Good day and thank you for standing by. Welcome to the Planet Fitness, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your host, Stacey Caravella, Vice President of Investor Relations. Please go ahead..

Thank you, operator, and good afternoon, everyone. Speaking on today's call will be Planet Fitness Chief Executive Officer, Chris Rondeau; and Chief Financial Officer, Tom Fitzgerald. We also have Dorvin Lively, President of Planet Fitness on the line, who will be available for questions during the Q&A session following the prepared remarks.

Today's call is being webcast live and recorded for replay. Before I turn the call over to Chris, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the call.

Our release can be found on our website, investor.planetfitness.com along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now I'll turn the call over to Chris..

Thank you, Stacey, and thank you, everyone, for joining us today for Planet Fitness' Q1 earnings call. Let me start by welcoming Stacey Caravella as our new VP of Investor Relations. We are very excited to have her join our team. We are very encouraged by the steady improvement in overall sentiment we witnessed in the U.S.

during the first quarter and the corresponding impact it had on our business. Americans appeared cautiously optimistic early in the new year as COVID-19 vaccines began to slowly roll out to health care professionals, frontline workers and others.

As the quarter progressed, national active case count started trending downward, states began to ease restrictions and the vaccine availability increased.

At the same time, the momentum we experienced in January accelerated as Americans began to feel more comfortable returning to regular activities they enjoy pre pandemic, including going back to our stores. Even in the early stages of emerging from COVID, it's clear that health and wellness are essential.

We are pleased to announce that we experienced sequential net member growth in each month of the quarter, ending March with 14.1 million members, up from 13.5 million members at the end of 2020.

The positive headline news of COVID-19 vaccine availability seems to have driven a seasonality shift in our membership trend as March membership growth in mature stores exceeded March 2019, reinforcing our belief that people are eager to get back to our gyms, particularly with our continued emphasis on our cleaning and sanitization standards.

In fact, in March, 30% of overall joins were prior Planet Fitness members versus 21% in March 2019. While our cancels remain at similar levels to 2019 on a monthly basis, we're seeing the percent of cancels related to COVID concerns declined significantly.

In an effort to capitalize on the shift of seasonality, we added a flash sale in April and are currently running a May sale with an unprecedented offer of the first month free and then just $10 per month with no commitment to inspire and encourage people to get off the couch and start their fitness journey.

With 14.3 million members at the end of April, our target audience of casual first-time gym goers continues to respond favorably to our messaging and value proposition. To put it in perspective, year-to-date, we have regained nearly 100% of our full year 2020 member loss and 40% from our highest membership levels in Q1 2020.

Research continues to show the importance of fitness. Results from a recently published study by Kaiser healthcare found that just 22 minutes of activity per day could reduce the risk of severe COVID outcomes and death.

Additionally, a recent poll by the American Psychological Association showed that more than 60% of adults experienced weight changes due to the pandemic with the average American reporting that they gained approximately 30 pounds and nearly 50% of parents saying that their stress levels have increased during the same time period.

Americans are waking up to the fact that their overall wellness needs to be a top priority and we offer them a judgment-free fitness option at an incredible value.

And I am proud of how our franchisees, headquarters staff and club staff have rallied together to provide a clean, safe fitness experience for our existing and new members seeking a non-intimidating environment. Today, we have nearly all our stores open with approximately 30 clubs still closed in Canada.

Regionally, the Midwest and South are leading the way in terms of performance metrics, having been reopened since May and June of last year. Usage in the stores in those regions is nearly 90% of 2019 levels while, naturally, usage is trending up during the quarter ending March at more than 80% of March 2019 levels.

Usage for all age groups is trending upward, with Gen Z leading the way. We believe that as more and more of Americans receive the COVID vaccine, usage in the clubs will continue to climb. Now to our digital strategy.

App adoption continues to accelerate with nearly 50% of our total membership base having the Planet Fitness app, up from 40% last quarter. Our app is another channel to engage with, provide service to and motivate our members inside or outside of our gyms.

For example, it provides the ability to upgrade to the Black Card and Crowd Meter to help plan your visit and content videos on how to use the machines on the gym floor and do virtual workouts. We also continue to test PF+, our digital-only subscriptions for $5.99 per month.

More than 30% of PF+ members joined Planet Fitness locations after subscribing, hence demonstrating our "digital as a gateway to bricks-and-mortar" strategy. This is up from 20% in Q4. Additionally, 65% of our members who have subscribed have visited our core bricks-and-mortar offerings since subscribing.

Beyond just being a gateway, more than 80% of the total PF+ subscriber base are members, an indication that members see the value and are willing to pay more to get more. This is where we believe we can offer real value to our members.

Today, consumers can download a wide variety of individual apps at all different prices for workouts, wellness, nutrition and mental health.

Our goal is to provide a holistic offering at an incredible value with a differentiated content geared towards breaking down the barriers for casual first-time gym goers all in one app, along with the ability to visit our gyms.

To this end, we plan to pilot PF+ in a limited number of stores to test price elasticity with bundled offerings for both our Classic and Black Card memberships. We expect to run these tests for the balance of 2021 and look forward to sharing more possible offerings in early 2022.

To underscore our commitment to our digital strategy, today, we announced that we have deepened our current partnership with iFIT Health & Fitness by taking a minority stake in the business. This enables us to accelerate our current digital content offerings to our members while also exploring complementary mind and body wellness categories.

I believe that the future of the fitness industry is truly about bricks with clicks, the powerful combination of providing people with a high-quality in-person fitness experience, coupled with the ability to engage and service them outside our four walls with differentiated premium content wherever they are.

As I think about the future of Planet, I come back to the fact that we are a purpose-led brand with health at the heart of who we are. We are on a mission to change people's lives for the better.

We're in the fitness business but we are also about providing a supportive community to our members, and this is what people are seeking right now, connection with others. The membership and usage trends that we are experiencing make me optimistic for the long-term growth, and I truly believe we are on the verge of a fitness boom.

According to the industry trade group IHRSA, approximately 17% of the U.S. gyms had closed due to the financial impact from COVID, and it projects that it could eventually be upwards of 25%. We believe that with our value proposition, we can take more than our fair share of the people looking for a new gym.

The role of fitness has never been clearer with nearly 80% of people hospitalized for COVID being overweight or obese according to the CDC and 90% of the deaths from COVID were in countries with the highest obesity rates according to the World Health Organization. People realize the value of fitness more than ever.

As we look to the future, we believe our purpose of enhancing people's lives and creating a healthier world sets us and our franchisees up for long-term success. I'll now turn the call over to Tom..

a debt service coverage ratio and a total system-wide sales threshold. Both are tested quarterly, calculated on a trailing 12-month basis and reported roughly on a 2-month lag.

In our most recent debt covenant reporting period of March 5, 2021, we had a 17% and a 93% cushion to the first triggering event for our debt service coverage ratio and system-wide sales covenant, respectively. We believe we have sufficient headroom for our two maintenance covenants, especially now with the majority of our stores open.

The unprecedented pandemic situation in 2020 proved the durability of our business model. Our stores were closed between two and nine months last year, and we did not have a single permanent closure due to COVID.

Additionally, during our franchise business reviews, franchisees have reported that while their store EBITDA levels has decreased, many of them still have EBITDA percent margins in the 30s for their mature stores.

I believe that as we emerge from the pandemic, our investment thesis has only been strengthened with the critical importance of health and wellness on the rise.

We are a differentiated and disruptive fitness concept that appeals to a broad demographic with a national scale advantage built on strong store-level unit economics, and we believe our competitive moat will continue to widen as we begin to come out of and get to the other side of this awful pandemic.

I'll now turn the call back to the operator to open it up for Q&A..

[Operator Instructions] Your first question is from the line of Randy Konik from Jefferies..

I want to ask a couple of questions. My first question, Chris, for you. Can you give us some perspective on the impact of -- Cali churn impact on weighing down the nice net member growth you saw in the quarter? It seems as if that would have held back the numbers a little bit that inflected in the quarter.

And then the other thing is, can you give us maybe some perspective why you said -- I think all workouts were up by all age cohorts.

Is there something where the millennials are leading the way in terms of new joins, but you could have had some still hesitation from the older age cohorts that were still waiting for vaccines and what have you that there could be an area of new member join opportunity going forward? I just want to get your perspective on that Cali impact and how you think about age cohorts going forward..

Yes. Thanks, Randy. This is Chris. Yes, the Cali impact would be some but pretty minimal. There's only 150-or-so stores in that market compared to the entire base. So it would have some impact but not that substantial. And at this point in the game here, with all U.S.

stores open now and the only stores really closed now are in Canada, about half of those roughly, the chance -- the pent-up cancels that we saw all of last year that we talked about are pretty much weeded through now. So our cancellations now are normalized.

And what we saw in January was -- from the join volume was not quite the stuff like we normally see in January, although positive. But as in my opening remarks, what we saw in March of this year on mature stores marked -- over index 2019 of March, and April was basically on par to April 2019 as well.

So -- and in April of 2019, we actually had a 10-day national sale, which we did not have this year, just a 3-day flash sale. So you can see now that although January was lower than we normally see, as we've talked about, what we kind of assume would happen as the vaccines get rolled out is we're -- we'll have an unseasonal change in volume.

And then to your question on the cohorts, Zs even since -- even during COVID were over indexing all along. They were coming in faster than we had ever seen in the past. Millennials were on par, slightly less, and Gen X and boomers were certainly down, especially boomers, as you'd expect.

What we're seeing now is they're all starting to go the right direction. Zs are still over indexing what we've seen in the past, but the boomers now -- which is a good point to point out, is now going in the right direction.

Although not to last year's -- or 2019 levels, they're now going in the right direction, I think, because the vaccines are out there and they're feeling comfortable..

Understood. And then with the investment announced this afternoon, it's clear that you're kind of moving and thinking through the company in an omni way.

Maybe just give us some perspective on what is your longer-term vision for the business and how you think about addressing omni, both on your -- in people's pockets on their phone with the app but in the gym as well. And just give us some perspective of what you think is the future for this company from an omni perspective..

Yes. That's a great question. When you look at this industry and up until -- the world of technology now, the apps, this industry had no way to service our members outside of our four walls. So they pay us month in and month out, and whether they walk through the front door or not, we had no way to service them unless they walk through.

So to think about that now for a minute, how do we provide service outside our four walls, whether it's the workouts that we're currently providing and continue to increase that library; do we get into meditation and diet/nutrition, for example, so having to continue to offer service, whether or not using the four walls, which at the end of day can only drive retention, I would assume, right? I mean if you're giving something to the members, whether they use the store or not and they're able to stay serviced, hopefully, it drives retention longer term.

And for our members, as you know, Randy, these are casual first-timers, and 40% of our members have never gone to a gym their entire life. And that still holds true today. So they're still choosing bricks-and-mortar the same rate they ever have even post COVID.

These people don't even know where to start, right? So they're having to go find their workout app or find their nutrition app or find another app and know where to go and what's the right source or what's the right avenue to go to. So why not handhold them and just close that circle and just not make it à la carte.

Let's just give it all to them so they don't have the go find on their own and try to piece it all together and really just make it easy and seamless for them to hopefully guide them on their wellness journey, which will drive results, right? And when they end up getting results, that too will drive stickiness longer term.

So I think it's how do we handle our customers so that they get a better service and better experience and better results..

Your next question is from John Heinbockel from Guggenheim..

Chris, let me start with how do you think about the cadence of marketing this year, right, if seasonality is going to be a bit different than before, right, in terms of staging your sales -- not just your sales but also your electronic marketing? And then also, as part of that, Teen Summer Challenge, I haven't seen much on that.

Is that -- is there any kind of hybrid or modest approach to that this year or that's going to be a '22 issue?.

Yes. The Teen Summer Challenge, unfortunately, we did postpone it and probably relaunch it next year, mostly to the fact that under occupancy limitations with the clubs. We didn't want to fill a seat with a free member as opposed to a paying member that couldn't get in.

At this point, luckily, about 50% of our stores had zero occupancy levels, so they're wide open, which is great so -- but still 50% won't do. So we wanted to postpone until next year. On the sales cadence, so as I just mentioned, the March and the April numbers for the mature stores were ahead March of 2019 and also on par to April 2019.

So what we did do so far -- the rest of the year is right now pretty normal. But what we did do, to your point, is the normal April national sale was just a 3-day flash sale, and we pushed that big national sale into May, which we're right in the middle of right now.

Because we felt -- we do feel that the longer this year goes in and the more vaccines get rolled out, that the unseasonable volume that I think -- that we'll see is there. So we're going to hopefully test and see that through this May national sale, which was normally in April..

Okay. And then maybe secondly, right, back to the -- what you're doing with iFit. So when you think about bundled pricing, right, obviously, I don't think you want to tack $5.99 on to a black card.

So is the idea really apply that to -- it's a Black Card benefit, the per-month pricing goes up $1 or $2 or $3, something like that? Because I know you've also noodled with the idea that -- I assume it will not apply to the White Card.

And do you really want to -- I guess, when you think about getting people there solely at $5.99, there'll be some of those, but I think you really want to convert them to Black Card members, correct?.

Yes, absolutely. And you're right. So now that we've had the pilot with the PF+ $5.99 digital subscription -- and we've talked about this for a couple of years now, that my vision was to have a bundled digital offering with the Black Card to hopefully drive some price or acquisition.

So now with the $5.99 price out there for just digital only, it sets that perceived value. So you're exactly right. So now with the Black Card, we add a couple of bucks to it. The member thinks they get the Black Card for $24.99, and they're getting really -- quite a good deal because the $5.99 would be by itself.

So now the Black Card pricing is in the 19s again. So that's exactly the idea. With the White Card, as we've always talked about, that $10 price point is sacred. It's our advertising go-to price, gets you to come in, gets you off the couch. And we're still getting upwards of 60% acquisition on Black Card.

So that's probably where we're trying to get you when you come in and see all the perks you get with the Black Card, although we probably will test some sort of White Card add-on to get digital on top of that, if you so choose. So we'll definitely try a few things out this year and definitely report more next year.

But the beauty with a digital component as an add-on or as a bundle to Black Card in the clubs now is that in the past, the franchisees would have to build standing rooms and CapEx would have to -- to renovate 2,100 locations. The beauty with this is a flip of a switch. So we have to test it in a bunch of stores here and see how it works.

If we decide to roll it out in a bundle, overnight, all 2,100-plus stores will have the ability to start selling the option..

Next question, we have Jonathan Komp from Baird..

Just I want to follow up on the membership trends you're seeing, which seem quite encouraging. But I know you mentioned some of the markets where usage is coming back faster. I don't know if you've taken a look at membership trends in those same markets and if you're seeing any difference there.

And then also, when you look forward kind of the better-than-normal seasonality you've seen, I mean how are you thinking about the chance that, that continues? I don't know, if you can toss in the puts and takes.

Or following up on the marketing, any proactive tactics you're taking to help encourage that going forward?.

Yes. Sure, Jon. The usage, as I mentioned in my opening remarks, the South and the Midwest where they were open longer back from May and June, they're definitely -- their usage now is over 90% for member workouts. And their cancellations normalized earlier on than the newer, say, California openings.

So as we've talked forever since this all started to happen, the ones that opened -- the clubs that are open the longest since reopening are acting the most normal. So I -- and there's no reason why the rest of the country, as they get further into this reopening/resurgence, they shouldn't see the same kind of results going forward.

Yes, the seasonality side of things, it's hard to say. March was a great example and so was April, but I don't think two months we can bet on a trend just yet.

But if we get through May and June here and we start to see the same sort of abnormal seasonality trend and we start being on par or over indexing April of 2019 in those months, that would definitely lead me to believe that the seasonality changes is probably going to be the rest of the year, which then begs the changes -- the direct change in the marketing schedule that's set today, which time will tell.

There's no way to guarantee that yet, but we'll have to wait and see..

Jon, it's Tom. Maybe one thing just to build on Chris' first answer there. I think to tie it to your membership question. The stores that reopened the earliest in Q1 had the strongest membership growth, which goes back to the longer they're reopened, the more normal and stronger they become..

Great. And then a follow-up. I don't know if you have an updated view on when you could see the system get back to pre-COVID membership per club. I know you talked at a high level before.

But related to that, assuming the trend continues, and you mentioned strong franchisee profitability, how do you think the operators are balancing repairing the balance sheet still in 2021 but not falling behind from a competitive standpoint, looking out to '22 in terms of unit growth and going back on offense?.

Yes. It's hard to predict exactly when we get back to pre-COVID levels, but I think it's pretty astonishing that we've gotten back just here in four months 40% of our peak last year. In just one month, we've made it back. So it's a great trajectory. Let's just keep working on that to keep it going in that direction.

When and if we get to the point where we're back to pre COVID, I don't think it will be this year, but definitely, we're headed in the right direction, which is promising..

Yes, Jon. And on the franchisee side, I mean, as I said in my opening remarks, they're all at different places, but talking to the largest ones here in our -- in the franchise business reviews, they are bullish. And they certainly bolstered our confidence in the range that we provided of 75 to 100 new store openings this year plus doing the reequips.

So if you think about -- to your question, about competition, anecdotally, we don't see any competitors marketing beyond some social media. So the franchisees in their markets, and certainly we're seeing it in our markets, they're not taking any real positions in traditional mass media.

We certainly don't expect and have heard anecdotally, again, that they're not reequipping their stores where our franchisees are, which is another sign of their financial wherewithal and strength because not only do we want to open new stores.

We want to make sure that the current stores we have and the current members we have in those stores have the best experience possible. So our franchisees are aligned with us that it's not only about the new capital for new stores. It's also about capital for the existing stores.

So -- and again, anecdotally, we've heard that some of the high-value, low-price players who were going to enter markets or broaden their -- increase their presence in existing markets have largely pulled back on their store development plans.

So we believe our store growth from last year and this year combined and more importantly, net store growth since we've closed zero as a result of COVID unlike others, will trump and dwarf any other high-value, low-price competitor individually and likely collectively..

Next question is from Joe Altobello from Raymond James..

So first question on the store build. You mentioned that you opened 22 new stores in Q1. Would you still expect Q4 to be the heaviest in terms of new store openings as it has historically? Given the 6- to 9-month lead time, it would seem like you guys would have pretty good visibility into that cadence throughout the year..

Yes. We -- go ahead..

Joe, this is Dorvin. As Tom said in his prepared remarks, we feel confident in our range of that 75 to 100. You're right in the sense that historically, a lot of the new store builds have tend to be weighted in Q4, the back half of the year.

But we have franchisees looking for locations kind of going out of the end of 2020, knowing that some things are opening up, certainly some of the states that we've referred to that opened up earlier and less risk of those closing down.

Obviously, other states like California and some others were -- either we weren't open or certainly a lot of risk of potentially closing down, a lot less activity out there in the market to try to build a pipeline for that. But yes, we've opened some stores in Q1 as we reported, and we expect to open some stores throughout the year as well..

Okay. That's helpful. And maybe on to membership. You mentioned that 17% of gyms closed permanently, and that number probably goes up.

How are franchisees marketing to those members since gyms have closed? Are they buying member lists, for example, from those closed gyms?.

Yes. In some instances, they are, Joe. This is Chris. They get known ahead of time. If there's a struggle there or that owner is not open, they will reach out and try to buy the member list from them, and it's a pretty seamless deal. Generally, how they work, from a high level, is they basically take the members and they service them.

And they make -- there's no financing involved. They could basically pay -- they will pay the club owner a portion of what they collect over a period of time, and that's their payout. And then they get the membership, 100% of it going forward. So it's a pretty seamless integrated takeover in that sense.

But in most cases, I'd say probably 80% of the time, it's really just a matter of marketing in and around that closing club, whether it's billboards and postcards and so on, driving them to the Planet location. So that's pretty much how they capitalize on that.

On a lot of the national chains like a 24 Hour Fitness, for example, in most of those cases, those members weren't abandoned like a mom-and-pop would be. Most of the time, in those situations, the big national chain like a Youfit, they would just dump their members at their -- of the closed clubs into their open clubs.

So it would be a slower cancellation transition as people say, "I don't want to drive that far to the next available club to use." So it's more the mom-and-pops, which as you know, as we've talked about, is highly fragmented. If we take all the -- us and all the big chains together, there's still 36,000, 37,000 mom-and-pops out there..

Next question is from John Ivankoe from JP Morgan..

A couple of questions, if I may. I'm sorry, I'm multitasking with another company that's also reporting, so I apologize if I ask something that's already been answered. First, I think I heard something about this that I wanted you to clarify.

The clubs that have been most recently opened, California, for example, how have the trends been in those markets, for example, after the annual fee was charged? I know that was an issue that we kind of dealt with in 2020, that people didn't cancel immediately.

Is that an issue in California or any other markets that you guys have?.

Yes. And so the California stores, so the cancellations in that sense weren't as bad, and this is the reason why. It's because, in California, because they were closed essentially until 2021, we didn't want to bill their annual fees upon reopening because then they would essentially have two annual fees within the same calendar year.

If that makes sense, John. So it's -- we thought it was the right thing to do for the -- it's lost revenue for the franchisees, but they agreed that we wouldn't want to hit them in January or February once they opened and then hit them again in June when they would do.

So we decided to waive them, which I think has probably helped a little bit on the cancellation side until it renews..

Is there a wave of annual fees in California that we should be sensitive to? Or is it going to be evenly distributed throughout the year based on whatever their initial contract was?.

Yes, just the initial contract. There's not going to be a big balloon there because it wasn't -- we just waived them for the full period..

Okay. I understand. Covering restaurants, I mean, I've seen a lot of companies that have pulled advertising, reduced their promotions, not done as much on the discounting side, much like grocery stores. In other words, if you think you have the demand, why advertise like crazy to bring people in? They're going to come anyway.

And it's interesting to juxtapose what is, very obviously, an aggressive May promotion, one month free, $10 a month, no commitment. Your belief is like, "Hey, there's going to be a wave of fitness because people have gained weight or don't feel good mentally or physically," what have you.

I mean can you kind of explain the thought of having one of your most aggressive promotions ever with your belief of, "Hey, this is going to be a wave of fitness," of people kind of coming back to the gym and being together?.

Yes. So I think I'd say probably three different things. One is market share grab, right? 17% of the industry is currently closed, and as more close, we want to make sure that we are front and center.

And even though we're number one in brand awareness, we didn't advertise most of last year so our brand awareness slipped from the first time in many, many years. It actually went backwards, although we're still number one.

So it's important for us to be top of mind so when they feel comfortable to start working out again, they come to Planet, don't choose a competitor or current members leaving, looking for a new gym because their club is closed. I think those are probably two big points.

And I think it's really, too, when you think about -- the media has tarnished the industry a little bit, I'd say, which is how they kind of put us in this corner of gyms are dirty and they're petri dishes over the last year.

So I think the cleanliness message of what we've been saying on the commercial with the sanitization stations that we have and the social distancing, I think it's important for people to see real time that it's safe to come in. And you break down those barriers so that there's basically no reason not to try fitness. We're $10 a month.

The first month is free. There is no commitment, cancel anytime. We basically took every excuse token out of their pocket to use, and we look at -- this is the time to be bold, and we decided to go that way..

I saw the commercial yesterday for the first time by accident, quite frankly, on TV. It's awesome. So congratulations on that spot. It definitely gets a lot of attention. And the final question, you mentioned kind of the commitment to your 2021 development. Is there a thought on '22? I mean how the pipeline is building, how your franchisees are feeling.

I mean even if it's just how many people are in the field looking for sites, maybe how many LOIs, for example, that have been signed. It's obviously an essential part of your story kind of longer term.

If you can kind of think about -- we still have enough time to really make a decision on '22, but in the conversations that you're having with your bigger well-capitalized franchisees, how they're feeling about getting stores in the ground in '22..

Yes. John, it's Dorvin. Obviously, we're not prepared to talk about '22 yet, but I think that from your point about conversations with franchisees, a lot of them are at different stages. Some have been open a good chunk of '20 and now in '21, whereas like the guys in California that just reopened recently.

So they're all at different stages, from rebuilding their balance sheet back to seeing some growth here in the first four months of the year that we've talked about. But I would say that the general sentiment is that they really like the trends they're seeing.

They're very bullish on the opportunity ahead, the combination of just the trends we're capitalizing upon, where we're at within the industry, our moat vis-a-vis the competition.

Knowing that as opposed to maybe a QSR, when you got to get somebody to come in and buy the burger, we didn't -- it's not like we lost all the members and we have to get all them back that first month we started billing. And so the store's cash flow positive the minute it opens back up. The margins are still good that -- as Tom talked about earlier.

But there is that time line, to the point I made earlier, six to nine months really, to get something going. So at this point, here we are -- we haven't gotten to the midway point yet of '21. By the time we get into late summer, early fall, we're certainly going to have a clear picture into the balance of this year.

And quite frankly, I think we'll see what kinds of activity is out there. The last factor I'd say is that we still don't have a real good feel where real estate land is going to be. In some markets, there's quite a bit of availability. In other markets, there's not as much availability yet.

Landlords are trying to hold on to rents as much as they can generally, from what we're hearing. In some cases, they're putting more TI money on the table upfront than they maybe did pre COVID.

There's a little bit of wait and see on that because if you think you can sign a 10-year lease with a couple of 5-year options and it might be just a little bit cheaper because something comes available here in a month or so, I think those -- there's been some hesitation because of that, too.

But I guess the net-net, John, it's still a little too early at this point, but all of the franchisees are very bullish about the future..

Next question is from Simeon Siegel from BMO Capital Markets..

Sorry if I missed this. Chris, nice job inflecting members.

How do you think about the timing of the market share grab opportunity that you mentioned from shutters gyms as we think further out? And do you have a view on what percentage of the members that you recaptured through the recent trough are new members versus reactivated?.

Yes. About 4% of our joins right now are coming from their clubs that are permanently closed. So we get -- about 4% right now of our current joins are from that. And my guess is it will continue to grow in the future. And I think the other important piece is -- I mean, the average club in the U.S. only has about 1,200 locations.

So although there's market share grab, it's not like we've got a 7,000-member gym across the street that's going to close that we capture a bunch of them. So there's definitely some upside there.

But I think also longer term, when you think about a market, and we've had this even pre-COVID world for 20 years, where we're in a market with these two or three competitors and 10 years later, we're the last guy standing.

It's really that month over month over month of just increased joins because there's just no other place to shop, right? And that's really where a lot of the benefit does come from in the future. But this was -- pre COVID, there's about 60 million members in the U.S.

So if 17% is closed and that could go as high as 25%, I mean, there's definitely some members to be had that have been looking for a new gym. And we're essentially now in pretty much every neighborhood and every DMA you can think of with that price point that's pretty hard to beat..

Great. And then the furthering of the iFit, I mean that's obviously very exciting. Congrats. You guys have done a really nice job going digital. Just as you think about what that ultimately looks like, does the relationship with iFit stretch further? Any color there would be helpful..

Yes. I mean, I think they've been in the -- in their industry, in fitness as long as we have, right? They've been around for 30 years at this point. So I think it goes back to home fitness. They're definitely pioneers in that space.

And I think it was a great partnership to make and to deepen it just to capitalize on our expertise to drive the business forward. And I think outside of the content, they do a lot of other things. They do have home gym equipment. They do have supplements. They do have meditation and cooking classes.

They have a lot of stuff that they do that as we broaden our involvement with them, this has a lot more opportunity than just strictly a digital company. So time will tell.

But it's definitely, I think, a good partnership in two big -- two of the biggest leaders, right, I guess, in the health club bricks-and-mortar space, and they're the biggest in the -- essentially in the home fitness space. So it's a great partnership..

Next question, we have Sharon Zackfia from William Blair..

I guess two questions. So on the equipment sales, obviously, the franchisees are rebuilding their balance sheets, as you alluded to, and you've got that kind of moratorium or extended leeway on the equipment replacement.

I'm just curious, in 2022, as we think that through, is there some sort of pig in the python when it comes to equipment replacement sales at that point? Or is it just everything was deferred so we get back to kind of like a $100 million plus in replacement but it's not kind of above that, if that makes sense? And then secondarily, the SG&A line, as you guys referred to, was pretty big this quarter for a couple of reasons.

Do you have an underlying SG&A number, kind of what that quarterly run rate would be ex stock comp and what you were doing in California with the app?.

Yes. Sharon, it's Tom. So on the equipment piece, it is -- there is no catch-up or pig in the python thing. It's really more all dates for both strength and cardio reequips were pushed out 18 months.

Now in some cases, franchisees have done it ahead of that time because either they thought it was the right thing to do for their customer base in the shape of their equipment or there might have been a competitor who was coming in town and they wanted to have fresh equipment to compete head to head. But -- yes. So there's no catch-up.

So essentially, I think maybe to your question, '22 starts to look like a pretty normal year in terms of those obligations because all dates have moved back from when we originally gave the extension in May of last year. On the SG&A side, yes, so 2020, there was no incentive comp. There was just a lot of sort of -- kind of things in there.

We took some pay reductions more in Q2, but that's coming up that we're going to anniversary. So it is hard to compare, which is why we've said 2019 is a better indicator where some of that noise wasn't happening. So if you take 2019 and factor in some appropriate investments in digital, you come pretty close to where we were.

We also had some onetime investments in marketing, as I mentioned in my opening remarks, both for California and to support our mobile app. So -- but we think those are the right things -- they were the right things to do strategically in California in an effort to get the local authorities to think about gyms differently.

So it was really kind of a very different campaign than our typical joins messaging and then if and when gym -- not if, when gyms reopen, that they could at least get to a higher status so that the maximum occupancy could be higher than it would be otherwise. So that was kind of the thinking behind that..

Can I ask a follow-up? So the first quarter SG&A was like $4 million higher than the first quarter of '19.

Is that the onetime investment chug?.

Some of that is the marketing investment, and some of that is the incentive comp that didn't exist last year..

Next question, we have Peter Keith from Piper Sandler..

Nice work on navigating a difficult environment. I had another follow-up question on the reequips. So understanding there's an 18-month pushout. Also hearing your argument out there that it may not be proper to have a one-size-fits-all approach. And so maybe thinking about gyms like in California that just opened, haven't been operated for a year.

Are you thinking about staggering some of the reequips based on the timing of when the gyms open and therefore, pushing out a little further?.

Peter, it's Tom. Yes, it's a good question. And the short answer is no. The 18 months was meant to capture closure periods, reduced usage, et cetera. And frankly, some of the stores in California are among the highest membership levels we have.

So they get a lot of usage, so you could argue almost for an accelerated reequip cycle under normal circumstances. So -- but the good news is our franchisees are completely aligned with what we're doing.

I think maybe some concepts that we've heard anecdotally are pushing more for new store growth and completely walking away from reequips, and that's just not what we want to do..

Okay. Yes. So maybe kind of to follow on that.

If a franchisee pushed back and said "I can reequip or I could build but I've got capital to kind of do one or the other," is your choice now to push with the reequip and keep those older gyms looking new?.

Yes. I mean I'm pretty clear that the fact I'd rather have 2,000 palaces out there than 4,000 pieces of junk. So we're pretty set on that. And the franchisees are great. We don't want to be out-newed and we want to protect our home turf before we go find new turf.

But you think about the other side of it, too, is these area development agreements that they had that they have to build under, eventually, they will have to build out. So they do have to do that. They don't want to lose their area development agreements. So it will all shake out, and they'll all grow together.

And they're happy with the way the business performs. They share our excitement with how this March and April went. So I think we're in a good spot..

Yes. And Peter, maybe just one last thing to build on Chris'. So implicit in your question is, is it an "or" in our franchisees, and we believe it's an "and", that they're doing both..

And our last question is from Oliver Chen from Cowen..

The usage data has been quite encouraging. Do you expect that to be volatile going forward and to regionally continue to be different or converge? And then, Chris, on advertising and marketing, in the past, you had some creative changes.

Are you feeling good about where you are with positioning in terms of who you're partnering with there? And the last question is on the mobile app. Are there other investments ahead? Would love your thoughts on the key opportunities to continue to improve that. You've done a good job innovating the app quickly..

Sure. Thanks. Yes. I believe the usage -- I don't think it will be volatile. I think we will continue week to week and month to month improving for the better. I think the longer opening stores will always probably be ahead of the older, but eventually, things will all be back to 100% once we get there. So I don't see any reason why it should be volatile.

I think it should all go in the right direction as the vaccines are more distributed. Yes. I think the advertising, I think the creative messaging, especially around the cleanliness standards, which I think, for any industry going forward or any public place, will be probably important for the near future years.

People will want to make sure they're sure that they're in a safe place, that it's a cleanliness place and that they can feel okay. So I think that's something that we'll probably keep in ours forever. Even though we've been meticulously clean for decades, I don't -- we never really featured that. We always thought it kind of goes without saying.

But we're really highlighting those now in the creative, and I believe it's working.

I think that's even driving current members that have seen the commercials that haven't yet to use the stores, seen the sanitization stations and the increased signage that we put in clubs and the social distancing and stuff, and I think that's probably driving some of the workouts along with the vaccine. So we'll continue that.

And I think it was John Ivankoe who saw the commercial and think's it's a really catchy commercial. I think breaking down the barriers that we have in that commercial will definitely do well for us. Yes. The mobile world, it's exciting. It's hard to believe that we ran this business without mobile three years ago, four years ago.

It's kind of hard to believe we didn't service the members or given ways to contact them or really engage them outside our four walls.

So as we continue to build out our library of content and look to meditation possibly and nutrition and diet and other things that we can use that platform for, it's really -- now the platform is built, but we continue to test and can drive more engagement with our members.

So -- and that's the thing with the partnership with iFit, was to speed that process up as opposed to trying to fill it up ourselves and run studios and so on..

There are no further questions at this time. Now I'll turn the call back over to Mr. Chris Rondeau, CEO..

Well, thank you, everybody, for joining the call today. We're really, really happy with our first quarter and the acceleration that we've talked about from March and April and look forward to this May sale and to see how the trends hopefully continue. I think I couldn't be more bullish on the brand and the business and the industry.

I think we couldn't be in a better spot coming out of COVID. And this post-COVID world has powered us as well as it goes. So I think we're going to have some -- experiencing serious tailwinds that we can capitalize on here as a brand, and look forward to reporting Q2. So have a good afternoon. Thank you..

This concludes today's conference call. Thank you again for participating. You may now disconnect..