Planet Fitness, Inc. (PLNT) Q3 2021 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Planet Fitness Inc. Third Quarter 2021 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Stacey Caravella. Thank you. Please go ahead, ma’am.

Thank you, operator and good morning everyone. Speaking on today’s call will be Planet Fitness’ Chief Executive Officer, Chris Rondeau and Chief Financial Officer, Tom Fitzgerald. We also have Dorvin Lively, President of Planet Fitness here, who will be available for questions during the Q&A session following the prepared remarks. Today’s call is being webcast live and recorded for replay. Before I turn the call over to Chris, I’d like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during this call. Our release can be found on our website, investor.planetfitness.com along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now, I will turn the call over to Chris.

Thank you, Stacey and thank you, everyone for joining us today for Planet Fitness’ Q3 earnings call. We are emerging from the COVID-19 pandemic stronger than ever, having achieved the highest sequential net member growth of any third quarter in company history, with membership levels reaching 97% of our all-time peak. We returned to positive system-wide same-store sales growth in Q3 of 7.2% and 100% of our stores are opened globally. For the past several decades, we have democratized fitness with our differentiated model, breaking down the barriers of intimidation and affordability for the approximately 80% of the population that does not have a gym membership. As we look ahead to our 30th anniversary next year, there are four factors driving both near and long-term growth opportunities, including our expanded leadership position as we emerge from the pandemic, our franchisees’ enthusiasm to continue to invest in the brand through new stores and equipment replacements ahead of their obligations, the consolidation from 16 national and local marketing agencies to one servicing our entire system to leverage our size and scale, and a number of factors driving a renewed appreciation for improving overall health and wellness. Let me address each one. First, we didn’t have a single permanent closure as a result of the pandemic, a sign of the power of our brand and our model. This is a remarkable achievement when you consider that IHRSA, the Fitness Club Industry Group, estimates that 22% of all fitness and health club locations in the U.S. have permanently closed due to the pandemic. Our size and scale advantage, combined with the strength of our franchisees, put us in a strong financial leadership position entering the pandemic and we are recovering quickly. We achieved the highest franchise segment revenue in company history in the third quarter. We are now capitalizing on industry consolidation as more people are realizing the broad range of benefits from exercise and looking for an affordable non-intimidating workout environment. The second reason is franchisee sentiment. We have always had a strong relationship with our franchisees. I was recently invited to join our franchisees at their annual meeting, marking the first time that we have all been together since the pandemic began. It’s a testament to the strength of our relationship that I was invited to join them to speak about our strategy and exciting opportunities that lie ahead. I believe that working together as closely as we did during the challenging days last year, only strengthened our already powerful partnership, one that I believe is rare in franchising world. Our franchisees’ enthusiasm to continue to grow the brand make fitness more affordable and ultimately change people’s lives is incredible. They are seeing strong trends in their businesses, which is driving to look for new sites, build new locations and actively replenish their development pipelines, with prime locations, capitalizing on the favorable real estate environment. Tom will address this in more detail. But as a result, we are raising our 2021 new store guidance to 110 to 120 new locations. Third, we are flexing our marketing muscle in transitioning from 16 marketing agencies to 1, Publicis Groupe. This transition, which is nearly complete, will unlock our full potential as a top tier U.S. marketer by gaining significant efficiencies through the consolidation enabling us to truly realize this competitive advantage. It will also ensure a consistent advertising strategy on the national and local levels. We already utilized the buying power of our system in other areas of our business such as equipment and other common items across our clubs, providing a better value to our franchisees, not only doing it with our marketing. Collectively, we will be able to purchase on a scale unrivaled in the U.S. fitness industry, resulting in lower cost media, which means even more of the 9% advertising contribution will go to acquisition efforts to fuel incremental member growth and we are doing it at an important time of the year. Pre-pandemic Q1 historically accounted for approximately 60% of net new joins for the full year, with January making up a large part of that growth. The agency will be fully on board for the creative and media placement in advance of our annual New Year’s sale. Finally, the pandemic has taken a major mental and physical toll, creating a focus on improving overall health and wellness. The American Psychological Association found that more than half of the U.S. adults have been less physically active than they wanted to be since the pandemic started, with the majority experiencing undesired weight changes, averaging between 30 and 40 pounds gained. And now, there are two bricks and mortar options for people who are looking to start their fitness journey. In the 8 years preceding the pandemic, we added approximately 11 million members getting people off that tell us to join Planet Fitness and growing industry membership by 87%. We also added approximately 1,500 new locations representing 13% growth. In the same period, the rest of the industry added only 1.7 million members, but nearly 10,000 locations. In, Q3, 40% of our joins were first-time gym members, a trend we have seen continuing from 2021, which is up slightly from 2019 and there is still tremendous untapped opportunity with 140 million non-gym members who live within 10 miles of a current Planet Fitness. We also believe that the continued evolution of our digital offerings will serve as an important gateway to make the initial step to get off the couch easier and less intimidating. And it’s not just about getting in better physical shape it’s also about mental health. The Center for Disease Control reports that even one vigorous to moderate workout can reduce one’s risk of depression and anxiety, while also improving sleep. Prior to Mental Health Day in October, we commissioned a national study, which shows that close to 3 and 5 Americans say they haven’t made their mental wellness a priority in the past year, while feelings of isolation and loneliness have increased. As the world realizes the multiple benefits of exercise, the tailwinds behind physical and mental well-being continued to drive historically unseasonable membership growth in Q3. In 2019, in line with our historical trends, member growth in mature stores declined sequentially from the second quarter to the third quarter. This year, it grew from Q2 to Q3, albeit slightly and we ended the quarter with more than 15 million members. We believe this reflects that Americans are waking up to the fact that they need to prioritize their health. Members who are visiting our stores are visiting more frequently than in the past. We believe this demonstrates a commitment to overall wellness. Another potential long-term positive is that in 2021 Gen Zs are outpacing other age groups in terms of joins, which is notable as only half of the generation is even old enough to join. In general, we began to see the return to pre-pandemic seasonality of join patterns towards the end of Q3. This is encouraging as we can focus on what we do best, providing our members the community-based judgment-free environment in which to get active and feel better about the overall health. Tom will address our positive updates to our 2021 outlook in his comments. And we will anticipate providing our performance targets for 2022 when we report our fourth quarter earnings next year. I hope that you can feel the enthusiasm as I truly believe that we are on the verge of a fitness boom. I am more excited than ever to leverage the collective passion and strength of our systems to help millions of people in the U.S. and beyond, get healthier, live better and improve the overall physical and mental well-being as we have been doing so for the last 30 years. And I believe there is no brand in the industry better positioned to do it than Planet Fitness. I will now turn the call over to Tom.

Thanks, Chris and good morning, everyone. Over the past 18 months, we have demonstrated the resiliency and durability of our asset-light financial model and our store level unit economics persevering through a devastating period for the health club industry. As Chris referenced, we withstood temporary store closures some for up to 9 months and not a single Planet Fitness location permanently closed because of the pandemic. We are proud of how our franchisees, headquarter staff and club staff rallied together to provide a clean and safe fitness experience for our members. We have been confident in our ability to come out of the pandemic even stronger, but the pace of the rebound is even faster than we expected. As a result, we are revising our full year 2021 outlook. First, I will cover our Q3 financial results and then I will address our updated guidance for the year. All of my comments will be comparing Q3 2021 to Q3 of last year, unless otherwise noted. We returned to positive same-store sales in the third quarter with system-wide same-store sales increasing 7.2%. Franchisee same-store sales grew 7.4% and our corporate store same-store sales increased 3.1%. Approximately, 60% of our Q3 comp increase was driven by net member growth with the balance being rate growth. The rate growth was driven by a 180 basis point increase in our Black Card penetration to 62.5%. Q3 total revenue increased $49 million or 46.4% to $154.3 million from $105.4 million. The increase was driven by revenue growth across all three segments. The increase in franchise segment revenue was due in part to temporary store closures last year, with growth driven by royalties, web join fees and equipment placement fees. The increase in revenue in the corporate-owned store segment was primarily due to COVID-related temporary store closures last year as well as the impact of 7 new corporate-owned stores since July 2020. Equipment segment revenue increases were driven by higher equipment sales to existing franchisee-owned stores. For the quarter, replacement equipment accounted for 54% of total equipment revenue. Our cost of revenue, which primarily relates to the direct cost of equipment sales to franchisee-owned stores, amounted to $27.1 million compared to $15.3 million. Store operation expenses, which relate to our corporate-owned store segment were $27.8 million compared to $21.4 million. The increase was primarily attributable to lower operating and payroll expenses with the COVID-related temporary closures last year, along with higher expenses with the new stores we opened since last July. SG&A for the quarter was $23.0 million compared to $18.3 million. The increase was primarily driven by higher incentive and stock-based compensation. National advertising fund expense was $15.6 million compared to $20.2 million and adjusted EBITDA was $62.2 million compared to $32 million. By segment, franchise adjusted EBITDA was $52.1 million, corporate store adjusted EBITDA was $14.7 million, and equipment adjusted EBITDA was $7.9 million. Adjusted net income was $22 million and adjusted net income per diluted share was $0.25. Now, turning to the balance sheet. As of September 30, 2021, we had total cash, cash equivalents and restricted cash of $585.8 million compared to $515.8 million on December 31, 2020. This was comprised of cash and cash equivalents of $527.3 million compared to $439.5 million with $58.1 million and $76.3 million of restricted cash respectively in each period. Total long-term debt, excluding deferred financing cost, was $1.78 billion as of September 30, 2021 consisting of our three tranches of securitized debt and $75 million of variable funding notes. Now as we have said before, our securitized debt structure is covenant light. We have two maintenance covenants, a debt service coverage ratio and a total system-wide sales threshold. Both are tested quarterly, calculated on a trailing 12-month basis and reported on roughly 2-month lag. In our most recent debt covenant reporting period on September 5, 2021, we had a 53% and a 143% cushion to the first triggering event for our debt service coverage ratio and system-wide sales covenant respectively. We believe we have sufficient headroom for our two maintenance covenants, especially with Q2 2020, a quarter in which we had our worst financial performance last year now out of the trailing 12-month calculation. Now, to our guidance for the balance of 2021, similar to last quarter, our current view of 2021 assumes there is no major resurgence of COVID that causes member disruptions, whether via shutdowns or more stringent mandates that result in a significant change in membership trends. As Chris noted, we now expect new store development to be between 110 and 120, up from the high end of 75 to 100. We believe this reflects the continued strengthening of our franchisees’ balance sheets. It also reflects the recognition that Planet Fitness is a premier retail investment, even with what we believe is a temporary slight setback in mature store level EBITDA margins caused by the closures last year. We also continue to expect that replacement equipment will account for approximately 50% of our total equipment revenue this year. We now believe that our full year revenue will be between $570 million and $580 million, up from the previous range of $530 million to $540 million, driven largely by higher equipment placement sales associated with our new store opening outlook. We now expect that full year SG&A will be in the low to mid $90 million range, primarily reflecting increased incentive compensation. Based on the higher revenue, we are raising our adjusted EBITDA guidance range by $10 million to $210 million to $220 million for the year with adjusted earnings per share now projected to be between $0.75 and $0.80 versus our prior range of $0.65 to $0.70. Our investment thesis has only strengthened as we emerge from the pandemic with significant industry consolidation, our franchisees’ desire to continue to invest and grow the brand and the increased focus on the importance of health and wellness. We are well positioned for the long-term to further expand our leading market share given the strength of our value proposition and simple operating model that produces strong economics. And with that, I will turn it over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Randy Konik from Jefferies. Your line is open. Please ask your question.

Hey, guys. Good morning. Can you hear me?

Sure. Can you?

Alright, great. Hey, how are you? So I guess the first question on the – is on store guidance. It was revised. It looks like slightly upward for the balance of – or for 2021 implying things are getting back towards normal. How should we just – I know you are not giving guidance yet on 2022, but just want to get some perspective maybe qualitatively of how we should be thinking about expansion return towards normalization as we go into 2022 and beyond? Thanks, guys.

Hey, Randy, it’s Dorvin. Good morning. As we indicated in the release and Chris’ comments, we are increasing that up from – we had said the high end of our previous range. And I think that what that means is it’s reflecting the franchisee enthusiasm of the business where it is today, how it’s built back over the year. When you compare us where we were kind of this time last year and the pipeline itself, as I have said in the past, was really stopped. But given what we have seen, what our franchisees have seen throughout certainly since say, March, April, May time period, that’s caused them to start looking at sites and start putting sites into the pipeline and some of those have been opened this year, hence the increase in our guidance. I think on a kind of a little bit more of a macro basis, we continue to see a lot of availability in real estate out there. We obviously didn’t have a single closure during COVID and a lot of other fitness companies had some issues with respect to closures, etcetera. And as you guys know, IHRSA has reported, I think it’s like 22% of the gyms have closed. A lot of those are smaller mom and pops, etcetera. But when we sit back and we and the franchisees look at where we are at today, the opportunities that’s in front of us to continue to take share, continue to penetrate markets, where we may have a lot of stores, but there is still a lot of penetration lapped and you’ve heard us talk about whether it’s in California or Texas or some of the other markets where there is a lot of population, but we don’t have as high a penetration rate there as maybe we do in the Northeast. And so all of those are kind of the factors I think that go into one, what’s happening and we believe will happen between now and the end of the year in terms of guidance. And to your point, we are not really talking about 2022 yet, but we have continued to say that we believe we are going to get back into that 200 plus range and it was just a matter of when we could get there versus if. And this now reflects the fact that franchisees are in the market and starting to generate a new size for the pipeline.

Super helpful. And then one last question, can you give some perspective on – you announced a recent partnership, I think with Shell Corporation, gas and so on and so forth. It kind of reminds me of what Costco tried to do with their membership and give their members a lot of other enhancements or value for their membership. So, can you give us an update on what you have been doing there around partnerships, because it seems as if the number of partnerships, have been increasing and that should potentially lead to some lower churn over time. So just curious on what work you have been doing there and any comments on impact on churn, improving churn, if that at all as well? Thanks, guys.

Sure, Randy. This is Chris. Yes, we announced the app almost 2 years ago now leading into COVID. The idea with the perk side of things, we really had no signs of depository that members knew when we get routinely guided to go open up this place that they offset, right and to know where to go and to see what the discounts are this week or this month or new partners. So, now with the app being built and that allows us now we don’t only have that feature, but also capture data from that feature and who is clicking through and how to go to partners and supply them data on the number of eyeballs that they are seeing and getting everyday. And when you think about weekly, we have roughly 8 million or so check-ins into the gym and we are roughly having about today about 6 million of those using the app to check in. So, 6 million people open the app every single week to check in and there is other features there, now they have the badges that will checkout perks and stuff. So, that’s allowed us to open doors with like [indiscernible] and Shell, for example. And Shell is definitely probably the best one we have launched so far as far as take rate. So, it provides a lot of data to now go to more partners. So, it’s more to come on it, but there is no doubt that offering more value to help people live a better life and we offer them to save money on other parts of their world and it’s a great benefit of being part of the Planet Fitness family. And as you know and as we have talked about forever, 50% of our members are going to use the store in a 30-day period. So, the schedules get busy and the Christmas season comes up, they just can’t make it in or kids got soccer practice for the spring and drive us some value regardless of the use of facility or the content workouts, it can only drive customer satisfaction and ultimately drive retention.

Very helpful. Thanks, guys.

Thank you.

Your next question comes from the line of Oliver Chen from Cowen. Your line is open. Please ask your question.

Hi. The customer trends are very encouraging. What are you seeing in terms of usage across regions as well as churn? Would also love your thoughts on the rationale behind the timing of the agency consolidation and what synergies you are most encouraged by that sounds really interesting as well? Thank you.

Yes, the usage side of things, we are about 90% of 2019 workouts, so not quite 100%, but very close to that at this point, which is great to see. I am not seeing any huge material changes from the regionality right now. So, that’s not really striking anything. We have roughly 400 or so clubs that are under some sort of math for vaccination mandate system peppered throughout the system, but nothing we are not seeing that’s really material in essence. And we are seeing about 30% to 40% of our members using the club in a 30-day period, so not quite that 50-50 that I used to see, but it just made above the 90% usage rate right now. So I think we will – things going in the right direction, which is great in the boomers, which are the ones that have lagged the most naturally. They continue to go in the right direction. So, I think it’s just a matter of time before they have kind of come back to normal as well. The agency thing is something that I have always wanted to do this for many years. And if you think about for everything else we do in this business, whether it’s the décor and wall paper we sell, the equipment we purchase, the flooring we use, we buy in bulk and joint and brand consistency is important. But the value the franchisees get from that is also important. Here we are today, the marketing is – should have probably done earlier. But here, we are doing it today, which really just streamlines and strengthens our dollar. The efficiencies that we get from that, not unlike the equipment business, for example, is that before it’s 16 agencies and everybody is paying their own independent agency fees and creative fees and everything else. Now we pay one agency in a lot less. And a big – much bigger company that’s buying media cheaper. So it’s the same dollars, but working dollars, acquisition dollars are used more as opposed to just administration fees. So, it’s almost like a 40, it sounds like whole lot of math – a lot of ways with about 20% savings. So, it really should help member acquisition going forward. We are onboarding now. We should be fully onboarded to this one agency. We are already working on our January promotions and first quarter promotions with them, so we are ready to ramp up for our first quarter and the January sales. So, it’s exciting. And the other side of it too as you think about the insight we have is we have one agency fee that’s responsible. So we have all the data that we need from best practice throughout the country on a local level because before, it was very hard for us to capture what each independent franchisee is doing every DMA across the country and then capture data to figure out best practices. So there is a lot of good things out of this and looking forward for the future working this way.

Thanks. And last question on the digital experience that the member has in store. What’s next? What’s on the road map that we should focus on as well as the key opportunities for continuing enhancement of your mobile app? Thanks, Chris.

Yes, sure, Oliver. Beside the content exercise stuff, which we continue to fine-tune and tweak and moving the pay wall around to figure out how much free content we offer, how much to pay content is behind the firewall. So we’re still working on that part of it. As I said in the past, also the platform is there now. We haven’t yet but get into more maybe diet and food nutritional guidance, meditation type guidance as well. But I think also the app, when you think about friction points. Crowd Meter is a prime example that we have lunched during COVID, which is something we thought about even pre-COVID just so we could help customer experience and the people want to avoid crowds or of our usage, they could move the schedule around without having to come to the club and get frustrated. So it’s a huge feature that people love, but on a friction point, being able to pay their balances before they get to the club if they happen to monster check VFT that month. It’s being able to bring a friend and invite them through the guests as opposed to walking through and have the sign when they come in, and it just ways to really reduce the friction points, which also helps with couple of member – not only a member but also staff satisfaction as well. They don’t have to deal with it as well. It’s all help themselves or having that uncomfortable feeling to the front desk and somebody has to be confronted by a balance. So lot of friction points we get to alleviate through the app.

Best regards.

Thank you.

Your next question comes from the line of John Ivankoe from JPMorgan. Your line is open. Please, ask your question.

Alright. I missed this. It’s multitasking morning. The total number of members at the end of October, did you say that number? I mean, I know in the press release, you said over 15 million, 15 million was, of course, what you reported in July, just kind of wanted to get your sense just in terms of that underlying demand? I know seasonally, third quarter is normally a fairly low add month, but any update on the total in the specific update on the total member side that you could repeat if you said it?

Yes. Yes, John. No, we did not pre-COVID, we didn’t either, but we kind of started doing that during COVID when we had real-time updates. But as we’ve now returned back to normal coming out of this, we just announced right through the end of Q3.

Okay. Alright. Yes, understood. I think we’re all fine getting back to 2019. So that’s okay. And then obviously, I mean, you guys have been kind of pulling up your fiscal ‘21 unit development basically since you gave it, well above now for the year relative to that initial guidance or at least the lower end of that initial guidance. How much of that do you think is pull forward of things that maybe you thought previously could have opened in ‘22 versus kind of the – of an accelerating trend just as you look at that overall pipeline and a little bit of an aside, but do you put that in the context of all the supply chain challenges that we hear. Are there any significant or major pieces of equipment or if anything else, I guess, any part of the FF&E package that’s missing that could potentially affect that rate of unit openings?

Hey, John, it’s Tom. I’ll start, and maybe Dorvin will add. I think if we step back a second, I think as you look at what we’ve said over the quarters, I think the headline is things have bounced back faster than we expected, V versus U-shape. And I think our franchisees have seen that their lenders have seen that and it’s allowed them to get their balance sheets and their covenant calcs back in line faster than they expected. In talking to them, their lenders have released some of the development capital that they might have had a bit of a grip on as they were providing waivers. So I think it’s just – that’s really what’s happening. And I think as we’ve gone through each quarter, we’ve gotten more and more confident about what we’re saying and the numbers are going up. And I think to your point about inflationary pressures and there were – at the moment, they are immaterial. They are not changing decisions from franchisees wanting to build a store to not wanting to build a store, categorically not happening. And so when you look at the new store development and the re-equipped investments that they are making, both of which are ahead of their obligations, based on the shift of development – sorry, based on the extensions we gave them. That starts to feel a little bit more like where we were pre-COVID when they were ahead of their obligation. So I think that’s the headline for me. And the supply chain issues as it relates to equipment, we have a bigger say in that given our concentration with our primary vendors there. And they frankly moved mountains to make sure that we can open when we say we want to open and reequip when franchisees want to reequip. It’s not like it’s – there aren’t any bumps in there. There are bumps, but we’re managing through it and any potential drags have been reflected in our outlook, assuming something crazy doesn’t happen. So I think the macro view is faster than we thought, and that has caused everything to move at an accelerated pace from what we thought earlier in the year.

And I think the only thing, John, is great for everybody on the call, too, when it comes to supply chain that you see all over the news is that with the 2,200 stores that are open, we’re not like a retailer QSR that that the dependent daily on weekly deliveries and inventory coming through in order to stay open and do business. We don’t require any of that. The equipment was installed 3 years ago, it’s business as usual. So we’re not under any kind of constraints when it comes to that.

Okay. Yes, fair enough. And I guess as I just kind of think a little bit longer term in terms of your organization in New Hampshire, I mean, as you kind of think about just the various – the benefits from adding even more functionality to your business versus benefiting from the scale that you’ve already built. I mean, where are you – I guess, where is your current mindset as you think about the size of the organization today relative to what your store count is going to be 3 years out, for example?

I’ll add something, Tom. I think one thing that’s where the beauty of our organization is the fact that we have actually shrunk our number of franchisees in the system, right, lot of consolidation. So we have the best of the best. We have the dream team of franchisees now about 125 that run the entire system. And we don’t continue to bring in new franchisees to build out our stores every year. It’s built out with the existing franchisees. So as that it’s not the point where we’re back in the old days I was – I personally was teaching how to clean the treadmill now they run the playbook. They have their own COOs. They have their own chief development office. So they are very sophisticated groups of franchisees in our system now. So it’s not like we’re holding hands as closely as we had too many years ago. So there should be definitely some benefits to that in the future.

Yes. The only other thing I’d add, John, is – and we’ve talked about this is that with the concentration that we’ve had here over the past several quarters in the digital area, and it’s just part of our everyday life now. So we’ve not only enhanced that area, but we will continue to enhance that areas it’s just a given that we have to be where the consumer where our members are, what they are looking for, Chris talked about the partnerships earlier. There is a whole host of things that quite frankly, have been accelerated because of code to be able to reach out and touch our customers and prospective members as well. And so that’s an area that we’ve invested in and we will continue to invest in. But I think on a more broader kind of macro basis of our kind of franchise or headquarters here, there is no area that we look at and we say, needs a significant amount of attention. The only one would be international, which we’ve talked about in the past, as we continue to grow that footprint even more. That’s an area that will also have some investment in. But outside of those, particularly because of the scale that we have and with Chris’ comment on the concentration of really smart franchisee groups built out with their teams and the private equity guys that come in and help supplement those, it makes our job easier to in a lot of ways because these teams are running some really good businesses with scaling.

Thanks. That’s helpful.

Thank you.

Your next question comes from the line of Jonathan Komp from Baird. Your line is open, please ask your question.

Yes. Hi, thank you. Good morning. I want to follow-up and ask about the member trends, especially since we’re past the Delta spike here. Chris, I know you mentioned the new joins towards the end of September, reverting back more to a normal trend. So I want to maybe ask what you’re seeing there. And then as we think to the fourth quarter, typically, your members per club decline seasonally in the fourth quarter. So I’m wondering your thoughts on the ability, again, like the third quarter to sort of outperform that typical seasonal pattern.

Yes. I mean we did see towards the end of third quarter, September and then a little bit maybe end of August that have started to come back to normal, which I think is not a bad thing. I think it’s a good thing in a sense that it’s not – we pulled a bunch of people forward during the second quarter and it’s a clip that we hit. So it’s back to normal, that’s a big is good and the usage stat that 90% range. So I think and the boomers continue to go in the right direction. Meanwhile, the Gen Zs are joining at an accelerated rate, which we haven’t seen before. So, that’s really good news as well. But I believe the fourth quarter will hold true to prior historical trends. I don’t see anything unwavering right now that’s going to make it materially change either way.

Okay. Great. Makes sense. And then maybe one follow-up, Tom, on the G&A outlook. It looks like the fourth quarter is implied sort of in the mid-$25 million range. Could you maybe just share how much of that is the incentive piece that you called out? And then as we think forward, should we think more to a baseline in the low $20 million range, which you had the first few quarters. And I know in 2019, you were under $20 million a quarter or is that mid $20 million range, more the baseline going forward, just trying to understand how to think about the fourth quarter moving parts and then the baseline?

Yes, John. So obviously, we’re not providing an outlook on 2022 yet. That will be the next call. But I think, as I said in my remarks earlier, the lion’s share is the – of the increase in G&A is really based on incentive comp. That notion of it’s more V-shaped and U-shaped in how our business has bounced you might expect wasn’t fully captured in how we set our targets. So therefore, our incentive comp is higher than we thought. There is also some inflationary pressures, as you might imagine, with things like insurance and different things. But I think if you look at our G&A from ‘19 and sort of forward to now, and we always believe we would come out of this stronger. And thankfully, it’s happening sooner and maybe our moat might be even wider than we thought at the time as awful as all of this has been for the country and our team members. But if you grew that G&A at a reasonable rate that we had grown historically and assume that our revenue would grow sort of as it did historically, you’d see that we would be driving significant G&A leverage. So I think it’s really about us looking long-term, making sure we’ve got the right folks to really take advantage of what we’re trying to do. While to Dorvin’s point, building out – and Chris’ point, building out digital capability because we want, as they say, skate to where the puck is going, not where it is. And that’s not just the digital team, right? There is a significant IT investment behind that. So we think our scale affords us the ability to do that in a way that will differentiate what we offer and importantly, get more people off the couch. That’s really what we’re doing at all for as that sort of gateway to our bricks and mortar. So all of it, I think, is a bit of a long-term view. We did take some short-term pain when everything was shut down, but that was temporary, not really permanent. And we’ve added back, as I think we’ve said over the arc of our conversation since the pandemic that we would invest where we thought we needed to strategically to widen our moat and that’s reflected in what you’re seeing.

Okay. That’s helpful color. Thank you.

Thank you.

Your next question comes from the line of John Heinbockel from Guggenheim. Your line is open. Please ask your question.

Hi, guys. I want to start with the pricing pilot, right, so Black Card pricing. Where do we stand on that because we’re testing multiple levels? And then long-term, when you think about pricing power of the brand, right, relative to what you’re offering competitors are going to go up right. So could you see the Black Card ultimately closer to 30? And is the White Cards still sacred?

Yes. I think the White Card is still sacred. I think that is, as I’ve always said, kind get you off the couch price. Back to my earlier comments, the fact that there is a 140 million people within 10 miles of our current plan that aren’t members, we still have to get them off the couch, we need to touch that. So I think that’s something that we take to. And I think the fact that we’re 62.5% Black Card even though we only almost always advertise the $10 membership is amazing when the customer comes in and pays more and double what they thought they were going to pay based on the benefits of it. I think get it to 30, I’d never really move it without adding more value. So without more perks, whether it’s more Shell gas type perks that are on Black Card incentives or with more content for more exercises or diet. The one thing we do have, which we’ve always talked about is the rest of process. That is still the number one used function of the Black Card. We have 3,000 stores that’s a better value than it is today. So that’s something – whether or not it goes to $30, it’s hard to get there, but I think the Black Cards, the pricing power that we will utilize to change the average ticket. That doesn’t mean we could come up with the third tier, we find some great benefit that we decided as a third-tier option. But I think the White Card, Black Card is an easy joint scenario, right? A or B essentially, it’s not very confusing for a customer to make a decision and a lot of our industry is not like that, like the menu of 20 you can chose from. So we make it very simple in that sense. But I think that’s kind of how we look at it. Now the pricing test right now is still in those 100-plus clubs or so, at $24.99, that includes the PF plus. So fine-tuning the kind of the – I guess how we present the offering, how we present the rate sheets and so on and how we sell it online. But we will continue to test through the end of the year and into first quarter and hopefully, we have some better data here for the first quarter to make a decision.

And secondly, given what you’ve done with the ad agencies, right? So does this now accelerate the process of restructuring the marketing spend, more national, less local? And is that – is the 7 to 9 right – still right if you’re getting a 20% reduction in cost on the national side?

Yes. I think almost both, right, John. I think as we learn more from the data and understand more of how the spent locally and the nationally and how they work together and they both I guess roll in the right direction. There could be efficiencies there, which could change the 9%. And then on top of that is the efficiencies of just having one agency that’s buying in bulk and not only administration fees that you are paying the 16. So, both of those will be working towards what you are asking. Whether or not it’s a two and seven or it’s a two and six or it’s a three and five, I mean we will have to see when we get there. But I think this is the beginning of all that long-term.

Okay. Thank you, guys.

Thank you, John.

Your next question comes from the line of James Hardiman. Your line is open. Please ask your question.

Hi, good morning. So, you touched on this. I just wanted to clarify the visitation trends. I think you said in aggregate, you are at 90% of 2019 sort of visitation levels or workout levels. In the prepared remarks, I think you mentioned that members who are visiting a store, visiting more frequently. I just want to make sure I understand that. Is it that the people that are there are actually working out more than they were in ‘19 and then there are some people that just aren’t there or should I think about that a different way?

That’s exactly right. The ones that are using are using slightly more than they had in the past. But we are not quite at the same percentage of numbers using this facility.

Okay. I appreciate that. And then as I think about where you are sourcing new customers from the people basically sourcing from the couch or sourcing from other chains, maybe chains that have closed. Do you have any updated numbers on sort of the mix of new customers? And how should I think about the difference, or I don’t even know if you have enough data at this point to understand the difference in behavior there, the difference in churn, ultimately trying to think about sort of lifetime value of a customer that you get from the couch versus a customer that you get from another gym chain that’s closed down? Thanks.

Yes. We haven’t seen the retention side of an abandoned member coming to us from a closed club. So, we haven’t really seen any impact there or change there. But we do have the data that shows that Q3, about 2% of our competition. The same trend holds true with the rejoins, which is a great one that 30% of our joins are rejoins. So, they are former Planet Fitness members that have come back. And that runs usually historically almost forever, 20%. So, it’s up quite a bit. So, people are coming back faster than they have ever in the past by quite a bit. And the Gen Zs are joining way above what they have – we have ever seen in the past, which is exciting. There is almost 80 million Gen Zs and there is only about 40 million that are even of each of joins. So, it’s a huge trend there that’s a tailwind that’s going to come each year as another bucket of Gen Zs falling to the age of joining. So, some great data there. And also 40% of our joins are still first timers. So, that’s also a great point, and that’s kind of historically been there forever. So again, people are coming back to bricks-and-mortar faster if they were former numbers and they are joining bricks-and-mortar as they were pre-COVID. So, it’s not a deterrent. It’s actually probably a benefit now to initially stay in shape. I think it’s been proven. I think everybody has seen this and also everybody should had been working out after COVID.

Got it. And so just to clarify, if I think about people coming that previously were Planet Fitness members, people that have never been gym members and people that are coming from other gyms, the biggest opportunity is still the couch people. Is that fair?

Yes. Yes, absolutely.

Got it. Excellent. Thank you, guys.

Your next question comes from the line of Chris O’Cull from Stifel. Your line is open. Please ask your question. Chris O’Cull: Thanks. Good morning guys. Tom, the revenue guidance looks like it implies roughly $166 million, $176 million in the fourth quarter, well above this quarter’s level. But adjusted EBITDA well below what you generated this third quarter. Can you help us understand what’s built into that expectation and whether you are seeing anything in the business that suggests margin pressure during the fourth quarter?

Thanks, Chris. It’s really just a mix. The Equipment segment really has its strongest quarter in the fourth quarter. And it was – and so that given its margin differential compared to the franchise in the corporate segment, that’s probably what you are seeing there. But there is nothing by segment, if you will, that across the three that there is any individual margin pressure quarter-to-quarter. It’s just more the mix of the business. Chris O’Cull: Okay. That’s helpful. And then it’s great to see the acceleration of new store openings. Can you provide a bit more color around how units opened this year are trending in terms of store maturation and new member acquisition relative to what you have seen historically?

Yes, sure thing. So, back in 2020, Chris, as we were talking about – I am sorry, stores that opened in 2020, they weren’t on the normal ramp curve for all the reasons you would expect given what was happening across the country and within our business. Now since then, as things have – through the earlier part of the year and particularly into the second and third quarters, things have improved across our business their performance has improved as well. So, they are sort of tracking about 80% of where we would expect them to be on a pre-COVID new store ramp. And the stores that have opened more latter part of Q4 and into this year are 90%-plus of that normal new store ramp. So, kind of tracking where our business is, if you will, in terms of visits and things, but very encouraged to see those members – those store ramps returning more closer to normal pre-COVID levels. And I think that’s another confidence sign for our system to accelerate their development efforts as Dorvin was alluding to earlier. Chris O’Cull: Great. Thanks guys.

Thank you.

Your next question comes from the line of Brian Harbour from Morgan Stanley. Your line is open. Please ask your question.

Yes. Hi, good morning guys. Just maybe another question on new member sign-ups, you mentioned a number of clubs that have – still have masking or maybe some vaccine requirements. I am curious about how sign-ups trends when some of those restrictions ends, or obviously, in the vaccine case, that will kind of stay in place. Do you think that’s good for sign-up where it gives people more confidence or you think that’s somewhat of a limit to kind of recover your memberships?

Yes. I think the mask thing we don’t see being much of an issue. The vaccine mandate, which luckily is on a very few number of clubs, 50 clubs, I think roughly that have vaccine mandate. So, that’s not a huge amount, which that definitely is a little bit more of a hurdle to get through. But the mask mandate, we haven’t seen that effect, even during COVID, the ones that’s had and didn’t have, we didn’t see really affect remember joins or so.

Okay. Great. And then maybe another question is on digital content, too. I am curious how usage of that has kind of trended? Has it decreased perhaps as people come more in person, or do you see it kind of continuing to grow? And I guess I am just curious about kind of how you think about that as more of a revenue generator in the future?

Sure, yes. We actually – since the stores started to reopen, so last even and a year ago this past summer when we started to have the stores open, we began to see just even the usage of the free stuff, we I mean launched the paid stuff, even the free stuff started to decline some. But I think the trends around the paid subscriptions, which is probably the most interesting where when you look at the paid subscription side of things, 80% of the members who have subscribed visited the club. So, their subscribers are actually using the club too. So, it’s not like they are using it as a replacement, I guess if you will, use it as a supplemental there in bricks-and-mortar, which is great to see because a lot of people are long time in the industry think they are going to going to work out of home, not gyms. So, they are actually using it as a supplement as opposed to substitute. And 40% of the PF subscribers – PF+ subscribers, so they started off with a digital membership to begin with. And then 40% have gone on to buy a bricks-and-mortar after. So, that kind of goes to that hint to that kind of gateway, if you will, where they kind of get a taste of Planet digitally and then we get them to convert to a bricks-and-mortar down the road. So, I think it’s almost – a lot of it is an acquisition to, whether there is not a Planet close by or they want to – maybe they want to get a little bit more shape before they join the gym and be around the people, but I think it’s a good gateway. And I think as we continue to streamline and learn how the members are using different content, different trainers and different likes and dislikes, we can only get better with it. We are then down the road, like I mentioned, is getting to maybe diet nutrition, meditation and so on, so we can hit different segments of our member base getting that today.

It sounds good. Thank you.

Thank you.

Your next question comes from the line of Alex Perry from Bank of America. Your line is open. Please ask your question.

Hi. Thanks for taking my question and congrats on the strong quarter here. Nice to see the recovery trends. I just wanted to ask on the cost inflation outlook on the equipment side of the business. Does this change the outlook at all for the equipment margins? And how would you sort – how would you sort of treat that? Would you pass that through to the franchisees or just wanted to get more clarity there?

Yes, sure thing. It’s Tom. So, I think – as I have said, we are very important to our two primary vendors, Matrix and Life. And they have passed along after a period of months of not passing it along. They did pass along a slight increase to our system. It’s viewed as temporary until steel prices pulled back. It varies a little bit based on type of equipment and vendor, but it’s sort of low to mid-single digit price increases. It’s not anything significant. And it doesn’t really affect our margins. It doesn’t really affect as I have said earlier, which is really the most important thing, franchisees’ willingness to move forward. I mean, that impact on their overall ROI and store level economics is right at the decimal. So, it’s not a gating factor at all. And I think back to what I was saying earlier, the fact that they are not only driving that new store activity that allowed us to take up our outlook. They are also investing in reequipping their stores, which I think is really a testament to how they feel about the brand, the customer and member experience that they want to have and making those investments ahead of when they need to, I think is testament that those slight inflationary pressures are not affecting how they think about the business and how they are investing in it.

Great. That’s really helpful. And then just a follow-up, I wanted to ask about the higher Black Card pricing in the pilot that you are doing there. And maybe you touched on this a bit earlier, but has there been any decision in terms of maybe rolling that out to the rest of the chain, or just sort of how you are thinking about the cadence of the Black Card pricing from here? Thank you.

Yes, this is Chris. Thanks for the question. Yes, we will continue to test, as I mentioned through the end of the year and probably the first quarter before making a longer term decision or a broader rollout decision, still watching all of the clubs. There is a little over 100 clubs roughly that are in that test, fine-tuning the rate sheet to sell process to be sure we get the right Black Card conversion. So, we don’t want to diminish Black Card conversions on the price increase. So, that’s really where we have to watch the data of how that falls. So – and then the retention, it takes time to figure out the higher price. It’s only $2, but you got to make sure that we are not driving a higher attrition because it’s a little higher price point than ones using the club. So, it just takes time. That’s all. But hopefully more in the first quarter, we will have some data here to share and to make a decision that we can move it.

Perfect. Best of luck of going forward.

Great. Thank you. I appreciate it.

Your next question comes from the line of Simeon Siegel from BMO Capital Markets. Your line is open. Please ask your question.

Thanks. Hi. Good morning, everyone. Congrats on the ongoing progress. Chris, just to follow-up quickly on the member – the Black Card member penetration, can you distinguish between new members and the existing? So, is there any differential between the new members you are seeing in terms of that Black Card penetration? Does that impact your view on the ultimate company level Black Card penetration opportunity? And then earlier, you brought up the brand perks that we have seen be pretty powerful. Any update on that or some form of data capture on conversion of those friends to members? Thanks.

Yes, sure. Thanks for the question. Yes. The Black Card or penetration, I mean it’s been great because it eats up a little bit each year, right, and as you have seen in the last few years in the continue rate of price slightly over the last 4 years or 5 years. So, I don’t see anything – any reason why it shouldn’t be able to continue year-after-year slightly tweak up as we – as I mentioned earlier, open more stores, process number one. We have 3,000 stores. It’s a better value than it is today. So, that’s always in our backlog as we build out our system. And any other new pilots or tests that we do that are out there that we find as a new port for the Black Card area or more discounts in our perks, but and this may be a Black Card only perk, right. So, I think more of that stuff – think we add value, I think can drive Black Card percentage, and that’s kind of how we are looking at that, but I think even without that, I think still slowly tweak up year-over-year on that side of things. Bring a Friend conversion you are right, now we have it in the actual capturing data on who those friends are. We have about 60% of our member base has the app so over 15 million, about 60% new. So, we are capturing some of those guests today, but people that are using that. But again, it’s not our entire member base that has the app, so we still capture more of that, but that is definitely low-hanging fruit for us that we didn’t have that ability to drilling market to them. We have done some small tests here in the year with those guests. The other one too is we have the refer a friend button on the app, which if you think about we didn’t even have a way to formally have a member invite a friend to join. And that’s been working extremely well. And we just started doing a little bit of gamifications with it where the member refers up to three friends, they could get up to three months free if they get their friends to join. So, with a way to reward members for referring. So, that’s all new to us. We didn’t even really have a formal way to do that. So – and again, once we get 80%, 90% of our members with the app, it’s even better for us. So, when you think about cost per acquisition there, we already paid for the first member to join the cost for acquisition for those members there is almost nothing except for the three months we give to current number. So, it’s extremely lucrative.

It sounds great. Thanks guys. Best of luck for the year ahead.

Thank you very much.

Your next question comes from the line Sharon Zackfia from William Blair. Your line is open. Please ask your question.

Hi. I think the Q&A in an alphabetical order today. But thanks for taking my question.

Thanks.

So, I guess I was really intrigued by the 140 million people that you mentioned are within 10 miles. And it made me wonder kind of where your brand awareness is at this point. I mean is that the number one opportunity, or if it’s not, I mean what is the main reason that your research would indicate that you haven’t captured, I guess a greater share of that 140 million?

Yes. I think it’s the brand awareness did retract. You would remember, I have mentioned that this first quarter. It did retract some when we weren’t marketing last year. We are still number one by far in the industry, but it retract some, I guess, now we are definitely getting back on track and probably after this New Year, we will be hopefully back to we were. Yes, that is the low-hanging fruit. I mean I look at – it was interesting when you talked about like unit growth, and we have talked about this a lot over the last couple of years. We are – we look at these area development agreements that we sold 8 years, 9 years ago that we thought we could fit 10 clubs and we find if we look back at it now, and you can probably fit 15 clubs in that same area. But just because we are getting more people off the couch and the bigger our marketing flywheel gets, the more people we get in front of. And whether its brand awareness or it’s the right offer or it’s just another club built closer to the population, less drive time more on their way they drive to work. So, it’s – but that’s really the low hanging fruit. And then more we penetrate that 140 million people that are just not gym numbers. And maybe it’s messaging, maybe it’s more getting into talking about it a lot people don’t realize they are working out, hey, make you sleep better. They don’t realize working out can relieves stress and anxiety. They think it’s all vanity. So, there might be other ways to what haven’t we said already. We are spending $250 million a year, let’s say, in the current year in marketing, there is more messaging we can get in front of that maybe gets another group of people that give it a shot.

Sharon, we have said this in the past. I think you have heard Chris talk about it. But even in, say, New Hampshire, where we have the highest kind of penetration rates and one out of every two health club members or members of Planet Fitness. But even a lot of our oldest clubs are here in New Hampshire. And if you go back over the last 3 years, 4 years, 5 years, they still comp. So, the thing about our brand is that because of those people that are on the couch, even with the kind of penetration rates we have here, we can still get more and more of the couch and grow our comps in those older stores in those markets, which then what that tells us, and we have said this, is that when you go into some of the markets where we have not had as many stores and that much penetration, we are still able to grow the comps in those markets, which gives us then that that expansion opportunity and then that confidence level that you heard us talk about to get to that 4,000 or even more.

That’s really helpful. I guess one other question. There are obviously a lot of wearables out there, right? And I feel like every day, I hear of a new fitness tracker of some sort. Have you explored any kind of partnerships there as a means for building awareness or new member acquisition?

Yes. We definitely have seen wearables connecting to our app, garments and Fitbits and stuff like that. We are working to make sure all those are pipe through our app as well, hot rate collection, all that. But also partnership wouldn’t be out of question. I mean there is always something that’s even our partner come up with your own is probably the bigger question, probably partnering. This might be a better option because some of the brand awareness with other companies that are already in that space. But it would be a great data capture, right. I mean the app is already great data capture, but that one more component would just be probably top it off.

Okay. Great. Thank you.

Thanks Sharon.

We have no further questions at this time. You may continue.

Well, thank you, everybody. Have a great morning. As you have heard, the business is performing extremely well. I couldn’t be more pleased. We all couldn’t be more pleased. We never wavered in confidence that we came out of this that we would come back and come back stronger than we were before. And I strongly believe that our future is going to be brighter. And I look forward to our fourth quarter release and then going into our first quarter for New Year to be pretty spectacular. So, thank you. Have a great day.

This concludes today’s conference call. Thank you for participating. You may now disconnect.