Planet Fitness, Inc.

PLNT

US72703H1014

Leisure & Recreation

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PLANET FITNESS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

May 11, 2020 at 04:52 pm EDT

Unless the context requires otherwise, references in this report to the
"Company," "we," "us" and "our" refer to Planet Fitness, Inc. and its
consolidated subsidiaries.
Overview
We are one of the largest and fastest-growing franchisors and operators of
fitness centers in the United States by number of members and locations, with a
highly recognized national brand. Our mission is to enhance people's lives by
providing a high-quality fitness experience in a welcoming, non-intimidating
environment, which we call the Judgement Free Zone, where anyone-and we mean
anyone-can feel they belong. Our bright, clean stores are typically 20,000
square feet, with a large selection of high-quality, purple and yellow Planet
Fitness-branded cardio, circuit- and weight-training equipment and friendly
staff trainers who offer unlimited free fitness instruction to all our members
in small groups through our PE@PF program. We offer this differentiated fitness
experience at only $10 per month for our standard membership. This exceptional
value proposition is designed to appeal to a broad population, including
occasional gym users and the approximately 80% of the U.S. and Canadian
populations over age 14 who are not gym members, particularly those who find the
traditional fitness club setting intimidating and expensive. We and our
franchisees fiercely protect Planet Fitness' community atmosphere-a place where
you do not need to be fit before joining and where progress toward achieving
your fitness goals (big or small) is supported and applauded by our staff and
fellow members.
As of March 31, 2020, we had more than 15.5 million members and 2,039 stores in
all 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican
Republic, Panama, Mexico and Australia. Of our 2,039 stores, 1,940 are
franchised and 99 are corporate-owned. As of March 31, 2020, we had commitments
to open more than 1,000 new stores under existing ADAs.
COVID-19 Impact
On March 11, 2020, the World Health Organization declared a global pandemic
related to the COVID-19 outbreak. The pandemic has caused unprecedented economic
volatility and uncertainty which has negatively impacted our recent operating
results. In response to the COVID-19 pandemic, we proactively closed all of our
stores system wide by March 22, 2020, the majority of which remain closed
through the date of this filing. We have not recognized first quarter revenue
related to monthly membership dues collected in March before stores closed,
including royalty revenue and national advertising fund revenue. As previously
announced, members will not be charged membership dues while our stores are
closed and will be credited for any membership dues paid for periods when our
stores were closed. In addition to these first quarter impacts we expect
decreased new store development and remodels, as well as decreased replacement
equipment sales for 2020 as a result of the COVID-19 pandemic.
We plan to reopen stores once local authorities issue guidelines authorizing the
reopening of fitness centers and we determine it is safe to do so. We expect to
recognize franchise revenue and corporate-owned store revenue associated with
any March membership dues collected as stores reopen. The March deferrals have
had a significant impact on our first quarter financial results.
The duration of the COVID-19 pandemic and the extent of its impact on our
business cannot be reasonably estimated at this time. We anticipate that the
COVID-19 pandemic will continue to negatively impact our operating results in
future periods. In recognition of the uncertain impact, we previously withdrew
our 2020 full-year guidance on March 30, 2020.
We have taken the following actions to efficiently manage the business, as well
as increase liquidity and financial flexibility in order to mitigate the current
and anticipated future impact of the COVID-19 pandemic on our business:
•      Board of Director and Executive Compensation: The Company's Chief
       Executive Officer, President, Chief Financial and Chief Digital and
       Information Officers have significantly reduced their base salaries. In
       addition, the base salaries of other members of senior management were

reduced in graduated amounts. The Board of Directors has suspended payment

of the annual cash retainer to non-employee directors.

• Corporate-owned stores: We have temporarily furloughed all employees

except the store manager at each corporate-owned store location while the


       store remains closed. These employees are able to continue receiving
       benefits from the Company.

• Corporate Office: Our corporate headquarters is closed and our employees

are working remotely to ensure their well-being.

• Credit Facility: We fully drew down our $75.0 million Variable Funding


       Notes to provide additional liquidity.


•      Share Repurchase: We have suspended share repurchases to preserve
       liquidity and flexibility.

• Capital Expenditures: Capital expenditures have been deferred, including

new corporate-owned store openings and investments in existing

corporate-owned stores.




Although we expect the COVID-19 pandemic to continue to negatively impact the
Company's operations and cash flows, based on management's current expectations
and currently available information, the Company believes current cash and cash
from operations will be sufficient to meet its operating cash requirements,
planned capital expenditures and interest and principal payments on the
Securitized Senior Notes well into 2021.

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Our segments
We operate and manage our business in three business segments: Franchise,
Corporate-owned stores and Equipment. Our Franchise segment includes operations
related to our franchising business in the United States, Puerto Rico, Canada,
the Dominican Republic, Panama, Mexico and Australia, including revenues and
expenses from the NAF. Our Corporate-owned stores segment includes operations
with respect to all corporate-owned stores throughout the United States and
Canada. The Equipment segment primarily includes the sale of equipment to our
United States franchisee-owned stores. We evaluate the performance of our
segments and allocate resources to them based on revenue and earnings before
interest, taxes, depreciation and amortization, referred to as Segment EBITDA.
Revenue and Segment EBITDA for all operating segments include only transactions
with unaffiliated customers and do not include intersegment transactions. The
tables below summarize the financial information for our segments for the three
months ended March 31, 2020 and 2019. "Corporate and other," as it relates to
Segment EBITDA, primarily includes corporate overhead costs, such as payroll and
related benefit costs and professional services that are not directly
attributable to any individual segment.
                                    Three months ended
                                         March 31,
(in thousands)                      2020          2019
Revenue
Franchise segment                $  58,529     $  65,762
Corporate-owned stores segment      40,516        38,044
Equipment segment                   28,186        45,011
Total revenue                    $ 127,231     $ 148,817

Segment EBITDA
Franchise                        $  36,746     $  47,360
Corporate-owned stores              12,007        15,569
Equipment                            6,367        10,407
Corporate and other                 (8,748 )     (13,562 )
Total Segment EBITDA(1)          $  46,372     $  59,774



(1)  Total Segment EBITDA is equal to EBITDA, which is a metric that is not
     presented in accordance with U.S. GAAP. Refer to "-Non-GAAP financial

measures" for a definition of EBITDA and a reconciliation to net income, the

most directly comparable U.S. GAAP measure.





A reconciliation of income from operations to Segment EBITDA is set forth
below:
                                                    Corporate-owned                     Corporate and
(in thousands)                       Franchise          stores           Equipment          other            Total
Three months ended March 31, 2020
Income (loss) from operations       $   34,824     $         5,679     $     5,105     $      (11,341 )   $  34,267
Depreciation and amortization            1,927               7,322           1,262              2,281        12,792
Other income (expense)                      (5 )              (994 )             -                312          (687 )
Segment EBITDA(1)                   $   36,746     $        12,007     $

6,367 $ (8,748 ) $ 46,372



Three months ended March 31, 2019
Income (loss) from operations       $   45,365     $         9,652     $     9,148     $      (10,980 )   $  53,185
Depreciation and amortization            1,996               5,713           1,259                939         9,907
Other income (expense)                      (1 )               204               -             (3,521 )      (3,318 )
Segment EBITDA(1)                   $   47,360     $        15,569     $

10,407 $ (13,562 ) $ 59,774





(1)  Total Segment EBITDA is equal to EBITDA, which is a metric that is not
     presented in accordance with U.S. GAAP. Refer to "-Non-GAAP Financial

Measures" for a definition of EBITDA and a reconciliation to net income, the


     most directly comparable U.S. GAAP measure.



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How we assess the performance of our business
In assessing the performance of our business, we consider a variety of
performance and financial measures. The key measures for determining how our
business is performing include the number of new store openings, same store
sales for both corporate-owned and franchisee-owned stores, EBITDA, Adjusted
EBITDA, Segment EBITDA, Adjusted net income, and Adjusted net income per share,
diluted. See "-Non-GAAP financial measures" below for our definition of EBITDA,
Adjusted EBITDA, Adjusted net income, and Adjusted net income per share, diluted
and why we present EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted
net income per share, diluted, and for a reconciliation of our EBITDA, Adjusted
EBITDA, and Adjusted net income to net income, the most directly comparable
financial measure calculated and presented in accordance with U.S. GAAP, and a
reconciliation of Adjusted net income per share, diluted to net income per
share, diluted, the most directly comparable financial measure calculated and
presented in accordance with U.S. GAAP.
Number of new store openings
The number of new store openings reflects stores opened during a particular
reporting period for both corporate-owned and franchisee-owned stores. Opening
new stores is an important part of our growth strategy and we expect the
majority of our future new stores will be franchisee-owned. Before we obtain the
certificate of occupancy or report any revenue for new corporate-owned stores,
we incur pre-opening costs, such as rent expense, labor expense and other
operating expenses. Some of our stores open with an initial start-up period of
higher than normal marketing and operating expenses, particularly as a
percentage of monthly revenue. New stores may not be profitable and their
revenue may not follow historical patterns.
The following table shows the change in our corporate-owned and franchisee-owned
store base for the three months ended March 31, 2020 and 2019:
                                                                Three months ended March 31,
                                                                   2020               2019
Franchisee-owned stores:
Stores operated at beginning of period                              1,903               1,666
New stores opened                                                      38                  65
Stores debranded, sold or consolidated(1)                              (1 )                (1 )
Stores operated at end of period(2)                                 1,940               1,730

Corporate-owned stores:
Stores operated at beginning of period                                 98                  76
New stores opened                                                       1                   -
Stores operated at end of period(2)                                    99                  76

Total stores:
Stores operated at beginning of period                              2,001               1,742
New stores opened                                                      39                  65
Stores acquired, debranded, sold or consolidated(1)                    (1 )                (1 )
Stores operated at end of period(2)                                 2,039               1,806

(1) The term "debrand" refers to a franchisee-owned store whose right to use the

Planet Fitness brand and marks has been terminated in accordance with the

franchise agreement. We retain the right to prevent debranded stores from

continuing to operate as fitness centers. The term "consolidated" refers to

the combination of a franchisee's store with another store located in close

proximity with our prior approval. This often coincides with an enlargement,

re-equipment and/or refurbishment of the remaining store.

(2) The totals above reflect stores operating prior to temporary store closures


     related to the COVID-19 pandemic. All stores were closed in March 2020 in
     response to COVID-19 and remained closed as of March 31, 2020.


Same store sales
Same store sales refers to year-over-year sales comparisons for the same store
sales base of both corporate-owned and franchisee-owned stores. We define the
same store sales base to include those stores that have been open and for which
monthly membership dues have been billed for longer than 12 months. We measure
same store sales based solely upon monthly dues billed to members of our
corporate-owned and franchisee-owned stores.
Several factors affect our same store sales in any given period, including the
following:

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• the number of stores that have been in operation for more than 12 months;

• the percentage mix and pricing of PF Black Card and standard memberships in

any period;

• growth in total net memberships per store;

• consumer recognition of our brand and our ability to respond to changing

consumer preferences;

• overall economic trends, particularly those related to consumer spending;




•     our and our franchisees' ability to operate stores effectively and
      efficiently to meet consumer expectations;

• marketing and promotional efforts;

• local competition;

• trade area dynamics; and

• opening of new stores in the vicinity of existing locations.




Consistent with common industry practice, we present same store sales as
compared to the same period in the prior year and which is calculated for a
given period by including only sales from stores that had sales in the
comparable months of both years. Same store sales of our international stores
are calculated on a constant currency basis, meaning that we translate the
current year's same store sales of our international stores at the same exchange
rates used in the prior year. Since opening new stores will be a significant
component of our revenue growth, same store sales is only one measure of how we
evaluate our performance.
Stores acquired from or sold to franchisees are removed from the
franchisee-owned or corporate-owned same store sales base, as applicable, upon
the ownership change and for the 12 months following the date of the ownership
change. These stores are included in the corporate-owned or franchisee-owned
same store sales base, as applicable, following the 12th month after the
acquisition or sale. These stores remain in the system-wide same store sales
base in all periods.
As a result of COVID-19, 130 franchisee-owned stores and nine corporate-owned
stores that would have been in the same store sales base closed prior to the
March draft and did not draft in March. These stores were excluded from the same
store sales base for March in the same store sales calculation for the three
months ended March 31, 2020.
The following table shows our same store sales for the three months ended
March 31, 2020 and 2019:
                                               Three months ended March 31,
                                                  2020               2019
Same store sales data
Same store sales growth:
Franchisee-owned stores                             10.0 %              10.3 %
Corporate-owned stores                               7.3 %               8.0 %
Total stores                                         9.8 %              10.2 %
Number of stores in same store sales base:
Franchisee-owned stores                            1,579               1,476
Corporate-owned stores                                67                  68
Total stores                                       1,662               1,548



Total monthly dues and annual fees from members (system-wide sales)
We define system-wide sales as total monthly dues and annual fees billed by us
and our franchisees. System-wide sales is an operating measure that includes
sales by franchisees that are not revenue realized by the Company in accordance
with GAAP, as well as sales by our corporate-owned stores. While we do not
record sales by franchisees as revenue, and such sales are not included in our
consolidated financial statements, we believe that this operating measure aids
in understanding how we derive royalty revenue and is important in evaluating
our performance. We review the total amount of dues we collect from our members
on a monthly basis, which allows us to assess changes in the performance of our
corporate-owned and franchisee-owned stores from period to period, any
competitive pressures, local or regional membership traffic patterns and general
market conditions that might impact our store performance. We collect monthly
dues on or around the 17th of every month. We collect annual fees once per year
from each member based upon when the member signed his or her membership
agreement. System-wide sales were $916 million and $798 million, during the
three months ended March 31, 2020 and 2019, respectively.

Non-GAAP financial measures
We refer to EBITDA and Adjusted EBITDA as we use these measures to evaluate our
operating performance and we believe these measures provide useful information
to investors in evaluating our performance. EBITDA and Adjusted EBITDA as
presented in this Quarterly Report on Form 10-Q are supplemental measures of our
performance that are neither required by, nor presented in

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accordance with U.S. GAAP. EBITDA and Adjusted EBITDA should not be considered
as substitutes for U.S. GAAP metrics such as net income or any other performance
measures derived in accordance with U.S. GAAP. Also, in the future we may incur
expenses or charges such as those used to calculate Adjusted EBITDA. Our
presentation of EBITDA and Adjusted EBITDA should not be construed as an
inference that our future results will be unaffected by unusual or nonrecurring
items. We have also disclosed Segment EBITDA as an important financial metric
utilized by the Company to evaluate performance and allocate resources to
segments in accordance with ASC 280, Segment Reporting. As part of such
disclosure in "Our Segments" within Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Company has provided a
reconciliation from income from operations to Total Segment EBITDA, which is
equal to the Non-GAAP financial metric EBITDA.
We define EBITDA as net income before interest, taxes, depreciation and
amortization. We believe that EBITDA, which eliminates the impact of certain
expenses that we do not believe reflect our underlying business performance,
provides useful information to investors to assess the performance of our
segments as well as the business as a whole. Our board of directors also uses
EBITDA as a key metric to assess the performance of management. We define
Adjusted EBITDA as net income before interest, taxes, depreciation and
amortization, adjusted for the impact of certain additional non-cash and other
items that we do not consider in our evaluation of ongoing performance of the
Company's core operations. These items include certain purchase accounting
adjustments, stock offering-related costs, and certain other charges and gains.
We believe that Adjusted EBITDA is an appropriate measure of operating
performance in addition to EBITDA because it eliminates the impact of other
items that we believe reduce the comparability of our underlying core business
performance from period to period and is therefore useful to our investors in
comparing the core performance of our business from period to period.
A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below
for the three months ended March 31, 2020 and 2019:
                                                Three months ended March 31,
                                                   2020               2019
(in thousands)
Net income                                   $      10,383       $      31,639
Interest income                                     (1,927 )            (1,798 )
Interest expense                                    20,240              14,749
Provision for income taxes                           4,884               5,277
Depreciation and amortization                       12,792               9,907
EBITDA                                       $      46,372       $      59,774
Purchase accounting adjustments-revenue(1)              68


Purchase accounting adjustments-rent(2)                141

123


Pre-opening costs(3)                                   361


Tax benefit arrangement remeasurement(4)              (502 )             3,373
Other(5)                                                93                  14
Adjusted EBITDA                              $      46,533       $      63,359

(1) Represents the impact of revenue-related purchase accounting adjustments

associated with the 2012 Acquisition. At the time of the 2012 Acquisition,

the Company maintained a deferred revenue account, which consisted of

deferred ADA fees, deferred franchise fees, and deferred enrollment fees

that the Company billed and collected up front but recognizes for U.S. GAAP

purposes at a later date. In connection with the 2012 Acquisition, it was

determined that the carrying amount of deferred revenue was greater than

the fair value assessed in accordance with ASC 805-Business Combinations,

which resulted in a write-down of the carrying value of the deferred

revenue balance upon application of acquisition push-down accounting under

ASC 805. These amounts represent the additional revenue that would have

been recognized in these periods if the write-down to deferred revenue had

not occurred in connection with the application of acquisition pushdown

accounting.

(2) Represents the impact of rent-related purchase accounting adjustments. In

accordance with guidance in ASC 805 - Business Combinations, in connection

with the 2012 Acquisition, the Company's deferred rent liability was

required to be written off as of the acquisition date and rent was recorded


      on a straight-line basis from the acquisition date through the end of the
      lease term. This resulted in higher overall recorded rent expense each
      period than would have otherwise been recorded had the deferred rent
      liability not been written off as a result of the acquisition push down
      accounting applied in accordance with ASC 805. Adjustments of $41 and $44

in the three months ended March 31, 2020 and 2019, respectively, reflect


      the difference between the higher rent expense recorded in accordance with
      U.S. GAAP since the acquisition and the rent expense that would have been

recorded had the 2012 Acquisition not occurred. Adjustments of $100 and $79

in the three months ended March 31, 2020 and 2019, respectively, are due to


      the amortization of favorable and unfavorable leases.



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All of the rent related purchase accounting adjustments are adjustments to rent
expense which is included in store operations on our consolidated statements of
operations.
(3)   Represents costs associated with new corporate-owned stores incurred prior

to the store opening, including payroll-related costs, rent and occupancy

expenses, marketing and other store operating supply expenses.

(4) Represents gains and losses related to the adjustment of our tax benefit

arrangements primarily due to changes in our effective tax rate.

(5) Represents certain other charges and gains that we do not believe reflect

our underlying business performance.




Our presentation of Adjusted net income and Adjusted net income per share,
diluted, assumes that all net income is attributable to Planet Fitness, Inc.,
which assumes the full exchange of all outstanding Holdings Units for shares of
Class A common stock of Planet Fitness, Inc., adjusted for certain non-recurring
items that we do not believe directly reflect our core operations. Adjusted net
income per share, diluted, is calculated by dividing Adjusted net income by the
total shares of Class A common stock outstanding plus any dilutive options and
restricted stock units as calculated in accordance with U.S. GAAP and assuming
the full exchange of all outstanding Holdings Units and corresponding Class B
common stock as of the beginning of each period presented. Adjusted net income
and Adjusted net income per share, diluted, are supplemental measures of
operating performance that do not represent, and should not be considered,
alternatives to net income and earnings per share, as calculated in accordance
with U.S. GAAP. We believe Adjusted net income and Adjusted net income per
share, diluted, supplement U.S. GAAP measures and enable us to more effectively
evaluate our performance period-over-period. A reconciliation of Adjusted net
income to net income, the most directly comparable U.S. GAAP measure, and the
computation of Adjusted net income per share, diluted, are set forth below.
                                                      Three months ended March 31,
(in thousands, except per share amounts)                2020

2019


Net income                                        $       10,383       $

31,639


Provision for income taxes, as reported                    4,884

5,277


Purchase accounting adjustments-revenue(1)                    68


Purchase accounting adjustments-rent(2)                      141

123


Pre-opening costs(3)                                         361


Tax benefit arrangement remeasurement(4)                    (502 )

3,373


Other(5)                                                      93


Purchase accounting amortization(6)                        4,213

3,999


Adjusted income before income taxes               $       19,641       $       44,500
Adjusted income taxes(7)                                   5,264               11,837
Adjusted net income                               $       14,377       $       32,663

Adjusted net income per share, diluted            $         0.16       $

0.35



Adjusted weighted-average shares outstanding(8)           87,501

93,664