Q1 2024 Earnings Summary
- Record-breaking performance of new club openings and strong demand leading to faster-than-expected profitability. The recent April club launches have achieved record-breaking numbers and are reaching contribution margin positive much faster than in the history of the company. Additionally, the company is experiencing high demand with more clubs implementing waitlists to manage capacity, indicating strong consumer interest.
- Improved member retention rates and engagement levels leading to higher revenue forecasts. The company is experiencing 10% better retention than ever before , and is seeing the most engaged customers in its history. This enhanced retention and engagement are driving higher revenue forecasts, allowing the company to modestly raise its revenue and adjusted EBITDA guidance.
- Clear growth strategy with plans to expand through new club formats and maintain double-digit revenue and EBITDA growth. The company is targeting between 8 and 12 large-format equivalent (LFE) club openings per year, averaging about 10 per year, to deliver double-digit 10%+ revenue and EBITDA growth. Leadership expresses confidence in their strategy, outlook, and execution.
- Significant debt maturing in early 2026 poses refinancing risk. Management acknowledges the debt coming due but provides limited details on their plans to address it, stating only that they are "working on those things right now" and expect to secure "much better interest rates" next year. This uncertainty could impact the company's financial stability.
- High capital expenditure requirements may constrain free cash flow. The company anticipates maintenance CapEx of $170 million to $175 million for the year, with about half required just to maintain current EBITDA levels. This substantial ongoing investment may limit the company's ability to reduce leverage or invest in growth without taking on additional debt.
- Rising labor costs may pressure margins with limited expansion potential. Management admits that wages have increased by 4% to 5% and are expected to continue rising. Despite strong revenue growth, the company is maintaining an EBITDA margin guidance of 23.5% to 24.5%, suggesting limited upside to profitability due to higher operational expenses.
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Debt Maturity Plans
Q: How will you address debt maturing in early 2026?
A: We're proactively working on plans to address our debt maturing in early 2026 and expect to refinance it sooner rather than later, potentially at better interest rates next year. Despite significant investments in opening new clubs, we've delivered positive free cash flow this quarter after all growth capital. Our debt-to-adjusted EBITDA ratio is improving and will continue to decrease from this quarter forward. -
Strong Demand & Retention
Q: Are you seeing any signs of cautious consumer behavior?
A: We are not seeing any signs of consumer weakness. Every month, we're recording record personal training sales and the best retention rates in our history. Demand is so strong that more clubs are going on waitlists to manage member experience. We expected to see some weakness over the past 18 months but have been pleasantly surprised. -
Margin Outlook & Costs
Q: How are costs impacting EBITDA margins?
A: We're pleased with our EBITDA margin of 23.5% to 24.5%. Although costs like wages, interest rates, and construction have increased, we've anticipated these changes and adjusted our business model accordingly. Our EBITDA plus rent margin is now roughly 5% higher than in 2019, giving us flexibility to manage increased expenses. While there's potential for margins above 24.5%, we're firmly guiding within this range to ensure we meet our objectives. -
CapEx Plans & Free Cash Flow
Q: What are your CapEx plans, and has anything changed?
A: Our CapEx plans remain consistent with prior guidance. Maintenance CapEx is approximately $10 per square foot across our 17 million square feet, totaling around $170 million. About half is for maintaining current EBITDA, and the other half is for investments in modernization and technology expected to yield additional returns. We plan to open 10 new large-format equivalents (LFEs) annually, each with a net investment of around $25 million, funded by our free cash flow. -
Sale-Leaseback Strategy
Q: How are higher rates affecting your sale-leaseback plans?
A: We're progressing with sale-leaseback deals and are under letters of intent on some properties. The difference in rates compared to 2-3 years ago is about 50 basis points on a GAAP basis, which we can absorb due to higher club-level margins. This slight increase won't impact our committed margins moving forward. -
New Club Performance
Q: How are the recently opened clubs performing?
A: Our new clubs have achieved record-breaking numbers, surpassing our expectations. They're reaching positive contribution margins faster than any clubs in our company's history. This strong performance reinforces the effectiveness of our growth strategy. -
Membership Pull-Forward
Q: What's driving membership pull-forward into Q1?
A: Members are joining earlier to avoid summer pool fees, resulting in a pull-forward of memberships into Q1. Typically, we see high sign-ups in May and June and drop-offs in September and October. By implementing fees starting in April, we've encouraged members to join earlier and stay longer, helping to smooth seasonality and reduce churn. Approximately half of the membership increase above consensus estimates is due to this pull-forward. -
Large-Format Equivalent Expansion
Q: What's the outlook for opening large-format equivalents (LFEs)?
A: We plan to open 8 to 12 LFEs annually, averaging about 10 per year. This growth is key to achieving our goal of 10%+ revenue and EBITDA growth in 2025 and beyond. About 4-5% of this growth will come from same-store sales, with the remainder from new LFEs and other initiatives. -
MIORA Program Update
Q: Any early insights on the MIORA program rollout?
A: While it's early days, we're pleased with the demand for the MIORA program. We're expanding our team to handle incoming traffic but don't expect it to materially impact this year's financials. We anticipate it could start contributing modestly in 2025, growing more significantly in 2026 and 2027. -
Pricing Strategy
Q: Are you considering raising prices due to high demand?
A: We're managing high demand by placing more clubs on waitlists rather than focusing on price increases. This approach helps us maintain the quality of the member experience without creating a barrier that might alienate customers. We prefer to emphasize long-term membership value over short-term pricing adjustments.