Hello and thank you for joining us. I would like to welcome you to the Planet Fitness Q2 Earnings Call. All lines have been muted to minimize background noise. Following the speakers' comments, there will be a question-and-answer session. Now, I will hand the conference over to Stacey Caravella. Please proceed.

Thank you, operator, and good morning, everyone. Speaking on today's call will be Planet Fitness Chief Executive Officer, Colleen Keating, 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 Colleen, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the call. Our release can be found on our 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 Colleen.

Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q2 Earnings Call. I'm thrilled to be here speaking with you. During the second quarter, we eclipsed the 2,600 store mark, grew same-store sales by 4.2%, delivered 5.1% revenue growth, and increased adjusted EBITDA by 7.2%. As I consider the opportunity to join Planet Fitness, I was drawn to two things. First, growing businesses is one of my passions. I believe I could not only contribute to the tremendous potential of our next chapter but that I could have a real impact on it. With 30-plus years of experience in franchise businesses, real estate, operations, and marketing, I've led high-growth consumer businesses at scale. I believe that I have a unique perspective on our growth opportunities and the actions we need to take to capitalize on them. And second was the franchise model and the opportunity to continue to work with franchisees. Throughout my career, I've worked extensively in franchise businesses within the hospitality industry. There are many similarities between hospitality and fitness. Foundationally, both are focused on bringing an experience to life for guests or members and that they leave feeling better than when they came. Since joining in early June, I've hit the ground running. I've already visited more than a dozen clubs across six states plus Spain, meeting with franchisees and interacting with team members, all with the purpose of listening, engaging, and seeing how our members are experiencing our clubs. We are a 30-plus-year-old brand with a solid base of about 100 franchisees and more than 19 million members. I'm proud to lead this special business and build on this foundation. As CEO, my near-term focus areas are, first, defining our growth ambition. This includes all facets of growth, from stores to members to profit to increasing shareholder value. We are building out our longer-term strategy and how we're going to enable and accelerate healthy growth. On the store growth side, as shown by two third-party studies last year, we believe we can double our footprint domestically to approximately 5,000 locations, up from the 4,000 target we set at our IPO in 2015. Importantly, we are 70% larger by store count than the next 15 high-value low-price competitors combined, and we have nearly 7x the membership of the next largest competitor. And we're in the early innings of international store growth as further evidenced by our first European club in Barcelona, Spain. I visited the club last week and saw firsthand our brand being brought to life in an authentic way. I also visited a number of other fitness brands operating in Spain today, and this furthered my confidence that we have a highly differentiated offering and tremendous runway to grow to real scale and density in the Spanish market, where today, only roughly 10% of the population belongs to a gym. I also toured our pipeline sites, visited two clubs under construction and a number of sites currently under consideration. These were thoughtfully selected sites in areas with strong population density and population growth. I had an opportunity to spend time with our team in Spain, who have the right skill set, market knowledge, and depth of experience to lead our growth on the ground. At the same time, we're ensuring that we're strategic and disciplined in our ambitions, prioritizing sustainable, profitable growth and the member experience. I see our growth ambition as an ongoing journey. I'm committed to continuously exploring and identifying new opportunities to accelerate our efforts while continuing to deliver value across our stakeholders. To that end, my second priority is delivering an unparalleled member experience. We hold a highly differentiated position in the high-value, low-price sector of the fitness industry. We are about bringing an experience to life and sharing a deep emotional connection with our members. We take care of people so they can improve their lives and well-being. I've been truly impressed by the interactions I've witnessed between our team and members during my many club visits to date. I experienced firsthand what's so special about this brand: the sense of belonging in a community you're proud to be a part of. You immediately feel the positive energy when you walk into one of our clubs. I've always been very passionate about having feet on the street, meaning spending time in our clubs and staying close to our members and our team members who deliver on our brand values every day. We strive to ensure that there is no gym intimidation in our clubs. We also need to make sure our current members have exceptional experiences both inside and outside our clubs so they choose to stay with us. My third priority is to evolve our brand messaging. In 2023, along with our franchisees, we estimate that we spent more than $300 million on marketing and advertising. Looking forward, we have an opportunity to further sharpen our brand promise and mission in our marketing efforts as we encourage members to choose us as they embark on their fitness journeys. We need to increase our emphasis on the high-value part of HVLP by communicating the unique selling points of being a Planet Fitness member. Our clubs break away from the cheap gym perception by offering an unparalleled experience and a sense of belonging. There are about 140 million people who live within close proximity of an existing Planet Fitness location today who don't currently belong to a gym. That's who we're looking to reach in addition to our current and former members. There are more than 4 million Gen Zs who become eligible for membership each year as they age. Gen Zs continue to make up the majority of our net new joins each quarter. To this end, we launched our fourth year of the High School Summer Pass Program in June and have more than 2.6 million teen participants to date, which is slightly less than we had last year at this time but is highly encouraging given that we shortened this year's program. This has been an incredibly successful relatively low-cost program that yields a 5.5% conversion rate to paying members last year. Across all demographic segments, we will be evolving our messaging of why Planet Fitness and what differentiates us from the competition. Our new brand messaging will start to show up later this year and, importantly, in the first quarter of 2025. And the fourth area of focus is underscoring that franchisee profit drives franchisor profit through product refinement and operational efficiency. I believe in creating a culture of accountability and in having a shared goal with our franchisees. A coach versus cop mentality allows us to continuously iterate on our fantastic model by working together with our franchisees as a team. If franchisees are successful, we will be successful. This will include refining our product offering and operational efficiencies to maximize the economic value proposition of our franchisees while delivering the most relevant on-brand experience for our members. In my interactions with investors since I joined Planet Fitness, there has been a focus on when we will get back to prepandemic new store opening levels. It's a very different macro environment than before COVID, and the cost to build a new location was up by more than 30% in 2023 versus 2019. The new growth model aimed at the biggest opportunities to further enhance the attractiveness of our returns is a key lever that we pulled to address unit economics. Additionally, on June 28, the $15 pricing for new classic card members took effect. Just a reminder, current classic card members who joined prior to June 28 are locked in at the $10 monthly membership fee. We expect that after one year of the price being in effect, existing stores will see a low- to mid-single-digit percentage increase to AUVs, with an even greater impact to new stores as the majority of their classic card members will be paying $15. We also launched two Black Card pricing tests in select markets, one at $27.99 and the other at $29.99. If either of these tests prove successful, this increase could also further enhance store returns. We look forward to continuing to collaborate with our franchisees, and we're excited to join them at our annual franchisee conference in September as we begin the next chapter of growth for Planet Fitness. And to capitalize on these opportunities, we need a great team that competes and wins. I keep a hard hat in my office to remind me that being a builder of blue-ribbon teams is what drives the business forward. As such, a top priority for me is the CFO search and I've been working closely with the team to identify the best candidate for the future of our brand. The search process we are running is thorough and comprehensive, and we're encouraged by the quality of candidates and the enthusiasm toward the role. We're grateful for Tom's ongoing support and commitment to Planet Fitness. Now, I will turn it over to Tom.

Thanks, Colleen. Before I get to our second quarter results, I'd like to address the debt transaction that we completed in June. The beauty of our asset-light franchise model is that it generates significant free cash flow. This enables us to continuously assess the best use of our cash and how we can leverage our balance sheet to enhance shareholder value. Over the last 2.5 years, we have completed two debt transactions, one that enabled us to acquire a top-tier operator in the system as well as this most recent one that funded and accelerated share repurchase. Since 2018, we've returned more than $1.3 billion to shareholders via share repurchases. As part of this transaction, we refinanced approximately $600 million that was due next year and we upsized the deal to $800 million given the favorable rates compared to what we were anticipating. This included a $425 million 5-year tranche with a fixed interest rate of just under 5.8% and a $375 million 10-year tranche with a fixed interest rate of just over 6.2%. Our total long-term debt, excluding deferred financing costs, now has five tranches of fixed-rate securitized debt of approximately $2.2 billion. We'll use the proceeds to repay the tranche due next year, which had the highest rate of our existing debt. And as a result, our blended interest rate only increased 50 basis points from 4.0% to approximately 4.5%. We were more conservative compared to historical refinancing levels this time given the current rate environment and the existing amount of liquidity already available on our balance sheet in the form of cash and marketable securities. We want to ensure that we have a sizable amount of cash on our balance sheet to weather any storm that may come along, which benefited us greatly when all of our stores temporarily shut down due to the pandemic. Additionally, we used the proceeds to pay costs associated with the transaction and also to fund the majority of the $280 million accelerated share repurchase agreement that we entered into on June 12. The Board also approved a new $500 million share repurchase authorization to replace the previous one upon completion of the ASR, which will occur before the end of the third quarter. Importantly, we have made changes over the past year to our underlying business to reduce the cost of owning and operating a Planet Fitness location as well as our recent classic card price increase, both of which enhanced what were already very attractive store-level returns. We believe the combination of our franchise model and strong unit economics sets us up to continue to take advantage of our long-term growth opportunities. Now to our second quarter results. All of my comments regarding our quarter performance will be comparing Q2 2024 to Q2 of last year, unless otherwise noted. We opened 18 new stores compared to 26. We delivered system-wide same-store sales growth of 4.2% in the second quarter. Franchisee same-store sales increased 4.3% and corporate same-store sales increased 4.0%. The classic card price increase, which went into effect on June 28, did not have any impact on our Q2 same-store sales. Approximately 60% of our Q2 comp increase was driven by net member growth, with the balance being rate growth. Black Card penetration was 62.4%, flat to the prior year. For the second quarter, total revenue was $300.9 million compared to $286.5 million. This increase was driven by revenue growth across the franchise and corporate-owned segments. The 9.1% increase in franchise segment revenue was primarily due to increases in royalties, new stores, and national ad fund revenue. For the second quarter, the average royalty rate was 6.6%, up from 6.5%. The 10.3% 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 8.4%. 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 18 new store placements this quarter compared to 26 last year. For the quarter, replacement equipment accounted for 84% of total equipment revenue compared to 79%. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, was $51.9 million compared to $59.5 million. Store operation expenses, which relate to our corporate-owned store segment, increased to $70.2 million from $58.9 million due to higher operating expenses in existing stores, primarily due to a timing shift in marketing spend from Q1 to Q2 of this year as well as the impact of new and acquired stores. SG&A for the quarter was $31.6 million compared to $32.6 million. Adjusted SG&A was $30.1 million, which includes a $1.3 million adjustment for CEO transition-related expenses, compared to $31.4 million, which included a $1.2 million adjustment for severance-related expenses. National advertising fund expense was $20.1 million compared to $17.9 million. Net income was $43.9 million. Adjusted net income was $62.2 million and adjusted net income per diluted share was $0.71. Adjusted EBITDA was $127.5 million and adjusted EBITDA margin was 42.4% compared to $118.9 million with an adjusted EBITDA margin of 41.5%. By segment, franchise adjusted EBITDA was $77.5 million and adjusted EBITDA margin was 71.9%. Corporate store adjusted EBITDA was $49.6 million and adjusted EBITDA margin was 39.5%. Equipment adjusted EBITDA was $18.6 million and adjusted EBITDA margin was 27.4%. Now turning to the balance sheet. As of June 30, 2024, we had total cash, cash equivalents, and marketable securities of $447.7 million compared to $447.9 million on December 31, 2023, which included $47.8 million and $46.3 million of restricted cash, respectively, in each period. In Q2 2024, we used $280 million to repurchase and retire approximately 3.1 million shares to date, which is approximately 80% of the stock that we expect to repurchase under the ASR, with any remainder to occur as part of the completion of the agreement in the third quarter. Finally, we are reiterating our outlook for 2024, including the targets we updated in June as part of the announcement of our accelerated share repurchase program. We continue to expect between 140 and 150 new stores, which includes 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 reequip sales will make up approximately high 60% of total equipment segment revenue. Let me address the quarterly timing of both replacement equipment sales to existing franchise locations and equipment placements in new franchise clubs. During Q2, we sold more replacement equipment to existing franchise stores than we expected, which shifted those sales into the second quarter and therefore, we do not expect those sales in the second half of the year, particularly not in the fourth quarter. In terms of timing for placements in new franchise stores, we continue to expect them to be weighted to the second half, with a significant skew to Q4. As a reminder, we are maintaining our equipment segment profit dollars for new placements. With the mix shift to more strength and less cardio, therefore, we expect that margin rate will continue to be higher in the second half of the year versus last year. We continue to expect the following targets that represent growth over fiscal 2023 results: same-store sales growth to be between 3% and 5%; revenue to grow in the 4% to 6% range; adjusted EBITDA will grow in the 7% to 9% range; adjusted net income to increase in the 4% to 6% range; and adjusted earnings per diluted share to grow in the 7% to 9% range based on adjusted diluted weighted average shares outstanding of approximately 86.5 million, inclusive of the shares expected to be repurchased as part of the ASR agreement. We also continue to expect net interest expense of approximately $75.0 million excluding the write-off of deferred financing costs associated with our debt refinancing transaction. Lastly, we continue to expect CapEx to be up approximately 25% and D&A to be up between 11% to 12%. Now, I'll turn the call back over to the operator to open it up for Q&A.

Our first question comes from Randy Konik with Jefferies.

Yes. I guess, Colleen, what would be really helpful for us is maybe give us some perspective on your prior leadership roles and different industry experiences and talk about some of those and how you're going to apply some of those learnings to strategies at Planet. And something also that would be really helpful is you highlighted in the script the kind of emphasis on the HV over the LP in HVLP. Maybe kind of give us added thoughts around what that means to you and how do you want to accentuate that part of the business.

Randy, nice to hear from you. Sure, happy to. So I think to the first part of your question about kind of background and prior roles. As you know, I spent most of my career in the hospitality space and the hospitality industry and really brand-led organizations. A large part of my career with Starwood and then several years with InterContinental Hotels Group. And then more recently, in the real estate space in the single-family home rental space. And at the end of the day, there are a lot of similarities between my prior experience and the fitness space. We're really bringing to life experiences for our members here at Planet Fitness. And I often say, in hospitality, we were the home away from home for weary travelers and wanted our guests to leave feeling better than when they came. And I think what we're offering at Planet Fitness is quite similar. Our members enjoy a great high-value experience in our clubs. And let's face it, who doesn't feel better after a great workout or when you have a great workout in the rear-view mirror? So we welcome people into our clubs in a bright, friendly, engaging, and very clean environment with a plethora of equipment and really able to help them wherever they're at in their fitness journey, their wellness journey, and then have them leave our clubs feeling better than when they came. One of the other things, I think, that's relevant in the hospitality background versus what we're endeavoring to do at Planet Fitness is the opportunity to extend the experience outside the four walls of the club through our app, through loyalty programs, and partnerships and even our perks program. We just had a great month in June with perks utilization. So there's an opportunity for us to really leverage our very broad membership base and our high app utilization through partnerships and bringing additional offerings to our members that they value even outside the four walls of the gym. And when I think about high-value, low-price, certainly, our pricing does make fitness accessible to most. At the same time, I really think about leaning into the HV of HVLP and I often say to the team here, I think about the HV in capital letters and the LP in lowercase letters and that really is about the value offering that we're bringing to our members.

I found your insights very valuable. Lastly, Tom, I recall there was a mention of a test for the Black Card at $27.99 and $29.99. Could you provide more details on when we might see the results of that test regarding a potential price change for the Black Card? Also, concerning the White Card, now priced at $15 compared to the previous $10, should we expect any noticeable impact in the first half of next year or the latter half? It would be really helpful to understand your thoughts on when these changes might reflect in our numbers.

Yes. Sure thing, Randy. So on the first part, we have two Black Card tests running. We actually rolled those tests into new markets where we weren't testing the classic card changes prior, right at the time that we raised the classic card price from $10 to $15. So that's like June 28 is when those were effective. So they've only been in place about a month. And as you know, with our business, we need to let them run for a while. So we expect to run them through the better part of Q3 and maybe even into Q4 before we determine whether or not we have enough information to make a call. And if one of those beats what we're testing them up against, we're pretty thorough in how we do all that with the control stores matched up, etc., then we'll make a change. If it doesn't beat, then we'll stick with what we've got. So time will tell, but it takes a few months to let those run. In terms of the classic card, yes, that's effective for new members. As you know, it doesn't apply retro. So as new classic card members join, they're joining at $15 and they'll feather in over time. Now that they're only about 40-ish percent of our membership base, so they're the minority of our members. But it will affect each quarter more so than the prior quarter and we'll talk about more what that means for 2025 when we get there. But you're kind of thinking about it right in terms of how it feathers in.

Our next question comes from the line of Simeon Siegel with BMO Capital Markets.

Congrats and welcome, Colleen. Obviously early, recognizing it would be a small sample size so far, but just any initial learnings you're seeing from the price hikes on the rest of the business? Curious if there's any benefit to churn and maybe how is the Black Card penetration for new members that face that higher price? And then, Tom, nice to see the higher-margin equipment come through. Can you elaborate a bit going forward in terms of the trade-off between revenues versus profit dollars because you're now showing us that you're realizing the benefits you were talking about earlier on? Any color there would be really helpful.

Yes, sure. Thanks, Simeon. So on the classic card impact, we're really only talking about Q2 here. So given that it happened at the very end, we'll have more to say on that next time. So I appreciate your patience on that, but we want to stick to only talking about the prior quarter. In terms of the equipment, yes. So as we talked about the Q1 results, we didn't see the full margin increase or saw very little margin increase because some of those orders were placed before the pricing changed. And really, what we're trying to do here is we remixed into having less cardio in any new store and more strength equipment based on what folks want to do in terms of their workout and just rebalancing our mix in the stores. That lowers the cost of the equipment for the franchisee or the revenue for our segment. So we raised our prices so that the margin dollars that we get on a per-placement basis would be equivalent to before we made the mix change to more strength, less cardio. So you're seeing that. The short answer is the cost per placement for our franchisee is down high single digits, low double digits. And the margin improvement is around about 300 basis points when it's all said and done.

That's great. And then just lastly, Colleen, any higher-level thoughts on the right corporate versus franchisee ratios from your perspective?

Yes. I think we believe strongly in our asset-light model. Our corporate clubs, corporate-owned clubs give us a great test opportunity, test-and-learn opportunity, and we think that the 10% or so is the right ratio. That said, as you're aware, we just launched Spain and opened our first club in Barcelona earlier this month. And we are leveraging our balance sheet to enter the market. We think there's an opportunity to get a market started using our balance sheet there and then recycle that capital with our franchise partner as we continue to grow the market.

Our next question comes from Sharon Zackfia from William Blair.

I guess, Colleen, a question for you, just given your background. I mean, clearly, everybody would love to see Planet grow its franchise unit development at a faster pace, I'm sure, including yourselves. What kind of timeline have you seen historically in your prior experience on kind of what lag would incur to see that kind of growth start to accelerate?

Yes. I think what I'll say first and foremost is having the right team and the right infrastructure to position ourselves to accelerate growth. And with that in mind, we're about to go out to search for a Chief Development Officer. So I think first and foremost, and you've heard me touch on the importance of having, I call it, a blue-ribbon team, and I use blue ribbon because blue ribbon means you're winning. So really getting the right infrastructure so that we're set up for growth and we're developing the relationships to be able to accelerate our growth. So I think first step is we're about to go out to search for a Chief Development Officer. And then, as I indicated in my remarks, really helping to refine and define our growth ambition is work that's begun and that we'll do in partnership with that Chief Development Officer when they are named. I think it's an opportunity for us to accelerate growth, I guess, is what I would say.

Tom, just a quick question on G&A. I mean, I know you guys have been really good with cost control, but it's kind of been, I think, better than most people have expected over the last few quarters. I mean how are you thinking about full year G&A? And what's the long-term kind of dollar growth rate that you look to beyond this year for G&A?

Yes, Sharon. That's a great question. Earlier this year, we anticipated some challenges that would impact our top line, and we aimed to manage our expenses accordingly. While we weren't able to completely offset the impact, we focused on being judicious with our investments by prioritizing and implementing changes. As we refine the strategy that Colleen and her team are developing, it will guide our investment decisions and help us identify areas where we can redirect past spending. This remains a growth business with many opportunities ahead, and we intend to carefully consider our investments. However, our goal isn't merely to cut costs; it's about funding our growth ambitions. We are reevaluating previous investments that may no longer align with our strategic goals and directing resources toward the most promising growth opportunities. We're not making predictions about what this will mean for 2025 and beyond, and we plan to revisit that outlook early next year.

Our next question comes from Jonathan Komp from Baird.

Colleen, welcome. I want to ask a question to you, Colleen. You clearly sound excited by the opportunity to leverage Planet's scale. But the business certainly is showing some of the slowest unit growth and member growth in its history here. So I'm curious maybe if you could share more of your early views on the opportunities. I don't know if that's marketing or other areas. And really the feedback that you're hearing from franchisees in terms of leveraging the scale for new growth opportunities.

Absolutely. I'll address two main points. First, regarding unit growth, we're just beginning to implement the new growth plan introduced earlier this year with our franchisees, along with the new pricing that will impact their economics. The new growth plan and the infrastructure we're developing, including hiring a Chief Development Officer dedicated solely to unit growth, should help drive our progress. We're also expanding into new locations, such as Spain. It's important to note that our approach to international growth focuses on achieving real scale and density, rather than simply establishing a presence in new markets. Both seeking new markets and accelerating growth with our franchisees while concentrating on their unit economics will be essential to driving unit growth. We also need to ensure we have the right resources to support this growth. On the member growth front, it's a multi-faceted approach, but I'll highlight two key areas. Firstly, enhancing the member experience is crucial. We must continue to evolve and modernize our brand to meet the expectations of today's customers, particularly as Gen Z becomes the fastest-growing segment of our membership. Secondly, our marketing efforts are important. We're refining our brand and promise to ensure we remain relevant and that our marketing efforts resonate effectively. The branding work we're undertaking will inform the marketing strategies that will roll out at the end of 2024 and into the first quarter of 2025.

And I think, Jon, to add to that, our marketing spend for the system is approximately $300 million annually. This significantly surpasses what our next largest competitor spends combined. Therefore, it’s important to consider what we haven't communicated to encourage more people to begin their fitness journey and to continue focusing on the 80% of individuals in the U.S. who do not hold a gym membership.

I'll also just add that in addition to the CDO, another role, I think, is critically important for which we'll be going out to search is a Chief Marketing Officer. I very much believe in an integrated approach to top-line strategy and making sure that as we do our brand work and the brand positioning work and refine the brand promise, that we're pulling that through in an effective way in our marketing to really reach our target customers. So Tom talked a little bit about it. He touched on it, kind of, we call it, funding the journey, but making sure that we're looking at our resource allocation and have the right leadership roles to help fuel our growth in these critical areas for our business.

That's great. Certainly looking forward to seeing progress on those fronts. If I could just ask one follow-up to Tom. The adjusted EBITDA outlook for the year implies further deceleration in the back half after the first half was very strong, up 12%. So could you maybe just review the factors that you're looking forward in the back half and whether there's any conservatism in that outlook?

Yes, Jon. A significant part of our better-than-expected performance in Q2 was due to the timing of some equipment replacements, which we initially projected for the latter half of the year. We ran our usual biannual promotion with our franchisees for these reequips, and the response was stronger than anticipated, leading to more activity in Q2 than we expected. This timing has affected the growth rates year-to-date in comparison to the rest of the year that you mentioned. However, we remain confident in our full-year outlook and are comfortable reiterating it, even though the timing does play a role in your concerns. I appreciate your question.

Our next question comes from Joe Altobello from Raymond James.

Welcome, Colleen. In terms of the new growth model, what's the timing on when we start to see the impact of that? I think it takes, correct me if I'm wrong, 12 to 14 months to open up a new store these days. So if you launch it late '23, is the impact more early '25?

Joe, it's Tom. Yes, so I think you may recall, we always sort of labeled this year as a transition year. Franchisees were able to opt into this new growth model which I think all but two of them did, and they each own one or two stores. So it's pretty much systematically a resounding yes to opt into this. But they had to work through the documents and ultimately sign them through Q1. So we always thought it would have an impact on subsequent years less so than it did in 2024 for the reasons you're mentioning in terms of development cycles being longer than they were pre-COVID. But having said that, we feel really good about what it's done to the economics of the business and improving what were already pretty strong returns. The changes in the growth model where we targeted a 10% reduction in the cost to build a new Planet plus some other changes we made on the timing of replacing equipment helped to improve the unlevered IRR. If it was pre-COVID in the 30-ish percent range with higher cost to build and other changes, that probably got down to the low 20s. So the changes in the growth model kind of close half that gap. And then we believe that once there is a full year of the classic card price increase at $15 feathered in, that adds a couple of hundred basis points more to that unlevered IRR. So now between the growth model and the classic card price, we're pretty much back to pre-COVID IRR. So there's certainly great incentive for franchisees to build the stores because they produce great margins and unlevered IRRs. It's just a matter of all that working its way through and people cranking up their pipelines. So we'll talk more about '25 when the time is right, but we always thought this year would not have a big impact from the changes.

Understood. Very helpful. And then maybe just a follow-up on that. I was curious how you guys view the member growth in Q2. It's a bit below what you've historically done in the second quarter. I know it's a relatively small quarter and I recall it got off to a slow start. But how did you guys see trends throughout the quarter? And maybe more importantly, what are you seeing in July after the classic card impact?

Joe, I believe you are correct. This year, we do not anticipate membership growth, and our current position is lower than we had expected for a few reasons. First, we previously mentioned that Q1 was quite soft. It feels like a long time ago, but in early January, there was still some concern regarding COVID, flu, and RSV, which led to a weaker start than anticipated. Additionally, we encountered an incident in March that affected our joining numbers for a brief period and had a more significant impact on cancellations. However, the situation has improved throughout the quarter, and while cancellation rates remain elevated, they are certainly better than what we were experiencing earlier. We are not focusing on Q3 at this time, but given our current standing and how the team managed these challenges, I believe we have navigated the situation well. Our significant franchisees have expressed satisfaction with the way everything unfolded and how the team addressed the issues. Nonetheless, these two factors did affect our membership levels compared to our expectations. Looking ahead, we now have the opportunity to prepare for the second half of the year, especially December leading into January, setting the stage for what should be a strong Q1.

Yes, I want to add that we observed an increase in joins in late June, partly due to the last-chance sale at $10. Additionally, the branding work we are currently undertaking is aimed to be launched by December, which will support our marketing efforts. Our objective is to ensure that this marketing initiative positively impacts our joins as we move into the crucial first quarter.

Our next question comes from Chris O'Cull from Stifel Financial Group.

Welcome, Colleen. I have a question about the ADA requirements. I know Tom at one point, the company had communicated that franchisees would need to open roughly 500 units, I think, between '23 and '25 to comply with the minimum specified in their ADAs. I'm just curious, could you give us an update on that? Or at least do you expect franchisees to still kind of meet that minimum ADA requirement?

Yes, Chris. There has been a change since our Investor Day in late '22 regarding the growth model. We have shifted from a unique approach involving cure periods for delays in ADA development to a more standardized practice. The main difference is the length of time allowed to address issues and the number of development opportunities it covers. Under the new model, all stores in the pipeline can have an extension of six months in the event of delays caused by factors outside the franchisees' control, such as permitting or landlord-related delays. This change impacts our timeline, but it is included in our projections. We maintain our forecast of 140 to 150 new stores this year. When we have our February call for Q4 and outline our expectations for 2025, we can provide further details about the pipeline for next year. While this represents a significant change, the ADA requirements themselves remain unchanged. It's primarily about adjusting the timing and the new mechanisms compared to our previous approach.

So it's kind of been pushed out six months, I guess. Is that the way to think about it?

Not comprehensively, but it could be for some stores.

Okay. I have one more question. I was hoping you could provide a bit more detail about the Black Card membership pricing test. What factors do you consider when deciding whether to implement a price increase for the Black Card? I'm trying to understand the key performance indicators you're evaluating to determine if it’s a good idea to proceed or not. Does it primarily come down to whether it affects the monthly membership fee, average monthly ticket, or dues, or are there other mechanisms or indicators you assess to make this decision?

Yes, it's a good question and somewhat unique to our business compared to typical multi-unit quick service restaurants, where traffic, transactions, and ticket size are the main metrics. In our case, we have to measure several factors, not just a single metric. For instance, we monitor the cancellation rate to see if customers sign up for the higher-priced Black Cards and then cancel sooner, which we want to avoid. We also consider the ratio of Black Card to classic card sign-ups at the time of joining, aiming for the majority to still choose the Black Card due to its value, despite the higher price. Additionally, we assess the effect on classic card sign-ups. Our goal is to increase the average unit volume as more members transition to the higher prices while ensuring this increase is sustainable. This means it should not solely rely on price increases but should also involve member growth. We strive for a good balance, prioritizing both member growth and rate growth. I liken it to focusing on quick gains rather than slow returns; we value volume and member growth as the sustainable way to expand the business. Historically, over 70 percent of our same-store sales growth has come from member growth. Therefore, we want our pricing tests to contribute positively in a sustainable manner. I hope that clarifies things.

Our next question comes from Rahul Krotthapalli with JPMorgan.

Colleen, good to meet you here. Can you discuss your philosophy on the marketing for the brand? I wanted to specifically dig on your comment regarding sharpening the $300 million spend given the importance of this for not only the gross adds but also improve the churn. Any preliminary thoughts or specific steps, or probably I shouldn't be calling low-hanging fruit but in that context, how do you also view the current 2-7 national-local structure split? And if you think this is optimal for the new growth model?

Certainly. Let me address a few points. First, regarding churn, I believe it reflects the overall member experience. That's why we are focused on enhancing the experience for our members, both within our clubs and beyond. When members perceive significant value at our affordable entry fee of $15 a month, it helps reduce churn. We believe that enhancing member experience will strengthen our relationship and ensure loyalty. Now, concerning marketing, we collaborate closely with our franchise partners and their marketing teams to develop a cohesive strategy. Our priority is to clarify our brand promise and positioning. This is not a major overhaul, but rather a refinement and modernization of our messaging to resonate effectively. We acknowledged in the previous earnings call that our Q1 marketing was not as successful as we anticipated, so we're focusing on refining our brand promise and ensuring effective execution in our marketing efforts. This will help generate the member growth we expect. There are also some initiatives planned for the clubs; while we're not ready to disclose specifics just yet, you can expect to see these changes emerging in late Q4 and early Q1, reflecting our brand evolution both in club experiences and marketing. Regarding the 2-7 split, the key point is our integrated approach with franchisees, ensuring alignment between national and local marketing efforts. We aim to provide franchisees access to effective marketing tools for local campaigns that bring our brand to life. This includes leveraging digital marketing, which is particularly important as Gen Z represents our fastest-growing membership segment. Ultimately, what's crucial about the 2-7 split is our integrated strategy that highlights our unique value proposition, setting Planet Fitness apart and appealing to a wide range of potential customers.

That's a great update, Colleen. I want to discuss the real estate aspect of the business, considering your background and the current challenges with retail space availability that we've observed in recent quarters. I'm interested in your perspective on the situation. There have been numerous bankruptcies and closures among retail brands. How do you envision leveraging Planet's scale to capitalize on these opportunities, as well as collaborating with franchise communities in real estate planning?

Thank you for your question, Rahul. I'm happy to address it. I mentioned some of this in my comments about Spain, and it's applicable to all our markets. In evaluating the sites we're considering in Spain, we considered factors like population density and growth. I won't reveal all the details of our approach, but I can confirm we have a strategy in place for opening new locations. Regarding retail space availability, we need to consider both the availability of space and the cost per square foot. The cost per square foot impacts the economics for our franchisees, which Tom has discussed extensively, so I won’t go into that again. We remain focused on unit economics, ensuring that even with recent increases in real estate prices, our economic model continues to be viable and can return to pre-COVID internal rates of return for our franchisees. Additionally, there have been several retail tenants with square footage similar to what we seek who have declared bankruptcy, presenting us with opportunities. It's also worth noting that throughout the pandemic, we did not have any clubs close permanently for financial reasons. For developers and landlords, looking at the bankruptcies of major and mid-sized retailers versus our uninterrupted operations gives us a competitive advantage when retail spaces become available. We have a strong opportunity to highlight the stability of our cash flows and the resilience of our business as we seek new retail spaces for clubs.

Our next question comes from Max Rakhlenko from TD Cowen.

Congrats, Colleen. So with the Black Card pilot now taking memberships to $30 in some markets, how are you thinking about the ceiling to where prices can go? Seemingly maybe tough to get above mid-30s in the construct of HVLP 1.0 box. So just, Colleen, if you can touch on a focus that you discussed earlier of having an unparalleled member experience, what can be done and what can be tweaked in a capital-light way to improve it which would allow for a bit more pricing power?

Yes. I think a couple of things. So we touched already a little bit on the mix of equipment. We're seeing a greater demand for space for strength. We still want our members to walk into a Planet Fitness and see that beautiful bright sea of equipment and know that they're not going to have to wait. At the same time, we are optimizing the mix. So HVLP maybe 2.0 is really what we should be talking about and how we are evolving the equipment mix for today's consumer. I will also say, we're continuing to look at low-cost amenities to continue to offer the greatest value, whether it be for a classic card member or a Black Card member. And I touched on this a little bit, and that is some of the amenities and the value proposition that we can bring to life through the app, adding value for our members, both in-the-gym experience or in-the-club experience and outside the four walls of the club. I often talk about my AAA membership. And my car comes with roadside assistance, but I don't cancel my AAA membership because even if I don't immediately need to tow, I know that I'm getting so many more amenities for that relationship. And I think leveraging our nearly 20 million member base, we saw one of our greatest participation rates with the perks program in June. I think there's an opportunity to continue to leverage our member base to bring additional offerings that add value for that membership. And as we think about Black Card pricing, we're also thinking about the Black Card experience and what we're delivering for our Black Card members.

That's very helpful. And then just a quick one, but can you provide an update to progress in rolling out the Media Network? If you could speak to the opportunity conceptually with where you are in the medium-term path? And then just how should we think about the revenue opportunity as well as margins because it has historically been quite a high-margin business for others?

Max, it's Tom. I would say we're still in the sussing-out stage on that one. I think we see it as a potential opportunity. We want to make sure we do it the right way. So I think we're not yet at a position where we're going to go full throttle on that nor sort of project what we think the impact could be. We think it's a nice opportunity to make to enhance the broader economic model, but we're still working our way through that one.

Great. Thanks a lot and best regards.

Thanks, Max.

Well, thank you for all the thoughtful questions and thank you for the warm welcome. I'm about 8 weeks in and continue to be just so excited about the opportunity to lead this brand as we enter our next chapter of growth. As you heard from us today, our team and I are very committed to further defining our growth ambition and to capitalizing on really meaningful opportunities across the industry, both in the U.S. and internationally. We'll maintain a clear-eyed focus on delivering an unparalleled member experience, evolving our brand messaging, and operating under the principle that we can enhance the economic value proposition for all stakeholders, from the franchisor to the franchisees, to ultimately deliver significant value for our shareholders. So, thank you for your time today.

The meeting has now concluded. You may now disconnect.