Hello, and welcome to today's Planet Fitness Q2 2022 Quarterly Earnings Call. My name is Jordan, and I'll be coordinating your call today. I'm now going to hand over to Stacey Caravella, VP of Investor Relations, to begin. Stacey, 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'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during this 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 for the Planet Fitness Q2 earnings call. We continue to be well positioned for disruptive growth. We're adding new members and new stores even with the near-term challenges from lingering COVID impacts due to the broader economy and the current climate around recession and inflation. During the second quarter, we added 300,000 net new members, ending the quarter with 16.5 million, and we grew our store base to more than 2,300 locations with the addition of 34 new stores. We believe our high-quality affordable fitness experience will resonate now more than ever as Americans are seeking value in feeling the rising costs of everyday items such as food and gas. We also believe that people will begin to prioritize their health and wellness while being more cost conscious, even trading down to Planet from high-priced gyms if they're not using the basketball court, the pool, daycare, etc. During the most recent financial crisis, from 2007 to 2009, we added 1.1 million members, grew same-store sales by double digits, and nearly doubled our store count. Even though we were a much smaller brand at that time, this gives us confidence that should the economy worsen, we are well positioned to continue to grow. COVID created a very challenging time in the health club industry. The majority of health and fitness locations globally experienced some type of temporary closure due to COVID, with 25% of U.S. gyms primarily closed as a result. Given the resiliency of our franchisees, along with our low-cost economic model, we did not permanently close a single store due to COVID. We surpassed our all-time member record in Q1 this year. During the second quarter, 34% of our mature stores were at or above pre-COVID membership levels. We continue to see consistent momentum toward full recovery the longer our stores have been open since the temporary COVID closures. System-wide, our stores are only 6% below pre-COVID membership levels. And we've added more than 330 new locations since the beginning of 2020. We anticipate more normalized joining trends and seasonality to continue for the balance of this year. We expect the percent of our mature stores that have recovered to previous membership levels to stabilize given that mature store membership growth is typically flat in the second half of the year. Our brand continues to resonate with the younger generation at rates that surpass prior generations as awareness of health and wellness continuously increases. Gen Z continues to be the fastest-growing demographic group of our membership. Our share of that generation over the age of 15 is 9%, which is more than it was for millennials at that same age. In Q2, we launched the high school summer pass program, its rebranded version of the Teen Summer Challenge program we ran in 2019 where high school teens can work out for free in all our stores. We believe the high school summer pass is extremely timely and incredibly important given the alarming teen mental health crisis coming out of the pandemic. At the end of July, we had more than 3 million teens enroll in the program versus just 1 million in 2019. This is more than the total paid membership of any of our high-value low-price competitors. It also represents more than 15% penetration of all high school-age teens in the U.S. between our summer pass participants and paying teenage members. And not only have they enrolled, teens have logged more than 14 million workouts. We made the sign-up process even more seamless this year, allowing teens to register online and enabling us to capture contact info for both the teen and the parent. In fact, our app topped the most downloaded list of all apps in the Apple Store during these initial days following the launch, even above TikTok and Instagram. In June, we fielded a survey of some of the participants and their parents and learned that for two-thirds of the high schoolers, this summer represents the first time they had access to any fitness club. This is absolutely what our brand is about, getting people off the couch to start and to lead a healthier life. And we're making that happen even earlier in their lives. More than 80% of respondents' parents reported that their senior teen's exercise has inspired other family members to get more physically active. Half of them said that they had worked out with their teens at some point this summer. Personally, I'm moved by some of the notes that we received from both parents and teens. One teen participant wrote, 'This experience has transformed not only my mental health but my physical health. This gym membership has really helped me stay on track with my fitness and health journey. I will absolutely be purchasing a membership once it ends.' From a parent, 'I've seen some extremely positive growth in my son. I know it comes from that quality time with friends, being physically active, and the independence he gets from taking charge of his health.' We believe this program is the right thing to do, and we are helping teens establish healthy habits they can build upon in the future. We estimate that there has been a slight negative impact on our paid membership during the quarter as some teenagers likely participated in the high school summer pass who otherwise would have paid for a membership. But we are focused on building lifelong brand loyalty with that generation. In New Hampshire, we retested this program back in 2018. We now have 20% penetration versus 15% nationwide. This demonstrates that the more years of running this program, the greater brand awareness we're building with Gen Zs. And we're just getting started with our efforts to capture Gen Z members. Pre-pandemic, we had 8% penetration of millennials, and today, that is 9%. Pre-pandemic, we had 5.5% of Gen Zs over the age of 15. And today, that is also 9%. We are gaining even greater share of each successive generation. It's also encouraging that after we ran 2019's teen summer challenge, 25% of participants became members at one point. 11% of them are still members, along with 5% of their parents. In May, we increased the Black Card membership to $24.99 from $22.99 for all new joiners. The system-wide rollout of the increase has so far outperformed the test results across key metrics, such as acquisition rates, retention, average monthly dues per member, and margin. In fact, we haven't seen an initial dip in our Black Card percentage rate as we did with past price increases. During Q2, Black Card membership penetration was 63.5%, up from 62.2% in the second quarter last year. Working with our franchisees, we continue to make progress with our national and local marketing agency consolidation effort. Despite challenges along the way, we have been looking for a new marketing leader in the past few months. As our business has scaled over several years, we decided to use this opportunity to restructure our marketing organization to better align with how our system operates. We announced this morning that we named a Chief Brand Officer, Jimmy Medeiros, who has been with Planet Fitness for 22 years, most recently serving as our VP of National Marketing. He will lead marketing, drive our national and local marketing strategy, oversee our national agency of record, and work collaboratively across the organization to bring our brand vision to life. Like me, Jamie started at the front desk and joined the brand working at our third location. She has extensive knowledge of our brand and, importantly, our members, and has played a major role in defining our uniquely successful marketing positioning. She also has strong relationships with our franchisees. Additionally, after careful evaluation of our marketing agency structure, we believe the best path forward to meet the needs of our system is to transition back to our prior agency, Barclay, to manage our national advertising front. We have a long-time relationship with the Barclay team and are confident in their proven track record. On the local side, our franchisees still have three agencies to choose from at this time to handle their local advertising. We believe few agencies provide greater consistency across our markets and increase data visibility while still giving franchisees choice. We are a brand whose growth is fueled by the strength of our collective marketing efforts. We believe that this marketing structure and the agency transition enable us to effectively go after the 80% of Americans who do not currently utilize a gym. To summarize, the trends in our business are positive. Our usage is back above the 90% index of 2019. We continue to see that people who are working out are doing so more frequently. The younger generation's prioritization of fitness is driving down the average age of our member. And there are strong tailwinds behind the focus on overall health and wellness coming out of the pandemic. We are confident based on past performance that we can not only survive but thrive in a high inflation or possibly recessionary environment. Looking to the future, I'm confident that we will continue to be a differentiator and disruptive force in the health and wellness industry. And we believe that fitness is essential, and that our industry is a key part of today's health care delivery system. Finally, before I hand it over to Tom, I'd like to address our announcement this morning that Dorvin Lively, President, has decided to retire and will transition through the next couple of months. Dorvin joined Planet Fitness in 2013 as our CFO and was instrumental in developing our finance organization, preparing us to go public, leading our IPO in 2015, and more broadly expanding our brand, both domestically and globally. We are grateful for Dorvin's leadership, friendship, passion for our members and franchisees, and significant contributions to the brand over the past nine years. We have begun a search for a new President, but we know these are big shoes to fill. Personally, I'd like to thank Dorvin for helping me lead the company. I'm forever grateful for his guidance and support. I'll now turn the call over to Tom.

Thanks, Chris, and good morning, everyone. In the first half of 2022, we completed three transactions to strengthen our resilient, asset-light franchise business model. First, we closed the Sunshine Fitness acquisition, which diversified the geographic profile of our corporate stores, as well as added stores with better profit margins while keeping our ownership level at just 10% of the total system. Second, we refinanced and upsized a portion of our debt and have locked in low fixed interest rates as well as paid off our variable funding note. Finally, in Q2, we executed a $44 million share repurchase at an average price of approximately $63.50, which underscored the strength of our balance sheet only two years after having all of our stores temporarily closed due to the pandemic. Now I will cover our Q2 results. All of my comments regarding our second quarter performance will compare Q2 2022 to Q2 of last year, unless otherwise noted. It's important to note that this is the first quarter that reflects a complete quarter of operating results from Sunshine Fitness in our corporate-owned store segment. As a reminder, we completed the Sunshine deal in mid-February. Therefore, our full year results will only reflect 10.5 months of the financial impact from the acquisition. We opened 34 stores compared to 24 last year. We had positive same-store sales growth of 13.6% in the second quarter. Franchisee same-store sales grew 13.4%, and corporate same-store sales increased 15.7%. As a reminder, Sunshine same-store sales will not be reflected in our 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've treated prior acquisitions. Approximately 80% of our Q2 comp increase was driven by net member growth, with the balance being rate growth. The rate growth was primarily driven by a 130 basis point increase in our Black Card penetration to 63.5%. As a reminder, our Black Card price increase that we implemented in May was only for new joins, so that will slowly begin to drive the rate up going forward. For the second quarter, total revenue was $224.4 million compared to $137.3 million. The increase was primarily driven by revenue growth across all three segments. The 13.3% increase in franchise segment revenue was primarily due to an increase in royalties from same-store sales growth, new stores, and stores that were opened this year that had temporarily closed last year, as well as an increase in placement revenue. Partially offsetting the royalty revenue increase was a decrease of approximately $3.1 million as a result of the stores acquired in the Sunshine Fitness transaction moving from the franchise segment to the corporate-owned segment. For the second quarter, the average royalty rate was 6.4%, which was a 9 basis point increase. The 150% increase in revenue in the corporate-owned store segment was primarily driven by the Sunshine Fitness transaction, same-store sales growth, new store openings, and the cycling of temporary store closures in the prior year period. Equipment segment revenue increased 70%, driven by higher equipment sales to new and existing franchisee-owned stores. For the quarter, replacement equipment accounted for approximately 60% of total equipment revenue. We completed 26 new store placements in the quarter versus 19 last year. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to $32.5 million compared to $18.5 million. Store operations expenses, which relate to our corporate-owned store segment, increased to $56.4 million from $28.4 million, primarily due to the additional stores from the Sunshine acquisition. SG&A for the quarter was $28.2 million compared to $21.8 million. Payroll costs primarily drove the increase with the addition of the Sunshine Fitness management team, as well as increased travel expenses. Included in the adjustments to EBITDA was approximately $1 million related to transaction fees and expenses incurred in connection with our acquisition of the Sunshine Fitness stores as well as some additional one-time fees. National advertising fund expense was $18.9 million compared to $13.5 million. Net income was $25.1 million. Adjusted net income was $34.5 million, and adjusted net income per diluted share was $0.38. A reconciliation of adjusted net income to GAAP net income can be found in the earnings release. Adjusted EBITDA was $89.9 million. The adjusted EBITDA margin was 40.1% compared to $55.6 million, with an adjusted EBITDA margin of 40.5%. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. Now by segment. Franchise adjusted EBITDA was $54.4 million, and adjusted EBITDA margin was 65.9%. Corporate store adjusted EBITDA was $40.4 million, and adjusted EBITDA margin was 39.8%. Equipment adjusted EBITDA was $10.2 million, with an adjusted EBITDA margin of 25.2%. Now turning to the balance sheet. As of June 30, 2022, we had total cash and cash equivalents of $446.3 million compared to $603.9 million on December 31, 2021, which included $62.8 million and $58 million of restricted cash, respectively, in each period. As I mentioned earlier, during the quarter, we paid off our $75 million variable funding note, and we used $44 million to repurchase approximately 700,000 shares. Total long-term debt, excluding deferred financing costs, was $2.0 billion as of June 30, 2022, consisting of our four tranches of fixed-rate securitized debt that carries a blended interest rate of approximately 4%. Finally, to our 2022 outlook. We reiterated our guidance for 2022 in our press release this morning, with the exception of updating our adjusted diluted shares outstanding guidance to 90.7 million, reflecting our second quarter share repurchase, and our net interest expense to $86 million. As a reminder, our view for 2022 assumes there is no material resurgence of COVID that causes member or supplier disruptions, whether it be shutdowns or more stringent mandates that result in a significant change in membership behaviors. As Chris mentioned, the marketing agency consolidation effort has been more challenging than we expected. And as a result, the NAF is incurring additional expenses that we did not anticipate. Therefore, expenses will be higher than collections this year, a portion of which was reflected in the second quarter. Additionally, the HVAC supply shortage has not lessened as the impact from the China COVID manufacturing shutdown lingers. We're monitoring the situation carefully and are working with our franchisees on alternatives, such as keeping in place an existing HVAC system in certain locations. But the supply constraint has not eased since we reported our first quarter earnings. We still believe that we can deliver our full year forecast even with these two developments, although they are likely to limit any upside. Importantly, we believe that they are both near-term one-off issues that will not prevent us from capitalizing on our long-term growth opportunities. I'll now turn the call back to the operator to open it up for Q&A.

Our first question comes from Randy Konik of Jefferies.

I have a question regarding the Sunshine team. If I recall correctly, Tom mentioned that Sunshine's performance is exceeding that of our core corporate locations by about 200 basis points. Can you provide some insight into the strategies that Sunshine will implement to expand to other corporate clubs? Additionally, when do you expect the performance gap between those corporate-owned stores and Sunshine to begin to close?

Randy, thank you. I think there are a couple of points to note. First, the corporate store segment is performing better than the franchise segment in terms of comparable store sales. This is largely because our legacy market stores, which are included in the corporate store same-store sales, were more significantly affected by the pandemic, facing longer closures and mandates due to regional conditions. This is part of why our corporate store same-store sales are stronger as they recover more quickly, similar to how the rest of the system was impacted. Regarding best practices, Shane and the team have adjusted pricing, promotions, and marketing efforts, particularly focusing on Black Card, which is generating positive results. Ultimately, we see that Sunshine continues to perform well internally, although we are not disclosing specific details externally. They remain a strong performer but are not classified as corporate stores, similar to how we managed prior acquisitions. They are part of the overall system but not part of the corporate store category.

And I guess lastly, I believe you guys are hosting a franchisee convention, I believe, next month for the first time in a couple of years. Maybe, Chris, kind of give us your perspective on how important that event is to have an obviously in-person and kind of some things that you've worked on in the past conventions, what you kind of think about as a focus point with your franchisees at this convention in terms of new areas for development, etc. Just give us some flavor on that event.

Sure, Randy. Yes, it's next month, marking our first gathering since September 2019, almost three years exactly. There's a lot of excitement around the event, with over 1,000 attendees already registered. In addition to my main address on stage and some fireside chats with Tom and the IFC franchisee committee, we will host various breakout sessions over a couple of days. These will include marketing, development, operations, best practices, and training. It’s all about educating and reeducating attendees to ensure everyone is operating at their best when managing their clubs. We'll also have Jamie Medeiros, our new Chief Brand Officer, presenting alongside Cheryl, our Chief Digital Officer. This is part of a significant marketing reset, with a deeper marketing team aimed at driving sales. Overall, there's a lot happening and much excitement, making the event feel like a pep rally as everyone gears up to get back to work after gaining insights from trends and data we’ll share.

Our next question comes from John Heinbockel of Guggenheim Partners.

So Chris, I have two questions related to marketing. Looking ahead over the next six to eight months, what’s the general plan? Will you do anything different for New Year's Eve? And I assume you’ll be back for the Super Bowl—will there be any changes there? Regarding your creative strategy, you had some B-list celebrity involvement; will you expand on that and possibly include new faces? That’s my first thought. Secondly, about the best practice of focusing on local spending, when do you expect that to start making a significant impact? Is that still something that’s far off into 2023?

Yes. So New Year's Eve is still on cue. That's being made as we speak. So that thing is all going in the same way. You won't see anything different than you've normally seen in the last six, seven years here. So bolstered up in the year. We haven't committed to that just yet. But we'll see the same normal cadence, the big January sales, we always see coming into New Year's, and also the normal cadence this year second half as far as marketing for October and so on. So nothing there should really change much. I think one thing to note with the high school summer passes. And you probably remember us talking in previous calls, we've seen 25% of 2019 teen summer challenge kids had joined at one point. Today, 11% of those teens from 2019 are still members and 5% are the parents. So with over 3 million teens this year, naturally, we're going to have a much more probably aggressive marketing campaign to get a lot of them to join. And also, you probably recall this year, we actually used our app to sign a lot of the people up with the website. So we have a lot more data in a way to contact both teens and parents to hopefully get them to convert into a paying membership going forward. It's also too interesting. We have, like I said, 25% of those teens joined since 2019, 11% of members today, but that was also six months later, and the pandemic hit. So there’s a lot of disruption in that normal join cycle. It could be really interesting to see from the 3 million teens and their parents. That’s a whole marketing product play that we never really had before the rest of this year and beyond. So that could be exciting. As far as best practices, it was already starting somewhat, even from January, we first started to see the data that we hadn’t really seen before from the LAF spend. But it’s really a learn and tune, learn and tune, learn and tune. So it's going to be an evolution that probably never changes. Even if you think about today, the amount of Gen Zs that are joining and how we target them, when you go back pre-pandemic, we only had 5% penetration of Gen Zs. Now we're at 9%. So that's a generation here that we probably have to think maybe a little differently than just strictly television networks as opposed to streaming and TikTok, for example. So it's going to be always an evolution of learn and then fine-tune and tweak sale to sale. But now that we're capturing the data, this is the benefit of it.

And one last thing. When considering how to monetize your membership, Brian, we've discussed this before regarding Black Card partners. Is there a specific membership level you're aiming for? Is it 20 million, or do you believe you're already there with what you've done? In a broader sense, how can you attract more partners and create additional value?

Yes. I think we're beginning to see improvement with Cheryl's assistance in her role as Digital Officer. The perks page and the button on our website are generating traction, and we're capturing data that allows us to demonstrate actual click-throughs and conversions for our partners. We are on the verge of not just obtaining discounts but potentially generating some revenue internally from these discounts, whether through shared revenue or commissions. We're making progress in this area. The interest from partnerships and individuals willing to collaborate with us has dramatically increased now that we can demonstrate data, compared to two or three years ago when we initially discussed perks.

Our next question comes from Brian Harbour of Morgan Stanley.

Maybe just a quick one to start. How many corporate stores did you open in the second quarter? And do you expect maybe somewhat of a similar pace to the second half? Or are you holding back on some of those just to help franchisees kind of get the proper equipment to some extent?

Brian, it's Tom. We opened four. We've discussed this before, and you can expect us to maintain a penetration rate around 10%. It might vary slightly from year to year. While I’m not referencing specific quarters, that’s our perspective for this year and the years ahead.

And on the high school summer pass, what do you think made it so successful this year? Was there anything you did differently just in terms of marketing it or maybe it's kind of a digital story? But what do you think explains some of that success?

Yes. The first aspect I would highlight is that since 2019, which seems hard to believe was three years ago, we've seen a significant increase in Gen Z joining, particularly those in their early 20s, around ages 23 to 24. Since the pandemic, their rate of joining has surged by about 150% compared to normal levels. The younger teens in high school are also beginning to join in greater numbers, contributing to the overall volume. One major factor facilitating this is the simplicity of sign-up. Previously, the process required in-person visits to the club, with parents needing to accompany their children to complete paperwork and waivers. Now, everything is handled digitally through our app and website, making it much easier for both parents and kids to sign up, receive their emails, and get their membership packages. This streamlined process has likely enhanced the number of sign-ups. Outside of these factors, there hasn't been anything particularly significant driving this change; there wasn't a massive media campaign, just organic visibility through free press. The older Gen Z demographic appears to be in a different place post-COVID compared to 2019, which has significantly boosted our numbers. We have logged over 3 million members and more than 14 million workouts, which is quite remarkable.

Our next question comes from Max Rakhlenko of Cowen and Company.

Great. Congratulations to Dorvin on the retirement. First, can you discuss the feelings and enthusiasm of our franchisees regarding the opening of gyms, especially with rising interest rates, a slowing macro environment, and increasing input costs? Do you anticipate any temporary slowdown beyond the HVAC issues or any other concerns?

Yes, this is Dorvin. Thank you for your comment; I appreciate it. As we have discussed previously, our franchisees were generally ahead of schedule in their development prior to COVID, with over 200 openings for about three years. Coming out of COVID, without any store closures, we've seen a strong momentum in bringing members back into the clubs and recovering membership growth. The enthusiasm for opening new stores remains high, with franchisees feeling optimistic about the brand and their potential returns on investment. Internally, Tom, Chris, and I have reflected on the potential of 4,000 clubs, and our confidence has actually increased over the past three years, particularly regarding our ability to expand into more markets, especially considering that around 80% of the population does not have a gym membership. However, this year, especially since late last year, supply chain constraints have affected our business significantly. We feel positive about our ability to acquire equipment necessary for new club openings, although HVAC issues continue to pose challenges that we manage on a weekly basis, especially due to plant shutdowns in China. All these factors were part of our guidance, as mentioned by Tom. Additionally, regarding the retail environment for our franchisees, development teams, and landlords in the U.S., we were fortunate pre-COVID due to our strong economic model and the traffic we bring to shopping centers. Currently, landlords have recognized that we did not close any stores and have repaid all deferred rent during COVID, making us one of the most appealing tenants in the market. Rental prices have remained stable, but landlords are increasingly willing to invest more in tenant improvements to secure us as tenants. We believe that franchisees will be eager to return to their pre-COVID development pace, and we have no doubts about their willingness to do so.

That's very helpful. And then as a follow-up, what is your expectation for when the mature gyms will reach pre-pandemic membership levels? Obviously, sort of we discussed being flattish for the back half of the year. But is Q1 23 the right bogey to think about?

Yes, Max, it's Tom. That's a good question. It's challenging to determine when all the mature stores will return to their pre-COVID membership levels. However, it's encouraging to see that membership continues to increase each quarter. The impact of Omicron in Q1, which we talked about earlier, was a setback. We believe that this January and Q1 will be more typical and stronger for us. We don't see any competitive threats on the horizon that will change our situation. It’s really about how long our ongoing marketing investments will take to motivate potential members to join. So, it's difficult to predict exactly when that will happen. Nevertheless, we are optimistic about the continued progress and are looking forward to a strong Q1 to help improve that.

Our next question comes from Sharon Zackfia of William Blair.

I'm curious whether you're seeing any kind of change in usage patterns or join beyond normal seasonality in some of the areas where we're seeing kind of some pandemic flare-ups. I know others have mentioned Southern California and the Northeast as maybe a bit more challenged recently from a COVID perspective. I'm curious what you're seeing there. And then secondarily, if I'm doing the math right, it seems like replacement equipment is still kind of well below the trend line that you saw pre-pandemic. I mean I'm calculating maybe 30% below even though you've got more clubs in the first half of this year than in 2019. Can you talk about what's going on in replacement equipment? Are franchisees kind of deferring that longer? Or is there something else going on there where we'll see some sort of catch up at some point?

Sure. Sharon, this is Chris. I'll address the first part of your question. We aren't noticing any geographical differences or country-specific issues related to the minor flare-ups happening. All the locations are behaving quite similarly. Even compared to pre-pandemic times, we haven't observed any regions acting significantly differently. A lot of this, considering that nearly 35% of the clubs are from before the pandemic, seems to be just a matter of time. While the average club has been closed for six months, some have only been closed for two months, and others for a bit longer. Ultimately, it's a waiting game. We're not seeing any changes in membership joining trends, except that Gen Z is joining at a rate that's significantly above normal, while the other generations are not.

Yes, Sharon, it's Tom. Regarding the re-equipped equipment, there are a couple of points to consider. The lockdowns in China, especially in Shanghai and other provinces, impacted our equipment manufacturers. However, we don’t believe this poses a risk for the entire year. In fact, we have a significant amount of inventory in the United States. Once those provinces reopened, our primary vendors are operating at full capacity. This situation caused a slight delay in some re-equipments from Q2 to Q3, but it doesn’t affect the overall year based on our observations.

Our next question comes from Jonathan Komp of Baird.

Yes. A bit of a modeling question, Tom. I'm just curious as you look to the back half, any shaping cadence that you think is important from new openings or will be equip? Or even if you could quantify that the NAF comments you made about some of the investments you're making.

Yes, John. I think Dorvin might have some additional insights on this. Typically, new store openings have a heavier emphasis on the back end, particularly with re-equipments. This might be even more pronounced due to the disruptions in China during Q2. Regarding NAF, the year-to-date GAAP reflected in the P&L is roughly half of what we anticipate our full-year shortfall will be, plus or minus. I hope that clarifies your questions.

Yes. That's really helpful. And then just a broader question on capital allocation. I was curious to see that the buyback activity restarts. So I just want to get your perspective on sort of the rationale there and then how we should think going forward. So you still have a sizable cash balance and a lot of cash flow generated.

Yes, there has been significant market volatility recently, and we believed it caused our stock price to drop too low. Therefore, we initiated a 10b5-1 plan to buy back shares, aiming to maintain our previous buyback levels. In the years leading up to the pandemic, we repurchased around $800 million of stock at an average price of $67, equating to nearly 12 million shares. This has been our usual method of returning cash to shareholders. With substantial cash on hand, we discussed with our Board and determined that it was wise to reduce our outstanding authorization by approximately one-fourth. The Board had authorized $500 million, and we previously executed a $300 million ASR in late 2019 and early 2020, leaving us with $200 million available for future actions. Additionally, we are mindful of rising interest rates. Fortunately, our debt is fixed, but we had a variable funding note for $75 million drawn in 2020, which is at a floating rate. We decided it was sensible to pay that off and proceed with the share repurchase. Our cash position remains strong, and we want to adopt a conservative approach amid higher inflation and potential recession risks. We want to ensure we have enough cash to deal with any unexpected disruptions. Overall, we believe it was a prudent decision, considering what has happened to our stock price.

Our next question comes from John Ivankoe of JPMorgan.

A couple, if I may. First, remind us of what the reason was for NAF expenses to be higher than revenue? I thought kind of a whole point of the NAF is that the two would basically offset each other. And I'll continue on that. The split that you guys have, 2% national, 7% local, I mean, at least in terms of restaurants, is highly unusual. In fact, I think it's unique, both in terms of the percentage of advertising that the system spends, but also a very heavy allocation of national to local as local as generally seen as much less efficient than national. So I guess where are we on that 9% being the right level? I mean, is there an opportunity to maybe allocate some of that 9% someplace else? And how far along the path are we in terms of maybe rethinking some of that 2% to 7% split that you have historically had? And if possible, I'd like another question after.

John, it's Tom. First of all, regarding your NAF question, I may have misspoken. Before the pandemic, we repurchased $800 million of stock, which included 12 million shares averaging about $67. It's important to note that prior to COVID, we definitely aimed to spend what we collected, and that’s what we did. The pandemic caused disruptions in 2020, which led us to spend more than we collected to restart marketing efforts after temporary store closures. The same applied in 2021. In 2022, while we are still experiencing the pandemic, we noticed some disruptions, including a softer January, which affected our collections compared to expectations. Additionally, changes with the agency incurred unexpected expenses. Despite this, we believed it was prudent to incur these costs while also ensuring we support national sales and transition back to our former agency, Barclay. Our goal, once this situation is behind us, is to align collections with expenditures unless there are unusual factors involved. However, being in the pandemic and undergoing an agency transition presented challenges, as Chris pointed out. We felt that taking the long-term approach was necessary to continue investing in member growth. As we've discussed, the lifetime value of a membership greatly outweighs the costs, even with some temporary overspending in NAF; it’s a significant difference.

Yes. I think the split, John, maybe, again, in time we mentioned in the past, I think once we get through this hopefully final transition here and begin to use best practices, as I said earlier, fine-tune and sell up to sale and quarter after quarter. And I guess two things. One, is 9% the right number? And then what should the split really be to be more effective? And as we get better at spending, then we can make those calls. But you're right. I think longer-term, more NAF probably does make some sense. But again, it's hard to rather think that call until we get data; it's not going to be something tomorrow or even next year; it could be something that goes 24 months or more to really figure out exactly how we how would it all play out.

It's interesting to note that you offer an appealing experience and services for a wide range of age groups, from baby boomers to Gen Z. These demographics may not engage with a brand in the same way simultaneously. So, I wonder if there are potential challenges in appealing to both younger individuals and older ones. As the brand evolves to attract a new generation, do you believe it's worth considering adjustments to enhance the in-gym experience and appeal more to younger consumers over time? How do you foresee changes in the Planet Fitness experience within the gym?

Sure. Yes. And I think one thing is to is the boomer population in our clubs is only about 13% of our base. So it's not a huge part of our membership. But for somebody living on a fixed income or what have you, and we have tons of cardio, you're not walking on the street, and you can be in a climate-controlled environment, in a safe place, I mean, that’s why I think boomers come to us a lot and always have. But again, it's a small part of our base. I think a little bit to your question on Gen Zs, I think the one thing that's somewhat anecdotal, but I think a little bit from some of our manufacturers that, from the younger generations, we're not seeing them use probably cardio like the older generations do. Meaning they're not getting on a treadmill for 45 minutes as much like we used to, but more functional training, John, so they're more using the kettlebells and the functional areas, which we started to put in functional areas in our clubs about five years ago, six years ago. There's no doubt that there's a shift there. So it's just a matter of I think, slowly and carefully transitioning as we watch trends so that we're definitely still getting Gen Zs to gravitate towards us and then join up eventually. But right now, I think we're doing the right thing; functional area is definitely busy. They could be expanded to think in time if this trend continues and as the boomer population becomes a smaller part of our base over years.

Our next question comes from Simeon Siegel of BMO Capital.

This is Garrett Klingshirn on for Simeon. I'm just hoping you could give a little color on digital. You mentioned kind of high school summer pass benefiting from sign up from online and being able to not have to do that entirely in store. I'm just curious how you're thinking about innovations on the digital side within the clubs and where you're thinking about investments there.

Yes. I believe there are several aspects to consider. When most people think of digital, they often think of the digital workouts available in our app, which is certainly an important part of it. Additionally, we've made it easier for users to navigate and utilize the equipment in our clubs without needing a trainer. We have implemented QR codes on nearly all equipment, allowing users to scan and access quick tutorials on how to use each machine, typically within 15 to 30 seconds. We offer workouts that can be done at the club and also provide options for at-home workouts for those who can't make it to the club or are traveling. However, I believe a major aspect of our digital strategy focuses on enhancing the customer experience and minimizing pain points. For example, before the pandemic, joining through our app wasn't an option. Now, around 20% to 25% of new memberships are initiated via the app, which did not exist prior to COVID. Members can now also pay their dues through the app, and a significant portion of these payments goes through the app compared to last year. Overall, we are working to make the experience smoother for our members, such as our crowd meter feature, and we continually expand the perks we offer. For instance, our partnership with Shell Gasoline, which began last November, has been very successful, with members redeeming nearly 2 million gallons of gas so far. Our collaboration with Crocs has also been well-received, particularly among Gen Z. The central question we address is how we can provide additional benefits and enhance customer experience, viewing digital as more than just a fitness tool. As we gather more insights and data trends, we can adapt and improve our offerings. Previously, our interaction with members was limited to when they entered the club, but now we can connect with them outside our physical locations, which is a significant advancement.

And I know you guys don't comment on churn, but I'm just kind of curious if we're thinking about kind of reception time from the past, and you kind of maybe gave all that great color earlier. How did churn kind of compare within Black Card versus kind of the classic membership? Was there any notable differences within there? And kind of how do you think that would maybe trend this time around if there is a recession or an economic downturn?

Yes. I can't recall back from '08, '09 off the top of my head, but I mean even recent trends, we've seen that even through COVID, that the Black Card members are canceling slower than the white card; it's crazy as that sounds. Even more recently with our Black Card increase in pricing, our Black Card acquisition is actually going up, which is counterintuitive to what you would expect. So I think that's great to see.

Our next question comes from Alex Perry of Bank of America.

I'd like to echo my congrats on your retirement, Dorvin. Just first, I wanted to circle back to some questions earlier. Could you give us some more color on how you're thinking about conversion for summer pass participants and their family members? How could this year be different? Would you still sort of expect that 25% conversion rate? And then maybe just remind us on sort of the timing of that. And then what is the participation rate of the 3.3 million summer pass participants spend? Are you seeing similar levels of usage from them as you saw in sort of 2019?

Thanks, Alex. This is Chris. When I mention 25% of the 2019 high school summer pass participants, I mean that they joined at some point between 2019 and today, and currently, 11% are still active members, along with 5% of their parents. Keep in mind this was during COVID and shutdowns. If we look ahead three years without any lockdowns, I would expect the rate to be higher. Additionally, we've noticed that the older Gen Z cohort is joining at a significantly greater rate than before COVID. I anticipate that the same trend will apply to these high school teens. I believe a 25% estimate is on the conservative side. We now have more effective methods to reach out to both parents and kids via email, and all of them have the app for checking in at the club. With our in-app messaging, we can connect with these teens to encourage them to join, whether in September or the following February. Reaching and communicating with them has become much easier and more efficient than in the past. They have logged over 14 million workouts, and their usage patterns align closely with those of typical Gen Z members. While their daily usage times differ somewhat due to school schedules, as more students finish school around mid-May, we observed a shift in usage from after-school hours to earlier in the day.

Perfect. That's really helpful. And then just a follow-up here. Could you just give us a little more color on how the business performed in prior economic downturns? Are you already seeing any benefits of trade down with new joins coming from some higher-priced clubs? And then would you expect similar levels of Black Card penetration? Or would you expect more joins to come from that sort of entry-level price point?

Yes. But we haven't seen any real data that shows that's coming from trade downs yet. We have to do some sort of a survey or something to try to capture that part of it. I think just the retention trend on the Black Card membership and then the more recent trends we're seeing on the Black Card price and the acquisition of Black Card leads me to believe that I don't think it's going to be a white card only option because Black Card is too expensive there. I think we probably would have saw that through the last couple of 2, 3 years and then the more recent price increase, but we're not seeing that.

Our next question comes from Chris O'Cull of Stifel.

Chris, it's been well publicized that roughly 25% of gyms permanently closed since the start of the pandemic. But it seems that those operating still haven't been able to get back to that pre-COVID average store membership level. So I guess the question is, what has your research indicated as the reason these members haven't returned to gyms? And what opportunities do you think you have to bring them back? And then I had a follow-up.

I think one positive outcome since we reopened our stores post-COVID is that our rejoin rate is higher than it has been historically. Currently, about 30% of our new members are rejoining, with the second quarter seeing a rejoin rate of around 33%. This indicates that people are returning to the gyms at a faster pace than before. However, it appears to be taking longer for many to overcome the tendency to stay inactive due to the period of being at home. Although Gen Z members are joining at significantly higher rates compared to previous years, the millennial, Gen X, and boomer groups have not yet fully returned to their pre-pandemic levels. It is encouraging to see increased participation among these generations, particularly Gen Z and millennials, even though Gen X and boomers are slowly improving. Ultimately, this process will take time. As Tom mentioned, it's not about if we recover, but when we will achieve that recovery. We're not expecting a sudden surge in new members as fitness trends change overnight. It may take some additional time, but we are committed to marketing effectively to facilitate this recovery. Before the pandemic, we had 13 consecutive years of positive comparable sales, averaging a 12% growth rate during that time, and there was nothing indicating that this trend would not continue. We aim to regain that momentum.

Okay. And then my second question relates to development. Do you have any visibility as to how long the HVAC and other equipment issues will continue to remain a challenge in terms of just lengthening project timelines? And then can you give us any sense of the '23 pipeline and your confidence level that you can accelerate development next year?

I think it's important to note that throughout the year, we've maintained close collaboration with our franchisees and the vendors they work with. We've never mandated a specific vendor for equipment like HVAC systems and haven't faced issues until now. As we encountered supply chain constraints, we’ve been working on the corporate side to engage with larger suppliers and consolidate purchases, giving them a larger stake in our business moving forward. However, these suppliers are also facing constraints, so it may be that only certain parts needed for the HVAC systems are missing, while everything else is available. They're actively working through their supply chains to address this. Previously, before COVID, we typically wouldn't consider using existing HVAC systems from facilities we're taking over for new stores. However, we're increasingly opting to maintain those older systems to buy time rather than opening a new location with a new HVAC system. This allows us to open clubs more quickly, with the understanding that we can replace the systems once supply chain constraints ease. Overall, the situation remains fluid day by day. As time goes on, we are seeing some improvements in the supply chain, but overall, vendors, including ours, have not fully caught up yet. Tom, do you want to add anything?

I think you covered it well.

I'll hand back to Chris for closing remarks.

Thank you all for joining us today. I'm very pleased with how the second quarter turned out, especially with the increase in members per store as we recover from the pandemic. I'm also thrilled about the success of our high school summer pass initiative. It's encouraging to see so many teens engaging with our stores, with participation more than three times higher than in 2019, reflecting a strong interest in health and wellness among younger generations. This presents a great opportunity for us to convert them into long-term memberships. I'm excited to connect with our franchisees next month for the first time in three years to discuss strategy, future plans, and execution. I genuinely look forward to it. Have a great day.

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