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PLNT > SEC Filings for PLNT > Form 10-Q on 3-Nov-2016All Recent SEC Filings

Show all filings for PLANET FITNESS, INC.

Form 10-Q for PLANET FITNESS, INC.


3-Nov-2016

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this report to the "Company," "we," "us" and "our" refer to Pla-Fit Holdings, LLC and its consolidated subsidiaries prior to the recapitalization transactions and to Planet Fitness, Inc. and its consolidated subsidiaries following the recapitalization transactions.

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 September 30, 2016, we had more than 8.7 million members and 1,242 stores in 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. Of our 1,242 stores, 1,184 are franchised and 58 are corporate-owned. As of September 30, 2016, we had commitments to open more than 1,000 additional new stores under existing ADAs.

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 and the Dominican Republic. Our Corporate-owned stores segment includes operations with respect to all corporate-owned stores throughout the United States and Canada. The Equipment segment 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 and nine months ended September 30, 2016 and 2015. "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.

                                                                                     Nine months ended
                                           Three months ended September 30,            September 30,
                                                2016                2015           2016             2015
(in thousands)
Revenue
Franchise segment                          $        27,225       $   19,794     $   84,380       $   63,430
Corporate-owned stores segment                      26,675           25,153         78,756           73,674
Equipment segment                                   33,107           23,870         98,686           87,588
Total revenue                              $        87,007       $   68,817     $  261,822       $  224,692

Segment EBITDA
Franchise                                  $        22,814       $   15,496     $   71,308       $   46,778
Corporate-owned stores                              10,550            9,256         30,259           26,342
Equipment                                            7,153            4,910         21,330           18,914
Corporate and other                                 (6,823 )        (13,162 )      (20,147 )        (27,191 )
Total Segment EBITDA(1)                    $        33,694       $   16,500     $  102,750       $   64,843

(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 September 30, 2016:
Income from operations                   $    20,662     $           6,715     $     5,602     $        (6,826 )   $  26,153
Depreciation and amortization                  2,142                 3,913           1,551                 139         7,745
Other income (expense)                            10                   (78 )             -                (136 )        (204 )
Segment EBITDA(1)                        $    22,814     $          10,550     $     7,153     $        (6,823 )   $  33,694

Three months ended September 30, 2015:
Income from operations                   $    13,381     $           5,411     $     3,357     $       (11,810 )   $  10,339
Depreciation and amortization                  2,071                 4,307           1,553                  45         7,976
Other income (expense)                            44                  (462 )             -              (1,397 )      (1,815 )
Segment EBITDA(1)                        $    15,496     $           9,256     $     4,910     $       (13,162 )   $  16,500

Nine months ended September 30, 2016:
Income from operations                   $    64,951     $          18,313     $    16,678     $       (20,349 )   $  79,593
Depreciation and amortization                  6,395                11,667           4,652                 413        23,127
Other income (expense)                           (38 )                 279               -                (211 )          30
Segment EBITDA(1)                        $    71,308     $          30,259     $    21,330     $       (20,147 )   $ 102,750

Nine months ended September 30, 2015:
Income from operations                   $    40,272     $          14,108     $    14,255     $       (25,325 )   $  43,310
Depreciation and amortization                  6,462                12,955           4,659                  84        24,160
Other income (expense)                            44                  (721 )             -              (1,950 )      (2,627 )
Segment EBITDA(1)                        $    46,778     $          26,342     $    18,914     $       (27,191 )   $  64,843

(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.

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 and nine months ended September 30, 2016 and 2015:

                                               Three months ended September 30,               Nine months ended September 30,
                                                 2016                     2015                 2016                     2015
Franchisee-owned stores:
Stores operated at beginning of period                1,148                      956                1,066                      863
New stores opened                                        37                       26                  121                      122
Stores debranded or consolidated(1)                      (1 )                      -                   (3 )                     (3 )
Stores operated at end of period                      1,184                      982                1,184                      982

Corporate-owned stores:
Stores operated at beginning of period                   58                       58                   58                       55
New stores opened                                         -                        -                    -                        3
Stores operated at end of period                         58                       58                   58                       58

Total stores:
Stores operated at beginning of period                1,206                    1,014                1,124                      918
New stores opened                                        37                       26                  121                      125
Stores debranded or consolidated(1)                      (1 )                      -                   (3 )                     (3 )
Stores operated at end of period                      1,242                    1,040                1,242                    1,040

(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.


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:

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

the percentage mix of PF Black Card and standard memberships in any period;

growth in total 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 for all stores that have been open and for which monthly membership dues have been billed for longer than 12 months, beginning with the 13th month and thereafter, as applicable. 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.

In March 2015, we completed a migration to a new point-of-sale and billing system ("POS system"), which gives us enhanced control over membership billing practices across all stores and allows us to create mandatory requirements to discontinue the attempted billing of delinquent membership accounts. We believe these changes in our billing practices are beneficial to our brand by controlling collection practices on delinquent accounts and do not believe they will have a negative impact on net membership billings collected by our corporate-owned or franchisee-owned stores. However, we expect the changes in our billing practices, which commenced in the second quarter of 2015, to cause our royalties to be lower due to earlier terminations of billings of certain delinquent accounts upon which we previously received royalty payments. While we do not believe that the impact on our royalties in the future will be material, these new billing practices are expected to negatively impact our same store sales metrics over the remainder of 2016 as monthly EFT is expected to include fewer delinquent membership accounts. Due in part to certain limitations of our prior POS system, we are unable to provide comparable same store sales data for prior periods had these changes in billing practices been implemented previously.

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.

The following table shows our same store sales for the three and nine months ended September 30, 2016 and 2015:

                                           Three months ended September 30,     Nine months ended September 30,
                                              2016                 2015            2016                 2015
Same store sales data

Same store sales growth:
Franchisee-owned stores                           10.3 %                7.3 %           8.4 %                8.8 %
Corporate-owned stores                             5.4 %                1.7 %           5.0 %                2.2 %
System-wide stores                                10.0 %                6.9 %           8.2 %                8.3 %

Number of stores in same store sales
base (end of period):
Franchisee-owned stores                            975                  782             975                  782
Corporate-owned stores                              58                   54              58                   54
Total stores                                     1,033                  836           1,033                  836


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 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, management fees, certain IT system upgrade costs, acquisition transaction fees, public offering-related costs, IPO-related compensation expense, pre-opening 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. Four-wall EBITDA is an assessment of store-level profitability for stores included in the same-store-sales base, which adjusts for certain administrative and other items that we do not consider in our evaluation of individual store-level performance.

A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below for the three and nine months ended September 30, 2016 and 2015:

                                               Three months ended September 30,        Nine months ended September 30,
                                                  2016                  2015              2016               2015
(in thousands)
Net income                                   $        14,863       $           738     $   49,300       $       20,890
Interest expense, net                                  6,291                 6,556         18,819               17,872
Provision for income taxes                             4,795                 1,230         11,504                1,921
Depreciation and amortization                          7,745                 7,976         23,127               24,160
EBITDA                                                33,694                16,500        102,750               64,843
Purchase accounting adjustments-revenue(1)               450                   195            458                  465
Purchase accounting adjustments-rent(2)                  202                   248            664                  692
Management fees (3)                                        -                 1,384              -                1,899
IT system upgrade costs (4)                                -                  (116 )            -                3,901
Stock offering-related costs (5)                       1,078                 2,167          2,105                7,239
IPO-related compensation expense(6)                        -                 6,155              -                6,155
Severance costs(7)                                         -                     -            423                    -
Pre-opening costs (8)                                      -                     -              -                  793
Other(9)                                                   -                     -             72                    -
Adjusted EBITDA                              $        35,424       $        26,533     $  106,472       $       85,987

(1) Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 acquisition of Pla-Fit Holdings on November 8, 2012 by TSG (the "2012 Acquisition"). At the time of the 2012 Acquisition, which consisted of the purchase of interests in Pla-Fit Holdings by investment funds affiliated with TSG Consumer Partners, LLC, the Company maintained a deferred revenue account, which consisted of deferred area development agreement 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 $105, $104, $372 and $310 in the three and nine months ended September 30, 2016 and 2015, 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 $97, $144, $292 and $382 for the three and nine months ended September 30, 2016 and 2015, respectively, are due to the amortization of favorable and unfavorable lease intangible assets which were recorded in connection with the 2012 Acquisition and the acquisition of eight franchisee-owned stores on March 31, 2014. 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 management fees and expenses paid to a management company affiliated with TSG pursuant to a management services agreement that terminated in connection with the IPO.

(4) Represents costs associated with certain IT system upgrades, primarily related to our POS system.

(5) Represents legal, accounting and other costs incurred in connection with offerings of the Company's Class A common stock.

(6) Represents cash-based and equity-based compensation expense recorded in connection with the IPO.

(7) Represents severance expense recorded in connection with an equity award modification.

(8) 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.

(9) Represents certain other charges and gains that we do not believe reflect our underlying business performance. In 2016, the expense related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate.


As a result of the recapitalization transactions that occurred prior to our IPO, the New LLC Agreement designated Planet Fitness, Inc. as the sole managing member of Pla-Fit Holdings. As sole managing member, Planet Fitness, Inc. exclusively operates and controls the business and affairs of Pla-Fit Holdings,
LLC. As a result of the recapitalization transactions and the New LLC Agreement, Planet Fitness, Inc. now consolidates Pla-Fit Holdings, and Pla-Fit Holdings is considered the predecessor to Planet Fitness, Inc. for accounting purposes. Our presentation of Adjusted net income and Adjusted net income per share, diluted, gives effect to the consolidation of Pla-Fit Holdings with Planet Fitness, Inc. resulting from the recapitalization transactions and the New LLC Agreement as if they had occurred on January 1, 2015. In addition, Adjusted net income 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 . . .

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