Planet Fitness, Inc. annual report, FY2021

Planet Fitness, Inc. — Fiscal 2021 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2021. The filing is an annual report, not a standalone fourth-quarter filing. Planet Fitness is primarily a franchisor and operator of fitness centers, with additional revenue from corporate-owned stores and fitness-equipment sales.

Business Context

• At year-end, the system had approximately 15.2 million members and 2,254 stores across the United States, Canada, Puerto Rico, Panama, Mexico and Australia.
• Of the stores, 2,142 were franchised and 112 were corporate-owned; 2,246 stores were open and operating at December 31, 2021.
• Franchisees had signed area development agreements to open more than 1,000 additional stores, including more than 500 expected over the following three years.
• System-wide sales, consisting primarily of monthly dues and annual fees billed by the Company and franchisees, were $3.4 billion, compared with $2.4 billion in 2020 and $3.2 billion in 2019.

Financial Results and Key Metrics

Metric	2021	2020	Change
Total revenue	$587.0 million	$406.6 million	Up 44.4%
Income from operations	$143.4 million	$59.8 million	Up 139.9%
Operating margin	24.4%	14.6%	Up 9.8 percentage points
Net income	$46.1 million	$(15.2) million	Returned to profitability
Net income attributable to Planet Fitness, Inc.	$42.8 million	$(15.0) million	Returned to profitability
Diluted EPS	$0.51	$(0.19)	Improved
EBITDA	$194.9 million	$118.5 million	Up 64.5%
Adjusted EBITDA	$224.4 million	$120.4 million	Up 86.4%
Adjusted diluted EPS	$0.82	$0.04	Improved
Cash flow from operations	$189.3 million	$31.1 million	Up $158.2 million

Revenue increased across all segments: franchise revenue was $290.7 million, corporate-owned stores revenue was $167.2 million, and equipment revenue was $129.1 million. Segment EBITDA was $194.3 million for Franchise, $49.2 million for Corporate-owned stores, and $29.7 million for Equipment; corporate and other costs were $(78.3) million.

Corporate-owned stores generated a 29.4% segment EBITDA margin. Reported four-wall EBITDA margin was approximately 34.0%, or 26.9% after applying the current 7% royalty rate. Approximately 62.6% of members were PF Black Card members, and average monthly dues per member were $17.63 at year-end.

Liquidity, Debt and Capital Resources

• Cash and cash equivalents were $545.9 million at December 31, 2021; restricted cash was $58.0 million, including approximately $42.0 million held by the securitization trustee.
• Total debt, excluding deferred financing costs, was $1.775 billion, including $75.0 million drawn under the 2018 Variable Funding Notes. Carrying value of total debt was $1.758 billion.
• Interest expense was $81.2 million, compared with $82.1 million in 2020.
• Capital expenditures were $54.1 million, including $22.6 million for new corporate-owned stores, $16.7 million for existing stores and $14.4 million for information systems.
• Net cash used in investing activities was $90.9 million, while net cash used in financing activities was $10.2 million. Cash, cash equivalents and restricted cash increased by $88.1 million.
• Management stated that available cash, operating cash flow and amounts drawn under the variable funding notes were expected to cover operating needs, capital expenditures, debt service and tax-benefit-arrangement obligations for at least the next 12 months.
• Tax benefit arrangement liabilities totaled $528.1 million, including $20.3 million classified as current.

Material Changes Versus Prior Periods

• Results rebounded materially from 2020, when COVID-19-related closures, suspended billing and reduced membership levels caused a substantial decline in revenue and profitability.
• Revenue remained below the 2019 level of $688.8 million, and EBITDA remained below the 2019 level of $271.3 million, indicating that the recovery was incomplete.
• Franchise segment EBITDA increased 69.0%, corporate-owned stores EBITDA increased 107.8%, and Equipment segment EBITDA increased 126.6% versus 2020.
• System-wide same-store-sales comparisons for 2021 and 2020 were not reported because stores were closed for portions of the comparable periods. Management reported a return to positive system-wide same-store-sales growth in the third and fourth quarters of 2021.
• The Company opened 132 total stores in 2021, including 125 franchised and seven corporate-owned stores. Two franchisee-owned stores were acquired and became corporate-owned.
• Other loss increased to $15.1 million, primarily due to a $17.5 million credit-loss expense on a held-to-maturity investment, partially offset by a $2.5 million insurance recovery.
• The Company invested $35.0 million in investments during 2021 and acquired a 21% interest in Planet Fitness Australia Holdings for $10.0 million.

Guidance, Outlook, Commentary and Unusual Items

• The filing does not provide formal quantitative revenue or earnings guidance.
• Management expects continued store expansion, membership growth, increased PF Black Card penetration, higher average royalty rates, increased brand investment and additional equipment sales.
• COVID-19 remains a material uncertainty. Stores may be required to close or operate under capacity, masking or other restrictions, and members are not charged dues for periods when their stores are closed.
• On February 10, 2022, after year-end, the Company refinanced portions of its securitized debt by issuing $900.0 million of 2022 Notes, including $425.0 million at 3.251% and $475.0 million at 4.008%, and replaced the 2018 variable funding facility with a $75.0 million facility that was fully drawn.
• On February 10, 2022, the Company acquired Sunshine Fitness, which operated 114 stores, for approximately $800.0 million, consisting of approximately $425.0 million in cash and $375.0 million in equity consideration.
• Following the refinancing and acquisition, management reported approximately $2.1 billion of outstanding debt. These transactions were subsequent events and were not reflected in the December 31, 2021 balance sheet.
• The Company’s growth and liquidity depend heavily on franchisee financial health, access to financing, successful new-store development and continued member demand.

Principal Risks and Contingencies

• COVID-19 or similar public-health events could cause store closures, lower memberships, deferred revenue, reduced development and lower equipment sales.
• High leverage and securitization covenants could restrict flexibility; rapid amortization events may reduce or eliminate cash available for operations and growth.
• Franchisee bankruptcies, disputes, nonrenewals, operating failures or insufficient financing could reduce royalty revenue and harm the brand.
• Competition from gyms, boutique studios, digital fitness and at-home fitness could pressure membership growth, pricing and retention.
• Cybersecurity incidents, payment-processing failures and evolving privacy, ACH, recurring-payment and consumer-protection rules could increase costs or disrupt collections.
• Indoor-tanning regulation and adverse public perceptions could affect PF Black Card demand and expose the Company or franchisees to compliance costs.
• The Company had approximately $6.7 million of maximum lease-guarantee exposure for certain franchisees; no material guarantee liability was accrued.
• A disputed Mexico franchisee put option remained unresolved at December 31, 2021; the Company estimated the purchase price would approximate the fair value of acquired assets.
• Legal proceedings arise in the ordinary course. The Company recorded an estimated $2.2 million obligation related to a judgment, offset by a fully reserved indemnification receivable.

Investor Verification Checklist

• Verify the effect of the Sunshine Fitness acquisition on 2022 store count, revenue mix, margins, leverage and integration costs.
• Reconcile the post-refinancing debt balance, repayment dates, interest rates, reserve requirements and covenant compliance.
• Monitor membership levels, PF Black Card penetration, average monthly dues and system-wide same-store sales as comparable periods normalize.
• Assess whether cash flow remains sufficient for debt service, tax receivable agreement payments, leases and planned capital expenditures.
• Review the $528.1 million tax benefit arrangement liability, potential acceleration provisions and sensitivity to future taxable income and tax rates.
• Evaluate franchisee financing, construction costs, store openings and the more than 1,000-store development pipeline.
• Confirm the resolution and financial impact of the Mexico put-option dispute and any other material legal or regulatory matters.
• Distinguish GAAP earnings and cash flow from non-GAAP measures such as EBITDA, Adjusted EBITDA and Adjusted net income.