Planet Fitness, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Planet Fitness is a franchisor and operator of fitness centers and a seller of fitness equipment to franchisees. For the three months ended March 31, 2017, the company had more than 10.1 million members and 1,367 locations, including 1,309 franchisee-owned and 58 corporate-owned stores. The interim financial statements are unaudited and should be read with the 2016 Form 10-K.
- Franchisee-owned stores opened: 54; total stores increased from 1,313 to 1,367.
- Existing area development agreements supported commitments to open more than 1,000 additional stores.
- Planet Fitness held 73.6% of the economic interest in Pla-Fit Holdings at March 31, 2017; continuing LLC owners held 26.4%.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $91.1 million | $83.3 million | Up 9.3% |
| Income from operations | $33.1 million | $25.6 million | Up 29.1% |
| Net income | $17.9 million | $16.3 million | Up 9.3% |
| Net income attributable to Planet Fitness, Inc. | $8.8 million | $3.4 million | Up 162.7% |
| Diluted EPS | $0.14 | $0.09 | Up $0.05 |
| EBITDA | $41.7 million | $33.7 million | Up 23.7% |
| Adjusted EBITDA | $42.3 million | $34.3 million | Up 23.3% |
| Operating cash flow | $30.5 million | $15.3 million | Up $15.2 million |
- Revenue mix: franchise $36.8 million, corporate-owned stores $27.0 million, and equipment $27.3 million.
- Operating margin was approximately 36.3%, compared with 30.7% in the prior-year quarter. Net margin was approximately 19.6%; EBITDA margin was approximately 45.8%.
- Franchise segment revenue increased 33.0%, supported by 11.5% franchisee same-store sales growth, higher annual-fee royalties, and additional stores.
- Corporate-owned store revenue increased 5.2%, with same-store sales growth of 4.5%.
- Equipment revenue declined 9.0%, primarily because of lower sales to new franchisee-owned stores.
- Interest expense increased 37.6% to $8.8 million following $230.0 million of additional term-loan borrowings in November 2016.
- Capital expenditures were $5.3 million, primarily for existing corporate-owned stores. Financing cash outflows were $5.3 million, including $3.1 million of distributions to continuing LLC members.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $60.2 million at March 31, 2017, compared with $40.4 million at December 31, 2016.
- Total debt, net of deferred financing costs, was $707.9 million, including $714.9 million of gross borrowings. The term loan matures March 31, 2021; the $75.0 million revolving facility expires March 31, 2019 and had no borrowings outstanding.
- Management stated that cash, operating cash flow, and available revolver capacity were expected to cover debt service, tax benefit arrangements, capital expenditures, and working capital needs for at least the next 12 months, even without sales or profit growth.
- The company reported a 4.0x leverage ratio at March 31, 2017, below the 6.25x covenant maximum then in effect.
- Tax benefit arrangement liabilities totaled $563.5 million, including $11.3 million classified as current; $443.5 million was scheduled after 2021.
- Total stockholders’ deficit was $188.0 million, including a $54.6 million non-controlling-interest deficit.
Material changes versus the prior comparable period
- Franchise revenue increased 40.9%, primarily from higher royalty revenue, same-store sales, annual fees, and store growth.
- Cost of revenue decreased 10.6% as equipment sales declined, while selling, general and administrative expense increased 16.7% to support franchise growth and included $0.6 million of secondary-offering costs.
- Interest expense increased by $2.4 million because of the November 2016 incremental borrowing.
- Income attributable to Planet Fitness, Inc. increased substantially because the company owned a larger economic interest in Pla-Fit Holdings after exchanges of Holdings Units.
- Operating cash flow approximately doubled, benefiting from higher earnings and favorable working-capital changes, including accounts receivable and equipment deposits.
- The March 2017 secondary offering involved 15.0 million Class A shares at $20.44 per share. Planet Fitness did not receive proceeds from the offering. Related exchanges increased its ownership of Pla-Fit Holdings and increased tax benefit arrangement liabilities.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide formal quantitative revenue, EBITDA, earnings, or store-opening guidance.
- Management expected franchisee-owned stores to comprise most future openings and anticipated selling, general and administrative expenses to increase as the franchise store base grows.
- Key risks include dependence on franchisee performance, member retention, competition, brand reputation, third-party and information systems, limited vendors, substantial indebtedness, variable interest rates, and tax receivable arrangements.
- A 100-basis-point increase in the effective interest rate on outstanding borrowings would increase annualized pretax interest expense by approximately $7.1 million. Interest-rate caps were in place to mitigate part of this exposure.
- Future adoption of the revenue-recognition standard is expected to change the timing of recognition for area development and initial franchise fees; the company was still evaluating the full impact.
- Ordinary-course claims and litigation were not expected to have a material adverse effect, although increased claims could affect results. Franchise-related guarantees had a maximum exposure of approximately $1.2 million.
- Adjusted EBITDA included $0.6 million of stock-offering costs, $0.3 million of purchase-accounting adjustments, and a $0.6 million gain related to tax benefit arrangements. These non-GAAP measures should not be viewed as substitutes for GAAP results.
Most important facts for investors to verify
- Whether franchise same-store sales and store openings continue to support royalty growth while equipment revenue remains weaker.
- The company’s ability to reduce or refinance approximately $714.9 million of variable-rate gross debt before the 2021 term-loan maturity.
- Compliance with increasingly restrictive leverage covenants and the availability of the $75.0 million revolver.
- The cash-flow and valuation impact of the $563.5 million tax benefit arrangement liability.
- The effect of future exchanges of Holdings Units on ownership, attributable earnings, dilution, tax assets, and tax-related liabilities.
- The eventual timing and financial statement impact of the new revenue-recognition and lease accounting standards.