Ladies and gentlemen, welcome to the Planet Fitness Fourth Quarter Earnings Conference Call. My name is Grant, and I will be the moderator for today's call. [Operator Instructions] I will now pass the call over to Stacey Caravella to begin. Stacey, please go ahead.

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.

Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q4 earnings call. I am proud of how we continue to prove our systems resiliency, strength of our model, our differentiated offering and the passion of our franchisees, all of which positions us to continue to succeed in an environment of increasing consumer prioritization of health wellness. Closing out 2022, we were very pleased with our record membership growth in the fourth quarter, which created a great momentum coming into Q1 of this year. Let me start with the two primary drivers behind this record growth. First, we had a new agency structure in place for the entire quarter with one agency handling our national advertising and two agencies partnering with our franchisees on a local level. The fourth quarter was the first time we had access to the ability to leverage our national and local media, as we begin to optimize our marketing based on analytical findings. An example of this is our newly implemented post national sales meeting with all three agencies to analyze results by region and franchise group to share best practices across our system. Importantly, our franchisees are pleased with the level of service they're getting from their agency partners, and they're confident with how our marketing investments are being executed at both national and local levels. Second, we continue to benefit from the increasing commitment to and interest in overall wellness coming out of the pandemic. Our members who are visiting the gym continue to visit more frequently, which we believe is a sign that they are more dedicated to working out. We had a successful promotion in November where you received a free halo, Amazon Fitness and Health Tracker. If you joined or upgraded to a Black Card membership,…

Thanks, Chris, and good morning, everyone. Overall, we feel good about where our business and our system is, particularly given what has happened over the last three years. We believe that we are operating from a position of solid financial and balance sheet strength as we continue to break down fitness barriers for first timers and casual gym goers. Our asset-light, highly franchised business model drove consistent and reliable growth last year, and we met or exceeded our financial targets. Notably, in 2022, we accomplished four things that I want to call out. First, we completed the acquisition of one of our largest and best-performing franchisees. Second, we closed a very successful refinancing and upsizing of our debt in an oversubscribed deal that resulted in a lower overall weighted average interest rate for our total fixed rate debt. Third, we repurchased 1.5 million shares at an average price of approximately $62 per share for a total spend of approximately $94 million. And fourth, our Board of Directors approved a new $500 million share repurchase authorization that replaces the existing one from 2019. Now, I will cover our Q4 financial results and then we'll address our operational and financial outlook for 2023. All of my comments regarding our fourth quarter performance will be comparing fourth quarter of 2022 to Q4 of 2021. We opened 58 new stores during the quarter, bringing our full year total new store openings to 158, as Chris noted earlier. We had positive same-store sales growth of 9% in the fourth quarter, franchisee same-store sales grew 8.8% and our corporate same-store sales increased 11%. As a reminder, same-store sales for the Sunshine Fitness franchise stores that we acquired in Q1 of 2022 will not be reflected in our corporate-owned same-store sales until we report first quarter results,…

Thanks. Hey, guys. Hope you are all doing well, a nice end to the year.

Thanks, Simeon.

Tom, any more color just on that last point on the franchisee you mentioned, maybe just how large they are expected growth from them? Maybe have you seen others step into the areas with exclusivity or interest you've gotten around that? And maybe just your comfort around this being a one-off? And then just any thoughts on broader SG&A dollars for next year as we think through some moving pieces within expenses? Thank you. And then, Chris, I'd love to -- if you could elaborate at all on your comment about the opportunity to double members. That's obviously an exciting comment in press release. So anything there would be helpful.

Hi, Simeon. So in terms of the franchisee that we're talking about we're not disclosing who that is, which is our typical practice for any reason. And we think that it's the right approach. We think there may be some interest. We were at the beginning of the beginning in terms of this process where they're exclusively is no longer in place in a few of their markets and existing franchisees may want to take a bite at that. And also, there's quite a bit of interest from former -- a few former franchisees who are out of the system completely and who missed it, frankly, and want to get back in somehow some way. And this -- maybe they're only on trade to doing that on a smaller scale compared to maybe what they did previously. So we tried to factor all of that into our outlook for the year on placements, but that's the long and short of that. And as you know, we collect financial information from our franchisees a couple of times a year and also have discussions with our top franchisees. And based on all of that, we believe this is an isolated situation just based on a lot of circumstances that we're not going to get into. But in terms of SG&A, I think our outlook, while we're not guiding to it is very consistent with what we talked about at Investor Day, where we said over the three years, we expect very slight leverage in SG&A. We still have investments we want to make. We want to -- we're in the process of building out an international team to drive accelerated growth there. We're also making additional investments in IT as well as the team. So we think this is very much a growth business. We want to support the growth in a prudent way. And -- but are not looking for large basis point leverage from SG&A. It's more very, very slight leverage. So then, Chris, over to you.

Sure, yes. Thanks, Simeon. Yes, I think when you look at our historical track records from the IPO, we had 1,000 locations at the IPO, at about 7 million members. And here we are eight years later, and arguably three years of the eight were COVID, right? So if that wouldn't happen to probably be faster. But here we are now with 17 million members in 2,400 locations. Even if you go back before the IPO, we partnered with TSG, the private equity company before we went public, we had about 600 stores in 2012, about 4 million members. So you can see the cadence of our growth. And leading into COVID, we had 53 straight quarters of positive comps. The vast majority of it be member growth. And this year, the same thing, 2022, we had the full year 11% same-store sales and again, vast majority is member growth. So there's nothing pointing in any other direction other than why wouldn't that happen again. We're very confident, especially with the Gen Z acceleration we've been talking about and how they're joining. Their sign-ups have been great past tailwinds as well as helping that out. And then right behind them is Gen alpha, which will come into the mix in about another four, five years. So there's no reason why we can't see us doubling once again.

Great. Thanks a lot guys. Best of luck for the rest of the year.

Thank you.

Thank you very much.

Thank you, Simeon. Our next question comes from Rakhlenko from -- Rakhlenko Max from Cowen. Rakhlenko, your line is now open.

Hey, good morning guys. This is Bradley on for Max this morning. Great results this quarter. First, I'd love if you could just discuss quickly any quarter-to-date learning's with the advertising rolling into January and then perhaps any early results from January?

Yes, we're not sharing anything really from the current quarter. But I do believe the large promotion we did at the end of December that expired on the 30th and then we actually kicked off New Year's Eve with the January sale, but actually on the 31st where, I think, helped carry the momentum from the December sales. So we're pleased with how momentum is playing out.

Great. And then switching gears a little bit to Gen Z. Could you just provide any more color on perhaps Gen Z utilization, maybe churn compared to other cohorts, Black Card mix? Just kind of any more details on what you're seeing with their ramp-up as they continue to join? Thanks, guys.

Yes, Gen Z is very similar and their workout patterns are very similar accretive. It sounds very similar to all the other generations. There's nothing really that spins out that's different. And the average members working out about six times a month, and it holds true really across all generations, you believe it or not. And even the younger Gen Z, which is the teenagers are still the same. We even saw that during the High School Summer Pass last summer it sounds actually their workout pattern is very similar regardless of their age.

Great. Thanks, Chris. Best of luck.

Great. Thank you, Bradley.

Thank you, Bradley. We have our next question comes from John Heinbockel from Guggenheim Partners. John, your line is now open.

Hey, guys. I wanted to start with, Chris, how do you think the seasonality has changed versus 2019, both in terms of fitness being more top of mind and High School Pass being as important as it is, right? Do you think you're a little less reliant on the 1Q and 3Q and particularly 4Q will be bigger? And then also as part of that, right, if you think about High School Pass, right, the 7% penetration, you would think that would build over time, right? I'm not sure how it would build as you get people coming in a second, third summer? How do you think about that?

Yes. I think you probably recall, we were talking about the -- for a few years, even before COVID, that summers weren't quite the drop off. They were a year, many years ago, right? And that -- it wasn't just first quarter, first quarter will always be the biggest one actually. But you go 10, 15 years ago, summers were very different than they are today where we still today have some net member growth during the summer months, which typically 10, 15 years ago, we didn't. So there's definitely a little less of that. So, I think New Year's resolution thing is still good, but it's not quite about that as much as it's just about if it's you're work out to work out. And I think you're right on High School Summer Pass. You've heard in my opening remarks, I mean, in New Hampshire, we ran this three years where we have 11% of our high school age teams are members of Planet. Naturally, that's only 4%. So if you think about as we continue to roll this program out summer after summer after summer, you have to imagine that we continue to penetrate more as paying members of teens and get more members more of high schools to give a short again. What's interesting, too, is this coming summer, we did in 2019, and by the time we re-launched it this past summer, probably two-thirds of those teens are already out of high school by then. So, there wasn't a lot of teens that could repeat the free summer again. So it will be interesting with the 3.5 million teens that did last year, let's call it, the 18, 19 years old are off to college, get backfilled with the new 14, 15 years old, but there's going to be a big chunk of those -- the freshmen junior kids that are still going to do for the second time they're going to speak to their friends about joining them again. So hopefully, we can get more momentum this summer.

And then secondly, on international, right, when will that team be in place? How many countries, do you think you go into this year and maybe next year? And geographically, right, will Asia be the focus? And then lastly, I assume that you've not been interested in MFAs, and I assume you're still not.

Hey, John, thanks for the question. This is actually -- this is Edward. And I've actually jumped in a bit on the international side already. We're currently definitely taking inventory on the opportunities to really accelerate in that space and look to new geographies. As we said in the past, though, I think we're not really going to change that strategy in terms of entering one to three markets per year. I don't see that changing, not really interested in planning a flag just to do that. We really want to grow from a strong foundation and establish a real disciplined approach around that. But just to let you know on that, the initial read on Mexico and Australia, they really performed well. I've been really happy also with sales. And the model is actually translating very, very well in the markets outside the US. So in the process of expanding that team working with them now and you'll be hearing more about that in the future.

Okay. Thank you.

And John last point there. We still don't have interest in it.

Okay. Thank you.

Thank you, John. We have our next question comes from Brian Harbour from Morgan Stanley. Brian, your line is now open.

Yes. Thank you. Good morning, guys. Just on kind of unit openings, when I think about this year and when I think about hopefully stepping up in 2024 and 2025 based on what you've said, how much of that do you think will come from some other franchisees selling in for this specific issue you called out? How much of that is more just tied to like equipment availability and such? How much of that do you think will be international? I guess, I'm trying to just kind of parse out what you think will kind of drive that step up in the subsequent years?

Yes, Brian, it's Tom. I'll start that. So I think we still feel very good about what we said at Investor Day that over the three years, worldwide, we feel very good about being able to average 200-plus per year across the three years. And we said this year would have some headwinds. So we didn't expect it to be at that level when we were all together in November. I think – and there are some headwinds, costs are up. We talked about that. They're up about 20%. And typically, franchisees would be ahead of their development obligations before COVID. Not all of them, but a handful of them. And we talked about if you take the couple of years before COVID roughly 15% to 20% of the new units were built ahead of their obligations. And now with the situation, we've got franchisees. If they're ahead of their obligations as they sit here today with higher costs, and it seems like inflation is coming down, they'll probably wait that out a little bit versus maintain their more aggressive postures. Some will go ahead and build. Obviously, there's a lot of new units going in the ground, but some may just take a bit of a wait-and-see approach. And we've talked about and probably heard Chris say that, if it was clear that the costs were going to remain where they are, they probably just go ahead and pull the trigger because the returns are still great. And I think there's also still a fair amount of interest outside the system to come in because if you look at multiunit brands, we still believe large, our concept – our model is far less impacted by inflation. We don't have all the things that go with incremental growth. When you look at some of the food concepts, they may have low single-digit same-store sales, but they've got a lot of pricing and not a lot of traffic growth. Our business is quite the opposite. We've got 75% member growth driving the same-store sales. And the flow through, there's no additional cost for every new member, so the flow-through is terrific. So when you look at the absolute and relative returns, the absolute and relative four-wall economics, we think there's still going to be a tremendous appetite within the system and those who want to get in the system to come in and grow the units, and the same, both in the US and abroad because the model works in the countries that we've expanded to beyond the US. So, we feel good about it. We factored in all the puts and takes into our outlook. But I think our model still stands as one of the best, if not the best economic propositions in multiunit opportunities.

Okay. That sounds good. And maybe just -- I know you upgraded the app recently. Anything you would say just about the new application? Has it kind of driven improved engagement? I know you have a lot of digital sign-ups, but did that continue to go up? Just any comments on that?

Yes. We continue to get more and more traction. There's no doubt that the digital sign-up stay strong even when now with gyms open and people walking back in, they're still just joining on the app and a lot of them were in the web and they're joining well ahead of where they were pre-COVID. So it's not the old ways where they take a tour and touch and feel it and join that actually joining coming in as a member of the shoot. I think we just improve the flow-through of using the app and the ease of use, whether it's joining or it's simply using perks or referring a friend or checking the crowd meter. So it's more of that type of stuff. Referrals continue to get traction. The perks continue to get traction. And as you've heard in my opening remarks, we'll finally be able to take capture the data finding that out of the perks redemptions, the ones that have 25% of them haven't been into the club in three months or more, which you have heard some from my last comments from previous calls, the one thing that we're thinking and hoping is that the biggest reason for cancellation is just nonuse. I haven't used the club in three months, I haven't used the club in six months, and I'm just going to cancel. So we can provide value outside the four walls. And even if there's not business related, like is a huge plus for us. They did like $1 million in three months in the app, so -- in purchases. So it's -- we can provide value, people hold on to the membership just so they might have a chance to use it. And we actually just tipped the tipping point that out of all ones that used the perks and redeemed, the savings that just tipped $10. So again membership and you're buying stuff and all of a sudden, you're saving amongst dues by your discounts, this is starting to add up. It's a little bit like the AAA model.

Thank you.

Thank you, Brian. We have our next question comes from Alex Perry from Bank of America. Alex, your line is now open.

Hi. Thanks for taking my question, and congrats on a strong quarter. Just first, can you talk a little bit about how churn is trending versus pre-COVID, especially given members are using the more? Are you seeing customers that are more sticky. And then could you maybe just give us a little color on the rest -- if customers have been receptive to the annual fee increase that you guys implemented? Thanks.

Sure. Thank you, Alex. Yes, the retention is just slightly better than pre-COVID. So it's a little bit more stickiness now. Hard to really say exactly what cause. I think it's probably just maybe just more or less people pay attention to fitness more now and health than they were pre-COVID probably driving a lot of that, which I think is also why they're probably working out more than they were pre-COVID. So that's a good trend. Hopefully, that continues. What was the other…?

The annual fee.

On annual fee, yes, we tested that in about 400 -- 500 clubs pre-COVID -- excuse me, earlier last year. Saw no change in retention or acquisition, which is why we decided to roll it out middle of December. So it was great to see that result, for sure. And that again, to Tom's point, it certainly helps profitability of new stores, as we our stores as they convert over because again, it's new members going forward, but on a new build that is costing a couple of hundred thousand more, this just makes up for pretty quickly.

That's really helpful. And then just my second question, maybe give us a little more color on the -- how the halo promotion impacted member growth in Black Card penetration? And you mentioned maybe a similar upcoming promotion. Could you just maybe give us some more color there? And how you're thinking about utilizing these promotions to drive member growth this year?

Yes. Yes. It was a good promotion. And I think the tricky thing with our pricing is once we -- you typically normal non-promo, you might have an enrollment fee, but where have you, right? And during a promo, we'll drop the enrollment fee. But other than that, there's no -- there's not many other places to go we pay somebody to join, right? So it's been no enrollment fee and $24.99 or no enrichment fee or $1 down and $10 a month. But having a giveaway like this, definitely, it creates a little bit definitely more buzz, but also a little bit more incentive to want to join as opposed to just saving the enrollment fee. So you're getting two different things. You get enrollment free, a free $70 halo for joining, which is great. And the new joins was good, but it was really interesting, and we've never seen us with anything we've tried in the past is that people that were upgrading their current membership dues to the new $24.99 to get the halo. So $10 memberships we do on it, even old Black Card members that were paying $19.99 for many, many years were upgrading to the $24.99 just for the halo and signing a new 12-month contract, which was really something to see. So we would never really been able to influence upgrades. You've probably heard us talking about in the past where people come in, they join as a Black Card join as a White Card, and that's pretty a much yet. We very, very seldom have any volume of people upgrading once they've already committed to join. So it's interesting to see us finding something a tool that could get old members to pay a higher price in the future.

Perfect. That's really helpful. Best of luck going forward.

Thanks, Alex.

Thanks, Alex.

Thank you, Alex. We have our next question comes from Jonathan Komp from Baird. Jonathan, your line is now open.

Yes. Thank you. Good morning. I want to ask about the membership trends, how you're thinking about the year? If you look at 2022, you added 1.8 million members for the year, 1 million in Q1 of 2022. That's despite Omicron and then also not having your marketing in place for the full year. So just thinking through 2023, is there any reason that you wouldn't exceed those targets? And then, Tom, could you just comment on the NAF expectations? Would you expect the revenue to more closely track the expense for the year?

Yes. Hey, John, I'll start that. In terms of membership, as you know, we don't guide on membership. But I think based on what -- and we also stopped kind of our pandemic practice of talking about the current month when we're doing the earnings call. So we've sort of reverted back to our pre-pandemic. But I think, as Chris said, we felt really good about the record growth that we saw in Q4, the momentum coming in the New Year's Eve and carrying forward, so more to come on that on the next call. In terms of NAF, yes, we expect -- again, assuming there's no resurgence or something that goes haywire here, but we expect collections to equal our spend here this year. And actually, NAF in 2022 was slightly favorable than what we had been projecting. So -- but we thought that was -- those were the right investments to make from across the last 3 years. But as I said, expect the spend to equal collections going forward.

Yes. Great. And then just one follow-up, thinking about the margin benefit you outlined for new units from the pricing assuming that also benefits all stores in 2023 and 2024 as the pricing rolls in over time. Just how are you thinking about the right royalty rates the next few years, given the margin benefits and the membership recovery that you're seeing?

Sure, Jonathan, it's Chris. Yes, I think, as I said in the past, I think if COVID never happened and our track record of same-store sales was continuing to just layer on top of it with 53 straight quarters of positive comps, most of it member growth. And as you know, the flow-through is about $0.84 to the bottom line because once -- adding an extra couple of hundred members doesn't change the cost of running that store. That never happened, we probably already would have. I think as we still are coming back from getting close back to with their pre-pandemic margins and profitability, today, about we reported last time about 30% of our clubs were at or above pre-COVID membership, and now we're at about 43%. So we're going in the right direction. But the pricing is getting ahead of that. So as they recover, then it's probably a topic of conversation, not just yet, but again, an upcoming year or two, I think it's something that we'll probably have to consider.

Yes. That's really helpful. Thank you.

Thanks, Jonathan.

Thanks, Jonathan.

Thanks, Jon. We have our next question comes from Joe Altobello from Raymond James. Joe, your line is now open.

Thanks. Hey, guys. Good morning. I guess first question on the placement guidance. What's sort of baked in, in terms of the HVAC supply situation? Are you guys assuming it gets better by midyear? And will the cadence of placements to be similar to what we saw in 2022?

Yes. Joe, it's Tom. So we have factored in what we think is our best thinking on HVAC. We still are not hearing anything concrete from the large manufacturers we deal with in terms of when things get back to normal or anything opposed to what we experienced before in terms of lead times. We have worked to try to secure more production for us. So we -- but I think, overall, we're assuming it's more of the same. And I think our cadence in terms of the quarterly openings is not dissimilar to what we had historically.

Got it. And maybe just to follow-up on that. In terms of Black Card penetration, you mentioned it was down slightly. What's been the historical experience when you do raise Black Card pricing? Does it typically take a step back and then maybe 6 months to 12 months later start to grow again?

Yes. Historically, yes, it would come back slightly than a year later, you wouldn't even know it happened and it's getting traction again. We see this pullback. We tested this in a few hundred stores with no pullback. This one -- this pullback is really mostly driven from two things. One is the High School Summer Pass and the teens that are joining, they generally join not Black Card, which is putting pressure on it as well as such a strong record fourth quarter growth, which is all promotional-driven, definitely pushes it down as well. Although one was a Black Card, but the December sale was a White Card. So member growth is great, but it definitely puts a little bit of pressure on that. But that's the only reason I think it wasn't necessarily the pricing that drove it down was more just the volume of members.

Got it. Okay. Thanks, guys.

Thanks.

Thank you, Joe. We have our next question comes from Rahul Krotthapalli from JPMorgan. Rahul, your line is now open.

Hi, guys. Thanks for taking my question. Ed, this is more directed towards you. It's good saying you ICR. Given you're like two months into the – or just under two months into the role and clearly, you're wearing multiple hats leading most of the segments out there. What do you see are your current priorities? Or where do you want to focus in the near or medium term as you get more comfortable into the role? And where do you think you see the most opportunity?

Yes. Thanks for the question and great talk to again. Look, I've been in the role a little bit over 30 days now, right? And very happy that, I've joined the Planet Fitness team. I mean the business model, Chris and the team put together is just -- it's incredible. And the more I had learned about it, the more excited I got about it. I'm really excited about the future because although we're an industry leader, of course, I believe we're just getting kind of warmed up. And that's one of my priorities is in the growth side. And I mentioned earlier, taking inventory around what those opportunities are to really grow both domestically and internationally as well. So as Chris explained, I'm responsible for the primary business segments, including US and international franchise businesses, the corporate stores and equipment sales as well as technology and legal functions as well. So I've really spent my first few weeks in listening mode and engaging with as many stakeholders as possible, including franchisees, and that's really helped me to kind of take that inventory and putting that plan together to really focus on the growth space, which I'm really excited about.

Thanks for that. Tom, this is probably better for you. In terms of thinking about franchise margins, I mean, pre-COVID, we did like closer to, I think, mid-80s almost. Like how should I think about like going forward, given all the changes to the systems within franchisees and then also as we move towards like building more international stores? So over time probably more of a medium to longer-term range. How do you see this shaking out?

Yes, Rahul. I think you're talking about for the franchise segment. And I think where we see the margin today is kind of where we think they'll be given the investments we're making in the segment and the resourcing. And I think to Chris' point, over time, as we see that there may be opportunities to raise the royalty rate that will certainly help. But I think what you've seen here in the last little while is, especially on an adjusted basis, is more indicative of where we see it going forward. Once you adjust out the NAF discrepancy there. So, if you equalize the NAF to be not an investment, but we're collections and spend equalize, then that's a more predictable margin going forward. That's the one big adjustment you have to make that role.

That's helpful, Tom. Thank you.

Thank you, Rahul. We have our next question comes from Chris O'Cull from Stifel. Chris, your line is now open.

Great. Thanks, good morning, guys. This is Patrick on for Chris. I wanted to touch on the mix of company development for this year. I mean, you're obviously planning to increase CapEx spend and that would seem to company store openings would accelerate relative to history. But I was hoping you could frame that out a little bit more as we just think through what that additional investment could look like in terms of corporate store unit growth relative to maybe the pace you've held in the past?

Yes. Hey, Patrick, it's Tom. So I think we opened 14 new corporate stores this year. And I think you could -- well, we don't typically guide on that. I think we expect to be in the same range, maybe up a little bit from that for 2023. And I think now with we had some transition there. And I think now with Jen Simons, who ran strategy working with Chris for a number of years now in the role and really focused on that growth, we are very bullish on the opportunities that we've seen so far and want to enhance the pipeline to really crank that up. The margins that we've talked about that were very attractive for the territories that Sunshine operated mostly in the Southeast. We're seeing that come through on the new opportunities that we see. But also, as Chris alluded to, with the -- on previous calls, with the practices that the marketing team and the broader team that Sunshine had get cascaded into our legacy markets, we're seeing accelerated growth. And for the first time, as you know, where those stores are leading the system versus they typically trail the system given they were a higher mix of more mature stores. So we think the opportunities are out there, both in the legacy markets for new opportunities as well as the newly acquired territories. So it's a matter of putting the -- putting additional resources, which we are against that -- against the development opportunities that we see. So we expect that number will likely be higher in the future.

Great. That's helpful. And that was actually a great segue. And then my second question, which is you guys had mentioned the focus of the team a couple of times in terms of driving the corporate store same-store sales performance. So I was curious, what are the things that are happening today that maybe weren't happening previously? And what's really driving that result? And then on the margin side for the company stores, can you give us a sense of what percent of the corporate store portfolio has recaptured their pre-COVID membership levels maybe relative to that overall system average? And how should we be thinking about the opportunity for corporate store margin performance in 2023 to maybe fully recapture at some point in the year, the 2019 margin levels? Or do you still see that being a slower build that maybe pushes out even into 2024? Thanks.

Hey, Chris, this is Chris. I'll start, and then I'll hand it over to Tom. I think the -- a lot of the same-store sales benefit, I think we're seeing is really a much more disciplined approach and cadence to the marketing of the legacy stores that wasn't played in place. And you may recall, like our corporate stores didn't really have a dedicated team, they were tapping into our marketing team here, who also services the franchisees was tapping into the development team who is also working to the franchisees. So now they have their own development people, their own marketing people. I think it's a more disciplined approach, which is helping and also some operational and I guess some gamification or competition amongst staff in different club locations to outperform, whether it's Black Card upgrades or closing percentages or things like that. So I think it's just getting the team more, I guess about servicing the customer and the coming through the get them to choose better membership. So I think it's a little bit of that from an option also a disciplined marketing approach. And then I'll have Tom to answer the margin question.

Yes, Patrick, as you know, we don't guide on segment margins, but I think maybe just to talk about it more generally, the corporate store portfolio isn't too far off from where the system is in terms of recovery to pre-COVID levels. And it's a little bit different between the legacy markets and the Sunshine markets, given the legacy markets were hit harder during some of the mandates and temporary closures. But I think the way to think about it is if you're looking at the 2019 margin that was for corporate stores. Those were all legacy stores. And now we're mixing in the Sunshine stores, which had more store growth and more ramping stores. So there's a bit of a nick on that. But overall, as you've heard us say, at the time of the transaction when we were talking about it, the mature stores that Sunshine had generally were 600 to 700 basis points higher four-wall margin than the mature market -- or sorry, the mature stores in our legacy markets. So there's kind of an averaging effect there. We don't want to really predict the timing of when we cross that threshold, so to speak. But I think that mix impact will be important as well as the pricing impacts, both on the Black Card and the -- in the annual fees as more of those new members feather into the mix, that will certainly boost the margin. But I think what we don't want to lose sight of either is we're predicting high single-digit same-store sales growth 75 in Q4, like as it's played out historically, three quarters of that growth is member growth, and we expect that to continue back to the opportunity over time to double membership. So it's very healthy growth, and the flow-through is just incredible, which on the member growth from the same-store sales and even accelerated by the pricing actions we've taken. So I think good news ahead for corporate store margins as well as our franchisees, obviously.

Great. Thanks guys.

Thank you.

Thank you. We have our next question comes from Ryan Cohen from Jefferies. Ryan, your line is open.

Yes. Thanks for taking my question. This is Ryan Cohen for Randy this morning. Given the strong growth in Gen Z and millennial penetration, just curious if you could provide your thoughts around how consumers shifting their focus towards strength training could impact performance and retention? And similarly, are you thinking about maybe rematching the equipment proportions at franchises?

Yes, it's a good question. And it's actually something we've already begun to do. We have seen ever since COVID and the increase in our member base of Gen Zs and millennials continue to grow as they have been in the past. But Gen Zs now are our second largest part of our member base, and it was one of our smallest pre-COVID. So it's -- what we have witnessed is that there's less cardio to pre-COVID, most of it says they're doing weight training and it's more functional stuff and that have a TRx stuff. So we have begun and we've worked with a couple of universities to see the habits of college age kids and then also what we've witnessed in our own stores and begun to fine-tune some of that. So it's a slight decrease in cardio and more gym space for functional training and some type stuff, things like that. So we already have begun to do to adapt to the growing population of our clubs that are the younger.

Great. Thank you.

Ryan, you’re welcome.

Thank you, Ryan. We have our last question comes from Linda Bolton Weiser from Davidson. Linda, your line is now open.

Hi. I was curious just about the comment you made about the increase in, I think, it was opening costs now versus pre-COVID. I think you said 20% higher. Is that primarily equipment cost or something else? Or can you just give a little more color around like that number and what goes into that?

Yes. Linda, it's Tom. Yes, I think it's consistent with what we've talked about on prior calls and at Investor Day that roughly 20%. And we did -- we also talked about we had passed along some price increases from our equipment vendors low double-digit price increases based on the inflation they were seeing and had not changed the price for a while. And we passed that along and maintained our margin rate on that. So that's a part of the increase. And -- but I think what we're also seeing, of course, it depends on the market. There was also inflationary pressure on some of the materials, right, this deal and the concrete and whatnot. And that's ebb and flow depending on the commodity. But I think also the general contractor expenses, again, depending on the market and the tightness of their labor and supply and demand has also caused an increase. So when you roll it all together, that's been the 20% or so increase. What I was referring to earlier about our model has less of an inflationary impact. We're not serving food, we're not selling apparel. We're not doing things that have seen price increases. It's really the price increases that we've seen or the inflationary pressures has been in the cost. And the wages, which are largely behind us, they spiked quite a bit in 2021 and part of 2022, but we've seen that moderate. So it goes back to the margins and the returns compared to other concepts, it's -- our model is just far less impacted by some of those things. But definitely, the cost of construction is up about 20%. So hopefully, that answers your question.

Yes. Thank you very much.

Okay. Thanks, Linda.

Thank you, Linda. This marks the end of the Q&A session. I will now pass the floor back to Chris Rondeau, CEO of Planet Fitness for closing remarks.

Thank you, Lynn. Really, really pleased with our strong ramp-up for 2022 with a record fourth quarter. I was actually at the Times Square event in New Year's Eve to see Time Square back to normal and to kick off our January sales will carry momentum forward. Really excited to this year with the new continue with the Black Card price at $24.99 and the annual fee increase, which I think is really going to be beneficial and great to see the price elasticity that we have and continue to have and re-kicking off past in a few months. So all good news and good trends ahead. So thanks for joining the call today, and look forward to speaking again.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.