Insights From Planet Fitness On Its Response to the COVID-19 Pandemic and Its Effect on the Company

Planet Fitness has responded to the COVID-19 pandemic by drawing down its $75 million variable funding notes to provide additional liquidity for the company, reducing salaries for the C-suite team members and furloughing most employees at corporate-owned clubs. (Photo by Pamela Kufahl.)

Planet Fitness, Hampton, New Hampshire, drew down its $75 million variable funding notes to offer additional liquidity for the company, just one of several measures taken to address the government-mandated closures of businesses caused by the COVID-19 pandemic.

On May 5 in its release of its first quarter 2020 financials and in a call with financial analysts, the executive team at Planet Fitness shared the steps it took to mitigate the financial effects of the government-mandated closures of health clubs that began in mid-March. Those steps included the following:

Credit facility: Planet Fitness drew down its $75 million variable funding notes to provide additional liquidity.

Capital expenditures: Planet Fitness has deferred capital expenditures, including new corporate-owned store openings and investments in existing corporate-owned stores.

Board of director and executive compensation: The company’s CEO, president, chief financial officer, chief digital officer and information officers have “significantly” reduced their base salaries. (The company did not share the level of reduction.) The base salaries of other members of senior management also were reduced in graduated amounts. The board of directors has suspended payment of the annual cash retainer to non-employee directors.

Corporate-owned stores: The company closed all of its 99 corporate clubs on March 17. It also encouraged franchisees to close their clubs. By March 22, all 2,000 Planet Fitness locations were closed.

Corporate office and corporate-owned club staff: The corporate headquarters remained closed as of May 5 when this status was released, and headquarters staff members were working remotely at that time.Planet Fitness temporarily furloughed all corporate-owned club employees except the club manager at each location while the club remains closed. The employees are able to continue receiving benefits from the company.

Members’ fees: Upon the closures of Planet Fitness clubs in March, all members’ accounts were frozen and the company communicated to members that they would not be charged any fees while the clubs were closed. This includes monthly membership dues and annual fees. In the second half of March, the company’s member count was not materially changed due to cancellations.

Share repurchase: The company has suspended share repurchases to preserve liquidity and flexibility.

Digital options: The company accelerated its number of digital initiatives, including its United We Move marketing campaign. The initiatives include daily 20-minute or less live workouts on Facebook launched on March 16. These workouts have featured Planet Fitness trainers and special celebrity guests, such as the New England Patriots football player Julian Edelman; “The Biggest Loser” trainer Erica Lugo and actor Jerry O'Connell. These workouts have averaged more than 100,000 views per workout and 4.5 billion media impressions. The workouts are then posted on YouTube, and the company’s YouTube subscribers have increased 229 percent since the temporary closings. The videos have more than 10 million views. People also are encouraged 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, the company has seen a 173 percent increase in average daily workouts on its mobile app.

Moving Forward

Looking ahead, the goal of Planet Fitness is to ensure that the company comes out of the COVID-19 situation with the same club count and member count it had pre-COVID-19, Planet Fitness CEO Chris Rondeau told the analysts during the May 5 call.

“Our current focus is on creating and maintaining a healthy, safe environment inside our stores for our team and our members for when they reopen,” he said.

The company is developing a COVID-19 operational playbook of more than 100 pages to address areas such as enhanced standardization policies, procedures, contact reduction between team members and members, physical distancing and more. The company will provide personal protective equipment for all employees, increase cleaning stations throughout each club, enable members to use cardio equipment while adhering to physical distancing guidelines (cutting usage of its average 120 pieces of cardio to usage of just half the equipment) and allow members to do touchless check-in via its mobile app, Rondeau shared as just some of the steps the company is taking.

As of May 1, the company began reopening three clubs, two in Georgia and one in Utah, in accordance with local official guidelines with plans to reopen about 150 stores by May 15.

“In these first few clubs we have re-opened, we are executing our updated operational procedures outlined in our COVID-19 operations playbook,” Rondeau said. “We believe this is an important first step and will allow us to obtain key learning’s in advance of a broader reopening rollout.”

At the time of the call, the first three clubs had been open for four days, but Rondeau said he was pleased with the joining momentum early on, saying there was “a little bit of a pent-up demand” but that usage was a bit slower initially.  

View of Franchisees

Dorvin Lively, Planet Fitness president, spoke during the call about how the temporary shutdowns had affected franchisees, noting that one of the biggest reasons for the company’s optimism about the brand's future is the overall strength of its franchise system and the size and scale of the company compared to competitors.

The number of Planet Fitness franchise groups had decreased from 190 when the company went public in 2015 to approximately 130 today due to consolidation during the five years of its franchisee groups. Today, the average franchisee owns approximately 15 stores with the largest owning 169 stores or approximately 8 percent of the store base, Lively said. Of the company’s 130 groups, 13 are majority owned by private equity and represent some of the company’s 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,” Lively said.

Historically, franchise clubs’ average EBITDA margin percentages have been in the high 30 percent range on an adjusted four-wall EBITDA basis, he said. Most franchisees have been reinvesting cash flows back into the business, growing their club numbers, replacing equipment and remodeling older locations. In the past few years, many franchisees have either sold their business to another franchisee or taken “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,” Lively said. “In fact, several of these private equity firms have indicated to us recently that they remained extremely interested in further investment in our brand.”

With no revenue and related cash flows during the temporary closures, franchisees have taken actions to reduce their cash burn until the stores can start to reopen, including discussion with landlords about rent relief, he said. Several of the franchisee groups received government assistance through the SBA Payroll Protection Program to help cover their day-to-day expenses.

Some franchisees are continuing to pay a portion of their workforce, while others have temporarily furloughed many of their employees, Lively said.

Planet Fitness is being flexible on equipment replacement and store remodel requirements of franchisees and will continue to be flexible over the near term as is deemed necessary, he said.

The Rest of 2020

The economic impacts of temporary business closures due to COVID-19 have affected both existing and near-term construction projects for Planet Fitness, leading Lively to say that Planet Fitness would not be able to provide guidance of the company’s performance for the remainder of the year until cities and states reopen and a better evaluation can be done.

However, he said that the team anticipates that expansion will ramp slowly once the company and the country emerge from this crisis. It is possible  that equipment placements and replacement equipment sales could be down 50 percent or more from the company’s record high in 2019, and the effects of the shutdown on this segment of the company’s revenue could linger into 2021.

“This is not a reflection of any change in our market opportunity,” Lively said. “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 buildout toward 4,000 locations in the U.S.”

Rondeau also acknowledged the difficulty of predicting the impact of COVID-19 on the industry and the country’s economy.

“However, based on several factors such as the strength of the Planet Fitness brand, our differentiated business model, our attractive price points and 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,” he said.

Suggested Articles:

The company now will offer its content and connected fitness products to businesses.

Freemotion Fitness is now Freemotion from iFit while its parent company, ICON Health & Fitness, is now iFit Health & Fitness.

CycleBar, which is part of the Xponential brand, is expanding into New York City as part of a partnership Xponential has with Palladin Consumer Retail