Planet Fitness, Inc. (PLNT) Q3 2019 Earnings Report, Transcript and Summary

Good evening. My name is Tunish, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Third 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. I would now like to hand the call over to Brendon Frey. Please go ahead.

Thank you for joining us today to discuss Planet Fitness’ third 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 third 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 solid results highlighted by system-wide same-store sales growth of 7.9%, on top of a 9.7% gain a year ago and adjusted earnings per share of $0.36 versus $0.28 last year, an increase of 29%. The majority of our system-wide sales growth in Q3 approximately 35% was driven by net member growth as casual and first-time gym users continue to be attracted to our brand and welcoming non-intimidating fitness concept. When compared to the industry, our growth is remarkable. According to IHRSA, the International Health, Racquet & Sportsclub Association, U.S. fitness industry opened roughly 1,100 new locations and added 1.6 million members in 2008. In the same year, Planet Fitness open 211 new stores and add 1.8 million members. We accounted for roughly 20% of the industry unit growth in more than 100% of the volume growth. Taking Planet Fitness out of the industry, the U.S. industry grew by over 800 stores, but membership declined by about 200,000, reinforcing the other fitness concepts are trading amongst themselves and with new store opening they are sharing a small piece of the same pie. Our bullish, well-capitalized franchisees continue to fuel our expansion efforts in both new and existing markets. With the opportunity to double our domestic store comp over time the U.S. remains our primarily growth driver. That said, international markets representing very attractive opportunity for our brand and business and we are excited to share a development on this front. Recently, we finalized plan to open our first Planet Fitness stores in Australia. Our entry into the Australian market is being led by a partnership between two existing U.S. franchise groups who joint forces with a local Australian fitness operator who own the trademark of the Planet Fitness in his name Australia and operated several locations in New South Wales. The initial development agreement secures ownership of the Planet Fitness trademark, in grants of the rights to convert and remodel several existing locations to our Planet Fitness brands and built a minimum of 35 new locations in a portion of Australia. In the third quarter, we have opportunity to alter and test our marketing mix and creative to select markets to measure overall effectiveness. We are pleased with the initial results and we will be incorporating the learnings going forward. While our marketing plans and media spend for the remainder of this year are largely committed. These tweaks will be implemented into our 2020 marketing plan in order to strengthen our messaging with our core consumer especially during important post New Year's sign-up period and improve our reach throughout the right balance of TV, digital and other forms of advertising. In addition our internal team and advertising agency have worked closely with our franchisee marketing committee to further share data and insights, enhance national and local marketing synergies and collaborate on our 20 marketing plan. Further adding to our strength of marketing, I'm excited to announce that Jeremy Tucker will be joined by a Planet Fitness later this month as our new Chief Marketing Officer Most recently Jeremy served as Vice President of Marketing, Communications and Media at Nissan North America, where he served as Head of U.S. marketing on the Executive Leadership Team. Jeremy brings nearly 20 years of broad marketing experience across large-scale global industry including retail, automotive, entertainment and consumer packaged goods and managing robust marketing budgets and teams. Prior to Nissan, Jeremy held various marketing role at Walt Disney Company and PepsiCo. I'm pleased to officially welcome him to Planet Fitness management team. I am confident that his deep experience will be an asset to our brands and our franchisees and will able to elevate and optimize our national and local marketing efforts. As part of our future plans we're gearing up for Q1 and being the presenting sponsor of Time Square iconic music celebration for the fifth year in a row. Once again Planet Fitness will be front and center on the global stage at a time with fitness, and health and wellness is top of mind for consumers. On the marketing sponsorship front, we are excited to announce the Planet Fitness will be the exclusive fitness partner of the Biggest Loser when the show returns in January on USA network, the number one rated cable network among adults 18 to 49 in 2018. In fact, one of trainers in the show is a Planet Fitness member who experienced our own incredible weight loss journey and uses her experience with the others. We look forward to being part of the show's comeback in Q1. Now for a brief update on the launch of our enhanced mobile app in early August. We had to see strong growth in both uses and downloads as evidenced by 49% increase in new downloads per day compared to previous app. Prior to rollout, all club team members across the system were trained on new features and functionality to promote the app and assist members with the transition. And to increased overall engagement we have implemented the app at the club level in our towards new member orientation. Since the launch there have been two incremental releases enhancing existing functionality based on user feedback such as improving login experience, a new features such as referring a friend to join and upgrade to the Planet Fitness black card. We are evaluating user feedback and will continue to enhance our offering with future releases. Shifting gears a bit. We want to briefly recap the Teen Summer Challenge program that ended December 1st. Final results were incredible. Although over 900,000 teams taking part in the program and conducting over 5.5 million workouts, introducing Gen Z fitness not sets them up on a path to develop healthy habits and build self-esteem. We also see it as a great long-term opportunity to introduce Planet Fitness to Gen Z and their families. In September we held our annual franchise conference with more than 1500 attendees including franchisees, their team members, vendors and brand sport staff. The theme of the meeting was focused on the member mission. To elevate the overall Planet Fitness experience in all channels for their entire journey with us. Our franchisees walked away from the event with energy, passion and commitment to continuing to grow the brand and building more stores, so we can bring fitness to more people's backyards. Our team members are inspired to remember the member in everything we do, going above and beyond to widen the customer services support. Our continued success in growth is a result of the collective passion and commitment of our entire system, and I'm extremely proud that the brand continues to be recognized for both our excellent in customer service and for our remarkable growth. The second consecutive year, Planet Fitness has been named Newsweek's list of America's best companies to customer service. Were also named in the 2019 Franchise Times top 200 list ranking number 49 overall up 10 spots from last year's ranking 59. Company also ranked number sixth in both Franchise Times, Top 10 fastest growers by units and Top 10 fasted grower by sales. I'm extremely pleased by our third quarter results and our track record for continuing to deliver strong performance. In fact the third quarter marked our 51st straight quarter well more than 12 years of positive store sales. That's pretty remarkable. For me, what was more exciting is Planet Fitness has a substantial runway the growth and our bright future ahead. From our domestic store extension opportunities and increasing international growth prospects to our group of experienced, well-capitalized franchisees, growing national and local advertising budget. We also believe our focus on enhancing the members experience through our multiyear technology initiative and exploring new brand sponsorships will further strengthen the attractiveness of the Planet and its brand in concept. I believe we're on the right path to conclude another outstanding year with a strong fourth quarter and that the company is on the right path towards achieving our objectives and generates increasing value for our shareholders. I'll now turn the call over to Dorvin.

Thanks Chris. And good afternoon everyone. I'll begin by reviewing the details of our third quarter results and then discuss our full year 2019 outlook. For the third quarter of 2019, total revenue increased 22.1% to $266.8 million from $136.7 million in the prior period. Total system-wide same-store sales increased 7.9%. From a segment perspective franchise same-store sales increased 8.1% and our corporate store same-store sales increased 4.9%. Approximately 75% of our Q3 comp increase was driven by member growth with the balance being rate growth. The rate growth was driven by 100 basis point increase and our Black Card penetration to 61.5% compared with the prior period combined with higher Black Card pricing for the new joints. The rate growth was mostly driven by the $2 price increase that was put in place system-wide in October of 2017 as the one dollar price increase was put in place in September of 2019. The impact from the increased White Card pricing drove approximately 180 basis points of the increase in same-store sales. Our franchise segment revenue was $66.7 million, an increase of 21.7% from $54.8 million in the prior. Let me break down the driver order. Royalty revenue was $46 million which consist of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue $36 million in the same quarter last year, an increase of 27.8%. This year-over-year increase had three drivers; first, we ended the quarter with 244 more franchise stores compared to the same time last year. Second, as I mentioned our franchise same-store sales increased by 8.1%. And then third, a higher overall average royalty rate. For the third quarter the average royalty rate was 6.2%, up from 5.7% in the same period last year driven by more stores at high royalty rates compared to the same time last year. Next, our franchise and other fees were $3.2 million compared to $3.5 million in the prior. These are fees received from online new member sign-ups, the recognition of these pay to us for new franchise agreements, area development agreements and the transfer of existing stores and fees received from processing dues to our point of sale system. Also within franchise segment revenue is our replacement, which was $4.3 million in the third quarter compared with $2.5 million a year ago. These are fees we receive for assembly and placement of equipment sales to our franchise-owned stores within the U.S. The increase was due to higher replacement equipment placements combined with placement of equipment in 45 new stores compared with 43 in your group. Our commissioning income, which are commissions from third-party preferred vendor arrangements and equipment commissions for international new store equipment sales was $0.6 million compared to $1.4 million a year ago. And then finally our national advertising fund revenue was $12.7 million compared to $11.4 million last year. Our corporate-owned store segment revenue increased 15.1% to $40.7 million from 35.4 million in the prior, a $5.3 million increase was due to higher revenue of $2.7 million from corporate-owned stores opened or acquired since the end of the second quarter of last yea, an increase in corporate owned, same-store sales of 4.9% contributing $1.4 million and increased annual fee revenue of $1.1. Turning to our equipment segment; revenue increased by $12.9 million or 27.9% to $59.4 million from $46.4 million. The increase was driven by higher replacement equipment sales to existing franchise owned stores where replacement equipment sales were 61% of total equipment sales in the quarter compared to 49% during the same time last year. Our are cost to revenue which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amounted to $46.2 million compared to 36.9 million a year ago, an increase of 25.3% which is driven by the increase in equipment sales during the quarter. Our store operating expenses which are associated with our corporate-owned stores increased to $22.3 million compared to $18.8 million year ago. The increase was driven by cost associated with the 14 stores open or acquired since the end of the second quarter of last year. SG&A for the quarter was $20.9 million compared to $17.2 million a year ago. This increase was related to incremental payroll to support our growing franchise operations and infrastructure, higher information-technology expense, marketing and professional fees and higher expenses related to our franchise E Conference held in September, which was not held in the prior quarter. National Advertising Fund expense was $12.7 million offsetting the aforementioned NAF revenue generated in the quarter. Our operating income increased 21.8% to $53.1 million for the quarter compared to operating income of $43.6 million in the prior period, while our operating margins were essentially flat with a year ago period at 31.8%. Our GAAP effective tax rate in the third quarter was 25.8% compared to 26% in the prior period. As we stated before because of the income attributable to the non-controlling interest and not taxed at the Planet Fitness corporate level and appropriate adjusted income tax rate would be approximately 26.6%. On a GAAP basis for the third quarter 2019 net income attributable to the Planet Fitness Inc was $25.8 million or $.31 per diluted share compared to net income attributable to Planet Fitness Inc of $17.5 million or $0.20 per diluted share in the prior. Net income was $29.7 million compared to $20.5 million a year ago. On an adjusted basis net income was $33.1 million or $0.36 per diluted share, an increase of 19.5% compared with $27.7 million or $.28 per diluted share in the prior period. Adjusting net income has been adjusted to exclude non-recurring expenses and reflect a normalized tax rate of 26.6% and 26.3% for the third 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 22.2% to $65.7 million from $53.8 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 19.6% to $44.3 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 8.1%, as well as a higher overall average royalty rate. Our franchise segment adjusted EBITDA margins decreased approximately 210 basis points to 66.5%. The decrease in margin was due to the high SG&A expenses discussed earlier including expenses related to franchisee conference held in September which was not held in the prior quarter. Corporate-owned store segment EBITDA increased to 9.9% to $16.8 million driven primarily by the 4.9% increase in corporate same-store sales, higher annual fees, the six new stores opened and eight stores acquired since the end of the second quarter of last year. Our corporate store segment adjusted EBITDA margins decreased by approximately 125 basis points to 43.5% was about half of the decrease due to foreign exchange rates. Our equipment segment EBITDA increased 42.3% to $13.7 million driven primarily by higher replacement equipment sales to existing franchise owned stores versus a year ago. Our equipment segment adjusted EBITDA margins increased by approximately 230 basis points to 23.1%. The increase in margin was primarily due to the one time reduction of margin in the prior year as a result of the transition to the new equipment vendors effective in July of 2018. Now, turning to the balance sheet. As of September 30, 2019 we had cash and cash equivalents of $219.8 million compared to $289.4 million on December 31, 2018. The decrease in cash and cash equivalents primarily reflects our share repurchase activity over the past nine months including $158 million for the repurchase of an additional 2.3 million shares during the third quarter of this year, which completed the $500 million repurchase program the board authorized in August of 2018. Total long term debt excluding deferred financing cost was $1.2 billion at September 30 of 2014 consisting solely of our whole business securitization. Now to our full year outlook. For the year ended December 31, 2019 we now expect total revenue to increase approximately 19% over 2018, up from our previous guidance of 18%. This includes total new store equipment sales now expected to be at the higher end of our previous range of 250 to 260 stores including approximately 15 international equipment sales and system-wide same-store sales of approximately 8.6% up from our prior guidance of approximately 8%. This guidance assumes fourth quarter system-wide same-store sales of approximately 8%. In terms of our profitability we are raising our projections and now expect adjusted EBITDA to increase approximately 24%, adjusted net income to increase approximately 21% and adjusted EPS to increase approximately 28% to $1.56 per share, up from our previous expectation for adjusted EPS to increase approximately 26%. This guidance assumes a weighted average diluted share count in quarter four of 90.9 million shares and 92.6 million shares for the full year. And net interest expense in the fourth order up $13.7 million and $52.3 million for the full year. Now, we'll turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from Randal Konik with Jefferies. Your line is open.

Yes. Thanks a lot. Hi, Chris and hi, Dorvin. How are you?

Hi, Randal. Thank you.

Just first question, I guess Chris, could you just expand upon -- you gave us some good insight on Australia and thinking through a market far away here. So, kind of what is that going into Australia what is that kind of have you thinking about in terms of taking over the rest of the Planet if you will. I guess pun intended. Give us some perspective how you might be thinking about the longer term future? And why you might attack a region or not? Why Australia et cetera. Just give us some perspective there?

Sure. Good question. As I've always said, U.S. is still our main focus with 4000 potential and we're barely a halfway there, so first I'll make that statement. But I'd say we did do some studies on international and I'm sure it was one of the Top Five that they recommended. English speaking makes it a bit easier than a lot of other places. Also I think with you know definitely being able to obtain the trademark that was registered by another individual there was a cherry on the top that we could take that at the same time. So – and it was also good where we had two U.S. franchises that we know are very good trusted operators with -- partnering with that individual in Australia who's also a veteran fitness operator from that country did see to be a great partnership to have that be the next frontier if you will. So I think as we've mentioned a past, Ray Miolla, Chief Development Officer who came averagely from GAP. He's been here a little over two years now, year and a half now. I think he gave him and he led their whole international franchising. So as you've seen the development here in the U.S. really come together well here and with our plan this year here I think you give him another year I think the international focus will be quite a bit stronger. And you'll divert some of his attention that way.

Got it. And then I guess, related back to the United States the way I kind of have conversations with investors, we talk about, your company reminding us of Amazon. But with Amazon, Amazon has competitors like Wal-Mart and Target which are pretty sizable and so forth. How do you think about --- it seems to me your business just as it grows the footprint you continue to gobble up more and more share because the price point of the amenities and the closeness to where the stores are versus where people work and live. So, you're kind of you know when you look at the competitive set there's not someone that kind of coming up your rear there in terms of a lot of units and size. Are you -- do you see kind of as you get more these units built you're going more towards 250 260 versus 200 back in the day. You continue to kind of crowd out the competition and just take more and more those members away. Can you give us some -- how do you react to that? How do you -- give us some commentary around what I just said?

Yes. No. It's a good question and a look at -- you think about size and scale advantage for a minute and you look at it in every facet of everything we do and have. We are franchising 70 or so years and we've taken that much time to find the best of the best franchise E groups out there that are sophisticated, well seasoned operators who are building their 20th, 50th or 100 plus store today, Randy, that they are in their own right, a national competitor in a lot of ways, right, compared to anybody else in their industry, in our industry. So there five, 10 years ago they were opening one a year and now they're only 15 or 20 a year each. So they themselves are a force to be reckoned with their own CMOs, the old Chief Development Officers and so on, so very sophisticated. You put our size and scale advantage with negotiating with recent landlords and retailers and equipment manufacturers and you just go down the list that we're closing in here on 2000 real quickly and the largest really full size operator in this country would be LA Fitness at about 700. We been there for quite a few years really, they haven't really grown. Low costs would be crunch at about 300 and we're opening almost that this year. So the acceleration of our growth with the franchisees in there, I guess their excitement for the brand and the unit economics of this model just constantly parlaying their dollars back into building stores and building stores faster. At the end of the day what we continue to see is stores that we're approving from a proximity to another store, five or 10 years ago we never would've dreamed to put them in that close. And it really does seem the more we open the more we can open. And the competition for 1000 it seems like every quarter is more reassured in our eyes that that is very attainable because it just seems like more we open more, we're more convenient, we market more dollars, we have more reciprocity with the Black Card and the flywheel is just spinning from every way.

I just want to ask one last thing here around churn. So the one thing that you know people always ask about his churn in the industry and yours is much lower. As you're getting more Black Card members, as you're doing more of those partnerships with Reebok and other types of 1-800-Flowers or other companies that want to kind of get access to your members and you're giving more to your members. Are you seeing more customer satisfaction lower churn? Just give us some perspective there? And that's all I have. Thanks.

Yes. I mean, I -- it mentioned in the last couple of quarters. Your retention is very slightly better, although better but very slightly. I don't know if we can really nail it back down to one or two of the things that we've done over the time. But I think as long as we continue to add more value to being a member of Planet it has to help you overall product and value that the customer is getting that drives them experience. And I think with the customer service that we continue to be in the upper rankings of the last couple of years JD Power last year and I think you just continue to do the right thing and get more value and not necessarily charge more for it. I think you always win. Keep the customers best interests at heart.

Thanks for answering my questions. Thanks guys.

Thanks Randy.

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

Yes. Hi. Thank you. I just wanted to maybe ask about the same-store sales trends and maybe a broader question as you look throughout 2019 any kind of reflection on the commentary from last quarter about your new joins being a little bit light and then in conjunction with the pretty solid update to the full year comps outlook. Just curious how you're viewing the trends within the system and in any color looking forward?

Sure. I'll comment more on the marketing front that I had spoke to in last earnings and probably Dorvin will speak to the same-store sales piece. As I recall you a lot of what I've looked at with data over the years and what had changed was a lot more of the allocation of the national ad fund where I'd been we kind of over allocated money to digital and it wasn't growing the traditional cable TV, advertising at the same clip as unit growth or NAF growth. And as I mentioned in my remarks some of the fine tuning we were able to do a little tweaks this third quarter and even real time today more around that is you know again this year is pretty much baked, but we'll do some small changes and small changes we had or did do is more around that you know taking some money out digital throwing it more to cable and network and we're seeing promising results that leads me to believe that we're going down the right road here of what we thought the data was telling us. So more to come, but really 2020 is being based off that plan and that and we have the marketing IFC market things independent franchise console that we involve heavily electing data from them at a local level, so really streamline how we spend that but also how we recommend that the franchise you spend their local advertising fund on the lap and I look forward to 2020.

Yes. Thanks. What, Jon, what I'd add to it is that a couple of things keep in mind. We stated on the call in Q2 that did not anticipate the rolling out nationwide of the $1 price increase. So that was not embedded into our guidance at that time. And I think we commented on the call that the results were very similar to what we'd seen previously with a $2 price increase. And that we would expect the impact to be very similar in terms of the cadence and the impact to the $2 price increase when we rolled it out. We expect that it had very minimal impact as I said in my remarks a few minutes ago in Q3. On a full year basis it's going to be about 10 basis points. So it's not huge. In Q4 we expect it to be in kind of the mid 30s in that range basis points of an increase in same-store sales for Q4. So when we set back and back in August when we were looking at the balance of the year, looking at our business and some of the comments we made back then and adjusted our guidance to approximately 8%. Now that was based on what we knew at that time and then we saw some favorability in Q3 and as Chris commented earlier in his remarks some additional favorability that we're seeing now. So all of that is baked in to how we get to the guide that we gave now for the full year. But we feel good about where the trends of the business are now and some of the changes that Chris talked about on the marketing front. But that's how we got to where we guided to.

Yes. That's really encouraging to hear. Maybe a follow-up that on the unit development, as you have accelerated the pace of development, I'm curious either what data you have or what feedback you hear from franchisees about the new unit performance given the accelerated pace of openings. And then is there anything unique about the pace of openings this year or should we think about this kind of the pace going forward in terms of the pace of annual openings?

Yes. I think that you know we've got some really great franchisees across the system all the way from our larger guys even down to the smaller guys that continue to build out their territories and new store performance is really not much different than what it has been last year or year before et cetera.. We're going into some newer markets that has less penetration than in some others, but frankly some of the results even then --this is as Chris has come in earlier about sometimes it seems the more we open the more we can that even stores that we are open up in more highly penetrated markets still seem to perform very similar as well. So we feel good about that and that's why Chris made the comment about we still think that long-term target seems to make sense. In terms of the franchisees willingness to invest, obviously, the returns are there that they want to get into these markets as fast as they can. But at the same time we and they want to be at Main and Main. And so in some cases there is either something not available quite yet and it makes sense to wait or doing ground ups and we're doing more ground ups this year than we have had historically, let's two or three years ago. So that takes a bit longer to get those done. But as we say here right now in terms of the guidance we gave for the year and you know this as well as anybody Jon there's a lot of clubs that still left to get open and get equipment in here in the last say three weeks in November and then all of December because there's so much activity that happens at that time of the year. But that gave us confidence to kind of say, we think we'd be at the upper end of that range. I guess the the governor on that so to speak is, we've been -- we've had weather on our favor in the last few years, so we didn't have any major snow storms that kept trucks from getting to a gym site. And it generally are franchisees and their real estate folks working in parallel with our teams here on the construction side to make sure that we can get these stores open by the end of the year or certainly get the equipment and so they opened shortly after the year closes. It gives us confidence and that kind of the higher end of that 250 to 260 range that we talked about early.

And that's all really helpful color. Thank you.

Thanks Jon.

Your next question comes from Oliver Chen with Cowen & Company. Your line is open.

Hi. Thanks for taking our question. This is Jonna on for Oliver. Just looking at the corporate stores, are you seeing anything different compared to franchisee stores in terms of member growth trends and obviously you won't see the same benefit from the new stores on that side. So how do you think about the comp trend over time? Thank you very much.

Thanks Jonna. A corporate store really performs pretty similar to a franchisee store in similar markets. So if you're in more urban areas to let's say more suburban markets to maybe smaller cities or on the outskirts of the more major metropolitan area, they perform very similar. And in fact, we have cities where we have corporate stores and franchisee stores that are in the same market. And if you went in the stores one you wouldn't know the difference between it's a corporate store or a franchise store and quite frankly, if they opened in the same year let's just say their three-year old store or five-year old store their growth rates are going to be almost virtually identical. So I mean that's the beauty of our brand is that it's the -- Chris always says he likes the Big Mac. He expects the Big Mac and one place to look feel taste like you know it is in another store. We want that same experience from our members to be exactly the same. And Jim and his team that runs a corporate store portfolio and then our great franchisees that run theirs and market collectively together and co-op. So we've got co-ops where we have corporate stores are participating in the marketing co-op along side by side with franchisees and they're all making group decisions on how to spend their money et cetera. So I think that's why from a performance perspective why it's virtually identical.

Got it. And just one more follow up. You're still expecting replacement next for the year to be slightly under 50%?

Yes. I think it's going to be probably around 45%, 46% kind of in that mid to slightly upper 40s.

All right. Thank you very much.

Thank you Jonna.

Your next question comes from Sharon Zackfia with William Blair. Your line is open.

Hi. Good afternoon. I guess store then it is really helpful.

Hi, Sharon.

Hi. It would be really helpful to talk about the price benefit impact as we enter 2020. So you've got that residual $2 price benefit that's kind of continuing to roll off. And then you've got the $1 that just started. I mean does that kind of leave all in kind of 2020s aggregate price benefit similar to 2019?

You know I'd say a couple of things, Sharon. We're not prepared obviously to kind of nail down comp guide yet for next year. I think the way to think about it though is that the -- and I made the comment a minute ago on the dollar. I would expect based on everything we know right now that the dollar impact, again we rolled that out on October 1 of 2017. So we got a full quarter's worth. So we rolled it out in September early September here of 2019. So I would expect Q4 this year and then four quarters next year to be pretty comparable at 50% of the rate as the $2 price increase. We will continue to see a decrease on the $2 impact. Now that were nine quarters or will be nine quarters I guess past it once we end Q4 this year. There'll still be some residual impact to it because it's not all going away and we still have members at the 1999 price point and as overtime as they turn and we continue to add more at the 2299 [ph], but we'll have a lessening impact in 2020 on the $2 price increase.

Okay. That's helpful. And then could you talk about on Australia if there are any tweaks to the model you plan on making in that market. And then I just want to make sure I kind of inferred company on development, am I correct in the quarter, it looks like you might have opened a handful of clubs if that was accurate. Could you kind of talk about what's going on the corporate side?

The Australia innocently enough, Bagel Mornings there doesn't work, so we can have muffins, so the pizza nights still work. Is that what your role in the kind of we have Mentos [ph]. So those are three changes as far as that part of it. The only thing it really changes the model there is tanning is not allowed in the model. And pricing wise in Australia U.S. dollars wise is a little over $13 a month for the White Card, which is which is -- in Australia is a bit different where they build buy weekly. So it's $10 bi weekly, so $20 total in a month, which turns out to be a little over $13 U.S.

Sharon, your question of corporate stores; we opened to new corporate stores in Q3 and we anticipate opening four more corporate stores in Q4.

Thank you.

Thank you Sharon.

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

So let me start with -- I think it looks like membership actually went up a 100,000 or so in the quarter. Is that fair? And then I'm curious what impact you saw from Teen Summer Challenge. Was that a nice membership driver this quarter or is that likely to happen more over time?

I would say the Teen Summer challenges over time I think to-date we're about 65,000 total joins of which about 45,000 are parents. So I think what I think is more of a longer term play, honestly John, but we did have a little bit of join traffic after that and just kind of learn best practice from a nationwide standpoint. So as we look to roll it out next year how do we have a year over year performance of driving hopefully incremental joins from best practices going forward.

And then as you think about what do you do differently because I don't think you did a ton of marketing last year around this. What do you do differently to try to drive that 900K up? And then longer term and you think about the mix between national and local, I do think you want to move the mix a little more national. When did that start to move? And what's the right mix? Is the right mix five national, four local something like that?

As far as the national marketing plans, yes, we have about one quarter now.

Yes.

So we have about four national programs now plus we have some flash sales that are also mixed in there. Yes, I think with the new IC marketing committee and the new CMO coming on board with Jeremy coming on board, I think a year or so from now more credibility, more data, more performance here based on some of the mix I talked about with switching to digital, gets more cable advertising. I think that makes a very good point to think about the synergies and I guess the cost effectiveness of blending some of that seven and two and is a big question, is it three and six, is it five and four, we don't know that yet. But there is some savings there. We consolidate some of that spend especially from buying purposes nationwide. So I think that will happen in time and I hope it does. As far as Teen Summer Challenge, we did it and actually of is all free PR which is incredible. You have almost 2 billion impressions, local here in New Hampshire it was our second year doing it, so we piloted here in Hampshire the first year. In New Hampshire we used some TV to push it and New Hampshire we did more than double the teens this summer compared to last summer. So not sure we can replicate that nationwide but I think maybe some TV backup up on advertising the sale of the sponsors, the efforts I guess to get people aware that we're doing it for free on TV could be a push next year for the Teen Summer Challenge.

And then just lastly you talked about maybe going back to more broadcast in the first quarter. We've talked about in the past the business maybe becoming a little less seasonal. Do you think that's true or with a little marketing elbow grease you can still have the seasonality we've seen historically in the first quarter still applies?

Yes. Seasonality is still a big driver for us. I mean between daylight savings as we are always seeing right now it's been pitch black already here for an hour and getting cold and issues that changes, sure. But there's definitely been -- the third quarter forces in the you know 10 years ago was always the almost you go backwards essentially an hour get a little bit of ground where before you'd actually go backwards you'd be a high end of January, but you'd be so backwards. So the world I think has changed some there for sure.

Yes. Just the other thing I'd add to that John is. I mean clearly think about how many stores we've added in the last say five years. We didn't have near the number of stores in some of the Southern states like Texas and Florida and California. You know some of the areas where the climate frankly is different and also can dictate kind of when you might want to join and obviously in the summertime of Florida you really don't want to be walking out outside. So there's some pieces of that. But as Chris says, still Q1 and early Q2 still important period.

Yes. I think to that point I think in the Northeast or the northern part of the states you have new resolutions plus weather where the southern states you have news resolutions but in the summertime it's kind of their winter because it's too hot right. So there isn't quite as big of a spike in January.

Okay. Thank you.

Thank you, John.

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

Hi. Thanks. Good afternoon and nice results guys. I have two questions on the franchisee event for our model. Could you just give us what the cost during the quarter was to run that event? And then secondly, maybe you just dig a little bit deeper for us. Were there any kind of key interesting learnings broadly for the franchisees or even Chris for you regarding your key franchisees? I know in the past you've talked about increased sophistication adding more executive talent. Curious if you could just give us sort of more color on maybe some of the learnings overall from that event?

Sure. This is Chris. I'll go over the learning part. So it's always best practices and we actually even include some of the franchisees and some of the teachings and teach-ins. We 1500 people you know most of at this point not only the senior management there but it's a lot of director regional managers throughout the country that are running 10 or 20 stores themselves, so it's a lot of hands on. And this whole is really about customer service and how to integrate the app and technology and how to onboard people. They think its a lot of low hanging fruit there. What's the right way to onboard a member from the day they join and get them acclimated to the club and I think with the technology in the app piece of it how do we teach them how to utilize technology whether it's equipment or the app and the different equipment we have. So they get a better experience in the club. So this one was all about the member and it was always about the team members, the club people that run our stores and how do we how do we streamline their jobs so that they can spend more time and attention to members and not the day to day tedious things operating just the front desk for example. So what a great stuff. I say it every year but the enthusiasm within the system is second to none. I mean it's some of the happiest and most culture driven people in the system. And as I said in the past I mean even given the 14 or so private equity groups that have entered the system where the franchisees have been here and open one store with me 10, 15 years ago that now have 30 or 40 stores that taken tens of millions of dollars off the table. They still rolled some equity and they still work every single day building more stores. So they really believe in the direction of the company and what we're out to do as a brand. So there's more to it than just the dollars. They really wrote there to serve a purpose.

Yes, Peter, the franchisee conference costs us in the quarter about $700,000 net expense.

Okay thanks Dorvin. One just follow up question again on the I guess the comp raise for the year so perhaps there is a little extra scrutiny on the back half of the comp guide coming off Q2. So I guess in our math you were previously guiding for about a 6.5% to 7%. Now you're saying that you're implying about an 8% for Q4. So it's a nice step up. Did I hear you correctly that it's really all attributed that $1 Black Card price increase or is there anything on the member front that's perhaps coming in a little bit stronger?

No it's -- I mentioned that the dollar impact would be about 35 bps of the impact in Q4. So you know whatever math you know you kind of back into that's the impact of that. So the balance of it is what we're seeing from membership trends and member growth, not only what we saw in Q3 kind of back half Q3 and then what we've seen in terms of current trends as we project over the balance of the year. So majority of it is really member growth that's driving the comp.

Okay. Thanks for that color and clarification and good luck guys.

Thank you.

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

Hi. Thank you. I apologize if I missed this. It's a pretty basic one I think. As you guys have obviously ramped up development in fiscal 2019. How is that giving you visibility for fiscal 2020? I mean is it I mean are you kind of comfortable at the nominal levels. Do you think we should be expecting another step up? Obviously there's still a lot to be done here on the placement side between now and the end of the year. But how we setting up for 2020 what should we be putting in our models at this point? And I have a couple of follow ups as well.

Sure John. I think you'll recall probably over the last, certainly the last couple of quarters I've talked about too big, I guess particular point so that things kind of got us to where we're at right now. One is that we clearly have more sophisticated larger groups that can afford to have their own real estate departments and people that focused on just kind of real estate development. And construction to get stores open whereas three, four, five years ago franchisee was doing that and marketing and ops and everything else. So it's one. The second point is that we've added to our SG&A both our own internal folks in the field real estate directors et cetera, as well as hiring our own commercial real estate brokers in the field. And then we've added some technology to get more sophisticated with market planning and location siding et cetera et cetera. So all of that I think is – and all of that working in concert is allowed us to what I think is kind of -- I guess I'd call it kind of filling the pipeline because in the roles they were all you don't just work on one store and get it open then work on another one and you got to keep it going which I think is your point is to. So what do you know now today setting here in kind of the middle of Q4 that maybe you didn't know a year ago and how do you kind of play that out and think about it for next year. And as you know we haven't given guidance and we'll do that for next year when we report year end results. But I'd say the pipeline is it continues to be very strong. We still have over a thousand in the pipeline that are committed. We add that back same time last year and we've opened a bunch of stores in the last 12 months. So we continue to add incremental sites to our area development agreements and a lot of that comes about from that the efforts of not only the franchisees team, but our real estate brokers kind of resizing some of those markets and we can do that either voluntarily by the franchisees wanting to amend their franchise or amend their ADAs rather. Or when the transaction takes place and a franchisee sells to private equity or another franchisee then we -- that's an opportunity that we can resize those ADAs at that one time. Chris mentioned that kind of the favorability in terms of with our size and scale. So yes, I think we get first dibs, lots of times on properties that are coming available. You have said in the past that today versus three or four years ago the REITs and lot of these major developers will you know there'll be more than willing to come see us as opposed to us trying to get our way into a meeting with them wherever their offices are at. So that's great. The brand is bigger and better known now and in virtually every community because we have so many stores now. So with all of that said, I don't see this as being a 230, 255, 285, 350 kind of front. I kind of like the pace of where we're at. I think that you've heard us talk about the flywheel on the marketing side and I think that's one of the key reasons why we've had virtually no underperforming stores. I mean there's always some on the bell curve. But when you open up a market and you put your first one and your second one and your third one and all of a sudden you start building the momentum and marketing dollars that the next three or four benefit from the first. And so to go into a market you know, California is a great example and say LA, the greater LA area where we don't have a ton of stores yet and still opening some. But to go in there and try to double what we have all of a sudden in the next six, eight months just doesn't make sense, because you wouldn't have enough marketing dollars to support the amount of stores and then to drive the amount of members that we've been able to prove that we can do through the maturity curve of a new store and you've heard us talk about that in the past. So we'll see. But I guess the comment I'd say is the pipeline is strong. We feel good about it. And we think we got the right assets in place and devoting the right attention to this and our franchisees frankly they've stepped up their game to do that as well and I think that's why you see where we're at this year versus where we were say twelve months ago.

Thank you for that answer Dorvin. It's great to kind of hear such a comprehensive view. I think a couple which may be a little bit more boring and more short from your perspective. As we think about you know kind of new unit volumes relative to average unit volumes however you think about it. As your kind of a good percent that we should be thinking about going forward. I mean it's not you know the math that we do a new unit volumes is imperfect. It is volatile quarter to quarter, but we're still just kind of trying to capture a trend in terms of new unit volumes as a percent of average unit volume is the first point. And then secondly as we're kind of in the fourth quarter of 2019, could you give us an update on the waterfall with how these stores comp kind of after they're in their 13th month, 25th month what have you just in terms of what the current math on that is?

So on your first question when you're seeing new unit volume, are you're talking about how our stores performing on an AUV basis.

Yes. So I'd say for example, the volume of an average store in year one relative to the average store? I mean, I don't know exactly what vernacular you use, I mean in restaurants we could say something like it's if it's 60% or 70% or 80% of the average unit volume in some cases it's 100% of the average unit line that wouldn't be the case for a gym like yours, But whatever you want to kind of communicate your one volume [Indiscernible]?

Yes. So, let me do it the way I've always done it because I don't want to start kind of something new here and I don't have that data point front of me either. What we say is that a typical store some kind of average and frankly the bell curve is pretty tight on this. Is that a typical store will reach cash flow breakeven in about month six, month seven kind of in that range and by month 16 kind of reaches an AUV of about 1.5 to 1.7. And yes, if it's a big – if it's a club beyond a high urban area may have more members and have more AUV. But it's going to have more cost, more rent, occupancy et cetera et cetera. But on the averages that's kind of where it gets to by about month 16 and that kind of second year run rate then. And that's what I would consider a pretty good run rate that then starts the cop in that you know kind of call it mid single digits on after that or mid to high single digits because it's still ramping in the back end the year two and even then in the year three as an example versus say a five-year old store. But that's the way we think about it. We set targets for all stores and we say, here's where you ought to be on about month 16. And we'll talk with franchisees on what they need to do out of the gate. We like to get stores open with thousand plus members or so out of the gate on day one. And in a normal curve they're going to get to that 1.5, 1.7 million call it in month 16. So that's how its performed and it's been very, very similar nice for four years.

Okay. Go ahead.

I was going to go the waterfall so go ahead.

Yes. Thanks a lot. Thank you. Perfect.

Okay. So from the way a store performs on -- and we look at this one on an individual store because you think about it you've got a franchisee that's looking at territory or, frankly we're at corporate, do we open the store at this location. And so we're looking at that how that individual store is going to perform. And back to my comment. Those are the kind of those expectations. So as you know we put stores and comp in month 13. So in that month 13 and back to my previous comment I used the point of month 16 and it's still ramping, but that you're in that kind of 1 5, 1 7 zone. That store in its first year comp month 13 is going to be a 40 plus percent comp. And then that store and it's kind of second year is going to be kind of you know call it mid single digits or thereabouts. And then think about it John it's now a four-year old store or older now, because first year is not in comp, I talked about the second and third or it's first year comp, second year comp. So a store that's four, five, six year old store is going to comp, they're going to comp very similar to the other cohorts there. What we do see at times is when stores get into months into years like six, seven, eight time period, sometimes we'll see a bit of a increase in comp and we think that's because or we know that in a lot of situations is because that's when the franchisees are -- they're doing a number of things. They're replacing the equipment. They may be doing some modest renovations. They don't have to do a complete renovation until they get to the end of their tenure franchise agreement but sometimes in a market where they already have you know 10, 12, 15 stores and they may be changing some of the things in one of their club, they may just go ahead and do it another club even though it's in year eight or nine or something. So oftentimes we'll see those stores then maybe a store in Year seven or eight might be doing a bit better of stores it's in call it five or six or something. But in general I've said this for several years now that stores are kind of four years older generally comp in the low to mid single-digits and that's been already consider.

I just wanted to -- just to clarify something, especially since we're on a live call to transcript. So after year one is 40% and then you mentioned going to mid single digits. Did we skip a year in the middle to go from that 40 to mid single digits or is that kind of how you should be thinking about it?

So, that's why we've always talked about.

Okay. All right. Okay. That's perfect. So you kind of hit the 13th month for a 12 month 40% and then after that you kind of mid single digits and then low to mid after that. Okay I've got it. All right. Perfect. Thank you so much.

Yep. Thanks John.

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

Hi there. This is Andrew stepping on for Dave. Thanks for taking my questions. So I guess just first sort of what percentage of your current members have at one point canceled their memberships and then have since come back to become members again?

Yes. Really 14 million, but 20% have been members at least one time in their past.

Great. That's helpful. Thank you. And then I guess just second just quick follow up. I know you guys have said that it's fairly similar, but about how big was the differential between Black Card and White card churn?

It's virtually the same. No difference.

Great. That's helpful. That's it my question. Thank you.

Thank you.

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

Hi. Thanks for taking my questions. Chris I just want to follow up on your comments on the adjustments you made to marketing the third quarter. Did you see improvement in the new member growth during the quarter? And then how much more opportunity do you have on the marketing side to continue to tweak that model?

Yes. It was member growth that was you know it was definitely a tweak I believe on the mix. We spent less on digital push more of that cable. We also use -- we might talk in the past the market segmentation study, customer segmentation studies on and we learned a lot from that too as also networks in which they want to use the fine tuning on with network channels and cable we were advertising on from past performance of used as well as we learned with a channels they work. So we kind of have the best of one side of this and other side to pick the right networks to go on. So I think that also had a play in it but less digital spend and better performance. And only so much we can do this year because we're already committed for most of the spend; but more fine tuning for the remainder of this year. But the 2020 is when we'll have already pretty much completely overhauled our future here with the franchisees and how we spend next year.

And then I just wanted to follow up again -- sorry to – but follow up on Jon's question earlier. I think in the past this second year of your waterfall you've spoken about like 15 to 20 before you went to mid single digits. Has that changed or do I have the wrong? And in the past those gone 40 to mid single digit?

No. I'd said its kind of mid teen, mid to high teens and it's in its second year of comp. First year 40 plus percent, second year comps in that mid to high teens and then third and on are in the kind of low to mid single digits on average.

Thank you for the clarification. And then just one more from me. As you look at the -- your older clubs some the more mature clubs. Are you seeing any change in the content there in terms of retention or are you still seeing positive clubs and some of your most mature clubs? Thanks.

Yes. All the old stores all cohorts are positive. Using them that we're seeing I think is the ones in that you know that re-equip is year five of cardio year seven to strength, and what would see more trends around it seems through that clubs in year seven plus seeing that actually pay more than the clubs the mid range. So if you look at like the [Indiscernible] positive is still in the year five, six, which is a testament to the commitment of the franchisees and us as a brand which in this industry never really seen people dedicated and committed to re equipping and remodeling stores and keeping them fresh and new. And if you go to this industry you go to 10 and 20 year old stores just 10 or 20 years old. So most brands other industries do remodel and do spend CapEx to keep their stores new and I think that's what we're seeing in our old cohorts stores continue to perform and even the oldest market is even here in New Hampshire would we've been 27 years in a state that does not grow with 1.3 million people forever. It's still member growth.

Thank you. It's really helpful.

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

Thank you. Good afternoon everybody and thanks to squeeze me in. Appreciate it. A couple of quick questions on a Black Card membership. I'm just trying to understand how we should think about that pricing lever going forward? Since the increase two years ago with $2, this year it was a dollar. So the delta between that and the classic card has now gone from $10 a month to $13. So I'll thinking about how wide that gap can go between Black Card and Classic Card. And maybe secondly what the runway is in terms of the penetration rate you're at 61.5% I guess Black Card membership today. Is there a number that you guys think that tops out at call it 70%, 75% for example?

Sure. So yes we were before the first price increase in 2017 to that 21.99 we were 19.99 essentially forever. What made us originally decide to do some price testing and changes was the reciprocity function. So you can use any store in the country or world for a metaphor for no charge if you're a Black Card member. And that's the only way you can do that is if you're black our member. It happens to be the most used perk of the Black Card. So if that that question back then we had 1600 of stores and there's a time to do it in which we did it. Moved it by $2, has to no pushback on acquisition and moved it. Here we are this year we're already added another 400 plus stores since then, so it begs the question once again should we test it again. So I think outside of other services we offer them the Black Card. Reciprocity is price something we always have in our back pocket. So I think every two three years we have another 400, 500, 600 store that it makes sense that we test it again. This price increase of a buck has been really well received and probably a little better than the last one quite frankly. You're right, we're at 61.5% Black Card, a year ago now we were 60.5% so we're up 100 basis points. So I think we'll always constantly look at reciprocity is one of those drivers. And on top of that we're always looking at other things whether it's the technology and capturing data from the cardio, so that members have it on their app and if you're Black Card member you receive that content in the app. We unlock certain features and there whether it's weight loss or diet nutrition or certain content you work out at home which you can't make it at the club today. Is that a Black Card benefit? So what are other ways are the services that we can use. So I think change your question in the Back Card pricing you know I'll always look to see if there's ways that we can raise it, but only if the members are receiving value for that raise. I'd never just do it cause. So we'll push for 400, 500 more stores in a couple of years. That begs the question or we offer more nutrition or content or other service would look to see if there's a lever there to pull.

And in terms of penetration is there is an upper band where you feel like that's the size you can go?

Joe, we have some stores there in the 70s penetration there. So I think there's continue room to slowly move that up. I mean, certain features, tannings are example are used more in some regions than others. So certain amenities or certain parts are usable than others and reciprocity is another one some areas that are well built out with a big network of club reciprocity is much higher so in that area. So some do get higher, so I think there's room to continue which is slowly edge that up over time. So that's the perfect storm is to be able to offer value to get price as well as more acquisition guys.

Got it. Okay. Thank you, guys.

Thank you.

I'd now like to turn the call back over to Chris Rondeau for closing remarks.

Well thank you everybody. Thanks for joining the call today. Really excited for our momentum here in Q3 and continues momentum to close up this year here and carry to 2020. So look forward to our next call. Thank you.

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