Planet Fitness, Inc. (PLNT) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Connor, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Brendon Frey, you may begin your conference.

Thank you for joining us today to discuss Planet Fitness’ third quarter 2018 earnings results. On today’s call are Chris Rondeau, Chief Executive Officer; and Dorvin Lively, President and Chief Financial Officer. A copy of today’s press release is available on the Investor Relations section of Planet Fitness’ website at planetfitness.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Planet Fitness’ judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness’ business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2018 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 welcome to Planet Fitness’ Q3 earnings call. We had a fantastic quarter highlighted be another strong financial performance. Before Dorvin walks you through the details, I’d like to quickly mention a few notable achievements. System-wide same-store sales in Q3 increased 9.7% on top of a 9.3% gain a year ago. Adjusted net income per diluted share grew 47% to $0.28 compared to $0.19 in the prior year period. Into the quarter, net member growth contributed 70% of the increase in system-wide same-store sales, reinforcing that our differentiated and affordable growth for fitness continues to resonate with consumers. Planet Fitness brand is also experiencing strong momentum both in new member growth and new unit growth. In Q3, our member base was 12.2 million members at the end of the quarter, up from 10.5 million members a year ago. We opened a total of 40 new franchise locations in Q3 and in the quarter with 1,573 franchise stores in the U.S., Puerto Rico, Canada, Dominican Republic, Panama and Mexico. And on the corporate store front, we opened one new corporate store in New Hampshire and acquired four franchise locations in the Denver market while the franchisee continues to focus and operating other markets. This brings our total corporate store count to 73 at the end of the third quarter, up from 58 in the prior period and brings our total system-wide store count to 1,646. With one corporate location in the Denver market prior to our four store acquisition, this acquisition allowed us to strategically maximize our marketing efforts to deliver operational efficiencies and is in line with our previously discussed plans to acquire and develop corporate stores location that make strategic sense. In Q4, we plan to open three additional corporate stores to run off the year. The Planet Fitness brand is truly expiring in all owners with enhanced leadership in both the real estate front and marketing front. I’m extremely excited about the work being done in these areas. From a marketing perspective, our efforts have become more and more sophisticated the enhanced research and analytics continuing to accept Planet Fitness apart from the competition. On a real estate perspective, we are also leveraging enhanced analytics and data for more precise isolation. Our well-capitalized franchisees continue to invest and getting the footprints and are taking advantage of pressure being placed on many bricks-and-mortar retailers from the increase in digital commerce to secure eight sites in various markets. Landlords in recent look to fill these vacant spaces are continuing to turn the Planet Fitness as a tenant to drive traffic to their centers. At the same time, we’re having conversations with the retailers they are downsizing their stores and are turning to us to take over extra square footage. Another positive trend is number of privately groups continue to invest in our existing franchisees. We now have over 10 private equity groups in the system, including our former sponsor, TSG Consumer. Importantly, the franchisee from whom they purchased these clubs are staying on board to lead their day-to-day operation and are focused on driving further development. With the increase in private equity groups, it’s bringing enhanced systems, process in marketing and analytics to the franchisees. Shifting gears a bit, I want to quickly recap the Teen Summer Challenge pilot program we executed in our 17 corporate clubs in New Hampshire this summer that allowed high school teenagers in the state to work out for free from June 1 to September 1. I could not be more pleased with the final results as thousands of teenagers took part of the program, but what’s particularly exciting to me was that a number of teens who activated their free membership combined with a number of workout, that are being steady throughout the summer. This program is a great opportunity to help teens introduce fitness into their daily lives and it’s also opportunity for Planet Fitness to build brand affinity and loyalty with Generation Z, which is the largest audience segment of the population today, making up approximately 26% of the U.S. preparation according to Nielsen data. We look forward to potentially spending this initiative nationwide next summer. While I’m extremely pleased with our consistently strong financial performance today, I’m even more excited about the bright future ahead and the many opportunities for continued growth. Industry trends continue to be positive and more people strive to achieve healthier lifestyles. In fact, a recent national study published in October showed that not exercising is riskier health than smoking, diabetes and heart disease. Heightened awareness of the importance of healthy lifestyle for your physical and emotional health will continue to benefit our industry and we are well-positioned to capture additional share of the existing market and attract new market entrants, thanks to our welcoming non-intimidating environment at an affordable price point. I look forward to closing a 2018 with a strong fourth quarter, typically our busiest period of the year in terms of new store growth. And bringing in 2019 launching Planet Fitness yet again, take over Times Square on this clock, I’ve got to rock in New Year’s Eve celebration viewed by over 180 million people in the U.S. and 1 billion people worldwide. Thank you, and I’ll turn the call over to Dorvin.

Thanks, Chris, and good afternoon, everyone. I’ll begin by reviewing the details of our third quarter results and then discuss our full year 2018 outlook. For the third quarter of 2018, total revenue increased 40.2% to $136.7 million from $97.5 million in the prior year period. Total system-wide same-store sales increased 9.7% and from a segment perspective, franchisees same-store sales increased 9.9% and our corporate stores same-store sales increased 6.1%. Approximately 70% of our Q3 comp increase was driven by net member growth, with the balance being rate growth. The rate growth was driven by a 40 basis points increase in our Black Card penetration to 60.5% compared with last year, combined with the $2 increase in Black Card pricing for new joins that was put in place system-wide on October 1 of 2017. During the quarter, the increased Black Card pricing drove approximately 300 basis points of the increase in same-store sales. Our franchise segment revenue, which beginning in 2018 now includes national advertising fund revenue, was $54.8 million, an increase of 54.2% from $35.6 million in the prior period. Let me break down the drivers of our fastest growing revenue segment. Royalty revenue was $36 million, which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $22 million in the same quarter of last year, an increase of 63.3%. This year-over-year increase had three drivers: First, we have 199 more franchise stores since the third quarter of last year; second, as I mentioned, our franchisee on same-store sales increased by 9.9%; and then third, a higher overall average royalty rate. For the third quarter, the average royalty rate was 5.7%, up from 4.3% in the same period last year, driven by more stores at higher royalty rates including stores that amended their franchise agreements. Next, our franchise and other fees were $3.5 million compared to $7 million in the prior period. These fees are received from processing dues through our point-of-sale system, fees from online new member sign-ups, fees paid to us for new franchise agreements and area development agreements as well as fees related to the sale and transfer of existing stores. The decrease was primarily due to the number of stores that have amended their existing franchise agreements to increase the royalty rate instead of paying these fees just mentioned. In addition, the change in how we recognize ADA and FAP revenue was about $2.5 million headwind in Q3 of this year compared to the prior quarter. As we outlined previously, we now need to recognize these fees over a 10-year period versus at the time the related franchise agreement and lease is signed. Also within franchise segment revenue is our placement revenue, which was $2.5 million in the third quarter compared to $2.4 million last year. These are fees we received for assembly and placement of equipment sales to our franchise on stores. Our commission income, which are commissions from third party preferred vendor arrangements and equipment commissions for our international new store openings, was $1.4 million compared to $4.1 million a year ago. The decrease was primarily attributable to the number of stores that have amended their existing franchise agreements to increase their royalty rate and to the paying commissions that’s just discussed. Finally, national advertising fund revenue was $11.4 million compared to zero last year as the new GAAP rules related to how we account for NAF contributions went into effect on January 1 of this year. As a reminder, prior to this year, the NAF contributions really only had an impact on our balance sheet. Due to the recent accounting changes, we must now recognize these contributions as revenue and record the expenses associated with managing the National Ad Fund as marketing expenses. Our corporate-owned store segment revenue increased 24% to $35.4 million from $28.6 million in the prior year period. Of these $6.8 million increase, $2.9 million was driven by the six franchise stores in eastern Long Island we acquired in January, $1.4 million was due to the four new corporate stores we opened in late 2017 and $1.7 million was driven by corporate-owned same store sales increased of 6.1% as well as increased annual fee revenue. As Chris mentioned, we acquired four franchise stores in Colorado in August, which contributed approximately $0.8 million to third quarter revenue. Turning to our equipment segment. Revenue increased by $13.1 million or 39.1% to $4.4 million from $33.4 million. The increase was driven by higher replacement equipment sales to existing franchise-owned stores and 15 additional new store equipment sales in the U.S. versus a year ago. For the quarter, replacement equipment sales were 49% of our total equipment revenue compared to 51% a year ago. Our cost to revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amounted to $36.9 million compared to $25.8 million a year ago, an increase of 43%, which was driven by the increase in equipment sales during the quarter. Store operation expenses, which are associated with our Corporate-owned stores, increased to $18.8 million compared to $15.6 million a year ago. The increase was driven by costs associated with the six stores acquired on January 1, 2018, and the four new stores opened in Q4 last year. In addition, we experienced increased cost associated with the four Colorado stores acquired in August, one corporate store opened in the prior quarter and additional Corporate Stores planned to open by the end of the year. SG&A for the quarter was $17.2 million compared to $14.1 million a year ago. The increase was primarily related to incremental payroll to support our growing operations and infrastructure and some recent versus the prior year, as well as higher variable and equity compensation. We expect the year-over-year percentage growth in SG&A to come down in the fourth quarter compared to the growth experienced in the first three quarters of this year. National advertising fund expense was $11.4 million, offsetting the aforementioned NAF revenue we generated in the quarter. Our operating income increased 28.3% to $43.6 million for the quarter compared to operating income of $34 million in the prior year period. Operating margins decreased by approximately 300 basis points to 31.9% in the third quarter of this year. This decrease was driven by the gross up on the income statement from the NAF revenue and the NAF expense mentioned earlier, which negatively impacted operating margins by approximately 290 basis points compared to a year ago. So on an adjusted basis and excluding the impact of NAF, adjusted operating income margins increased approximately 10 basis points to 35.9%. Our GAAP effective tax rate for the third quarter was 26% compared to 25.7% in the prior year period. As we have stated before, because of the income attributable to the non-controlling interest, which is not taxed at the Planet Fitness corporate level, and appropriate adjusted income tax rate for 2017 was approximately 39.5% if all the earnings of the company were taxed at the Planet Fitness Inc. level. For 2018, following the passage of tax reform late last year, an appropriate adjusted income tax rate would be approximately 26.3%. On a GAAP basis, for the third quarter of 2018, net income attributable to Planet Fitness Inc. was $17.5 million or $0.20 per diluted share compared to $15.3 million or $0.18 per diluted share in the prior year period. Net income was $20.5 million compared to $18.9 million a year ago. On an adjusted basis, net income was $27.7 million or $0.28 per diluted share, an increase of 47.9% compared with $18.7 million or $0.19 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude non-recurring expenses and reflect a normalized tax rate of 26.3% and 39.5% for the third quarter of 2018 and 2017, respectively. We have provided a reconciliation of adjusted net income to GAAP net income in today’s earnings release. Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain non-cash and other items that are not considered in the evaluation of ongoing operating performance, increased 24% to $53.8 million from $43.4 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. On an adjusted basis, and excluding the impact of NAF, adjusted EBITDA margins decreased approximately 160 basis points to 42.9%. The decrease in adjusted EBITDA margin was primarily the result of having 47% of the $13.1 million of our growth in revenue, excluding NAF, coming from our lowest margin segment, our equipment segment. By segment, our franchise segment EBITDA increased 23.9% to $37.1 million driven by higher royalties received from additional franchisee stores not included in the same-store sales base and an increase in franchise owned same-store sales of 9.9%, as well as a higher overall average royalty rate. Excluding NAF revenue and expense, our franchise segment adjusted EBITDA margins increased by approximately 150 basis points to 86.6%. The increase in adjusted EBITDA margin was due to the 22% increase in revenue, excluding NAF, partially offset by higher SG&A costs discussed above. Corporate-owned stores segment EBITDA increased 26.8% to $15.3 million, driven primarily by the 6.1% increase in corporate same-store sales, higher annual fees, the six franchise stores we acquired in January and the four stores opened in late 2017. Our Corporate Stores segment EBITDA margins increased approximately 50 basis points to 44.8%. Our Equipment segment EBITDA increased 25.6% to $9.7 million driven by higher replacement equipment sales to existing franchisee owned stores and higher new store equipment sales versus a year ago. Our equipment segment adjusted EBITDA margins were 20.9% compared with 22.7% a year ago, 180 basis points decrease in margin was mainly due to a one-time impact as a result of how we account for equipment discounts and rebates that are handled differently under the new current contract. We still expect equipment margins to be in the 22% to 23% for the full year and going forward. Now turning to the balance sheet. As of September 30, 2018, we had cash and cash equivalents of $572.7 million and undrawn borrowing capacity under our variable funding note of $75 million. During the third quarter, we repurchased approximately 824,000 shares of Planet Fitness’ Class A common stock for a total cost of $42.1 million. As of the end of the third quarter, approximately $458 million remain of the $500 million share repurchase plan that the board approved in August. Total long-term debt, excluding deferred financing cost was $1.2 billion at the end of Q3, consisting solely of our whole business securitization, which includes $575 million of four-year notes due in September 2022, with a fixed interest rate of 4.262% and $625 seven-year notes due in September 2025, with a net interest rate of 4.666%. Now to our full year outlook. Based primarily on better visibility and to the timing of scheduled equipment sales and placements related to 2018, we are raising elements of our full year guidance. We now expect revenue to increase by approximately 33% year-over-year, up from our previous guidance of approximately 26%. Adjusted EBITDA is now expected to grow approximately 19% up from 16%. We now expect adjusted EPS to grow approximately 43%, up from approximately 33%. This new guidance assumes we will sell and place equipment in approximately 225 new stores compared to our previous outlook of approximately 200 stores. We now expect system-wide same-store sales to increase approximately 10% at the high end of our previous guidance in the 9% to 10% range. I’ll now turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from the line of Oliver Chen with Cowen and Company. Your line is open.

Hi, great quarter. Regarding the comp store sales composition, as you start to lap the pricing increase, will we see a different mix in terms of the member growth contribution versus pricing? And Dorvin, also on your helpful comments about raising the full year outlook, could you just elaborate on what greater visibility you had into the equipment sales timing? It sounds like that was one of the key factors.

Yes, Oliver. On your first question regarding kind of, I guess, the two drivers driving comp. As I stated a few months minutes ago on the call that about 300 basis points was related to the pricing. We still expect some price impact next year, that will be less than this year given the we put that in place in Q1 of 2017. So we’ve now had a full 12 months. We’ll continue to have some, but at a much lower rate. So I would expect that if you compared kind of the mix of volume versus rate in Q3 and year-to-date, you’ll probably see some change on that next year, everything else being equal. And then in terms of kind of the visibility on equipment, I think you guys have heard me say a few times, particularly when we kind of start the year when we talked about where we expected full year to be and then frankly, Q1 and Q2, the lifecycle of the site from identifying a location, finding a lease, maybe a couple of lease locations that you start to negotiate a lease on, ultimately get the lease signed and then that’s when we tend to have more visibility into the timing. Obviously, the delivery of the box itself can have an impact on that if you could just a plain vanilla box. It’s going to be a quicker time period. We tend to usually say it’s about three months to four months to get to that point. So I take it back now, go back to the Q2 call. We had some insight into kind of the next two months to three months, but as you know, a lot of our new store openings, certainly the equipment sales side of that, happens in November/December. So we really just have more visibility into the fact that we don’t have many leases were signed, how many are currently scheduled at the moment for placement and then what DGCs on the franchisees are saying, what the last three weeks of December look like. So that’s really the cadence of how it looks and how we have visibility into the development side.

Okay, great. And Chris, you’ve had a lot of interesting things happen with on the technology front with the technology ecosystem that you’re building and the services you’re adding as well as your relationship with manufacturers. Could you update us on what you’re seeing lately and what you’re thinking about what’s possible? And the last question, Chris and Dorvin, was just about as we look forward to the holiday period and the next holiday period, what are some key factors in terms of marketing and demand creation programs? Which are different versus last year? Thank you.

Sure. On the cardio front, question with the premium consuls, they’re still capturing all the data here. Nothing new to really report, although we have hired a consumer research point to help us analyze the data that we’re capturing as well as put together some consumer focus groups to help refine the offering and experience and probably rolling out some more tests towards 2019 from the learnings, coupled with more conversations with possible wearables integration as well in next year at the launch of our version one of our new app. So I’m just kind of all coming together, but next year should be probably more to report.

As far as the holiday period, the next we’ll all gear up for the 2019 New Year’s Eve celebration really kicks off our January sale that we do annually. And lot of more integration here. We’ve got the LA integration as well. We also have one of the major billboards that’s just below the ball itself, which will have some great exposure versus right underneath the ball. So it’s a new integration there, and we also have some possible celebrity integration and a dance group that’s from a TV show that might be we can disclose yet that will also be performing for us in Times Square.

Thank you. Best regards.

Okay. Thanks, Oliver.

Thanks, Oliver.

Your next question comes from the line of John Heinbockel with Guggenheim Securities. Your line is open.

So couple of things. Let me start with the equipment installations this year. Is that just a timing issue? Or does it actually reflect the potential for more openings than 200 next fiscal year? And then along with that, where do you guys stand now with possibly going into taking over some space from the mass retailers? Is that a non-linear opportunity for 2019?

Yes, John. It is just kind of a tack on to the comments I made a minute ago to Oliver. When we gave guidance to where we think that number will be, obviously, we’re taking into consideration the timing of the way things have happened in the past. And clearly, there are shifts that can happen both ways for stores that either we or the franchisees think are going to happen in December and they get shifted for various reasons, construction delays, permitting, et cetera, gets into January. But at the same time, sometimes franchisees that were able to get their permits faster, able to just get some of the construction done earlier, be able to get in and at least get the equipment and although the store might not open then until January, as an example, and we’ve had that in the past. I think that the way kind of looking backwards is a little bit of both. There’s some timing there in terms of stores that we thought probably would happen next year and then just some of the franchisees trying to accelerate to get things done earlier and get it in and be ready for January 1, et cetera. In terms of next year, we’ll obviously give full guidance in when we report Q4, but I think the momentum where our business is and just the drive the some of the private equity groups from a development perspective are, they’re out there trying to find this many locations as they can and we’ve said in the past that you might be negotiating one or two or three sites in a town. You might end up with two or you might end up with just one, depending on what’s going on from unavailability perspective, which kind of ties into your last question, and we continue to have conversations with a lot of retailers and given all the public news that’s out there of some of the guys that are either downsizing, carving off some excess space or just going under closing some stores whether it be like the OSH stores out in California or calls as mentioned that would downsize some, and then the other Toys "R" Us sites, et cetera. So a lot of those clearly are continued to be in our favor as long as we don’t have a store yet down the street or nearby. So we’re continuing those conversations and we expect that we’ll be able to be able to get in some of those boxes.

And then just secondly, you’ve added both buying franchisee locations and opening up some greenfield. Is that kind of a spur here right in the corporate segment? So what’s the thought philosophically in terms of growing that business? And is the idea that some of these – they ultimately see refranchising, Denver or some other markets, or that’s a segment you actually do want to grow a little bit?

Yes, I think – John, this is Chris. I think more of it’s just to do these stores we were already corporately have franchise club like in Denver, for example, we had one store, so we’ve got the payroll, we’ve got the taxes going, we’ve a manager on the ground just running the area, but only one store so they get the economies of scale and the efficiencies there to open more stores or they just buy the franchisee that’s in around us are just easy and that franchisee has gone on to use his capital to build more some moral. So that makes sense for us and the last one was the one in Long Island, which we had the rest of the island and this was the start the most each of the tip of the island that this franchisee was retiring. This made sense for us to own it as well as open more stores on Long Island, more so from a franchisee happen to become rise in our corporate stores. We’ve managed to do with ourselves and change to build out the rest of the area.

Yes. The only other thing I’d add, John, is to the kind of greenfield. Obviously, with both of those acquisitions that Chris is talking about, be it Long Island or be it in Colorado, not a ton, but there’s some runway there, which most likely we would take advantage of, obviously. And then just in our existing territories where we had our, let’s call it our older mature stores, some of those markets have the opportunity to continue to be able to develop. So the question comes down to, do we sell out to a franchisee, which there’s going to be some cannibalization to that in some instances. Or do we build-out a new store itself? And in a lot of the situations, we’ve made the decision to do that. I don’t see this being a 15, 20 store a year at least here in the near-term development. But this year, will do four. Next year, we might do five, six or so – but this is – its kind of a guess at pace of building out some of those ADA’s where we already have stores, good markets, and we have the opportunity to put another store in that market.

Okay, thank you.

Yes. Thanks, John.

Thanks, John.

Your next question comes from the line of Jonathan Komp with Baird. Your line is open.

Yes. Hi, thanks, guys. I wanted to ask about the same-store sales. Obviously, you raised to the high end again in quite a bit above where you thought you would be coming into the year. So I just wanted to maybe hear more about what you think is driving the strength and the sustainability as you look forward.

Yes, John. I would say that – a couple of things, one would be that clearly, the pricing impact, we didn’t know exactly where that would come out. When we – we have one quarter under our belt last year as we entered the year on that. So to know kind of where Black Card would go with the percentage stay the same, would it increase, would it come back a little bit? Obviously, we have to test, which we talked about, but we didn’t know that. And so I think it’s been positive to us that, one, we been able to increase the overall penetration rate slightly, but to be able to get the lift on that. And then I think the second thing and we’ve talked about this on a couple of calls that, albeit not just huge changes but there have been slight changes, improvements, on the attrition side. And I think I attribute that to the brand is bigger. We have more locations. The opportunity for the Black Card usage is bigger. I think our newer clubs or better. I think our effectiveness of our marketing is better. And so I think it’s a combination of all those things that kind of lead into that, but so from a guidance perspective, there were kind of the two things that we took into effect. One would be just what’s the overall growth rate look like. And then, two, what would be that rate impact as we knew it would have an impact quarter-by-quarter, which we obviously either told you exactly what it was. In this case, the 300 basis points are where we thought it would come out for the year, but I think those are the two things, but you talked, Chris and I, we’ve made a lot with franchisees here out in the field and the guys are as excited today as they’ve ever been. The private equity guys are coming and investing the business. And so the model continues to be a very robust model and I think that when you get right down to what it delivers, we’ve been able to kind of hit or exceed the top end of our range.

Yes. The only thing I’d add to that is on top of the ever spinning marketing budget where we talk about all the time just because it’s every incremental members additional marketing dollars every day is, back to the private equity, some of the sophistication of the bigger franchise groups as we – as our system matures, they’re just bringing their own CMOs in and more infrastructure on the marketing front. So just like us with Roger Chacko, our Chief Commercial Officer, which is really just getting under the hood now and he’s already been really impressed with some of the stuff he’s pulled off already that. And then, I think a lot of good stuff to happen in the future from both sides, franchisees and corporate.

Great. And then my other question related to that, the buyback and the just over $40 million that’s completed in the quarter. Could you maybe give a little more color how that was executed kind of open market versus other arrangements? And then how should we think about the repurchase opportunity going forward, especially anything that you’ve been able to complete quarter-to-date here?

Sure. Those were – those purchases in Q3 were all just in the open market purchases. We had talked about, when we increased the buyback plan, the Board authorized back at the beginning of early in Q3 that we intended from time to time to be in the market and execute against that program. I think I made the comment that most likely any significant acquisition shares more than likely would come through on ASR. So we continue to evaluate our options on that, but nothing else at this point in time, to report on that.

Okay, understood. Thank you.

Thanks, Jonathan.

Thanks, Jonathan.

Your next question comes from the line of Peter Keith with Piper Jaffray. Your line is open. Peter Keith, your line is open.

Sorry about that. Congratulations on the good quarter. I just want to get a little bit of clarity on where you think you would land with total openings. It sounds like placing a $225 million, but maybe not opening $225 million, where do you think you’ll actually shake out for full year?

Yes, Peter, we really only guide to that placement side and it’s kind of because of the comment I made. I mean, I could go back to every year now, the last three years or four years and we’ve been public, that you’re going to have stores that are going to – we’re going to get the equipment. We recognize revenue when the equipment gets placed. And there’s a combination of things. You can actually place the equipment in some locales without the CO to be able to come in and open up for business. And so you kind of have instances to think about this that in a lot of cases, municipalities were left their employees on vacations between Christmas and New Year. So if your contractor just gets it ready to go you get the equipment and the staff is trained and everything turn on ready to go, but the inspector is on vacation until January 2 or 3, then you’re locked out. So it goes both ways. It’s usually not a huge number, to be honest with you. But if you think about it, the stores that are – where we placed equipment, the lease is signed, the building’s there at the equipment, so obviously, they’re going to open and whether it’s three or four days or a week or so, it’s not a big deal in terms of the number of EFT dollars or certainly, as you know, we draft our revenue on the 17th of each month. So if a store opens on December 29 or January 4, it doesn’t impact what we get really on a revenue basis at all. So the guide is to the number of placements that we will put into the stores and obviously anything that we get placed here in the next four or five weeks will most likely open. It’s just that last week 10 days of the year, and as I said, it’s usually the municipalities on the inspections.

Okay, that’s very helpful. Also I just wanted to follow-up on the last comments you made Dorvin, I believe it Dorvin, on the – improvement on the attrition side. I think you guys have spoken about maybe attrition rate of like 4.5% to 2% with average over 12 months. Could you just dig into that a little more for us? Is it that percentage rate coming down? Or is the attrition rate also coming down in sort of less than 12 months or less than three months, or – what’s the biggest rate of change at this point?

Yes, you’re right. We’ve said it’s usually in that 1.5% to 2.5% a month. And what I was alluding to is a slight improvement over time obviously helps right, even if it’s just a small amount each month, et cetera, but other than that, that’s really the only kind of guidance we’ve given. And marginally, I’d say over the last 12 months, 18 months, it’s improved slightly. But I think that’s a combination of, to the callers earlier question on what could be driving some of these comps that might have been higher here over the last four or five quarters, let’s say, or if you look at 2017 and 2018 as to how we kind of guided, we tend to have delivered over that guide in all those quarters and a small piece of that has been a slight improvement in attrition.

Okay, that’s helpful. Thank you very much.

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

Yes, thanks, guys. I guess, Chris, I want to, I guess, dive deeper on the Teen Summer Challenge for a second. You’ve talked about success of the program. It seems like a really smart strategy to build brand affinity, but also a feeder system for future consumers and customers and members. So can you just give us maybe some perspective on potential conversion of people that signed up for the program post the end of the program, I guess you said it ended in June or September, something to that – in that regard. And it seems like you were working with the Governor of New Hampshire on building awareness of the program. So I’m just curious on how you think about not only the conversion of – and looking back on the program in New Hampshire, but also how we’re thinking about potentially nationalizing the program and building out awareness for it, because it seems like a very big opportunity into next summer to build, I think, future customer base for the next fall and beyond. So I’m just kind of curious of how you’re thinking of this program on a nationalized perspective, but also on an ongoing basis, marketing and then, I guess, the statistics around what you learned from the program in its first year in New Hampshire.

Yes, great questions. It’s really hard, especially when I look about how we can leverage them in the future. So in Hampshire alone, we had about 2,600 students activated and did about 12,000 workouts in that three-month period. A couple of statistics here with a pretty cool out of the 2,500 kids that activated, 2,000 of those were from households that the parents weren’t already members. So, not only do we affect the 2,500 kids and introduce them to Planet, those parents had to come in and activate their kids membership. So they had exposure. Parents’ are exposed to the brand as well, which is encouraging for future joints as well. Through September 1, we have about 90 joints off that. So that’s through September 1. So we’re actually going to retarget those. And I think going forward, everything of the Generation Z population, they are the largest generation, bigger than the Boomers. And I look at the millennials, for example, which we talked about which are almost 45% of our 12 million members and when you think about we started this brand in the ’90s, they were just barely toddlers and barely being born at that point and now they make up almost half of our 12 million. So there’s been reports that the Zs are more active than the millennials and they’re just barely turned 21, and we look at our member base, the joining rate is really that 21 year old, 22 year old and people a pretty good clip. So if you look at the huge pipeline of Z that’s just started to turn 21 and this 86 million of them is really a feeder system so it makes sense for us to get ahead of that introduce them to the brand early, introduce them to fitness early and to be there when they’re ready to be in their first club.

Yes, it’s helpful. I wanted to switch gears to the Black Card program for a second. So the Black Card program penetration around, I guess, under 61%. It looks like on the website, there’s some additional partnerships, I guess, if you join, there’s some sort of benefit with Audible Plus. I think there’s also existing member benefit with Reebok for a percent off on purchases. I know something that you have to be a Black Card member. But do you guys, it must be getting a lot of inbounds from other types of companies, one the kind of partner with you given your strong membership base. Do you think about – how do you think about that impacting the business, either having the ability to raise the Black Card price further or potentially introducing even a third tier of membership Black Card plus-plus or something, where for a little incremental more, you’ll get extra benefits as a member into other programs or company that have an affinity our partnership with you going forward. How do you kind of think about that?

Yes, you’re right. So we have a couple of the Reebok one with the Audible, I think, we’re doing now. With Roger, as a Chief Commercial Officer, he’s right looking at the bigger picture than just coming out with the next 20 commercial and driving just new sales is how you drive more value for card members or acquisition of the Black Card, for example. I think maybe higher Black Card penetration or rate or both will probably be our main objective, and we are as Roger builds our team, we actually have people in charge now, a new hire that’s basically what they’re looking for a only job is to look out for commercial partners and corporate membership stuff. So I think it’s more on that. It’s really interesting because it seems like in the last probably 12 months, we’ve talked about affinity programs like this I think Randy you probably remember since the IPO even, couldn’t really get a lot of traction, but it seems like in the last 12 months, the amount of times our phone rings now is quite a bit different than it was 12, 18 months ago so I think we’re at the tipping point of size and scale where we’re being noticed.

[Operator Instructions] Your next question comes from the line of Brennan Matthews with Berenberg. Your line is open.

Hi, thank you very much for taking my question. I actually wanted to ask about Mexico, which I think you opened your first location there roughly six months or so. I mean, just any more update on kind of the trends you’ve been seeing? Any thoughts about maybe having another location or so to Mexico next year?

Yes. They’re the franchisees that are in that – that comes even great and they’re in the process of looking for other markets to go into in the greater Monterey area. They want to do a couple two different demographic areas other than what you’re in now to try three different economic demographic areas to see how it all works so come in and figure out market size in the future. In Panama, again, we have opened the one last December, has already got two more – three more to open and one more coming down the pipe, which have all been great.

Okay, that’s great. And then I just had one other question. I wanted to try to rephrase this correctly, but we’ve been seen some kind of more inflation on even for singles like kind of freight like higher freight cost. And looking more at your equipment segment, I mean, is that something that is passed on to the franchisees? Is that something that your vendors are having the kind of that’s impacting all your vendors or is that something that you guys are going to have to kind of deal with as well? How should we think about that?

Yes. So we, corporately, we acquired the product, equipment from the manufacturers and in most cases, take title of that equipment for their dock to the franchisee location and then a lot of instances then, it’s our team that actually assembles equipment, places it in a club based on the architectural drawings, et cetera. So we build the franchisee for the freight. So when we build them for the full cost of product, that includes freight. We haven’t seen any significant freight prices – pricing issues to this one. Some of the franchisees – I’m sorry, some of the manufacturers make their product here in the U.S. Some of the others import it. But at this point in time, in terms of kind of actual cost, let’s call it inflation, we haven’t seen anything significant.

Okay, perfect. Thank you so much.

Thank you.

Your next question comes from the line of John Ivankoe with JPMorgan. Your line is open.

Hi, thank you. Two separate questions, if I may. Firstly, when you guys see start to think about G&A metrics, maybe over the next couple of years, are there any benchmarks that you’re using or beginning to hone in on whether on a per-store basis versus percentage of systems sales or percentage of revenue that we can maybe think about – as you think about the business in terms of how optimized that G&A number you could in fact, over time?

Sure, John. Obviously, and you know this business well. There’s not a lot of gym businesses that we get to do on an apples-to-apples basis. So frankly, the best comps that we look at on a multiple KPIs would be the QSR guys and, obviously, you’re familiar with those. But you got the huge guys like McDonald’s or Wendy’s or so and then you got some really small guys that maybe only have 50 or 100 stores. So it’s always hard to find something that would say, Okay, well what’s the right amount we’re at. And if you’re trying to digging deeper and I try to do this and really haven’t had a lot of luck to say, okay, from a franchisor perspective, what’s the right kind of cost to manage a franchising system? So we obviously have, call it 1,600 stores and whether it’s a Duncan or a quick one, it’s hard to get that kind of data out of some of these other public companies. And so at the end of the day, you basically just have to kind of look at total SG&A. Sometimes you can look at kind of an HQ expense versus ops and try to figure that out. On a store level basis, it’s a bit easier. And so we’ve done some of that on kind of our Corporate Stores to some of the other systems that have stores. But what I would say the net of it, the way I think about it, John, is that if we went back call it three to four years ago, maybe right before we went public or right after we went public, we had a significant base of stores with a large pipeline and I think we were probably underfunded in terms of how we were supporting the franchisee base. And I’ll get a couple of examples that I would point out. One in particular would be training where in this kind of business, just as in the QSR business, you’re going to have a lot of turnover. And in a – I mean, on the benefit side with the fixed cost model, obviously, you don’t have the kind of the raw material cost and other things, but at the same time, if you’re staffing for a call it a 12 to 14 person team 24/7 and you’re having a lot of turnover, you’re going to be paying a lot of overtime, a lot of soft cost for training, et cetera. And then, just on the pure operation side for the bigger guys today that three years ago had three stores and today, they have 15 or 20 stores, really helping them develop the processes really playbook type of stop. And we’ve invested a lot of that and continue to invest, not as much as we did back in building it, but we continue to do it to make it better. So that would be one example. The second one would be, which I think has been allowed us to continue to go back four or five years ago where we were doing 120 to 150 stores a year to where we’re at today and finding smarter – better locations would be investing on the real estate and the development side in the field. So two years ago, we didn’t have anybody in the field. Today, we do. Two years ago, we frankly didn’t have many operation folks in the field. Today, we do. We believe those are worthwhile investments. And so the way I kind of think about kind of – so where are you today really and where can the business go. I mean, we’ll continue to invest as long as we continue to see that kind of growth we’re having and we’ll invest it in primarily those areas. So I think that the headquarters side of the business, three years ago, we didn’t have some of the executive team leaders we have in place today. We feel really good about our leadership team that we have now. And then secondly, I think that we’ve also talked about the fact that we really didn’t have a full incentive comp program in place when we went public. We now have that in place. We’re about to get to the point that we’ve now, and it’s a four-year, so we are now kind of layering it to where it’s not a new brand-new incremental layer. So a lot of our costs over the last, call it four to six quarters or so have really been on the payroll side, both from HQ in the field and then on the incentive comp plans that we put in place today. I think our growth rate and SG&A will continue to grow, but at a slower rate when I think about the next, call it four to eight quarter or so. The last piece would be, and Chris kind of alluded to it earlier on the question about technology, I mean, we really believe that we have the ability to do some pretty special things on technology side, particularly in the digital area. And so some of that technology investment will require some incremental kind of SG&A overtime, but that’s the way I think about kind of the key drivers of our business from a pure SG&A perspective.

And that was definitely a great answer, and thank you for that and it actually dovetails, I think, perfectly into my second question, which is sometimes covering QSR and restaurants, you see brands are growing very quickly and even comping very well, but there can begin to see signs at the store level that get satisfaction scores aren’t necessarily being maintained maybe because of the spike, those increase in the number of stores, increase in comp. So can you talk about how you guys are looking at what you think are the most important reasons by people staying members of Planet Fitness or join Planet Fitness. It seems like cleanliness or equipment quality or availability what have you, friendliness of stop whatever it is as we kind of look at this very rapidly growing system, the controls that you put into place to make sure that every single year, the customer is getting a better experience despite that rate of growth.

Sure. Yes, John, this is Chris. You’re right, this is a definitely huge point of it from member standpoint, which is one of the things, we have the Brand Excellence crews on the ground and we have the AMM or area marketing managers in the ground, the message is correct and that’s on brand as well. But the equipment replacement, I can’t under emphasize the importance of that and I even come back to I mentioned we went on that roadshow on the road trip with the family this past summer in August, 8,000 miles to planet all over the country and I couldn’t even tell eight years old to two years old. And there’s not many brands of even QSR that can say that. And I think the beauty of that as well on top of that is the fact that almost all of our openings the last few years with existing franchisees. So it’s not a onesie twosie franchise system, and we have a franchisees that have 20 clubs in the market, they themselves other clubs to be a shiny like a shiny $0.01. So they don’t have any clubs out there that are falling apart and making other clubs look bad. So it’s really the power of the system we have. The multi-club operators, they recoup to keep in the clubs to new – I’m afraid that we never want to be able to do by competition, so don’t be of new to as what we say so because we renovate and keep them the stores up-to-date and this industry’s never really seen a chain that doesn’t done that. Typically, you go into a 10 or 20 club store, the club is 10 to 20 years old. And that’s what happens with valleys and a lot of the current larger chains that are out there today. And it’s usually important and our franchisees are passion as we are.

And maybe there’s an internal or external guess satisfaction score that’s empirical that we can begin to talk about, measure something like 2019 versus 2018 or 2018 versus 2017, because it has been, I think shown in a lot of different cases to be kind of a leading indicator of comps and profitability in a number of different things, that’s really where I’m going to the question if you’re prepared to talk about it in that way.

I think the only thing probably is relative to same-store sales all cohort of stores are all comp in positive. So it’s not like the older stores are anything in the newer stores when we’re deploying it is – its greater than just pumping little lower than a few year old store, but they’re still comping positive. So we’ll constantly just dig deeper and deeper into that, 80% of the population that doesn’t have a gym membership.

The only thing I’d add to that, John, is that we control the customer service side over here. So we get calls, as you can imagine, with 12-plus million members, we get a lot of calls. But we’re able to with that and kind of know where it’s coming from, what the issues are and either try to deal with it here if need be or push it down to the location of the franchisees. But I think Chris really hit an interesting point in that and you’ve seen it from our results where replacement equipment side of our business continues to grow and grow as a percentage of our total and to be able to have new equipment in there and then with the Planet Fitness teams, be it the franchisee or Corporate Stores, et cetera, to constantly monitor the cleanliness, kinds of comments you get and to do the inspections that we do, both us doing them here from a corporate franchisor perspective and many, many of our Zs do their own secret shopping inspections as well because protect this big investment that they continue to invest in.

That’s perfect, thank you.

Thanks, John.

There are no further questions at this time. I will turn the call back over to presenters.

Thanks, everybody for joining us today for the Q3 call. It was really a great quarter. I look forward to a really strong fourth quarter ending in the year-end. So thanks for taking the time today and look forward to talking to you soon.

This concludes today’s conference call. You may now disconnect.