Planet Fitness, Inc. (PLNT) Q1 2019 Earnings Report, Transcript and Summary

My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] Thank you. Mr. Brendon Frey, from ICR, you may begin your conference.

Thank you for joining us today to discuss Planet Fitness' first quarter 2019 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 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 included in our first quarter 2019 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. 2019 is off to a very good start, with strong first quarter results that included system-wide same-store sales growth of 10.2%, and adjusted earnings per share of $0.35, an increase of 29.6% over the prior year period. Our same-store sales performance comes on top of an 11.1% gain we posted last Q1, was primarily volume driven, and approximately 75% of the increase came from net new member growth. We kicked off Q1 with a bang as a presenting sponsor of Time Square's iconic New Year's Eve Celebration, watched more than one billion viewers worldwide. The impact of this event is far-reaching, is a huge contributor to Planet Fitness' remaining number one in unaided and aided brand awareness in the fitness category. Thanks to our tremendous marketing machine, which in addition to New Year's Eve, runs nonstop throughout the year, the Planet Fitness brand continues to gain momentum, and our system continues to expand. Our group of experienced franchisees are bullish on aggressive thoughtful [ph] expansion in both new and existing markets, fulfilling our shared mission of bringing non-intimidating, affordable, and accessible fitness to all. In total 65 stores, and Q1 company record for Planet Fitness, were opened during first three months of the year, and we ended the first quarter with more than 13.6 million members and 1,806 stores system-wide. Staying on the topic of expansion, in March, we were excited to announce a collaboration with Kohl's to initially open up to 10 Planet Fitness stores adjacent to select Kohl's stores in 2019. Planet Fitness will utilize approximately 20,000 to 25,000 square feet next to each of the select Kohl's stores in various markets throughout the country, with the opportunity for additional locations in the future. This complimentary partnership made strategic sense to both brands. As we continue to grow, it's a great opportunity for us to secure eight sites [ph] and introduce shoppers to our welcoming, non-intimidating and affordable fitness concept, while simultaneously driving traffic to Kohl's stores. In fact, our research shows that our members tend to fulfill daily needs near their clubs and stay nearby for shopping. For example, 76% of our members combine their gym visit with other shopping, 89% of members shop at other retailers within their club shopping center, and 59% do so at least once per week. And 26% of our members reported that they would never visit their close shopping center if Planet Fitness were not located in it. In today's retail landscape, we believe our differentiated approach to fitness continues to drive traffic to our shopping centers across the country, which is why partners like Kohl's and recent landlords in general are interested in looking at a PF become tenants in their centers. Turning to our franchisees, in March, we held franchisee meetings in Palm Springs. We conduct these meetings in between our larger conference to ensure we're continuing to engage with our franchisees on various topics, including development, operations, marketing, technology, and more. Personally, I believe spending time with our franchisees and providing them an opportunity to share best practices with one another is extremely valuable. I'm continuously inspired by their passion for the brand and our shared commitment to open more stores and improve millions of peoples' lives. The passion of our system and the strong leadership we have with our franchisees continues to be a significant competitive advantage for us. Before I close, last week we announced the nationwide rollout for the Teen Summer Challenge in [indiscernible] in response to our successful pilot program in New Hampshire last summer. The initiative, which allows teenagers from 15 to 18 to workout for free in all our clubs nationwide officially kicks off on May 15th, and it runs through September 1st, and we will introduce members on Gen Z and their parents to our brand, build loyalty and affinity. Teens today are under increasing pressure to succeed academically, socially that are like growing with the responsibilities both inside and outside the classroom, and become well-rounded members of their community. At Planet Fitness, a healthy active lifestyle should never be a challenge, which is why we're flipping that notion on its head for teens this summer and giving them a free place to workout in a comfortable judgment-free zone. In preparation of the national rollout of this program, we surveyed teens and their parents about their feelings towards health and wellness. Today's teens are more health conscious than ever before, take exercise as a way to improve both their physical and emotional health. 91% of teens agree that they want to stay active and healthy over the summer. Among teens who already workout, 72% said it positively impacts their mental health, and 47% said they believe it helped them focus on schoolwork, and also 47% felt more confident, and 37% felt less stressed. And perhaps the most interesting, when asked all teens how they prefer to spend their time this summer, 36% wished to exercise more or workout more, which is greater than the number of teens who want to spend more time playing videogames, which was 27%, browse social media, which was 15%, and watch TV, which was 16%. Providing youth with free access to fitness not only addresses an important societal need to help teens get active and increase their overall health and wellness, we believe that it will also create opportunity for the brand in the long-run. In summary, it is shaping up to be another year of strong growth for Planet Fitness. We are on pace to open approximately 225 new locations in 2019, and the path to 4,000 stores in the U.S. long-term is becoming clearer as both health and wellness and real estate trends continue to move in our favor. We are extremely excited about the many growth opportunities that lie ahead, and I know our franchisee groups share our passion and enthusiasm about the future. With that, I'll 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 2019 outlook. For the first quarter of 2019, total revenue increased 22.7% to $148.8 million from $121.1 million in the prior period. Total system wide same-store sales increased 10.2%. From a segment perspective, franchisees same-store sales increased 10.3% and our corporate store same-store sales increased 8%. Approximately 75% of our Q1 comp increase was driven by net member growth, with the balance being rate growth. The rate growth was driven by a 70 basis points increase in our Black Card penetration to 60.6% 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, 2017. During the quarter, the increased Black Card pricing drove approximately 240 basis points of the increase in the same-store sales. Our franchise segment revenue was $65.8 million, an increase of 20.4% from $54.6 million in the prior period. Let me break down the drivers for the quarter. Royalty revenue was $44.7 million, which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $34.4 million in the same quarter of last year, an increase of 30.1%. This year-over-year increase had three drivers. First, we had 233 more franchise stores compared to the first quarter of last year; second, as I mentioned, our franchisee owned same-store sales increased by 10.3%; and then third, a higher overall average royalty rate. For the first quarter, the average royalty rate was 5.9%, up from 5.4% in the same period last year, driven by more stores at our current royalty rates including stores that amended their franchise agreements. Next, our franchise and other fees were $5.4 million compared to $5.7 million in the prior period. These are fees received from online new member sign-ups, fees paid to us for new franchise agreements and area development agreements, fees received from processing dues through a point-of-sale system as well as the transfer fee of existing agreements. Also within franchise segment revenue is our placement revenue which was $2.8 million in the first quarter compared to $2.1 million a year ago. These are fees we receive for assembly and placement of equipment sales through our franchisee owned stores. Our commission income, which are commissions from third-party preferred vendor arrangements and equipment commissions for international new store openings, was $1 million compared with $2 million a year ago. Finally, national advertising fund revenue was $11.8 million compared to $10.5 million of prior year. Our corporate-owned store segment revenue increased 16.3% of $38 million from $32.7 million in the prior year period. A $5.3 million increase was driven by the four franchise stores in Colorado we acquired in August, the four corporate stores we opened in late 2018 and corporate owned same-store sales increase of 8% as well as increased annual fee revenue. Turning to our equipment segment, revenue increased by $11 million or 32.3% to $45 million from $34 million, the increase was driven by higher new store equipment placements and a higher replacement equipment sales to existing franchise owned stores versus 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 $34.5 million compared to $26.5 million a year ago, an increase of 30.1%, 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 $20.9 million compared to $18.4 million a year ago. The increase was driven by costs associated with the eight stores opened and acquired since the first quarter of last year. SG&A for the quarter was $18.2 million compared to $17.6 million a year ago. This increase was primarily related to incremental payroll to support our growing franchise operations and infrastructure as well as higher variable and equity compensation. This was partially offset by lower expenses associated with the timing of our Franchisee Conference, which was held in Q1 last year but will take place in Q3 of this year. National advertising fund expense was $11.8 million, offsetting the aforementioned NAM revenue we generated in the quarter. Our operating income increased 36.7% to $53.2 million for the quarter, compared to operating income of $38.9 million in the prior year period while operating margins increased approximately 370 basis points to 35.7% in the first quarter of this year. Our GAAP effective tax rate for the first quarter was 14.3% compared to 22.7% in the prior year period. The effective tax rate for the 3 months ended March 31 2019 deferred from the U.S. federal statutory rate of 21% primarily due to the recognition of approximately $3.8 million of a deferred tax benefit from the re-measurement of deferred tax assets and liabilities and income attributable to non-controlling interest that is not subject to U.S. federal and state taxes. As we've stated before, because of the income attributable to the non-controlling interest and not tax at the Planet Fitness corporate level and appropriate adjusted income tax rate would be approximately 26.6%. On a GAAP basis for the first quarter 2019, net income attributable to Planet Fitness Inc was $27.4 million or $0.32 per diluted share compared to net income attributable to Planet Fitness Inc of $19.9 million or $0.23 per diluted share in the prior year period. Net income was $31.6 million compared to $23.5 million a year ago. On an adjusted basis, net income was $32.7 million or $0.35 per diluted share, an increase of 24.9% compared with $26.2 million or $0.27 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude non-recurring expenses that reflects a normalized tax rate of 26.6% and 26.3% for the first quarter, 2019 and 2018 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 29.9% to $63.4 million from $48.8 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. By segment, our franchise segment EBITDA increased 29.1% to $47.4 million, driven by royalties received from additional franchisee owned stores not included in the same-store sales base, and an increase in franchise owned same-store sales of 10.3% as well as a higher overall average royalty rate. Our franchise segment adjusted EBITDA margins increased by approximately 420 basis points to 72.1% with the portion of the improvement driven by the aforementioned reduction in expenses associated with the timing of our franchisee conference. Corporate-owned store segment EBITDA increased 27.9% to $15.6 million, primarily driven by the 8% increase in corporate same-store sales, higher annual fees and the four franchise stores we acquired in August. Our corporate store segment adjusted EBITDA margins increased by approximately 240 basis points to 41.3%. Equipment segment EBITDA increased 39.3% to $10.4 million driven by higher new store equipment placements and higher replacement equipment sales to existing franchisee owned stores versus a year ago. Our Equipment segment adjusted EBITDA margins increased by approximately 120 basis points, to 23.1%. Now turning to the balance sheet, as of March 31, 2019, we had cash and cash equivalents of $336 million, compared to $127.1 million on the same date last year, an increase of 164.2%. The company completed its accelerated share repurchase agreement on April 30, 2019, which resulted in an approximate incremental 525,000 shares to be repurchased and retired during the second quarter of this year. This was in addition to the 4.6 million shares retired during Q4 of last year that was previously disclosed. At the end of the first quarter, approximately $158 million remained of the $500 million share repurchase plan that the board approved last August. Total long-term debt excluding deferred financing costs was $1.2 billion at March 31, 2019, consisting solely of our whole business securitization, which includes $572 million of four-year notes due in September of 2022 with a fixed interest rate of 4.262% and $622 million of seven-year notes due in September of 2025 with an interest rate of 4.666%. Now to our full-year outlook, for the year ended December 31, 2019, we still expect revenue to increase approximately 15% over 2018 levels, driven by same-store sales growth in the high single digits, and the sale and placement of equipment in approximately 225 new stores. With respect to profitability, we still expect adjusted EBITDA to grow approximately 20%, adjusted net income to grow approximately 18%, with diluted earnings per share increasing approximately 25%. I'll now turn the call back to the Operator for questions.

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

Hi. Congrats on a great quarter. You've had several digit comp momentum, and you're guiding towards a high single-digit comps and it compares to ease throughout the year. Just I was curious about what helped inform your guidance given the momentum, and how are you thinking about how the older vintage stores are comping, and thoughts around making sure you optimize churn as well. Thank you.

Thanks, Oliver. This is Dorvin. We guided to high single digits, and we talked about the impact on same-store sales in the quarter with respect to both an increase in Black Card penetration, as well as then the impact of the pricing on a year-over-year basis, which was the pricing impact was about 240 basis points. We've talked in the past, I think late last year and then at year-end in terms of where we think pricing will kind of end up for the year. It's going to gradually continue to decline as we cycle over more quarters. I think on a full-year basis, we're probably going to be in the 150-150-plus basis points range full-year, so you'll see that start to wane more and more or at least based on what we know today quarter-by-quarter. I would say in terms of overall store performance, kind of the waterfall we've talked about in the past, no significant changes in the way that our business operates. If you look at -- we tend to call mature stores being stores that are, call it, four years or older, so they've been in comp for three years. And that kind of waterfall matrix is pretty similar, let's just say, in the last six to eight quarters or so. If you go back in history I think you guys will probably remember that historically three, four, five years ago you would see the older stores more in kind of a flat to maybe 2%-3% kind of comp range. I've stated publicly over the last year or so that the overall retention of members is slightly improved. I think the size and scale of our marketing budget has grown. Those stores tend to be more in the two-to-four, three-to-five range these days. And then the brand new stores and comp year two in operation kind of in that 40% range of so, and then -- their second year comp more in that kind of 15%-15%-plus range. So that's not much of a significant change from the past. So we still -- we feel comfortable in that high single-digit range on a full-year basis.

Thank you. And Chris, on both the marketing front and the digital front, what are your thoughts on the mobile app and the improvements you've made there, anything we should focus on look forward to? And also as you continue to innovate in the discipline of marketing, what are some things you're considering just to continue to move the needle forward on initiatives and opportunities to drive continued awareness?

Sure. So, on the marketing front we did come up with the new Black Card Digital marketing and Black Card Digital in TV marketing. So we have some new creative on Black Card. And then typically we've always focused on almost solely White Cards. So we did test some Black Card marketing stuff which has turned out pretty decent for us. Digital front is as normal. We have increased it this year and last year compared to years past as we tend to drive that NAF which will be about -- National Ad Fund this year will be about $225 million, up from about $150 million last year. As we add more members, as we keep talking about the marketing machine, that marketing budget continues to grow. The app, as I mentioned before, we will be rolling out the app this quarter, looks like June. It'll be a soft rollout at first, market-by-market, and then but really by Q3 will be a full rollout across the system nationwide, but it'll be a slow rollout, starting June. And really you won't see -- it'll look different, but you won't see a much functionality -- a little bit function -- more functionality than the current app, but what it really does it is we're taking it in-house from an off-the-shelf third-party customer that we used for it that we have really zero flexibility on how to scale it as far as partnerships and content and so forth. So this will be -- kind of really give us the plumbing all over in the background than we can start doing partnerships and add content, and be able to give more value, I guess, really to the member in the club and out of the club quite frankly, so and we look forward to having that flexibility and as we talk to partners in the future. A couple of key features that will be in the new app which I think will be really neat is right now we have no way for a member to refer a friend come in and try the club for a day. So that'll be would neat feature in that app that our members could now just invite one of their friends to come work out and we could instantly be shooting their friend the email with the guest pass, as well as the opportunity for a White Card member to simply upgrade their membership on the app, which is a simple easy task that should already be there honestly and is not there, so that could be a good thing for us as well that a member could literally upgrade the membership right on the app.

That's very helpful. Thank you, and best regards.

Thank you, Oliver.

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

So, guys, I'm wondering do you think the business will become and member signups become slightly less seasonal and skewed to the first quarter for a variety of reasons, there are free Teen Summer or your own marketing plans. Do you think that happens and you actually get some stronger signups in two, three, and four, versus where we've been historically?

It's interesting you asked that question, because I think as times have changed over, not even just a year or two, just even the last probably 10 years, I think as more -- fitness becomes more mainstream in believe that you'll see, and I think what we've seen is less of a New Year's Eve being be called action to workout, and it's more of a -- as we see volumes of growth, and I mentioned in the past, we've had July's last few years that have really surprised us in member growth. So I think as millennials and Gen Z as we've talked about [indiscernible] you see less of that giant spike right after New Year's Eve. And we've had great summers the second, third, fourth quarter. So I think you'll see in the years ahead that it'll be just when the demand is there it's there, it' not about a one-night call to action. As far as the Teen Summer Challenge, yes, that will kick off this month, on May 15th. And as I'm sure, most or if not all that have been on the call we've had tremendous response, I mean, even it's really on I can't we go -- over 1,200 outlets have picked up the story already. And we haven't gotten into our really big kick off and launch on May 15, which will be around a lot more media. So, I couldn't be more pleased with that initiative, and that I think will come down to really help us in the future and years at even.

And then as a follow-up to that, what's your first year here, but what's your thought on marketing impetus for Free Teens Summer, the first year, more kind of what you got New Hampshire with kind of governors calling out, is there more of a shift in the marketing spend may be around the May-June timeframe? How do you get the word out more word of mouth or more spend?

I would say we're in nationwide -- we're more launching it how we did in New Hampshire with the Governor's TV presence, PR around that. And then, but we are going to test some additional tactics in New Hampshire, as we moved out with the baseline for New Hampshire last year. So additional tactics this year in New Hampshire to see how that works and then we can my plan longer term, it should be in every summer for deal honestly if all goes well. So, but I think it's a great opportunity, and as I've mentioned the past out of that 2500 kids in New Hampshire, the activated 2000 of those came from homes that the parents weren't members yet and that's going to come in and sign the parents the kids up. So it's really great exposure, not in the teens. But even there if parents.

Okay, thank you.

Well, thank you, John.

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

[Technical difficulty] re-equipment revenue as a percent of the total equipment or just the amount overall?

Hey, John, you're on mute I think there for a second. Can you repeat that again?

Yes. Sorry about that. And hopefully you can hear me the replacement of the equipment revenue did you give the amount that was in the quarter. Just for the re-equipment piece?

Yes. I did not, but it was 35% for the quarter and we said back when we gave, full-year guidance for the year we expected it to be just shy of 50% for the year, we still believe that's going to be kind of in that range on a full-year basis.

Okay, so should any other color around shaping of that I mean that implies a pretty big pickup, the next few quarters?

Yes, well I think that in terms of it's basically a percent of the total revenue and you look at the new equipment sales in this quarter as well as in the full-year implied that we reiterated on the call. Summer month also talked about this in the past, that it tend to more count in that time period because it's less busy in the clubs. So you'll see it, I mean we do some reequip business every quarter but on a percentage basis you're typically going to see it more in the kind of the summer months.

And just related to the unit the development outlook for new units, I know you had very strong first quarter. Any color generally what you're hearing from franchisees and the appetite and just maybe more color on what's driving the strength there and then maybe if you had any color on how the second quarter might play out?

Yes, I think that when we sat back and kind of compare our business today, our franchisees business that we are real estate development construction teams work with, you go back four or five years ago, usually as a franchisee and maybe one of the person that was playing roles of COOs and real estate construction development et cetera et cetera. Now as we have bigger groups particularly the private equity groups, and then some of our other still franchisees own group are quite large as well. They really invested in all areas frankly of their functional teams be a CFO to COO to CMOs and options real estate. I think that when you get to bit - have a pretty big operation like that, you don't want to cramp all your shores into one ear, sorry into one quarter because you know the execution and getting those stores up and operating and running, the execution, that's critical. And then at the same time, you can't open a store and then start working on the next one in terms of real estate development etcetera, etcetera. So, I think what we're seeing now with a lot of our groups is that, with the teams they have employed, the sophistication of the teams they have employed and then working with our teams that we've enlarged over the last couple of years or so to assist franchisees, you see more quality sites being submitted quite frankly, and sites that multi franchisees and we have had our eyeballs on a couple of times. So, we feel good about that. In terms of the cadence question we talked about that it would be front half loaded, we still believe, based on our insights today, we believe that's the case. We obviously have more insight into the next three-four months or so. Typically it's about a five-six month lead time when you start negotiating a lease, get it signed. And it's typically three months or so to get it opened once you get it turned over from the landlord, all depending on the quality and the turnover, the box. So, as we've done in the past, we'll release Q2 in late July or the first part of August, we'll have a lot more insights into the balance of the year then because of just the activity that normally takes place for Q3 and 4 activity. But, we reiterated our guidance which is very similar to where we were last year but consistent with the direction we said that we'd be more front half loaded than back half loaded this year.

Okay, great. And just a last one if I could sneak it in. I know you don't guide quarterly, but when you look at the first quarter, comps and member sign ups, any color on hoe it performed versus your plan and does that change your confidence at all in the full year target that you iterated? Thanks.

Yes, thanks John. Just a couple of comments I'd make. I'd say that we were pretty consistent with our plan both top line and bottom line in terms of how -- back to my previous comment of equipment sales, the placement and timing of equipment can drive the revenue changes, if you will, from quarter to quarter. So, we came in pretty much on plan on the top line and bottom line as well as cost. And so, that gives us -- gave us, the confidence then to then reiterate our full year guidance that we put out back in February.

Okay, thank you.

Thanks, John.

Thanks, John.

Your next question comes from the line of Dave King from Roth Capital Partners. Your line is open.

Hi, there, this is Andrew stepping on for Dave. We were just curios, how different is the churn between your White Card and Black Card members? And is there a reason why one would be higher than the other?

It's basically the same Andrew between White Card and our Black Card and it's always been going back in years of history. So, no significant difference between the two.

Great, that's helpful. And then just a follow up, to what extent have any of your current members churned off at any point in time? And do you have what that percentage might be?

Yes. So, we've talked about how we think about our business model and who we're going after. So, we're introducing the masses to fitness, and as you probably know the statistics, only about 20% of the population in the U.S. below to a gym -- also the industry organization. And we really go after the 80% whereas frankly, a lot of our competition just go after the -- and try to trade back and forth between the competitors. And in fact, close to 40% of our members that join have never been a member of a gym before in their lives. So, as we continue to open stores and have more penetration within markets, we're getting closer and closer to some of those people that are in the 80% and either quite frankly have never been a member of a gym or maybe haven't worked out since they were in college. And so, we look at just throwing a lot of people into that funnel and to introduce them to our brand and fitness and the non-intimidating environment that is really what our brand's all about. A lot of people don't understand that the intimidation factor is just a huge element for particularly people that have never been a member before and they want to give it a try. And working out is hard, it's hard work. So, some people are not going to stick with it. And so, what we do is, we look what happens after a member has joined Planet and been with us for 12 months? So, then what happens after that? And we believe that we've got them to join the club, we've had some consistency of them being a member for a while now and try to turn them into a lifer. The cancellation rate after 12 months is a very little bit [indiscernible] etcetera, but it's in that 1.5% to 2.5% per month range and it's been pretty consistent over the last couple of years or so.

Great, that's helpful. Thanks for taking my questions.

Yes, welcome.

Thanks, Andrew.

Your next question comes from the line of Jag Rosic from Bank of America. Your line is open.

Hello, good afternoon. Thanks for taking my question.

Hi, Jag.

Hi. Can you talk a little bit more about the new initiative with Halls? What stood out about Halls that made you choose that retailer versus, maybe, some others? And then, do you see other opportunities longer term to pursue other partnerships with other retailers?

Yes, we've done quite a few different calls in the past as well as other retailers. Even [indiscernible] had done some when they were downsizing. I think they should have been more proactive with their right-sizing initiatives so they looking at their portfolio had next to some of theirs and reached out. So, that's how the conversation started. So, it definitely, I think, will open doors up with more, in the future, as retailers decide to right size their boxes. The other thing [indiscernible] which is interesting is, we're also -- it's a much bigger, I think, it turned into a much bigger partnership than just strictly real estate which is going to be great for us. They want to work together from a marketing initiative and in fact we're working on getting that -- they reward customers and their members get discounts, their employees get discounts in our stores and our members get a shopping week for discount at their stores. So, it's a great partnership and I think it will turn into more things in the future as well.

Great. And then, just in terms of pricing, how do you think about potentially increasing Black Card pricing more longer term? The Black Card penetration keeps going up even though you increased the pricing two years ago. Do you see additional pricing power there? And then, how have the competitors that have had similar pricing, how have they responded to your Black Card increases?

Yes, I'd say that it seems that they've followed us which is interesting because of the pricing but, we originally did the increase from that 19.99 price point to 21.99 back October of '17. And that was strictly based on reciprocity which happens to be the most used perk of the Black Card. And we started a decade ago, we had 100 stores. Here we started and we may be changed -- we had probably 1,300, 1,400. So, if you look at today we're -- even today we're about at 30% more basis after we've been tested. So, I think based on reciprocity alone, I think, something we should revisit every year, couple of years, three years whatever, how much and when is a different topic of testing and what the elasticity is just based on that perk alone, but it does beg the question, reciprocity alone could drive some pricing around it. Outside of that, reciprocity piece, we're constantly looking up ways of driving more value for the members. Well, inside this Black Card spa areas, is there a better massage bed that we could put in there or red light or something like that that would drive more usage and more demand. Or, like we mentioned, we talked of the app earlier, is there more functionality with the app where we did some consumer studies where a lot of the members are looking for is, we had to collect their data from the cardio, for example. So by the time they hit the front on their way out, they have their mileage, their pace, their speed, their calories burnt on their app and how it compares to last week or last year. So, could that be a Black card perk that they get, their data? They could be able to look at that and tick their workouts going forward. So, I believe we constantly look at other ways to drive value to the members to make it a Black Card park, which again could drive more acquisition or price or both. So it's definitely something that we're very focused on.

Great. Thank you.

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

Hi, good afternoon. It's actually Bobby Friedner [ph] on for Peter. Thanks for taking my question. I just wanted to follow-up on the Teen Summer program, it seems they're very compelling and great when introduced Genzymes to the brand. Do you have a target for a number of teams, your opening have signed up this year and related booking at last year, what percent of teams or parents of teams who sign up for that program ended up becoming full members afterward? Thank you.

Yes. We weren't - New Hampshire with 2500 teams and that was about 18 stores, so they can extrapolate some of that volume. We could do nationwide. I guess the only difference there the density of New Hampshire is much less. So I'm hoping for a much better turn on that if you look extrapolate those numbers on the 80,000 stores we have opened today. On the parent themselves, we had some joined the even right after the ending of we have already so parents join us for that program. But this year now that we've learned a lot more for from it we're getting a lot more, I guess, focused on big screen sort of get their email addresses, and addresses to build the market opportunities for both the teenagers, well as the parent. So I think we'll be much more creative this year on how we move forward with the capture of those going forward.

All right, thanks for the detail.

Yes, thank you.

Your next question comes from the line of Brandon Sonnemaker from JPMorgan. Your line is open.

Yes, thanks, guys. This is Brandon on for John. I think I believe that gym with less than 8,000 square feet was tested recently. Could you discuss that experience versus the typical 20,000 square foot gym and our different size boxes, changing the way the company thinks about their 4000 unit potential target in the U.S.?

Yes, we did just opened one of in Texas, for example, it was, it was actually very successful for us. Although we believe and even the franchisee believes should be probably more in that 10 to 12,000 square foot range so the real right customer experience. It's a nice customer experience, but you do you get to a point where is the Black Card expiry is really nice is, it could be is the lockers really is largely should be in -- is the equipment selection have enough variety of that should be. So I think that 10,000 to 12,000 is quite a better number. And that's more of a small market, which is that, when there was in a market that, typically we had been in the future, and we're still really validating how small is small, how small we can go as far as the density of population is concern. But in those markets like that one for example it is - that is really a club in a market that really is in the 4,000 number. So although still investigating what the potential there is that would be upside.

And then if I could just circle back on the pricing question. I think you've talked around the past potentially when you reach 2000 stores you consider additional price increase, is that, call it mid 2020 timeline still the right deal at timeline you're thinking about and what that, what could that price increase look like?

Yes, I mean I think it's all of the testing, I don't think I'd still the lower we can keep both memberships the more volume we can do with the more penetration, we don't want to get over our skis and be in the high '20s for example, and you also a $10 membership really is really what drives a lot of demand and get people on the coast that governance point was 40% gym and their life, and that's why we really found the 10 bucks as much as we do to get people really curious walk through that door and even though we have 60% acquisition of Black Card, which is great thinking that they want to pay tenant and walk up in 21.99. I think if we have too much of a spread between that 10 and call it 29, I don't think we have that kind of conversion, I think you have to get carefully get too much of a spread there, but I think it's the look for dollar to, I don't think it's out of the question. So nothing really concrete today, but it's something we're constantly look at.

Great, thanks guys.

Yes, thank you.

Your last question comes from line of Brennan Matthews from Berenberg. Your line is open.

Hi, thank you for taking my question. I just wanted to ask about Mexico, I think you had a location there for just over a year now. I mean, how is that performed relative to your expectation and any update on maybe opening some more stores there or maybe any other countries you've gotten interest and our thinking about?

Sure. Yes, we had the one store opened in the city rail side of Monterrey, that's in like a middle income area and what we're testing now we're looking to do by over amount another 2 or 3 there later this year and different demographic areas, see if it works everywhere like it does here in the States. We have clubs in Manhattan. And we have clubs in Oakland, California and here in New Hampshire so its' very -- it works in very diverse markets compared to the other. So, once we did those open will get allow to size Mexico, if you -- to begin work everywhere not to determine the full market potential in Mexico before we have a real strong game plan on a quicker rollout, but we'll will have two, three open later this year and then size it from there. But club perform great opened on day one with 5,000 members, which we would say in the past in the States we opened with about 12 to 1500s of that club just weren't crazy from day one, not unlike Panama, then just as well. So the static markets have done very well for us. So, but for now, really focused on Mexico, get that off the ground and running before we really focus on any other big countries.

Okay, thank you so much.

There are no further questions at this time. Mr Chris Rondeau, I turn the call back over to you. End of Q&A:

Thank you. Thanks everybody who joined us today. Me and Dorvin, we had a great first quarter and great opening, another record quarter for us on top of a record openings last year 230. So I look forward to our 225 openings this year and strong same-store sales and seeing some challenges really exciting forward -- look forward reporting later on that this summer. Thank you. Have a good evening.

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