Sharon Zackfia: Hi. Good morning. I kind of want to make sure everyone understands the arc of membership. There’s a lot of moving parts this year. I guess you talked about obviously what happened with the social media noise in March. And it sounds like rebounding joins subsequently, but elevated attrition. Are you looking at the second quarter having attrition outpaced joins? Or are we going to see a sequential kind of down quarter in membership?
Thomas Fitzgerald: Sharon, this is Tom. I appreciate the question. As you know, we don’t guide on membership. And I think what I would say is all the things that we expect to happen in membership, and again, it’s a forecast, right, we don’t we don’t know, are factored into our same-store sales, which is the primary driver there. As you know, member growth is still typically 70-ish percent of our same-store sales growth. So while it’s still positive, it’s definitely called down and also with a wider range because it is a little bit more difficult to predict, and we certainly have seen a fairly consistent trend in cancellations year-on-year. We had a number of quarters with year-on-year improvements in attrition. More recently, I think in Q4, it was more flat.
And in Q1, in the early part, it was kind of a similar trend and then it definitely elevated in the back half of March through more recent days. So that’s factored into how we adjusted our outlook for same-store sales and the cascading effects or ripple effects on all the other metrics.
Sharon Zackfia: And then I just want to talk about kind of timing of the Classic Card increase. I mean I think in the press release and on this call, you talked about consumers looking for more value. It does seem like an odd time to take a 50% price increase on the Classic Card. I understand why the franchisees would want it. But I’m also curious, competitively, where you ran these tests, and there are going to be regions where you’re not the lowest priced anymore. So how do you think about that? And how do you think about the messaging associated with that price increase?
Craig Benson: Sharon, I’m not sure that what competition may or may not do. There’s also a school of thought that if we move other people move it’s sort of been waiting for us to do something. We haven’t touched the Classic Card since 1998. $10 is Tom said in his opening remarks, I think it’s worth about $21, $10 worth around $21 now. And we’ve seen in every industry, people moving price. So it is not going to come as a shock to anybody that we are moving a price that’s been in effect for a long, long time, 25 years. And so we, again, tested it pretty rigorously in multiple markets with good control groups and again saw positive results. We think that this is the right time to do it. We also think it’s the right time to look at different options on the Black Card, which may or may not change.
But we have to be aggressive in testing and innovating amenities and end pricing. And so we’re going to do that. OpEx and CapEx are two ingredients for running a successful club. And some of these price changes do change some of the OpEx calculations that are going on, whether it’s changes in pay scales and/or its changes in rent or its changes in depreciation schedules, they all have changed and so we need to recognize that.
Thomas Fitzgerald: And Sharon, maybe just to add a couple of things to Craig’s comments. As you know, about 60% of the people who joined join as Black Card members. So that is an important point for those who aren’t familiar. I know you are. And I’d say the second point back to what Craig said, we’re a promotional brand. We’re trying to get people off the couch, 40-ish percent of our new members have never belonged to any gym in their life. So I think it’s just a question of the messaging and the types of promotions, but we’re not saying back in the day, we’re not doing a JCPenney of walking away from all the promotions and going to full price. That’s too abrupt. I think it’s just a matter of changing the elements, but still not taking our foot off the promotional accelerator.
Operator: Your next question comes from the line of Joe Altobello from Raymond James. Please go ahead.
Joseph Altobello: Thanks. Hey guys. Good morning. The first question on the price change. I understand you couldn’t share the $15 level with franchisees ahead of time, but I’m sure you’ve gotten plenty of feedback during the test. So what does that look like? And has it been uniform or does it vary by market since $15 in one geography is a lot different than $15 in another, for example?
Craig Benson: Yes. But the interesting part is that we looked to test across different demographics, markets. And again, with control groups matched up pretty well. And we were able to say that the price change to this $15 level would work across the board. And so we did take all that into consideration. Again, we spent a long time on this test. You recall, Joe, that we started the first set of tests last August and they progressed through the fall and all the way to almost April. And so we do have a lot of test data by markets. It just — it seems like the right time to do what we did and the right messaging. And again, the feedback from New Orleans, again, we can’t tell them, but a lot of talk about needing some relief on the pricing front.
Joseph Altobello: Okay. Very helpful. And maybe a second question on the advertising campaign. You mentioned it wasn’t as effective as you would have hoped. Was the big issue, the inability to highlight a uniform price, which, I guess, now changes going forward?
Craig Benson: Well, it’s a factor. It’s not the factor. And so the last portion of the advertising in that first quarter is 5x-ish more than the national advertising. So it’s a big thing. And the local advertising did have a pricing element that national did not. So — but again, I go back to the fact that we have to be more than just about price. Tom’s point about promotion is we’ll always be a promotional brand, totally get it. But we need to be also talking about all the other benefits we bring to the market. And I think that creates stickiness. And having a brand allows us to be more targeted towards reinforcing a message that we found to be successful versus not having a successful brand where you’re taking potshots at what might work and what might not.
And so — and it’s always anchored around promotion. So I think Colleen is going to come in and do a great job with this because, as Tom mentioned earlier, she has in her past has juggled 10 brands simultaneously, and you can’t step on one for the benefit of the other and you have to clearly create market space for each one of them with a differentiated message. She knows way more about this than I do by a long shot. So I’m looking forward to coming in.
Operator: Your next question comes from the line of Max Rakhlenko from TD Cowen. Please go ahead.
Maksim Rakhlenko: Great. Thanks a lot, guys. First, can you remind us how many members gyms open with these days? And what does the member waterfall look like over the first few years? And then you previously noted that the 5-point growth plan would contribute about 500 basis points to IRRs. So curious, what about this? How does this price increase compare? And then when you combine the two, does it get franchisees’ IRRs potentially quite close to back in line with pre-pandemic levels?
Thomas Fitzgerald: All right, Max. You win the award. Let me — so the first one is on the ramp. So I think in terms of how stores open. So we measure it through presale periods day one and then subsequently. And I think the good news is we continue to see through Q4 and the early part of Q1 here, very similar ramps that we saw pre-COVID, not quite back to where they were, but definitely much closer than we’ve seen in the prior years. Certainly, in aggregate, the trends that we’re talking about that are affecting our outlook will affect some of that ramp a little bit. But hopefully, again, that’s temporal in nature. I would say the moves that we made in the new growth model to get it somewhere between a 5% and 10% cost reduction in the cost to build, we’re ahead of schedule, as Craig mentioned in his prepared remarks there.
And the team is continuing to look at ways to find more savings that do not affect the members’ experience. So I feel really good about the progress the team has made on that. The — and combine that with the changes we made in the CapEx obligations, both extending the franchise agreement from 10 to 12 years, adjusting the strength in cardio mix and all the rest that you know moving reequipped cycles out on average a year. We believe we’ll definitely get us back to sort of closing more than half of the gap that we’ve had in our IRRs recently versus pre-COVID. This pricing test, we believe — it takes a while for the members to feather in at $15. As we model it based on the results we saw over the many months of testing, we believe that after a year or so, when the membership has more mix than at $15 that there’s probably a low to mid-single-digit improvement in AUV, which will certainly help improve the IRR.
It may not get — depending on the circumstance, it may not get it back all the way to pre-COVID, but further helps chip away at the remaining gap that we talked about. So we’re the pre-COVID unlevered IRR would might be in the low 30s, more recently and be in the low 20s, the changes in the new growth model get it to the mid-plus-20% range. So this would just be even more accretive may not get back to the low 30s, but we’re continuing to find ways to reduce the cost, which should continue to close that gap as well.
Maksim Rakhlenko: Got it. That’s helpful. And then this one should be a little more qualitative. But can you speak to the competitive environment. Some of your HVLP peers have been seen pretty significant growth in the opening. It seems like they might have had a bit of a better first quarter. A lot of those boxes are almost twice the square footage of your gyms. So just curious how you’re thinking about the competitive set and whether that may have driven part of the weakness here in 1Q? And then just bigger picture. The competition today is certainly stronger than previously. It’s better financed, so definitely going to be something to watch going forward. So curious how you’re thinking about where the biggest opportunities are for you guys to step up your own execution because this might become a bigger risk going forward?
Thomas Fitzgerald: Yes, Max, it’s a good question. And I think you’re right. Certainly, in pockets, both geographically and competitively, brands, there are pockets that are stronger than others. Crunch definitely took down quite a bit of space in 2023 and some of that is where they have franchisees that are PE backed and a bit more aggressive kind of like some of our folks. There are some other bigger boxes like EOS and Vasa that offer a much bigger box and a whole lot more inside of it, whether it’s a pool or classes or the theater, cycling rooms that some of them have. I’d say what they all don’t do is provide a non-intimidating environment. We still think that’s the thing that sets us apart from the rest. Some use the words.
But if you go in there it’s kind of loud because people are banging weights and granting and doing all kinds of things that if you’ve never been in a gym is going to intimidate you. So we still think that’s an important part of what we do that others don’t do and really can’t do based on the number they attract. So I think back to what Craig was saying about the brand, the positioning, the projection and the messaging, that’s got to come through probably stronger. And to many people, that’s way more important than whether we’re $10 or $15 based on some of the research we’ve done. Because if you’ve never been, we used to say people get to the parking lot and they’re afraid to go in the front door because they’re not sure what’s on the other side.
So we — to the extent that we can ease that anxiety, we don’t think our competitors will. Will there be more — so I think they’re still going after the 20%, we’re still going after the 80%.
Operator: And your next question comes from the line of Korinne Wolfmeyer from Piper Sandler. Please go ahead.
Korinne Wolfmeyer: Hey, good morning, guys. Thanks for the question. I’d like to touch a little bit on, first, the international expansion. I know we’ve been focused more on the U.S. today, but if you could provide an update on efforts internationally in the Spain efforts, that would be great?
