Description

Investment Thesis: Xponential Fitness (XPOF) is the leader in the boutique fitness market with a rapidly growing footprint, large recurring revenue base, and a significant addressable market relative to its size. XPOF has strong competitive barriers to entry given its market leading brands in 5 of the industry's largest verticals - pilates, barre, indoor cycling, yoga, and rowing. With a 3+ year and growing contractually obligated pipeline of new studio openings, XPOF has a high degree of revenue and earnings growth predictability with 20%+ organic growth projected for the next few years. The company’s asset-light franchise business model is highly scalable. Given the expected revenue growth, this should translate into a doubling in current adjusted EBITDA margins on a ttm basis to 40%+ in the next 3 years. Moreover, this should provide high free cash flow, which can be used for future brand acquisitions. Underscoring the company’s highly resilient business model, XPOF opened 350 locations through the pandemic. Despite recessionary concerns, the company’s key KPI’s have now rebounded post-COVID to new highs and management has recently raised its near-term revenue/profitability guidance. Additionally, our highly correlated alternate source data shows that XPOF’s North American system sales in Q3 were at to modestly above consensus expectations and early data thru October show they are tracking well, suggesting the possibility of some upside in revenues and earnings versus FY22 consensus forecasts.

Our review of management’s long-term financial targets shows they are likely conservative, especially relative to revenue growth. Our revenue analysis suggests that if management hits its annual new store opening targets over the next 3-5 years (a high probability given the large pipeline of new licenses sold), organic revenue growth should exceed management’s low-to-mid teens forecast and compound at 20%+. Management is guiding for 500 new studios openings per year on a base just under 2,500, which implies 20% annual growth. Furthermore, the company projects mid-high single-digit comp growth, which puts revenue growth in the initial years at north of 25%. Given scalable operating expenses, adjusted EBITDA (excluding acquisitions) should grow by a CAGR of ~30% (vs management’s target of 20%-25%) over the same period. Given the company’s history of accretive M&A, potential new brand/category acquisitions are likely to occur and could add to this growth. With KPI’s now normalizing to pre-COVID levels, we model full year FY23 EPS of roughly $1.00/share growing to $2.50-$3.00+ in 5 years. Given where franchised peers trade, we think XPOF should trade at 30x earnings or greater. This translates into a $75-$90 target price in 5 years, or a 33-38% IRR. 

We believe there are a number of parallels between XPOF and Planet Fitness (PLNT-NYSE) at similar points in their life as a public company relative to the share price and valuation. Despite compelling growth in profitability early in their public trading history, both stocks exhibited lackluster appreciation. As a result, their valuations did not properly reflect their future growth potential. However, after a period of continued solid growth and execution, PLNT saw an increase in investment sentiment and a significant extended period of rapid share appreciation. We suspect that as XPOF continues to execute and deliver strong growth in profitability, the concerns surrounding the shares will begin to dissipate. Similarly to Planet Fitness, we believe the shares will re-rate higher and significantly outperform the market over the next 3-5 years.

The Dominant Industry Leader With A First Mover Advantage And Strong Competitive Barriers: Xponential Fitness LLC was founded by CEO Anthony Geisler in August 2017 and Xponential Fitness, Inc. was incorporated in Delaware on January 14, 2020. Geisler acquired Club Pilates in March 2015 and served as CEO until 2017, during which time he formed Xponential Fitness LLC a platform upon which to acquire and consolidate various boutique fitness brands. The company acquired Club Pilates as its first brand in September 2017. Xponential Fitness LLC became a wholly owned subsidiary of Xponential Holdings LLC on February 24, 2020. The company completed its IPO on July 23, 2021.

XPOF has a dual class ownership structure and a complicated legal operating structure instituted through various reorganizations (known as an Up-C structure). This allows continuing pre-IPO LLC members to continue to realize tax benefits associated with a pass-through entity for income tax purposes. Despite the dual class ownership structure, the voting rights of management and the founders are equal with shareholders. The details of the post-IPO operating and ownership structures are available in various SEC filings, but PE firm Snapdragon Capital owns ~20% of the company, CEO Geisler owns about 20% of the company (through his ownership in Snapdragon) and other management about 5%.

The genesis for creating the XPOF platform began in 2001 when Geisler purchased LA Boxing, a small California gym that he had been a customer of. He grew the company to 200 locations in 35 states and sold the company in 2012, but stayed involved in the business until 2014. Realizing the business opportunity in specialized workouts, Geisler acquired Club Pilates in 2017. He then utilized the same formula and many of the same people to grow the new company from a small collection of about a dozen boutique pilates studios concentrated in California to 750 locations today. 

Geisler went on to receive funding from TPG Growth, where he met partner Mark Grabowski, XPOF’s current Chairman. Grabowski left TPG in 2018 and founded Snapdragon Capital Partners, which became a major investor in XPOF and oversaw the platform’s consumer investments. Since creating the XPOF platform in August 2017, it has grown to 10 brands and 2,357 locations with total signed licenses of 4,935 as of June 30th. This equates to a pipeline of 2,578 additional future studio openings. Noteworthy, within the individual brands, Club Pilates is the largest pilates brand in the U.S., PureBarre is the largest barre studio in the U.S., CycleBar is the largest indoor cycling brand in the U.S., YogaSix is the largest franchised yoga brand in the U.S., and Row House is the leading rowing brand in the U.S. The chart below illustrates the brand evolution of the XPOF platform in key fitness verticals.

Source: Xponential Fitness

One of the factors that has helped the company to put together a portfolio of leading boutique brands has been the company’s first mover advantage. By being one of the early implementers of this concept, XPOF has been able to acquire many of the leading brands early in their growth cycle. Thus, XPOF has been able to hit the ground running in growing already established brands versus a greenfields approach which would have taken longer to build each brand from scratch. As illustrated below, this has enabled XPOF to become somewhat of the “800-pound gorilla” in the space and has created significant barriers to entry  for potential competitors to try to copy.

Source: Xponential Fitness investor presentation

The diversity of XPOF’s different brand offerings in various sectors of the boutique fitness market provides a competitive advantage that the company is capitalizing on. This is best exemplified through the company’s  XPASS & XPLUS programs. With the exception of PE firm Roark Capital, who owns Orange Theory, no other fitness boutique is multi-branded like XPOF. Thus, for customers who have different health & fitness needs or just like the option of different workouts, XPOF, with a number of the leading fitness concepts, offers a unique proposition. 

Through different priced packages, XPASS offers four monthly subscription plans that allow members to enjoy classes at its different brands (except BFT) to vary their workouts. The price and point structure of the XPASS program is designed to optimize studio class inventory through dynamic pricing and to efficiently fill class vacancies. Franchisees receive ~70% of the subscription fee from the XPASS program, and the company receives approximately 30% of the subscription fee. This makes the program attractive for both consumers and its franchisees. Likewise, the company also offers a XPLUS digital platform with over 3,900 workouts from all brands except BFT. XPASS was launched in late 2021, was breakeven in 2Q22 and is bringing in 15% of the new leads. The program has been an acquisition driver with 25% of XPASS members being brand new to the XPOF ecosystem and has also been valuable at reactivating dead leads.

Well Positioned In A Fast Growing Sector Of The Fitness Industry With A More Resilient Customer Base: The overall fitness industry has been a fairly consistent growth industry over the last two decades. According to the IHRSA, The Global Health & Fitness Association, the US general fitness industry has recorded 21 consecutive years (1998-2019) of annual growth prior to the pandemic. Within the overall $37 billion US fitness market, the boutique fitness sector (~$22 billion) has been the fastest growing segment of the market and constitutes a growing percentage of the overall market. Boutique fitness studios have grown membership faster and have higher customer retention rates than big box gyms.  Boutique fitness studios are expected to grow at a 5.8% CAGR through 2025. 

Source: Frost & Sullivan

The typical XPOF customer profile is that of a 20-60 year old female, with a bachelor’s degree and a household income of ~$130k annually. For this customer, fitness tends to be viewed as a way of life and a social experience as opposed to a temporary activity to try to achieve a weight loss goal. A Frost & Sullivan commissioned study showed that the target consumer for boutique fitness spent more money and engaged in fitness facilities more frequently than the average health and fitness club member in 2019. This is supported by the fact that ~90% of XPOF members are on recurring memberships. 

XPOF’s customer base appears to be more resilient to economic swings than “big box” gyms. This was proven out to some degree during the pandemic, when XPOF franchisees opened ~350 new locations.  Furthermore, when all studios reopened post-pandemic, most of the company’s major financial KPI’s quickly rebounded to/above pre-pandemic levels. The following charts show how the company’s same store sales (SSS), average unit volumes (AUV’s) and system sales have recently rebounded above pre-pandemic levels to new highs.

Source: Xponential Fitness & SEC filings

The health of the typical boutique fitness customer contrasts somewhat with that of typical “big box” gym customers. According to IHRSA, the health and fitness club industry experienced unprecedented damage in 2020/21 during the pandemic. To quantify this, the U.S. experienced a 58% decline in 2020, with eight major health and fitness brands entering bankruptcy and 30% of boutique studios closing permanently in 2020. Among “big box” gyms that filed for bankruptcy include 24 Hour Fitness, Gold’s Gym and New York Sports Clubs parent company, and Town Sports International. With roughly 30% of the capacity of gyms in the industry closing permanently, this creates an opportunity for well financed/positioned boutique studio brands like XPOF to capture some of these former members. 

Some Investor Concerns Unwarranted Or Overblown: There are two major pushback concerns that we have heard for investors regarding a potential investment in XPOF. Firstly, in light of some concerns from investors, it is important to point out and contrast the post pandemic rebound and continued growth in XPOF’s KPI’s compared with the fall off in business that Peloton Interactive (PTON-NYSE) has seen in its business in the same period. This highlights the differences in the customer base of each company. On one hand, growth for PTON appears to have faded as the pandemic and stimulus ended and more people who had lots of free time at-home returned back to in-person corporate work environments. However, as most XPOF customers view health and fitness as a continuous part of their lifestyle and outside of home daily routine, the company’s KPI’s have rebounded quickly to new highs and continue to increase further. Thus, while estimates for PTON have been significantly reduced post-pandemic, management of XPOF in August increased their sales and earnings forecasts for FY22. Additionally, our highly correlated alternate source data shows that XPOF’s North American system sales in Q3 were at to modestly above consensus expectations and early data thru October show they are tracking well, suggesting the possibility of some upside in revenues and earnings versus FY22 consensus forecasts.

Secondly, in light of investor concerns that in the past some fitness concepts have grown out of fashion or faded out, with a number of pandemic related bankruptcies, let me make a couple of points to consider in comparison to XPOF. During the pandemic numerous consumer focused business experienced significant financial hardship due to mandated closures. “Big box” gyms were among the hardest hit, with a number of big names filing bankruptcy protection, including Gold’s Gym, 24 Hour Fitness and the parent of New York Sports Clubs. Contributing to their difficulties were their large relative rents, high debt loads as well as large employee and overhead costs. Conversely, other stronger, more tightly managed gyms like Planet Fitness (PLT-NYSE), were able to make it through the pandemic in relatively good shape. While not totally insulated from those who had experienced financial pressures, the small footprint, lower rent boutique fitness studios on balance fared better than larger “big box” gyms. Another thing to point out is that while other boutique operators tried to rapidly expand their base of franchisees, many times with first-time franchise owners, XPOF’s very stringent requirements (only ~2% of new franchisees are accepted), likely translated into a stronger, more financially secure base of franchisees capable of weathering severe economic swings. The numbers support this. While a couple of other boutique fitness organizations experienced financial difficulties, XPOF opened 350 new locations and did not close any existing locations during the pandemic. 

Noteworthy, size and the quality of the brand tend to be important factors in determining the longevity of consumer-focused companies and their ability to navigate challenging times. In this regard, XPOF’s three largest brands, Club Pilates, Pure Barre, and CycleBar, enjoy dominant market share positions within their respective verticals and are approximately nine, four, and three times larger, respectively, than the next largest competitors. Finally, it is possible that a single concept may begin to move out of favor with consumers, which could have a significant impact on single franchise operators, like F45 Training Holdings (FXLV-NYSE). Conversely, XPOF’s diversified portfolio of 10 unique brands (like a diversified investment portfolio), and likely growing, provides some insulation from a softening in demand for any one concept creating significant difficulties for the overall organization.

The Company Has Recorded Rapid Growth In Its Network; The Combination Of A Pipeline Of Contractually Signed New Licenses And A Large TAM Provides A Significant And Tangible Growth Runway: XPOF has seen a rapid rise in the size of its network of studios and its system sales. This has been achieved thru the combination of both organic growth as well as acquiring and building new brands. As illustrated in the below charts, since 2017 XPOF has grown the number of studios in its portfolio from 818 to 2,357 as of Q2 FY22, representing a CAGR of 27%. Maybe more impressive, is that global franchise licenses grew from 2017 to 2021 at a 31% CAGR.  As of June 2022 there are 4,935. 

Source: Xponential Fitness investor presentation

The primary reason for the rapid growth in franchise licenses sold is the appealing studio-level economic returns offered to its franchisees. Franchisees have a relatively low initial investment per studio, driven by a small-box format of 1,500 to 2,000 square feet. Management’s data shows on average for an initial $350k investment, franchisees can expect after a 6-12 month ramp to maturity 25%-30% operating margins, a 2.5 year payback, and a ~40% cash-on-cash return. Management notes that it has high standards for approving new franchisees. Most of whom are experienced former corporate executives or proven business professionals, and approves only about 2% of applicants. The company’s franchise agreements have initial 10-year terms. These can be renewed for one or two additional 5-year terms and grants each franchisee an exclusive territory based on demographics and population density. Currently, no single franchisee accounted for more than 5% of the company’s revenue, with the largest franchisee in North America owning 46 licenses.

While acquisitions brought new studio brands into the portfolio, the majority of incremental organic growth has come from the combination of SSS growth and new franchise studio openings. Pre-pandemic, SSS grew 7.8% in 2018 and 8.3% in 2019. Following a decline during the pandemic, SSS have rebounded strongly in recent quarters commensurate with increasing AUV’s, which are now above pre-pandemic levels. The company’s track record of increasing SSS gives us confidence that management’s target of mid-to-high single-digit future SSS growth is achievable.

However, the driver of the most dramatic growth in the size of the network and in overall system sales growth has come from franchise license sales and the corresponding opening of new franchises. Anthony Geisler and his management team have a proven track record of growing the number of studios within a specific brand, first as described above at LA Boxing and then at Club Pilates. In the case of Club Pilates, since it was acquired in 2015, the number of studios has grown from ~12 to about 750, AUV’s have increased threefold from $250k to $750k.  Moreover,  the growing returns to franchisees have allowed the company to increase its royalty from 6% to 8%. Management hopes to emulate the success achieved with Club Pilates across its network. This track record should give investors confidence in the company’s ability to grow various concepts to their targeted TAM’s.

A recent contracted study by Buxton Company suggests that the company’s current TAM, including the most recent BFT acquisition, is roughly 7,900+ studios. This is more than 3.3x its current base of studios, indicating plenty of white space left in its TAM. The study estimated that over 60% of the continental U.S. population lives within 10 miles of one of the company’s studios. Management estimates that the company has penetrated only 5% of the U.S. boutique fitness market. The following chart illustrates the growth potential in each of the brand concepts.

Source: Piper Sandler

With contractually obligated new licenses at 2,578 at the end of Q2 and management targeting ~500 new studio openings per year, this provides the company with a tangible ~5-year growth runway. As illustrated in the below chart, assuming the mid-point of management’s guidance for studios opened at year end 2022 and its goal of ~500 new studios opened annually, this implies a CAGR of 18% from 2021 to 2025.

Source: Xponential Fitness

A key element of the increase in new licenses is from international expansion, which the company has begun to explore following its acquisition of BFT in October 2021. Prior to the BFT acquisition, international revenues only constituted ~2% of revenues. As of June 2022, XPOF had 234 international studios operating in Australia, New Zealand, Singapore, Saudi Arabia, Japan, Spain, the Dominican Republic, and South Korea, with 130 of which located in Australia, New Zealand, and Singapore from the BFT acquisition. In most international markets, licenses are sold to master franchisees that sell licenses to individual franchisees. International licenses are more profitable as XPOF does not have the same support infrastructure, which is handled by the master licensee, and have a more favorable accounting treatment as they are recognized in full at the time of sale vs. amortized like a direct franchisor/franchisee relationship. These expansion efforts have gained traction quickly as master franchisees are contractually obligated to open an additional 917 studios in 10 countries (including expansion into Austria and Germany), of which 224 had been sold to franchisees for studios not yet opened. This large existing pipeline of new international licenses are almost 4x its current studio base. 

Source: Xponential Fitness investor presentation

Independent Franchise Industry Consultant Speaks To XPOF’s Strong Brand And Growth Potential: Supporting our favorable view on XPOF’s growth potential are the following July 2022 comments from an expert call with the owner of a leading franchise consulting firm, that works with people that are interested in buying a franchise and guiding and coaching them through that process, and who has known CEO Anthony Geisler and the company since 2015:

– The consulting firm does 40-55 new franchise deals a year, 20-30% are fitness and over the last 3 years ~80% are XPOF [~8-10 XPOF units/year]. Regarding new XPOF franchisee deals in 2022/23: “I think it will probably actually be higher than that this year. [In 2023] I don't see it reducing. So, I think it will be at or above”.

– Regarding how XPOF is perceived as a franchisor: “As I talk to candidates that I work with, I pay what I think is the highest compliment when I talk about AG [CEO Anthony Geisler] and the rest of his team, and I think they're exceptional operators from beginning to end. So, I think they're very, very strong. And we work with many of the boutique fitness groups that are out there. And I don't know that there's anybody that is, in my opinion, stronger”…..“The international master franchise that I was speaking to in Korea, he was the CEO of Pizza Hut in Asia. So, somebody that understands franchising, they look at Xponential and they see good operators.”

– Regarding current demand from potential franchisees: “We have done more placements than we've ever done, [the firm has been around for 20 years]….So I don't see that slowing. If you look at just the growth that Xponential has had even in the first quarter, there's a lot of demand. I'm working right now, I don't know, maybe 30 people…. And over the past 3 or 4 weeks, I haven't had anybody that has dropped out over concerns of the economy or a recession.”

– Regarding future demand for new franchisees: “I think that it's either higher or the same. I think the further we get away from the pandemic, and I think the more confident people are that there's not going to be another shutdown on those sorts of things, that was really the only thing people did have concern about. So, I think that I would put that on an upward trend. I think that we'll see that continue to accelerate. If you look at the AUVs for the overall on Xponential, those are going to continue to go up as they open up more of the more recent acquisitions”.

– Regarding XPOF’s new brands: “If you look at the AUVs of those brands comparative to Pure Barre, where they've got a lot of units that are open, and some of these newer brands hit their stride, that overall AUV is going to keep going up. And that's claimed to bring in even a higher level of interest than what's present today”……..“And the more units that are open, the more confident they are. StretchLab is a good example of that. The first year or so for StretchLab, there were a lot of people that were waiting for proof of concept. It was kind of a newer idea, along with a new brand. Now there's enough units open that those questions can be satisfied. It's a really strong brand. When I've got somebody that's in a market where StretchLab is available, and they can put together a 3- to 6-unit deal, they win a lot.”

With Multiple Revenue Drivers and A Large Recurring Revenue Base, The Company Has A High Margin, Asset-Light, Strong Free Cash Flow, Scalable Business Model: The company generates revenue from five categories, including: franchise revenue, equipment revenue, merchandise revenue, franchise marketing fund revenue, and other service revenue. As illustrated below, franchise revenue is the largest category, accounting for roughly half of total revenue. Franchise revenue consists of royalty fees, license fees, training fees, and technology fees. Royalty fees are typically 7% of gross sales calculated monthly beginning on the day that a studio begins generating revenue from operations. Royalty fees are the largest components of franchise revenue. Noteworthy, over time, royalties at 100% margin, will make up a larger portion of the overall total revenue, which will provide a tailwind to future margin expansion. Recurring revenue accounted for 77% of 2021 revenue and 69% in 1H FY22.

Source: Xponential Fitness investor presentation

Future revenue growth will be driven by: additional domestic & international studio locations, adding new members, increased AUV’s &  growth, and the potential increase in royalty take-rates from brands that over time demonstrate significantly improved economic returns to franchisees (as was the case with Club Pilates). As acquisitions are part of XPOF’s DNA, we suspect there will be additions to the brand in the future and management has indicated that the pipeline is healthy. 

B2B Partnerships Provide Additional Growth Opportunities: In addition to the traditional franchise revenue sources, XPOF has been trying to leverage the success of its brands and growing membership to sign a number of B2B partnerships. The company recently hired an executive in charge of these activities from the LA Chargers to leverage the success that major sports teams have had with these partnership agreements. 

One of the first of these partnerships was with Lululemon and MIRROR in April 2021. As part of the partnership with home gym technology, MIRROR, four of XPOF’s brands, Pure Barre, Rumble, YogaSix and AKT are on track to go live on the MIRROR this fall. In March 2021 the company launched a partnership with Apple that included Apple Watch integration across the company’s brands. A partnership signed in October 2021 with LA Fitness gives the company the exclusive right to open XPOF studios within LA Fitness locations with a minimum development commitment of 350 franchise locations over 5 years. Today, the company has 7 open studios within LA Fitness locations, and will continue to build out this footprint.  

Additionally, the company signed an agreement with leading energy drink, CELSIUS, which is now the official energy drink partner of CycleBar.  Moreover, C4 Energy is now the energy drink partner of Row House and Rumble studios. Recently the company signed a 5-year exclusive license agreement with extensive co-branding opportunities with Princess Cruises to develop 8+ XPOF brands onboard each of their 15-ship fleet. Management believes this partnership will increase global brand awareness by more than 1 million eyeballs annually and increase lead generation to physical studios and the XPLUS offering. In total, these existing and future partnerships will add incremental revenue growth opportunities to XPOF and help increase membership as well as consumer engagement and retention.

Business Model Overview: XPOF does not operate any studios, except temporarily with a few transiting ownership from time to time. The company’s business model relies on franchisees to operate and manage the studios, while providing general management & support services as well as advertising & marketing services. Support services include: real estate identification, site selection, studio buildout & design assistance, comprehensive pre-opening support, membership sales, marketing support, employee training, programming development, intensive instructor and studio-level management training. This asset-light franchise model is meant to more rapidly drive overall unit growth faster than a similarly capital intensive corporate-owned model. XPOF benefits from low ongoing capital requirements (such as technology innovation related) and recurring predictable revenue streams.

As a franchise operator, XPOF has an asset-light, high margin business model that generates strong free cash flow to revenue returns. The company’s operating business model is highly scalable. Each brand is overseen by a President and Chief Marketing Officer, while shared general services can be provided across multiple brands with marginal incremental costs. Thus, incremental growth in AUV’s or even via acquisitions can be managed with only moderate increases in corporate infrastructure. As illustrated below, given the company’s rapid revenue growth, this business model has translated into significant EBITDA margin expansion to date. 

Source: Xponential Fitness investor presentation

After EBITDA margins turned positive in 2019, and retreated modestly during the pandemic, they have scaled significantly and are expected to close FY22 at ~32%, which is at the mid-point of management's guidance. Given the expected growth in the size of the network and revenue base, management targets a future 40%–45% EBITDA margins.

The increase in the company’s profitability has translated into a significant rise in free cash flow generation. Cap-ex runs about 2%-3% of revenue and is used to fund advancements to the company’s technology offerings (i.e. XPASS, XPLUS, Apple Watch integration). As illustrated below, with KPI’s improving steadily coming out of the pandemic, FCF turned positive during FY21 and has increased significantly thru the 1H of FY22. Given the forecast for further improvement in XPOF’s margins, we expect FCF to rise commensurately in the future. The FCF will likely be used to fund future M&A or deleverage the balance sheet.

Source: Xponential Fitness SEC filings

Excellent 3-5+ Year Growth Prospects, Management’s Financial Targets Appear Conservative: Looking out to the next 3-5 years it appears that XPOF has excellent tangible growth prospects. The backbone of XPOF’s strong growth prospects is the company’s contractually obligated base of 2,578 licenses for new studios, which represents a pipeline of about 3 years at management’s targeted new studio openings. As this base of licenses converts to opened studios, and new licenses are signed, this will fuel strong revenue growth over the next 3-5+ years. Additional growth drivers include the company’s history of increased AUV’s in new studios. 

Management’s long-term growth targets include:

• 500+ annual new studio openings

• Mid to high single digit same store sales growth

• Low to mid teens revenue growth

• 20% - 25% adj. EBITDA growth

• 40% - 45% adj. EBITDA margin

We believe managements targets are not just achievable, but appear to be conservative. The pipeline of contractually obligated licenses of 2,578 new studio openings clearly supports management’s target of 500+ annual new studio openings. Additionally, management’s target for growth in the mid to high single digit range appears to be consistent with pre-pandemic growth of 7.8% in 2018 and 8.3% in 2019. However, as discussed previously, management’s targets of opening 500 new studios per year translates into a CAGR thru FY25 of ~18% from FY21 and ~16% from the average of their FY22 new studio openings guidance. Thus, assuming unit growth of 16%-18%, plus SSS growth of 5%-8%, translates into revenue growth more like 20%-25% thru FY25. Also, this figure does not assume any future acquisitions or any meaningful contribution from growing partnership revenues. Revenue growth in the post FY25 time period will be dependent on growth in the number of new licenses signed from current levels and possible acquisitions and could moderate from the higher base of existing studios expected at that time. Noteworthy, acquisitions are in XPOF’s DNA, so we believe the company’s brand portfolio could be expanded in the future to support continued growth. Management noted that the acquisition pipeline is strong and that they characterize their TAM as the broader wellness market, as opposed to the more narrowly focused fitness market, which increases the breadth of possible acquisition possibilities. 

Management targets 40%-45% EBITDA margins in 3-5 years. While this represents a significant expansion in profit margins from current levels in the mid-30% range, management’s target is consistent with other franchise concepts like Planet Fitness. Management’s 40%-45% EBITDA target assumes operating expense growth well below their projected low to mid-teens revenue growth to achieve the scaling benefits implied by the margin targets. As stated previously, each brand is overseen by a President and a marketing professional, while shared general services can be provided across multiple brands with marginal incremental costs. Thus, incremental growth in AUV’s or even via acquisitions can be managed with only moderate increases in corporate infrastructure. Assuming overall operating expenses grow at a still healthy 12% CAGR (at the low end for their revenue growth targets) in the FY22-FY25 time period, on our revenue growth forecasts, XPOF should hit the midpoint of their 40%-45% EBITDA target in FY25.

These assumptions (illustrated below), which exclude acquisitions, translate into a CAGR in EBITDA in the FY22-FY25 time period of about 30%, with stronger growth in the earlier period. We model the company’s EBITDA more than doubling in the 3 year period from $70 million in FY22 to about $152 million in FY25. 

Source: Xponential Fitness press releases, SEC filings and our estimates.

Valuation Attractive On An Absolute & Relative Basis: On our estimates, the shares are valued at an EV/EBITDA multiple of 11.7x normalized FY23 earnings and 7.6x FY25 earnings. We believe this valuation is attractive for a company like XPOF with a strong pipeline, high margins and growing profitability at a ~30% CAGR. Additionally, the valuation of XPOF represents a meaningful discount to both fitness comp’s and other rapidly growing consumer franchise companies. As illustrated below, on average XPOF has higher margins, is growing profits at a relatively faster rate, but the shares are selling at a significant discount to the group.

Parallels Between The Two Suggest XPOF Could Be The Next PLNT: Notably, there are a number of parallels between XPOF and Planet Fitness at similar points in their life as a public company relative to the share price and valuation. Following PLNT’s IPO in April 2017, the share price showed little appreciation during the first ~18 months of trading. However, in the following 2-year period the shares of PLNT jumped roughly 4-fold. Similarly, during the first 18 months PLNT’s EV/EBITDA multiple remained relatively unchanged at about 10x forward earnings, but increased to the mid-20x range in the later 2-year period. The following charts from a recent Piper Sandler report on the company illustrate the similarities between the two companies in their early trading months, relative to the share price and valuation.

Source: Piper Sandler

Like PLNT, we suspect that as XPOF continues to execute and deliver strong growth in profitability, the concerns surrounding the shares will begin to dissipate. Ultimately, we believe the shares will re-rate and significantly outperform the market over an extended period. 

Catalyst

• Continued strong growth in profits, with potential for upside earnings surprises (as per our discussion previously) and increases in consensus estimates.
• Strong growth in new franchise openings.
• Further growth in the new franchise pipeline.
• Improvement in major KPI's, like AUV's and strong SSS growth.
• New B2B agreements.
• Possible future accretive acquisitions.