Planet Fitness, Inc. — Form 10-Q Summary
Business context and reporting period
Planet Fitness is a franchisor and operator of fitness centers and a supplier of fitness equipment. For the three months ended March 31, 2019, the company had more than 13.6 million members and 1,806 locations, including 1,730 franchised and 76 corporate-owned stores across the United States and select international markets. The filing is unaudited and compares the quarter with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $148.8 million | $121.3 million | +22.7% |
| Income from operations | $53.2 million | $38.9 million | +36.7% |
| Operating margin | 35.7% | 32.1% | +3.6 percentage points |
| Net income | $31.6 million | $23.5 million | +34.7% |
| Net income attributable to Planet Fitness | $27.4 million | $19.9 million | +37.9% |
| Net margin attributable to Planet Fitness | 18.4% | 16.4% | +2.0 percentage points |
| Diluted EPS | $0.32 | $0.23 | +39.1% |
| EBITDA | $59.8 million | $47.6 million | +25.6% |
| Adjusted EBITDA | $63.4 million | $48.8 million | +29.9% |
| Cash flow from operations | $57.9 million | $48.1 million | +20.4% |
Revenue by segment was $65.8 million for Franchise, $38.0 million for Corporate-owned stores, and $45.0 million for Equipment. System-wide sales were approximately $798 million, compared with $670 million in the prior-year quarter. Same-store sales increased 10.2% overall, including 10.3% for franchisee-owned stores and 8.0% for corporate-owned stores.
Liquidity, debt and capital resources
- Cash and cash equivalents were $336.0 million at March 31, 2019; restricted cash was $30.6 million, for total cash, cash equivalents and restricted cash of $366.6 million.
- Operating cash flow was $57.9 million. Capital expenditures were $7.5 million, producing operating cash flow less capital expenditures of approximately $50.5 million.
- Total long-term debt, net of deferred financing costs, was $1.17 billion, including $1.19 billion of principal outstanding. The debt consisted primarily of fixed-rate Class A-2 notes bearing interest at 4.262% and 4.666%.
- The company had $75.0 million of available borrowing capacity under its Variable Funding Notes, which were undrawn at March 31, 2019.
- Management stated that available cash, operating cash flow and borrowing capacity should be adequate for at least the next 12 months to fund operations, debt service, tax benefit arrangements, capital expenditures and working capital, even assuming no growth in sales or profits.
Material changes versus the prior comparable period
- Franchise revenue increased 25.6%, supported by same-store sales, new stores, higher royalty rates and higher annual-fee royalties. Commission income declined because of the Rebate to Royalty Amendment, which shifted economics toward royalties.
- Corporate-owned stores revenue increased 16.3%, reflecting new and acquired stores, 8.0% same-store sales growth and higher annual-fee revenue.
- Equipment revenue increased 32.3%, driven by additional equipment sales to new franchisee-owned stores and increased replacement-equipment sales.
- Income from operations grew faster than revenue, and operating margin improved to approximately 35.7% from 32.1%.
- Interest expense increased to $14.7 million from $8.8 million, primarily because of the $1.2 billion securitized financing issued in August 2018.
- Income tax expense declined to $5.3 million from $6.9 million. The effective tax rate was 14.3% versus 22.7%, primarily due to a deferred-tax-asset remeasurement benefit.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $130 million of operating lease liabilities and corresponding right-of-use assets. A $1.7 million cumulative transition adjustment was recorded through retained earnings.
- The store base increased by 241 locations year over year, from 1,565 to 1,806, and 65 new stores opened during Q1 2019 versus 47 in Q1 2018. The company had commitments to open more than 1,000 additional stores under existing area development agreements.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative full-year revenue or earnings guidance. Management emphasizes continued growth through franchise development, new-store openings, same-store sales and equipment sales.
- Key risks include dependence on franchisee performance, member acquisition and retention, competition, brand and reputation, third-party systems and vendors, and execution of the growth strategy.
- The company has substantial indebtedness and faces refinancing and repayment risks, including anticipated repayment dates in 2022 and 2025 for the Class A-2-I and Class A-2-II notes, respectively. The legal final maturity is in 2048.
- Tax benefit arrangement liabilities totaled $449.5 million at March 31, 2019, with projected future payments extending beyond 2023.
- The company began guaranteeing certain franchisee leases in 2019. Maximum lease-guarantee exposure was approximately $5.8 million, although management estimated the expected ultimate loss at zero and recorded no material accrual.
- Other expense included a $3.4 million tax benefit arrangement remeasurement loss. Adjusted EBITDA also excludes this item and other purchase-accounting, amortization and nonrecurring adjustments.
- The $300 million accelerated share repurchase agreement was finally settled on April 30, 2019, after quarter-end; the bank delivered an additional 524,124 Class A shares.
- Ordinary-course claims and litigation were not expected by management to have a material adverse effect, but a significant increase in claims or amounts owed could materially affect results.
Most important facts for an investor to verify
- Reconcile revenue and EBITDA growth with the contribution from new stores, same-store sales, royalty-rate changes and equipment sales.
- Assess leverage, fixed-rate debt service, anticipated 2022 and 2025 repayment dates, refinancing requirements and covenant or rapid-amortization risks.
- Review the sustainability of the unusually low 14.3% effective tax rate and the impact of tax benefit arrangement obligations.
- Evaluate cash conversion, capital expenditure needs and the effect of ASC 842 lease liabilities on leverage and liquidity analysis.
- Monitor franchisee financial health, the pipeline of more than 1,000 committed stores and the company’s ability to maintain same-store sales growth.
- Confirm the post-quarter-end settlement of the accelerated share repurchase agreement and its effect on shares outstanding and per-share results.