Business Overview and Chronology
Xponential Fitness, Inc. (NYSE:XPOF) is one of the leading global franchisors of boutique fitness brands, operating a diversified portfolio of nine concepts spanning verticals such as Pilates, indoor cycling, barre, stretching, dancing, boxing, functional training, metabolic health, and yoga. The company’s unique franchise model and strategic expansion efforts have propelled its growth trajectory, making it a prominent player in the dynamic fitness industry.
Xponential Fitness LLC (XPO LLC) was formed on August 11, 2017 as a Delaware limited liability company for the sole purpose of franchising fitness brands in several verticals within the boutique fitness industry. The company’s expansion strategy has been centered around acquiring and integrating various boutique fitness concepts into its platform, leveraging its expertise in operations, marketing, and franchisee support.
Xponential Fitness, Inc. was formed as a Delaware corporation on January 14, 2020 for the purpose of facilitating an initial public offering (IPO) and entered into a series of transactions to implement an internal reorganization. Prior to the formation of Xponential Intermediate Holdings, LLC in February 2020, the company was a wholly owned subsidiary of HW Franchise Intermediate Holdings, LLC.
In connection with the IPO, Xponential Fitness entered into a series of transactions to implement an internal reorganization. The pre-IPO members of Xponential Intermediate Holdings, LLC who retained their equity ownership in the form of limited liability company units are referred to as Continuing Pre-IPO LLC Members.
In 2021, the company completed its initial public offering, raising $200 million and further solidifying its position as a leading player in the fitness franchise space. Over the years, Xponential has strategically expanded its brand portfolio, adding concepts such as Club Pilates, CycleBar, StretchLab, YogaSix, Pure Barre, Rumble, BFT, and most recently, Lindora, a provider of medically guided wellness and metabolic health solutions, which was acquired in January 2024.
As of September 30, 2024, Xponential Fitness operated a global footprint of 3,178 studios, with 2,722 studios in North America and 456 international studios. The company’s franchisees were contractually obligated to open an additional 1,740 studios in North America and 1,090 studios internationally, providing a robust pipeline for future growth.
Financial Performance and Metrics
Xponential Fitness has demonstrated strong financial performance, with revenue of $236.53 million for the nine months ended September 30, 2024, compared to $228.47 million in the same period of the prior year, representing a 3.5% year-over-year increase. The company’s North America system-wide sales, which serve as a key indicator of the health of its franchise network, reached $431.2 million in the third quarter of 2024, a 21% year-over-year increase.
The company’s focus on delivering a best-in-class franchisee experience has been reflected in its strong average unit volume (AUV) performance. In the third quarter of 2024, the company’s North America run rate AUV stood at $631,000, up 8% from $585,000 in the prior-year period. This growth was driven primarily by an increase in the number of actively paying members and a favorable trend in the proportionate studio openings from the company’s scaled brands.
Xponential Fitness’ adjusted EBITDA for the third quarter of 2024 was $31 million, representing a 17% year-over-year increase and an expanded adjusted EBITDA margin of 38%, up from 33% in the previous quarter and the prior-year period. This improvement in profitability reflects the company’s ongoing efforts to optimize its operations and support its franchisees’ success.
For the full year 2023, Xponential Fitness reported revenue of $318.66 million and a net loss of $17.48 million. The company generated operating cash flow of $35.42 million and free cash flow of $26.21 million in 2023. In the most recent quarter (Q3 2024), the company reported revenue of $80.49 million, a net loss of $17.97 million, operating cash flow of $10.91 million, and free cash flow of $4.67 million. The year-over-year revenue growth for Q3 2024 was 0.10%, primarily driven by increases in franchise revenue and equipment revenue, partially offset by a decrease in other service revenue.
Xponential Fitness operates primarily in the United States but has a growing international presence. For the three and nine months ended September 30, 2024, the company generated $3.81 million and $10.36 million of revenue outside the United States, respectively, compared to $3.35 million and $10.34 million during the same periods in 2023. As of September 30, 2024, the company did not have material assets located outside of the United States.
Liquidity and Capital Structure
As of September 30, 2024, Xponential Fitness had $37.8 million in cash, cash equivalents, and restricted cash, down from $51.9 million as of September 30, 2023. The company’s total long-term debt stood at $353.8 million, an increase from $329.7 million as of September 30, 2023, primarily due to additional borrowings to address lease termination payments and for general working capital purposes.
The company’s capital expenditures are expected to be in the range of $8 million to $10 million for the full year 2024, or approximately 3% of revenue at the midpoint, with a focus on technology transformation initiatives and the integration of the recently acquired Lindora brand.
Xponential Fitness’ debt-to-equity ratio was -2.23 as of September 30, 2024. The company has a $212 million senior secured term loan facility, of which $353.75 million was outstanding as of September 30, 2024. The current ratio stood at 1.02, and the quick ratio was 0.90 as of September 30, 2024, indicating the company’s ability to meet its short-term obligations.
Guidance and Outlook
For the full year 2024, Xponential Fitness is reiterating its guidance for system-wide sales to range from $1.705 billion to $1.715 billion, representing a 22% increase at the midpoint from the prior year. The company’s total revenue guidance remains unchanged at $310 million to $320 million, a 1% year-over-year decrease at the midpoint.
Adjusted EBITDA is expected to range from $120 million to $124 million, reflecting a 16% year-over-year increase at the midpoint and an adjusted EBITDA margin of approximately 39%. The company has lowered its guidance for global new studio openings in 2024 to a range of 490 to 510, a 10% decrease at the midpoint from the prior year, as it focuses on ensuring franchisees meet minimum membership levels and are fully prepared prior to opening new studios.
Xponential Fitness now expects total SG&A to range from $145 million to $160 million, an increase driven by higher legal costs and one-time lease restructuring charges.
Risks and Challenges
Xponential Fitness operates in a highly competitive fitness industry, facing competition from other boutique fitness franchises, as well as larger gym chains and alternative fitness options. The company’s success is dependent on its ability to attract and retain qualified franchisees, maintain brand relevance, and adapt to evolving consumer preferences and industry trends.
Additionally, the company’s financial performance is subject to macroeconomic factors, such as inflation and consumer discretionary spending patterns, which could impact the profitability of its franchisees and the overall demand for its services.
Regulatory changes and legal proceedings, such as the ongoing investigations by the Securities and Exchange Commission, the U.S. Attorney’s Office, and the Federal Trade Commission, could also pose risks to the company’s operations and financial position.
The company faced a federal securities class action lawsuit filed in February 2024 alleging misstatements and/or omissions in certain of the company’s financial statements, press releases, and SEC filings. Additionally, a shareholder derivative lawsuit was filed in March 2024 making similar allegations.
In May 2024, the company experienced a significant leadership change when its former CEO, Anthony Geisler, was removed from his duties and suspended indefinitely by the board of directors on May 10, 2024. He resigned as CEO effective immediately on May 13, 2024. The board then appointed Mark King as the new CEO effective June 17, 2024. This leadership transition may pose challenges to the company’s strategic direction and operational continuity.
Product Segments and Revenue Streams
Xponential Fitness generates revenue through various segments:
Equipment Revenue: Revenue from the sale of equipment packages to franchisees for studio openings reached $41.51 million for the nine months ended September 30, 2024, a 3.5% increase year-over-year. While global equipment installations declined, the average revenue per installation increased due to a higher proportion of equipment being installed for brands with higher equipment prices.
Merchandise Revenue: Sales of branded merchandise to franchisees and consumers generated $20.59 million for the nine months ended September 30, 2024, a 14.3% decrease from the prior year period, attributed to lower demand from studios, sales promotions, and a reduction in the number of company-owned transition studios.
Franchise Marketing Fund Revenue: This segment, which collects marketing fees from franchisees to promote Xponential brands, generated $24.78 million for the nine months ended September 30, 2024, a 25.3% increase year-over-year, in line with the growth in the number of operating studios and same-store sales.
Other Service Revenue: This segment, which includes revenue from digital platform offerings, on-demand fees, and other miscellaneous services, generated $20.42 million for the nine months ended September 30, 2024, a 49.0% decrease compared to the prior year period, primarily due to a $17.50 million decline in package and membership revenue from the lower average number of company-owned transition studios.
Conclusion
Xponential Fitness has established itself as a leading global franchisor of boutique fitness brands, leveraging its diverse portfolio and strategic expansion efforts to drive growth. The company’s focus on delivering a best-in-class franchisee experience, coupled with its strong financial performance and liquidity position, positions it well for continued success in the dynamic fitness industry. However, Xponential Fitness must navigate the evolving competitive landscape, macroeconomic challenges, regulatory scrutiny, and recent leadership changes to maintain its momentum and deliver sustainable growth for its shareholders.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.