Thank you for joining us. My name is Krista, and I will be your conference operator today. I would like to welcome everyone to the Planet Fitness First Quarter 2024 Earnings Conference Call. I will now turn the conference over to Stacey Caravella, Vice President of Investor Relations. Stacey, you may begin your conference.

Thank you, operator, and good morning, everyone. Speaking on today's call will be interim Planet Fitness Chief Executive Officer, Craig Benson; and Chief Financial Officer, Tom Fitzgerald. Both 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 Craig, 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 investor website 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 Craig.

Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q1 Earnings Call. We ended the first quarter of 2024 with approximately 19.6 million members; same-store sales growth of 6.2%, primarily driven by new member growth; and nearly 18% adjusted EBITDA growth. Our system opened 25 new units and ended the quarter with 2,599 Planet Fitness locations globally. Today, I'm going to address 3 topics. First, the headwinds that we faced in the first quarter that impacted our results; second, our decision to raise the Classic Card price; and third, the exciting announcement about our new CEO, Colleen Keating, who joins us on June 10. The increase of approximately 900,000 net new members in the first quarter was below our expectations for what has historically been our highest net growth quarter pre-pandemic. The year began with national media headlines about the rising cases of COVID as well as RSV and other respiratory infections that may have made people hesitant to go to public places, including gyms, especially in the first half of January. In the month of January, fitness or gyms are among the top search items on the Internet. This year, while it remains among the top search items, both flu and savings-related items were even higher. Additionally, an industry source noted that many brands in the fitness industry experienced a similar soft beginning of the year. We also had double-digit decreases in our website traffic. While we continue to see more than 80% of our joins come via online channels during the quarter, we had fewer people visiting our website to potentially join Planet Fitness. Usage, which historically correlates with join trends, was the same on a quarterly basis year-over-year. However, it was down significantly in the first couple of weeks of January during the peak of our join season. We also believe that a contributing factor to our lower net joins in Q1 versus last year was the effectiveness of our advertising campaign. We believe that this was due in part to the messaging not resonating as broadly as we anticipated as well as our strategic decision to not include price-pointed offers as part of our nationally funded portion of the advertising. We made this decision because we are conducting pricing tests in several markets to inform our pricing strategy going forward. In a study that we commissioned to assess our first quarter campaign, consideration of Planet Fitness is trending upwards and is the highest it's been in years. However, the lack of a price point in our national funded January sale ads may have created less urgency for consumers to get off the couch and join. To a far lesser degree, the first quarter softness also derived from a reaction to an incident regarding our nondiscrimination policy. The isolated incident took place on March 11 in an Alaska gym. Media mentions relating to the incident peaked in the middle of March, which we believe contributed to some of the softness we saw in joins for the balance of the month, as well as some increase in cancellations. This policy has been in place for more than a decade and is not dissimilar from other industry peers, including longtime brands such as the YMCA. As a result of these headwinds we faced in Q1, we are updating our 2024 guidance targets, which Tom will cover. Now to our pricing tests. Last fall, we started testing 2 price points for the Classic Card, a $15 and a $12.99 in about 100 stores each, both reverted back to $10 during the national sale periods and the advertising in those markets communicated a call to action with explicit savings in monthly dues to join before the sale expires. We added an additional test in December to include the New York DMA where we kept the price at $14.99 regardless of a national sale. We continue to run these tests through the April sale. We use a disciplined, data-driven approach to determine the best balance between higher dues while minimizing the loss of membership. Based on our learnings, we decided to change the price of the Classic Card to $15. It drove the most significant increase to average unit volumes with the least impact on the rate of joins. The increase will be effective this summer, only for new members. We continue to test different promotional strategies, as I believe a good portion of our focus on innovation includes exploring pricing and amenities. To that end, we'll be starting Black Card price tests around the time the system migrates to the new Classic Card price. Tom will address more specifics on the role of the Classic Card price increase. Finally, we announced in April that Colleen Keating will be joining us as CEO next month. Our appointment follows a thorough, extensive search process conducted by the Board, and we could not be more thrilled to welcome her to Planet Fitness. She brings over 3 decades of experience across hospitality and real estate, as well as expertise in operations, franchise and brand management, and leading consumer-facing organizations. She is excited to join an industry leader with significant runway for even further growth, both domestically and internationally, and she's eager to get started. I will work closely with Colleen and the management team to ensure a seamless transition. Now for a quick update on our CFO search. The search is well underway. We have interviewed and are considering a number of promising candidates. Colleen will become involved with the process once she officially starts with us in June. Finally, last week, I had the opportunity to address our franchisee community at their annual conference in New Orleans. We had great conversations around new initiatives, including building clubs for smaller markets, which we kicked off a few months ago. We also discussed how we're ahead of schedule to reduce new units and remodel build costs by at least 10% before the end of the year. Other aspects of the new growth model were part of the discussions, which led to a real sense of excitement about a greater return on their investment and our long-term store growth opportunity. I am grateful to have had the opportunity to serve as interim CEO, especially during a period in which we put in place a number of initiatives that we believe will support the company's long-term growth trajectory. I also look forward to returning to my role as a Board member and a franchisee with an even greater appreciation that I have gained for the Planet Fitness brand, our members, our franchisees, our leadership team, and our shareholders. Now I'll turn it over to Tom.

Thanks, Craig. Before I get to our first quarter results, I'd like to cover our upcoming Classic Card price increase as well as our plans to explore refinancing a portion of our debt this year. As we've said previously, we've been working on a number of initiatives to further improve our already strong store economics and new store returns. Our new franchisee growth model that we unveiled in Q3 of last year is primarily focused on reducing the capital requirements for opening and operating a Planet Fitness franchise location. For the past several months, we have had 3 different groups of stores testing 3 different prices for our Classic Card membership. Based on those test results, we have decided to increase the price from $10 to $15 to further enhance the average unit volumes for our stores. Our Classic Card membership has been priced at $10 since 1998, which based on inflation would be about $20 in today's dollars. As Craig noted, the price increase will go into effect this summer, and only new members who join after it goes into effect will pay $15 for a monthly membership fee. Current Classic Card members will continue to pay $10 for the duration of their membership. It will take some time for the benefit of the price change to expand our store-level margins, as the price increase will only be on new Classic Card memberships. Additionally, more than 60% of our members join as Black Card members. Now to our debt. We have a tranche of debt of approximately $600 million that comes due in September of 2025, which we anticipate refinancing in the middle of this year, subject to overall market conditions. Based on forecasted interest rates, we believe our overall weighted average interest rate for all of our debt would still be below 5% when we refinance that tranche. Now to our first quarter results and our revised 2024 outlook. All of my comments regarding our quarter performance will be comparing Q1 2024 to Q1 of last year, unless otherwise noted. We opened 25 new stores compared to 36. We delivered system-wide same-store sales growth of 6.2% in the first quarter. Franchisee same-store sales growth increased 6.3%, and corporate same-store sales increased 6.2%. Approximately 70% of our Q1 comp increase was driven by net member growth, with the balance being rate growth. Black Card penetration was 62.1%, an increase of 10 basis points. For the first quarter, total revenue was $248.0 million compared to $222.2 million. The increase was driven by revenue growth across the franchise and corporate-owned segments. The 12.2% increase in franchise segment revenue was primarily due to increases in royalties, new stores, and ad fund revenue. For the first quarter, the average royalty rate was 6.6%, up from 6.5%. The 15.6% increase in revenue in the corporate-owned store segment was primarily driven by same-store sales growth as well as new and acquired stores. Equipment segment revenue decreased 8.6%. The decrease was primarily driven by lower revenue from equipment sales to new and existing franchisee-owned stores, which was driven by fewer new store placements, as well as the shift to more strength equipment versus cardio. As we noted last quarter, the shift in the equipment mix brings down overall sales on a per-store basis. We completed 14 new store placements this quarter compared to 18 last year. For the quarter, replacement equipment accounted for 59% of total equipment revenue compared to 58%. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to $19.0 million compared to $19.4 million. Store operation expenses, which relate to our corporate-owned store segment, increased to $74.4 million from $66.0 million, due primarily to new stores opened or acquired. SG&A for the quarter was $29.2 million compared to $27.8 million. Adjusted SG&A was $27.3 million. This includes a $1.6 million adjustment for severance-related expenses incurred in connection with the reduction in force that we mentioned on our last earnings call, as well as a $0.3 million adjustment for CEO transition-related expenses. National advertising fund expense was $19.8 million compared to $17.0 million. Net income was $35.0 million. Adjusted net income was $47.3 million and adjusted net income per diluted share was $0.53 per share. Adjusted EBITDA was $106.3 million, and adjusted EBITDA margin was 42.9% compared to $90.2 million with adjusted EBITDA margin of 40.6%. By segment, franchise adjusted EBITDA was $76.1 million, and adjusted EBITDA margin was 73.2%. Corporate store adjusted EBITDA was $42.4 million, and adjusted EBITDA margin was 34.6%. Equipment adjusted EBITDA was $4.8 million, and adjusted EBITDA margin was 22.2%. Now turning to the balance sheet. As of March 31, 2024, we had total cash, cash equivalents, and marketable securities of $486.4 million compared to $447.9 million on December 31, 2023, which included $46.2 million and $46.3 million of restricted cash, respectively, in each period. In Q1 2024, we used $20.0 million to repurchase slightly more than 300,000 shares. Total long-term debt, excluding deferred financing costs, was approximately $2.0 billion as of March 31, 2024, consisting of our 4 tranches of fixed-rate securitized debt that carries a blended interest rate of approximately 4.0%. Finally, moving on to our updated 2024 outlook, which we provided in our press release this morning. We're providing wider ranges for the targets that we are updating, given the current choppy environment in which we're operating. We continue to expect between 140 and 150 new stores, which include both franchise and corporate locations. We also continue to expect between 120 and 130 equipment placements in new franchise stores. For the full year, we continue to expect that reequipped sales will make up approximately high 60% of total equipment segment revenue. We also continue to expect that this year will look more similar to 2023 in terms of the quarterly cadence for those sales, as it was a more typical year versus the prior 3 that were impacted by COVID. As I noted earlier, the shift to more strength equipment versus cardio will bring down overall sales on a per-store basis. During Q1, we continued to refine the mix that will result in slightly lower sales per store. We are maintaining our equipment segment profit dollars, so therefore, margin rate will increase. We now expect system-wide same-store sales growth to be between 3% and 5%. Previously, we expected between 5% to 6% growth. This reduction is driven by the factors that Craig noted earlier. All of the following targets are updated to reflect the changes I just mentioned and represent growth over fiscal 2023 results. We now expect full year revenue to grow in the 4% to 6% range. Full year adjusted EBITDA will grow in the 7% to 9% range. Adjusted net income to increase in the 6% to 8% range, and adjusted earnings per diluted share to grow in the 7% to 9% range. We continue to expect shares outstanding to be approximately 88 million, which is inclusive of the repurchase of 1 million shares over the course of the year, the amount we shared back at our Investor Day in November of 2022. And we continue to expect our net interest expense to be approximately $70 million, which assumes we refinanced the tranche I mentioned earlier at 6.5%. We will update any applicable guidance targets if necessary, pending the completion of the anticipated refinancing transaction later this year. Lastly, we continue to expect CapEx to be up approximately 25% and D&A to be up between 11% to 12%. Now despite a challenging start to the year, we believe that the changes we have made as part of our new franchisee growth model, along with the upcoming price increase, improve our store economics and enhance our differentiated brand and market-leading position. We continue to be a highly attractive franchise system that generates strong and stable free cash flow for long-term sustainable growth and increased shareholder value. I'll now turn the call back to the operator to open it up for Q&A.

Your first question comes from the line of Simeon Siegel with BMO.

I was hoping you could provide more details on the lower guidance, especially since it appeared to be a solid quarter for member growth and topline excluding equipment. Have you noticed anything since the start of the quarter that might have raised concerns, such as an increase in churn? I'm trying to understand your view on the disappointment for the quarter. Member growth was slightly below the last two years, but it still seemed quite solid, with encouraging comparisons and new members. I would have thought this quarter was fairly good, aside from the equipment shortfall. Any insights you can share? Additionally, does the guidance account for any impact from the price increase to $15?

So in terms of the quarter, we did have decent member growth, $900,000. It wasn't where we expected it to be. And some of the things we mentioned on the call, we knew when we had our earnings call in February, and we provided our outlook. I think what we didn't know is sort of what happened in March. The first part of March was pretty good. Joins and cancels were pretty good. And then once social media sort of blew up over our policy issue, we definitely saw a change in the results in the back half of March. Joins and cancels were fairly significantly affected. Now the good news is, and we're not going to provide a lot of color on Q2, but at a high level, just to provide some perspective. The good news is we've seen the joins rebound, but cancels have remained elevated. So that's really principally what we have seen and, therefore, factored into this latest revision in our outlook. There were some things in Q1 early on that we talked about in January. Our business is definitely probably way more sensitive to what happens in those first couple of weeks of January than most other ones. So we talked about that. But then things definitely were getting better across the back half of January through February and the first half of March, as I described. So the good news is that the joins have bounced back. And while we're never totally pleased with what we're seeing, it's better for sure. It's the cancels that have remained elevated. And the second question, yes, the price increase won't have a huge impact. As you know, our business, it only is affecting new members, and with it coming in the back half of the year, it's not going to have a huge impact, but it is factored in. One of the benefits that Planet has for its members is good price for life, and we've never made a big deal about that. But as part of this price change, we're going to highlight it much more. And so we ought to get the benefit of a subscription-based business that doesn't change pricing on people in the middle of their usage of those services or what have you. So we're going to start to really trigger that as well. Sorry to cut you off.

I was going to ask if, in the test, you noticed any cases where people wanted to maintain their original grand product price.

Yes. We're not going to go into all the different metrics that we saw in the test. But definitely, as you know, we have been analyzing the results for a long time and feel really good about observing those same outcomes when we implement the rollout because of the thorough testing that was conducted.

Your next question comes from the line of Chris O'Cull with Stifel.

Craig, the company has had issues with marketing campaigns or media buying during the lower important New Year's Eve membership season in the past few years. I'm just wondering what's the company doing to ensure a higher probability of success going forward?

Well, as you know, Chris, we are really aggressively chasing a brand identity strategy that we've not had in the past, which will help us with marketing because we will have, as we talked about just a minute ago, price for life as an example. We've never talked about that. And then some of the other benefits we offer our membership, whether it's perks or opportunities to use different clubs with the Black Card and that kind of thing, bring a friend. We don't talk about that stuff, and we don't put in the context of our brand identity. So we have had issues in the past with different people we work with. That's been pretty much fixed. We're down to 2 agencies now for the entire LAF system. We used to be as high as 16. For 1 year, we went to 1, and now it seems to have settled out. So I think we're doing better on that front. I think the real challenge is hitting the market with a real branding effort to talk about the benefits of Planet Fitness beyond just price and offering that to our membership for 2 reasons. One is to get them to join, but the other is to get them to stay. And so if we could kill both of those birds with one stone, that would be great.

You guys called out a lot of different factors affecting joins during this quarter, everything from the weather to the situations with the bathroom incident. I mean I'm just curious how confident are you that the pricing test did not have effect on the joins and the new membership trends in the markets that you were testing the higher prices?

Chris, it's Tom. That's a great question. To clarify, we didn't identify weather as a subscription business factor; fortunately, it's rarely a significant influence for us. There are various other elements to consider, and it's often a combination rather than a single factor. We aimed to emphasize what we believed were the major influences. Regarding the price test, we feel confident because the results aligned with our previous month's observations after we decided as a team to change the price. Essentially, what we found wasn't a localized issue, but rather a broader, more comprehensive trend. As a result, we are pleased that the outcomes matched our expectations and previous data from the test. We aren't concerned that this specific incident, which we believe is behind us, will affect the validity of the test results.

And Chris, the other thing is, as you probably know, but I want to make mention of it. We always have a control group to match up against the test group and the control group is very similar to the test group in the types of clubs, location, that kind of stuff. So we have controls built-in to be able to see anomalies between pricing changes and other things, including things like weather, which Tom said we didn't measure, but there may be periods of time where it gets a little busier than others because people can get out or they can't. And so we do a pretty thorough job of controlling the data from the test and with another group that's not involved in the test.

Your next question comes from the line of John Heinbockel with Guggenheim Partners.

I wanted to start by referencing something Tom mentioned regarding the situation with social media. It seems that while we’ve seen some challenges, your assumption is that it’s not getting worse. The guidance appears to indicate that no improvement is expected. Please correct me if I’m mistaken; it seems you believe the situation will remain stable. How do you plan to tackle this issue without bringing more attention to it? This seems quite challenging.

Yes, John, just to make sure I'm clear, what I was talking about was really the social media mentions on that. Hopefully, it's kind of died down. It was certainly not broad scale, but it definitely had an impact. And what I would say is and why we talked about providing the wider ranges, it is an election year. There are things that swirl around and it's certainly been a choppier first few months than we expected coming into the year. So I think it's with that in mind that we provided the wider range to ensure that some of what we're seeing is factored into our outlook. And to the degree that, that ramps up or down a little bit is why we broadened the range. In terms of how we're thinking about the rest of your question, I'll pass it to Craig.

Yes, I believe we have managed this whole situation well, including working with federal authorities on necessary actions. I want to express my appreciation for all our franchisees and employees for their efforts during this challenging time and for moving towards a more positive outcome.

Okay. And then maybe the other question with regard to pricing, right? So $15 has a decision been made on, you'll still run promotions? Do you run them at 10, do you run them at 15, 15 becomes the new 10, right, I guess, with no money down? And then you also referenced Black Card, right? So I don't think you want to promote that. So that's really a study on like you had in the past, whether you take that up $1 or $2? Or are you thinking about something different?

Yes. We're going to test a couple of different versions of the Black Card with pricing. We're also going to try and reajigger some of the amenity portions of it, if possible. So there may be a few different iterations here of being able to test Black Card. We do put Black Card on sales from time to time. So it's not that we only put the White Card on sale. With regards to that, we're still working through, as you know, we're a promotional brand; I don't like to get away from some of the promotions we've done in the past, because it's been 100% promotional based. But there's more levers to pull as far as promotion goes, whether it's 3 months or other things that we could put into the mix that we haven't thought of doing in the past. And I think you'll see more variety of that. And just how it rolls out and what we do is undefined at this point in time. We know we want the system to shift up to $15 and use that price as the price going forward if possible.

Yes. John, I can't provide specifics for competitive reasons as we don't want to disclose our promotional plans or timing. However, we are optimistic about our direction. As Craig has emphasized, we will continue to explore and learn to identify beneficial options. Historically, we have raised the Black Card price every couple of years, with the last increase in May 2022. Therefore, we believe there is potential to test various strategies as we adjust the Classic Card.

Our next question comes from the line of Megan Alexander with Morgan Stanley.

I wanted to come back to just the comments on member growth. I guess you did talk about a consumer looking for savings. We've heard from a lot of companies. There's been a lot of bad messages about the consumer, particularly the low-end consumer. So I guess, how do you reconcile what we're hearing a bit in the broader market just about the consumer environment with maybe what you've seen from a membership perspective, understanding you've had some noise? And then how do you think about raising prices into the summer months when the summer pass member typically joins that high school member typically joins at the White Card, and there was an article yesterday in the journal about how Gen Z seems to have more credit card debt than generations before. So just trying to understand whether there's anything there from just a low-end consumer perspective that might be perhaps pressuring things and how you're thinking about it as we head into the high school summer pass period?

Megan, it's Tom. I think we all recognize the current challenges. Consumers are feeling the pressure from years of high inflation and rising interest rates. For those with mortgages, recent data shows payments have increased by about a third compared to previous lower rates. Our analysis of joins and cancellations across various household income levels indicates little variation, suggesting we aren't losing lower-income members or gaining higher-income ones. The figures remain quite consistent. We are excited about the high school summer pass program and will continue it. It allows us to introduce our brand to many people for free, and we see a significant number of teens later joining as members, which is a positive outcome. This will be our third consecutive year and fourth overall running the program, and we view it as beneficial for our brand as it encourages kids to adopt healthier lifestyles. Regarding the pricing change we mentioned, we haven't specified the timing or its impact on the summer pass, but whether it affects this year's or next year's group, it remains a great value at $15. Additionally, we believe that not emphasizing pricing in our ads can overshadow the other benefits we want to communicate. By improving this balance, we expect to enhance perceived value and drive demand, keeping in mind that our offering extends beyond just price.

And I'd just add 2 things, Megan. I don't think we've gotten credit for the summer pass in the ways we should. But this year, we're going to give 3 free months to every member if we get 3 million, like we had last year. That's $90 million worth of value that we're putting into the marketplace to allow teens to feel better physically and mentally. And so it's important to highlight, I think, for the world that Planet Fitness is putting its money where its started by inviting young people who've been through a difficult period of time, both in their school lives and outside lives to use exercise as a way to help them deal with mental or physical challenges they may have. And I think the other thing that's important rolling out price, as Tom mentioned, the last time we did it was May 2022, and the reason we like to do it in the slower summer months is that any price change takes a while to burn in. And so we use the slower months as a burn-in period of time for new pricing. It generally allows us to get through that change period and come back out the other side before we get into the busier time of the year for us.

Got it. That's helpful. As a follow-up regarding unit openings, could you discuss how the numbers for '25 and the quarter came in compared to your expectations? You have maintained the year, and I think the puts and takes rates are somewhat higher. Could you provide an update on real estate availability and your overall confidence level in the placement outlook? Also, do you anticipate that pricing will have an impact on your top-line or bottom-line results this year? Or is this more of a development outlook for franchisees that will take shape in '25?

I think franchisees take into consideration all the different things we've done as to their outlook; I mentioned in my opening remarks, I just came back from the conference in New Orleans. We couldn't talk about price changes there. And so they weren't privy to that. But clearly, that was one of the things that was top of mind for them. And so we spent a lot of time talking about the new growth model and some of the progress we've made on cost cutting and that kind of stuff. In fact, smaller clubs in markets that can sustain a 20,000-square-foot box. CBRE came out with a statistic, I think fairly recently. They said the amount of available space is going to be half of what's able to be taken down this year. So it continues to be challenging for us. Clearly, there's been some retailers that are running through difficult times. And we're trying to be all over that as ways to sort of mitigate some of those challenges. But I think all in all, I was very pleased, again, based on the comments I made in the opening script with the tone and tenor of the New Orleans conference; pretty much everybody was there. And I got a lot of time to spend with the different franchisees both one-on-one and in a group setting. So I feel very good about this company and where it is right now. I still think we have work to do for sure, but there are really great opportunities.

Your next question comes from the line of Rahul Krotthapalli with JPMorgan.

This is on franchise leverage in the system. Certainly, the pricing decision should alleviate a lot of concern here. And interest rates narrative have continued to be key, but it's something not under your control. How has the sentiment been in the convention specific to the leverage concerns? And Craig or Tom, is your sense that franchise consolidation here given the transactions we are seeing out there will help some of these large franchises to compete better for the targeted real estate opportunities? And I have a follow-up on marketing.

Sure. We are so fortunate that we have now under 100 franchisees. And the reason I say that is because, as you know, I'm part of the Dunkin' Group, too, and we have 2,000. So you can get to a conference in New Orleans and really get some face time with all these different actions. So we have really sophisticated operators in the system. Clearly, by now, we expected interest rates to at least be headed in the opposite direction of where they have been added in the last couple of years. That is not happening. But most of our operators are sophisticated, have sufficient capital and not huge amounts of leverage. So they're able to sustain their business without a lot of problems. And so again, I feel really good about where we are with price changes as far as taking costs out of clubs and looking at different things that we've done with the new growth model to help them through the difficult times of inflation, which this company has never really had to deal with having been founded in 1992. I'm old enough to remember inflation in my 16% home mortgage back in the day. And this company has not had to face that. But I think we've hit square on with now pricing changes and changes CapEx and build-outs and remodels and re-equips so that we are really working as a partner with our franchisees to keep this ball rolling.

On the marketing mix, would you take this opportunity based on your prior comments on the call to revisit the national versus local mix? And also do you think approaching with a clean slate focusing on the price point promotions and whatnot would make a lot of sense at this time?

Yes. So Rahul, I think marketing needs to be addressed in the way that you talked about as well as other ways in the messaging we're putting out. So I think it's a whole different look at things. I, in the first time that I met with the franchisees in October, they had a separate conference, talked about rejiggering the NAF and LAF, which is national advertising fund and local advertising fund. We didn't get into any specifics, but they clearly understand that over time, we're probably going to have to relook at the way we do it and reallocate resources so that we can have a branding campaign nationally that's consistent, concise, and more cost-effective. And so there's a lot that needs to be done. And I do think over time, we will start to shift.

And Rahul, I think Colleen coming in as our new CEO with both franchise, multi-unit hospitality and marketing experience will help shepherd that journey.

Your next question comes from the line of Sharon Zackfia from William Blair.

I kind of want to make sure everyone understands the arc of membership. There's a lot of moving parts this year. I guess you talked about obviously what happened with the social media noise in March. And it sounds like rebounding joins subsequently, but elevated attrition. Are you looking at the second quarter having attrition outpaced joins? Or are we going to see a sequential kind of down quarter in membership?

Sharon, this is Tom. I appreciate the question. As you know, we don't guide on membership. And I think what I would say is all the things that we expect to happen in membership, and again, it's a forecast, right, we don't know, are factored into our same-store sales, which is the primary driver there. As you know, member growth is still typically 70-ish percent of our same-store sales growth. So while it's still positive, it's definitely called down and also with a wider range because it is a little bit more difficult to predict, and we certainly have seen a fairly consistent trend in cancellations year-on-year. We had a number of quarters with year-on-year improvements in attrition. More recently, I think in Q4, it was more flat. And in Q1, in the early part, it was kind of a similar trend and then it definitely elevated in the back half of March through more recent days. So that's factored into how we adjusted our outlook for same-store sales and the cascading effects or ripple effects on all the other metrics.

And then I just want to talk about kind of timing of the Classic Card increase. I mean I think in the press release and on this call, you talked about consumers looking for more value. It does seem like an odd time to take a 50% price increase on the Classic Card. I understand why the franchisees would want it. But I'm also curious, competitively, where you ran these tests, and there are going to be regions where you're not the lowest priced anymore. So how do you think about that? And how do you think about the messaging associated with that price increase?

Sharon, I'm not sure that what competition may or may not do. There's also a school of thought that if we move, other people move; it's sort of been waiting for us to do something. We haven't touched the Classic Card since 1998. $10 is, as Tom said in his opening remarks, worth about $21 now. And we've seen in every industry people moving price. So it is not going to come as a shock to anybody that we are moving a price that's been in effect for a long, long time, 25 years. And so we, again, tested it pretty rigorously in multiple markets with good control groups and again saw positive results. We think that this is the right time to do it. We also think it's the right time to look at different options for the Black Card, which may or may not change. But we have to be aggressive in testing and innovating amenities and pricing. And so we're going to do that. OpEx and CapEx are 2 ingredients for running a successful club. And some of these price changes do change some of the OpEx calculations that are going on, whether it's changes in pay scales or changes in rent or its changes in depreciation schedules; they all have changed, and so we need to recognize that.

And Sharon, maybe just to add a couple of things to Craig's comments. As you know, about 60% of the people who joined join as Black Card members. So that is an important point for those who aren't familiar. I know you are. And I'd say the second point, back to what Craig said, we're a promotional brand. We're trying to get people off the couch; 40-ish percent of our new members have never belonged to any gym in their life. So I think it's just a question of the messaging and the types of promotions, but we're not saying back in the day, we're not doing a JCPenney of walking away from all the promotions and going to full price. That's too abrupt. I think it's just a matter of changing the elements, but still not taking our foot off the promotional accelerator.

Your next question comes from the line of Joe Altobello from Raymond James.

The first question on the price change. I understand you couldn't share the $15 level with franchisees ahead of time, but I'm sure you've gotten plenty of feedback during the test. So what does that look like? And has it been uniform or does it vary by market since $15 in one geography is a lot different than $15 in another, for example?

Yes, we found it interesting to test across various demographics and markets. The control groups were well matched, indicating that the price adjustment to $15 would be effective overall. We carefully considered all of this. As you may remember, Joe, we began our initial tests last August and they continued through the fall and nearly into April. This provided us with extensive market test data. It felt like the right moment to implement this change and deliver the appropriate messaging. Additionally, we've received significant feedback from New Orleans, where there's been considerable discussion about the need for some relief on pricing.

Okay. Very helpful. And maybe a second question on the advertising campaign. You mentioned it wasn't as effective as you would have hoped. Was the big issue, the inability to highlight a uniform price, which, I guess, now changes going forward?

It is a factor, but not the only one. The last part of the advertising in the first quarter was five times more than national advertising, which is significant. Local advertising included a pricing element that national did not have. However, we need to focus on more than just price. Tom's point about promotion is valid; there will always be a promotional brand. We must also emphasize the other benefits we offer in the market, which contributes to customer loyalty. Having a brand allows us to target our messaging effectively based on what has worked, as opposed to relying on trial and error without a strong brand. This approach is always connected to promotion. I believe Colleen will excel in this role because, as Tom mentioned, she has successfully managed multiple brands at once in the past, ensuring each brand has its own market space and message. She has significantly more expertise in this area than I do, and I'm eager to see her contributions.

Your next question comes from the line of Max Rakhlenko from TD Cowen.

Great. First, can you remind us how many members gyms open with these days? And what does the member waterfall look like over the first few years? And then you previously noted that the 5-point growth plan would contribute about 500 basis points to IRRs. So curious, what about this? How does this price increase compare? And then when you combine the two, does it get franchisees' IRRs potentially quite close to back in line with prepandemic levels?

All right, Max. You win the award. The first topic is about the ramp-up of store openings. We track this through presale periods starting from day one and then look at subsequent performance. The good news is that we are continuing to observe ramps in Q4 and the early part of Q1 that resemble those prior to COVID. While they are not yet fully back to pre-COVID levels, they are significantly closer than what we've experienced in recent years. Overall, the trends influencing our outlook will affect some of this ramp slightly, but we hope that this is temporary. I would say that we are ahead of schedule with the changes made in our new growth model, aiming for a 5% to 10% reduction in building costs. The team is still working on identifying additional savings without impacting member experience, and I feel confident about the progress we are making. Moreover, with the adjustments we made to our capital expenditures, including extending the franchise agreement from 10 to 12 years and modifying our cardio equipment mix, we believe we can close over half of the gap we've seen in our internal rate of return recently compared to pre-COVID. Regarding the pricing test at $15, we anticipate that it will take time for members to adapt. Based on our months of testing, we estimate that after about a year with a membership mix at this price, there could be a low to mid-single-digit enhancement in average unit volume, which would contribute positively to our internal rate of return. While this might not completely revert it to pre-COVID levels, it will help reduce the remaining gap we have mentioned. Our pre-COVID unlevered internal rate of return was in the low 30s, while it has recently been in the low 20s; the adjustments in the new growth model position it in the mid-20% range. This ongoing effort to cut costs should help further narrow that gap as well.

Got it. That's helpful. And then this one should be a little more qualitative. But can you speak to the competitive environment? Some of your HVLP peers have been seen pretty significant growth in the opening. It seems like they might have had a bit of a better first quarter. A lot of those boxes are almost twice the square footage of your gyms. So just curious how you're thinking about the competitive set and whether that may have driven part of the weakness here in 1Q? And then just bigger picture. The competition today is certainly stronger than previously. It's better financed, so definitely, going to be something to watch going forward. So curious how you're thinking about where the biggest opportunities are for you guys to step up your own execution because this might become a bigger risk going forward?

Yes, Max, that’s a great question. You're absolutely right. In certain areas, both geographically and competitively, there are brands that are stronger than others. Crunch definitely made significant inroads in 2023, particularly where they have franchisees that are private equity backed and more aggressive, similar to some of our franchisees. There are also larger competitors like EOS and Vasa that provide more extensive facilities, including pools, classes, and specialized cycling rooms. However, what they all lack is a non-intimidating environment. We believe that this aspect is what differentiates us from the competition. Some may claim to be welcoming, but when you enter their gyms, it can be overwhelming with the noise of weights and intense activity; this can be intimidating for first-timers. We consider this a crucial element that we offer and that others cannot, given their patronage levels. I think it ties back to what Craig mentioned about our brand, positioning, projection, and messaging, which needs to be conveyed more effectively. For many potential members, this is far more significant than whether our pricing is $10 or $15, according to our research. Many people who are new to gyms might hesitate at the parking lot in fear of what they will encounter inside. Therefore, we aim to alleviate that anxiety, which we believe our competitors won't be able to do. While they might target the 20%, our focus remains on the 80%.

And your next question comes from the line of Korinne Wolfmeyer from Piper Sandler.

I'd like to touch a little bit on, first, the international expansion. I know we've been focused more on the U.S. today, but if you could provide an update on efforts internationally and the Spain efforts, that would be great?

We are actively pursuing the Spanish market right now, having made our own investment in Spain to accelerate our efforts. We are looking for a partner to join us, but participating in this process has provided valuable insights into our potential success and the adjustments we need to make to better align with the Spanish market. This experience will also enable us to explore other opportunities in Europe, leveraging what we've accomplished in Spain and our investments there. Overall, we are satisfied with our progress and anticipate gaining short-term insights and benefits that will enhance our entire system.

Yes. We're aiming to open our first store in the early part of Q3. As Craig mentioned, we will learn a lot from this opening, which will impact future openings. We've been reviewing numerous sites and have several in different stages of negotiation. We feel positive about our progress.

Great. And then now with a new CEO hiring, I know she is still yet to start, but is there any update on progress with the CFO search? I know you had wanted to get the CEO before the CFO, but any update you can provide on the CFO search? And what kind of criteria the team is looking for?

Yes, the team has already begun interviewing candidates. We are eager for Colleen to join and contribute. We have identified both internal and external candidates, and the interviews are underway. Colleen is expected to start on June 10, and she will also be involved in this process.

Yes, maybe just one more. I think we're probably in the third inning or so. And hopefully, we're by the time Colleen arrives, she's got a short list of candidates to interview and make a selection from. We feel good about the progress we've made, and that will still give some time for transition based on that timing.

And that concludes our Q&A session for today. I would like to turn the call back over to Craig Benson for closing remarks.

We very much appreciate your time and patience with us today. Again, this company is, I think, well positioned based on the changes that have been made and changing leadership that's forthcoming. So I want to thank you again and look forward to talking to you soon.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.