Planet Fitness, Inc. — Q2 2023 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. As of June 30, 2023, it had more than 18.4 million members and 2,472 locations across the United States and selected international markets, including 2,230 franchised and 242 corporate-owned stores. The unaudited filing covers the three and six months ended June 30, 2023, compared with the same periods in 2022.
The company operates through Franchise, Corporate-owned Stores, and Equipment segments. It had commitments to open more than 1,000 additional stores under existing area development agreements.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $286.5 million | $224.4 million | $508.7 million | $411.1 million |
| Income from operations | $77.0 million | $55.1 million | $129.2 million | $103.7 million |
| Net income | $44.2 million | $25.1 million | $68.9 million | $43.4 million |
| Net income attributable to Planet Fitness | $41.1 million | $22.3 million | $63.8 million | $38.8 million |
| Diluted EPS | $0.48 | $0.26 | $0.75 | $0.46 |
| EBITDA | $114.1 million | $87.3 million | $202.1 million | $165.5 million |
| Adjusted EBITDA | $118.9 million | $89.1 million | $209.2 million | $165.8 million |
| Net cash provided by operating activities | — | — | $157.3 million | $110.3 million |
Q2 operating margin was approximately 26.9%, compared with 24.6% in the prior-year quarter. Net income margin was approximately 15.4%, compared with 11.2%. Six-month operating margin was approximately 25.4%, compared with 25.2%, while net income margin was approximately 13.6%, compared with 10.6%.
- Q2 revenue increased 27.6%; six-month revenue increased 23.7%.
- Q2 franchise segment revenue rose 19.7%, corporate-owned stores revenue rose 12.1%, and equipment revenue rose 82.6%.
- System-wide sales were $1.147 billion in Q2 and $2.256 billion for the first six months, compared with $1.019 billion and $1.980 billion, respectively, in the prior-year periods.
- Same-store sales growth was 8.7% system-wide in Q2 and 9.3% for the first six months. Franchisee-owned store growth was 8.6% and 9.1%, respectively; corporate-owned store growth was 10.2% and 11.0%.
- Total Segment EBITDA increased 30.6% in Q2 and 22.1% for the first six months. Adjusted EBITDA increased 33.4% and 26.1%, respectively.
Cash flow, debt, and liquidity
- At June 30, 2023, the company had $236.1 million of cash and equivalents, $117.8 million of current marketable securities, $2.5 million of long-term marketable securities, and $62.5 million of restricted cash.
- Total debt was $1.991 billion net of deferred financing costs, including $2.015 billion of principal outstanding and $20.8 million of current maturities. Estimated fair value of long-term debt was $1.774 billion.
- Operating cash flow increased to $157.3 million from $110.3 million. Capital expenditures were $45.1 million.
- Investing cash outflows were $201.0 million, including $119.6 million of marketable securities purchases, the $26.3 million Florida acquisition, and a $10.0 million investment in Planet Fitmex.
- Financing cash outflows were $130.9 million, primarily reflecting $125.0 million of share repurchases and $10.4 million of debt repayments.
- The $75.0 million variable funding facility was undrawn at quarter-end. Management stated that available liquidity, operating cash flow, marketable securities, and the facility should be adequate for at least the next 12 months, subject to business and economic conditions.
- The company was in compliance with its debt covenants at June 30, 2023. Future obligations include scheduled debt principal payments, leases, and projected tax benefit arrangement payments of $475.0 million.
Material changes versus the prior comparable period
- Revenue growth was driven by higher royalties and fees, same-store sales, new stores, corporate-owned store growth, and substantially higher equipment sales to existing franchisees.
- The company acquired four Florida franchisee stores for approximately $26.3 million on April 16, 2023, adding them to the corporate-owned store segment.
- Store count increased to 2,472 from 2,324 at June 30, 2022. Franchisee-owned stores increased to 2,230 from 2,091, and corporate-owned stores increased to 242 from 233.
- The company repurchased 1.7 million Class A shares for $125.0 million during the first six months, including 1.4 million shares for $100.0 million in Q2. Approximately $375.0 million remained under the $500.0 million repurchase authorization at quarter-end.
- Interest income increased materially because of higher interest rates and increased investment balances. Interest expense declined modestly because the variable funding notes were repaid in May 2022 and the prior-year period included a $1.6 million debt extinguishment loss.
- Other losses included a $6.3 million increase in the estimated Mexico legal settlement liability during the first six months, bringing the remaining liability to $14.5 million at June 30, 2023.
- Adjusted results included $1.2 million of severance costs related to eliminating the President and Chief Operating Officer position, as well as legal, acquisition, and other unusual items.
Guidance, outlook, commentary, and risks
The filing does not provide explicit full-year revenue, EBITDA, or earnings guidance. Management expects continued growth from new store openings, existing area development commitments, same-store sales, franchise expansion, corporate-owned stores, and equipment sales. Management also believes current liquidity will support anticipated debt service, capital expenditures, tax benefit arrangement payments, and working capital needs for at least the next 12 months.
- Key risks include competition, member acquisition and retention, franchisee financial performance and bankruptcies, inflation and construction costs, supply-chain disruptions, site availability, store cannibalization, labor costs, and dependence on suppliers.
- Cybersecurity, data privacy, information-system interruptions, payment-processing regulations, auto-renewal and cancellation laws, and consumer-protection requirements could affect operations and reputation.
- The company has substantial leverage and relies on refinancing or repayment of securitized notes around anticipated repayment dates. Failure to refinance could result in additional interest and rapid amortization events.
- Marketable securities are exposed to credit, liquidity, market, and interest-rate risk. A 100-basis-point increase on borrowings under the undrawn variable funding facility would increase annualized pretax interest expense by approximately $0.8 million if drawn.
- Off-balance-sheet obligations include franchisee lease guarantees with a maximum potential obligation of approximately $5.6 million; no material accrual was recorded.
- The company deconsolidated two variable-interest entities during Q2 after determining it was no longer the primary beneficiary. The deconsolidation did not affect the statement of operations.
Important facts for investors to verify
- Whether same-store sales and membership growth remain resilient as comparisons become more difficult.
- The pace and economics of openings under the more than 1,000 existing area development commitments.
- Equipment revenue sustainability and related gross-margin trends, particularly sales to existing franchisees.
- Debt repayment and refinancing capacity around the 2025–2026 anticipated repayment dates, including compliance with securitized financing covenants.
- The ultimate cost and timing of the Mexico settlement and any required acquisition of franchisee-owned Mexican stores.
- The effect of continued share repurchases on liquidity, leverage, diluted ownership, and per-share earnings.
- Execution of the Florida acquisition and any further corporate-owned store acquisitions.
- Changes in marketable securities values, interest rates, inflation, labor costs, and franchisee financial health.