Planet Fitness, Inc. — Q3 2019 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 quarter ended September 30, 2019, the company had more than 14.1 million members and 1,899 locations, including 1,817 franchised and 82 corporate-owned stores across the United States and selected international markets. Existing area development agreements covered more than 1,000 additional stores.
The filing presents unaudited results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The company operates through Franchise, Corporate-owned stores, and Equipment segments.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $166.8 million | $136.7 million | +22.1% |
| Income from operations | $53.1 million | $43.6 million | +21.8% |
| Operating margin | 31.8% | 31.9% | Approximately flat |
| Net income | $29.7 million | $20.5 million | +45.0% |
| Net income attributable to Planet Fitness | $25.8 million | $17.5 million | +47.5% |
| Diluted EPS | $0.31 | $0.20 | +55.0% |
| EBITDA | $64.8 million | $52.4 million | +23.7% |
| Adjusted EBITDA | $65.7 million | $53.8 million | +22.2% |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Revenue | $497.3 million | $398.5 million | +24.8% |
| Income from operations | $171.5 million | $131.3 million | +30.6% |
| Operating margin | 34.5% | 33.0% | +150 basis points |
| Net income | $101.2 million | $74.4 million | +36.0% |
| Net income attributable to Planet Fitness | $88.0 million | $63.2 million | +39.2% |
| Diluted EPS | $1.04 | $0.72 | +44.4% |
| EBITDA | $199.0 million | $156.9 million | +26.8% |
| Adjusted EBITDA | $205.6 million | $160.9 million | +27.7% |
Q3 revenue growth was led by Franchise revenue of $66.7 million, up 21.7%; Corporate-owned stores revenue of $40.7 million, up 15.1%; and Equipment revenue of $59.4 million, up 27.9%. Equipment growth primarily reflected higher replacement-equipment sales to franchisees.
Q3 same-store sales increased 8.1% for franchisee-owned stores, 4.9% for corporate-owned stores, and 7.9% system-wide. System-wide sales were $781 million, compared with $659 million in the prior-year quarter. Nine-month same-store sales increased 9.1%, 6.2%, and 8.9%, respectively.
For the nine months, operating cash flow was $152.7 million, compared with $143.9 million in 2018. Capital expenditures were $37.1 million, and cash used for acquisitions was $14.8 million. Net cash used in financing activities was $170.8 million, including $157.9 million of share repurchases and $9.0 million of debt repayment.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $219.8 million at September 30, 2019, compared with $289.4 million at December 31, 2018.
- Restricted cash was $30.5 million, primarily held for debt-service and other reserves.
- Total debt, excluding deferred financing costs, was $1.188 billion; carrying value after deferred financing costs was $1.167 billion.
- The debt consisted primarily of fixed-rate senior secured Class A-2 notes bearing interest rates of 4.262% and 4.666%. The notes had anticipated repayment dates in 2022 and 2025 and legal final maturity in 2048.
- The company had $75.0 million of undrawn Variable Funding Notes capacity and stated that available cash, operating cash flow, and borrowing capacity should cover expected needs for at least the next 12 months, including debt service, tax-benefit arrangements, capital expenditures, and working capital.
- Tax-benefit arrangement liabilities totaled $433.4 million, including current and noncurrent amounts.
Material changes versus the prior comparable period
- Revenue and profitability increased substantially, supported by store growth, higher same-store sales, higher royalty rates, and stronger equipment sales.
- The store base increased to 1,899 from 1,646 at September 30, 2018. During the first nine months of 2019, 157 franchised and two corporate-owned stores opened.
- The company acquired four franchisee-owned Maine stores on May 30, 2019 for $14.8 million, adding them to the Corporate-owned stores segment.
- Share repurchases increased to $157.9 million from $42.1 million in the prior-year period. The company repurchased 2.272 million Class A shares during Q3 at an average price of $69.51 and completed its $500 million repurchase authorization.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $130 million of operating lease liabilities at adoption. At September 30, 2019, right-of-use assets were $127.7 million and total lease liabilities were $142.5 million.
- Interest expense increased on a year-to-date basis because of the 2018 issuance of the $1.2 billion securitized notes, although the prior-year period included a $4.6 million loss on extinguishment of debt.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide clear quantitative full-year revenue or earnings guidance in the provided filing text. Management expects continued growth from new franchised stores, existing development commitments, same-store sales, and equipment demand. Selling, general and administrative expenses are expected to continue increasing as the franchise network expands.
- Key risks include dependence on franchisee performance, member acquisition and retention, competition, brand reputation, technology and cybersecurity disruptions, reliance on vendors, and the ability to identify suitable sites for new stores.
- Leverage and refinancing are material risks. The company must service approximately $1.188 billion of principal debt and faces anticipated repayment dates in 2022 and 2025.
- Franchisee lease guarantees created a maximum potential obligation of approximately $10.4 million as of September 30, 2019; no material accrual was recorded.
- A former-employee legal judgment was $6.2 million, including accrued interest. The company recorded an estimated obligation of $1.2 million, offset by an indemnification receivable. An additional $4.3 million of potential interest was not accrued because payment was not considered probable.
- Adjusted EBITDA and adjusted net income exclude or adjust for purchase accounting items, pre-opening costs, tax-benefit arrangement remeasurement, amortization, and other items. These are non-GAAP measures and should not replace GAAP results.
- The company reported effective disclosure controls as of September 30, 2019 and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the pace of new franchise openings and the more than 1,000-store development pipeline can be converted into sustained royalty growth.
- Whether same-store sales growth remains strong as the store base expands and competition increases.
- The sustainability and mix of equipment revenue, particularly replacement-equipment sales to franchisees.
- Debt-service capacity and refinancing plans for the 2022 and 2025 anticipated repayment dates.
- Cash requirements for tax-benefit arrangements, leases, capital expenditures, acquisitions, and share repurchases.
- The impact of franchisee financial health and the company’s approximately $10.4 million of lease guarantees.
- The ultimate resolution and indemnification recovery related to the former-employee judgment and potential additional interest.
- The effect of ASC 842 lease liabilities and the company’s substantial tax receivable agreement obligations on leverage and distributable cash flow.