Planet Fitness, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; filed August 8, 2019. Planet Fitness is a franchisor and operator of fitness centers and sells equipment to franchisees. At June 30, 2019, it reported more than 14.0 million members and 1,859 locations across 50 states and several international markets, including 1,779 franchised and 80 corporate-owned stores.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $181.7 million, up 29.3% | $330.5 million, up 26.2% |
| Income from operations | $65.3 million; 36.0% margin | $118.5 million; 35.8% margin |
| Net income | $39.8 million | $71.5 million |
| Net income attributable to Planet Fitness, Inc. | $34.8 million | $62.3 million |
| Diluted earnings per share | $0.41 | $0.74 |
| EBITDA | $74.4 million; approximately 41.0% margin | $134.2 million; approximately 40.6% margin |
| Adjusted EBITDA | $76.5 million | $139.9 million |
| Operating cash flow | Not separately provided for the quarter | $82.5 million |
- Revenue mix: Six-month revenue comprised $137.6 million from the Franchise segment, $77.7 million from corporate-owned stores, and $115.2 million from equipment sales.
- Comparable-store performance: Six-month same-store sales increased 9.6% for franchisee-owned stores, 6.9% for corporate-owned stores, and 9.5% system-wide.
- System-wide sales: $851 million in the second quarter and $1.649 billion year to date, compared with $732 million and $1.402 billion, respectively, in the prior-year periods.
- Liquidity: Cash and cash equivalents were $330.6 million at June 30, 2019, with an additional $30.6 million of restricted cash. The company also had $75.0 million of undrawn Variable Funding Note capacity.
- Debt: Total debt, net of deferred financing costs, was $1.169 billion, including $1.191 billion of principal. Quarterly interest expense was $14.6 million versus $9.0 million in the prior-year quarter.
- Balance sheet: Total assets were $1.523 billion and total stockholders’ deficit was $314.4 million. Tax benefit arrangement liabilities totaled $433.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 29.3% in the quarter and 26.2% for the first six months, driven by franchise growth, higher same-store sales, increased royalty rates, store additions, and stronger equipment sales.
- Equipment revenue increased 45.7% in the quarter and 40.2% year to date, primarily due to replacement equipment sales and incremental equipment sales to new franchisee-owned stores.
- Franchise Segment EBITDA rose 24.5% in the quarter and 26.7% year to date; Corporate-owned Stores Segment EBITDA rose 23.7% and 25.6%, respectively; Equipment Segment EBITDA rose 46.4% and 43.6%, respectively.
- Income from operations grew faster than revenue, with the operating margin increasing to 36.0% in the quarter from 34.9% and to 35.8% year to date from 33.5%.
- Interest expense increased materially following the August 2018 issuance of $1.2 billion of fixed-rate Class A-2 senior secured notes.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording $115.4 million of operating right-of-use assets and $127.0 million of operating lease liabilities at June 30, 2019.
- On May 30, 2019, the company acquired four Maine franchisee-owned stores for $14.8 million in cash, adding $7.2 million of goodwill.
- The company completed final settlement of its $300 million accelerated share repurchase agreement on April 30, 2019, receiving and retiring an additional 524,124 Class A shares at a weighted-average price of $58.46. Approximately $157.9 million remained under the repurchase authorization at June 30, 2019.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that available cash, operating cash flow, and undrawn borrowing capacity should be adequate for at least the next 12 months to fund operations, capital expenditures, debt service, tax benefit arrangements, and working capital, even assuming no growth in sales or profits.
- The company had commitments to open more than 1,000 new stores under existing area development agreements and expects continued growth in selling, general and administrative expenses as the franchise network expands.
- Senior secured notes have anticipated repayment dates in 2022 and 2025, although their legal final maturity is in 2048. Failure to repay or refinance on the anticipated dates may result in additional interest and rapid amortization events.
- Lease guarantees for certain franchisees created a maximum potential obligation of approximately $10.4 million; management estimated the expected ultimate settlement at zero and recorded no accrual.
- A former employee obtained a joint and several judgment of $6.2 million. The company recorded an estimated obligation of $1.2 million and an offsetting indemnification receivable; an additional $4.1 million of potential interest was not accrued because it was not considered probable.
- Key risks include dependence on franchisee performance, member retention, competition, brand reputation, third-party and information systems, vendor concentration, substantial indebtedness, refinancing requirements, tax receivable agreements, wage inflation, and litigation.
- Adjusted EBITDA and other adjusted measures exclude or adjust for items such as tax benefit arrangement remeasurement, purchase accounting effects, pre-opening costs, and other unusual items; these are non-GAAP measures and should not replace GAAP results.
Investor Verification Items
- Verify the sustainability of revenue growth, particularly the contribution from equipment sales, placement revenue, higher royalty rates, and acquired or newly opened stores.
- Assess franchisee financial health, store-opening execution, and the ability to fulfill commitments for more than 1,000 additional stores.
- Reconcile reported EBITDA and Adjusted EBITDA to GAAP net income and evaluate the recurring nature of excluded items.
- Review debt amortization, anticipated 2022 and 2025 refinancing requirements, covenant compliance, and available liquidity.
- Monitor tax benefit arrangement liabilities and projected payments of $433.6 million, as well as the company’s continuing stock repurchases.
- Evaluate the legal judgment, indemnification receivable, franchisee lease guarantees, and other contingencies.
- Confirm the effects of ASC 842 adoption on reported assets, liabilities, rent expense, and comparability with prior periods.