Hello everyone, and welcome to the Planet Fitness Q1 2022 Quarterly Earnings Call. My name is Seth, and I will be the operator for your call today. I will now hand the floor over to Stacey Caravella to begin, please go ahead.

Thank you, operator, and good morning, 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 here, 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 would 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 will turn the call over to Chris.

Thank you, Stacey, and thank you, everyone, for joining us for Planet Fitness' Q1 earnings call. We remain extremely bullish on the long-term growth opportunities for our brand and business for many reasons, led by the tailwinds behind health and wellness in our appeal to millennials and Gen Z. Despite continuing to operate in a fluid environment, we set an all-time record high member count, ending the first quarter with 16.21 million members. We also added 37 new stores, nearly a 30% increase over Q1 2021, bringing our total worldwide club count to 2,291 locations. Like many businesses, we were impacted by the ups and downs of consumer sentiment around COVID-19 during the first quarter. The Omicron variant led to softness in our January join trends compared to pre-pandemic levels. This was not surprising given that the US Census Bureau estimated that approximately 14 million Americans were directly or indirectly impacted by the virus at some point during the month. Omicron also impacted usage. In January, it slipped below the 90% index in 2019 that we had most of last year. Higher member usage historically corresponds with higher join activity. But as the quarter progressed, both joins and usage rebounded. While our net membership growth for February and March this year outpaced 2019, it wasn't enough to make up for January's softness. However, by the end of the quarter, approximately 30% of our clubs reached their pre-pandemic membership levels. In the final week of Q1, usage was back above the 90% index in 2019. We continue to see that people who are working out are doing so more frequently. The regions that were hardest hit by COVID restrictions, Mid-Atlantic, Northeast, and West, all achieved visit frequency highs since the start of the pandemic. Both Gen Z and millennials also hit post-pandemic visit frequency highs, and baby boomers, who have been slower than the other generations, had the highest usage in March since COVID. As we mentioned on our fourth quarter call, we experienced some challenges with our national and local marketing and advertising agency consolidation efforts. Our franchisees now have three agencies to choose from to handle their local advertising. We believe that the long-term benefits from the consolidation of agencies outweigh the near-term disruption. We announced yesterday that Chief Marketing Officer, Jeremy Tucker, is no longer with Planet Fitness. We appreciate his contributions to the brand and wish him the best in his future endeavors. We are beginning the search for his replacement. Throughout the past two years of the pandemic, we’ve learned to be nimble and resilient. This resulted in our single permanent closure of a Planet Fitness store due to the pandemic, which is very different from how the industry fared, while more than 25% of U.S. gyms are now permanently closed. Hopefully, the worst of the pandemic is behind us, as the world begins to learn to live with the virus. Looking to the future, I'm confident that we will continue to be a differentiated and disruptive force in the health and wellness industry. We offer what people need now more than ever for both physical and mental wellness: a high-quality, affordable fitness experience in a welcoming, non-intimidating environment. We are focused on two main growth strategies: first, driving system-wide same-store sales in both membership growth and pricing; and second, continued store expansion in a broad range of markets. Let me start with driving same-store sales. Gen Z was the fastest growing demographic group of our membership in 2021, bringing our total share of that generation, who are over the age of 15, to nearly 8%, which is exciting as only half of Gen Z are even old enough to join our gyms. The research shows that Gen Z, like millennials, prioritize an active lifestyle more than previous generations. We are focused on building lifelong brand loyalty with both generations, capitalizing on our appeal to these groups. This is why we are excited about the upcoming launch of the High School Summer Pass. It's a rebranded version of the Teen Summer Program introduced in 2019, where high school-aged teens could work out for free in all of our stores all summer long. The program resulted in nearly one million teen participants, and more than 11% of those teens are members today. We're bringing it back after two years, making the sign-up process even more seamless. Teens can register online, and if they're under the age of 18, parents or guardians can later give their consent. We believe the High School Summer Pass is extremely timely and incredibly important given the alarming teen mental health crisis in the U.S. According to the Journal of American Medical Association, less than 15% of teens met the recommended daily physical activity guidelines during the pandemic. While teens' screen time doubled from pre-COVID estimates, not including virtual learning, we recently commissioned a national study and found that a majority of teens who exercise also agree that physical fitness makes them feel healthier, stronger, and happier. Almost half of the teens admitted that they struggled with mental health for the first time during the pandemic. To help address this issue, we're offering teens a chance to stay active during the summer and perhaps introduce them to a lifelong commitment to their overall health. It's also an opportunity to introduce their parents to our brand if they are not already members. We must be the fitness brand people think of first in relation to a healthy, active lifestyle. We understand that fitness can be intimidating, and we're focused on breaking down the barriers for all ages. In fact, more than 5% of the parents who joined the Teen Summer Challenge program are still members today. Our pricing model is another way that we are a disruptive force in the fitness industry and was a key driver of our consecutive quarters of positive comps prior to the pandemic. For just $10 per month, our standard membership offers access to high-quality cardio and strength equipment in our judgment-free environment. While we predominantly advertise our standard membership, 6 out of 10 people who joined Planet Fitness purchased the Black Card membership, which is more than twice the price. We launched a Black Card pricing test in the summer of 2021 in about 100 stores. The test was successful across key metrics such as acquisition rates, retention, average monthly dues per member, and margin. Beginning this month, the new price for the Black Card is $24.99 for all new joins. I've always said we won't raise prices without adding value for our members. Since the last price increase in 2019, a new Black Card membership now includes access to an additional 400-plus stores with reciprocity being our number one use Black Card amenity, access to premium digital content via our PF+ platform in our app, and an always-expanding perks program. We believe there is tremendous untapped opportunity for our brand long-term in the U.S. to get people off the couch. Within 10 miles of the current Planet Fitness store, there are approximately 140 million people who do not belong to any gym. With fewer competitors due to significant industry consolidation, we believe that our potential of 4,000 stores in the U.S. may be the floor and not the ceiling for store growth. We're also laying the groundwork for expansion outside the U.S., where many countries have much lower gym membership penetration. To this end, we announced this morning that we signed an agreement to bring the Planet Fitness brand to New Zealand, where 80% of the population doesn't belong to a gym. The agreement is for a minimum of 25 locations over the next several years. We believe we have the right local team in place to replicate the success we're seeing in Australia, where our growing fleet of clubs has been performing very well since reopening last year. We recently opened our first stores in Mexico under the new development agreement we signed last summer for at least 80 new stores over the next five years. Nearly 97% of the Mexican population doesn't have a gym membership in a country where more than 70% of the people consider themselves overweight. Our high-quality, affordable, and welcoming fitness experience appears to be resonating. The first new store’s membership comp on day one far exceeded that of a typical U.S. store opening day. It's hard to believe that this year marks the 30th anniversary for the Planet Fitness brand. This milestone is very personal for me. I joined the company one year after it was founded, working in the first store. As our brand has grown, so too has our ability and opportunity to help people be healthier physically, which leads to being healthier mentally. With COVID, we’ve seen firsthand the repercussions of not prioritizing our mental and physical health. It highlighted the importance of access to fitness centers for overall health. We believe that fitness is essential and that our industry is a key part of today’s healthcare delivery system. I'll now turn the call over to Tom.

Thanks, Chris, and good morning everyone. During the first quarter, we completed the acquisition of one of our best performing franchisees, Sunshine Fitness, as well as a successful refinancing and upsizing of a portion of our debt. We believe that the acquisition strengthens our powerful business model by enhancing our corporate store team and diversifying the geographic profile of our corporate-owned stores. With the refinancing, we locked in low fixed rates on a significant portion of our debt before the inflationary environment began in earnest. Now, I will cover our Q1 results and then discuss more details on the Sunshine Fitness acquisition. All of my comments regarding our first quarter performance will compare Q1 2022 to Q1 of last year unless otherwise noted. It's important to note that we completed the Sunshine deal in mid-February; therefore, our first quarter results only reflect 1.5 months of the financial impact from the acquisition. We opened 37 new stores, compared to 22 last year. We had positive same-store sales growth of 15.9% in the first quarter. Franchise same-store sales grew 15.8%, and our corporate same-store sales increased 17.0%. Same-store sales growth from the Sunshine stores is included in system-wide same-store sales and partially affected franchisee same-store sales in the quarter. Sunshine stores were only included in franchise same-store sales for January and will not be reflected in corporate-owned same-store sales until February of 2023, but they will continue to be reflected in system-wide same-store sales. This is consistent with how we have treated prior acquisitions. Approximately 80% of our Q1 comp increase was driven by net member growth, with the balance being rate growth. At the end of the quarter, approximately 30% of our mature stores had fully rebounded to their pre-COVID membership levels, and in aggregate, membership per mature store is only down 6% from pre-COVID levels. Member growth contributed more to system-wide same-store sales this quarter than it has historically, as we were comping over depressed membership counts from COVID. The rate growth was driven by a 180 basis point increase in Black Card penetration to 63%. For the first quarter, total revenue was $186.7 million, compared to $111.9 million. The increase was driven by revenue growth across all three segments. A 26% increase in franchise segment revenue was due to same-store sales growth, new stores, and stores opened this year that were temporarily closed last year. The royalty revenue increase was partially offset by a decrease of approximately $1.6 million, as a result of the 114 stores acquired in the Sunshine Fitness transaction, moving from the franchise segment to the corporate-owned segment. For the first quarter, the average royalty rate was 6.4%, up from 6.3%. The 100% increase in revenue in the corporate-owned store segment was driven by the Sunshine Fitness transaction, as well as new store openings, the cycling of temporary store closures in the prior year period, and same-store sales growth. The equipment segment revenue increase of 206% was driven by higher equipment sales to new and existing franchisee-owned stores. For the quarter, replacement equipment accounted for about 40% of total equipment revenue, and we completed 33 new store placements in the quarter versus 18 last year. Our cost of revenue, which primarily relates to the cost of equipment sales to franchise-owned stores, amounted to $22.4 million, compared to $8 million. Store operations expenses, which relate to our corporate-owned store segment, increased to $47.5 million from $25.9 million, primarily due to the additional stores from the Sunshine acquisition. SG&A for the quarter was $30.8 million, compared to $22.5 million. About half of the increase in SG&A in the quarter was non-recurring expenses related directly to the transaction. I will address the ongoing impact to SG&A from the deal later on. National advertising fund expense was $14.5 million, compared to $12.8 million. Net income was $18.4 million. Adjusted net income was $29.0 million, and adjusted net income per diluted share was $0.32. Adjusted EBITDA was $77.3 million, compared to $43.7 million. A reconciliation of adjusted EBITDA to GAAP net income can be found in the earnings release. By segment, franchise adjusted EBITDA was $58.1 million, corporate stores adjusted EBITDA was $25.4 million, and equipment adjusted EBITDA was $8.7 million. Now turning to the balance sheet. As of March 31, 2022, we had total cash and cash equivalents of $536.7 million, compared to $603.9 million on December 31, 2021. This was comprised of cash and cash equivalents of $471.2 million, compared to $545.9 million with $65.5 million and $58.0 million of restricted cash respectively in each period. Total long-term debt, excluding deferred financing costs, was $2.0 billion as of March 31, 2022, consisting of our four tranches of fixed-rate securitized debt that carries a blended interest rate of 4.0%. And given the increase in interest rates, yesterday we paid off the $75 million variable funding notes. Now, to the financial impacts from the Sunshine Fitness acquisition. On April 26, as required by the SEC, we filed an 8-K with pro forma financial statements showing our fiscal year 2021 results as if we acquired the Sunshine Fitness stores as of January 1, 2021. I'll walk through the changes on our income statement using the pro forma results in the 8-K to explain the shifts in our financials as a result of the transaction. Starting with the changes to 2021 revenue. First, there was a decrease of approximately $14.6 million to franchise revenue, driven largely by the royalties that Sunshine stores generated, along with some web join fees and equipment placement fees. Revenue decreased approximately $3 million, and equipment revenue decreased approximately $10 million, inclusive of the margin we make in that segment. Conversely, we benefited from an approximately $172 million increase to corporate store revenue. The end result of all these changes was an approximately $145 million increase to our 2021 net revenue. On the expense side, our cost of revenue decreased without the Sunshine equipment purchases. Store operations expense increased approximately $80 million, which is fairly close to what our historical store operating expenses were in 2021, given they had a similar number of stores. SG&A increased approximately $12 million, reflecting our assumption of their support center expenses, including the management team and staff to support critical functions like marketing and store development, along with the President of our Corporate Store, Shane McGuiness. Additionally, there was an increase of approximately $60 million to depreciation and amortization. Half the increase was due to depreciation, primarily related to the doubling of our corporate store fleet as we are also doubling our historical corporate store CapEx spend. The other half is amortization expense from Sunshine’s intangible assets. D&A increased significantly given the size of this acquisition compared to the ones we've done in the past, and the pro forma D&A expenses are in line with our 2022 guidance that it would double. Finally, regarding our 2022 outlook, we reiterated our guidance for 2022 in our press release this morning. As a reminder, our view for 2022 assumes there is no material resurgence of COVID that causes member disruptions, whether via shutdowns or more stringent mandates that result in a significant change in membership behaviors. The two things to note on our outlook are first, our system-wide same-store sales growth will likely be higher in Q1 with the depressed membership levels in Q1 last year, combined with the unseasonable membership join trends last year, where Q2 had more net member growth than Q1 for the first time in our history. This will make the comparisons for same-store sales more difficult in the coming quarters. Second, regarding expenses, as I outlined in the 2021 pro forma results, the addition of Shane McGuiness and his team added approximately $12 million to SG&A last year. For 2022, Sunshine's support center costs impacted our SG&A in Q1 for only 6 of the 12 weeks, and therefore, will have an increased impact in the subsequent quarters. The near-term continues to be fluid with the pandemic's ongoing impact on consumer sentiment. However, we believe we are well positioned for the long-term to further expand our leading market share given the strength of our value proposition in the fitness industry, as well as the resilience of our asset-light business model. I'll now turn the call back to the operator to open it up for Q&A.

Thank you. The first question today comes from Randy Konik from Jefferies. Please go ahead.

Hey, good morning. I guess this question is more for Chris, to start here. Chris, I just wanted to note that a lot of the data we track around traffic trends, web traffic searches, etcetera, continue to point towards in-person fitness coming back. Peloton's results are out this morning, and they look kind of sub-par. I just wanted to get your thoughts on where we continue to see things or what you expect to see for at-home versus in-person. And then get an update from you on what you're seeing around the mom-and-pop competitors. Are those store closures in the gym side continuing, or are they stabilizing? Just want to get your thoughts on the competitive environment and the moat that you guys have and continue to build going forward?

Sure, Randy. Thanks, and good morning. Yes, I think what we're seeing happen here today, Randy, you probably remember the last year and a half going through this pandemic is that in-person fitness has always been the key driver of health and wellness, and home fitness has always really played second fiddle to it. Maybe third fiddle in a lot of ways. We're seeing today. Honestly, we even saw that in our content consumption. When we were all closing down our gyms, our content consumption in our app hit an all-time high, and we’re seeing it today, not back to pre-COVID, but it certainly isn’t anything close to where the consumption was when we were closed. What we are seeing is that the Gen Z population is joining at a rate that is higher than we've ever seen pre-COVID. They're joining at an astronomical rate, which is great to see, but they're active, and studies show that they're equally as active as millennials. And as you know, millennials have always been a big part of our member base, which is great. So, I think at-home fitness will continue to be the second fiddle, and people are driving back to gyms. The beauty of that is now that 25% of the industry has permanently closed, and we didn't lose a single store, there's just fewer competitors and less opportunities except for us. I think with the recession here and in light of it, and we saw this a little bit in 2008 and even back as far as the dot-com bust in 2000, when we only had four stores. As a whole, there may be fewer people looking to join gyms, but the ones that are, are only looking at Planet Fitness because they can afford it or they're being more smart with their money. So, we evidently win in those times, and some of our highest same-store sales in history were during the 2009-2010 period. I think people won't stop prioritizing their health; they will continue to choose it, but they will be more cost-conscious at the end of the day.

Super helpful. And I guess one more question is, I want to explore what you're doing around the perks side of the business. You added the Crocs perk in the quarter or just thereafter. I just want to understand, kind of what's the strategy around there? You're adding more and more perks; they seem more compelling. It would seem as if the member at some point realizes that the perks kind of pay for the membership themselves. Just want to understand, kind of what the strategy is around the perk side of what you're doing there? Thanks.

Yes. I think as you know, since you noted the IPO, about half our members use a store in a thirty-day period, right? Anyway we can add value for members even if they're not using the store is a good thing because they are paying us every month and I think we should be offering them value in and out of the store. Content is one part of that; can we offer benefits for being a member that are even outside of fitness in some ways that can help them live a better life, like discounts on gas, which in today's world is really meaningful. Crocs is a great example; they're back. I didn't see them bounce back this much, but they've been a great launch, and Gen Z's are all over it. So, it's great to see that one is now in place. We did well with sunglasses recently as well. So, I think with the app built-in with the perks button and the platform that's been built, it enables us to track a lot of click-through rates and redemption rates, which prior to the app launch in the summer of 2019 we really didn't have a depository with all our perks or a way to track it. So, now it allows us to go to all other companies out there that we want to do partnerships with and show them true data, which is hugely impressive. Currently, about 70% of all our members are on the app. About 90% of our new members download the app, and we’re doing roughly 8 million check-ins a week, and about 6 million of those members are opening the app, using it to check into the gym, and accessing their perks. So, the amount of eyeballs on these perks is significant. Now that we have that data, it's opening doors to a lot of vendors, and I think there will be a lot more to come here. If we can provide value when people are having doubts about their membership, but they're getting discounts on gas and Crocs, it effectively pays for the $10 membership in some ways.

Yes. Super helpful. Thanks, guys.

Our next question comes from Brian Harbour at Morgan Stanley. Please go ahead.

Good morning guys, thank you. In the second quarter, I understand your comment on same-store sales, but do you think there will still be somewhat atypical seasonality in terms of membership joins? Are you still seeing pent-up demand given that the first part of Q1 was a little bit slower just from a membership sign-up perspective?

Sure, Brian. This is Chris, and then I'll have Tom jump in as well. What we're seeing now is more typical of historical years where the seasonality is more on trend as opposed to what we saw last year. We always saw the second quarter be better than the first quarter, so I don’t think we’ll see that necessarily this year, but Tom do you want to talk about that?

Yeah, Brian. I think in terms of same-store sales, we hinted at this on the last call, given what we're anniversarying in terms of membership levels in 2021. Last year we had very atypical growth across the quarters where we had more member growth in Q2 than we did in Q1 for the first time in our history. So, the comps will get tougher. Despite the 59, we're still sticking with our outlook of low double-digit comps for the year. Still very strong, but it just gets a little tougher as the comps from last year get more difficult across the rest of this year.

Okay, great. Thanks. And maybe just a more detailed margin question. I noticed that equipment segment EBITDA margins were above historical levels in the first quarter. Just curious if there are any one-time drivers of that, and do you think they'll remain at that level or will they come back down to a more normal level?

I think they are fairly in line with the history. We've passed along our margin – the price increase that we've gotten from vendors. So, we're maintaining our margin. Some of that is a little bit of mix between the vendors that moves it around a little bit, but it's fairly in line.

Our next question comes from Max Rakhlenko from Cowen and Company. Please go ahead.

Great. Thanks a lot. So first, with the increase in Black Card pricing, what is your outlook on what the lift to comps will be? Do you think it's going to look similar to the previous time that you've raised the pricing by $2?

Yes. I think what's happened historically, as you know Max, we raised the price back in 2017 by $2 and then $1 in 2019. In those times, what we've seen is – and what we saw in the test, by the way, is initially the Black Card acquisition will be relatively flat sequentially, but the Black Card member penetration or the Black Card mix of membership still grows year-on-year. That's what we expect will happen this year. We talked about; you know this past quarter we had a 180 basis point improvement in Black Card penetration to 63. So, we expect the same result now. It is a little different in terms of the impact on same-store sales because it's only on the new joins. Given the rest of the year and the size of our membership base, that impact will be muted, but it will certainly be accretive in the subsequent years in a more significant way.

Great. That's helpful. And then just a quick follow-up, what is your sense of when we could see the members per gym return to 2019 levels? I think you said 30% of your mature gyms have already come back, so I'm just curious your thoughts on the rest of the fleet. Thanks.

Okay, I'll start maybe. I think if you look at, when we look at mature stores really the best barometer as we think about it is, if we take the calendar year 2018 and prior stores, those stores in aggregate have about 30% of their memberships back to pre-COVID levels, and they're down about 6% overall. So, I think as we think about the same-store sales growth and member growth, it's just a matter of time for each and every quarter for more and more stores to get back to that pre-COVID membership level. Again, it’s a when question, not an if question in our mind.

Our next question comes from Sharon Zackfia from William Blair. Sharon, please go ahead.

Hi, good morning. I guess a question on the marketing. I know in the fourth quarter call you thought Omicron and the marketing shift both contributed to January. As you have gone throughout the last three months subsequent to January, how big of a factor was the marketing shift that you did? I know you kind of re-expanded to the three agencies that you mentioned, but trying to get some color there. And then on attrition, are you seeing any difference in attrition at this point relative to pre-pandemic? I'm wondering if maybe it's even a bit better because you've got a sort of Darwinian element, where the folks who maybe weren't using the clubs that much have dropped out over the past few years?

Yes, right now we're still about typically pre-COVID, about 50% of our members would use a store in a 30-day period. Today that number is about 40%. So, that's still about the same as it was most of last year. Of the ones using it though, they are using it more than pre-COVID. So, the ones that are using it are using it more, and attrition, you're right; our attrition is slightly better, just slightly, but it's slightly better than pre-COVID right now, which is a great sign. As far as the marketing question, I think most of it was Omicron-related because even when we look at the February and March numbers, our net member growth was even better than February and March of 2019. We had the same agency going on at that point too, right? So, I think it was more likely Omicron-related than by some marketing impact as well, but Omicron really impacted the first two weeks of January.

That's really helpful. And then I guess the market is very concerned obviously about a recession. Can you talk about your franchisee enthusiasm and whether any of this macro talk is starting to, kind of, concern franchisees and potentially dampen their appetite to accelerate expansion?

No, I think many of them, luckily, have been with us since the beginning when we started franchising in 2003. They’ve been through 2009 and 2010 as well, which probably doesn't look as severe as this might be, but they saw their same-store sales even in that period. They're watching it, naturally, as we all are. They realize the business is fine. It's probably more the increase in build-out costs. But even within the build-out costs we're seeing today, the unit economics are still quite so profitable that it can weather that storm and data to make it exciting to build stores even under that environment. I don’t know if Tom will add?

Hey, Sharon, I'll just maybe build on Chris' answer. I think the other piece happening in our business is there's a fair amount of larger franchisees who were taking some chips off the table and either the old, prior private equity firm is rolling out and a new one is rolling in, but there's a lot of appetite from outside the system to come in, and there's a fair amount of activity. So, when those businesses change hands, as we've talked about, the owners and operators stay and roll, and there's new money coming in that's looking to develop pretty aggressively and typically more so than the prior group would. So, that bodes well. But I think to Chris' point, there's been no hesitation, and if anything, maybe more money coming in will help us to put it to work.

Okay, great. Thank you.

Thanks, Sharon.

Our next question comes from Simeon Siegel from BMO Capital Markets. Please go ahead.

Thanks. Hey guys, hope you’re all doing well? I think you grew franchise EBITDA dollars more than you grew franchise sales this quarter. So, just any changes to how you're thinking about underlying franchise segment EBITDA rates? Just basically, speaking to what the right margin level should be as we normalize from the pandemic costs. And then, could you elaborate a little bit more on the congrats on New Zealand; could you just elaborate a little bit more on how we should think about your broader international growth opportunity and focus as we look further up? And then if there's any differences in expected international economics? Thanks a lot.

Yes, hey Simeon, it's Tom. On the margin question for franchise, last year we had a fair amount of marketing we were doing to help certain franchisees in certain states get reopened or upon reopening to put a bit more money in their marketing activity. So, we didn't repeat that this year. So, it was a cost last year that depressed margins that we didn’t repeat this year. This is more typical of where we see franchise margins going forward.

I think on the international front, as you know, we had Australia; we launched just before COVID-19 hit us, but now they're all reopened, and that market performs very well. That group is up and running. New Zealand is next door, and they’re going to actually help them a bit with some support for us as well to get them off the ground. I think going forward, Asia is definitely something on our radar. There’s not any large low-cost competitor to speak of compared to Europe, as many of them exist. In Europe, I think going there might be more of an acquisition strategy, if and when we went there just because you have many chains over there that have north of 500 locations each and a couple of them having over a thousand. I'm not sure if you go there and open one at a time to compete with that or not. But yes, we’re excited about New Zealand. Mexico, that new ADA we signed last summer; that group is up and running very strong; they’ve opened their first couple of stores here, with opening numbers well exceeding that of a U.S. store and acting much like the original club that opened. Additionally, since the majority of South America has low gym membership penetration, the potential is huge there.

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

Thanks, Simeon.

Our next question comes from John Ivankoe from JPMorgan. Please go ahead.

I don't know what happened there. We’ll try it on the speaker. Just looking back on the Black Card, I understand and thank you for reminding us that customers of our Black Card members from 2017 and prior are still paying $19.99. We’ve obviously added a lot of functionality to the Black Card and many more network gyms, which I think is the number one reason why they join. What is the thought, and why haven’t you normalized the pricing across the system? Do you think there would be any resistance to that customer that’s obviously gotten a great price for a long time? If it's possible for me to ask, what percentage of your Black Card members still reside at that $19.99 price point?

Yeah. I don't have that number, John, on top of my head as far as how many are still at $19.99, but we've always looked at it as though, yes, there are long-time paying loyal members; I have a hard time justifying that I should raise their rates. In fact, I'd probably reward their rate rather than penalize them. Hopefully, longer-term it continues to drive some retention. We have members who've been around for 30 years this year. We have members with no annual fees even on their memberships. In some ways, looking at the loyal members, I wouldn't want to penalize them. I’d rather reward them by letting them keep it for as long as they want to be with us. Normal attrition over time will remove some members, but the average rates will continue to grow as people adopt the newer rate and we open more stores under the new rate. In any agreement, we don't have the right to raise those rates either, which is a legal part of that. But that's kind of how we look at it in relation to the long-standing members.

Thank you. And then separate topic. Obviously, the marketing function has undergone probably more changes than what you would have thought in the last six months when we seemed to be making some really good progress on the management of local. A couple of questions: Does it still make sense for the brand to consider a shift from local to national? Do you think that the local/national mix is currently optimized? I understand there’s a contract there, clearly, but do you think that is being optimized at this point? And point two, with the new CMO that you have, what types of functionality or execution or process do you think the next CMO and this marketing department can do better as we look for a high-profile replacement?

I think on the marketing side, this first quarter, and now having gone with three agencies, is the first time we began to see data true like marketing mix that local money was being spent on. Before that, we knew what dollars would be spent, but we really didn't know the tactics. We didn't know how much cable, how much network, what channel they were on, how much FM radio, how much satellite radio, how much digital? We didn't have that data, which the first quarter was the first time we have a start. So, as we get best practices nailed down and learn more in the upcoming months and years here from these three agencies, we can start to determine what the true right mix is in terms of marketing. What is the optimal allocation of spending? This data should help us determine that longer-term. As far as the role of the CMO, with 2,200 clubs domestically with a potential to expand to about 4,000, we want a CMO with a franchise background and experience in working with franchisees.

Understood. Thank you.

Thanks, John.

Our next question is from Jonathan Komp at Baird. Please go ahead.

Hi, thank you. I wanted to follow up on the member trends you're seeing. I know you mentioned February and March are above 2019 join levels. Do you think there was any sort of pent-up or delayed demand effect from Omicron? How should we think about membership trends going forward? Are you seeing signs that older populations are starting to pick up activity in terms of joins? I know you mentioned the usage, but what are you seeing and expect on joins for the older population?

Yes, even the boomers. Hi Jon, it’s Chris. We started to see the boomers, even though they are still not back to pre-COVID levels, have now hit all-time usage highs since COVID started. So, while they're not back to pre-COVID levels, they're actually reaching highs now, which should drive more boomers into the gym. However, they are still a pretty small part of our member base overall. If you think about millennials and Gen Z, for example, they make up over 60% of our membership base as a whole. So, while we still want to bring the boomers back, they do not drive our growth as much as the younger generations do.

That's really helpful. And then maybe just one follow-up on the franchise economics with the pricing that you recently took. Any comment on your thoughts about franchise economics and cash flow relative to pre-pandemic? Also related to that, are there any impediments you see today to getting back to that normal, sort of pre-pandemic opening rate still at some point in 2022?

Yes, hey Jon, it’s Tom. On the margin question for franchises, the new Black Card price will feather in as new members join, so it won’t have a huge impact in the near term, but it certainly helped in the longer term. The reason for the price increase was driven by providing more value, not for the sake of increasing franchise economics. The underlying economics of our business have remained strong. As we stated, we have not seen anything standing in the way of our franchisees or our corporate stores reaching pre-COVID membership and profitability. It's just a matter of time as membership rebounds. Also, we’ve moved away from previously discussing specific new store openings for the year, and we're back to what we used to do, which is indicate the number of franchise placements in the system. We’ve indicated 170 for the year, and if you factor in corporate store openings, it’s likely a total closer to 200. Everything we see suggests we will be on pace to reach those new openings during 2022.

That's really encouraging. Thanks again. Best of luck.

Thank you.

Thanks, Jon.

Our next question comes from John Heinbockel from Guggenheim. Please go ahead.

So, guys, I wanted to start with the corporate segment, when you look at the pipeline that Sunshine has. They may have grown units 13% or 14% last year. Do you think that segment can grow faster than the franchise segment over the next several years, partly because of Sunshine’s growth? But also, I assume you think Sunshine can get legacy margins up to where they are? Can that segment grow faster for a while?

Yes, John, it's Tom. I think one of the reasons we found the Sunshine fitness purchase so attractive was their economics and the economics of their new units. Do I think it will outpace overall franchise segment growth? Not necessarily. We don't want to put the proverbial gun to our head on how many units to open in a year; we want to open great sites that have great returns. We think that about 10% growth is in line with maintaining that 10% penetration in our system. If that number is up or down a bit from there in any given year, I think we’re fine with that as well. Their pipeline is very robust across all of the states they operate in, and the margins they've produced historically have been very consistent across those states. Also, if you compare mature stores from Sunshine with our previous corporate portfolio, there was about a 700-basis point gap in performance. We think management talent and practices they have will benefit the stores to capture some of those improvements.

Great. And maybe Chris, philosophically on royalty rate, right, what do you think the franchisee appetite would be for higher rates? Is there a ceiling in your mind? What does it take to get there? Is it a restructuring of the marketing spend that gets you there?

I think until our mature store base, which Tom said, 30% are at or above pre-COVID, I wouldn’t look to have that conversation yet. I want to make sure all of them are back to where they're accustomed to being; at that point, same store sales should be back and continuing like we were pre-COVID with 53 straight quarters of positive comps. Most of the growth is member-driven—and $0.84 to the bottom line for every new member above that. So, that can drive margin and then gives the ability to raise royalties longer-term. I also think we could lower the advertising fees, making it even more palatable as we become more efficient with marketing dollars. The next 2,000 stores won’t need to spend as much as the first 2,000 in marketing. It reaches a point where the system can absorb the advertising costs efficiently, so those two levers are something I think we’ll watch closely before making a determination.

Thank you.

Thanks, John.

Our last question today comes from Warren Cheng from Evercore. Please go ahead.

Hey, good morning guys. It sounds like some of the age cohorts in regions that underperformed in the last few quarters are catching up to the company averages, especially the boomers. Is there still a significant gap versus pre-pandemic membership levels for some of these underperforming age groups? It just seems like Gen Z has outperformed, but numbers per location are still down. I'm just curious about the breadth and depth of how depressed we are for these other age groups.

I think, first of all, boomers, even though they are still not back to pre-COVID levels and have now reached all-time highs, are starting to trend in the right direction. However, they’re still a relatively small portion of our membership base. If you look, millennials and Gen Z make up the bulk of our membership. For reference, boomers make up roughly 13% of our membership. So, though we want to bring them back, their impact on our growth isn't as significant as that of our younger generations.

Got you. Okay. And I also wanted to ask a follow-up to your answer to John's question on the Black Card pricing. It sounds like you're pretty committed to maintaining that $19.99 for the pre-COVID Black Card cohorts. I think you've said in the past, the $19.99 entry price point is pretty much off-limits. Does that mean you're likely to maintain this pricing architecture, kind of regardless of what’s going on externally other than, of course, the new Black Card joins?

Yes. It’s a strong business model. As you’ve noted, we almost always advertise $10 a month. When people go online to see the benefits of the Black Card, 60% of them end up choosing it, which is more than twice the price. If we are going to get people off the couch and get more of them into the gym, it seems counterintuitive to raise the price. They are already considering how to cancel their membership; we should be lowering barriers to entry. Keeping it at $10 gives everyone a chance to try fitness without commitment and allows us to drive the value of the Black Card through perks, reciprocity, and other offerings. This model has worked for many years, and it will continue to help drive member growth.

Thanks. Very helpful. Good luck.

Thanks, Warren.

Thanks, Warren.

Our last question comes from Patrick Johnson from Stifel. Please go ahead.

Great, thanks guys. Good morning. This is Patrick on for Chris. I had a quick clarification question. Tom, can you just remind us of the program you put into place during the pandemic that allows franchisees to defer equipment replacement? Is that fully expired? And then, are you guys seeing any new supply chain issues on the horizon that might affect the ability to re-equip or have franchisees open new locations?

Yes, hey Patrick. So, yes, during the pandemic, we granted ultimately 18 months on the re-equip obligation, and that's all passed. There are no catch-ups; whatever date somebody's obligation was has been moved out accordingly. All new stores are back on the five-year and seven-year re-equipped cycles as you know. Currently, we do not see any issues with equipment availability. We're in constant contact with our primary suppliers and don't foresee any cause for concern for equipment availability to support re-equips for the rest of the year or new store growth. The primary issue that folks are facing is HVAC availability. We’re not immune to that, but we're working with our primary suppliers to secure our needs without any risk.

Great. That's really helpful. And then lastly, I just wanted to ask on the effectiveness of the Super Bowl ad campaign; did you guys have any other insights there, other than maybe what you shared last quarter? More broadly, what has that taught you about the potential to have premium ad placements, and the ability to go after a bigger audience, and how much of an impact can you drive to new member sign-up trends with those bigger stages that you're not able to access?

Yes, it was a significantly larger effort than what our competitors did. Doing big brand moments like New Year’s Eve and then the Super Bowl is something that sets us apart and positions us differently than most of our peers. We reached a unique audience through that campaign. About 40% of people surveyed said they would likely join PF in the next 12 months as a direct result of it. We’re also conducting a brand health study, which will offer even more insights. The response was overwhelmingly positive; it was about 69% positive in what they liked about the commercials. I think they were memorable; having celebrities helped boost recall, and we will likely continue that strategy going forward.

Great. Thanks guys.

Thank you.

Thanks, Patrick.

Our last question today comes from Joe Altobello from Raymond James. Please go ahead.

Good morning. This is Martin Mitela for Joe Altobello. Just wondering if we can get an update on unit economics, especially when it comes to labor, equipment costs, and commercial real estate as well.

Yes. In terms of wage inflation, the good news is that we have a pretty low labor model. Typically, there are about 12 to 15 people on the roster for any given store, and on the floor at any time, there are two to three people. Wage inflation could affect our franchisees, but compared to other places where our store associates can work, it’s a pretty good place to work. You're not going home smelling like a French fry or slipping on grease; it's a great working environment. Financial impact is temporary. If wages don't continue to climb at unusual high rates, we view this as a one-time reset, and as memberships rebound, the overall economics will normalize. Equipment costs are higher, up low double digits depending on the supplier and category, but this does not substantially impede decision-making on whether to build a store. Franchisees have had strong returns from building new stores, and occupancy rates have remained stable. We’ve seen some aggressive tenant allowances being offered by landlords to ease initial costs, but overall, we’re not facing dramatic changes.

Great. Thank you. That’s super helpful. Just one last follow-up question. You mentioned about 25% of gyms across the U.S. are permanently closed; are you seeing a significant number of those members migrate to Planet, and are you seeing workers there migrate over to Planet as well, allowing you to get a little bit more experienced workers?

I haven't seen any – this is Chris. I've not noticed any shift in employees. In the first quarter, about 1% of our joins were coming from closed competition. To put things in context: about 25% of gyms are permanently closed, and that’s largely made up of 30% of boutiques, like yoga and cycling studios, which tend to have about 200 members per store. We’re not seeing a lot of 5,000 member gyms going out of business. So, yes, there is some market share to grab, but not quite as large as you’d think when considering the 25%. I visualize this as a long-term gain; month over month less competition means fewer opportunities for members to join, which positions us well compared to the industry. Great. Thank you everyone for joining us today. It was an exciting quarter for us. We're happy to see that people are returning to bricks and mortar as we anticipated. Very proud of our net membership growth for the first quarter. I'm headed to Boca for tomorrow to speak as our independent franchise counselor has invited me to speak to the franchisees. They’re excited to all get together and discuss our future. Next Monday, we will launch high schools in the past, giving all our teams throughout the U.S., Canada a place to work out for free, blow off some steam, and hopefully introduce them to fitness for the first time. So, good stuff to come; have a good summer. Thank you.

This concludes today's conference call. Thank you very much for joining. You may now disconnect your lines.