Earnings Call Transcript - PLNT Q1 2020

Operator, Operator

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness First Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. I would now like to turn the call over to your speaker today Brendon Frey. Thank you. Please go ahead, sir.

Brendon Frey, Moderator

Thank you for joining us today to discuss Planet Fitness's first quarter 2020 earnings results. On today’s call are Chris Rondeau, Chief Executive Officer; Dorvin Lively, President; and Tom Fitzgerald, Chief Financial Officer. Following the prepared remarks, we will open the call up for questions. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Planet Fitness's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our first quarter 2020 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events, or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today. With that, I’ll turn the call over to Chris Rondeau, Chief Executive Officer of Planet Fitness. Chris?

Chris Rondeau, CEO

Thank you, Brendon. And thank you everyone for joining us today. Before we dive into our Q1 results, I want to address the unprecedented COVID-19 situation. First and foremost, our thoughts are with the family members of those who have lost loved ones as a result of the pandemic, and health care providers, first responders, and essential workers on the frontline supporting our communities. COVID-19 has presented challenging realities for all businesses. On March 17, we have closed all of our 99 corporate stores, and encouraged our franchisees to do the same. By March 22, all of our more than 2,000 locations were closed. Throughout this evolving situation, we have been in constant communication with our franchisees and our team members, and have also worked to keep our members informed and engaged with our brand. Upon the closures of our stores in March, all members’ accounts were frozen, and we communicated to them that they would not be charged any fees while our stores are closed. This includes monthly membership dues and annual fees. As a leader in the industry, we and our franchisees believe it is critical that Planet Fitness put our members’ interests first and foremost. We believe this message has been extremely well received and may have also helped minimize cancellation requests. In fact, we did not see any material change in our member count due to cancellations in the second half of March during the initial closure period. Our corporate headquarters employees continued to work remotely to support the business and our franchisees during this time. Given stay-at-home orders are still in place in many states, new store developments and equipment placements are on hold at this time. Our teams and franchisees have been hard at work preparing for the reopening of our prospective stores, including developing a COVID-19 operational playbook to address things like enhanced sanitization policies, procedures, reduced contact between team members and members, physical distancing, and more. As of May 1, we began a thoughtful phased reopening approach and opened three stores, two in Georgia and one in Utah, in accordance with local official guidelines, with the safety of our teams and members as our top priority. We will continue to monitor these guidelines and reopen additional stores throughout the system and we believe we can safely do so. In these first few clubs we have reopened, we are executing our updated operational procedures outlined in our COVID-19 operations playbook. We believe this is an important first step and will allow us to obtain key learnings in advance of a broader reopening rollout. Now onto our Q1 results. 2020 got off to a strong start. Tom will go over it in more detail on how COVID-19 impacted our first quarter results, but I'm certainly pleased with our system-wide same-store sales increase of 9.8% on top of a 10.2% increase in the year-ago period. In total, we opened 39 new stores in the first three months of the year and ended the first quarter with 15.5 million members in 2,039 stores system-wide. To jump start 2020, Planet Fitness was the presenting sponsor of Times Square's iconic New Year's Eve Celebration once again, which continues to be a great opportunity for us to put the brand front and center on a global stage at a time when consumers are thinking about health and wellness in joining a gym. Our partnership with Biggest Loser also kicked off in January. This platform allowed us to reach captive viewers, who are interested in health and fitness and may be looking to make a lifestyle change and brand messaging that reinforces how Planet Fitness is different than traditional gyms. As part of our marketing mix in Q1, we leaned heavily into TV advertising, debuting new creative which we believe resonated with first timers and casual gym-goers. As I said, new member signups were strong in the first quarter. It was business as usual with both usage and new member signups right up until the stores started to close due to COVID-19 in mid-March. Based on the enhancements we've made in our marketing mix, messaging and creative in the strong new join trend in the first quarter leading up to the store closures in mid-March, we are confident that we have the right strategy in place for the future to continue to optimize overall effectiveness and results. In an effort to keep our members active and engaged with our brand while at home, we’ve accelerated our number of digital initiatives, including our United We Move marketing campaign. This includes daily live workouts on Facebook that are 20 minutes or less featuring Planet Fitness trainers and special celebrity guests, such as New England Patriots football player Julian Edelman; Biggest Loser trainer Erica Lugo; and famous actor and director Jerry O'Connell. From an engagement and brand perspective, these workouts have been extremely successful averaging more than 100,000 views per workout, and 4.5 billion media impressions. We've also encouraged people to download the Planet Fitness App for access to more than 500 exercises that can be done at home with minimal or no equipment. As a result, we're seeing a 173% increase in average daily workouts on our mobile app. Finally, last month, we announced a new partnership with iFit, a leader in streaming home workouts, and interactive connected fitness technology to further accelerate our digital offering. The first step in our collaboration was a series of new streaming workouts available to anyone exclusively on the Planet Fitness App to be used with minimal or no equipment. The workouts are available for free to both Planet Fitness members and non-members to span a broad range of fitness and wellness categories, including at-home cardio, at-home strength training, stretching, and more. We continue to explore possibilities for expanding our partnership with iFit in the future in order to deliver more value to our members. Looking ahead, our goal is to ensure that we emerge from the COVID-19 situation with the same-store count and member count we had when we began. I could not be more proud of the way our team members and franchisees have united to muscle through this together and support one another during this time. Our current focus is on creating and maintaining a healthy, safe environment inside our stores for our teams and our members for when they reopen. Examples of a few steps we've taken to ensure this include providing personal protective equipment for all employees, increasing cleaning stations throughout our stores, enabling members to use our cardio equipment while adhering to physical distancing guidelines, touchless checking for members via our mobile app, and more. These are difficult times for everyone and the impact of COVID-19 on our industry and overall economy is still unclear at this point. However, based on several factors, such as the strength of the Planet Fitness brand, our differentiated business model, our attractive price points, a welcoming non-intimidating store environment, our great group of employees and franchisees, and an increased focus on the importance of health and wellness, I'm confident we will emerge from this period well-positioned to further expand our leadership role in the fitness industry. I'll now turn the call over to Dorvin.

Dorvin Lively, President

Thanks, Chris. As Chris said, we continue to be optimistic about the future of Planet Fitness for several reasons, one of the biggest being the overall strength of our franchise system and our size and scale advantage versus our competition. Our system is comprised of approximately 130 franchise groups, which compares with approximately 190 at the time of the IPO, as there has been some consolidation over the past five years. Today, the average franchisee owns approximately 15 stores, with our largest owning 169 stores or approximately 8% of the store base. Of our 130 groups, 13 are majority owned by private equity and represent some of our largest operators. All-in-all, we have a very experienced group of seasoned operators that have been operating the Planet Fitness brand for many years. While franchise stores average EBITDA margin percentages have historically been in the high 30% range on an adjusted four-wall EBITDA basis, most franchisees have been reinvesting significant cash flows back into the business, growing their store fleet, replacing equipment, and remodeling older locations. In the past few years, we've had many franchisees either sell their business to another franchisee or, as I mentioned, take significant investments from private equity. In the past, some of these private equity firms have indicated to us that they are seeing higher returns on their investment in the Planet Fitness brand than in many of their former or existing portfolio companies and have significant runway to build out more Planet Fitness stores. In fact, several of these private equity firms have indicated to us recently that they remain extremely interested in further investment in our brand. When it comes to the capital structure of our franchisees and their balance sheets, it varies. Some of these businesses have put on leverage in recent times, while others have focused on increasing their financial flexibility and sustainability. Regardless of their financial condition, all of our franchisees are dealing with the same challenges as other businesses that have had to close due to COVID-19. With no revenue and related cash flows, they have taken actions to reduce their cash burn until the stores can start to reopen. In general, we're hearing that franchisees are having productive discussions with their landlords about different forms of rent relief. We know many of our groups were also successful in accessing government assistance through the SBA Payroll Protection Program to help cover their day-to-day expenses. Some are choosing to continue to pay a portion of their workforce, while others have temporarily furloughed many of their employees. At the same time, we are providing flexibility on replacement equipment and store remodel requirements, and will continue to do so over the near term, as we deem necessary. Finally, we're working closely with our entire system to prepare for when stores are able to reopen, to ensure we provide a safe environment for our staff, team members, and our members. In terms of development, as the overall economy went into shutdown mode, this has had a significant impact on both existing and near-term construction projects, as well as the overall real estate pipeline activities. As states and communities reopen and our conversations with franchisees continue, we'll be in a better position to evaluate what system-wide new store openings in 2020 will look like. While we're not providing guidance at this time, due to the high degree of uncertainty created by COVID-19, we anticipate that expansion will ramp slowly once we emerge from this crisis. It's within the realm of possibility that our equipment placements and our replacement equipment sales could be down 50% or more from our record high in 2019. This headwind could linger into 2021 as well. This is not a reflection of any change in our market opportunity; rather, it is based on the uncertainty of how the economy will reopen, combined with the fact that franchisees are focused on preserving liquidity in the near term. That said, we believe the impact from COVID-19 on the real estate industry will provide a more favorable real estate environment for the Planet system over the long term, as we continue to build out toward 4,000 locations in the U.S. With that, I'll turn it over to Tom, who will review the Q1 financials.

Tom Fitzgerald, CFO

Thanks Dorvin and good afternoon everyone. For the first quarter, total revenue was $127.2 million, compared to $148.8 million in the prior year period. As you've heard, COVID-19 significantly disrupted our business starting in the middle of March. I'll walk through how the shutdown impacted our overall first quarter results and then provide color by segment. The biggest impact on our Q1 top and bottom line was the deferral of revenue related to monthly membership dues collected in March, before stores closed due to COVID-19. As previously announced, members will be credited for any membership dues paid for periods when our stores were closed. We expect to recognize franchise revenue and corporate-owned store revenue associated with those membership dues that were drafted in March once stores reopen. In addition, due to the outbreak of COVID-19, we were unable to move forward with planned new and replacement equipment sales over the last few weeks of March. Let me summarize the impacts to our top line results due to COVID-19, which caused total revenues to be down $35.4 million due to the following three drivers. First, there was a $20 million deferral of revenue related to monthly membership dues collected in March before stores closed. That's made up of $14.1 million from franchise royalty and $5.9 million from corporate-owned stores monthly dues. Second, $4.6 million of NAF contributions were deferred; and lastly in the equipment segment, new and replacement equipment sales were reduced by $10 million, and equipment placement revenues were $0.8 million lower in the franchise segments. Now with that as context, we're very pleased that first quarter same-store sales increased 9.8%. From a segment perspective, franchise same-store sales increased 10.0% and our corporate same-store sales increased 7.3%. Approximately three quarters of our Q1 comp increase was driven by net member growth, with the balance being rate growth. The rate growth was driven by a 26 basis point increase in our black card penetration to 60.9%, compared with the prior year period, combined with higher black card pricing for new joints. The rate growth was mostly driven by black card pricing increases over the past two years. The impact from black card pricing drove approximately 210 basis points of the increase in system-wide same-store sales. Note that when stores are closed and don't draft monthly membership fees or don't execute a full draft upon opening, they are not included in the comp base and therefore are not included in the same-store sales calculation for that month. There was a total of 164 stores that were closed prior to March 17, and therefore did not draft. Of the 164, 139 would have been in the comp base, including 130 franchise and 9 corporate stores. Due to their closure, they were excluded from the same-store sales calculation for the month of March. Moving on to a review of our segments revenue results, franchise segment revenue was $58.5 million, compared to $65.8 million in the prior year period. Now, let me break down the drivers for the quarter. Royalty revenue, which consists of royalties on monthly membership dues and annual membership fees, was $40.6 million, compared to $44.7 million in the same quarter of last year. The $40.6 million of revenue excludes $14.1 million of deferred revenue from stores that closed after the March draft as a result of COVID-19. The average royalty rate for the first quarter was 6.3%, up from 5.9% in the same period last year, driven by more stores at higher royalty rates compared to the same period last year. Next, our franchise and other fees were $6.2 million, compared to $5.4 million in the prior year period. These are fees received from online new member signups, the recognition of fees paid to us for franchise agreements, area development agreements, and the transfer of existing stores and fees received from processing dues through our point-of-sale system. The increase was primarily driven by higher web join fees, due to higher web join acquisition percentage of total joints and higher join volume compared to the same period last year. Also within the franchise revenue segment, our placement revenue was $2.0 million in the first quarter compared to $2.8 million a year ago. These are fees we received for the assembly and placement of equipment sales to our franchisee-owned stores within the U.S. The decrease reflects the lower new store placements we executed in the quarter compared with a year ago due to a challenging year-over-year comparison and our inability to place equipment late in the quarter due to COVID-19. I'll further discuss the number of new equipment placements later in my script when I discuss equipment revenues. Finally, national advertising fund revenue was $9.2 million, compared to $11.8 million last year. The NAF revenue in the current quarter does not include $4.6 million of deferred NAF revenue that was collected, but not recognized related to COVID-19. Our corporate-owned stores segment revenue increased 6.5% to $40.5 million from $38 million in the prior year period. The $2.5 million increase was due to higher revenue of $5.5 million from corporate-owned stores opened or acquired since the end of the first quarter of last year, partially offset by lower revenue of $3 million from stores included in the same-store sales base, but whose monthly membership dues were deferred for the month of March. The $40.5 million of revenue for the quarter excludes a total of $5.9 million of deferred revenue from stores closed after the March draft due to COVID-19. Turning to our equipment segment, revenue decreased by $16.8 million or 37.4% to $28.2 million from $45 million. The decrease was primarily due to lower new store equipment sales, as well as lower replacement equipment sales to existing franchisee-owned stores. Now, as we discussed on our fourth quarter call in February, we were up against a record high number of new store placements in the first quarter of last year and expected this figure to be down year-over-year. In addition to the challenging comparison, the decrease reflects approximately $10 million of lower revenue from new and replacement sales due to COVID-19. In the first quarter, we had 30 new store equipment placements, including one international, which was down 24 from the prior year period, and 10 below our expectations due to the COVID-19 impact. Our cost of revenue, which primarily relates to the direct cost of equipment sales to new and existing franchisee-owned stores, amounted to $21.8 million, compared to $34.5 million a year ago, a 36.7% decrease and in line with the revenue decrease I previously mentioned. Store operation expenses, which are associated with our corporate-owned stores increased to $26.2 million, compared to $20.9 million a year ago. The increase was primarily driven by costs associated with the seven new stores opened and 16 stores acquired since the end of the first quarter of last year. SG&A for the quarter was $17 million, compared to $18.2 million a year ago. The decrease was driven primarily by reductions in variable and equity compensation related to COVID-19. National advertising fund expense was $15.2 million. The difference between NAF expenses and NAF revenue this quarter primarily reflects the deferral of the NAF revenue associated with the March draft. Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation, and amortization adjusted for the impact of certain non-cash and other items that are not considered in the evaluation of ongoing operating performance was $46.5 million, compared to $63.4 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. The overall impact from COVID-19 due to the deferral of revenue discussed previously, on our first quarter adjusted EBITDA was approximately $24.6 million. Additionally, as previously mentioned, there was a $10 million decrease in equipment sales, which would equate to a $2.5 million decrease in adjusted EBITDA. Adjusted net income was $14.4 million down $18.3 million from a year ago, and adjusted net income per diluted share was $0.16, a decrease of $0.19. The declines reflect the $24.6 million impact to adjusted EBITDA due to the deferral of revenue discussed previously, which equates to $18 million of adjusted net income and $0.21 of adjusted net income per share. Our adjusted net income and EPS in the first quarter also includes the $10 million of reduced equipment sales due to the impact of COVID-19. Now turning to the balance sheet. As of March 31, 2020, we had cash and cash equivalents of $547.5 million, compared to $436.3 million on December 31, 2019. The increase in cash and cash equivalents since the end of 2019 was driven by free cash flow generated in the first quarter of approximately $64.1 million combined with the $75 million we drew down on the variable funding notes during quarter one. Based on the current situation and our focus on preserving liquidity, we announced in March that we were halting our share repurchase activity for the time being. Additionally, we took additional measures to reduce our monthly cash burn, including the previously announced compensation reductions for our leadership team and our board of directors. Total long-term debt excluding deferred financing costs was $1.81 billion as of March 31, 2020, consisting of our three tranches of debt, and $75 million related to the fully drawn on our variable funding notes in March of 2020 to preserve liquidity and flexibility. Our WBS debt structure is covenanted. We have two maintenance covenants, a debt service coverage ratio and a total system-wide sales threshold. These are both tested at the end of every quarter and calculated on a trailing 12-month basis. In our most recent debt covenant reporting period of March 5, 2020, our debt service coverage ratio stood at 4.16 times, and total system-wide sales was $3.25 billion. Both of these levels are well above a potential triggering event. For the DSCR, the first trigger would occur when that ratio falls below 1.75 times, at which point 50% of our cash inflows would be automatically trapped to service the principal and interest. For our other maintenance covenant, the trigger occurs when total system-wide sales on a trailing 12-month basis falls below $1.25 billion. If this were to happen, rapid amortization would only kick in if it was declared by the controlled party. At the end of the first quarter, we had a cushion of approximately 50% and 60% to those thresholds for our DSCR and system-wide sales maintenance covenants, respectively. Finally, we would only be at risk of tripping the rapid amortization DSCR covenant if our stores remain closed throughout the end of the year, and again, the controlled party would have to declare rapid amortization as it does not trigger automatically. Similar to our liquidity position, we believe we have sufficient headroom for our two maintenance covenants. Now as Dorvin alluded to with respect to guidance based on the significant near-term disruption to our business caused by COVID-19 and uncertainty around when conditions will normalize, we're not providing an updated financial outlook at this time. While these are undoubtedly the most difficult operating conditions the company has ever faced, we feel very good about our ability to weather the storm and our confidence that Planet Fitness will be able to resume its long track record of delivering growth and increased profitability. I'll now turn the call back to the operator for questions.

Randy Konik, Analyst

Yes, thanks a lot, and good afternoon, everybody. I guess my first question I wanted to ask of Chris. Chris, you know, you've been a lifelong participant in the industry, and you're starting to see more and more news around bankruptcies. Can you give us your perspective on, you know, what this movie looks like right now compared to other movies in the industry in the past, and talk about, you know, the market share opportunities that are afforded from that, based on your perspective? Thanks.

Chris Rondeau, CEO

Sure. Thanks, Randy. This is Chris. Yes, and I think, you know, the silver lining, I think in all of this is that it's definitely going to probably accelerate a lot of the, I guess, longevity of a lot of our competition that we've been talking about for a few years now. And I think with the strength of our model and profitability of our model compared to others, and in the recent Gold's Gym bankruptcy and closing of their 30 stores and what you hear about 24 Hour Fitness and others, I think it's, unfortunately it’s a lot of what they've been known for, and a lot of what, you know, we've been known for being the opposite of them, is really catered to that casual first timer, keeping up on CapEx, which is a big one, Randy. I mean, our stores are always fresh, they're always new. We're not, build it once and let it sit until it lives a slow death. So, I think this is definitely accelerating. The timing I would have probably taken if these pandemic didn't happen, so I guess that's a silver lining here. And honestly, I do think that when situations like this arise, people will have some renewed appreciation for the importance of being healthy. This longer-term will help the industry, but you've got to weather the storm to get through it. So, I think we're in a good spot and I think you're right, this will pave the way to widen our moat even more so than it already is, and I'm excited to get back to work here.

Randy Konik, Analyst

Helpful, and then, I think a follow-up, you mentioned that, I believe some of the clubs have started to open a little bit here. In the first few that have opened, you know, any particular learnings about what you're seeing from the members or the club operators? And then related to that, when you have your, I think you have a franchisee council, what are the topics that are being discussed the most in the franchisee council right now, and kind of, how are you using that kind of position? You know, the opening plans and other things to the business going forward?

Chris Rondeau, CEO

Sure, yes, great question. So, the openings have been, you know, just three clubs right now. We have two in Georgia and one in Utah. It's only been a few days. So, the 1st of May we opened those. And as I mentioned in my opening remarks, we have about a 100-page COVID-19 operations list of all the protocols and policies we put in place for members and staff and cleaning procedures. So, we're using these three clubs to make sure we have all our T’s crossed and I’s dotted before we roll out to the broader system, which right now we're planning about 150 stores to open pre-May 13, to May 15. It's early, again since it's only four days, but I'd say, you know, so far, really pleased with the joining momentum early on. I think there was a little bit of pent-up demand; cancellations aren't really anything surprising. We're out of whack there, which would be great; usage is a bit slower. I think on a CEO roundtable of about seven gym chains around the world, one in particular who's ahead of us in this whole pandemic, he's been open now seven weeks with about 170 stores. A lot of what he is seeing is a pent-up demand; his joins are ahead of last year, his cancellations are on par with last year. So, definitely a pent-up demand and the member usage, which is a little bit different, is slow out of the gate in the several weeks in. Now they're about 80% of last year's member usage. But I think the demand is the most encouraging and exciting thing for me, which back to what I just said a minute ago is, I think there is a renewed interest in exercise and being healthier, and I honestly see it, Randy, in my own neighborhood. I mean, the people you see walking around, I never had neighbors until this all happened. So, I think people are just paying more attention to that. The other question was on the franchisee council, the big one there, Randy, and Dorvin, feel free to jump in here. The big one there really is the opening procedures manual. We use our franchisee committees to help design that 100-page document, and the big one is they all want to – they're excited to get open and grow. It's more or less getting through the storm and how they want to stay, you know, on the right side of their ADA schedules and re-equip schedules and stuff, but is there any concessions that we can make to give them some leeway, so they're not having to, you know, re-equip right now when they're not even open? So, it’s generally around that, and giving them some rope here so they can go and get their feet under them, start drafting again and build up their revenue.

Randy Konik, Analyst

Really helpful. Sounds like great partnership with the members and your franchisee partners. So, that's really great. So, thanks a lot, and I'll move on.

John Heinbockel, Analyst

Hi, Chris. Two things: how you sort of plan to communicate with members to get them comfortable to come back in once that particular gym opens? And then remind us of two things, your demographics, which I think skew younger one; and then two, kind of usage even at peak times. That would seem to not be an issue, right? Your clubs are not overwhelmed with members, and they're not staying for more than probably 45 minutes. Touch on those, please.

Chris Rondeau, CEO

Sure. So, just like we communicated when we closed down, we communicated that they weren't going to be billed for the time we weren't open. So, now it's similar communication for, you know, when the club plans to reopen, what the billing process looks like, as Tom had mentioned in his opening remarks, how we – some members were billed, and then we closed shortly after because of the government regulations. So, we owe them credit. So, how that credit gets applied to their opening time. So, it’s a lot of that communication on top of what they can expect when they see and when they walk in to the gyms will definitely be different that first opening compared to when they – what they saw when we closed. There will be more cleaning, more sanitization stations than we had before, which we've always had for decades, which is not all that common unfortunately in the gym world, but we've always had more of those. We will have more signage reiterating our already existing cleaning policies and procedures where, you know, our stores, our members are cleaning as much as our staff is. I mean, it’s, you know, before and after they use a bench, they are cleaning, you know, the treadmill or their workout apparatus that they're on. So, reiterating all of that, a lot of that self-checking in a way; we're now forcing app downloads using the barcode there. There is no more the staff taking the person's keys or key type from their hand, and giving it back to them or their phone. They will actually check themselves in on the way they go in. So, those are some of the things we will be expressing to the members. On the age thing you're right. Yes, we have, you know, 15 million members, but 50% are millennials, and a big part of that is Gen Z. I think the other thing on the usage is a big one there is that, as we've always said, we have about 5,000 workers in the store, about two-thirds of those are Monday through Wednesday. The majority of those are evenings, call between 4 and 7. So, if you do 1,500 workouts on a Monday, that same club on a Friday is doing 700 and on a weekend that's doing 300 or 400 a day. On 1,500 visits, you know, they're probably doing 500, 600 of those between 5 and 7 or 4 and 8. So, it's really connected to the evenings. Really quick to that one, though, John, is interesting with work from home and those three recent clubs that are open, the 9 o'clock in the morning and 3 in the afternoon hours are busier than I've seen. So, I think people are not having to come in, you know, the crack of dawn before work, and they're not coming in afterwards, they are just using the gyms throughout the day. Any stipulations on opening, which these first three clubs there is where you can't have more than 150 people in a club at one time. Technically, even a Monday night for one hour is not that bad. Even in January, that wouldn’t be that bad. So, this time of the year on a Monday night is not that bad but 150 now with this spread, their usage out throughout the day is even better for us.

John Heinbockel, Analyst

And then lastly, maybe just the mechanics of the deferred revenue, right. So, it sounds like that will get realized when each of those clubs opens. So, a lot of that would be like you said, will be spread over 2Q and 3Q, is that fair?

Tom Fitzgerald, CFO

Hi, John, it's Tom. It really depends on when the club reopens. The vast majority, as Chris said, and we said in the opening, drafted and then based on the advice of the authorities, the gyms closed. That's the – I think there were 165 clubs who actually closed before the draft. So, it just depends on when those clubs open up and the members essentially burn off what is essentially a 30-day credit in most cases.

Joe Altobello, Analyst

Thanks. Hi guys, good afternoon. So, first question I want to go back to the notion of communicating with your members. I'm curious if you guys have done any surveys among your members, how to gauge how readily and how quickly they intend to return to the gym? I think Equinox did something like that. I'm curious if you guys have any sense for: A, once the store opens, how quickly they come into the gym; and b, how long it might take to build back up to normal volume?

Chris Rondeau, CEO

Yes, we've done some. We did one where we're saying that compared to even our peers, we’re looking to, you know, resume their memberships and continue the memberships. Some were unanswered, and we were skewed higher than our competitors. In terms of cancellations, how many want to discontinue after we opened? Our competitors were at about 6% wanting to discontinue, we were only at about 3%. So that was helpful. As far as working out, I want to get back and trying to think if I had anything that was pointed that part out exactly, I don't believe so. Yes, hard to really say but it really determines how fast we can fill the pipeline with real estate and get that opening flywheel moving again.

Tom Fitzgerald, CFO

I think Joe, the only thing I'd add to that is, you know, in my remarks a while ago, I said that, obviously, with the shutdown across the country, you know, all the way down to, you know, construction crews generally had to shut down as well. And then the working of the pipeline, you know, in essence came to a halt because no one knew when and how and how long it would take etcetera. So – and I indicated that, you know, we would expect total units to be down this year over, you know, our high last year, and that could even go into next year, just because you got to get the pipeline back up and going again. A couple of things, I guess, I would say is one, you know, we obviously still don't know, so we're in that time period as to you know, how the country will reopen and exactly what they will look like. I think a little bit to maybe, I think it might have been in Randy's question earlier that Chris answered in terms of competition. I think that not only from a competitor perspective but the whole retail landscape is going to look a lot different coming out of this as well. I just think there's going to be a whole repositioning in the retail world and I think that also then provides, you know, opportunities, you know, in the near to even longer-term. So, we've always said we believe, and had a lot of confidence in that 4,000. Obviously, that's still, you know, even pre-COVID was still a few years down the road. I don't see this impacting that, but at the same time, you know, we've got to see what may be the new normal will look like, but we expect to take advantage of that size and scale. You know, in terms of our base of members, our sophisticated franchisees, and the ability to, you know, continue to grow this brand.

Joe Altobello, Analyst

Great, thank you, guys.

Peter Keith, Analyst

Hi. Thank you. Good afternoon. Wanted to just get a little more detail on the reopening, Chris, you made some interesting comments on CNBC, around maybe unplugging half the cardio machines. To go back to some of the earlier questions around gym capacity, are you ever at a point where your gyms are well over 50% capacity? I think there's some concern that members might have issues with gym crowding and on the other hand, maybe you never really faced that issue, so could you help clarify those comments?

Chris Rondeau, CEO

Sure, yes. So, you know, we have about 120 or so pieces of cardiovascular equipment in the clubs. And as we have three clubs open now, if there is social distancing mandated by that area, we're doing every other piece of cardio, unplugged, and then signage so that people are spaced out. So, for the 120 pieces of cardio, you will have 60 pieces usable. If it was a Monday night in January, you know, kind of a good way it's opening here in May and June, so things generally get quieter in the gym world. And then back to what I mentioned with John Heinbockel, with the question, people coming in here with the work from home people coming in mid-day, which is not something you generally see a lot of, so luckily it will spread that out quite a bit for us. So, I don't really see an issue. One, time of the year. Two, people are spacing out their workouts. The third piece is the user data about 50% of our members don't use the club in a 30-day period either. I've always heard that you get people who want to go where the crowds can't get in, and they just come a different day of the week and spread that usage out.

Peter Keith, Analyst

Okay, that's interesting. And then one other question I want to ask was around franchisee concessions. Maybe there were some implied comments in there with regards to equipment replacement, but are there any concessions that you are looking at right now for that reopening process, maybe with ad spending? Curious if you could help us frame up some of the possibilities we might see unfold over the coming months or quarters.

Dorvin Lively, President

Yes, I mean, this is Dorvin, Peter. You know, one of the things that Chris said earlier, I think in his remarks, maybe Tom even referred to it, but I think the franchisees obviously are most interested in getting the stores open. And, you know, that's not the highest priority to come out and try to re-equip clubs here. All clubs are down or plan on it, and you know, maybe in July or August when we don't know what clubs are open, etc. So, one of the things that we want to make sure, because obviously our biggest asset, our franchisees out there, is to in essence kind of take that worry off of their plate in terms of being in default of their franchise agreements for not being in compliance with that. And so what we've done is, we have communicated to our franchisee base that we would push out all re-equips as well as all new store requirements under the development schedules. Just push everything out a year. What that does is a couple things. Number one is, it allows them to focus on their business, focus on getting ready to open the clubs back up, focus on taking care of the members, and making sure that we're ready for that. And then, not have that issue of losing their territory because quite frankly, that's, you know, the pipeline is a huge asset that they have. So, we wanted to do that to provide them kind of that level of comfort. So, that's number one. The second thing that we've done is to make sure that we're there to help support them in ways that they need to, and you know, but on the flip side of that is, you know, you've heard Chris say that we're as much of an advertising company as anything else. So, you know, we're – we still have the same requirements in terms of the local marketing spend, etc. Because we want to get these calls back open.

Tom Fitzgerald, CFO

Yes, and we may have mentioned this before, but our development team led by Ray Miolla has worked with the franchise groups to really share his team’s best practices on how to really have productive conversations with landlords about abatements and deferrals. I’d say, as Dorvin touched on earlier, for the most part, those have been very fruitful conversations. The majority of landlords are giving deferrals and very few abatements, but deferrals on rent while the stores are closed. And so, if that's for a month or two months, that rent that was foregone would get added on to the subsequent six or nine months depending on the situation.

Dorvin Lively, President

And I'd say that the final thing is we've tried to help as we think about to Chris's point, our leadership position in cleanliness and sanitization and taking that to another level given the situation and people's expectations. We are investing on behalf of the franchisees to secure difficult products and tools to secure so we can elevate our ability to enhance our sanitization capabilities at the store level. So, we're essentially buying that inventory in advance, so we ensure we could secure it. And then as they order it and get it in their clubs, they'll pay it off. So that helps with their liquidity. So, I'd say, you know, a combination of things that we think in some franchisees are based on calls we have with them every week, I think are appreciative and understand that we're all in this together and all looking to come out stronger, both in terms of how we've treated the customer from a billing standpoint, how we're going to run the clubs going forward, and really continue to widen the moat that we have competitively.

Peter Keith, Analyst

Okay, thank you. That's very helpful feedback and good luck in the coming months with the reopening.

Oliver Chen, Analyst

Hi, thank you, everybody. Dorvin, on your comments you mentioned, equipment replacement sales could be down as much as 50% or more. What does that imply roughly for how you are thinking about what might be possible? Or generally with net openings and some things that you are looking at as there are a lot of unknowns in the environment? And then the second question was around churn and thinking about managing churn amidst the crisis, and in relation to marketing or strategies that are underway as you monitor that and I'm sure the nature of marketing spend is quite different with what's been happening? Thank you.

Dorvin Lively, President

You know, we whipped through our guidance back earlier this year and as Tom said a few months ago, we're not providing guidance over the balance of the year, but in terms of kind of that balance of the year or full-year rather development of new store openings, as well as replacement equipment. I made the comment in my remarks that, you know, it could likely be down 50% or more over what it was last year. As a result of the fact that, you know, stores are closed now, except for the three stores that Chris mentioned earlier that have opened with the uncertainty of when those stores would open back up and then ultimately, you know, kind of regenerate the pipeline, you know, for new sales down the road. And what we said then, the comment I made just a couple minutes ago was to be able to, you know, give the franchisees some, you know, confidence that we were not going to step in, and require them to be putting replacement equipment in and, you know, here in May or June or July or August or something when we're still trying to get clubs open, that's not the highest priority on our list and we didn't want it to be the highest priority on their list.

Chris Rondeau, CEO

Yes, I think one thing is, you know, the unknown is, will it create some retention benefit? As I mentioned, 50% of our members don't use the gym. We don't know if they are using our content; maybe they'll keep the membership longer.

Dorvin Lively, President

Yes, and to Chris’s point, I think that's really important for us to be able to say that not only have we been a compounding company, but we really, you know, we’re plumbing the depths of analytics to really understand that we will build a stronger base if we can couple it with that digital content here in the pandemic.

Sharon Zackfia, Analyst

Hi, good afternoon. I wanted to follow up on the digital dynamic, because obviously, it's important to keep your members engaged, but it's also pretty intriguing how many non-members you've been able to attract via the different classes you've been offering. So, can you talk about, and I don't know if you have this data, but is there any demographic difference at all between what you're seeing in terms of engagement online versus people who come into the club? Any evidence that this is widening the aperture for Planet, and then how do you follow up once clubs start to reopen and trying to engage these folks to move from the digital realm into the club?

Chris Rondeau, CEO

Yes, Facebook Live is high, we don't really know, you know, who those members are or non-members are; unfortunately, there were 100,000 a night. One thing that will be interesting with our app is a lot of the content that we have on it now is all free. Members or nonmembers, if you can download the app, you get access to it. We don't have the data yet, but we're going to work on where we'll be able to report on people who have the app, who is actually a member and who's actually just utilizing the content for free. And then within that messaging, which is launching, you know, as we speak today that we'll be able to then message to them separately. So, it could create a second marketing avenue for us to use to kind of introduce our brand to a non-member and give them a taste of what we're like, so that hopefully we can market to them to get them to come in.

Linda Bolton-Weiser, Analyst

Hi, actually, my question has been asked and answered. Thank you very much.

Chris Rondeau, CEO

Great. Well, thank you everybody for attending the call today for our first quarter release, under pretty different times for all of us. Still happy to see the business and franchisees, you know, excited about getting these things open, excited about the future. I really think that this silver lining in all of this will, as I mentioned, widen our moat longer term and being the trusted source for wellness for our members in the future, and non-members that we don't have just yet. So, look forward to our second quarter call and give you an update at that time. Thank you.