accelerating over the last quarter even, are you seeing kind of a more quality real estate opportunities, and do you feel as if you have greater leverage in negotiation?

I'd say it's been good now for quite a while, last year too. So I don't think there's any better or worse, I think it's probably still good quarter for us. And as I said in the past, the recent landlords are generally calling us as one of the prime tenants to take these spaces. Due to the fact is we can't be Amazon if you will and we also our busiest days of the week, we have 5,000 workouts per center per week, and majority of those are Monday, Tuesday, Wednesday, which they drive traffic to the center when they're generally not as busy. So it's a great [indiscernible] driver when the grocery stores are busy in the weekends.

Great. Thanks for taking the question.

Thank you, John.

And your next question comes from the line of Dave King with ROTH Capital. Your line is open.

Thanks. Good afternoon, guys. I guess, first off on the change in royalty rate, I'm assuming it may only impact the existing ADAs for now, I guess how should we think about the 190 to 200 stores plan for the year? I guess how many of those should be on existing ADAs?

Typically every year, Dave, most of the store openings come under ADAs. You start the year with -- I think I've said before on our prior calls that we will this year and have always historically had a few one offs franchise agreement to get signed somebody off. Somebody will say, I want to plan it this year in this town, and that market is available, and we'll do that. We like to do more ADAs, five to 10 types of ADAs typically. But every year we do so. And those would be kind of self-generated if you will during the year, and we'll do so more this year. But the far majority of them -- because if you get my comments a few minutes ago to the question that we posed, that timeline is from start to finish, when you start out a brand new ADA, it's just that that type of length of time to get that development schedule going. Because of that, most of our stores will come from our existing platform.

Okay, okay. So then not contribute that much this year in terms of revenue impact than last two -- okay, but it would help further out. Okay. Thanks for the color there. And if I look at your comps, they continue to accelerate which is impressive. I guess the pace of membership growth, looks like it's sort of been holding in at similar level. Is that more of a function of a slower pace of openings, or is it more due to initial sign-ups, anything to point to there, and how that's been trending at new locations?

I'd say that very similar to where we have been, I mean, we haven't seen in Q1, whether it's stores opening in the first month or how they get ramped up in the earlier stages. We're four months into this year now, to April. No significant changes in the economic model I would say. And then just the last one I'd say is that in addition to what we see in Q1, it was very similar to last year and even 2015 frankly that the far majority of our comp is coming from member growth, which speaks to us being able to -- you know, and our franchisees to be able to drive with that marketing in these local markets drive more and more people to the stores. So, we forget about that.

Okay. And then I guess one more, Chris, any sort of high level thoughts understanding it's still early in terms of the -- seeing the response to the royalty rate change, but in terms of anecdotally from the franchisees, has there been any pushback at all? What are the conversations been like in terms of thoughts around?

Sure.

You know the change?

Good, Dave, yes. I'd say one thing even whether it's this or equipment negotiations or -- we are very transparent with our franchisees. So to help them understand the -- I get the math behind it, we had three other groups and three other groups are actually backed by private equity actually use their analytics to validate the math and show their off you get complex. So we involve them, so they'll understand the math and get their mind around the change in 1.59 was really truly an incremental 41 bips, it's not a 2%. So, that's -- we involve them, and because we are involved in it, so it went well.

That's great color. All right, thanks guys, good luck with the year.

Thank you.

Thank you.

And your next question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

Hi. Congrats. Thanks a lot. So, regarding the royalty rate, as it -- with the 40 basis points, what was the main driver in terms of how you're thinking long-term and why 40 basis point was kind of the right methodology? And then also as we think about international, just what's your strategic framework for how you'd prioritize markets in terms of where you would think that the brand would make sense, just kind of your filter as you work with franchisees and thinking about the right opportunities and how to sequence them with the right risk rewards? Thank you.

Yes, I think 41 bips is more -- you know, going from 5 tyo 7, I think was a big move granted, it was -- a lot of it, most of it was from one pocket to the other. So it was more just a clean number that we can get franchisee approval and endorsement to be comfortable with the move. So I think it's really with -- the increased came from. And I think it was 41 bips. As you can see, we have great same-store sales and drive more members per door, that is, to get more into this point, we can get a little more royalty, incremental royalty is good. As far as marketing, really all markets that are growing, I can't really say a one that's necessarily a priority, you know, [indiscernible] more than another, and I think it wanted to fire on markets to either open new stores or relocate older stores to see the comp.

Okay, and just finally, Dorvin, on the comp guidance, it was tweaked up slightly at the low-end, what was the rationale for doing that in terms of what you're seeing and how you're feeling about the outlook?

Sure, Oliver. Obviously, we put our guidance in place at the beginning of the year we had insight into a couple of month's worth of activity at the time, saw what was going on, kind of the carryover effect from last year into January, February, and this recurring billing concept we have. So we have obviously have that insight into that. We saw the member growth number that we had and net basis for the quarter, and it was -- I guess it was as we were thinking about this for a year and reflecting back on my comments a minute ago of kind of what that two-year kind of stacked comp would look like, we wanted to make sure that we got into the year to see how matured stores were performing, because it's getting to be obviously a bigger percentage of the base, our new stores out of the gate, or performing, and I think what we ended up with been sitting here now with three months past us looking into the balance of the year is that we still see that increasing card number on a year-over-year basis up -- it's headwinds up against us, although albeit we feel good about our business, so tightening the range we feel very comfortable with right now, but we're also have nine more months to go. So I think it was really bad and seeing that the low-end of our range was clearly achievable.

Okay and it sounds like the mature stores you're really pleased with are their methodologies on marketing programs or initiatives that are in place to kind of ensure that the glide path for mature stores continues to be robust, just any thoughts along that line would be helpful? Thank you.

Yes I would say the one thing that we're really disciplined on with the mature stores and unlike you would some would think is that once it get 70,000 members you can throttle back to marketing because you're there and the last thing you want to do is you want to continue to do every month drive awareness and drive new members in and get them comfortable coming in giving a shot, 8% of that membership. So, I think it's a disciplined approach to re-equipping, re-modeling and constantly part of the marketing.

Thank you, and best regards.

Thanks, Oliver.

And your next question comes from the line of Rafe Jadrosich from Bank of America Merrill Lynch. Your line is open.

Hi, good afternoon, thanks for taking my questions and congratulations, Dorvin.

Thank you. Thank you, Rafe.

As you look at your comp growth, can you talk about how much of the growth you think is coming from you growing the market versus share gains and then within share gains, who would you think you're taking share from, is it the lower price players, higher price players are you seeing more members that are kind of signing up for multiple gyms?

This is Chris, I think still the same as Q1 of 2016 and Q1 of this year, the survey shown that just over 40% coming in as first time gym members though, I think as shown we are tapping into that taking those population just been bit of surprised. So that's a great news. In this industry that show that people with two memberships which is a growing trend and I think that is more based around the acceleration while we have fitness outlets that are higher priced and you need deployment to work out and if you can't get cycling class [indiscernible] period. So you do need to backup option and for 10 bucks a month where the perfect option for that, so you can get any of us but I can't say really necessarily which competitors they are really coming from, it's coming from another club.

Got it and then you just spoke about the rising brand awareness, have you seen any changes to your new store productivity or stores opening with more members initially now that your brand awareness is higher or has it stayed pretty consistent?

It's pretty consistent, Rafe, I made that comment just a minute ago, we obviously have all the DFT revenues that we draft every month. We look at how close we are performing out of the gate, we think that ramp period is important in the first 12 to 16 months of an operation and maybe even to Chris's point he said mature stores continue to be able to comp albeit at lower rate as we talked about in the past but there has been no real significant change in the model. We go - when we go into newer markets, sometimes they perform a little bit different or when I say newer market less market penetration maybe just because of the reciprocity is not as valuable in some of those markets maybe but no significant change from that perspective.

And then last question, as you look at the comp, the sequential comp acceleration over the last few quarters. What would you attribute that most to and then are you seeing that sequential improvement consistent across all maturity levels of your stores or of your gyms?

I would say there's not one single thing that's driving that which I think is, it speaks to the power of the brand both are more higher market penetration markets like here in the Northeast and maybe the Southeast where we've hedged more stores and been there longer. Our new point of sales system which we put in place back in early 2015, I think that we and our point of sale provider, third-party partner have gotten smarter with not only managing the data but functionality of some things that that we can do internally. I think our franchisees today are significantly smarter than they were three or four years ago, if you look at a number of our groups today they have Chief Marketing Officers and CFOs and Head of Store-ops that they didn't have four, five years ago all the way from the investment that we make corporately from a headquarters perspective not corporate store perspective but in putting people in the field closer to our franchisees having marketing coordinators for the various markets where we form these marking co-ops looking at the way we're spending our money versus the way it was the prior years. All driving on that and then it comes down to the power of the data and we didn't have this kind of data back under our previous point of sales systems, so it's a combination of all of that and franchisees today are holding their own training and coaching and mentoring and it's all of that, I think that when you think from an executional perspective you could say well, I mean it's common sense things but keep in mind if you go back three or four years ago probably the average franchisee that hadn't gotten in just in the last 12, 18 months probably only had three, four, five stores whereas today it's more like eight to 10 to 15 stores. And so, they've got more money invested, you got smarter with this, so I think it's a combination of all those kind of things.

That's really helpful, thanks for all the color.

Thanks Rafe.

And your next question comes from the line of George Kelly with Imperial Capital. Your line is open.

Hi guys, a couple questions for you. First there has been a lot of growth in digital streaming subscription services, wondering what your view is towards that market is that a place that you think within the years you could be operating in?

Yes, it's Chris. I would say I think one thing I must say is kind of in that comment I made about just general awareness on wellness, all of this I think helps the entire industry whether it's this or quite honestly even in commercials, I mean I think just it's more [indiscernible] based, I think the more people have to give a shot and I think being whoever that first time will get before but whether iPhones or Apps or there might be something that would be interesting or have an integrated for example. So it's again it's pretty strategic things that what we're looking at.

Okay. And then second question on your - the testing you've been conducting on the black card. How long have those tests been going on, can you share any more detail about what you've seen and how long you expect to continue to test?

Yes, it's only been [indiscernible] so it's fairly new to really giving a color on it but right so far it has been favorable.

Okay, thanks.

Thanks, George.

And your next question comes from the line of James Hardiman with Wedbush Securities. Your line is open.

Hi, good morning. Thanks for thanks my call. So thanks for taking my call.

Hi, Jim.

Quick clarification, how are you doing? Just wanted to make sure I understood this properly, so the same-store sales guidance came up a bit at least at the lower end but it doesn't look like the overall revenue number came up at all, is that just sort of rounding or are you being a little bit more cautious maybe on the equipment front?

Yes so be on the same-store sales side, which is totally independent to the equipment side of the business, I think we've stated on some calls in the past that like a 100 basis points change or improvement on franchisee same-store sales is not a significant number, if you look at our overall average royalty rate that we have today, it's in the long run obviously month-by-month is all cumulative but it doesn't move the needle on a significant amount to warrant basically doing and then increase on the top line revenue. Get the main reason that we did not move our top line guidance 405 to 415 is that we still as I said earlier within that 190 to 200 placement range. And that's the real, the real variable driver of revenue is that number because if it is, significantly up or significantly down typical average stores about around $600,000 in revenue so, those are the more variable components, but that's the reason that we, we didn't change the top line and then basically tighten the range on the same store sales.

Got it. That's really helpful and then I guess staying on the equipment side you maybe this is an unfair question but your primary equipment supplier last week basically made a comment that and there, they've seen some, some weaker equipment numbers and they made a comment that the clubs seem to be slowing investment as they evaluate changing exercise preferences. I guess my question is was that maybe in reference to you and they didn't understand sort of the timing between 4Q and 1Q or do you think maybe that was in reference to other club customers that they have and you ultimately gaining share maybe as some of these other clubs or are slowing their, their equipment investment.

Yes. Jim, I think you are far right at -- back into that is not necessary the rest of it is that are slowing down their growth or and our replacement with replacement in this industry unfortunately this kind of an agreement of this industry no one had spend CapEx like we do, so I think the both of the new club growth is slow everybody else but would you let seen.

Okay, that's helpful. And then, I guess lastly for me on the royalty rate change I guess I don't can you explain why an existing franchise would willingly increase their royalty by that 41 basis points and I guess if they do or if any of that the existing franchisees gets that, that's step up if you're having conversations with them and they're thinking about how to offset that incremental cost and it's not a big jump up but are they thinking about it more in terms of increasing their memberships or maybe increasing the Blackheart penetration How are they thinking about offsetting that that 41 bips.

Yes so, it's the 1.59% it's not the 41 that is in that sense; they have the Option if they so chose to amend their franchise agreement and add the 1.59 to their existing rate. And then they would start buying those products and services at cost so it's, it's, from a P&L perspective everything else being neutral it's really no impact to the bottom line but keep in mind I want to make sure you understand it is that the franchise agreement that you signed as a franchise. That franchise, that royalty rate is for the entire life of the franchise agreement which is 10 years so, if you signed a franchise agreement two years ago and you were at a 5% royalty rate and that stores open then you are today paying 5% but you're also purchasing for example we give T-shirts away for free, our franchisees do and we do in our corporate stores. And those of T-shirts as an example that a franchise purchases from a third party vendor we receive a rebate from that vendor that would go away for that franchise if he so choose to amend all of his franchise agreements and then go up by that 1.59%. So, that's why we said that it really should be neutral to a store level P&L. And then the 41 basis points would not come into play until you know in my hypothetical example eight years from now the franchise agreement would expire and then they would renew at the then current rate whether that seven or something higher than that or lower than that.

Okay And just so I'm a thousand percent clear here if I'm an existing franchisee and I choose to go to the "New Deal," I'm not going the seven I'm going the 6.59 is that how are you thinking about that.

If you're 5% you would go to that we have stores that we opened back, years ago before the franchise the royalty rate went up to 5% that they are paying a rate lower than that and their rate would go up by 1.59% as well.

Got it, got it. And then just to the question of how they I guess franchisees whose ADA's are expiring and are now rolling over to the new agreement, how are they thinking about recouping that cost? Or are they just assuming their profitability is going to go down?

Probably be their 41 bits, and as we continue to throw more savings to our sales and more comp, if you're more than offset it, I mean, even one small thing we can talk about the past, we changed our light card annual fee from $29 a year to $39 a year. Just that by itself more than covers the 41 bits, and that was done in December 15. So it's full revenue all along.

Got it. Thanks, guys.

And your last question comes from the line of John Ivankoe with JP Morgan. Your line is open.

Hi, thanks for the follow-up. Covering the covering franchise systems over the years, you see some regions that do better than others, some markets that do better than others, and there can be a lot of great reasons why market doesn't do as particularly well. Wrong franchisee, the real estate have grown too fast, or competition what have you, and as you kind of have gone from being a regional company to multiregional to national over time. How good are you feeling about the entire system versus whether it's percentage of markets or percentage of stores, what have you? When you guys are just really striving for 100% excellence, do you think the system needs work or maybe needs a new franchisee or needs a new kind of strategy in any given market? Or is there a possible that you're kind of happy with everything that's out there?

I think I'm happy with everything that's out there. I think new markets are doing as good as old markets. I think the ones that are really close is what is the sales of sales company even the mature stores, the older generation stores. and I give that a lot of credit to franchisees that are remodeling and reinvesting in their system. And a lot of it wants to join as they are 10 or 20 stores in a market. They take pride in their market. They themselves don't want a couple of ugly stores amongst their 20 because they're giving themselves a bad rep. So, outside of [indiscernible], they themselves take their business very seriously. So I think that's really pushing in all fronts, and we are also into the [indiscernible].

And even in some new expansion, your franchise heading your business plans like basically at a 100% level, I mean, I ask this just because it's very normal, especially when coming into new markets that things don't probably go as smoothly as initially planned, but the answer is everything is good, then everything is good, I guess.

I wouldn't say, I mean you never bat a 1,000, Jon, but we feel you know, from conversations with franchisees, they are really growing and expanding into some of these new world markets, where there is market penetration. So you could argue on the one hand you don't have as much data on your existing members in that market, and know exactly how those older mature stores are doing, and then maybe the store is opened up in the last year or two. So, you got a lot of information in the market, you've been pounding that market and marketing et cetera. So, on that I would say that even in a market like that, a franchisee would be willing to even open up a store knowing that potentially it -- everybody wanted to be you know, a homerun grand slam and perform exactly like the others would be, but also keeping up the competition is also an important point that your supplicated franchisees think about when they look at that market or markets that they own. The flipside of that is when you go to newer markets, so you know, primarily out West, because that's -- as you know, that's where we have less market penetration et cetera, and again, it's not going to be a 1000%, but arguable we haven't -- California is one of the markets which -- it's got a huge opportunity, we are opening a lot of stores. We haven't been there for long time, but we add stores in a market like that where operating cost can be very high, whether its rent or labor et cetera compared to maybe some other markets. And you still see some of those stores still perform very similar to other markets. And now, I guess just the third I would say is that there is more and more smaller geographical areas, more and more cities, smaller that -- or moving into, just because that's where as you build out further around your markets, and there you have the benefit of maybe you can't get 6,000 or 7,000 members but typically you're going to have cheaper ramp for sure and probably cheaper labor a bit and so the combination of those two things can offset the kind of same member volume that you might not get there as you would get in a more populated area. So we see as we talk to franchisees going out to markets to visit them or if they're coming in to buy new door et cetera, we see a combination of all of those factors as things that they think about in growing their markets.

Thanks.

Thanks, John.

And this concludes today's question-and-answer session. I'll turn the call back over to the presenters for closing remarks.

Well, thank you everybody for joining us today. And we pretty shared our Q1 numbers with you. We look forward to Q2 call in August. And thanks for joining this evening.

Thanks everybody.

And this concludes today's conference call. You may now disconnect.