Business Context and Reporting Period
Planet Fitness, Inc. is a franchisor and operator of fitness centers and sells fitness equipment to franchisees. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reported more than 14.1 million members and 2,146 locations across 50 states and several international markets. Of the locations, 2,043 were franchised and 103 were corporate-owned; 2,110 locations had reopened by March 31, 2021 following COVID-19 closures.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $111.9 million | $127.2 million | Down 12.1% |
| Income from operations | $29.4 million | $34.3 million | Down 14.2% |
| Operating margin | 26.3% | 26.9% | Down approximately 60 bps |
| Net income | $6.2 million | $10.4 million | Down 40.4% |
| Net income attributable to Planet Fitness | $5.6 million | $8.6 million | Down 35.2% |
| Net margin | 5.5% | 8.2% | Down approximately 270 bps |
| Diluted EPS | $0.07 | $0.11 | Down $0.04 |
| EBITDA | $45.0 million | $46.4 million | Down 2.9% |
| Adjusted EBITDA | $43.7 million | $46.5 million | Down 6.1% |
| Operating cash flow | $23.5 million | $73.1 million | Down $49.6 million |
| Capital expenditures | $6.4 million | $9.2 million | Down approximately 30.6% |
Franchise revenue increased 6.7% to $52.2 million, while national advertising fund revenue increased 25.8% to $11.6 million. Corporate-owned store revenue decreased 6.5% to $37.9 million, and equipment revenue declined 64.7% to $9.9 million. System-wide sales declined to $765 million from $916 million.
Same-store sales declined 14.9% overall, including declines of 14.7% at franchisee-owned stores and 18.2% at corporate-owned stores. Franchise segment EBITDA increased 12.1% to $41.2 million, while corporate-owned stores EBITDA decreased 11.0% to $10.7 million and equipment EBITDA decreased 71.3% to $1.8 million.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $445.6 million at March 31, 2021; restricted cash was $58.3 million, including $42.3 million held by the securitized financing trustee.
- Total debt, including Variable Funding Notes and net of deferred financing costs, was $1.77 billion. The company had $75.0 million outstanding under its Variable Funding Notes at a 2.20% borrowing rate.
- The company made $4.4 million of principal payments during the quarter and paid $18.8 million of cash interest.
- Debt includes anticipated repayment dates of September 2022 and September 2025 for the 2018 notes, December 2029 for the 2019 notes, and September 2023 for the Variable Funding Notes, subject to extensions. Failure to repay or refinance on scheduled dates may result in additional interest.
- The company stated that cash on hand and expected operating cash flow should be sufficient for operating needs, capital expenditures, debt service, and tax benefit arrangement obligations for at least the next 12 months, although it cautioned that future performance and refinancing capacity are uncertain.
Material Changes and Unusual Items
- Revenue decreased primarily because COVID-19 reduced membership levels, temporarily closed stores, and delayed franchisee new-store development, remodels, and equipment purchases.
- Equipment revenue fell sharply after the company granted franchisees a 12-month extension for new-store development obligations and an 18-month extension for re-equipment obligations.
- Selling, general and administrative expense increased 32.7% to $22.5 million, driven by higher incentive and stock-based compensation, California reopening support, and mobile-app costs.
- Depreciation and amortization increased 21.0% to $15.5 million because of recently opened corporate-owned stores and new information-systems assets.
- Other operating results included a $2.2 million gain from a probable insurance recovery related to legal claims.
- The company invested $25.0 million in equity securities during the quarter, contributing to cash used in investing activities of $31.4 million.
- Contract liabilities increased to $68.1 million from $59.3 million at year-end 2020, largely reflecting deferred franchise, advertising, membership, and related revenue.
- The company exchanged 358,979 Class B shares and related Holdings Units for newly issued Class A shares. Planet Fitness held 96.1% of the economic interest in Pla-Fit Holdings at quarter-end.
Guidance, Outlook, Commentary, and Risks
The company did not provide financial guidance because of continuing uncertainty regarding the duration and impact of COVID-19. Management expects the pandemic to continue negatively affecting operating results, cash flows, membership levels, new-store development, remodels, and equipment sales. Certain locations could be required to close again under local regulations, and membership dues are not charged during closure periods.
Management reported commitments to open more than 1,000 new stores under existing area development agreements and stated that current liquidity is expected to support operations for at least the next 12 months. Key risks include prolonged or renewed COVID-19 impacts, member retention, franchisee financial health and bankruptcies, competition, execution of the growth strategy, cybersecurity and data protection, supplier concentration, long-term lease obligations, debt refinancing and covenant compliance, and minimum-wage and other regulatory changes.
The company has a maximum potential obligation of approximately $7.3 million under guarantees of certain franchisee lease agreements. A Mexico franchisee put-option acquisition remained unresolved at March 31, 2021, with the purchase price expected to approximate the fair value of the acquired assets. The company also recorded an estimated $2.1 million obligation related to a legal judgment, offset by a fully reserved indemnification receivable.
On May 4, 2021, after quarter-end, the board approved an Executive Severance and Change in Control Policy effective July 1, 2021. The policy provides specified salary, bonus, benefits, and equity-vesting protections for eligible senior executives upon qualifying termination events.
Investor Verification Items
- Verify the pace and sustainability of store reopenings, membership recovery, and same-store sales improvement.
- Assess whether franchisee liquidity and delayed development or re-equipment obligations could affect future royalty, equipment, and store-growth revenue.
- Review debt maturities, anticipated repayment dates, variable-rate exposure, covenant requirements, and refinancing needs.
- Reconcile reported cash with restricted cash and evaluate projected cash requirements for debt service, leases, taxes, and tax benefit arrangements.
- Evaluate the sustainability of earnings excluding the $2.2 million insurance recovery and other non-GAAP adjustments.
- Monitor the unresolved Mexico acquisition, lease guarantees, legal contingencies, and the post-quarter-end executive severance policy.