Planet Fitness, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Planet Fitness filed its Form 10-K for the fiscal year ended December 31, 2018. The company is a franchisor and operator of fitness centers, with revenue from franchising, corporate-owned stores and equipment sales. At year-end, the system had approximately 12.5 million members and 1,742 locations, including 1,666 franchised and 76 corporate-owned stores.
Management emphasizes a low-cost, non-intimidating fitness model, recurring membership and royalty revenue, franchise-led expansion and equipment replacement requirements. Franchisees had signed area development agreements for more than 1,000 additional stores, including more than 500 expected over the following three years.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $572.9 million | $429.9 million | Up 33.3% |
| Income from operations | $184.0 million | $147.5 million | Up 24.7% |
| Operating margin | 32.1% | 34.3% | Down 2.2 points |
| Net income | $103.2 million | $55.6 million | Up 85.5% |
| Net income attributable to Planet Fitness, Inc. | $88.0 million | $33.1 million | Up 165.5% |
| Diluted EPS | $1.00 | $0.42 | Up $0.58 |
| Adjusted EBITDA | $223.2 million | $184.7 million | Up 20.8% |
| Adjusted net income | $119.5 million | $82.3 million | Up 45.3% |
| Net cash from operating activities | $184.4 million | $131.0 million | Up 40.7% |
Revenue growth was led by franchise revenue of $175.3 million, national advertising fund revenue of $42.2 million, corporate-owned store revenue of $138.6 million and equipment revenue of $210.2 million. National advertising fund revenue and expense were presented gross in 2018 following adoption of ASC 606.
System-wide sales increased to approximately $2.8 billion from $2.3 billion. System-wide same-store sales growth was 10.2%, including 10.4% for franchisee-owned stores and 6.5% for corporate-owned stores. PF Black Card members represented 60% of membership, and average monthly dues increased to $16.52 from $15.58 in 2014.
Corporate-owned stores generated segment EBITDA of $56.7 million, or a 40.9% margin. Reported four-wall EBITDA was $63.0 million, or 46.2% of revenue; after a 7% royalty adjustment, the margin was 39.3%.
Cash flow, debt and liquidity
- Cash and cash equivalents were $289.4 million at December 31, 2018; restricted cash was $30.7 million.
- Operating cash flow was $184.4 million. Investing cash outflow was $86.4 million, including $40.9 million of capital expenditures and $45.8 million for acquisitions of franchisee-owned stores.
- Debt excluding deferred financing costs was $1.197 billion, compared with $709.5 million at year-end 2017. Total debt and capital lease obligations increased from $709.5 million to $1.197 billion.
- In August 2018, the company issued $575 million of 4.262% Class A-2-I notes and $625 million of 4.666% Class A-2-II notes, and repaid its prior Term Loan B. The notes have anticipated repayment dates in September 2022 and September 2025, with legal final maturity in September 2048.
- The company had $75 million of undrawn variable funding capacity. Management stated that cash, operating cash flow and available borrowing capacity should cover expected debt service, capital expenditures, tax benefit arrangement payments and working capital needs for at least the next twelve months.
- The company repurchased $342.4 million of Class A common stock in 2018, including a $300 million accelerated share repurchase. Approximately $157.9 million remained under the repurchase authorization at year-end.
Material changes versus the prior comparable period
- Revenue increased 33.3%, while income from operations increased 24.7%; the lower operating margin reflected increased costs supporting growth and the gross presentation of national advertising fund activity.
- Franchise segment revenue increased 49.3% and franchise segment EBITDA increased 20.6%, driven by higher royalty rates, new stores and same-store sales growth.
- The average royalty rate increased to 5.61% from 2.95% in 2014. Approximately 86% of franchisee-owned stores had adopted the higher royalty structure by year-end, although only 16% of all stores paid the full current 7% rate.
- Franchisee-owned stores increased by 210 net locations, while corporate-owned stores increased from 62 to 76 through four openings and the acquisition of ten franchisee-owned stores.
- Interest expense increased to $50.7 million from $35.3 million following the debt refinancing. The company also recorded a $4.6 million loss on extinguishment of debt.
- Net income comparability was affected by a $316.8 million tax benefit arrangement remeasurement gain in 2017 and $334.0 million of 2017 tax expense from remeasurement of deferred tax assets following the Tax Cuts and Jobs Act.
- The company adopted ASC 606 using the modified retrospective method, recording a $9.2 million cumulative reduction to beginning stockholders’ deficit. The filing indicates that 2018 revenue would have been $536.4 million under the previous standards, compared with reported revenue of $572.9 million.
Guidance, outlook, risks and unusual items
The filing does not provide formal numeric revenue or earnings guidance. Management expects continued store growth, positive same-store sales, increased PF Black Card penetration, higher average royalty rates, additional equipment sales and further brand investment. The company believes the U.S. system could ultimately exceed 4,000 stores.
- Key risks include dependence on franchisee financial performance, franchisee financing and execution, store-site availability, competition, membership attrition and changing consumer preferences.
- The company relies heavily on ACH and other electronic payments and third-party information systems. Cybersecurity incidents, billing interruptions, data privacy regulation or payment-processing failures could reduce revenue and damage the brand.
- The securitized financing facility is secured by substantially all domestic revenue-generating assets and includes covenants, reserve requirements and rapid-amortization events tied to debt-service coverage, system-wide sales, manager termination, defaults and refinancing deadlines.
- Tax receivable arrangement liabilities totaled $429.2 million at year-end. The company generally owes 85% of realized tax savings to the applicable holders, and payments could accelerate upon certain change-in-control, early-termination or breach events.
- Contractual obligations totaled approximately $2.056 billion, including $1.197 billion of principal debt, $280.0 million of interest, $429.2 million of tax benefit arrangement obligations and $113.6 million of operating lease commitments.
- The company had no material legal proceedings identified as having a probable material adverse effect. It also reported no impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets in 2018.
- The company does not currently pay cash dividends. It expects to adopt the new lease accounting standard on January 1, 2019 and estimated recognition of approximately $125 million to $135 million of operating lease liabilities.
Most important facts for investors to verify
- Whether franchisee development commitments convert into openings at the expected pace and whether new stores maintain historical unit economics.
- The sustainability of 10.2% system-wide same-store sales growth and continued growth in PF Black Card penetration and average dues.
- The effect of higher debt service, anticipated 2022 and 2025 note repayment dates, refinancing risk and securitization covenants on future liquidity.
- The timing and cash impact of the $429.2 million tax receivable arrangement liability, including potential acceleration provisions.
- The economic effect of ASC 606 and the comparability of reported 2018 revenue and earnings with prior periods.
- The final settlement of the $300 million accelerated share repurchase, expected in the second quarter of 2019, and the remaining repurchase authorization.
- Exposure to franchisee financial distress, payment-system disruption, cybersecurity incidents, regulatory changes affecting electronic fund transfers and indoor tanning, and rising labor and occupancy costs.