Planet Fitness, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, filed February 28, 2020. Planet Fitness is a franchisor and operator of fitness centers with three reportable segments: Franchise, Corporate-owned stores, and Equipment. The company had approximately 14.4 million members and 2,001 locations at year-end, including 1,903 franchised and 98 corporate-owned stores across the United States and selected international markets.
The business emphasizes a low-price, recurring-membership model, with standard memberships typically priced at $10 per month and PF Black Card memberships at approximately $22.99 per month. Approximately 90% of corporate-owned and franchise revenue consisted of recurring revenue streams in 2019.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $688.8 million | $572.9 million | 20.2% increase |
| Income from operations | $233.1 million | $184.0 million | 26.6% increase |
| Operating margin | 33.9% | 32.1% | 180 basis-point expansion |
| Net income | $135.4 million | $103.2 million | 31.3% increase |
| Net income attributable to Planet Fitness, Inc. | $117.7 million | $88.0 million | 33.7% increase |
| Diluted EPS | $1.41 | $1.00 | 41.0% increase |
| Adjusted EBITDA | $282.2 million | $223.2 million | 26.4% increase |
| Adjusted net income | $146.7 million | $119.5 million | 22.7% increase |
| Net cash provided by operating activities | $204.3 million | $184.4 million | 10.8% increase |
Revenue mix in 2019 was $277.6 million from the Franchise segment, $159.7 million from Corporate-owned stores, and $251.5 million from Equipment. System-wide sales were approximately $3.2 billion, up from $2.8 billion in 2018. System-wide same-store sales increased 8.8%, including 9.0% for franchisee-owned stores and 6.1% for corporate-owned stores.
At December 31, 2019, cash and cash equivalents were $436.3 million, with an additional $42.5 million of restricted cash. Total debt, excluding deferred financing costs, was $1.735 billion, compared with $1.197 billion at year-end 2018. Net debt after deferred financing costs was approximately $1.705 billion. The $75.0 million Variable Funding Notes facility was undrawn.
Total assets were $1.717 billion and total stockholders’ deficit was $707.8 million. The company does not currently pay cash dividends.
Material changes versus the prior comparable period
- Franchise revenue increased 27.3% to $223.1 million, driven by higher royalties from same-store sales, new stores, and higher average royalty rates. Average royalty rate increased to 6.10% from 3.27% in 2015; the current franchise agreement rate is generally 7%.
- Franchise segment EBITDA increased 26.0% to $192.3 million. Corporate-owned stores segment EBITDA increased 15.7% to $65.6 million, and Equipment segment EBITDA increased 25.2% to $59.6 million.
- The company and franchisees opened 261 stores in 2019, including 255 franchisee-owned stores and six corporate-owned stores. The company also acquired 16 franchisee-owned stores, increasing corporate-owned stores from 76 to 98.
- Membership increased 14.7% year over year, while store count increased 14.9%. PF Black Card penetration reached 61% of members, compared with 57% at December 31, 2015.
- Capital expenditures increased to $57.9 million from $40.9 million, primarily for new and existing corporate-owned stores and information systems. Cash used for acquisitions was $52.6 million.
- The company issued $550.0 million of 3.858% fixed-rate 2019 Notes in December 2019. Interest expense increased to $60.9 million from $50.7 million, primarily because of the 2018 and 2019 note issuances.
- The company repurchased and retired approximately 6.1 million Class A shares for $458.2 million during 2019. A $300 million accelerated share repurchase agreement delivered 3.3 million shares initially; final settlement was expected in the second quarter of 2020.
- ASC 842 lease accounting was adopted on January 1, 2019, adding approximately $130 million of operating lease liabilities at adoption and $155.6 million of right-of-use assets at year-end.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific quantitative financial forecast in the filing. Management described continued opportunities to expand the store base, increase brand awareness, grow same-store sales, increase PF Black Card penetration, raise average royalty rates as agreements renew, and expand equipment sales. Signed area development agreements represented commitments to open more than 1,000 additional stores, including more than 500 over the following three years. Management believes the U.S. store opportunity could exceed 4,000 locations.
Management stated that available cash, operating cash flow, and the undrawn Variable Funding Notes capacity should be adequate for anticipated debt service, tax benefit arrangement payments, capital expenditures, tax distributions, and working capital needs for at least the next twelve months, even assuming no growth in sales or profits. This assessment remains subject to operating performance, refinancing conditions, covenant compliance, and other risks.
- Leverage and refinancing: substantially all U.S. revenue-generating assets are pledged to secure the securitized notes. The 2018 Notes have anticipated repayment dates in 2022 and 2025, and the 2019 Notes have an anticipated repayment date in 2029, creating refinancing and rapid-amortization risk.
- Franchise dependence: royalties depend on the financial performance, compliance, financing access, and renewal decisions of approximately 130 franchisee groups operating 1,903 stores.
- Growth execution: future development depends on franchisee financing, suitable real estate, construction costs, permitting, labor availability, and the ability to avoid cannibalization among nearby stores.
- Tax receivable agreements: the company recorded $427.2 million of obligations at year-end and generally must remit 85% of specified realized tax benefits to agreement holders. A hypothetical early termination as of December 31, 2019 was estimated at $491.1 million.
- Contingencies and guarantees: the company recorded an estimated $1.3 million obligation related to a civil judgment, offset by an indemnification receivable. Lease guarantees for certain franchisees had a maximum exposure of approximately $10.3 million, with no material accrual recorded.
- Unusual items and non-GAAP measures: adjusted results exclude items including tax benefit arrangement remeasurement, purchase accounting adjustments, a $1.8 million loss on reacquired franchise rights, and $1.8 million of pre-opening costs. Adjusted EBITDA and adjusted net income are not GAAP measures.
- Audit and controls: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Critical audit matters included lease accounting, deferred tax assets associated with exchanges, and valuation of reacquired franchise rights from the New Jersey acquisition.
Most important facts for an investor to verify
- Reconcile reported revenue and EBITDA growth with the contribution from new stores, same-store sales, royalty-rate changes, equipment replacement sales, and corporate-owned store acquisitions.
- Assess debt-service capacity and refinancing requirements relative to approximately $1.735 billion of principal debt, anticipated repayment dates, covenants, and restricted cash.
- Review the tax receivable agreement liability, projected payments of $427.2 million, and the potential impact of future exchanges or a change of control.
- Evaluate whether the more than 1,000 signed development commitments convert into stores on schedule and at acceptable franchisee returns.
- Monitor franchisee financial health, renewals, compliance with brand standards, and the effects of competition, economic conditions, and potential store cannibalization.
- Verify the final settlement of the $300 million 2019 accelerated share repurchase agreement and the remaining repurchase authorization.
- Distinguish GAAP earnings from management’s adjusted EBITDA, adjusted net income, four-wall EBITDA, and royalty-adjusted four-wall EBITDA.