Planet Fitness, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016. The financial statements are unaudited and should be read with the company’s 2015 Form 10-K. Planet Fitness operated 1,171 locations and served more than 8.3 million members across 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. The store base included 1,113 franchised and 58 corporate-owned locations.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $83.3 million | $76.9 million | 8.3% |
| Franchise segment revenue | $27.7 million | $21.8 million | 27.2% |
| Corporate-owned stores revenue | $25.7 million | $23.5 million | 9.1% |
| Equipment revenue | $30.0 million | $31.6 million | (5.2%) |
| Income from operations | $25.6 million | $14.3 million | 77.0% |
| Operating margin | 30.7% | 18.6% | Up 12.1 points |
| Net income | $16.3 million | $8.5 million | 91.4% |
| Net margin | 19.6% | 11.1% | Up 8.5 points |
| Net income attributable to Planet Fitness, Inc. | $3.4 million | $8.4 million | (60.0%) |
| Class A basic and diluted EPS | $0.09 | Not presented | Prior-period EPS unavailable |
| Segment EBITDA | $33.7 million | $21.8 million | 54.9% |
| Adjusted EBITDA | $34.3 million | $28.5 million | 20.4% |
Franchise Segment EBITDA increased 75.4% to $23.8 million, while corporate-owned stores Segment EBITDA increased 30.3% to $10.2 million. Equipment Segment EBITDA declined 6.6% to $6.3 million. Same-store sales growth was 7.0% for franchisee-owned stores, 4.9% for corporate-owned stores and 6.8% system-wide.
Cash flow, liquidity and capital structure
| Metric | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $38.3 million | $31.4 million |
| Total assets | $685.7 million | $699.2 million |
| Total debt, net of deferred financing costs | $484.0 million | $484.9 million |
| Stockholders’ equity | $7.3 million | $(1.1) million |
- Operating cash flow was $15.3 million, compared with $12.0 million in Q1 2015.
- Investing cash outflow was $0.8 million, compared with $5.3 million in Q1 2015; capital expenditures were $0.9 million.
- Financing cash outflow was $7.7 million, primarily reflecting $6.4 million of distributions to continuing LLC members and $1.3 million of debt repayment.
- Cash increased by $6.8 million during the quarter to $38.3 million.
- The company reported $40.0 million of available borrowing capacity under its revolving credit facility.
- Term loan borrowings were $491.0 million, with approximately $5.1 million of annual scheduled principal payments and final scheduled maturity on March 31, 2021. The revolver matures March 31, 2019.
- The company’s leverage ratio was 3.4 to 1.0, below the 6.5 to 1.0 covenant limit applicable at March 31, 2016.
- Tax benefit arrangement liabilities totaled $138.1 million, including $5.9 million current and $132.2 million noncurrent.
Material changes versus the prior comparable period
- Revenue growth was driven principally by franchise royalties, franchise fees, vendor commissions and the larger store base. Franchise stores increased from 919 to 1,113 year over year, while total stores increased from 976 to 1,171.
- Franchise revenue benefited from new stores, 7.0% franchisee-owned same-store sales growth and higher annual-fee royalties.
- Equipment revenue declined because fewer new franchisee-owned stores opened, partly offset by higher replacement-equipment sales.
- Operating margin improved materially because cost of revenue, selling, general and administrative expense, and depreciation and amortization declined as percentages of revenue. Q1 2015 included $3.6 million of information-technology upgrade costs and $1.7 million of IPO-related costs.
- Interest expense increased 33.9% to $6.4 million because of the additional $120.0 million of term-loan borrowings issued on March 31, 2015.
- Income attributable to Planet Fitness, Inc. declined despite higher consolidated net income because the non-controlling interest attributable to other holders of Pla-Fit Holdings increased substantially. Planet Fitness, Inc. held 37.1% of the economic interest in Pla-Fit Holdings at quarter-end.
- Management fees to TSG were zero in Q1 2016 versus $0.3 million in Q1 2015 following termination of the management agreement in connection with the IPO.
- The company stated that the material weakness related to authorization and processing of IT hardware purchases, identified in the first half of 2015, had been remediated as of March 31, 2016.
Outlook, commentary, risks and unusual items
- The company reported commitments to open more than 1,000 additional stores under existing area development agreements. Management expects most future openings to be franchisee-owned.
- Management believes cash on hand, operating cash flow and revolver availability will be sufficient for at least the next twelve months to fund operations, debt service, tax benefit arrangements, capital expenditures and working capital, even with no growth in sales or profits.
- The company cautioned that future cash generation and refinancing or servicing of its senior secured credit facility depend on economic, financial and business conditions outside its control.
- A migration to a new point-of-sale and billing system is expected to reduce royalties and negatively affect same-store-sales metrics through the remainder of 2016 because delinquent accounts are terminated earlier. Management does not expect a material long-term royalty impact.
- Variable-rate debt creates interest-rate exposure. A 100-basis-point increase in the effective rate on outstanding borrowings would increase annualized pretax interest expense by approximately $4.9 million. Interest-rate caps with $224.0 million of notional value were outstanding at quarter-end.
- Other risks include franchisee performance and relationships, brand reputation, competition, member retention, reliance on vendors and third-party systems, substantial indebtedness, tax receivable agreements, minimum-wage increases, foreign exchange exposure and ordinary-course litigation.
- Lease and debt guarantees for certain related franchise entities had a maximum commitment of approximately $1.7 million; no accrual was recorded because the estimated fair value was not material.
- On May 10, 2016, the board authorized a program to repurchase up to $20.0 million of Class A common stock using existing working capital. The program has no fixed expiration date and may be suspended or discontinued.
Facts investors should verify
- Reconcile consolidated net income growth with the decline in income attributable to Planet Fitness, Inc. and monitor changes in the non-controlling interest.
- Assess debt-service capacity, variable-rate exposure, scheduled amortization and compliance with the progressively tighter leverage covenant.
- Evaluate whether franchise store openings and the more than 1,000-store development pipeline translate into sustained royalty and commission growth.
- Monitor the effect of the new billing practices on same-store sales, royalties, member collections and franchisee economics.
- Review the $138.1 million tax benefit arrangement liability and future cash payments, particularly the $107.5 million scheduled thereafter.
- Confirm execution of the $20.0 million share-repurchase authorization and its effect on liquidity and ownership.
- Read the company’s 2015 Form 10-K risk factors and verify the continuing effectiveness of the controls remediation.