Planet Fitness, Inc. Form 10-Q Summary
Business Context and Reporting Period
Planet Fitness, Inc. is a franchisor and operator of fitness centers and a seller of fitness equipment. For the quarter ended June 30, 2022, the system had more than 16.5 million members and 2,324 locations across the United States and selected international markets, including 2,091 franchisee-owned and 233 corporate-owned stores. The filing presents unaudited results for the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
As of June 30, 2022, no stores were closed because of COVID-19. The company had commitments to open more than 1,000 additional stores under existing area development agreements.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $224.4 million, up 63.5% | $411.1 million, up 65.0% |
| Income from operations | $55.1 million; 24.6% margin | $103.7 million; 25.2% margin |
| Net income | $25.1 million | $43.4 million |
| Net income attributable to Planet Fitness, Inc. | $22.3 million; diluted EPS $0.26 | $38.8 million; diluted EPS $0.46 |
| Segment EBITDA | $87.3 million; 38.9% of revenue | $165.5 million; 40.3% of revenue |
| Adjusted EBITDA | $89.9 million | $167.3 million |
| Adjusted diluted net income per share | $0.38 | $0.70 |
| Net cash provided by operating activities | Not separately provided for the quarter | $110.3 million |
Revenue growth was led by corporate-owned stores, which generated $101.5 million in the quarter and $177.6 million year to date, reflecting the Sunshine Fitness acquisition. Franchise segment revenue was $82.5 million in the quarter and $162.6 million year to date. Equipment revenue was $40.4 million in the quarter and $70.9 million year to date.
Same-store sales increased 13.6% system-wide in the quarter and 14.6% year to date, including franchisee-owned store growth of 13.4% and 14.5%, respectively, and corporate-owned store growth of 15.7% and 16.3%, respectively. System-wide sales were $1.019 billion in the quarter and $1.980 billion year to date.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $383.5 million at June 30, 2022; cash, cash equivalents and restricted cash totaled $446.3 million.
- Operating cash flow was $110.3 million for the first six months, compared with $74.3 million in the prior-year period.
- Investing cash outflow was $466.3 million, including $424.9 million for the Sunshine acquisition and $41.4 million of capital expenditures.
- Financing cash inflow was $198.6 million, reflecting $900.0 million of new long-term debt, repayment of $714.4 million of debt and variable funding notes, $44.3 million of share repurchases, and debt-related costs.
- Total debt, net of deferred financing costs, was $2.006 billion, including $2.036 billion of principal outstanding before deferred financing costs. The company had no outstanding borrowings under its $75 million variable funding facility at June 30, 2022.
- Operating and finance lease liabilities totaled $390.0 million. Tax benefit arrangement liabilities totaled $510.0 million.
- Management stated that available cash, operating cash flow and availability under the variable funding facility should be adequate for at least the next 12 months, including debt service, tax benefit arrangements, capital expenditures and working capital needs.
Material Changes Versus the Prior Comparable Period
- The February 10, 2022 Sunshine Fitness acquisition added 114 corporate-owned stores. Preliminary consideration was $824.6 million, consisting of $430.9 million in cash and $393.7 million in equity consideration.
- Sunshine contributed $49.8 million of second-quarter revenue and $4.1 million of income before taxes; year-to-date contributions were $78.5 million and $7.1 million, respectively.
- Corporate-owned stores increased from 106 at June 30, 2021 to 233 at June 30, 2022, while total stores increased from 2,170 to 2,324.
- Goodwill increased from $228.6 million at December 31, 2021 to $714.2 million, primarily from the Sunshine acquisition. Intangible assets increased to $441.3 million from $200.9 million.
- The company refinanced debt in February 2022 with $900 million of new fixed-rate notes, repaid the 2018 Class A-2-I notes and temporarily drew, then repaid, the $75 million variable funding facility.
- Interest expense increased to $22.0 million in the quarter and $44.6 million year to date, partly due to higher debt balances and a $1.6 million loss on debt extinguishment in the first quarter.
- The company repurchased 697,691 shares for $44.3 million during the first six months. Approximately $155.7 million remained available under the repurchase program at June 30, 2022.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear quantitative full-year revenue, earnings or store-opening guidance. Management emphasized continued franchise development, corporate-owned store growth, same-store sales performance and more than 1,000 committed future store openings.
- Reported results include significant acquisition-related effects, including purchase accounting amortization, transaction costs, a loss on reacquired franchise rights, a gain on settlement of preexisting contracts and increased depreciation and lease costs.
- Other unusual items included a $3.9 million gain from remeasurement of tax benefit arrangements, a $1.8 million gain from reducing the allowance for credit losses on held-to-maturity investments, and a $0.9 million reserve related to a legal indemnification receivable.
- The company recorded a $3.2 million estimated obligation related to a final judgment in a former-employee civil action and fully reserved the related indemnification receivable because of collectability uncertainty.
- A disputed Mexico franchisee put-option transaction requiring the company to acquire certain stores had not closed as of June 30, 2022; the company expects the purchase price to approximate the fair value of acquired assets.
- Key risks include COVID-19 or similar disruptions, competition, member retention, franchisee financial condition, store development and construction costs, cybersecurity and data privacy, regulatory changes affecting memberships and payments, long-term leases, supplier concentration, inflation, and the ability to refinance or repay securitized debt.
- The company was in compliance with its debt covenants at June 30, 2022. Fixed-rate notes reduce exposure to rising interest rates, but borrowings under the variable facility would be subject to variable rates.
Important Facts for Investors to Verify
- Final purchase-accounting valuations and the realized operating performance and synergies of the Sunshine Fitness acquisition.
- The sustainability of reported same-store sales growth and the pace of new franchise and corporate-owned store openings.
- Debt amortization and refinancing requirements, including anticipated repayment dates beginning in 2025 and the associated covenant requirements.
- Cash generation after capital expenditures, debt service, share repurchases and tax benefit arrangement payments.
- The effect of acquisition-related depreciation, amortization, lease costs and other non-GAAP adjustments on recurring earnings.
- The status and potential cost of the disputed Mexico acquisition and the former-employee litigation matter.
- Whether inflation, labor, equipment, shipping and construction costs pressure corporate-owned store and franchisee profitability.