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. 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 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 healthcare professionals, frontline workers, and others. As the quarter progressed, the national active case count started trending downward, states began to ease restrictions, and 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 decline 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. 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 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 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 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.

Thanks, Chris, and good afternoon, everyone. I'm going to cover three topics before I get into our first quarter financials. The first is the state of the franchisees' balance sheets and their desire to reinvest into their Planet Fitness store portfolios. The second is our recurring revenue model and how it ties to our net membership growth; and third, our outlook for 2021 and beyond. On the first topic, we just completed business reviews with nearly all of our top 30 largest franchise groups that own the majority of our stores. The overall sentiment from the reviews was that our franchisees are very encouraged by the trends they are seeing across their stores and are eager to get back to our historical store growth levels. Almost all of the top 30 have debt, the majority of which tripped their debt covenants due to the temporary store closures last year. Those franchisees are all at different stages of paying deferred rent and building back their stores' profitability to the point where lenders make their development lines of credit available again. In some cases, that's already happened. In other cases, it will take more time because their stores were closed for a longer period of time. However, some of those franchisees are able to fund CapEx with cash from their balance sheet. The good news is franchisees and lenders are collectively becoming more bullish on expansion the longer the gyms are reopened and membership trends continue to move in the right direction. We expect franchisees to capitalize on the industry consolidation and more favorable real estate opportunities that are starting to emerge. With the pace of vaccine rollouts, we believe that the chances of a temporary shutdown on a national scale are less than when we reported our fourth quarter earnings in February, adding to our confidence in our projection of 75 to 100 openings in 2021. In Q1 this year, 22 new stores were open compared to 39 in Q1 last year. On to the second topic, our recurring revenue model. Beginning with our September sale last year, we have been focused on getting our marketing flywheel going again. As a reminder, our model and same-store sales results depend on the ability to continually grow net membership levels across our store base month over month, quarter-over-quarter and year-over-year. In our recurring revenue model, our same-store sales performance at any point is a function of what happened to our membership levels over the trailing 12 months in our comparable stores. We capitalized on the tailwinds that Chris talked about earlier and ramped up our membership acquisition-driven marketing throughout the first quarter of 2021. We ended March with approximately 14.1 million members, up 600,000 from where we ended 2020. And as Chris noted, it was our third consecutive month of sequential net membership growth. While an encouraging trend, it's hard to predict what the balance of the year will look like for membership growth as this is the first time that we have experienced this type of seasonality shift. With the economy growing and more and more states and municipalities lifting restrictions, we believe that there is positive momentum behind people wanting to become more active. As I mentioned, our system-wide same-store sales growth is a function of membership levels over the trailing 12 months. So while we are seeing signs in the near term of month-over-month net membership growth, our membership levels in our comparable stores are still below where they were in Q1 of last year when we hit an all-time high. As a result, same-store sales in the first quarter were down 14.9%, with franchise down 14.7% and corporate-owned down 18.2%. The decline was largely driven by the 1.4 million decline in membership levels year-over-year, slightly offset by an increase in average rate, which was driven by higher Black Card penetration. Black Card penetration increased to 61.2% at the end of Q1. As a reminder, we will not be reporting same-store sales growth figures in Q2 due to the majority of our store base being closed during Q2 last year. Lastly, I'd like to update our thoughts on guidance. On our Q4 call, we conveyed that we were not providing the typical metrics we guide on due to the continued uncertainty caused by the pandemic and feel that is still appropriate today. We did provide our new store development projections of between 75 and 100 new stores for the year, and as we announced last May, we provided franchisees with a 12-month extension on all of their development requirements and equipment placement obligations. In December, we extended the re-equip commitments by an additional six months to a total of 18 months from the original due date. We want to give more insight into how we see those areas as a percentage of our total equipment revenue this year. Using the range of 75 to 100 new store openings this year, we expect that equipment replacement will be approximately 50% of our total equipment revenue this year. This is not a metric we will provide in the future, but we felt it was important during this period to try to provide additional insight into our equipment revenues and indirectly into our franchisees' ability to fund their CapEx commitments, which is strong. Additionally, during this time, we continue to provide membership updates for the months following our most recent quarter. As the year progresses and the effects of the pandemic start to wane, we will likely discontinue this practice and revert to providing the prior quarter's results only. Now on to our financial results. For the first quarter, total revenue was $111.9 million compared to $127.2 million in the prior year period. The $15.4 million decline was primarily driven by the lower equipment revenue, which was the result of the extensions that we've provided to our franchisees. Additionally, we deferred $24.6 million of revenue out of Q1's results last year due to the temporary closure of all of our stores as of mid-March. Moving on to a review of our segment revenue results. Franchise segment revenue was $64.1 million compared to $58.5 million in the prior year period, an increase of 9.5%. Let me break down the four components. First, royalty revenue, which consists of royalties on monthly membership dues and annual membership fees was $46.6 million compared to $40.6 million in the same quarter of last year. The average royalty rate for the first quarter for stores drafted was 6.3%, consistent with the same period last year. Note that the prior year period's royalty revenue was negatively impacted by a $14.1 million revenue deferral related to monthly membership dues collected in March shortly before stores closed. Next, our franchise and other fees were $4.8 million compared to $6.2 million in the prior year period. These are fees received from online new member sign-ups; the recognition of fees paid to us for franchise agreements, area development agreements and the transfer of existing stores; and fees received from processing dues. The decrease was primarily driven by lower total online join fees in the quarter. Also within the franchise segment revenue is our placement revenue, which was $0.8 million in the first quarter compared to $2.0 million a year ago. These are fees we receive for the assembly and placement of equipment sales to our franchisee-owned stores within the U.S. The decrease reflects the lower net store and re-equip placements we executed in the quarter compared with a year ago. And finally, national advertising fund revenue was $11.6 million compared to $9.2 million last year. Similar to royalty revenue, the prior year period's NAF revenue was negatively impacted by $4.6 million deferral related to monthly membership dues collected in March shortly before stores closed. Our corporate-owned store segment revenue was $37.9 million compared with $40.5 million in the prior year period. The $2.6 million decrease was due to lower membership fees driven by lower membership levels and closure of some of our corporate stores for a portion of the period, partially offset by $5.9 million of deferred revenue that was collected but not recognized in the three months ended March 31, 2020 as a result of COVID-19 store closures and the opening of five new corporate-owned stores since January 1, 2020. Turning to our equipment segment. Revenue decreased $18.2 million or 64.7% to $9.9 million from $28.2 million. The decrease was driven by both lower new store equipment along with lower replacement equipment sales to existing franchisee-owned stores. Replacement equipment sales in Q1 were $1.1 million compared to $10.6 million in Q1 last year. In the first quarter, we had 18 new store equipment placements, which was down 12 from the prior year period. Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise-owned stores, amounted to $8.0 million compared to $21.8 million a year ago, a decrease of 63.4%, in line with the equipment revenue decrease previously discussed. Store operation expenses, which are associated with our corporate-owned stores, decreased to $25.9 million compared to $26.2 million a year ago. The slight decrease was primarily driven by lower payroll and operating expenses, partially offset by higher rent and occupancy costs associated with the higher store count and marketing expense. SG&A for the quarter was $22.5 million compared to $17.0 million a year ago. The increase was primarily driven by higher incentive and stock-based compensation compared with the prior year period, local marketing support in California to accelerate the reopening of gyms, and expenses to promote our mobile app. The California and mobile app expenses were investments that we believe set us up for continued growth in both an important market as well as in our bricks-with-clicks digital strategy. National advertising fund expense was $12.8 million compared to $15.2 million in the prior year period. Adjusted EBITDA was $43.7 million compared to $46.5 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income or loss can be found in the earnings release. By segment, franchise adjusted EBITDA was $41.3 million, corporate store adjusted EBITDA was $11.2 million and equipment adjusted EBITDA was $1.8 million. Adjusted net income was $9.1 million, and adjusted net income per diluted share was $0.10, or a decrease of $0.06 per diluted share. Now turning to the balance sheet. As of March 31, 2021, we had total cash and cash equivalents of $503.9 million compared to $515.8 million on December 31, 2020. This was comprised of cash and cash equivalents of $445.6 million compared to $439.5 million, with $58.3 million and $76.3 million of restricted cash, respectively, in each period. Total long-term debt excluding deferred financing costs was $1.79 billion as of March 31, 2021, consisting of our three tranches of securitized debt and $75 million of variable funding notes. 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, 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 covenants, 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 have 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.

Your first question is from Randy Konik from Jefferies.

I want to ask a couple of questions. My first question is for you, Chris. Can you provide some insight on how the churn in California has affected the strong net member growth you experienced in the quarter? It seems like it might have slightly held back the numbers. Additionally, could you elaborate on why you mentioned that all workouts increased across all age groups? Are millennials leading in new memberships, while older age groups might be hesitating due to vaccine-related concerns? I'd like to hear your thoughts on the California impact and how you view age groups moving forward.

Yes, thanks, Randy. This is Chris. The impact from California will be minor since there are only about 150 stores in that market compared to our total store base. While it will affect us somewhat, it won’t be significant. Currently, all U.S. stores are open, with only some in Canada closed, roughly half of which are still operational. The pent-up demand causing cancellations that we discussed last year has mostly been resolved. Our cancellation rates have normalized. In January, the volume we saw during joins was not typical for that month, although it was still positive. However, in March this year, mature stores significantly exceeded March 2019, and April was about the same as April 2019. Notably, in April 2019, we had a 10-day national sale, while this year we only had a three-day flash sale. Therefore, even though January's figures were lower than usual, we anticipated an unusual increase in volume as vaccines become widely distributed. Regarding age cohorts, Generation Z has consistently outperformed expectations, joining at a faster rate than ever before. Millennials are on par but slightly behind, while Gen X and Boomers have seen a decline, particularly Boomers, as expected. However, it’s encouraging to see that Boomers are now starting to trend positively, even though they haven't returned to 2019 levels yet, likely due to increased confidence from vaccine availability.

Understood. With the investment announced this afternoon, it's clear that you're taking a comprehensive approach to the company. Could you share your longer-term vision for the business and how you plan to address the omnichannel strategy, both through the app on people's phones and in the gym? What do you envision for the future of this company in terms of omnichannel engagement?

That's an excellent question. In this industry, until now, we had no way to serve our members outside of our physical locations. Members have been paying us consistently, but we could only assist them if they visited us in person. We need to consider how we can provide service beyond our walls, whether through expanding our workout offerings, exploring areas like meditation and diet/nutrition, or finding ways to deliver services regardless of physical attendance, which should enhance member retention. Many of our members are casual newcomers, with 40% having never set foot in a gym, and that remains the case today. They continue to prefer brick-and-mortar gyms post-COVID. These individuals often struggle to find where to start, whether it’s a workout or nutrition app, and they may not know which sources to trust. So, instead of letting them navigate this on their own, we should provide a comprehensive solution that simplifies their journey. Our aim is to offer everything in one place, making it easy and seamless for members to engage in their wellness journey, which should lead to positive outcomes. When they see results, it also enhances their commitment over time. Ultimately, our goal is to improve the service, experience, and results for our customers.

Your next question is from John Heinbockel from Guggenheim.

Chris, could you share your thoughts on the marketing strategy this year, especially considering any changes in seasonality? How do you plan to stage your sales and electronic marketing? Additionally, I've not seen much regarding the Teen Summer Challenge. Will there be a hybrid or modest approach to that this year, or is it going to be more of a 2022 focus?

Yes. We have decided to postpone the Teen Summer Challenge and plan to relaunch it next year due to occupancy limitations at our clubs. We didn't want to fill spaces with free members when paying members were unable to get in. Currently, about 50% of our stores have zero occupancy, which is encouraging, but it's still not enough. Hence, we opted to delay until next year. Regarding sales, the numbers for mature stores in March and April were ahead of March 2019 and on track with April 2019. So far, the rest of the year has been fairly normal. However, we conducted a short 3-day flash sale for the usual April national sale and have moved the larger national sale to May, which is happening now. We believe that as the year progresses and more vaccines are distributed, we might experience unseasonable volume. We hope to see this reflected in our May national sale, which is typically held in April.

Okay. Moving on to iFit, when considering bundled pricing, it seems you might not want to add $5.99 to a Black Card. Is the idea to incorporate it as a benefit for Black Card members, increasing the monthly price by $1, $2, or $3? I assume this wouldn't apply to the White Card. When it comes to attracting customers at just $5.99, some may come in that way, but the goal should really be to convert them into Black Card members, correct?

Yes, absolutely. You're correct. Now that we have completed the pilot for the $5.99 digital subscription, which we’ve discussed for a couple of years, my vision has been to create a bundled digital offering with the Black Card to help drive pricing or acquisition. With the $5.99 price set for digital only, it establishes that perceived value. So, with the Black Card, we can increase the price a couple of dollars. Members believe they are getting the Black Card for $24.99, which is a good deal considering the standalone $5.99. The Black Card pricing is now in the $19 range. This is the strategy. As for the White Card, we've maintained that the $10 price point is essential; it attracts customers and encourages them to engage. We continue to see over 60% acquisition with the Black Card. Our aim is to entice new members with the benefits of the Black Card, although we will likely test a White Card add-on to include digital options, should members choose it. This year, we will try various approaches and provide updates next year. The advantage of having a digital component as an add-on or bundle with the Black Card is that unlike before, when franchisees had to invest in renovations for 2,100 locations, this can be implemented easily. We need to test it in several stores and observe the results, but if we decide to proceed with a bundle, all 2,100+ stores can begin offering this option almost immediately.

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, the usage has increased significantly in the South and the Midwest, where facilities reopened earlier back in May and June, now averaging over 90% for member workouts. Cancellations in these areas returned to normal levels sooner than in newer openings, like those in California. As we've noted, clubs that opened first are behaving more typically. There’s no reason to think that other parts of the country won’t see similar results as they progress in their reopening efforts. Regarding seasonality, it’s challenging to make predictions based on just a couple of months. March and April were strong, but we need more data to confirm a trend. If May and June show abnormal seasonality trends and exceed April 2019 numbers, it would suggest that these seasonal changes could continue throughout the year, which would require adjustments to our current marketing schedule. We cannot guarantee this will happen, but we will monitor the situation closely.

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. Regarding our franchisees, as I mentioned in my opening remarks, they are all at various stages, but when speaking with the largest ones during our franchise business reviews, they are optimistic. This has definitely strengthened our confidence in our projection of opening 75 to 100 new stores this year, alongside reequipping existing locations. In terms of competition, we have not observed any competitors actively marketing beyond some social media efforts. Franchisees in their respective markets are not significantly engaging in traditional mass media advertising. We also do not expect, and have heard, that they are not updating their stores where our franchisees operate, which indicates their financial strength. Our goal is not just to open new stores but also to ensure that our current stores and their members have the best possible experience. Our franchisees share this vision, understanding that investments are needed for both new and existing stores. Additionally, we have learned that some of the prominent low-cost players planning to enter or expand in existing markets have largely scaled back their development plans. Therefore, we are confident that our overall store growth from last year and this year, particularly considering that we have not closed any stores due to COVID, will surpass and overshadow any individual high-value, low-cost competitor, and likely any collective efforts as well.

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. Please proceed.

Joe, this is Dorvin. As Tom mentioned in his prepared remarks, we are confident in our range of 75 to 100. You are correct that historically, many new store openings have been concentrated in Q4, particularly in the latter half of the year. Our franchisees are seeking locations as we approach the end of 2020, recognizing that some areas are starting to reopen, especially states that have reopened earlier with a lower risk of closures. In contrast, states like California experienced either complete closures or significant risk of shutting down, resulting in reduced activity for building our pipeline. However, we have opened some stores in Q1, as we reported, and we anticipate opening more stores throughout the year.

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 cases they are. This is Chris. They often know in advance if there is a struggle or if the owner is not open to discussions. They tend to reach out and purchase the member lists, making the process quite smooth. Generally, their approach involves servicing the members they acquire. There is no financing involved; they typically pay the club owner a share of what they collect over time as their payout, after which they receive 100% of the membership going forward. The integration is seamless in that regard. However, in most instances, about 80% of the time, it primarily comes down to marketing around the closing club—using billboards, postcards, and similar mediums to direct potential members to a Planet location. That's how they leverage these opportunities. With larger national chains like 24 Hour Fitness, typically those members aren’t completely left behind as they would be with smaller, independent gyms. In those situations, big chains like Youfit usually transfer members from closed clubs to their open locations, leading to a slower cancellation rate as some members decide they don’t wish to drive further for a workout. It’s mainly the independent gyms, which are indeed very fragmented. Even when combining all of us and the large chains, there are still around 36,000 to 37,000 independent gyms 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. The cancellations in our California stores weren't as severe due to a particular decision we made. Essentially, since those stores were closed until 2021, we chose not to bill their annual fees upon reopening. This way, they wouldn't have to pay two annual fees in the same calendar year. We believed this was the right approach, as it would prevent additional financial pressure on the franchisees when they reopened in January or February and were charged again in June. As a result, we decided to waive those fees, which likely helped reduce cancellations until the fees renew.

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 won't be a significant increase because we waived the fees for the entire 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?

I would highlight three key points. First, we want to capture market share. Currently, 17% of the industry is closed, and as more clubs shut down, we aim to stay at the forefront. Although we lead in brand awareness, our lack of advertising last year caused a decline in awareness for the first time in years, despite still being number one. It’s crucial that we remain top of mind so that when potential members feel ready to return to fitness, they choose Planet over competitors or find a new gym if their current club is closed. Second, the media has somewhat damaged the industry's reputation, often portraying gyms as unclean or unsafe. Therefore, we emphasize our cleanliness measures, including sanitization stations and social distancing, to assure people that it’s safe to visit us. We’re reducing barriers to entry for fitness; our membership is just $10 a month, the first month is free, and there’s no long-term commitment, allowing members to cancel anytime. We’ve removed every excuse not to give fitness a try, and we believe this is a bold moment for us to act.

I accidentally saw the commercial for the first time yesterday on TV, and it's fantastic. Congratulations on that spot; it definitely captures attention. As for your commitment to the 2021 development, do you have any insights regarding 2022? Specifically, how your pipeline is progressing and how your franchisees are feeling. It would be helpful to know how many site searches are underway and how many letters of intent have been signed. This is clearly a critical aspect of your long-term narrative. While there's still time to decide on 2022, in your discussions with financially strong franchisees, how do they feel about opening new stores next year?

Yes, John, it’s Dorvin. While we aren’t ready to discuss '22 yet, regarding your point about conversations with franchisees, many are at various stages. Some have been open for a significant part of '20 and now into '21, while others, like those in California, have just recently reopened. They’re all at different stages, from rebuilding their financial positions to experiencing some growth in the first few months of the year that we’ve mentioned. Overall, the sentiment is positive; they are optimistic about the trends they're witnessing and the opportunities ahead, including the favorable trends we're capitalizing on, our position within the industry, and our competitive advantages. Unlike a quick-service restaurant where one needs to attract customers to buy food, we didn’t lose all our members and have to win them back immediately when we resumed billing. Therefore, the stores generate positive cash flow as soon as they reopen. The margins remain solid, as Tom discussed earlier. However, there is a timeline, as I previously mentioned, of about six to nine months to achieve significant progress. Currently, we haven't reached the midpoint of '21 yet. By late summer or early fall, we should have a clearer understanding of the rest of the year, and we’ll be able to observe the activity patterns. Additionally, we’re still uncertain about real estate trends. In some areas, there is a lot of available space, while in others, options are limited. Landlords are generally trying to maintain rental rates, and in some cases, they’re even offering more tenant improvement incentives than they did before COVID. There’s a bit of caution surrounding these decisions because if someone considers signing a 10-year lease with options, they may hesitate if a better opportunity arises soon. Overall, it’s still a bit early to make definitive conclusions, but all franchisees remain very confident 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?

Currently, approximately 4% of our new joins are coming from clubs that are permanently closed. I expect this percentage to continue to increase in the future. It's important to note that the average gym in the U.S. has roughly 1,200 locations, so while we are gaining market share, we don’t have a major competitor with a large member base nearby that would significantly increase our numbers. There's definitely potential for growth. Over the long term, we've seen, even before COVID, situations where we've started in a market with a couple of competitors and ten years later, we're the only ones left. This results in consistent month-over-month increases in new joins because there simply aren't many other options available. Before COVID, there were about 60 million gym members in the U.S., and with 17% of gyms closed, potentially rising to 25%, there are definitely members who are looking for new gyms. We are now positioned in nearly every neighborhood and market area at a competitive price point.

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 believe they have been in the fitness industry as long as we have, which is around 30 years. Their foundation in home fitness makes them pioneers in that area. Partnering with them has been beneficial, allowing us to leverage our expertise to advance the business. Beyond their content offerings, they provide home gym equipment, supplements, meditation, and cooking classes. As we expand our collaboration with them, there are significant opportunities beyond just the digital aspect. Time will reveal how this develops, but I see it as a strong partnership between two major leaders in the health club and home fitness markets.

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. Regarding the equipment aspect, there is no backlog to catch up on. All timelines for both strength and cardio equipment replacements have been extended by 18 months. Some franchisees have opted to upgrade their equipment sooner, either to better serve their customers or to compete more effectively against new competitors. So, there is no catch-up needed. To address your point, 2022 appears to be returning to a more typical year for these obligations since all deadlines have shifted from when we announced the extension last May. On the SG&A side, in 2020, there were no incentive compensations, and various adjustments were made, including pay reductions mainly in Q2. This makes comparisons difficult. That’s why we believe 2019 is a more reliable benchmark when that kind of disruption wasn’t present. If we consider 2019 and account for suitable investments in digital, we reach figures quite similar to where we were. Additionally, we made some one-time marketing investments, as I noted earlier, for both California and in support of our mobile app. We believe these were strategic decisions aimed at encouraging local authorities to reconsider their views on gyms. It was a unique campaign compared to our usual messaging, with the intent that when gyms do reopen, they can operate at a higher capacity than they might have otherwise. That was the rationale for our approach.

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, that's a great question. The short answer is no. The 18 months was intended to account for closure periods and reduced usage. In fact, some of the stores in California have the highest membership levels, so they experience a lot of usage. You could argue for a faster re-equip cycle under normal circumstances. The positive aspect is that our franchisees are fully supportive of our approach. I think some concepts we've heard about are focusing more on new store growth while neglecting re-equips, which is not the direction we want to take.

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.

I appreciate the question. I don't anticipate any volatility in usage. I expect steady improvement week by week and month by month. New stores will likely perform better than older ones initially, but I believe we'll eventually return to full capacity. There’s no reason to expect volatility; everything should progress positively as vaccine distribution continues. Advertising and creative messaging, particularly regarding cleanliness standards, will be crucial for the foreseeable future. People will want assurance that they are in a safe and clean environment, so emphasizing this aspect will be a permanent part of our approach, even though we've maintained high cleanliness standards for years without highlighting them. We're now making these efforts more visible in our creative promotions, which seems to be effective in attracting current members who have seen the ads but haven't yet visited the stores. The visibility of sanitization stations and increased signage regarding social distancing is likely driving workouts, alongside the impact of vaccinations. I recall John Ivankoe mentioning how appealing he finds our commercial, and I believe addressing barriers shown in that commercial will contribute positively to our efforts. Regarding the mobile app, it’s amazing to think we operated without it just a few years ago. We lacked ways to engage with our members outside of our physical locations. As we expand our content library and explore areas like meditation, nutrition, and diet on the platform, we are committed to enhancing member engagement. Our partnership with iFit aims to accelerate this process instead of trying to develop everything in-house. Thank you all for joining the call today. We are very pleased with our first quarter and the progress we've seen since March and April. We are excited about the upcoming May sale and hope to see positive trends continue. I am extremely optimistic about our brand, business, and the industry overall. We are in an excellent position coming out of COVID, and the post-COVID environment has really benefited us. I believe we will experience significant tailwinds that we can take advantage of as a brand, and I look forward to sharing our Q2 results. Have a great afternoon, and thank you.

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