Planet Fitness, Inc. quarterly report, Q3 FY2022

Planet Fitness, Inc. — Form 10-Q Summary

Business context and reporting period

Unaudited results for the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Planet Fitness is a franchisor, operator of corporate-owned fitness centers, and seller of fitness equipment. At quarter-end, the system had more than 16.6 million members and 2,353 locations across 50 states and several international markets, including 2,122 franchised and 231 corporate-owned stores. No stores were closed due to COVID-19 as of September 30, 2022.

Key financial metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Revenue	$244.4 million	$154.3 million	$655.5 million	$403.4 million
Income from operations	$61.9 million	$44.5 million	$165.7 million	$114.2 million
Operating margin	25.3%	28.9%	25.3%	28.3%
Net income	$30.7 million	$18.6 million	$74.1 million	$39.8 million
Net income attributable to Planet Fitness	$26.9 million	$17.4 million	$65.7 million	$37.0 million
Diluted EPS	$0.32	$0.21	$0.78	$0.44
EBITDA	$99.3 million	$61.5 million	$264.8 million	$161.7 million
Adjusted EBITDA	$93.9 million	$61.7 million	$259.7 million	$160.1 million

Q3 revenue increased 58.4%; nine-month revenue increased 62.5%. Growth was led by the Sunshine Fitness acquisition, higher same-store sales, new stores, and equipment sales.
Q3 net income attributable to Planet Fitness increased 54.3%; nine-month net income attributable to Planet Fitness increased 77.5%.
Same-store sales increased 8.2% system-wide in Q3 and 14.6% for the nine-month period; Q3 franchisee-owned and corporate-owned store increases were 8.1% and 9.7%, respectively.
System-wide sales were $968 million in Q3 and $2.948 billion for the nine months, compared with $870 million and $2.503 billion, respectively, in the prior-year periods.
Operating margin declined year over year primarily because the business mix shifted toward corporate-owned stores and equipment, which carry higher associated operating costs, and because depreciation and amortization increased following the acquisition.

Cash flow, debt, liquidity, and capital allocation

Operating cash flow was $190.4 million for the nine months, compared with $149.5 million in 2021.
Investing cash flow was negative $469.2 million, including $424.9 million for the Sunshine Fitness acquisition and $65.1 million of capital expenditures. Proceeds from the sale of six corporate-owned stores were $20.8 million.
Financing cash flow was positive $142.7 million, reflecting $900.0 million of new long-term debt, $75.0 million of variable funding borrowings, $719.6 million of debt repayments, and $94.3 million of share repurchases.
Cash and cash equivalents were $404.5 million at September 30, 2022; cash, cash equivalents, and restricted cash totaled $467.2 million. Management stated that available cash, operating cash flow, and revolver capacity were expected to cover anticipated needs for at least the next 12 months.
Total debt excluding deferred financing costs was $2.030 billion, with $2.003 billion reported net of deferred financing costs. The $75.0 million variable funding facility was fully repaid on May 9, 2022 and was undrawn at quarter-end.
Lease liabilities totaled $379.9 million, and projected tax benefit arrangement liabilities totaled $505.5 million.
The company was in compliance with its debt covenants as of September 30, 2022. The debt structure includes fixed-rate senior secured notes and a variable-rate facility, limiting but not eliminating exposure to interest-rate increases.
The company repurchased 1.529 million Class A shares for $94.3 million during the nine months. On November 4, 2022, the board approved a new $500 million repurchase program replacing the prior program.

Material changes versus the prior comparable period

On February 10, 2022, Planet Fitness acquired Sunshine Fitness for preliminary consideration of $824.6 million, consisting of $430.9 million in cash and $393.7 million in equity. The acquisition added 114 stores and materially increased corporate-owned-store revenue, expenses, assets, goodwill, depreciation, and lease liabilities.
Goodwill increased from $228.6 million at December 31, 2021 to $700.2 million at September 30, 2022, primarily due to the Sunshine acquisition.
Corporate-owned stores increased from 106 at September 30, 2021 to 231 at September 30, 2022. Total stores increased from 2,193 to 2,353.
Property and equipment, right-of-use assets, and intangible assets increased substantially as a result of the acquisition and store expansion.
Long-term debt increased from $1.775 billion of principal debt, including variable funding notes, at December 31, 2021 to $2.030 billion at September 30, 2022, reflecting refinancing and acquisition financing.
The company refinanced the 2018-1 Class A-2-I notes with $900 million of 2022 notes and recorded a $1.6 million loss on extinguishment of debt.
Stockholders’ deficit improved from $642.8 million at December 31, 2021 to $248.1 million at September 30, 2022, although total equity remained negative.

Guidance, outlook, management commentary, risks, and unusual items

The filing does not provide clear numerical full-year revenue, EBITDA, or earnings guidance. Management reported commitments to open more than 1,000 new stores under existing area development agreements and expects most future openings to be franchisee-owned.

Management stated that current liquidity and cash generation should support debt service, tax benefit arrangement obligations, capital expenditures, working capital, and operations for at least the next 12 months.
Inflation may increase materials, shipping, equipment, labor, rent, and construction costs. The company may not be able to offset all cost increases, particularly wage inflation at corporate-owned stores.
Key risks include competition, member retention, franchisee financial condition and bankruptcies, franchise development execution, site availability, store cannibalization, supplier concentration, cybersecurity and data protection, regulatory compliance, international operations, and long-term lease obligations.
COVID-19 remains a disclosed risk, although there were no COVID-related store closures at quarter-end.
Unusual items included Sunshine acquisition-related costs and purchase accounting adjustments, a $1.3 million gain on the sale of six stores, a $4.5 million quarterly gain from remeasurement of tax benefit arrangements, a $1.6 million debt extinguishment loss for the nine-month period, and a $1.2 million reserve against an indemnification receivable related to a legal matter.
A Mexico franchisee exercised a put option requiring the company to acquire certain stores, but the transaction remained unresolved because the parties disputed final terms; the filing states that potential additional costs cannot currently be estimated.
The company recorded an estimated $3.4 million obligation related to a final judgment in an employment-related civil action. The judgment was paid after quarter-end, and the company expects indemnification from sellers of Pla-Fit Holdings but reserved the related receivable due to collectability uncertainty.
Management concluded that disclosure controls and procedures were effective as of September 30, 2022. Internal-control integration for Sunshine Fitness was ongoing.

Important facts for investors to verify

Separate the organic performance of the franchise business from acquisition-driven growth in corporate-owned stores.
Assess the sustainability of same-store sales, membership growth, and the more than 1,000-store development pipeline.
Review leverage, scheduled principal payments, anticipated repayment dates, covenant requirements, and refinancing exposure.
Evaluate cash conversion after acquisition spending, capital expenditures, share repurchases, and tax benefit arrangement payments.
Monitor Sunshine Fitness integration, preliminary purchase-price accounting, goodwill, and potential impairment risk.
Confirm the resolution and recoverability of the legal judgment indemnification receivable and the status of the Mexico acquisition dispute.
Reconcile GAAP results with EBITDA, Adjusted EBITDA, and Adjusted EPS, noting the company’s use of non-GAAP adjustments and the change in Adjusted EBITDA methodology.