Good afternoon. My name is Susan and I will be your conference operator at this time. At this time, I would like to welcome everyone to the Planet Fitness Third Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] I would now like to turn the call over to Brendon Frey. You may begin..

Thank you for joining us today to discuss Planet Fitness’s third quarter 2020 earnings results. On today’s call are Chris Rondeau, Chief Executive Officer; Dorvin Lively, President; and Tom Fitzgerald, Chief Financial Officer. Following Chris and Tom’s prepared remarks, we will open the call up for questions.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Planet Fitness’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness’s business.

Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our third quarter 2020 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today.

With that, I will turn the call over to Chris Rondeau, Chief Executive Officer of Planet Fitness.

Chris?.

Thanks, Brendon, and thank you everyone for joining us today. It's been nearly eight months since we temporarily enclose all our stores in March due to COVID-19 pandemic. And while the operating environment seems to be volatile, only 95% of our stores are currently open in providing a safe, healthy indoor environment for our members.

I want to start off by talking about our membership levels and how they've changed over the past few months. Looking back, we ended Q2 with 15.2 million members, down approximately 1% from the end of Q1. For clubs that reopened in May and June membership levels remained relatively steady through the end of Q2.

As Q3 got underway in July, there was a surge in the virus in several states which appeared to shift consumer sentiment. This has also coincided with the normal billing resuming for the clubs that reopened in May and some numbers being billed an annual fee on July 1. As a result, we saw an acceleration in the attrition rate.

New join trends also slowed which we attribute to the virus surge in the fact that we didn't repeat our typical national sale in July, since majority of our clubs were not open. As we previously said, by the end of July membership stood at 14.8 million.

For today's earnings release, we ended the third quarter with approximately 14.1 million members, down approximately 5% since the end of July and flat compared to last year.

The biggest change in membership between the end of July and the end of September occurred in the roughly 1100 clubs that reopened in May in June and resume their billing monthly dues and collected annual fees. We have seen a clear pattern of pent up cancels upon reopening and resumption of billing.

However on a positive note, we are starting to see this trend begin to normalize the longer clubs are open with a total year-to-date cancellation flat to prior year in the system. Also encouraging, we are seeing a similar pattern with the usage rates as the early clubs were 74% of a year ago levels in September and the system average was up to 67%.

In September, we were excited to turn our national marketing engine back on for an eight day national sale.

Our first national acquisition-driven marketing, since -- before COVID, the results were very encouraging as consumers responded positive to our messaging was reinforced the importance of exercise in the toll pandemic is taking on people physical and mental health, combined with our commitment to keeping members safe.

To feel healthy we started our marketing flywheel in meaningfully slowly declining membership with a number of the stores experiencing positive number growth is September.

With the approximately 500 clubs that reopened in July, August and September we are seeing similar attrition trends as annual billing resumed, usually the second month post reopening before begin to stabilize after the third month.

The good news is, we expect this to be somewhat offset by the high gross new joins driven by our national advertising resuming.

Based on the encouraging results of the September sale reinforcing consumer demand, the management team and the Board of Directors made a decision to invest incremental national marketing funds throughout the remainder of the year, starting with another national sale in October.

These models were also very encouraging with even more stores in October experiencing positive member growth compared to September. At the end of October overall membership totaled 14 million.

Speaking of marketing, our United We Move initiative providing free workouts on Facebook since we temporarily closed our stores in March, also continues to see strong results with 45 million viewers in 36 countries since the pandemic began. This has proven to be a great opportunity to keep people engaged and motivated outside the gym.

Looking ahead, Planet Fitness will once again be the title sponsor of Time Square's New Year's Eve celebration. While the celebration in New York will be largely virtual given COVID-19, the Planet Fitness brand will be front and center as the world says goodbye to 2020 and brings in 2021.

In this year, we’re excited that Planet Fitness will be the presenting sponsor for the first time during the 11:30 to 1 AM time slot, which will increase our brand's visibility at a critical time during the night celebration, including the coveted midnight countdown.

With social distancing and limitations on galleries around the world, viewership could be an all-time high level. Turning to our digital initiatives, adoption of our mobile app remains at an all-time high. With the new join app adoption rates more than 60% in Q3.

Currently, nearly 30% of total membership base has adopted the mobile app which allows us to engage with them while they're at home or in the gym, with new features like in-app messaging, a QR code reader for instructions on how to use the equipment and the crowd meter check the capacity of their club in advance of going to the gym.

We believe the crowd meter has played a role in helping to balance visits during the week, as have changing consumer habits given the increase with remote work schedules. This will be even more beneficial during peak usage months. We’re also going to be encouraged by the mobile app Black Card upgrades in member referrals.

Providing members with an ability to quickly upgrade to our Black Card membership and refer a friend to join have proven to be beneficial, particularly as app adoption fees increase, and we see a lot of opportunity in the future. Our digital content journey continues to accelerate.

We're seeing strong engagement with our fitness content via the app with meaningful percentage of users representing non-members. This creates a large opportunity for future conversion, it further validates Planet Fitness’s brand recognition as a trusted source of health and wellness.

As a result, we are currently in the process of testing a digital only subscription membership for 599 a month via the mobile app called PF plus. We will always offer free content via our mobile app.

However, PF Plus will feature more premium content developed in our partnership with high-tech gear towards breaking down the barriers so that approximately 80% of the population does not have a gym membership, including live daily workouts, digital fitness classes you can do at home or in the gym, a variety of fitness trainers, aggressive workout series to help you advance over time and more.

We view our standalone digital membership as a gateway to our traditional bricks and mortar membership, not a replacement for it. And this provides us with an opportunity to further engage inside and outside the gym. The ability to provide even more content for additional fee introduced prospective members to the brand.

During the testing phase, we will assess consumer feedback on content in usability to reform any broader rollout plan. Longer term digital content could potentially strengthen our value proposition to members throughout expanded or bundled offerings potentially in adjacent categories.

On the store development front, 29 stores opened during Q3 with 2086 stores at the end of the quarter. Based on the current visibility, we expect 2020 new store openings to be down roughly 50% or more compared to 2019 record levels of 260.

Our franchisees emerged from their store closure period, and are beginning to gain strength as operations approach more normalized conditions. Across the system, the focus remains on keeping our staff member safe. Our stores open to service members and now more recently rebuild membership levels.

Relative to the rest of the fitness industry, we believe we are a much stronger financial and strategic position evidenced by the bankruptcies and reported store closures a number of national chains, as well as feedback we've received from many franchisees about locally owned gyms and the markets that aren't reopening.

We expect this trend will continue and overtime potentially result in the number of gym goers looking for a new place to work out. And we believe our unrivaled value proposition when sure we continue our trend of gaining market share.

While the near term operating environment is likely to remain volatile, the pressure on near-term revenue and profitability, I'm confident that in the long run, once this pandemic is behind us Planet Fitness will be able to significantly widen our competitive moat for several reasons.

First, the strength of our franchisees which has been underscored by how well they have navigated through the unprecedented situation. Second, we are well positioned to capitalize on industry consolidation that has already taken place and likely to continue.

Third, the real estate market will be even more attractive in terms of available prime locations, and lower rent costs and enhanced landlord incentives for our system because not many brands will be adding hundreds of locations in the coming years.

And fourth, the encouraging early results and the opportunity we're seeing as a result of the accelerated digital content strategy, focusing on the needs of first time academy gym goers And finally, the demand in objects in usage we're seeing as a result of the marketing efforts reinforcing the overall increase focus on health wellness.

This will further enhance the tailwinds of the category. And we feel our value proposition is second to none. I'll now turn the call over to Tom..

Thanks, Chris. Good afternoon, everyone. As Chris mentioned, approximately 95% of our store base is now open with approximately 500 stores reopening during the third quarter. In terms of development, 29 new stores opened during Q3 compared to 41 new stores added in the year ago period.

Our primary focus over the last several months has been on reopening stores and more recently re-launching our national marketing efforts and as previously communicated all development requirements have been given a 12-month extension.

As you'll hear in a moment, the change in equipment sales to new and existing stores was the biggest driver of our top line decline. For the third quarter, total revenue was $105.4 million compared to $166.8 million in the prior year period.

As a reminder, the vast majority of our stores drafted monthly membership dues back in March and then closed shortly thereafter. Therefore, those members that were drafted had a 30-day credit to utilize once their home store reopens.

Q3 includes the recognition of $7.3 million in previously deferred revenue related to monthly membership dues collected in March before stores closed. This has broken down into $3.9 million from franchise royalty, $2.2 million from corporate own store monthly dues, and $1.2 million from NAF contributions.

Now before I get into the specifics of same store sales, I'll spend a minute on our same store sales definition. When stores are closed and don't draft monthly membership dues or don't execute a full draft upon reopening, because members have credits to utilize from prior periods, they are not included in our comparable store base.

But for some contexts, we reported 53 quarters of positive same store sales before COVID hit in March and shut down all of our stores. The average of our same store sales growth over those 53 quarters was 12.0% and average 9.6% for 2018 and 2019.

Our model and historically strong same store sales results depend on the ability to continually grow net membership levels across our store base month-over-month and quarter-over-quarter.

Additionally, in our recurring revenue model, our same store sales performance at any point in time is a function of what's happened to our membership levels over the trailing 12 months. When our stores shut down due to COVID, we were unable to grow net membership levels in our stores.

And as Chris discussed, we've seen higher attrition in the first couple of months post the store reopening as the initial billing of monthly and annual membership dues results in elevated cancellations before starting to normalize after the third month.

As we have moved farther away from our first monthly and annual billing event for many of our reopened stores, and resumed marketing our brand and our national sale in September, we saw sequential improvement in underlying joint and canceled trends as Q3 progressed. However, overall membership growth remains negative.

And importantly for the same store sales calculation, the change in membership levels or growth rate was worse this year than in the prior year period. As a result of these dynamics, we have seen same store sales, growth slow and turn negative. Of the 1605 stores that had at least one full draft in Q3, 1416 of those stores were in the comp space.

These stores had a same store sales decrease of 5.6% with franchise stores declining 5.6% and corporate stores down 6.6%.

The 5.6% same store sales decrease was driven by a 6.7% decline in build memberships partially offset by 1.1% increase in average rate due to both higher black card penetration and higher black card pricing compared to the prior year period.

Note, that although the monthly decline in membership levels improved sequentially in each month of Q3 because growth rates remained below that of the prior year period. This led to a worsening same store sales trend through the quarter.

As such, our system wide same store sales growth worsens across the quarter, and was down high single digits in the month of September. As I previously mentioned, since our same store sales trends are based on what has happened to our membership levels over the prior 12 months.

In order for same store sales growth to improve the growth and membership levels in our comp stores must exceed the member growth in the same period in the prior year. Moving on to a review of our segments revenue results, franchise segment revenue was $59.8 million compared to $66.7 million in the prior year period, a decrease of 10.4%.

Let me break down the components. First, royalty revenue which consists of royalties on monthly membership dues and annual membership fees was $43.1 million compared to $46million in the same quarter of last year.

The $43.1 million of revenue includes $6.1 million attributable to catch up billing of annual membership fees and $3.9 million of deferred revenue recognized from the March draft -- from stores that were closed in March as a result of COVID-19 and reopened during the quarter.

The average royalty rate for the third quarter for the stores that drafted was 6.2% equal to the same period last year. Next, our franchise and other fees of $2.6 million compared to $3.2 million in the prior year period.

These are fees received from online new member signups, the recognition of fees paid to us from franchise agreements, area development agreements and the transfer of existing stores and fees received from processing dues. The decrease was primarily driven by lower online join fees in the quarter and lower commission revenue.

Also within the franchise revenue segment is our placement revenue which was $1.5 million in Q3 compared with $4.3 million a year ago. These are fees we receive for the assembly and placement of equipment sales to our franchise owned stores within the U.S. and Canada.

The decrease reflects the lower new store and re-equipment placements we executed in the quarter compared with a year ago. I 'll discuss the number of new equipment placements later when I discuss equipment revenues. And finally, national advertising fund revenue was $12.5 million compared to $12.7 million last year.

The NAF revenue in the current quarter includes $1.2 million have previously deferred NAF revenue that was collected in March but not recognized until Q3.

The year-over-year decline reflects the impact of temporary store closures as NAF is not collected unless stores are open and draft monthly dues and that was partially offset by higher NAF contribution rate of 3.25% that beginning in September and will run through the remainder of 2020.

Our corporate store segment revenue was $28.3 million compared to $40.7 million in the prior year period. The $12.5 million decrease was driven by lower membership fees due to the closure of many of our corporate stores for a portion of that period.

The $28.3 million includes $2.2 million of previously deferred revenue recognized from the March draft from stores that were closed in March as a result of COVID-19 and reopened in Q3. Turning to our equipment segment, Revenue decreased $42million or 70.8% to $17.3 million from $59.4 million.

The decrease was driven by both lower new store equipment I mentioned earlier in the call, along with lower replacement equipment sales to existing franchisee owned stores. Replacement equipment sales in Q3 were $2.7 million compared to $42.5 million in Q3 last year.

In the third quarter, we had 28 new store equipment placements, which was down 18 from the prior year period. Beginning in Q2 we launched a 15% discount offer on all equipment orders to support our new store development and replacement orders. This offer applies to all equipment purchased and placed by the end of 2020.

Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores amounted to $15.3 million compared to $46.2 million a year ago, a decrease of 66.9% in line with the revenue decrease as previously discussed.

Store operation expenses which are associated with our corporate owned stores decreased to $21.4 million compared to $22.3 million a year ago.

The slight decrease was primarily driven by cost saving measures due to store closures, including lower payroll, marketing and operating expenses partially offset by higher occupancy expense associated with 9 new stores opened and 12 stores acquired since the end of the third quarter of last year.

SG&A for the quarter was $18.3 million compared to $20.9 million a year ago. The decrease was primarily driven by reductions in variable compensation, decreased travel and lower equipment placement expenses. National advertising fund expense was $20.2 million compared to $12.7 million in the prior year period.

The increase in expense for the quarter was the result of overall higher full year forecasted NAF expenses, which resulted in an adjustment in Q3 to reflect the proper ratable year-to-date expense.

Adjusted EBITDA which is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain non-cash, and other items that are not considered in the evaluation of ongoing operating performance was $32.0 million compared to $65.7 million in the prior year period.

Included in this quarter’s adjusted EBITDA was approximately $7.3 million related to the recognition of deferred revenue previously discussed. A reconciliation of adjusted EBITDA to GAAP net income or loss can be found in the earnings release.

By segment, franchise adjusted EBITDA was $31.6 million, corporate storage adjusted EBITDA was $6.7 million and equipment adjusted EBITDA was 2.3 million. Adjusted net income was $1.6 million and adjusted net income per diluted share was $0.02 a share, a decrease of $0.34 per diluted share.

One last point on the P&L, before I talk about the balance sheet, as Chris mentioned, we resumed our national marketing efforts in September with our national sale, our first step towards expanding membership since before the pandemic hits. The results were very encouraging.

And we decided to make an incremental investment in national advertising of $10 million from October through December. As a result of this incremental investment in NAF and the projected NAF revenues for the year, on a full year basis, NAF will be a net expense to our P&L.

However, we believe that the incremental advertising investment was the right long-term decision for the business, given the encouraging results of our September sale and the competitive dislocation occurring within our industry.

Now let me turn to the balance sheet, as of September 30, 2020, we had $501.6 million in total cash, with cash and cash equivalents of $419.7 million, compared to $423.6 million on June 30, 2020. In addition, we ended the quarter with $81.9 million of restricted cash compared to $86.4 million at the end of Q2.

Based on the current situation, and our focus on preserving liquidity, we announced in March that we were halting all share repurchase activity for the time being.

We also took additional measures to reduce our monthly cash burn, including previously announced compensation reductions for our leadership team, and our Board of Directors and during Q3, we made the decision to right size, our headquarters and field teams in an effort to refocus on our core priority of maintaining and growing our membership base.

Total long-term debt excluding deferred financing costs was $1.80 billion as of September 30, 2020, consisting of our three top tranches of securitized debt, and $75 million of variable funding. Our securitized debt structure is covenant light, we have two maintenance covenants, a debt service coverage ratio and a total system wide sales threshold.

Both are tested quarterly, they're calculated on a trailing 12-month basis, and reported roughly on a two month lag. In our most recent debt covenant reporting period of September 8, 2020, we had a 56% and a 108% cushion to the first triggering event for our debt service coverage ratio, and system wide sales covenant respectively.

Similar to our liquidity position, we believe we have sufficient headroom for our two maintenance covenants. Given an uncertainty surrounding the evolving nature of the pandemic, we are continuing to refrain from providing guidance.

While the near-term is difficult to predict, we believe that we are well positioned financially and strategically compared to the rest of the industry to capitalize on the many value creating opportunities we believe will emerge over the long-term as a result of the pandemic. I'll now turn the call back to the operator for questions..

Thank you. [Operator instructions] The first question comes from the line of Randy Konik with Jefferies. Your line is open. .

Thanks a lot, and good evening, everybody.

Can you hear me?.

Yes, sure, we can hear you. Thank you. .

Awesome. So I guess the most important metric that everyone wants to key in on is the membership trends. So if I do the math, from June to September, it looks like the membership roles went down by about 1.1 million members, and then in the last 30 days, a 100,000 members.

So I guess what I'm trying to get at is A, if we look at those two different time periods, are we seeing a clear deceleration in the overall cancellation number? And especially as we get going into this last 30 day periods, only a 100,000 and that changed to the downside.

A, is that the case and B, how do we kind of think about the different moving pieces between the three cohorts because there's an 1100 unit cohort that opened in June and July, it looks like there's a 500 unit cohort that opened in September.

And then, it also looks like in the last, I don't know, 30 days or so assuming that 95% of your overall gyms is open, that's another 400 that are just recently opened.

So could you give us a little education on, I know, it's a little complicated, but I think it's really important, on the different membership trend changes or cancel rate changes, in the different time periods, again, June, September, and now more recently, in the last 30 days? And then between the different cohorts? Because I think if we can get some real conviction that the membership numbers starting to stabilize, that's what I think is going to be the most important thing going forward.

Thanks. .

Thanks, Randy. And I couldn't agree more that's exactly what my main focus is. You're right, all those numbers were right, where we dropped about 1 million from the end of June through the end of the Q3 number. And then you're right, this last 30 day period of October was about a 100,000.

So we began to see it slow in September, and then even more so in October.

And a lot of what I said in my opening remarks, as the big part of a thing, but we had no marketing acquisition marketing out there, since before COVID started, so, it was pretty much the pond was going down every day with no rain, and finally we're marketing here and we're filling the pond back up. So, it's a lot of that.

At the same time, the older cohorts, you're exactly right to the older cohorts, the May openings, especially in June, which have been opened for a few months, this cancellations are beginning to come back to more normalized rates.

So, you got the plus side of driving member growth, and in the slowing, especially the older cohort stores, cancellations are slowing.

And also mind you, like we had a portion of his last few hundred clubs that opened up, which I think you mentioned, where the first annual fee for them was October 1, and another one was June 1 -- on November 1, excuse me.

So, we still have some of those cleaning out of those pentup camps from the more recent openings, but a much smaller section of clubs compared to the 1100 that were opened up early on. So you're exactly right, with all those numbers, and how the marketing now is starting to really encourage that the fact that it's happening, and people are listening.

And as I mentioned, I think on one of the calls that, September sale was a little bit cautiously optimistic, where people are ready to join and listen to our marketing and really be proactive and get off the couch.

And they were which is why we decided to do some corporate backing to throw in another sale period to capitalize on the demand that's out there. So, and in fact that competition is struggling and going down.

So, and I think the other interesting thing is when you look at the cancelled year-to-date, which I mentioned is cancelled year-to-date, although look really high for these few months. But the cancelled year-to-date are actually on part of last year.

So it’s really interesting thing too is we look at reason cohorts which COVID virus has now reason cohort of cancellation which didn't exist last year. We had a couple of million give or take approximately, that were non-use no time last year, which now that is about less than a million and there's a million people that cancelled because the COVID.

So it's interesting you don't have any more or less cancels, they use COVID as an excuse, as opposed to saying that they just don't, I'm motivated to workout. So I think what’s really a matter of not really a cancel problem as much, it's just the remarketing and getting that flywheel going to start to drive those sales..

So, you’re then saying that, if the cancel cancels aren’t part to last year, the real problem was a lack of ability to get people in the door to join because the units were kind of closed and there was no marketing.

So, are you then saying that the cancels are kind of normalizing and now that you are seeing some notable acceleration in join such that over the coming few months or whatever it takes, we should start to see that cancel number or that membership -- overall membership number reached a just a stable point of no longer going down.

How should we see that those two different vectors going over the next few months?.

Yes, I think the acceleration the joins that put up maybe in other ways, maybe getting the joints to be on par last year, we had all these sales last year, which we didn't have, up until the September sale.

So, I wouldn't say like acceleration over last year, but more normalized in our last year's acquisition, because we didn't any acquisition marketing. So, now we're playing catch up, I guess, is the way to put it. So, it is the older cohorts that are really having the net adsorption.

In September, we had a good section of clubs having positive member growth, in October had even the largest section of clubs having positive member growth, and it's an older cohort.

So, when you fast forward now, the next two or three months, we're going to have pretty much all of these 2000 stores have gone through their entire membership billing cycles for a couple months here, and also the annual fee cycles have gone bias.

So, by the end of the fourth quarter, especially the first quarter, honestly, is they've all gone through this clean out period of pent up cancels because of billing, and hopefully now start to show that that member growth again..

Thank you. And our next question comes from the line of Oliver Chen with Cowen. Your line is open. .

Hi, thanks. Thanks for all the details. So, the commentary on a normalization of the pent-up cancellations was helpful. I mean, is your expectation is that that will continue.

Were you seeing that across regions and different vintages in terms of older, much older gems versus newer gems? And then would also just love, that there's a lot of uncontrollables in the pandemic, unfortunately, including resurgence risk that's happening globally.

What about the way forward, as we have plenty of uncontrollable variables, and there are more surges? How do you think that will intersect with your marketing spending program and new joiner behavior going forward it was more challenging over the summer when it first happened? Thanks. .

Yes. Thanks Oliver. This is Chris.

I think real quick on the on the resurgence too, which is one thing is interesting with the joint libbets [ph] and Randy's question and your question is that, although we're seeing all this resurgence right, as real time in the last few weeks here, what we're not seeing now that we saw back in July, you probably remember me talking when the resurgence happened in Texas and Florida, and then we were forced to shut down our stores in Arizona in California, we saw nationally in all regions, a slowdown on the joins and a heightened cancel rate.

We're not seeing even though, all this media is pretty much as crazy as it was in July, we're not seeing that sort of reactions from the consumer sentiment side of things. So, it's almost I think the COVID fatigue people are talking about I think is probably real.

People are not listening quite like they were in July and when they were freaking out not joining. So, I think that's one good thing there. As far as the cancel trends and demographics, we're not seeing anything regionally, it really comes down all over how long the clubs have an open or reopened. It's really just we stopped billing people.

And then how we clean out all this cancels that we didn't have all this closure period, because people can cancel by mail or rush tickets and phone calls of those clubs. But really until we stopped billing is when we begin to see the cancel resurgence. So, but demographically or regionally, we're not seeing any trends there.

It’s more so just how long have the club's been open, and they act more normal, the longer they've been open..

Thank you, best regards. .

Thanks, Oliver..

Next question comes from the line of John Heinbockel of Guggenheim Securities. Your line is open..

Hey Chris, two questions.

How do you guys measure metrics measure the effectiveness of the national sale campaigns? And how did September perform versus pre COVID? How did October perform versus September if you know? And then lastly, when you when you think conceptually about 2021, normal seasonality would seem not to apply next year, for a lot of reasons in terms of membership additions, meaning more back end loaded.

Is that fair and how do you think about seasonality next year?.

Yeah, I mean, I think some of the membership trends as well as the member workout trends that we're seeing, which I mentioned have picked up since we started national advertising. I also think that's because of seasonality.

We were reopening the first section of clubs in middle of July, where it was beautiful out where, I'm looking outside now, its pitch black already and it's cold in the northeast so people aren't walking outside.

So I think the seasonality I don't really think that January going to not be a joining month I think it'll be, I think the new year's resolutions and the winter months will be busy like usual, as busy or depending how have the spike is in the unknown. No one really knows right now.

But granted, I think if we stay on this trend we see today and or better by the first quarter, I would think things will even be perform great, but if the resurgence comes in, we ended up having to shut down a big section of clubs that will change things, as well as the marketing budget.

I think what we're seeing right now, though on the closure side of things, is that we're not seeing, we've had a few clubs here and there closed and reopened a couple weeks later. So there hasn't been any big regional, like, three phase closed down on us or big areas that would affect any kind of budget from a marketing standpoint.

So granted that doesn't happen, everything should probably go as planned there. The September sale we didn't -- we've never really had a September national sales. So we didn't have too much to go off of. On the October sale was pretty comparable to last year, we usually measured on a baseline of the previous week to figure out how the lift was.

So we were pleased with both of those results from both sales, which is why we decided to do some corporate sponsor dollars for that NAF to keep that flywheel moving and take advantage of the joint demand that’s out there..

Okay, thank you. .

Thanks..

And our next question is from the line of Sharon Zackfia of William Blair. Your line is open. .

Hi, good afternoon. .

Hey Sharon. .

So I think a lot of us -- Hi. We're all trying to disentangle the member trends.

And I guess it might be helpful just in October, where you’re down a 100,000 from the end of September? Is there the possibility of dimensionalizing for us, what was the attrition versus the ads? If that makes sense, trying to figure out like, how the marketing is really impacting the dynamic here so far on the fourth quarter? And I guess, I'm thinking and I apologize, I'm thinking of that like original cohort, the 1100 clubs, so I recognize a lot of noise going on with the clubs that are more recently opening?.

Yeah, there's no doubt that the majority of the net member growth clubs are all that first cohort, the May here was about 500 or so. So make clubs that are opened and another 500 or so in June. So majority of the net ads were definitely in those sections of clubs.

And then the majority of the -- not majority of the -- the higher cancellation rates were definitely the newer joins, and the newer clubs that opened comes, August, September clubs that again, restated their billing cycles and annual fees, which has been the trigger to the very beginning and the trend is holding the same even with the newer clubs opening..

Okay. Maybe I'll just shift gears on the digital content. How are you going to -- well, I guess, I'm wondering about the economics of a digital only membership with a franchise base.

Like are you sharing some of those economics with the franchisees? I mean, how does that, I know it's a test, but how does that kind of flow through the P&L and how did the franchisees feel about it?.

Sure, yeah, yeah. It's early stages, and we've worked with our independent franchise counsel on the old program. And as we've done with everything and since day one as you know Sharon, as we've always made it a win-win with our franchisees.

So, the digital subscription will be something that we'll look to see the way that we share this back to them as well. So, that we all win in the process, because we want them to endorse them, which helps them sell it so that we all sell more subscriptions at the end of the day.

And I think the interesting thing with the subscriptions we're seeing is that, you may recall, when I read the free content, which we'll always have. I mean that they really is a good way to get people introduced to the club, to the brand, and about 20% of our content consumption are non-members of our stores.

So they're looking at planet as a trusted source and wellness. It's really early, we only want to say a couple weeks ago and no marketing, we kind of have a slow pace to kind of make sure there are no bugs or anything in it. But, even right now with the few subscriptions we have, 20% of the subscriptions are non-members, too.

So it really is a gateway into getting people introduced to the stores and our brand. So it's just -- it's really intriguing to see the potential we could have with this and 5.99 is really kind of a lot leader to get people to juice the brand and get them in to message them to try to purchase more out. .

Okay. Thank you. .

You're welcome..

And our next question comes from Jonathan Komp of Baird. Your line is open..

Yeah. Hi. Great. Thank you.

Chris maybe first question when you think of the re-closure risk, do you think that message is getting out that there's really not been a lot of direct transmission tied to gyms and certainly the health benefits? Do you think there's some separation in how gyms are being viewed versus other enclosed your interactions or any thoughts there?.

Yeah. We've had some pretty good luck, to take that. What’s the matter Jon, if we hear the scuttlebutt before they close us and we can get ahead of it and get to governor's office or the mayor's office, what have you.

We've had some pretty good luck with all the data we have moved on 10s of millions of workouts with no breakouts, and very few people that have in the health department come back to the same that somebody worked on yourself that had it. And you've got to go down to a six hours deep clean, or let the numbers know.

So we've had some pretty good luck getting that change. And even the very few closures we've had, or re-closures, they haven't been really large like big counties has really been like one or two clubs, and it's for a couple weeks, maybe so.

But I think, definitely going forward, I don't think the industry, unfortunately we haven't been vocal enough on the benefits of exercise. We hear it, but I don't think we get the appreciation or the attention the industry should especially Planet.

Getting people off the couch $10 a month, I mean, we're doing a service to them to American citizens, a face that that keep people active in building immune systems. And we see who this is affecting the most. So they're listening, I'm thinking a couple mayors like in the New Jersey maybe and one other said that there's been a big debate.

We're going to closures of like nightclubs again, and bars, restaurants. And they said they weren't going to do gyms because there's been zero evidence that gyms are a cause of any of it. So we've had some pretty good luck..

Great. And as you think ahead in the environment and clearly you're going on offense as the marketing, given the positive signs that you've seen there.

When you think about unit growth and really franchisee willingness to really embrace unit growth at higher rates, what do you think you need to see in terms of continuation of some of the usage patterns or the net number trends? Like what do you think to really support confidence in the growth outlook that you need to see as a system?.

Sure, hey Jon this is Dorvin. I think you're hitting the nail on the head in terms of the system today obviously is from a franchisee perspective, is they're looking at their clubs that hopefully are all open. Although, we have some franchisees that have some clubs open, some closed, and a handful that still have their ports closed out in California.

But, they're looking at the same kind of trends we are, what is the usage rates in the clubs? I think to Chris's point about how we viewed the September and October sale that was very pleasing to the franchisees too.

Because we all -- we didn't really know what it would be like after going through the pandemic and then going so long without having any marketing presence out there. But as I've said on previous call that, franchisees are not out there, generally beating down the bushes trying to find sites.

Now, we still have some that are, and some of the ones that they're looking at the opportunities out there from a real estate availability perspective, given what's happened so far, in kind of retail America. And some of the guys are doing some deals, but by and large, they're setting back the way and they're doing it for two reasons.

One, they want to see can clubs get open and stay open? Because that's obviously very important as opposed to open, close, reopen, et cetera. And then, what's the demand? Demand both on just usage from our existing members and then demand for new signups.

And I think what will happen is, we're virtually now into wintertime as Chris said earlier, January is just around the corner.

I think that's kind of a key time period, people are going to look to say has things kind of died down a bit on the COVID resurgence scenario or not? What's going on with usage in terms of our members coming in to the clubs? Is it kind of hanging in there? Is it increasing, et cetera? And then, really probably more important than anything in kind of real estate world is what is going on with space -- retail vacancy? And will there be a number of retailers that are kind of hanging on to get through the Christmas holiday season, and then there will be closures, and there will be more opportunities.

And, the guys that -- the bigger guys that do a lot of development and have their own real estate teams, most of them did not get rid of their real estate guys. They kept them on, they didn't furlough them et cetera. Because they know they're going to get back into development.

And when you talk to those guys, I mean, they're saying that there is going to be more opportunities out there, and more than likely at cheaper rents, but certainly, landlords are more willing to put some tenant improvement dollars on the table.

So there's a bit of a wait and see on both of those fronts when it comes to thinking about overall development..

And our next question comes from John Ivankoe of JP Morgan. Your line is open. .

Yes, I actually wanted to follow-up on development than I have a follow up as well. You did opened 29 units in the third quarter, which is actually a good number all things considered. Was that a catch up number? I mean, I guess this comes up the first question.

I mean, should we expect a material acceleration into the fourth quarter? I mean, as would normally be the case of the company is, I guess part A of the first question.

And then, secondly, I mean we had heard before that some franchisees were sensitive about attracting new members to new gyms, is that a kind of a concern that was well placed? Or are you seeing trends that are slightly different than that? So that's I guess the first broad question.

And then secondly, just in case I get cut off, the headquarters and field team restructuring that you talked about. I mean how much does that actually net to, I guess there's a run rate into fiscal 2021.

And if you were to consider fiscal 2021 is the headcount for what it is maybe some ads for incentive compensation, is there a sense of maybe what fiscal ’21 G&A can look like relative to fiscal ’19 if it's fair to ask at this point?.

Sure, I'll take the first part of that, maybe, Tom, you can talk about the run rate question on SG&A. I think, John, in terms of, I wouldn't call what happened in Q3, as a catch up. There were -- think about a development of a site, it's generally six to nine months out from the time that you really start.

I mean, if you're negotiating on an LOI that could take 30-60 days, it may take you another 30 days, 45-60 days to get your permitting and your drawings and everything approved. If it's a pretty good box, it takes about three months to ultimately get all the build out and everything done.

And so, to a certain extent, I'd say it's a little bit of a couple things. Number one is, there were sites that most likely would have opened in Q1.

We talked about that back on the Q1 call, that all construction stopped, because you couldn't have more than 10 people on a location, you remember back those conversations, so some of those got pushed into Q2.

Then as we got into kind of the April May time period, when everybody thought maybe things would start back up in 30-45 days, and we realize it's going to go longer, some of the franchisees were able, even when construction could start, they're able to kind of either slow things down, or push it out a little bit further, because they didn't -- I mean, you didn't want to open a store when you were shut down in your state.

So they were able to do some pushing things out, deferring, certainly no acceleration or development, et cetera. And all of those are the things that led us into saying that the overall store openings for the year could be 50% or more down from the peak of 2019.

So in reality in Q3 here John, there's probably, if nothing would have happened with respect to COVID, number one, we'd have more sites for the whole year.

And we probably would have had more sites a little bit of Q2, would have been in Q1, some of these here might have been in Q2, and then there might have been some from Q4, that will open this year's Q4 could have actually happened in Q3. So, it's such a fluid deal, John, that and in fact, some were able to just totally push things out from next year.

They've gone to landlords and just say I want to negotiate this deal, we're going to do in November, December, we want to wait and do it in Q1. So there's a lot of that happening. And it really happened because things were shut down and closed. And so it's like, I don't want to open a store up and then it closes right back down again.

Which kind of leads into part of your question, I think about attracting new members. I mean, we as you’ve said, we open stores this quarter, we'll open stores every quarter this year. And I think it kind of ties a bit back into one of Chris's comments earlier is that there is a demand for memberships.

For mature clubs that were closed once they open, we have people start to use them and where are people joining. I would say that the new clubs that opened late last year to early part of Q1 this year, they in essence missed, call it three to six months.

The clubs were closed down in the middle of March and they're still not open today, they've lost in essence call it six months, whereas some clubs did may be open in, July or August, maybe only last call it two, three months.

So, they're not going to be on par with total memberships and ultimately, monthly revenue to where there the same class from the year before would have been last year and in the first, call it six to nine months of this year. So they're definitely behind.

But what we're not seeing John, is that when you open up a club, it has activity, I guess, so to speak.

I mean, people are still -- it’s in a market where we're bringing a high value, a very affordable option to a place where we didn't have a club and in some places, particularly today, John with the closures of 24-hour and goals and some of the other guys, we're bringing the gym to places where maybe there's not much competition.

And so, we can attract members in and around that particular store..

Hey, John, I'll pick up on the on the right sizing question. So, I think in the quarter it was neutral between the savings and the severance. But as we look on an annual basis beyond that, we're in the $6 million to $7 million range of savings from that action.

Now really, why we did it is we want to focus on our priorities, as Chris said, net membership growth, what we're doing with the app and with digital as being the really the top two priorities, and clearly those are interrelated.

And as we look to 2021, we're in the midst of planning that now, you know there may be some of that invested back in against those initiatives. But we thought that that was the right thing to do, given where the business was, and really get focused on our priorities, and what's important for the next while..

Thank you. And our next question comes from the line of Peter Keith of Piper Sandler. Your line is open..

Hi, thanks. Good afternoon, everyone. Maybe Chris, you've talked a bit about the new member signups and cancellations. I was hoping you could give us some of the sequential trends in that usage rate, just checking the notes from the prepared remarks. I think, at the end of Q2, you said the usage had plateaued at 60.

And now you're saying it's at 67? Even as we march forward with October, November, when we get the time change colder weather, are you seeing usage continues to sequentially step up?.

Yeah, well, especially the older club that opened in May is definitely as mentioned earlier, that the longer the clubs are opened, the longer the more of normal they act. So, the May re-openings had an increase of 64% in August of 74%, -- 70% to 64%, previous 74% in August, and now September up to 76%.

So you see, the longer the stores are open, the more normal they're act, but the overall system average is 67%. But that's also skewed, because we have a lot of stores that open the last 30, 60 days..

Got you.

So, those the clubs that have been open the longest are almost getting back to a normal usage rates?.

Yeah, it'll be interesting to see what happens over the next couple of weeks to a time change. Like I said, earlier, it's pretty black here in the northeast already. So, it's definitely something to do with that.

And I think some of the seasonality we saw changing in September, were people going back to routine when the kids go back to school and stuff, which I think helped with our marketing. But it was interesting when we started marketing in September; it was literally overnight that we started seeing usage pickup.

So, I think a little bit of just, I think our marketing was probably speaking to non-members as well as members, highlighting cleanliness that, give it a shot. Once you come in, you'll be surprised at what you see. And I work out of my local plan here in Seabrook, New Hampshire. And you feel totally fine in there.

And I've noticed just when I go in the mornings, and I go early mornings, but it's definitely actually even today compared to, three weeks ago and two months ago, it's night and day as far as how the people are those probably that are in there working out. So, it's been really good..

Okay, that's great. So, the one I have separately a kind of big picture question just on the emerging trends of home workouts. And I think it's a great idea that you guys are doing the digital apps subscription to become more omni-channel. But one question we do get from investors is just the structural change with home work out activity.

And does that impede overall gym member growth, longer term into the future? How do you guys think about that for your customer base? And do you think there's a characteristic of the Planet Fitness member that perhaps doesn't like working out at home or won't stick to that behavior?.

Yes, I think, I always thought the same way but I mean, home fitness is not anything new. It's been around since I would say Richard Simmons and James Bond and then it was Billy Blanks Tae Bo to p90x with DVDs.

And, and I have peloton, and I think it's peloton is a very different customer, first price point and cost for example, but and then you think about who has a space or who wants put in a living room or who has a basement to put it in. So, you get space is initially a cost.

But I think when you look at, commercial grade equipment, the best quick money can buy 24-hours a day, seven days a week, and you got $10 bucks a month, you haven't experienced that it just unmatched and.

And I have a great gym in my basement, naturally being in the industry, but I still go to my local Planet, because 5 o'clock in the morning in my basement aren't that much fun. So, I think the energy you feel in a club is just un-replaceable by any home fitness. I think it's a good supplement.

But one thing I would say though, through COVID is and I look at digital not necessarily is home fitness, I think digital is it same club was at home and it's outside. And I think people have learned how to use digital to get better workouts and probably be more creative with their workouts and educate themselves, how to work out better.

And with the app, we went down this road last summer because two summers ago now, because we saw people in our clubs using content in our clubs, and we didn't provide it to them. They were finding it a third party, which is why we started to go down this road, two summers ago. And luckily, we did.

What it took the COVID though, for us to realize that, 20% of the consumption were non-members. So, I was like, well, this is much larger than we realized that people are coming to Planet as a trusted source and looking for us for assistance.

We've kind of led us down this road, because originally we were looking at it as a bundle with the Black Card, for example, which is something we're still, probably going to test someday.

But as the subscription model is working now and looking at this rollout is how does this work and how do we introduce more people to the brand that we can then invite them into the club to give it a shot? And I think it gives a great brand exposure.

It's either they're super intimidated, Peter, I mean, with a judgment free zone, we cater to casual first timers. But maybe there's a level of people out there that are just really intimidating to walk into a gym and I get it and maybe this is the way to -- this is their gateway to bricks and mortar.

Also, maybe they just not a plan in their backyard just yet. And when we get there, they'll know the brand. So, I think it's just a, it's a great opportunity for us to be front and center. So, people that are finding our app as it is, that are non-members and are current members to get better workouts.

So I think at the end of the day is $10 a month is an unbelievable value. But it's a hell of a value, if you really know how to use all the equipment in the gym.

And we’ve 7,000 members of store, how do you really get them -- how do you get trainers to introduce everybody to every single piece 24 hours a day, seven days a week?.

Thank you. And our next question comes from the line of Simeon Siegel of BMO. Your line is open..

It's early and this might just be unanswerable now, but given the obvious dislocation, have you guys done any analysis. Are you willing to share any around updated views of what the market share opportunity does look like? And obviously, we can see the pressures from the larger chains.

But can you also maybe just speak to the opportunity from independent? Thanks..

Hey, Simeon, it's Tom. I'll start that and maybe the other guy's lead. So, I think URSA just came out recently, the trade organization and said or trade association said, there could be upwards of 20% to 25% of the gyms don't reopen.

So, if you take us out of it, that that means there could be somewhere in the neighborhood of 50 million, there's 50 million gym goers who are not a member of Planet Fitness. And if 20-ish, 25% of those have gyms that close, that's 10 million people looking for a place to go.

And as our share is about 25% today, and even if we got our fair share, that's still a considerable number of people to come into our membership role. And what we're hearing, we've talked about you're up to date on all the big names.

And as we've said, and maybe talk to you about before, and it continues as we talk to our franchisees more and more the local operators who are in their markets that, most of us have probably never heard of, just don't have the ability to reopen.

And also, we're hearing some of the brands that we do know are walking away from sites they were looking at, because they just can't do it. So, we think that this will do and so who knows how that's all really going to play out.

But at least, and that's the 20% -- those numbers, I was quoting the 10 million people who might be displaced from their gym, to Chris's point, that's not even who we target, as you know. That's just the folks who are already working out, who are typically 40-ish percent of our member base.

So, we think it's an it's a tremendous opportunity, both to get the 80% of folks off the couch and also pick up some of the 20% who are going to be displaced when their gyms closed..

Great. Thanks a lot, guys. Best of luck for the rest of year. .

Thank you. Talk to you soon..

And next question comes from the line of Joseph Altobello with Raymond James. Your line is open. .

Thanks, hey guys good afternoon. .

How are you doing?.

I guess first, -- good, good. First quick question, any update on the timing of the remaining 100 or so store re-openings given that most of those are in California. Has the state advised you where your franchisees are and all? Number one. And number two, you mentioned the progress that you guys are seeing in terms of usage rates.

But I think the numbers that you gave earlier that the 67% system wide, and even the 74% for early openings, they don't sound all that different from let's say three months ago.

Are my numbers wrong or have you seen pretty progress there?.

Yeah, Joe this is Chris. The 67% on average, a lot of that is skewed because of the recent openings, 300 or 400 or so clubs that just opened doesn't bring that down. But if you look at the main openings for example, that are up to 76%today.

The system average back then was high 60, or low -- high 50s or so and they were most clubs back then were probably high 60s or 70s. We still have some clubs in that. Early May openings, there are still even higher than that. That's just the average, there are some, like I mentioned back then that are in the 90% or 85% 90%. So it's coming up.

It's not, which was a hell of a lot higher. But I'm just more happy that, it's going the right direction, not the wrong especially with the recent trends you see on TV in the resurgence because that was definitely not the case in July and August. So that's a good part there.

As far as 100 left open, like the Panama, they told us November 2, they pushed it off. So that's not happening right now, maybe mid-November in Panama. But as far as the remaining, so it's mostly in California at this point. It's really regional in California.

And they have a coding system there that they have to, based on hospital check-ins and cases that are reported that they turn a code and then this club is rather open. So there's really no timing, it's just a sit and wait. And each week they look at the numbers they report, and they give us a code that we can open it out.

So there's really no timing there in that state. .

Okay. Great. Thanks guys. .

Thank you. The final question of today's question and answer session will come from Alex Maroccia of Berenberg. Your line is open. .

Hi, good evening, guys. Thanks for taking my questions.

Among the active member base at franchise gym, so the members that are frozen and not paying currently, if it's still included in the active base?.

Yeah, they’re still in the active base..

But it's really pretty small..

Okay, understood.

And then how are reequip trends compared to historical rates given the 15% discount for franchisees?.

Dorvin, do you want to take that one?.

Yeah, so one of the things that we did Alex was, as you recall, we announced that we were pushing out both new development as well as replacement of equipment out 12 months from the date that it was needed to be replaced. So there certainly been a preservation of capital or cash and liquidity during the time period since we made that announcement.

We'll still have some, as Tom went through some of the results earlier for Q3 and as well as Q4, but and it's not keep in mind, it won't be a catch up then when you get out to the end of that 12 months.

So in the essence, all equipment that was out in the field regardless of the year of vintage got an incremental 12 months before it had to be replaced. So if you will recall, our requirements were cardio in five and springs in seven.

So that gets moved out a full year, but all brand new equipment, whether it's a new store, or whether it's replacement equipment in an existing store, still has the five and the seven year requirements on it. But a lot of franchisees are going to take advantage of it.

Because number one is, we still have the issues with stores, some franchisees where not all stores are open. And then there's just obviously the concern of will stores get re-closed again, etcetera.

So, most are actually going to take advantage of that, but we'll still have some, but just not where it would have been historically based on the requirements..

Okay, that's helpful. Thanks..

Absolutely..

At this time I'll turn the call back over to the management for any closing remarks you may have. .

Thank everybody for dialing in today and this has been one heck of a year as we all know. And I couldn't be more excited with how our marketing is really getting people off the couch again to join the clubs.

And that, it's interesting to see even with what you see in the news that with our joining trends and with the marketing work in that 40% of our members that are joining, are still first time gym members. And they're not being persuaded to not choose bricks and mortar as their place to start their wellness journey.

So that's super, super encouraging as well as honestly, I couldn't get off the call without giving kudos to our management team here in the office, and all our franchisees in the field that quite honestly have been remarkable to work with you through all of this and their excitement to put this behind us and they're bullishness with the brand and what they see the future is as bright as what I see.

And I wouldn't be here and running this company as good as I am without the corporate team here as well as our franchisees in the field. Well, thank you and have a good evening. .

And this concludes today’s conference call. You may now disconnect..