Planet Fitness, Inc. — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Planet Fitness is a franchisor and operator of fitness centers and a seller of fitness equipment. For the quarter ended June 30, 2017, the company reported more than 10.4 million members and 1,403 locations across 48 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. The network comprised 1,345 franchised and 58 corporate-owned stores, with commitments to open more than 1,000 additional stores under existing area development agreements. Results are unaudited and presented for the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Total revenue | $107.3 million | $91.5 million | +17.3% |
| Income from operations | $38.3 million | $27.8 million | +37.4% |
| Operating margin | 35.6% | 30.5% | +5.1 percentage points |
| Net income | $18.0 million | $18.1 million | -0.5% |
| Net income attributable to Planet Fitness | $12.4 million | $4.1 million | +200.3% |
| Diluted EPS | $0.16 | $0.11 | +$0.05 |
| EBITDA | $45.2 million | $35.3 million | +27.9% |
| Adjusted EBITDA | $47.9 million | $36.8 million | +30.3% |
- Franchise segment revenue increased 28.2% to $37.8 million; corporate-owned stores revenue increased 7.2% to $28.3 million; equipment revenue increased 15.8% to $41.2 million.
- Q2 same-store sales increased 9.0% system-wide, including 9.3% for franchised stores and 4.3% for corporate-owned stores.
- Franchise Segment EBITDA increased 31.6% to $32.5 million, corporate-owned stores Segment EBITDA increased 34.5% to $12.8 million, and equipment Segment EBITDA increased 24.8% to $9.8 million.
- For the six months ended June 30, 2017, revenue was $198.4 million, operating income was $71.3 million, net income was $35.9 million, net income attributable to Planet Fitness was $21.3 million, and EBITDA was $86.9 million.
- Six-month operating cash flow was $63.0 million, compared with $50.1 million in the prior-year period. Capital expenditures were $14.1 million, and net cash used in financing activities was $10.9 million.
- Cash and cash equivalents totaled $78.5 million at June 30, 2017. The company reported $75.0 million of available revolving credit capacity.
- Outstanding debt was $713.1 million before deferred financing costs, or $706.4 million net, including $699.2 million of long-term debt. The term loan matures March 31, 2021.
- The leverage ratio was 3.8x at June 30, 2017, below the applicable 6.0x covenant maximum. A 100-basis-point increase in interest rates would increase annualized pretax interest expense by approximately $7.1 million.
Material changes versus the prior comparable period
- Revenue growth was led by franchise royalties, new and recently opened stores, higher franchise fees, annual fees, commission income and equipment sales.
- Operating margin improved because revenue growth outpaced cost growth. Store operations expense declined 7.3%, while SG&A increased 19.3% to support additional headcount and infrastructure.
- Interest expense increased 46.5% in the quarter and 42.0% year to date, primarily because of $230.0 million of additional term borrowings completed in November 2016.
- Net income attributable to Planet Fitness increased substantially despite broadly flat consolidated net income because Planet Fitness increased its economic ownership of Pla-Fit Holdings through exchanges of Holdings Units.
- Planet Fitness completed secondary offerings in March and May 2017. The company did not receive proceeds from the shares sold by existing holders, but its economic interest in Pla-Fit Holdings increased to 87.1% at June 30, 2017 from 2016 levels.
- The May 2017 credit agreement amendment reduced applicable interest-rate margins by 50 basis points for term loans and 25 basis points for revolving borrowings, subject to specified conditions.
- Tax benefit arrangement liabilities increased to $727.1 million from $419.1 million at December 31, 2016, and net deferred tax assets increased to $738.0 million from $410.4 million, primarily because of exchanges and related tax attributes.
Guidance, outlook, risks and unusual items
- Management stated that available cash, operating cash flow and revolver capacity are expected to be adequate for at least the next 12 months to fund operations, capital expenditures, debt service, tax benefit arrangements and working capital, even with no growth in sales or profits. No formal revenue or earnings guidance was provided.
- Management expects SG&A to continue increasing as the franchised store base grows and expects the majority of future new stores to be franchisee-owned.
- Adjusted EBITDA included $1.0 million of credit-facility amendment transaction fees, $0.3 million of stock-offering costs, $0.7 million of early lease termination costs, purchase-accounting adjustments and other items. Adjusted net income also excluded $9.2 million of purchase-accounting amortization for the six-month period.
- The company adopted the stock-compensation accounting standard effective January 1, 2017 with no material impact. It expects adoption of the new revenue standard in 2018 to change the timing of recognition for certain franchise and area-development fees and to materially increase reported revenue and expenses for national advertising fund activity, largely on an offsetting basis.
- Key risks include dependence on franchisees, member retention and store success; competition; brand and reputation risk; information-system and third-party-provider risks; substantial variable-rate indebtedness; tax receivable agreement obligations; and the need to refinance or service debt maturing in 2021.
- The company reported ordinary-course claims and litigation but does not believe any current matter will have a material adverse effect. Maximum obligations under certain franchisee guarantees were approximately $1.1 million.
Most important facts for investors to verify
- Whether franchisee store openings and the more than 1,000 committed development opportunities convert into sustainable royalty and equipment revenue growth.
- The durability of 9.0% system-wide same-store sales growth and the effect of membership mix, annual fees and new-store maturation.
- Debt repayment and refinancing capacity, including exposure to variable interest rates, the 2021 term-loan maturity and progressively tighter leverage covenants.
- The cash burden and timing of the $727.1 million tax benefit arrangement liability.
- The effect of increasing Planet Fitness ownership of Pla-Fit Holdings on reported taxes, non-controlling interests, EPS and future cash obligations.
- The impact of the forthcoming revenue-recognition standard, particularly the gross presentation of national advertising fund contributions and expenditures.
- Reconciliation of EBITDA, Adjusted EBITDA and Adjusted net income to GAAP results, including recurring or potentially recurring adjustments.