Planet Fitness, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Planet Fitness is a franchisor and operator of fitness centers and sells fitness equipment to franchisees. For the three months ended March 31, 2020, the system had more than 15.5 million members and 2,039 locations across the United States and several international markets, including 1,940 franchised and 99 corporate-owned stores.
The company closed all stores system-wide by March 22, 2020 in response to COVID-19. All stores remained closed at March 31, 2020. The interim financial statements are unaudited and should be read with the 2019 Form 10-K.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $127.2 million | $148.8 million | Down 14.5% |
| Income from operations | $34.3 million | $53.2 million | Down 35.6% |
| Net income | $10.4 million | $31.6 million | Down 67.2% |
| Net income attributable to Planet Fitness, Inc. | $8.6 million | $27.4 million | Down 68.6% |
| Diluted EPS | $0.11 | $0.32 | Down $0.21 |
| EBITDA | $46.4 million | $59.8 million | Down 22.5% |
| Adjusted EBITDA | $46.5 million | $63.4 million | Down 26.6% |
| Net cash from operating activities | $73.1 million | $57.9 million | Up $15.2 million |
Operating margin declined to 26.8% from 35.8%, while net margin declined to 8.2% from 21.3%. Same-store sales growth was 9.8%, compared with 10.2% in the prior-year quarter, although the calculation excluded stores that closed before March billing.
Revenue and Segment Changes
- Franchise segment revenue decreased 11.0% to $58.5 million. Franchise revenue declined 7.6% to $48.9 million, and national advertising fund revenue declined to $9.2 million from $11.8 million.
- Corporate-owned stores revenue increased 6.5% to $40.5 million, primarily because of stores opened or acquired since January 1, 2019, partially offset by COVID-19 effects.
- Equipment revenue decreased 37.4% to $28.2 million, including approximately $10.0 million of COVID-19-related impact from closures and travel restrictions.
- Segment EBITDA declined to $46.4 million from $59.8 million. Franchise, corporate-owned stores, and equipment EBITDA decreased 22.4%, 22.9%, and 38.8%, respectively.
- Approximately $24.6 million of corporate-owned store and franchise revenue related to monthly membership billings was deferred because of temporary closures. This included approximately $14.1 million of royalty revenue, $4.6 million of national advertising fund revenue, and $5.9 million of corporate-owned store revenue.
Cash Flow, Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $547.5 million at March 31, 2020, compared with $436.3 million at December 31, 2019. Restricted cash was $63.2 million.
- Net cash provided by operating activities was $73.1 million. Capital expenditures were approximately $9.2 million, and investing cash usage was $9.0 million.
- Net financing cash provided was $69.4 million, primarily reflecting the full draw of $75.0 million under the Variable Funding Notes on March 20, 2020.
- Total debt, including the Variable Funding Notes and net of deferred financing costs, was $1.777 billion at March 31, 2020, compared with $1.705 billion at year-end 2019.
- The Variable Funding Notes carried a stated current interest rate of 2.95%; a 100-basis-point increase would increase annualized pretax interest expense by approximately $0.8 million.
- Management stated that available cash, operating cash flow, and the drawn Variable Funding Notes were expected to fund operating needs, capital expenditures, tax benefit arrangement payments, and debt service well into 2021, subject to COVID-19 developments.
Guidance, Outlook, Risks, and Unusual Items
- The company withdrew its 2020 full-year guidance on March 30, 2020 because the duration and impact of COVID-19 could not reasonably be estimated.
- Management expected continued adverse effects on revenue, cash flow, new store development, remodels, equipment sales, membership activity, and franchisee operations.
- Management reduced executive and senior management salaries, suspended non-employee director retainers, furloughed most corporate-owned store employees, deferred capital expenditures, and suspended share repurchases.
- The $500 million share repurchase program was suspended on March 18, 2020. The final settlement of the $300 million 2019 accelerated share repurchase agreement delivered an additional 666,961 shares at an average price of $75.82.
- Subsequent to quarter-end, the company provided an approximately $9.0 million short-term loan to its third-party payment processor for amounts drafted by franchisee-owned stores but not collected because of COVID-19. Repayment is expected over several months after stores reopen.
- Material risks include prolonged store closures, reduced membership and billing activity, franchisee financial stress, substantial indebtedness, debt covenant and refinancing requirements, supply-chain and equipment disruptions, and possible deterioration in liquidity or operating cash flow.
- The company had approximately $14.5 million of maximum exposure under franchisee lease guarantees, with no material liability accrued. A separate legal judgment was estimated at approximately $1.3 million and was offset by an indemnification receivable.
Important Facts for Investors to Verify
- Timing and pace of store reopenings, member reactivation, billing reinstatement, and recognition of deferred revenue.
- Actual COVID-19 effects on franchisee solvency, new store openings, equipment demand, and same-store sales.
- Cash burn, operating cash flow, and compliance with debt-service, leverage, rapid-amortization, and other securitized financing requirements.
- Refinancing or repayment plans for the anticipated 2022, 2025, and 2029 note repayment dates and the $75.0 million Variable Funding Notes.
- Whether management’s liquidity expectations remain valid as stores reopen and tax benefit arrangement and debt payments become due.
- Potential impairment of goodwill, intangible assets, and corporate-owned store assets if the pandemic materially reduces expected future cash flows.