Planet Fitness, Inc. (PLNT) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Josh, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Second 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 with ICR. Please go ahead.

Thank you for joining us today to discuss Planet Fitness’ second 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’ 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 included in our second 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. We delivered another quarter of strong results highlighted by system-wide same store sales growth of 8.8% and adjusted earnings per share of $0.45, an increase of 32.4% over the prior year period. Our same store sales performance was once again primarily volume driven as approximately 75% of the increase came from net new member growth. Our two and three year stock basis, comps are up 19% and 28% respectively. Planet Fitness’ Judgement Free affordable approach to fitness continues to resonate with consumers. We added approximately 400,000 net new members during the second quarter to end the period with more than 14 million members, an increase of approximately 16% over last year. We also opened 53 new franchise locations in Q2, and in the quarter with 1,859 stores system-wide as our group of experienced and well capitalized franchisees continue to successfully execute their extension plans. Planet Fitness’ continues to leverage a size and scale of the capitalized on current real estate trends and dominate the market where we operate. A perfect example of this is our partnership with Kohl’s. We are tracking to open five new Planet Fitness stores adjacent to existing Kohl’s locations by the end of 2019 with more to follow in 2020. Four of the five stores are set to open this year, our franchise locations, well one is a new corporate store. One highlight for me from the second quarter was a kick-off of the Teen Summer Challenge. I could not be more pleased with the results, we’ve seen this nationally rolling out this initiative, which invites teens ages 15 to 18 to work out for free in our 1,800 plus locations in the U.S. and Canada from May 15 to September 1. On top of our 14 million members approximately 900,000 teens have signed up for the program and completed over 4 million workouts, not only have we introduced members of Gen Z to our brand, we believe we have also made meaningful impact on making teens healthier. This summer at a time when teens physical activity significantly declined due to the decreased access to organized sports and fitness. We’re providing you with free access to fitness not only helps teens get active and increase their overall health and wellness. We believe it is also a great opportunity for the long-term to build brand loyalty and affinity with this demographic. In addition to introducing teens to Planet Fitness, the Teen Summer Challenge has also enabled us to introduce their parents to our brand with approximately 75% of teen sign ups coming from non-PF households. And from mid-May through July more than 30,000 parents have joined Planet Fitness with limited marketing efforts. With a few weeks left to summer remaining, we look forward to encouraging as many teens as possible to keep up the great work and supporting them in their fitness journey. Now for a brief update on our technology initiatives. We plan to officially launch version one of the mobile app this month, we have soft launched it internally within our system and segments of our member population over the past few months with significant positive feedback and the enhanced features and functionality such as ability to upgrade our classic White Card membership to Black Card membership, workout tracking and new features like custom workouts. We look forward to building upon that functionality in future releases and continue to enhance our members’ experience. Looking ahead in September, we have our system-wide franchise conference with more than 1,300 franchisees and team members are expecting to attend. We conduct these meetings biannually and between our smaller franchise galleries as an opportunity to strengthen our relationships with our franchisees and harness our collective moment, get our system excited about our strategy and what lies ahead with the brand to engage on a variety of topics including marketing, development, technology, operations, training, recruitment and more. It only proves to be an educational fund and inspiring event. And I look forward to spending time both our franchisees and our team members on the front lines of our businesses each and every day. In closing, it’s been a strong first half of 2019 with Q2 marking our 50th consecutive quarter of positive same store sales. More Planet Fitness locations open during the first six months than any year on our history. Our passionate franchisees are increasingly eager to reinvest and expanding their footprint evidenced by the increase and projected new store openings to a range of 250 to 260, up from our previous outlook of approximately 225. With that a close to 1.5 million net new members of January 1, we provided [fees that] [ph] just approximately 900,000 teenagers to date across the country. At the same time, we delivered significant top and bottom line growth and generate a significant free cash flow would provide the company with great financial flexibility. I am proud of the tremendous work being done across our system by our franchisees, our corporate staff and store team members. Their efforts have been excited about what’s in store for Planet Fitness for the remainder of 2019 in the longer-term. I’ll now turn the call over to Dorvin.

Thanks, Chris, good afternoon, everyone. I’ll begin by reviewing the details of our second quarter results and then discuss our full year 2019 outlook. For the second quarter 2019, total revenue increased 29.3% to $181.7 million from $140.6 million in the prior year period. Total system-wide same store sales increased 8.8%. From a segment perspective, franchisees same store sales increased 9% and our corporate store same store sales increased 5.8%, approximately 75% of our Q2 comp increase was driven by net member growth with a balance being rate growth. The rate growth was driven by a 100 basis points increase in our Black Card penetration to 61.5% compared with last year combined with a $2 increase in Black Card pricing for new joins it was put in place system-wide on October 1 of 2017. During the quarter, the increased Black Card pricing drove approximately 200 basis points of the increase in same store sales. Our franchise segment revenue was $71.8 million, an increase of 23.5% from $58.2 million in the prior year period, let me break down the drivers for the quarter. Royalty revenue was $48.9 million, which consist of royalties on monthly membership dues and then annual your membership fees. This compares to royalty revenue of $38.3 million in the same quarter of last year, an increase of 27.7%. This year-over-year increase had three drivers: first, we ended the quarter with 239 more franchise stores compared to the second quarter of last year; second, as I mentioned our franchisee on same store sales increase from 9%; and then third, a higher overall average royalty rate, for the second quarter the average royalty rate was 6%, up from 5.5% in the same period last year driven by more stores at our current royalty rate including stores that have amended their franchise agreements. Next, our franchise and other fees were $4.2 million compared to $4 million in the prior year period. These are fees received from online new member sign ups, the recognition of fees paid to us for new franchise agreement, area development agreements, and the transfer of existing stores and fees received from processing dues through our point-of-sale system. Also within franchise segment revenues is our placement revenue, which was $5.1 million in the second quarter compared with $3.1 million a year ago. These are fees we received for the assembly and placement of equipment sales to our franchised-owned stores within the U.S. During the second quarter of 2019, we placed equipment in 50 new stores compared with 38 in the year ago period. Our commission income, which our commissions from third-party preferred vendor arrangements and equipment commissions for our international new store openings was $1.1 million compared to $1.6 million a year ago. And then finally, our national advertising fund revenue was $12.5 million compared to $11.2 million last year. Our corporate-owned store segment revenues increased 15.9% to $39.7 million from $34.3 million in the prior year period. The $5.4 million increase had several drivers including the 12 stores opened or acquired since the first quarter of last year. Corporate-owned same store sales increase of 5.8% and increased annual fee revenue. Turning to the equipment segment, revenue increased by $22 million or 45.7%, to $70.2 million from $48.1 million, the increase was driven by higher replacement equipment sales to existing franchise-owned stores and higher new store equipment sales versus a year ago. Our cost of revenue, which primarily relates to the direct cost of equipment sales to the new and existing franchise-owned stores, amounted to $54.4 million compared to $36.7 million a year ago, an increase of 48%, which was driven by the increased equipment sales during the quarter. Store operation expenses which are associated with our corporate-owned stores increased to $20.2 million compared to $18 million a year ago. The increase was primarily driven by costs associated with the 12 stores opened and acquired since the first quarter of last year. SG&A for the quarter was $18.9 million compared to $17.2 million a year ago. This increase was primarily related to incremental payroll to support our growing franchise operations and our infrastructure. National advertising fund expense was $12.5 million offsetting the aforementioned NAF revenue we generated in the quarter. Our operating income increased 33.7% to $65.3 million for the quarter compared to operating income of $48.8 million in the prior year period, while operating margins increased approximately 120 basis points to 35.9% in the second quarter of this year. Our GAAP effective tax rate for the second quarter was 22.2% compared to 23.3% in the prior period. As we 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 second quarter of 2019, net income attributable to Planet Fitness Inc was $34.8 million for $0.41 per diluted share compared to net income attributable to Planet Fitness Inc of $25.9 million or $0.29 per diluted share in the prior year period. Net income was $39.8 million compared to $30.4 million a year ago. On an adjusted basis, net income was $42 million or $0.45 per diluted share, an increase of 26.6% compared with $33.2 million or $0.34 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude nonrecurring expenses and reflect a normalized tax rate of 26.6% and 26.3% for the second quarter of 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 31.1% to $76.5 million from $58.4 million in the prior 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 24.5% to $49.9 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 9% as well as a higher overall average royalty rate. Our franchise segment adjusted EBITDA margins increased by approximately 20 basis points to 69.7%. Corporate-owned store segment EBITDA increased 23.7% to $18.1 million driven primarily by the 5.8% increase in corporate same store sales, higher annual fees, the four franchise stores we acquired last August and for new stores opened in 2018. Our corporate store segment, adjusted EBITDA margins increased by approximately 180 basis points to 46.5%. Our equipment segment EBITDA increased 46.4% to $16.8 million driven by higher replacement equipment sales to existing franchise-owned stores and higher new store equipment sales versus a year-ago. Our equipment segment adjusted EBITDA margins increased by approximately 10 basis points to 23.9%. Now turning to the balance sheet. As of June 30, 2019, we had cash and cash equivalents of $330.5 million compared to $147.8 million on the same date last year, an increase of 123.7%. Total long-term debt, excluding deferred financing cost was $1.2 billion at June 30, 2019 consisting solely of our whole business securitization. Now to our full year 2019 outlook. For the year ended December 31, 2019, we are adjusting our guidance as follows: total new store equipment sales will be in the range of 250 to 260 new stores, up from approximately 225, including approximately 25 international new equipment sales. Same store sales will be approximately 8% in line with our previous guidance of high-single-digits. Total revenue will increase by approximately 18%, up from approximately 15%. Total adjusted EBITDA will increase by approximately 22%, up from approximately 20%. Adjusted net income will increase approximately 20%, up from approximately 18%, and adjusted EPS will increase by approximately 26%, up from approximate 25%. Now we will turn the call back to the operator for your questions.

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

Yeah. So a couple things, Chris, let me start with you guys for a while there had purposely held unit growth down, I think, because you thought real estate was going to get better. Clearly, the system can handle more openings, right, financially and operationally. Is this sort of a shift in the algorithm, right, where the 250 to 260 goes 270 to 280 than the 300 and so on? Or is this a blip that you don’t see repeating?

I think, I’ll answer that and Dorvin can add to it. I think, our last call in Q1, I think as we’ve seen that sophistication within the franchise system whether it’s private equity involved or just more sophistication within the current franchisees adding to their own infrastructure with the 230 we opened last year and 225 we approximate at this year, I think, we’re seeing more of that that benefit, it’s just a little bit more than we probably would expect, yes, but I think it’s evident by the commitment to the brand in the model and really the sophistication that built that it’s – that could be more excited about the brand, and I think it’s great momentum that we’re seeing for sure.

Yeah. I think, John, the other thing I’d add is that, we’ve talked about over the last probably – the last 12 months or so, how we’ve added incremental resources to really assist the franchisees and that’s – it’s kind of in all facets. But one thing which I’ve mentioned on different calls is how we put real estate people in the field, where we’re not – if you go back maybe three or four years ago, we were basically letting franchisees bring sides to us that we would approve. And in many cases, we would decline sides and you’ve heard us talk about that. I’d say over the last 12 months or so under the leadership of Ray Miolla, our Chief Development Officer, we start to – we put more boots on the ground where we’re working with the commercial real estate brokers for the landlords, REITs et cetera. And at same time then the franchisees to Chris’ point have invested more resources as well, because many of these guys are larger and they have territories kind of spread out. And so I think it’s the collective effort of all three groups. It’s us, it’s the franchisees and then just frankly it’s the brand awareness of the national brand where you have people Kohl’s, which we’ve talked about in the past and others that reach out that four or five years ago they weren’t. We weren’t the number one calling the list, when something was coming up. So I think it’s a combination of those, the private equity backed guys as well as some of the larger guys, clearly, have the capital to be able to invest. And a lot of it is timing, it’s coming down to finding those great locations. But the environment as good as it’s ever been in terms of funding real estate and we feel good about the pipeline.

And just as a follow-up to that. How do you guys think about the balance between all the franchisees right between intensifying some of these markets, driving more total membership and then may be accepting a little bit of a cannibalization of existing clubs. That tradeoff, and obviously, that drives system-wide sales and the marketing flywheel. I assume that’s a good tradeoff, right? And you’re okay with a step up in cannibalization. Is that fair?

I think, what we’re seeing and the franchisees are seeing with more analytics and data is that, and we keep going to using the same saying is the more we open, the more we can open. And in markets that we expected more cannibalization years ago that we may have not approved the site, call it three, four, five years ago. Today, we look at very differently than we had back then in the sense that we’ve learned a lot more in last few years, they opened almost 500 stores last couple of years, we’ve learned a lot to be approved and have a date on every site. So I think the franchisees were just more comfortable intensifying these markets.

Okay. Thank you.

Thanks, John.

Thanks, John.

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

Yeah. Thanks a lot. So I just want to kind of come back to the intensification of the markets. When you look at the data, is there any kind of way to think about potentially instead of thinking about traditionally your thought process has been opening more stores near each other. There’s not essential cannibalization, but if we’ve learned something from, I don’t know, Starbucks or other names. The idea has been more about the closer year or two, the consumer where they work or live, you actually kind of grow the market. So, I guess, the New Hemisphere market. Is their kind of evident to kind of suggest that almost actually gaining more consumers that would potentially go to your box, because there you got much more closer to where they potentially live or work? Any kind of evidence or data you’re seeing on that dynamic?

Yeah. I think, Randy, it’s – we’re still early in the game in some markets versus in others to your reference of maybe New Hampshire or maybe even like Massachusetts where we have a lot of stores and started up in this area. But there’s clearly markets where – you’ve heard us talk about it where we might have 4% or 5% of the market penetration today and decent metropolitan area. But in other markets, we may only be at 2.5% and so it’s a combination then of literally getting closer to people as well as then building out, I guess, I would say in markets where – we’re not yet 80% or 90% of it. But we’re getting more in the market from a market planning perspective that then provides for more opportunities for Black Card usage and the reciprocity, et cetera. And so then there is some of that kind of home or work or meeting your friends to work out, et cetera. But it’s still combination of both, I mean, there are markets where we’re setting, you’re realizing there’s still a lot of stores that can be built where there’s a significant amount of population that we’re not within a 12 to 15 minute drive time. Because it still has the 80% population don’t have a gym membership.

That’s helpful. And if we think about amenities, one thing that has started to kind of pop up on the radar is it seems to be there’s more and more announcements or partnerships between Planet and other third parties, if you will where there’s – all these benefits that Black Card or even all Planet Fitness members can kind of sharing. So what are the learnings of any kind of statistics or data that show that’s increasing engagement or utilization on a more frequent basis of the Planet gym? And I guess, I’m trying to get out is, are you starting to see the increase of amenities, I’m sure you’re getting a lot of inbounds of people want to work with you third party friends that want to associate with Planet. It seems like there’s an opportunity to increase that engagement further reduced potential churn over time, just curious on how you’re trying to think about strategically utilizing these partnerships to either increase that engagement or reduce churn over a long period of time? Thanks.

Yeah, I mean, we’ve done some studies that there’s one thing that members are looking for is content to whether is in club or outer clubs that stuff where we are investigating with the launch of the app. This week actually we’ll get the ability to pipe in that ability. But you’re right on like we just recent partnership with [InterGo] [ph] where Black Card members have discount obligations, which is outside of really fitness and wellness, but it is giving a Black Card member of their benefits and perks just for being a member. And believe it AAA three month trial [on audible] [ph] which you’ve seen once a while as well. Reebok just comes with a long time. So we are getting a lot more inbound calls. I think it’s our size and scale now, which is opening more and more doors for us, which is great, because it’s something the competition is so far behind that they’re not going to have their ability. So I think any way we can give our members more experience and more benefits the better for value.

Got it. Thanks. Last question, I guess, for Dorvin, one question we get a lot of is people thinking about the differential in return characteristics on the, I guess, the smaller box formats versus the regular box kind of anything can you share on any differentials you see and any learnings from some of these different spot sizes that we can share, as I think the market can get really comfortable about the smaller boxes really taking hold, it really gives the market potential in the thought process of many more thousands of units being able to be put through the system both domestically and even potentially internationally. I’m just curious there? Thanks.

Sure. Sure. I mean, we have a number of locations that – and some of our older stores that we’ve had for a while, but clearly in the last couple of years or so, where we’ve gone into cities that are call it under 40,000 to 50,000 in population within a 15 to 20 minute drive time versus kind of the traditional more metropolitan-suburban locations that have a lot of population. And then one of the initiatives we’re working on is can there be a different size box in some of the smaller towns, and then therefore less capital invested more than likely fewer members per store. But yet still get that economic return that that someone is willing to invest the money to build out those stores. And I think that what we’re seeing is that the return is there. And it will be obviously depended upon over time whether what’s the right size of box, because we want the brand that we put out there today as a Planet Fitness store that’s got the reciprocity benefits, it’s got the other things that we think drive value particularly in selling our top membership. We want you to be able to still have some of that look and feel albeit maybe in a smaller box. And I think in some cases, population and then size could drive it to a point, where maybe it does represent the brand, we want it to be. So that’s what we’re working on today. And looking at some different size configurations most of all of our boxes we’ve built in the last couple of years in the 20,000 square foot box, but we’ve built some smaller than that. We’ve built some in the 15,000 range. We’ve built some even a small than that. I think at the end of the day will probably circle around – somewhere around 10,000 square foot boxes probably on the small end. And you’re probably going to need in that call it 30,000 to 40,000 populations to be able to drive that or to be able to drive the kind of return. And the one thing that’s a different is drive times, because before in at suburban Atlanta or Chicago or Dallas, where we’d be looking at call it a 12 minute drive time, whereas you get into some of these outlying smaller towns, it may be a 20 to 30 minute drive time that makes it work, because people are driving 25 to 30 minutes to go to the grocery store or go to the drug store. So those are the things we’re looking at and the franchisees that are building those stores. And we have couple of corporate stores. The returns are – they fit the profile of someone wanting to invest, and I guess I’ll put it that way.

Understood. Thanks, guys. I appreciate it.

Thanks, Randy.

Thanks.

Your next question comes from Sharon sexy Ellis William Blair. Your line is open.

Hi, good afternoon. A couple of questions…

Hi.

Hi, Sharon.

Hi. I think, you were testing an increase to the Black Card pricing. And just wondering what you saw from that and whether or not you’re planning on rolling out any kind of increase to new members later this year or early next. And then secondarily on equipment, Dorvin, if you wouldn’t mind letting us know kind of what percent was replacement versus new units? And I think at one point you had said that you expected equipment revenues to be down in the fourth quarter. I didn’t know if that was still the case.

Sure. Sharon, this is Chris. On the Black Card price test – we’re testing a dollar increase, so [2299] [ph] we’re testing that right now and virtually the same 100 stores that we did the last test which was two years ago. We’re going to play out the rest of the summer and then probably make a decision towards end of the summer here. So far, very promising, the acceptance of the increase has been virtually the same results as the last time, so pushback and it’s been as far as the Black Card percentage acquisition as well as adopting the dollar increase. So you’re right, to be new members going forward. I don’t see anything now it doesn’t say, we probably won’t move forward second half of the year. But we’re still evaluating the next week or so.

Yeah. Sure. And on the equipment, so for the quarter, I mean, we – I think I’d be remiss to say that our franchisees are they continue to believe in this brand and really reinvest. And we think that’s a key differentiator that we’ve had, you’ve heard us talk about it. And for the quarter 60% of our total equipment revenue was from replacement equipment. So it shows you that and we had a good quarter on new equipment sales as well. We still expect the full year, which I gave – when I gave guidance for the year, I said, it would just be a bit shy 50%. We still think it will be a little bit under 50% on a full year basis even with our updated guidance on equipment sales, but it continues to show that they’ll be willing to invest on the equipment side. The way we’re thinking about the balance of the year is still a bit similar to the way it was – back earlier in the year. It looks like that probably a year-over-year Q4 over Q4. The equipment revenue will be down a little bit versus where it was last year. One, given just kind of where we’re at year-to-date, and then just the cadence between Q3 and Q4 to get up into that 250 to 260 range. But we do believe it will be down slightly in the fourth quarter.

Thank you.

Your next question comes from Rafe Jadrosich with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Hi, good afternoon, thanks for taking my questions.

Hi, Rafe.

I was wondering if you could talk a little bit about the mix of your online signups versus in-store, and then, how that’s changed over time.

Right now is about 30% join online. It is about 25% in the past year, so it’s up slightly from a couple of years ago, I’d say.

Okay. And then in terms of can you just give us an update on international, because the trends you’re seeing in Mexico and Latin America. And then are there any new markets that you’re looking at going forward?

So the Mexico we had one store open, this is a couple slated to open the remainder of this year, and Panama as well we opened at one store for 18 months ago, and is three or four there now still the same results have been high demand form as I mentioned in South America the bigger hurdle that we figure out and work through is more EFT, and how that translates in the banking world down there. A few blips here and there, but they figured it out and is working relatively good so. For now just really focusing on Mexico getting that rolling and we’ll be looking for more international into future, but for right now really focus on the U.S. growth and Canada and getting Mexico off the ground.

Okay. And then, I think you finished the buyback authorization in the quarter, just going forward how are you thinking about capital allocation. And then are there any changes to your approach to leverage or priorities for cash?

Yeah. On a on a net of cash basis we’re at about 4.6 times leverage at the end of Q2. We have the $1.3 billion outstanding on the securitization. I think that in terms of where we’re at with respect to our longer term strategies the same. We believe that our model is strong enough to continue to generate a lot of cash flow and return cash to shareholders. We chose the share repurchase plan last year, as the way to do that, we have about $150 million or so left under the $500 million approved repurchase plan by our board. And I think, we’ll continue to work with our board over the balance of the year as we continue to delever down to look at ways to return cash to shareholders.

Okay. Thank you.

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

Yeah. Hi, thank you. First question I just wanted to ask about the same store sales outlook and very strong first half above 9% on the system comps. I just want to ask and clarify to get down to 8% for the year, I think implies closer to 7% in the back half. And that’s very good, but maybe the slow – on the slower end of what you’ve seen the last few years? I just want to maybe ask about your confidence there and what you see is the ongoing same store sales drivers?

Sure, Jon. As we had guidance for the full year, and then kind of reiterated that at the end of Q1. We saw our comps coming in and then the mid-single-digit range kind of that 7% to 9% range. Given we’re halfway through the year, we decided to narrow that to say at approximately 8%, so still within the range. I’d say there’s two or three things that that go into the way, I would describe your call, you’re right in that with given were Q1 and Q2 are, and then a full year kind of guide to 8% implies that that the back half would be moderate in the first half. And if you go back beginning of the year, in fact, that’s the way we gave our guidance. We said that it assumed that the growth would moderate throughout the year, and I think, I said quarter by quarter. So a couple things on that: one is, as I’ve said in the past that the older mature stores they come up in that kind of low- to mid-single digits and the base of those stores just continues to grow into that more mature state. And you start to see a lessening impact from the newer stores over time. Now that’s been somewhat offset if you go back certainly last year, and even frankly, first couple of quarters. This year that’s been somewhat offset by the fact that we had $2 price increase that took effect back on October 1. And so just to give you a sense for that that, so Q1 impact on same store sales in terms of the Black Card pricing was about 240 basis points. And the 2Q impact was about 200 basis points of this year. And that’s down about 50 bps from last year’s Q2 was about 250 last year in Q2. And as we look at Q3 and Q4, we see the Black Card pricing continue to decline as we continue to cycle. And all of this assumes there’s no incremental pricing to the question earlier – early on the call. But as an example, last year’s Q3 drove about – and Q4 drove about 300 basis points of same store sales in Q3 and Q4, whereas this year it’s going to be more in the 190 range for Q3 probably 170 range for Q4. So you’re starting to see over 100 bps plus and increasing, yeah, as I just mentioned from Q1 to Q2 we dropped about 40 bps increase just quarter to quarter. And then finally, I guess, I’d say just – I think our new joins in the first half the year been just a touch lighter than what we would have forecasted and what we what we thought for the year. But still, when you step back and think about it given on an 8% comp we’re still in that kind of high-single-digit range, and really pretty much in line with where we thought we would be back at the end of Q1 when we last talked about comps.

Yeah. Understood. And when you think about the drivers going forward of the new joins. Any thoughts, Chris or Dorvin, just if you look to the marketing plans in the set of drivers that you have wind up, what we should expect going forward as you look out of few quarters?

Yeah, I think in hindsight looking at you may recall early this year, we had mentioned that we increased our digital marketing spend by about 50% over the previous year. And I think, as the national ad fund has grown, I think, maybe a disproportionate amount has been put into digital, which I think maybe over digitized our marketing where traditional marketing really is what drives what we’re seeing more volume. So I think it’s probably some changes we’ll look to retool some of this year and for 2020 as well going forward.

Okay, great. And then if I could follow up, on the Black Card penetration it’s really accelerated pretty nicely in the last couple of quarters. Any thoughts does that inform kind of your thoughts on what the ultimate pricing ability is, and I know you’re testing the dollar increase, but now that you’re back at a more than 100 basis points of Black Card penetration year-over-year it seems like if anything it have quite a bit of pricing power, so just curious to get your thoughts more broadly on that?

Yeah. I think, the reciprocity was the reason that this make the question it may move again as even a couple years already had 400 some more stores here, so quite a big increase in the last two years, which is why we decided these dollars. I think, as we continue to provide more service and open more stores, whether it’s either content or more amenities within the store, or just more locations for reciprocity that it’s probably a lever that will always have in our back pocket to constantly look to see if it has the ability to raise.

Okay. Great. Thank you very much.

Thanks, Jon.

Thanks, Jon.

Your next question comes from Oliver Chen with Cowen and Company. Your line is open. Oliver Chen with Cowen and Company. Please go ahead. Your line is open.

Hi. Sorry. This is [Jonah] [ph] on for Oliver today. Just a quick question. How do you think about the competitive landscape as you open more stores and other concepts are also riding the health and wellness trend? And have you seen any noticeable change in the churn rate that you’ve noticed recently? Thank you so much.

Yeah. No. Nothing has happened with churn at all, I mean, as we’ve mentioned in the past, attrition is slightly better. A little bit slightly better in the last couple years. I think, if anything, Jonah, I say that although you see more specialized boutiques that are kind of pop up and different concepts come around. I think, if you look at more of the I guess lower cost, high value clubs like us, whether it’s [Retro or You Fit] [ph] or so. The other one is really grown at any amount would be crunch which is, I think, last year 50 or 60 stores. S0 – and that closes after that where You Fit has really grown at all, Retro as only grown it also. I think on the lower cost one, we haven’t seen anything change there at all. And even more, I guess, the mid box – mid size box, the You Fit is 24-hour fitness, have really seen them grow in the club either they’ve been kind of stuck at that fitness has been about 700 market or take for a while and 24-hour fitness has been with 450 or 500 for five plus years. So I think, if that’s boutique world we’re different concepts come up and I haven’t seen anything change in that realm which a lot of ways of boutiques whether they’re higher price in a very different consumer.

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

Hi, thank you. The question earlier was asked about range of square footage per box, and I’d like to react that maybe in a different way what was kind of the range of square foot by box for fiscal 2019? What was it in 18? If there is an average gym per square foot that you look at between the two years? And I guess, as we think about 2020, as you begin to narrow things in and have a different range of experience, I mean, what do you think the appropriate return on investment range that’s you’re going to give the right amount of service to the design amount of customers? And what is that level of box that you think you’re going to hone in on as you think about in fiscal 2020 relative to the previous years?

I would say, John, that in 2018 and even this year, and probably 2017. The size of box really hasn’t changed a lot, I mean, you think about it we’re opening, call it the last three years, 200 plus counting this year. It’s going to be right between probably 19,500 and 20,000 square feet. Now there’s a few you know little outliers for that, because happened to be a box in a certain place you want to put it in it was 16,500 or something like that. You heard us talk about the store we built, corporate store in Berlin, Vermont. It’s about 15,500 in a very small town up there. We opened a small store down in a small town in Texas of just shy of 8,000 square feet last year. But that’s a big outlier. So the far majority of all the stores 2017, 2018, 2019 a right around 20,000, and we have some over that, so that helps in terms of the average. But far majority bread and butter right down the fairways 20,000. What I was trying to allude to the question earlier, at least, the way I thought the question was being asked was as we get more and more penetration into markets, and open more and more stores. And then as franchisees start to kind of look towards the fringes, let’s say, of their career [ph] development agreements or in just frankly more rural states, maybe how it can small be and then will they build them and get a return on it. And that’s where I was alluding to us looking at anywhere from say 10,000 to 15,000 square feet. If it’s a small enough market then we’re looking at that and saying then that drive the return. And I think affirmatively, I said, yes. Clearly, there’s no doubt that the far majority of all of our franchisees, if there’s enough people there, they’re going to put that 20,000 square foot box, because it can and we’ve said this before, I mean, it can handle anywhere from call it 5,500 to 6,000 members and maybe a more cheaper real estate environment in some markets all the way up to 12,000 to 15,000 members in some markets too. And we believe that brand and the size of the box, and the usage patterns of our members can handle that. But if it’s in markets, where we have not saturated the market with the maximum number of stores, it’s most likely going to be a 20,000 square foot box. Even in markets, John, where we want to box and there’s enough people and there’s no real estate, we’re building some, I’d say, we on the system. We’re doing some ground ups and we’re done 20,000 square foot, because we think that’s the right profile that gives us the best perception from a customer, the best layout, the right mix of equipment et cetera. And then, when you get out to that fringes, okay, it’s just a small town. And maybe it can’t drive the same type of membership to drive the economics. I think the way that most people are looking at this is, if they can get that on the low-end 20% kind of cash and cash returns, they’re willing to do it, and clearly anything about that they’re willing to do it. And so far, we haven’t had that kind of a problem of trying to struggle to get to that 20% cash on cash returns.

Yes. Of course, maybe even worse, I think, I mean it sounds like you are not expecting a material change in square foot per boxes, it certainly 2019 or 2020. And if it is it would be so slight to not even be worth mentioning, I think that’s with that.

Absolutely correct.

Okay. That’s the important point. And then secondly, just talking about the Black Card pricing, obviously, you have it [1999] [ph] for a long time, you want to [2199] [ph] in October of 2017. You’re certainly in restaurants there’s always kind of a big philosophical debate of you taking pricing when you have to, because there’s cost pressure and the franchisees are really asking for that or keeping pricing basically what it is, because you have such an excellent value perception. The amount of member growth can maintain at a fairly high level. So I mean, I guess is, do you think about taking that price, I mean, what is kind of the balance between the franchisees are asking for because they want more profitability and they want to cover some of their cost increases maybe in labor versus hey, we keep pricing like it is and we just keep the flywheel of member growth really going, I mean, what’s – I mean, I guess at this point really driving that need to maybe, the answer is, hey, what it’s profitability and shareholders love that and that’s the answer just in it of itself.

Yeah. I think is, we look at, we still only really so we advertise a $10 membership which is really the segregate get the [indiscernible] and curiosity factor. And still a large portion of our members are the $10 members and that’s what they want to pay and that’s what they’re willing to pay. So I think the Black Card membership is pretty unique in the sense is not really giving more or less access to fitness, more or less access to a Black Card spars and benefits that are kind of outside of the treadmill.

If you will and some people is willing to pay more for that price, so I think it’s something that we will look at in the future as well. But I think you’re right too is, I think is definitely the one thing I’d never want to do is use that to [mask other] [ph] issue, for sure.

Okay. Thank you.

Thanks, John.

Thanks, John.

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

Hi, thanks. Good afternoon and good results, guys.

Thanks, Peter.

I wanted to maybe follow up on one of the earlier questions just regarding the step up to the overall unit growth, I guess, you probably don’t want to guide us to next year, but it seems like all the tools and assets are in place to maintain a run rate of this to 250 to 260 going forward is just potentially maybe at least kind of a rough baseline and how we could think about the total number of absolute openings at least for the next couple of years?

I don’t think we want to get into giving any early guidance into 2020. But the – we have over thousands still in the pipeline that are under every development agreement are committed. Just to reiterate what Chris and I said in earlier, franchisees are clearly committed to deploying capital, we’ve got a good pipeline of sites in place that that are either being negotiated on or certainly getting close to firming up from early 2020, and they were still a few months out from locking and loading all of stores even in Q1. But there’s clearly sites that are – leases are signed and things in terms of whether it’s architectural drawings or whatever that are in place for early 2020. And we feel good about what our franchisees are doing and how they’re – you’re not only reinvesting in their existing fleet, but continuing to really beat the ground and the markets there and try to you’ll find the best locations be the first to market if it’s in a kind of a new old markets, then maybe somewhere there’s it’s a little bit more mature. And then in the – my prepared remarks I made a few months ago, I said that out of that to 250 to 260 about 25 of those would be international locations. And just as a data point, I think, last year it was 13. So we’re close to doubling the number size albeit small, but out of the to call it 250 from in it, out of that about, we think about 25 of those will be international locations, as Chris was talking about earlier between Canada, Mexico, et cetera. But in any event that that we feel really good about where we’re at right now, and clearly, we’ll give more intel towards 2020, when we get to the next year.

Okay. Fair enough. And maybe also following up on another question from before just regarding the equipment sales, so the growth in replacement equipment was quite strong, and I’m curious if you’re seeing any faster refresh rates beyond the normal five years for cardio or seven years for strength, that it’s for whatever reason franchisees are seeing a good return on that or if it’s just maybe a timing dynamic with Q2 that caused that strong growth.

Yeah. It’s always been a bit lumpy and we’ve talked about that with you guys over the quarter’s since we’ve been public. I’d say $2.1 million is Q2 is always a good time to do it, just because it’s a lower usage time period within the gym, although, we had a little bit incremental use of this year with the success of the Teen Summer Challenge. But it’s a good time to do it. But no – I’d say they’re doing it, you go all the way back to when we first, we kind of laughed about it when we first started calling up franchisees and saying you got to replace the equipment, and it was you may not have to replace the equipment, and all the way till today that they just do it on their own. And we’ve also talked about the fact that when you look at the new stores that have opened up over the last you know call it five years now, so that kind of that first year cardio coming up. The volume of the two to three years prior to that is significantly less, so what you’ve got is now more and more stores are going to be coming up on their first cardio and first strength. And then you’ve got others rolling into that that’s doing their second or third time around. So, although, I said it be about 50% this year or just shy 50% replacement everything else being equal that’s going to grow at a much faster rate. And I’ll want to say it again, I think it’s what differentiates our brand and you go in the clubs that are 8, 9, 10 years old and they don’t look like a 10-year old club, and it’s a testament to the franchisees willing to continue to reinvest in their business.

Okay. Thanks a lot. Very helpful. Good luck with the back half, guys.

Thanks, Peter.

Your next question comes from Joe Altobello with Raymond James. Your line is open.

Thanks. Hey, guys, good afternoon. First question, Dorvin, I just wanted to go back to something you mentioned earlier, you said that you thought membership growth was a bit lighter than you thought, and for the reason why you’re seeing a little bit lighter comps, I guess, in the second half of the year. If you look at membership with the last few quarters, it’s been in that 15% to 18% range. It was right in that range in this quarter, so I guess, first is, what are you expecting and maybe second is, if it was a bit lighter than you thought, why do you think that is?

Yeah. A couple things. One is, I think, I’m going to use the term as a touch lighter. So it wasn’t a significant huge driver in Q2. But it’s just another factor that as we can kind of look over the balance of the year, where maybe we were just a tight lighter or maybe our budgeting was a little bit aggressive, but – so that’s point one. But point two, I’ll go back to Chris’s comment in that if you look at our spend of marketing maybe with 2020 hindsight maybe we shifted as of on a percentage basis of the total marketing spend maybe we shifted a bit more towards digital spend as opposed to some of the more traditional media that clearly in the past is it has been successful in driving new joins. But it’s something that we’re continuing to look at the data and we’ll look at that as we plan our 2020 marketing campaigns.

Great. That’s helpful. And then maybe secondly of the 40,000 new members you signed up this quarter or net new members you should say. How many of those you think came from the Teen Summer Challenge?

We have the 30,000 parents had joined so far since May 15. With no real – very little marketing effort to this point, now with this August here we’re rolling up our summer we’ll start to target both them and the teens at this point. So we do see what happens with that in the future. But it was great to see these people finally actually get in the join after the kids have the free exposure.

Is this something you’re going to do next year as well?

Yeah. I don’t see why we wouldn’t be something that we – we’re known for quite honestly, I think, it’s a great thing, it’s great for society, it’s the right thing to do and for the brand longer term, I think it will pay dividends in the future. So I think it’s a great thing to do it over 2 billion impressions it was just an amount of media exposure we had of this whole thing was just truly remarkable, not to mention the amount of stories that came through this office with e-mails and letters to us from parents, it was just – it’s a great cause I think it’s made sense for us to be involved in this way. We think about two, we had the 9,000 kids with that perspective for a quick second is that women here for 27 years and we have of the entire Gen X population in the country, 5% of members at Planet, of the 15 to 18 year old teenagers we achieved 5% penetration of them in 60 days. I mean that’s just didn’t make that up.

Great. Thank you, guys.

Thank you.

Thanks, Joe.

Your next question comes from Michael Kawamoto with D.A. Davidson. Your line is open.

Hey, guys, thanks for taking my question. First, can you just update on how the tests are going in the 15 stores replacing connected equipment and maybe you’re planning plans to expand that going forward?

Yeah. The test is still going those 15 stores, I make it my last call that we’re working with matrix this point to retool the, I guess, experiences and platform that from what we learned from a lot of segmentation studies and member consumer studies. And then the fourth quarter, we’re going to roll out some of the matrix equipment in new stores with a complete kind of retool platform experience based on what we learned. Out of all the stuff that’s on these current screens today. Although we talk about Hulu and Spotify and Netflix and so on and so forth. Netflix was the most used out of all those, but only 9% of members used it. So I think it’s almost too much clutter in some ways and more streamlined stuff what the members wanted to do while they run their cardio. And so through some of the – a lot of consumer studies what was surprising is they wanted to use that cardio time for educational purposes around how to exercise better get more results in nutrition. So we’re going to try to retool some of the newer stuff in the fourth quarter to satisfy those demands, if we could get more interaction.

That’s helpful. So on the three vendors, or are you going to continue to with all three of them or just matrix that one you’re choosing.

We are working with all three of them, but just for this test and sort of getting all three going down a different role, we’re going to just focus on matrix at this point.

Got it. Thanks, guys.

Yeah. Thank you.

Thank you.

Your last question comes from Sumit Sharma with Berenberg Capital. Your line is open.

Hi. Thank you for taking my question. I think a lot has been discussed already under real estate. But I think just to get a sense on how this is being effectuated, I guess. Who is – what sort of the development structure you have we, I mean, is it like a traditional developed sale-leaseback kind of deal the vast majority that we’re looking at or more leasing situation where you’re the franchisee gets bigger allowances from the landlord, because of your volume and your sort of nationwide identity?

Yeah, it’s more the lighter. Most of our franchisees just lease the equipment directly from the landlords, the REITs across the country. Yeah, we have a few franchisees that will – they’ll buy the building or they’ll buy land and build a building, and it’s a little bit of a – kind of a combined real estate play with owning with our business that goes along with it. But the far majority of all the stores are just leasing situations, and you bring up a good point, because the beauty, I guess, of where we’re at today versus retail in general is that particularly in that box size we’re looking at. I think about this way it’s generally kind of the Toys "R" Us, Staples, Office Max Office Depot; those kinds of boxes, the Old Navy, Circuit City. As you go down the list, and I mean if you go back and take the last 5 to 10 years and you add up all those stores that those retailers have closed. There’s a lot of those boxes out there that were in today. And there’s more will go into, but a lot of those landlords are – they’re trying to find a way to fill that space. And in particular in centers where they’re really trying to take a no center that’s maybe it’s got a lot of vacancy and try to revitalize it, and do things like that. And we drive a tremendous amount of traffic to a center will do about 5,000 workouts a week. And so we’re bringing people into a shopping center that in all intents and purposes may not have ever gone to that shopping center. So that makes this attractive for that, so they are getting tenant improvement allowances, I mean, it’s not unheard of if you’re going to build a store – typical store today. It varies from region to region a bit, but you’re talking for a 20,000 square foot box, you’re going to end that $2 million range. It’s not uncommon to get $250,000, $350,000, $400,000 in tenant improvement allowances. And so you can – it certainly helps on the return on the cash and with time value money on the ROI, et cetera. So – but the answer to your question it’s mainly leases.

Thank you. So much, I guess that’s about it for me to.

Thank you.

Thank you.

[Operator Instructions] I’ll turn the call back to Chris for any closing remarks.

Thank you. I appreciate your great time today, couldn’t be more pleased with our results for the first half of the year and the second quarter as well as the committed by our franchisees and the support of our corporate staff to help them achieve these great results. And we look forward to the second half of the year and carry the momentum. So thank you. Have a good evening.

This does conclude today’s conference call. You may now disconnect.