Planet Fitness, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Planet Fitness operates through franchising, corporate-owned fitness centers and equipment sales. At June 30, 2020, the system had more than 15.2 million members and 2,059 locations, including 1,960 franchised and 99 corporate-owned stores. All stores were closed beginning in March in response to COVID-19; 1,490 had reopened by June 30.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $40.2 million, down 77.9% | $167.5 million, down 49.3% |
| Operating income (loss) | $(22.7) million; operating margin of approximately (56.4)% | $11.5 million; operating margin of approximately 6.9% |
| Net income (loss) | $(32.0) million; net margin of approximately (79.5)% | $(21.6) million; net margin of approximately (12.9)% |
| Net income (loss) attributable to Planet Fitness | $(29.2) million; diluted EPS $(0.36) | $(20.6) million; diluted EPS $(0.26) |
| EBITDA | $(9.8) million | $36.6 million |
| Adjusted EBITDA | $(9.3) million | $37.3 million |
| Operating cash flow | $(13.0) million for the six months, versus $82.5 million in 2019 |
Second-quarter revenue declines reflected store closures and lower equipment demand. Franchise revenue was $16.2 million, corporate-owned store revenue was $9.4 million and equipment revenue was $9.8 million. System-wide sales were $86 million in the quarter and $1.0 billion for the six months, compared with $851 million and $1.6 billion, respectively, in 2019.
At June 30, cash and cash equivalents were $423.6 million, with restricted cash of $86.4 million, including $70.4 million held by the securitization trustee. Total debt, including $75.0 million drawn under the Variable Funding Notes, was $1.8 billion before deferred financing costs, or $1.77 billion net. Lease liabilities were $172.5 million, and projected tax benefit arrangement liabilities were $469.0 million. Management stated that available cash, operating cash flow and the drawn facility should cover operating needs, capital expenditures, debt service and tax benefit arrangement obligations for at least the next 12 months, subject to COVID-19-related uncertainty.
Material changes versus the prior comparable period
- Second-quarter revenue fell $141.4 million, or 77.9%, primarily because of COVID-19 closures; six-month revenue fell $163.0 million, or 49.3%.
- Second-quarter franchise segment EBITDA declined to $3.5 million from $49.9 million, corporate-owned stores EBITDA declined to $(6.3) million from $18.1 million, and equipment EBITDA declined to $1.3 million from $16.8 million.
- Six-month operating cash flow declined by $95.5 million to a use of $13.0 million, primarily due to lower earnings.
- Interest expense increased to $20.5 million in the quarter and $40.7 million for the six months, principally because of the $550 million 2019 Notes issued in December 2019.
- The company borrowed the full $75 million available under its Variable Funding Notes on March 20, 2020.
- Share repurchases were suspended on March 18, 2020; no shares were repurchased during the quarter.
- Capital expenditures were $21.2 million for the six months, compared with $18.9 million in 2019, while no franchise acquisitions were completed in 2020 versus $14.8 million spent on acquisitions in the prior-year period.
Guidance, outlook, risks and unusual items
The company withdrew its 2020 full-year guidance and provided no updated guidance because the duration and impact of COVID-19 could not be reasonably estimated. Management expects the pandemic to continue negatively affecting operating results, membership levels, new store development, remodels and equipment sales. Stores may be required to close again under local guidelines, and same-store sales comparisons were not provided because fewer than 50% of the relevant stores had billings throughout the periods.
Management reduced senior executive compensation, furloughed most employees at closed corporate-owned stores, deferred certain capital expenditures, delayed annual tax benefit arrangement payments to the third quarter and suspended share repurchases to preserve liquidity. Approximately $10.3 million of deferred revenue related to March membership billings remained to be recognized as stores reopened.
Key financial risks include substantial leverage, required principal and interest payments, refinancing exposure around anticipated repayment dates, securitization covenants and rapid-amortization events, continued membership declines, additional store closures, franchisee financial stress, and potential supply-chain or equipment demand disruption. The company also had a disputed Mexico franchisee put option that could require acquisition of stores; the transaction had not closed as of June 30, 2020. Lease guarantees for certain franchisees represented a maximum potential obligation of approximately $14.4 million.
Most important facts for investors to verify
- Whether reopened stores remain open and whether additional closures materially affect membership, royalty revenue and cash collections.
- The pace of membership recovery and the amount of deferred revenue recognized as stores reopen.
- Liquidity after operating cash flow turned negative, including the sustainability of the $423.6 million cash balance and the $75 million revolving borrowing.
- Compliance with the securitized debt covenants, including the 7.0x leverage cap, debt-service requirements and anticipated 2022, 2025 and 2029 repayment dates.
- The company’s ability to service approximately $1.8 billion of debt and $469.0 million of projected tax benefit arrangement payments while earnings remain depressed.
- The final terms and financial impact of the disputed Mexico acquisition obligation.