Earnings Call Transcript
Planet Fitness, Inc. (PLNT)
Earnings Call Transcript - PLNT Q1 2023
Operator, Operator
Ladies and gentlemen, welcome to the Planet Fitness Q1 Quarterly Earnings Call. My name is Grant, and I will be the operator for today's call. I will now hand you over to your host, Stacey Caravella to begin. Stacey, please go ahead.
Stacey Caravella, Host
Thank you, operator, and good morning, everyone. Speaking on today's call will be Planet Fitness Chief Executive Officer, Chris Rondeau; and Chief Financial Officer, Tom Fitzgerald. Also joining us is Edward Hymes, President and Chief Operating Officer. They will all be available for questions during the Q&A session following the prepared remarks. Today's call is being webcast live and recorded for replay. Before I turn the call over to Chris, I'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the call. Our release can be found on our website, investor.planetfitness.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now, I'll turn the call over to Chris.
Chris Rondeau, CEO
Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q1 earnings call. We have a strong start to 2023 as we capitalize on the tailwinds behind the consumer focus on overall health and wellness. We believe we continue to be well-positioned to deliver disruptive growth with our high-quality affordable fitness experience. I'm going to cover two topics today. First, Q1's member growth and the resiliency of our model in an inflationary or possibly recessionary environment; and then I'll discuss our system's continued recovery from the impacts of the COVID-19 pandemic and how it supports our long-term growth opportunity. Let me address our Q1 membership growth. Our strong momentum from the end of 2022 continued into the first quarter, driving membership to more than 18.1 million, a net increase of more than 1.1 million members. This Q1 was the first time in four years that the all-important first quarter of membership growth was not interrupted by COVID. We kicked off the year with our big fitness energy campaign that addresses the post-workout positive feeling. It featured our Low E Ads that continue to generate great consumer buzz. Prior to COVID, membership growth was the primary driver of our 53 straight quarters of positive same-store sales growth. In Q1, member growth continued to be the primary driver of the 9.9% system-wide same-store sales growth. Our membership growth demonstrates that our high-quality affordable fitness experience resonates now more than ever as Americans are seeing value and feeling the rising cost of everyday items while they continue to prioritize their health and wellness. Historically, we've seen that our model is resistant to inflationary and recessionary pressures. It is proving to be true again in this current environment, validated by three key trends. The first trend is our diverse member growth. During the quarter, all age generations surpassed their pre-pandemic population penetration levels. Our strong value in a judgment-free, non-intimidating atmosphere also continues to drive people off the couch in Q1, as 40% of our new joins were first-time gym members. The second important trend is our rejoin rate. In Q1, about 30% of our new joins were previous members compared to about 20% in 2019. We believe this is a really good sign to have former members rejoining faster than they have historically, despite inflationary pressures causing their income to not go as far. The third is our cancel rate, which again indexed below the prior year's rate in the first quarter. This marked the seventh straight quarter of year-over-year cancel rate improvement. We're also seeing that our members are more committed to fitness than they were pre-pandemic, with higher overall visits per member as all age groups are visiting more frequently than 2019. This is a good sign since nonuse is the number one reason why members cancel, so more usage should continue to bode well for our cancel rate. Now to our continued recovery post-COVID and our long-term growth opportunity. We continue to see consistent momentum towards full recovery the longer our stores have been opened since the temporary COVID closures. At the end of Q1, more than 50% of our US stores that opened before 2019 are back to or above pre-pandemic membership levels. Additionally, almost 60% are at or above their pre-COVID revenue per store, partly as a result of the price increases that we made last year. Pre-pandemic, 50% of our full-year net membership gains happened in the first quarter. So an uninterrupted Q1 was huge for the entire system, especially for those stores that opened during the past four years. They had yet to feel the benefit from what has historically been the highest net membership growth quarter. Most of the Black Card members of stores that opened this year and last year are paying a new Black Card price and the increased annual fee, helping to further boost new store profitability. Our growth is fueled by the strength of our collective marketing efforts with our franchisees. We invested more than $0.25 billion last year to go after the 80% of Americans who do not currently belong to a gym. Our significant marketing spend enables us to attract someone at the right time when they are ready to start their health and wellness journey. More member growth means more dollars towards advertising funds. It's this flywheel that keeps us well ahead of our competitors, with our membership more than eight times greater than the next largest US high-value low-price brand, and we have greater than 50% more stores than our next 17 low-price US competitors combined. Our app and broader digital platform are real differentiators versus the competition as well. To drive even more value to our members, we are leveraging our size and diversity of our member base to partner with our major brands like Shell, Verizon, Sam's Club, Chewy.com, and Puma on purchase discounts. In March, the average redemption savings through the purchase program was more than $10, exceeding the cost of our monthly classic card membership. And while it's a small percent of our members today who engage with our perks offers, we will continue to partner with brands to offer more and better discounts to benefit more of our members. Our confidence in our 4,000-plus long-term store growth opportunity is strengthened by our system's recovery and our historical ability to achieve a greater penetration of each successive generation. We understand that fitness can be intimidating and we continue to be hyper-focused on breaking down the barriers of all ages. We want to be the fitness brand people think of first when they are ready to start their wellness journey, regardless of their age. Generational trends are also fueling the confidence about the future. Gen Zs and Millennials continue to lead our joins, with over 9% of each group now a member of Planet Fitness. And that's with the Gen Zs who are over the age of 15. We will continue to have Gen Zs age into our prospects member pool with Gen Alphas only a few years behind. To further strengthen our brand's appeal with Gen Zs, earlier this week, we announced the return of our high school summer pass program. We are excited to be able to run this program for the second consecutive year. It's largely similar to last year's program, including the seamless online registration process. We had more than 3.5 million team participants in the high school summer pass last year, along with 2.3 million parents and guardians that signed them up. At the end of the first quarter, more than 600,000 teens and their parents or guardians had joined as paying members for a conversion rate of greater than 10%. We continue to outpace our 2019 conversion rate, the last time we ran a similar program. Finally, we recently republished our 2022 environmental social and governance report, which demonstrates how we are delivering our purpose to create a more judgment-free planet where health and wellness is within reach of all. Looking to the future, I am confident that we will continue to be a differentiated and disruptive force in the health and wellness industry, as we have been for over 30 years. We believe that affordable fitness is essential, especially today as research continues to show the other benefits of working out to overall health and wellness besides weight loss. Our purpose of enhancing people's lives and creating a healthier world sets us, our franchisees, and our shareholders up for long-term success. I'll now turn the call over to Tom.
Tom Fitzgerald, CFO
Thanks, Chris, and good morning, everyone. In the first quarter, we continued to demonstrate the positive attributes of our asset-light business model. We grew our members and store footprint despite inflationary headwinds that Chris discussed, and we invested in near- and longer-term growth areas such as technology infrastructure and building out a small dedicated international team. Additionally, we continue to generate significant free cash flow and we repurchased $25 million of our shares. Subsequent to the quarter, we repurchased another $25 million, bringing our total number of shares repurchased to date to approximately 625,000 bought at an average price of approximately $79.50. Now I'll cover our first quarter results. All of my comments regarding our quarter performance will be compared to Q1 of last year unless otherwise noted. We opened 36 new stores compared to 37 last year. We delivered same-store sales growth of 9.9% in the first quarter. Franchisee same-store sales grew 9.7%, and our corporate store same-store sales increased 12.1%. As a reminder, same-store sales for the Sunshine Fitness franchise stores that we acquired in Q1 of last year were reflected for two-thirds of the quarter in the corporate store segment but were in system-wide same-store sales for the entire quarter. Approximately 75% of our Q1 comp increase was driven by net member growth, with the balance being rate growth. Black Card penetration was 62.0%, a decrease of 100 basis points. The decrease reflects that we had a highly successful January sale this year for our Classic Card compared to last year when our sale was negatively impacted by the Omicron strain, as well as the impact from strong Gen Z member growth, including high school summer pass participants. For the first quarter, total revenue was $222.2 million compared to $186.7 million. The increase was driven by revenue growth across the franchise and corporate-owned store segments, partially offset by a decrease in the Equipment segment. The 15.7% increase in franchise segment revenue was primarily due to an increase in royalties and national ad fund revenue. The royalty increase was primarily driven by same-store sales growth, royalties on annual fees, and new stores. Partially offsetting the increase was a decrease of approximately $900,000 as a result of the Sunshine stores moving out of the franchise segment. For the first quarter, the average royalty rate was 6.5%, up from 6.4%. The 39% increase in revenue for the corporate-owned store segment was primarily driven by the Sunshine Fitness transaction, as well as same-store sales growth and new store openings. Equipment segment revenue decreased 22%. And while new store openings were in line year-over-year, more of this year's openings had equipment placed in Q4 of last year, leading to lower new store equipment sales. We completed 18 new store placements compared to 33. The decrease in revenue was partially offset by higher equipment sales to existing franchisee-owned stores. For the quarter, replacement equipment accounted for approximately 58% of total equipment revenue. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to $19.4 million compared to $22.4 million. Store operations expenses, which relate to our corporate-owned store segment, increased to $66.0 million from $47.5 million, primarily due to the additional stores from the Sunshine acquisition, which were only reflected as corporate stores for approximately half of Q1 last year. SG&A for the quarter was $27.8 million compared to $30.8 million. This decrease was primarily the result of transaction fees incurred and higher expenses related to the Sunshine acquisition. National advertising fund expense was $17.0 million compared to $14.5 million. Net income was $24.8 million, adjusted net income was $36.4 million, and adjusted net income per diluted share was $0.41. A reconciliation of adjusted net income to GAAP net income can be found in the earnings release. Adjusted EBITDA was $90.2 million, and adjusted EBITDA margin was 40.6% compared to $76.7 million with an adjusted EBITDA margin of 41.1%. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. Now by segment, franchise adjusted EBITDA was $67.9 million, and adjusted EBITDA margin was 73.2%. Corporate store adjusted EBITDA was $34.1 million, and adjusted EBITDA margin was 32.2%. Equipment adjusted EBITDA was $5.6 million, and adjusted EBITDA margin was 23.5%. Now turning to the balance sheet. As of March 31, 2023, we had total cash and cash equivalents of $523 million compared to $472.5 million on December 31, 2022, which included $62.6 million and $62.7 million of restricted cash respectively in each period. As I mentioned earlier, year-to-date through April, we used $50 million to repurchase shares, which includes $25 million in Q1 and an additional $25 million in April. Total long-term debt, excluding deferred financing costs, was $2.0 billion as of March 31, 2023, and consisted of our four tranches of fixed-rate securitized debt that carries a blended interest rate of approximately 4.0%. We completed a refinancing and upsizing of a portion of our debt when we purchased Sunshine Fitness last February. At the end of Q1 last year, our leverage ratio was 6.2 times net debt to LTM adjusted EBITDA. With the increase in membership across our system and the growth of our highly profitable corporate store portfolio, our leverage ratio declined to 4.6 times at the end of Q4 last year. At the end of the first quarter of 2023, it was down to 4.0 times. We expect our net debt to LTM adjusted EBITDA to continue to decrease for the remainder of the year. Finally, to our 2023 outlook. As a reminder, our view assumes there is no material resurgence of COVID or similar unforeseen dramatic circumstances that result in a significant change in membership behaviors or impacts our supply chain. In our earnings press release this morning, we reiterated our growth targets for the year. I'd like to address our placement target for 2023. We continue to expect new equipment placements of approximately 160. As a reminder, these placements are only in franchise-owned locations. Our new stores for the year will include corporate-owned stores of which we expect to build a similar number to last year, approximately 15. Since we provided this target in February, we haven't seen any relief from headwinds that will likely keep franchisees from building ahead of their required obligations, including HVAC availability and elevated costs to build. The substantial increase in interest rates over the past year is also a headwind to new store growth. Given this, we believe that 160 new equipment placements is likely the high end of what we expect to achieve this year. Everything considered, in a somewhat difficult economic environment, we are encouraged by our member growth in the first quarter and the overall resiliency of our model demonstrated by our strong same-store sales and profit growth. We believe that the size and scale advantage of our brand will continue to deliver value to all of our members, franchisees, and other stakeholders. I'll now turn the call back to the operator to open it up for Q&A.
Operator, Operator
Thank you. We have our first question from Randy Konik from Jefferies. Randy, your line is now open.
Randy Konik, Analyst
Thank you very much, and good morning, everyone. Chris, could you please go over some of the summer pass statistics? That would be very helpful. Also, was everything digitized regarding the summer pass last year, or is it all fully digitized this year to potentially increase the number of people signing up, including their parents? Additionally, are we expecting to see higher conversion rates from the summer pass later this year? I would like to hear your thoughts on that.
Chris Rondeau, CEO
Yeah. Sure, Randy. Good morning. We digitized pretty much the exact same way it is this year it's just slightly different. But otherwise, it's very, very much the same. And I think that the benefit we have this year as opposed to last is as you probably remember the last time we did it was 2019, and then COVID hit. So this is the first time we've done it consecutively. So what's going to be interesting now is the teams that didn't age out. So the seniors are gone now, but now the new freshman class has come in. So all of the other ages, the four grades that are still in it that still have the app from last year, we still have the ability now to remarket to them either by e-mail or in-app messaging. So we already have a strong pipeline of leads, which we really didn't have last year because the last time we ran it was 2019 three years later half of them are already gone. And it wasn't digitized. So it will be interesting this year, year-over-year that we're able to remarket to them to grab some quick momentum in the sign-up process which is already underway and we kick off our usage in the gym starting May 15. The other thing that's a little bit different this year we should actually help the process even easier is the minor joint flow where the parents or guardians were able to execute the parent guardian waiver or have them actually physically come into the store to do so. So that just makes it that much more seamless.
Randy Konik, Analyst
Super helpful. Tom, I wanted to follow up on your last statement regarding the placements, which I believe you mentioned could reach 160 at the high end. Could you provide some insight on how we should view the range of potential outcomes for unit openings for the remainder of the year? This is a common question from investors, and I would appreciate your perspective on this as we look ahead to the balance of the year. Thanks.
Tom Fitzgerald, CFO
Yeah. Sure thing, Randy. So I think some of the things that we've been talking about as I said a few minutes ago are still there. And certainly the interest rates sort of – the interest rates cumulatively have had an increasing impact on franchisees. So it's been a headwind. It's amazing to think here we sit SOFR is almost 5%. Last time I looked in a year ago, it was less than – it was less than 50 bps. So it's been a big move. And I think to that as we've talked to franchisees here about their development plans, we just see, and I think we said this a little bit last time, the combination of all those factors that I mentioned has led to where franchisees are just really not building ahead of their schedules on new store development, where they did quite a bit of that in the past pre-COVID. So that's why we said we think the 160 outlook that we have is likely on the high end. So we still think our corporate store growth this year will be pretty close to last year, roughly 14 or 15, so that would take our total store openings, if you combine those two to approximately 175. And we'll – as the year goes on obviously, we'll have a firmer view of the franchisee store openings and our own corporate stores but that's the best we can call based on how we see it but we didn't want folks really thinking there might be upside to that because we don't see it much beyond the 160.
Randy Konik, Analyst
And can I ask just to finalize and my last question to clarify? Is your thought on what the low end could be on 175 on the high end but just so we know kind of what the minimum might be on the low end?
Tom Fitzgerald, CFO
Yes. No, we feel the 160 number is the appropriate number. We really don't range that number. But that's our view, has been our view, and we're sticking to it. We just don't see the range going above that.
Randy Konik, Analyst
Understood. Thanks so much. Thanks a lot, guys.
Tom Fitzgerald, CFO
Thank you, Randy.
Operator, Operator
Thank you. We have our next question comes from Simeon Siegel from BMO Capital Markets. Simeon, your line is now open.
Simeon Siegel, Analyst
Thanks. Hey, everyone. Good morning. Nice job on the ongoing progress.
Tom Fitzgerald, CFO
Good morning, Simeon.
Simeon Siegel, Analyst
So guys, given you keep setting new member records, just any help to how we should think about member growth trajectory next quarter and over the year? And then I'm sorry if I missed it. Did you say the slightly lower Black Card penetration was a function of more new members signing up at 10, or was it existing Black Card trading down? And then realistically, I think you're still nicely above pre-pandemic period penetration. So just any thought on where Black Card penetration looks for the rest of the year. Thanks.
Chris Rondeau, CEO
Sure, it's Chris. On the Black Card piece, most of those two things are really driving it. One is the successful $10 sale we had in January this year. And last year's $10 sale, actually, the Omicron was a little bit tampered down. The other big piece, which is a good thing in a lot of ways, is it's the younger Gen Z. So the high school summer pass teens, the great performance of them converting and joining the teenage high school teens joined at very low Black Card percentages. So although the later Gen Zs, called the 20 years plus to 25, those have great Black Card percentages, it's still younger generations that are joining because the high school summer pass that are bringing that number down. If you were to remove the high school age, it's upwards, but pretty much over last year slightly. And then the growth – membership growth, we don't really comment on quarter-over-quarter membership growth but 60% of our net growth for the year is the first quarter. April and May tend to be decent months but it's the tail end of the year really, summer, and the rest is more trending water time. The new stores do add some growth to it but mature stores really don't add a lot of members or any and that's the matter during the rest of the year.
Simeon Siegel, Analyst
That is very helpful. Thanks, Chris. And then just congrats on having over 50% of clubs above the pre-pandemic memberships. Out of curiosity, why do you think the remainder don’t? Do you think there’s something post-pandemic structural? Do you think it’s just a question of time? Just kind of thinking through from your perspective where you think that average settles in?
Chris Rondeau, CEO
Sure. I'll start and Tom will add to it. I'd say it's mostly just timing. Different states were closed during different periods of time. Different states had different restrictions, whether it’s even though they're open for a while they actually had full distance and mask requirements for many months or a year later. So it's more just a timing coming out of it. And the more – the longer we go down the road and the time that goes by the more members they sell and the more clubs will fall into the good bucket. The good thing with the Black Card increase last year, and now the annual fee that the revenue, as I mentioned in my pre-recorded remarks, is that it is outpacing the membership, which is great news.
Tom Fitzgerald, CFO
Yes. Just to build on that, the gap for stores built prior to 2019, which is what we are focusing on, has continued to narrow compared to their pre-COVID membership peak. Stores that are performing better are significantly above that peak. So, as Chris mentioned, we believe it’s just a matter of time. If you visualize a map of the country, the stores in states that haven't fully recovered are those where the COVID situation became more politicized, resulting in a lingering effect. It's not that there are new competitors in those areas; rather, the decline was more pronounced, leading to a longer recovery period.
Simeon Siegel, Analyst
Perfect. Thanks so much, guys. Best of luck for the rest of the year.
Tom Fitzgerald, CFO
Yes. Thanks, Simeon.
Operator, Operator
Thank you. We have our next question comes from Maksim Rakhlenko from Cowen. Max, your line is now open.
Maksim Rakhlenko, Analyst
Hi, guys. Thanks for taking my questions. So first can you speak to your franchise health? How are those conversations going? And then separately, just any updates on the situation with the franchisee that lost its exclusivity rights and if other franchisees have stepped up?
Tom Fitzgerald, CFO
Hi, Max, it's Tom. I'll start by discussing things more broadly, particularly interest rates. Currently, rates are at 5%, which is less than a point compared to a year ago, and this has impacted some franchisees more than others. The key takeaway is that our model remains very profitable. Many stores have membership and EFTs at or above pre-COVID levels. This is evident in our own stores, where margins remain strong, with $0.84 of every new member dollar and dues reaching the bottom line. However, cash pressure for investments has increased, especially for some franchisees backed by private equity, due to higher debt service responsibilities. We've reviewed their financial information and confirmed there are no covenant issues; rather, the concern is whether there's enough cash to meet debt obligations while also investing in necessary CapEx for our system. We don’t disclose the exact debt levels, but one can estimate by considering the total number of stores and average unit volume, along with standard four-wall margins and a deduction for G&A at the franchisee level. This gives a sense of where total system EBITDA would be assuming modest leverage, resulting in a significant level of debt. With higher interest rates now, the costs associated with a new store can impact cash flow, indicating that franchisees may not be ahead of their financial obligations. It's crucial for franchisees to prioritize CapEx for existing stores to ensure they are adequately equipped and remodeled. If there isn't enough capital left for new store endeavors, we may need to withdraw their Area Development Agreements, which would significantly affect their value and multiple when they decide to exit since the growth pipeline would be compromised. Different private equity firms might make varying decisions, but if we do pull the ADAs, we still have a waiting list of former franchisees eager to re-enter. Some of these former franchisees, who have left to explore other investments, might find it more appealing to purchase the ADA and develop an entire area. Although we haven’t sold a franchise in the US for some time, we believe it’s unnecessary at this moment, as there are many interested parties. The model remains sound; the question is whether the current capital structure, constrained by higher interest rates, allows franchisees to invest adequately and service their debt. If they can’t, both they and we will face important decisions moving forward. I hope this gives you a clearer perspective on our outlook.
Maksim Rakhlenko, Analyst
No, Tom. That's incredibly helpful. Just go ahead.
Thomas Fitzgerald, CFO
No, sorry, I forgot your second question, Max. The franchisee we discussed has finalized our agreement. We're not revealing the terms, but we have reached out to some of the franchisees on the waiting list to inform them about the territories they can explore for new store opportunities. We are in the process of those discussions, but there is some delay. As we mentioned previously, some franchisees may be familiar with the available markets, while others may not, so they will have to put in some effort to research. However, the documents we were waiting to sign are now signed, the agreements are finalized, and we're moving forward with the plan.
Edward Hymes, COO
Yes. This is Edward. I'd say that also in addition to that, what Tom said, we've had signed an agreement. But given we're several months into the year, we expect a new store development from that primarily to lead into 2024 and beyond.
Maksim Rakhlenko, Analyst
Got it, guys. That's very helpful. Tom, a quick follow-up to that and then I have another pretty quick separate question. But how likely are you at this point to reopen the franchise to former franchisees? Like is that something that you're really leaning towards, or do you think that there is potentially still enough interest from other franchisees that are currently in the system?
Thomas Fitzgerald, CFO
It could be both, Max. It depends on various factors, but I believe there are several larger franchisees in our system who operate with a more modest capital structure. This gives them more resources and flexibility, so they might be interested. As you're aware, we've seen significant interest from both inside and outside the system, including former franchisees. We don't anticipate a lack of interest; it’s really just a matter of timing and allowing things to develop.
Edward Hymes, COO
I'd also add that we're open on the international side as well.
Thomas Fitzgerald, CFO
Yes.
Maksim Rakhlenko, Analyst
Yes. Okay. No, that's helpful. And then, just quickly, can you comment on how much the Halo partnership helps contribute to member growth in 1Q? And then, are you now looking to replace that with something similar potentially in the connected fitness space?
Chris Rondeau, CEO
The March sale did not perform as well in terms of membership compared to the November sale, so I can't say it was a significant driver. It was unfortunate how it turned out. However, we're happy that Amazon has decided to offer an $80 gift card to those who subscribe. Customers will be able to use their Amazon Halos until the end of July, and they will receive the gift cards for use on the website. It's good news that Amazon is looking out for their customers. Additionally, we are waiving the commitment for these members, so if they are not satisfied by July, they won’t be locked into a 12-month contract. This is the right approach for our customers, and we are committed to it. Overall, we don't anticipate a significant impact from this situation. Regarding your question about teaming up with another option, we are always open to opportunities that align well, but are not rushing into the next option.
Maksim Rakhlenko, Analyst
Got it. Okay, guys. Thanks a lot. Best regards.
Chris Rondeau, CEO
Sure, Max. Thank you.
Thomas Fitzgerald, CFO
Thanks, Max.
Operator, Operator
Thank you. Our next question comes from Chris O'Cull from Stifel. Chris, your line is now open.
Chris O'Cull, Analyst
Thanks. Tom, first I had a follow-up question to an earlier one. I know you deferred the majority of the development obligations for that one large franchisee. But have you needed to do that for any other groups?
Chris Rondeau, CEO
No. We have not rewritten area development agreements to restage them for anyone else.
Chris O'Cull, Analyst
Okay. Perfect. And then I had a question about the equipment, the guidance that the equipment placements will likely be I think you said towards the lower end of the 160 units this year. I'm just curious, does this affect the company's goal of averaging 200 annual unit openings over the next three years?
Tom Fitzgerald, CFO
I may have misunderstood you, but the 160 million is the high end of the range, not the low end. As we sit here today, I mentioned before that combined with new corporate stores, which we expect to be similar to last year, around 14 to 15, we expect to have about 175 new stores this year. That’s a 25% reduction from the straight average. At Investor Day, we indicated that we didn’t expect to reach 200 this year, which aligned with our outlook. So we're actually pretty close to where we anticipated being in the context of our three-year plan. We remain optimistic about our goal to add approximately 600 new stores by 2025.
Chris O'Cull, Analyst
Okay. Perfect. And then just one last one. The equipment margin and company store margin were both down quite a bit year-over-year. Can you just give a little bit of explanation for the year-over-year change?
Tom Fitzgerald, CFO
Yeah. Sure thanks, Chris. So the equipment margin last year we had a big, pretty sizable rebate from our primary manufacturer and our contract year runs midyear to midyear. So it ends up being a fairly sizable number that gets reflected. And we didn't hit that tier here this year. So that's it on the equipment side. Sorry. On the corporate sales side, I'd say a couple of things. One is we had Sunshine in last year as you know for the back half of the quarter. So the higher local marketing spend that we do in our corporate clubs and our franchisees do in January was not reflected in that margin last year and it ends up being a pretty important impact and there was that's the primary around that. The secondary is the timing of our April sale this year started at the end of March. So it caused some of the expenses from that sale to hit in Q1 this year where that wasn't the case last year. So the long and short of it is marketing but there are two components of it there Chris.
Chris O'Cull, Analyst
Okay. Any color you can provide in terms of what we should expect going forward? I mean should it be fairly comparable year-over-year going forward, or are there any other...
Tom Fitzgerald, CFO
Yeah. We really don't provide that kind of outlook. But I think if you spool it all up across the segments to what we were guiding and in terms of top-line growth and adjusted EBITDA growth, I think we end up in a pretty good place, but we don't provide that kind of detail on our outlook.
Chris O'Cull, Analyst
Fair enough. Thanks guys.
Tom Fitzgerald, CFO
Okay. Thank you, Chris.
Chris Rondeau, CEO
Thank you very much.
Operator, Operator
Thank you. We have our next question comes from Jonathan Komp from Baird. Jonathan, your line is now open.
Jonathan Komp, Analyst
Thank you. Good morning. Tom, could you provide more details about the openings planned for 2023, specifically regarding the distribution of openings in the second quarter compared to the second half of the year? Additionally, how much clarity do you have from current agreements or letters of intent regarding reaching the 160 franchise placements?
Tom Fitzgerald, CFO
Yeah, hi, John. So I think not atypically our openings will be back-end loaded. So probably closer to the historical spread across the quarters there plus or minus. And we really don't provide the specifics on the stages of our pipeline. But obviously, that goes into all of our internal discussions and franchisee discussions to ultimately get to where we got to, which is to affirm the 160, but to say it's likely the high end of the range.
Jonathan Komp, Analyst
Okay. And maybe I'll just one follow-up not to be too specific, but just so we don't end up mismodeling a quarter again, but I think you had 29 new openings on the franchise side last year. Is that what you expect to be kind of near or a little below that this year for Q2 and then more back-weighting? I'm just trying to clarify your comments around the weighting.
Tom Fitzgerald, CFO
Yes, I think we'll probably be closer to that number in Q2.
Jonathan Komp, Analyst
Okay, great. That's really helpful. And then maybe Chris, I'd love to hear your thoughts just on a broader question around since the last quarterly update we've seen some more rules from the FTC around potential subscription rule changes that are coming for the whole industry in any subscription business. But any thoughts just on how Planet is viewing those potential changes? And any reaction that you'd have for the business?
Chris Rondeau, CEO
Sure, John. I'd say we currently have the click-to-cancel fees implemented in several states, including California, which has been in effect since before COVID. As we mentioned previously, we initially observe a rise in cancellations for a couple of months, but it eventually stabilizes to a normal level. The good news is that we don't see a significant effect at this moment. Recently, we rolled this out in Tennessee, which started around December 31, so it's still too early to assess its impact, but we haven't noticed any major issues there. Additionally, Planet has one of the simplest cancellation policies in the country: a seven-day notice allows members to cancel easily. Very few of our members leave before their commitment ends, meaning cancellations are straightforward. This simplicity supports our high rejoin rate, which is now 30% higher than pre-COVID levels. For first-time customers, ease of cancellation is a crucial factor in their decision-making process. Regarding auto-renewals, it’s still too early to determine how that will specifically affect memberships, particularly with regard to commitment terms and annual renewals. There’s a lot to navigate in that area, making it challenging to predict future outcomes.
Jonathan Komp, Analyst
Great. That’s helpful. Thanks for the color.
Chris Rondeau, CEO
Thanks, Jon.
Tom Fitzgerald, CFO
Thanks, Jon.
Operator, Operator
Thank you. We have our next question comes from Rahul Krotthapalli from JPMorgan. Rahul, your line is now open.
Rahul Krotthapalli, Analyst
Hey guys. Thanks for taking my question. Chris you talked about lower cancellation rates for the seventh straight quarter. Can you just discuss like the value of your Perks program and how the ramping perks are improving the retention rates for your current members? And going forward like do you have a good plan to kind of monetize this like the data like how this membership data is captured in your current platform?
Chris Rondeau, CEO
Sure. Right now, we don't have enough members to fully understand what's driving the lower cancellation rates. However, among those using the program, we noticed that 25% of redemptions come from members who haven't used the club in over 90 days. This is encouraging because it supports our belief that we can offer value beyond just the club. For example, similar to how AAA provides discounts on hotels even if you aren't using their towing service, we hope that by offering discounts outside the club, members will be more inclined to maintain their memberships. Additionally, we saw that in March, the average redemption value was over $10, reflecting our goal of providing a month's worth of membership for free. As we grow and gather more data, we'll attract more partners. We've come a long way from just a couple of partnerships a few years ago, and the quality and variety of discounts should continue to enhance our members' experience. Furthermore, regarding cancellation rates, as I pointed out earlier, people are exercising more now that the effects of COVID are lessening. This increased activity is likely contributing to higher retention rates.
Rahul Krotthapalli, Analyst
That’s helpful. Thank you.
Chris Rondeau, CEO
You’re welcome.
Operator, Operator
Thank you. We have our next question comes from John Heinbockel from Guggenheim Partners. John, your line is now open.
John Heinbockel, Analyst
Hey Chris, I want to start with the Perks. How are you approaching the number of offers you're planning to feature and their seasonal aspects? Some of these offers seem to be time-sensitive. You have a few exclusive to the Black Card. Are you considering doing more of that to encourage upgrades to the Black Card? What's your philosophy on this? If we aim for a 65% or 67% penetration rate, will tiered perks be the main strategy to achieve that instead of relying on reciprocity?
Chris Rondeau, CEO
No, I believe reciprocity will likely remain the main driving force based on our historical observations. Every few years, we tend to open around 400 stores. So, moving from a market with three stores to one with fifteen greatly enhances our value. This has certainly been the key factor over the years. However, we are continuously gathering data on what incentives generate interest. For example, we've seen success with partnerships like Crocs and Shell gas, and offers such as the free phone with Verizon. As we identify the key factors that capture attention and attract discounts, we will keep refining our approach. It will be interesting to see how we evolve as we grow, collect data, and face competition from perks providers, such as T-Mobile trying to offer better discounts than Verizon. Ultimately, we aim to provide greater value to our members. I strongly believe that if we can offer discounts on everyday products, especially in today's inflationary climate where consumers are feeling the pressure on their finances, it can only benefit us. This not only enhances the value for our members but also drives our business forward. Additionally, as we venture more into the pay-to-play arena and gather concrete data to demonstrate our effectiveness, we plan to explore more opportunities, especially as our membership base expands and the data we collect grows.
John Heinbockel, Analyst
Tom, when considering corporate profitability, you touched on the seasonal aspect related to promotional spending, which seems significant. Is that accurate? Looking ahead, while labor costs are higher, the overall cost to operate is likely elevated compared to the past. Is there a belief that profit margins in that segment can improve over time and that legacy can reach the levels of Sunshine? Is that still a reasonable expectation moving forward?
Tom Fitzgerald, CFO
John, that's both a yes and a no. The positive aspect is that we expect improvements over time, and particularly this year, we are often comparing back to 2019. We feel optimistic about the progress we are making in our corporate store margins and overall margins compared to those levels, though the situation is quite different now. While wages have increased and other factors play a role, we've never stated that the gap between the margins of the acquired Sunshine stores and our legacy stores would close completely. We believe there are ways to adopt some of the best practices from the Sunshine team, particularly in marketing and operations, which contributed to their strong performance prior to COVID. These practices have certainly contributed to the impressive performance in same-store sales for corporate locations compared to the system overall, which has historically been the reverse. However, it's important to note the structural differences between the Northeast legacy markets and the Southeast Sunshine markets, where hourly wages and rental costs per square foot differ significantly. There will definitely be improvements and faster growth thanks to the acquisition, but we have never expected to completely close that gap.
John Heinbockel, Analyst
Okay. Thank you very much.
Tom Fitzgerald, CFO
You bet.
Operator, Operator
Thank you. We have our next question comes from Warren Cheng from Evercore ISI. Warren, your line is open.
Warren Cheng, Analyst
Hey, good morning. I just have a follow-up to the last couple of questions on Perks. So you've given some numbers last year around both your Shell gasoline and your cross partnerships. And if I'm doing the math right, it implies the engagement levels are still sort of in that very low single-digit range. So first, can you give us some benchmarking or range of what percentage of your member base knows about and is taking advantage of Perks today? And second, has that changed in the last year? So have things like the new app or some of these new partnerships you've engaged in over the last couple of years moved the needle?
Chris Rondeau, CEO
We haven't revealed the percentage of members using it, but it has certainly increased along with the overall app adoption. Currently, about 80% of our members have the app, and almost 90% of new members are now using it. The key is that the more members have the app and check into the club, the more they recognize the benefits. It’s crucial to engage them through education so they understand what’s available, why it matters, and how it functions. The increase in usage is largely about educating members on the opportunities. After COVID, we ended 2020 with 13.5 million members, many of whom were not familiar with these offerings. New members are easier to inform at point of sale about money-saving opportunities. Our emphasis remains on driving adoption and engagement through continued learning.
Warren Cheng, Analyst
Great. Thanks. And can you remind us the sort of the financial mechanics of some of these partnerships? Are there different models? What's the flow-through view, or is this more focused on the marketing side?
Chris Rondeau, CEO
Yes, they all vary somewhat. However, in general, they represent a discount off their regular prices. Responding to John Heinbockel's earlier question, some are exclusively for Black Card members. Black Card memberships typically receive a larger discount compared to Classic Card memberships, while others offer the same discount for both types. I believe you will notice more differentiation in the coming months and years.
Warren Cheng, Analyst
Great. Thank you. Good luck.
Chris Rondeau, CEO
Thank you.
Operator, Operator
Thank you. We have our next question comes from Joe Altobello from Raymond James. Joe, your line is now open.
Joe Altobello, Analyst
Thanks. Hey guys. Good morning.
Chris Rondeau, CEO
Good morning.
Joe Altobello, Analyst
I wanted to revisit the placement numbers. There is typically a seasonal drop in placements from Q4 to Q1, but why was it so significant this year? What factors contributed to this shift in timing?
Tom Fitzgerald, CFO
Yes, Joe, it's Tom. I'll start by saying that we often have stores that, due to timing or permitting issues, are expected to open at the end of December but end up opening in January. The equipment is usually placed, but there are various reasons why the store can't open on time. In these cases, the placement is recognized in the fourth quarter, while the store opens in the first quarter. We typically see a certain number of these stores each year, with some variation. This past year, however, the number was larger, partly due to supply chain delays that pushed openings further back, such as the shutdowns in Shanghai. This created a notable gap between placements and openings. We expect this situation to normalize back to historical levels by the end of this year. This gap is mainly affecting the first quarter, and we don't anticipate it being a significant issue in the following quarters, barring any unexpected supply chain disruptions that differ from past trends.
Joe Altobello, Analyst
Okay. And just a follow-up on that, I'm trying to put the 1.1 million net new members in the context. I'm curious, how it compares to your expectations given that you were adding a similar number and sometimes even a larger number pre-COVID on a smaller base? Are you guys hoping for something better, I guess, is what I'm asking, in the quarter.
Tom Fitzgerald, CFO
Yeah. I think, Joe, maybe I'll start that one. I think we don't really get into the quarterly view of our business. And I think what I would say is, the same-store sales growth continues to be 75% member growth. We affirmed our same-store sales outlook of high-single digits. So that may tell you that we're tracking to where we thought, but we don't really get into what our quarterly expectation was on actual member growth. It's sort of reflected in our same-store sales number that we talk about for the full year.
Joe Altobello, Analyst
Okay.
Tom Fitzgerald, CFO
I hope that it helps.
Joe Altobello, Analyst
All right. Thank you. Yeah, it is. Thank you.
Tom Fitzgerald, CFO
Yeah.
Operator, Operator
Thank you. We have our next question coming from Sharon Zackfia from William Blair. Sharon, your line is now open.
Sharon Zackfia, Analyst
Hi. Good morning.
Tom Fitzgerald, CFO
Good morning, Sharon.
Sharon Zackfia, Analyst
We on the outside have a really hard time kind of projecting equipment revenue. So in the second quarter specifically, are you expecting that to grow year-over-year? I think some color there would be helpful. And then, secondarily, as the membership skews younger, can you talk about any changes you're doing within the club, whether it's the kind of equipment the clubs are going to have or change to or anything else that needs to happen in the clubs to appeal to that kind of younger demographic.
Chris Rondeau, CEO
We have observed a trend where the younger generation is increasingly focusing on functional training and weight training rather than cardiovascular workouts at our clubs. In response, we have started to adjust our new builds and remodels over the past few months by reducing the number of cardio machines. For instance, a club that previously had 120 cardio machines now typically has around 100, allowing us to allocate more space for weight and functional training areas. Last year, we conducted a study that revealed member visits remained steady while the duration spent on cardio decreased by 17% to 20%. Although the usage of treadmills has stayed relatively stable, other cardio equipment has seen a decline. Nonetheless, members are still engaging in workouts using weights and functional training, resulting in growth in these areas. Additionally, these changes are cost-effective compared to maintaining cardio equipment. Overall, while frequency of visits has increased across generations, it's worth noting that boomers may actually work out slightly more than younger members. Ultimately, the primary adjustment we’ve made in clubs pertains to the equipment available, rather than a significant shift in workout frequency.
Tom Fitzgerald, CFO
Yeah. And Sharon, back to your question on timing. And I think a little bit of what I was saying to Joe's question there, the Q4 to Q1 piece is a little trickier and was more outsized or exacerbated this year for the supply chain reasons. I think for Q2 of this year, and we normally don't provide this kind of view but I get the difficulty. I think if folks thought about our placements for Q2 to be roughly flat to up very slightly you wouldn't be too far off.
Sharon Zackfia, Analyst
Thank you.
Tom Fitzgerald, CFO
Okay.
Operator, Operator
Thank you. Our next question comes from Alex Perry from Bank of America. Alex, your line is now open.
Alex Perry, Analyst
Hi. Thanks for taking my questions. I just wanted to ask about any change to the international strategy especially now that you're investing in a dedicated team. Does that mean you're planning on sort of accelerating international growth? And what would be the timing of opening of new markets? Thanks.
Edward Hymes, COO
Yes. Thanks for the question. This is Edward. We're really just beginning our international growth plans. We currently have a presence in several countries, including Canada, Australia, Mexico, and Panama. In 2022, we announced an agreement to expand into New Zealand as well. Historically, our strategy was more reactive, considering new markets only when approached. Now, we're in the process of forming a dedicated team to actively accelerate our growth outside the US. Once this team is in place, we anticipate that international growth will gradually constitute a larger share of our annual new storage expansion. We've noted before that the US has the highest gym membership penetration globally, and we have experienced success in every international market we've entered. We are pleased with how our judgment-free environment and affordable membership model resonate in global markets. For instance, in Mexico, the membership penetration rate is quite low, around 33%. There is a desire to work out, but access to affordable gyms is limited. We aim to fill that gap and will continue our expansion beyond current markets. While we don't provide detailed forecasts, Europe is a market of interest, despite existing competitors in the ULT space. We believe our judgment-free environment and low pricing set us apart from those competitors. Additionally, Asia presents a new opportunity without significant incumbent competition, and we are considering that as well.
Alex Perry, Analyst
Perfect. That's incredibly helpful. And then I just wanted to ask, is there anything you're doing different this year with high school summer pass that you think could improve membership conversion post the program? So the 10% I thought was pretty impressive that you've done from last year, but anything you're planning on doing different this year to maybe even improve that conversation rate? Thanks.
Chris Rondeau, CEO
Yes. One thing I would mention is the data we've collected over the past year regarding the peak times when individuals tend to become paying members. We will focus our targeting efforts during those times with various offers and incentives to encourage them to join. Additionally, it's important to note that once they join, parents will not have to assist them in signing up for a paying membership, which should be a significant advantage for us this year—this was not in place until the end of last year. As the program comes to a close, we expect to see an increase in paying members, particularly since September is typically a strong month for us.
Alex Perry, Analyst
Perfect. That’s helpful. Best of luck going forward.
Chris Rondeau, CEO
Great. Thanks.
Edward Hymes, COO
Thanks, Alex.
Operator, Operator
Thank you, Alex. We have no further questions on the line.
Chris Rondeau, CEO
Thank you for joining us today for the Q1 earnings call. Despite some challenges from higher construction costs and interest rates, I want to highlight that our member growth remains strong. It's encouraging to see the resilience of our brand and business model during this economic situation. The increase in our annual fees and better performance regarding cancellations and rejoining members indicate positive trends. Most importantly, our members are engaged and continue to work out regularly, which is great news. If we can maintain this momentum, we should be able to navigate any inflation and interest challenges in the future. Thank you all, and have a good day.
Operator, Operator
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.