Planet Fitness, Inc. — 2018 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Planet Fitness is a fitness-center franchisor, operator and equipment seller. At quarter-end, it had more than 11.8 million members and 1,565 locations, including 1,497 franchised and 68 corporate-owned stores, across the United States and selected international markets. Existing area development agreements covered more than 1,000 potential new stores.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $121.3 million | $91.1 million | 33.2% increase |
| Income from operations | $38.9 million | $33.1 million | 17.7% increase |
| Operating margin | 32.1% | 36.3% | Down 4.2 percentage points |
| Net income | $23.5 million | $17.9 million | 31.5% increase |
| Net income attributable to Planet Fitness | $19.9 million | $8.8 million | 124.8% increase |
| Net margin | 19.4% | 19.6% | Broadly stable |
| Diluted EPS | $0.23 | $0.14 | Increase |
| EBITDA | $47.6 million | $41.7 million | 14.1% increase |
| Adjusted EBITDA | $48.8 million | $42.3 million | 15.4% increase |
| Operating cash flow | $48.1 million | $30.5 million | 58.0% increase |
Revenue growth was led by franchise revenue of $42.2 million, national advertising fund revenue of $10.5 million, corporate-owned stores revenue of $32.7 million and equipment revenue of $34.0 million. Same-store sales increased 11.1% system-wide, including 11.4% for franchisee-owned stores and 5.0% for corporate-owned stores. Segment EBITDA was $36.7 million for Franchise, $12.2 million for Corporate-owned stores and $7.5 million for Equipment, partially offset by $8.7 million of corporate and other costs.
Cash and cash equivalents were $127.1 million at March 31, 2018, compared with $113.1 million at December 31, 2017. The company also reported $75.0 million of availability under its revolving credit facility. Capital expenditures were $2.0 million, while $28.5 million was used to acquire six franchisee-owned New York stores.
Total debt was $702.4 million net of deferred financing costs, including $707.7 million of term loan borrowings before those costs. The term loan matures March 31, 2021, with approximately $687.9 million scheduled for repayment in 2021. The company reported a 3.3-to-1.0 leverage ratio versus a 5.75-to-1.0 covenant limit and was in compliance at quarter-end. A 100-basis-point increase in borrowing rates would increase annualized pretax interest expense by approximately $7.1 million.
Material changes versus the prior comparable period
- Revenue increased 33.2%, reflecting higher royalties, system growth, same-store sales, corporate-owned store growth and equipment sales.
- Franchise segment revenue increased 48.4% to $54.6 million. Royalty revenue benefited from amended agreements that increased royalty rates by 1.59%, higher annual-fee royalties and additional stores.
- Commission income declined to $2.0 million from $6.5 million, primarily because of the royalty-rate amendment and related rebate mechanics.
- Corporate-owned stores revenue increased 21.0%, helped by stores acquired or opened since March 31, 2017 and 5.0% same-store sales growth.
- Cost of revenue, store operations and selling, general and administrative expenses increased with higher equipment volume, the acquired stores, system growth, headcount, equity compensation and a franchisee conference.
- Operating margin declined because expenses grew faster than reported revenue, while net margin remained approximately unchanged.
- Planet Fitness adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption produced a $9.2 million cumulative reduction to opening accumulated deficit and increased deferred revenue. It also required gross presentation of $10.5 million of national advertising fund revenue and expense.
- For comparability, management indicated that revenue under the prior accounting standards would have been $112.6 million, income from operations $40.7 million and net income $24.8 million for Q1 2018. ASC 606 had no net impact on operating cash flow for the quarter.
- On January 1, 2018, the company acquired six stores for $28.5 million in cash and recorded a $0.35 million loss on reacquired franchise rights.
- Franchisee-owned stores increased from 1,456 to 1,497, while corporate-owned stores increased from 62 to 68. Total stores rose from 1,518 to 1,565.
Guidance, outlook, commentary and risks
The filing does not provide specific quarterly or full-year financial guidance. Management expects continued growth primarily through franchisee-owned store openings and stated that selling, general and administrative expenses are expected to increase as the store base expands. Management believes existing cash, operating cash flow and revolver availability will cover anticipated debt service, tax benefit arrangement payments, capital expenditures and working capital needs for at least the next 12 months, even assuming no growth in sales or profits.
Tax benefit arrangement liabilities totaled $434.1 million at March 31, 2018, with $31.1 million projected for the remainder of 2018 and additional payments thereafter. The company also had approximately $0.9 million of maximum exposure under guarantees of certain franchisee-related leases and debt; estimated ultimate loss was zero.
Principal risks include dependence on franchisee performance and store openings, member attraction and retention, competition, brand and reputation exposure, reliance on vendors and third-party systems, information-security and regulatory risks, variable-rate debt, substantial indebtedness, tax receivable arrangements, minimum-wage inflation and the need to refinance or service debt. Ordinary-course claims and litigation were not expected to have a material adverse effect, although an increase in claim frequency or severity could be material.
Important facts investors should verify
- Assess reported growth using comparable ASC 606 measures, particularly the gross presentation of national advertising fund activity and the deferral of franchise fees.
- Monitor the substantial 2021 term-loan maturity and the company’s ability to refinance or repay approximately $687.9 million then due.
- Track leverage covenant compliance as the maximum permitted leverage ratio becomes more restrictive over time.
- Evaluate cash conversion after acquisitions, tax benefit arrangement payments, debt service and franchisee distributions.
- Verify whether same-store sales, membership growth and the more than 1,000-store development pipeline translate into sustainable store and royalty growth.
- Review the effects of the six-store acquisition, including integration, store-level profitability and preliminary purchase-accounting allocations.
- Consider the economic impact and timing of the $434.1 million tax benefit arrangement liability.