Planet Fitness, Inc. — Q1 2022 Form 10-Q Summary
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021. The filing is unaudited and prepared under U.S. GAAP.
Business Context
Planet Fitness is a franchisor and operator of fitness centers and a seller of fitness equipment. As of March 31, 2022, the system had more than 16.2 million members and 2,291 locations across the United States and selected international markets, including 2,062 franchised and 229 corporate-owned stores. No stores remained closed because of COVID-19 at quarter-end.
The company completed the Sunshine Fitness acquisition on February 10, 2022, adding 114 corporate-owned stores in Alabama, Florida, Georgia, North Carolina, and South Carolina.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $186.7 million | $111.9 million | +66.9% |
| Income from operations | $48.7 million | $29.4 million | +65.5% |
| Net income | $18.4 million | $6.2 million | +196.9% |
| Net income attributable to Planet Fitness | $16.5 million | $5.6 million | +194.9% |
| Diluted EPS | $0.19 | $0.07 | + $0.12 |
| EBITDA | $78.2 million | $45.0 million | +73.6% |
| Adjusted EBITDA | $77.3 million | $43.7 million | +76.9% |
| Adjusted net income | $29.0 million | $9.1 million | +219.8% |
| Adjusted diluted EPS | $0.32 | $0.10 | + $0.22 |
Margins: GAAP operating margin was 26.1%, compared with 26.3% in the prior-year quarter. Net margin improved to 9.8% from 5.5%, while net income attributable to Planet Fitness represented 8.8% of revenue versus 5.0%. EBITDA margin increased to approximately 41.9% from 40.3%.
- Franchise segment revenue increased 25.0% to $80.1 million; Segment EBITDA increased 45.9% to $60.1 million.
- Corporate-owned stores revenue increased 101.1% to $76.2 million; Segment EBITDA increased 118.5% to $23.4 million.
- Equipment revenue increased 206.2% to $30.4 million; Segment EBITDA increased to $8.7 million from $1.8 million.
- Same-store sales increased 15.9% system-wide, including 15.8% for franchisee-owned stores and 17.0% for corporate-owned stores. The comparable prior-year figures were declines of 14.9%, 14.7%, and 18.2%, respectively.
- System-wide sales increased to $961 million from $765 million.
Cash Flow, Debt, and Liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Cash flow from operating activities | $58.0 million | $23.5 million |
| Cash flow used in investing activities | $(449.7) million | $(31.4) million |
| Cash flow from financing activities | $324.2 million | $(4.1) million |
| Capital expenditures | $23.9 million | $6.4 million |
| Cash, cash equivalents, and restricted cash at March 31 | $536.7 million | $503.9 million |
Cash and cash equivalents were $471.2 million at March 31, 2022, versus $545.9 million at December 31, 2021. Investing cash use was dominated by $425.8 million of cash consideration for the Sunshine acquisition.
Total debt, excluding deferred financing costs, was $2.116 billion at March 31, 2022, compared with $1.775 billion at December 31, 2021. The company issued $900 million of 2022 fixed-rate senior secured notes, refinanced certain prior debt, and drew $75 million under variable funding notes. The variable funding notes carried an applicable borrowing rate of 2.45% at quarter-end. The company stated that it was in compliance with its debt covenants.
Management believes available cash, operating cash flow, and the drawn variable funding facility will be adequate for anticipated debt service, tax benefit arrangement payments, capital expenditures, and working capital needs for at least the next 12 months. The $75 million variable funding borrowing was repaid in full on May 9, 2022, after quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability rebounded substantially from the COVID-affected Q1 2021 comparison period.
- The Sunshine acquisition added 114 corporate-owned stores and contributed $28.7 million of revenue and $7.3 million of income before taxes from February 10 through March 31, 2022.
- The acquisition was funded with approximately $431.9 million of cash and $393.7 million of equity consideration. Preliminary purchase accounting added $467.7 million of goodwill and $283.0 million of identifiable intangible assets.
- Corporate-owned store count increased from 112 to 229, while franchisee-owned stores decreased from 2,142 to 2,062, primarily because of the acquired stores and 114 stores debranded, sold, or consolidated.
- Debt increased following the acquisition financing and refinancing. Interest expense rose to $22.6 million from $20.2 million, including a $1.6 million loss on extinguishment of debt.
- Selling, general and administrative expense increased 37.1%, including $4.4 million of Sunshine transaction fees and higher acquisition-related expenses.
- The effective tax rate increased to 38.6% from 35.1%, primarily because of deferred-tax remeasurement related to a change in the deferred state tax rate.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific quantitative full-year revenue, EBITDA, or store-opening guidance. Management reported commitments to open more than 1,000 new stores under existing area development agreements.
- Management expects continued growth from new store openings, franchise development, membership growth, and the corporate-owned store portfolio.
- COVID-19 continues to be identified as a risk despite the absence of COVID-related store closures at quarter-end.
- Key risks include competition, member retention, franchisee financial condition and bankruptcies, construction and maintenance cost inflation, labor costs, long-term lease obligations, cybersecurity and data privacy, information-system disruptions, supplier concentration, regulatory compliance, and execution of the growth strategy.
- Inflation in materials, shipping, equipment, and labor could pressure company and franchisee profitability. The filing states that inflation had not materially affected continuing operations through the reporting date.
- The company has approximately $6.5 million of maximum potential obligations under franchisee lease guarantees; no material liability was accrued.
- A civil judgment-related obligation of approximately $2.2 million was recorded, offset by a fully reserved indemnification receivable.
- The company remains in dispute over the terms of a required acquisition of franchisee-owned stores in Mexico; the transaction had not closed as of March 31, 2022.
- Other unusual Q1 items included a $2.1 million gain from reducing the allowance for credit losses, a $2.1 million gain from settlement of preexisting Sunshine contracts, a $1.2 million loss on reacquired franchise rights, a $3.8 million tax benefit arrangement remeasurement gain, and $4.4 million of acquisition transaction fees.
Important Facts for Investors to Verify
- Reconcile reported GAAP earnings with EBITDA, Adjusted EBITDA, and Adjusted net income, particularly the acquisition, tax, financing, and credit-loss adjustments.
- Review the final purchase price allocation for Sunshine Fitness, including goodwill, intangible assets, deferred taxes, lease liabilities, and any subsequent measurement-period adjustments.
- Assess leverage, scheduled principal payments, anticipated repayment dates, covenant requirements, and refinancing exposure under the securitized senior notes.
- Confirm the impact of the May 9, 2022 repayment of the $75 million variable funding notes on liquidity and interest expense.
- Monitor same-store sales, system-wide sales, member counts, new store openings, and the conversion of more than 1,000 committed development opportunities into operating locations.
- Evaluate the sustainability of post-COVID growth against the unusually weak Q1 2021 comparison period.
- Review exposure to franchisee health, lease guarantees, Mexico acquisition obligations, litigation, inflation, cybersecurity, and data privacy risks.