Planet Fitness, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Planet Fitness operated 2,086 locations and had more than 14.1 million members at quarter-end, including 1,985 franchised and 101 corporate-owned stores. The company closed all stores in March 2020 because of COVID-19; 1,983 stores had reopened by September 30.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $105.4 million | $166.8 million | $272.8 million | $497.3 million |
| Income from operations | $16.0 million | $53.1 million | $27.6 million | $171.5 million |
| Operating margin | 15.2% | 31.8% | 10.2% | 34.5% |
| Net income attributable to Planet Fitness | $(3.1) million | $25.8 million | $(23.7) million | $88.0 million |
| Diluted EPS | $(0.04) | $0.31 | $(0.30) | $1.04 |
| EBITDA | $29.7 million | $64.8 million | $66.2 million | $199.0 million |
| Adjusted EBITDA | $32.0 million | $65.7 million | $69.2 million | $205.6 million |
Q3 revenue declined 36.8%; nine-month revenue declined 45.1%. Q3 system-wide sales were $661 million, down from $781 million; nine-month system-wide sales were $1.663 billion, down from $2.430 billion.
Q3 same-store sales declined 5.6% for franchisee-owned stores, 6.6% for corporate-owned stores and 5.6% overall. Nine-month same-store comparisons were not provided because fewer than 50% of comparable stores billed monthly dues throughout the period.
At September 30, 2020, cash and cash equivalents were $419.7 million and restricted cash was $81.9 million. Net cash used in operating activities was $2.1 million for the first nine months, compared with $152.7 million provided in the prior-year period. Capital expenditures were $36.7 million.
Total debt, including the $75.0 million draw under the Variable Funding Notes and net of deferred financing costs, was $1.772 billion. The company also reported $184.1 million of lease liabilities and $456.0 million of projected tax benefit arrangement liabilities. Total stockholders’ deficit was $722.9 million.
Material changes versus the prior comparable period
- COVID-19 closures and lower membership levels reduced franchise, corporate-store and equipment revenue.
- Equipment revenue fell 70.8% in Q3 and 68.3% for the first nine months, partly because franchisees received a 12-month extension for new-store development and re-equipment obligations.
- Franchise segment EBITDA declined 29.8% in Q3 and 49.6% for the first nine months; corporate-owned-store EBITDA declined 66.0% and 77.5%, respectively; equipment EBITDA declined 83.5% and 75.7%, respectively.
- Interest expense increased to $20.7 million in Q3 and $61.4 million for the first nine months, primarily following the $550.0 million issuance of 2019 Notes in December 2019.
- The company drew the full $75.0 million Variable Funding Notes in March 2020, suspended share repurchases, reduced executive and other compensation temporarily, furloughed many corporate-store employees and completed a reduction in force of approximately 15% of headquarters employees.
- Q3 included approximately $2.0 million of expense for a reserve against an indemnification receivable, partly offset by a $1.4 million CARES Act employee-retention payroll tax credit.
Guidance, outlook, risks and unusual items
The company withdrew its 2020 full-year guidance and provided no updated guidance because the duration and impact of COVID-19 remained uncertain. Management expected the pandemic to continue negatively affecting operations, cash flows, membership, new-store development, remodels and equipment sales. Stores could be required to close again under local guidelines.
Management stated that available cash, operating cash flow and the drawn Variable Funding Notes were expected to fund operating needs, capital expenditures, debt service and tax benefit arrangement obligations for at least the next twelve months, while noting there was no assurance that future cash flows would be sufficient.
Key financing risks include approximately $1.797 billion of principal debt before deferred financing costs, a 7.0x leverage-ratio incurrence cap, customary securitization covenants and rapid-amortization events, and anticipated repayment dates of September 2022, September 2025 and December 2029 for the principal fixed-rate note classes. The Variable Funding Notes are anticipated to be repaid by September 2023, subject to extension options.
Other contingencies include approximately $14.3 million of maximum franchisee lease-guarantee exposure, a disputed Mexico franchisee put option that had not closed, and a $5.4 million joint and several judgment for which the company recorded an estimated $2.0 million obligation and a fully reserved indemnification receivable.
Investor verification checklist
- Track store reopenings, any subsequent closures, membership trends and the recovery of same-store sales.
- Verify liquidity against debt service, restricted cash requirements, tax benefit arrangement payments and lease obligations.
- Monitor compliance with securitized-debt covenants, anticipated repayment dates and Variable Funding Notes refinancing or repayment plans.
- Assess whether franchisee financial health affects royalties, new-store openings, equipment demand and lease guarantees.
- Reconcile GAAP results with EBITDA and Adjusted EBITDA, including severance, pre-opening costs, tax-benefit remeasurement and other adjustments.
- Review the status and valuation of the disputed Mexico acquisition and other litigation or indemnification matters.