Description

Overview: Xponential Fitness (XPOF) is a boutique fitness franchisor that since its IPO in July 2021 has an excellent track record of execution in meeting or exceeding all its financial forecasts, while increasing adjusted EBITDA from $27.3 million in FY21 to an estimated ~$106 million in FY23 and with consensus forecasts calling for ~30% growth in FY24, while maintaining a tangible multi-year growth runway of contractually obligated new studio openings. Despite management’s success in increasing underlying intrinsic value, the company has been under a relentless coordinated short attack which has resulted in a 60%+ drop in the share price in 2023 and a modest decline from its IPO price. The multiple of the shares has contracted in the last few months from ~19x consensus 2023 adjusted EBITDA forecasts to about only 7x. At the current valuation, the shares are valued at an EV/EBITDA multiple 50%-75% below its slower growing franchise peers and well below the ~20x valuation that a number of comp’s have transacted at in the private market. To underscore the company’s valuation disparity, we believe just 3 of XPOF’s “crown jewel” assets – Club Pilates, Pure Barre and Stretch Lab – alone of the 11 brands in its diversified portfolio, are worth over 2x the shares market cap in the private market and when the company’s two fast growing younger brands – Rumble & BFT – are included, the basket of assets could be worth roughly 3x the current valuation. 

In addition to trying to disparage the character of management, with very questionable supporting evidence, the most serious accusations in the short thesis focus on questioning the health of the company’s brands. By cherry picking data on inconsequential small brands which represent less than 5% of the system sales and highlighting something commonplace within the franchise industry (i.e. store closings and vendor rebates), making it seem particular to the company and nefarious in nature, the shorts have pushed a narrative that Xponential is a struggling business run by an unreliable CEO. Our detailed research shows this could not be farther from the truth.

The constant stream of accusations by the short community has recently led to the SEC asking the company for information regarding their claims. We find it interesting and strange that media outlets knew of an SEC investigation even before the company did, which leads us to believe the various media outlets targeting Xponential were the ones who convinced the SEC to initiate the investigation. According to the company, Xponential has passed several additional and more thorough audits and detailed investigations from Deloitte around the accounting issues brought up by the shorts with no issues. We believe the SEC investigation is a result of the attacks that have been initiated by the media and the shorts, and after double checking the points brought up in the short report, will amount to nothing.

Over the last few months, we have conducted extensive primary research ourselves by speaking with individuals who own over 40 different franchises, former employees, and various franchise executives, and our findings directly contradict the various short reports and news articles. The vast majority of the franchisees we have spoken with are happy with their studios and make solid returns on their investment. They feel they were presented an honest picture of what to expect in the company’s FDD franchise documentation, XPOF provides them very helpful support if needed, and they speak highly of Anthony Geisler, XPOF’s CEO. We have also spoken to a consulting group that helps entrepreneurs interested in franchising find the right franchise - and they consistently steer their clients towards Xponential brands and personally own stock. They said they help clients open about 10-15 XPOF studios per year and would encourage their family members to be XPOF franchisees.

In direct contrast to claims by the shorts that over half of XPOF’s franchise network is unprofitable, our research indicates that over 90% of franchisees are profitable, and that many of the 10% or so that may not be profitable are usually in their first 12 months of launch, which is a normal ramp up period. Our work around the industry also shows their historical closures to be below competitor averages (historically XPOF closed no stores but going forward they will close underperforming locations). For example, Wendy’s, McDonald’s, and Domino’s tend to close around 1-2% of the overall system annually. We think going forward Xponential’s average store closures will be a similar rate to its larger listed peers. 

When one takes the time to research the individual claims of the shorts on the strength and validity of their merits, which we have done, you quickly see the numerous inaccuracies and weaknesses of most accusations and begin to challenge the overall foundation and theme of the short thesis. Notably, we find a significant inconsistency and difficulty in squaring the circle between the accusations in the short thesis of widespread losses and dissatisfaction among XPOF’s franchisee base with the combination of the company’s factually strong same location sales, continuously growing AUV’s, new store openings from existing franchisees and new licensing agreement sales. Noteworthy, approximately two-thirds of new franchise sales come from existing franchisees. Ask yourself, if overall franchise economics were as bad as portrayed in the short report, how can the above KPI’s across the board be so strong and why are existing franchisees signing new franchise agreements? We note the comment from our discussion with the franchise industry consultant we spoke with who suggested the acid test of any strong franchise organization is if franchisees continue with their obligations to open new locations, which he said continues to be true in the case of Xponential. 

Normally, valuation discrepancies as large as the one that exists between XPOF’s intrinsic value and those in both the public and private market normally don’t last long and are normally corrected one way or another. And when they do so, the price and valuation gap tend to close very rapidly. The cloud over the shares by the short accusations and recent SEC inquiry may take a few months to clear up and lead the company to be fully exonerated, which we believe will be the case. However, we believe the valuation gap may be closed more quickly by potential interest in the company’s assets, whole or in part, by a potential acquirer. Given the lack of success the company has had in generating favorable returns for investors in the public markets, and considering the fiduciary duty of the company’s Board of Directors to act in the best interest of all shareholders, the company may be forced to either proactively or respond to potential acquisition interests. We would not be surprised to see the company commence a strategic review process to sell all or some of the company’s assets. We have sent a letter to Xponential’s Board of Directors to suggest they consider initiating a strategic review process to consider options to maximize shareholder value. We believe that given the short position in the shares, such an announcement alone would have a significant impact on the share price as a result of a short squeeze. We believe that even if the company sold some of the smaller more challenged brands that comprise 5%-10% of their profitability, it could have an additional oversized positive increase in the overall multiple of the shares. Noteworthy, there is strong interest among private equity firms for consumer growth franchisors, like Xponential, with several such firms having a dedicated interest and portfolio in the industry. 

Given the current profitability of Xponential’s business on a current run rate basis, as well as its TAM, long growth runway, and future margin and cash flow expansion opportunities, we could see potential offers for the company in whole or a sum of the parts valuation equating to $25-$30 per share in the next 3-12 months. 

While it may take longer to monetize, we see even more value should the company choose to remain public. With a net base of ~3,100 contractually obligated studios yet to be opened (as of 9/30/23), at the current opening pace of ~550 per year, this represents a 5+ year growth runway. Xponential has a proven highly scalable business model which has resulted in significant margin expansion to date. Adjusted EBITDA margins have increased from 17.6% in FY21 to a projected 34% this year and management guiding to 45%+ in FY26. Currently, the AEBITDA to FCF conversion ratio is ~45% and should increase in the future. Management has a 3-year FY26 EBITDA target of $190 million, which is about double the current run rate profitability and assumes no incremental new growth initiatives which we believe is conservative. 

When the company gets fully exonerated, we could see the beginning of a longer-term multiple expansion coupled with the growing profitability and cash flow in the business. Given a rebound in the multiple of the shares to the 15x-18x range (still a discount to public and private peers and below earlier 2023 levels) and the expected free cash flow generation over this period, the $190 million EBITDA target equates to roughly a $50-$60 share price in about ~24 months. Thus, we believe that either outcome provides an outstanding IRR for investors in the shares of XPOF.

Debunking The Major Short Argument Questioning The Health Of XPOF’s Brands; Cherry-Picking Small Somewhat Irrelevant Franchisees: We believe the most critical of all of the accusations from the short community suggests that the overall health of the Xponential brand portfolio is weak, with various claims including over half of the franchisees are losing money and 8 of the 10 brands are unprofitable. As is the case with any large franchise organization of the company’s scale, there will be a wide range of franchisees who are happy and satisfied with their business from a financial perspective and others who are not. Not only is this the case among all 10 (excluding the recent acquisition of Lindora) of the company brands, but it is also true even within individual brands. Given a base of 3,000+ open studios, when trying to gauge the health of the Xponential brand portfolio, there are many franchises to choose from. However, what is important and we believe very misleading about the short thesis is that the overwhelming critical comments come from 3-4 brands that in total are somewhat irrelevant, in that they only make up 10% or less of the overall base of open stores, and more importantly, less than 5% of Xponential’s worldwide system sales. However, the shorts misconstrue these brands to be representative of the entire Xponential network. The following chart and table break out the number of open Xponential studios as of 9/30/23 by brand, and more importantly, by our estimates, by each brand's contribution to the company’s system sales.

The above chart and table highlight that a couple of Xponential brands make up a large majority of the overall company portfolio. Noteworthy, just 3 brands - Club Pilates, Pure Barre and Stretch Lab – make up just over 70% of Xponential’s entire brand portfolio. All three of these brands have a very healthy franchisee base and are growing their studio count.

However, despite this, the overwhelming critical comments that are often touted by the shorts represent 3-4 smaller brands that combined comprise only less than 5% of Xponential’s total worldwide system sales. While we would agree that these brands – Stride, AKT, Row House and some Cycle Bar franchisees – are more challenged financially, they do not represent the average franchisee, as portrayed by the shorts. Note, there are also some younger brands - Rumble & BFT - that in their early days in building a national brand have some more challenged franchisees. 

Likewise, from a studio opening perspective, roughly 85% of new studio openings come from the combination of Club Pilates, Stretch Lab, BFT and Rumble. Our research indicates that in general all of these brands are performing very well with above average AUV’s, which should provide Xponential a tailwind for continued financial success.

Thus, it would be easy for someone to cherry-pick comments among Xponential’s 3,000+ franchise base to come up with a predetermined conclusion and then try to paint a picture that this represents the health of the overall network. And, this appears to have been done by the shorts, which as described below sharply contrasts with our own independent research. 

Debunking The Major Short Argument Questioning The Health Of XPOF’s Brands; The Feedback From Franchisee & Related Party Discussions Is That For The Most Part The Brand Portfolio Is Healthy: Over the last few months, we have done our own extensive independent research on the health of the Xponential network by speaking with and hearing insights from multiple sources, including a number of franchisees across most of XPOF brands as well as both former company executives (including the person who headed franchise operations and relocations) and other industry participants (including a major franchise industry consultant). In the appendix, we highlight some of the key quotes/points from our discussions. 

For anyone who is aware of the short thesis, you will note some of the stark differences between the comments/quotes listed in the appendix and the picture painted in the short thesis of widespread losses and dissatisfaction among XPOF’s franchisee base. Additionally, while the focus of our calls was on the unit economics and health of XPOF’s franchise base, there were certain comments made by individuals that challenged some of the personal character accusations of management and claims of loose financial standards at the company that were also discussed in the short thesis.

These discussions lead us to conclude that for the most part, XPOF’s brand economics are healthy and that there are significant growth opportunities within the overall brand portfolio. Not surprisingly we found some brands to be financially strong with happy franchisees and a couple of the smaller brands to be challenged with some dissatisfied franchisees. As is the case with any franchise organization, there are a mix of both happy and unsatisfied franchisees across all the brands. Even in some of the more challenged brands, there are plenty of franchisees that are doing well. Not surprisingly, we learned that there are multiple different factors that result in various financial outcomes among different franchisees, some within and some outside of their control. Thus, one of our findings is that it would be inaccurate to use a certain set of KPI’s for all franchisees within a brand to try to portray the health of that brand, as there are a multitude of other factors that come into play to obtain a fair and true picture. Some franchisees fail because of their own decision making and others fair due to bad location or a modality that is more difficult to turn profitable (Row House, AKT, Stride). 

In looking at Xponential’s individual brands, we concluded that the company’s top 3 brands (Club Pilates, Pure Barre & Stretch Lab) are very healthy, with the overwhelming majority of these franchisees both profitable and mostly satisfied. As stated previously, these three brands alone comprise over 70% of the base of the company’s system sales. Additionally, the brands with the largest growth potential in the form of potential future license sales and new studio openings in the next couple of years include Stretch Lab, Rumble and BFT. Likewise, in our discussions with various franchisees, these three brands were mentioned the most often (along with Club Pilates) as being attractive modalities with happy franchisees. Conversely, our discussions suggest that some of the company’s smaller brands, including Stride, AKT, Row House and some Cycle Bar franchisees, are challenged and there are currently a fair number of dissatisfied franchisees. We heard that these challenged brands were among the hardest hit by COVID and have been the slowest to return to prior membership levels. However, these brands comprise only a small minority of open studios and given there are still plenty of happy franchisees, less than 10% of the system that we would characterize as weak or unhappy. In our discussions with franchisees, the comments regarding the remaining brands (most small as well), were mixed. So, we conclude roughly ~90% of all franchisees, (consistent with management’s estimates) are healthy and nowhere near the claims by the shorts that over 50% of franchisees are unprofitable.

Debunking Some Of The Other Short Claims Regarding Xponential’s Business Practices: There are a number of other claims the shorts have regarding the validity of the company’s Franchise Disclosure Documents (FDD), how the company reports its major KPI’s and regarding its business practices that we will address below. Additionally, our discussions with some XPOF former executives (detailed in the Appendix section of this report) also support our view that these accusations are inaccurate or at best misleading. Many of the claims in the short community appear to be made with questionable supporting evidence in the hope of making enough accusations to support the reports big picture theme of calling into question the business practices and character of management as well as the health of the company’s brands. The following are what we believe are the most discussed accusations. 

• The Company’s FDD Documents Do Not Provide An Accurate Financial View For Franchisees: The franchise disclosure document (FDD) is a Federal Trade Commission (FTC) legal disclosure document that must be given to individuals interested in buying a U.S. franchise as part of the pre-sale due diligence process. The document contains information essential to potential franchisees about to make a significant investment. In addition, several states require franchisors to register their FDD’s with a local state regulator before offering or selling a franchise within the state. Various comments from the short community have questioned that certain aspects of Xponential’s financial presentation in the FDD documents do not provide an accurate picture for potential franchisees, including among other things, understating start-up and store opening costs as well as the overall operating costs, resulting in unrealistic profitability and investment returns.  

Regarding estimating studio start-up costs, our franchisee's discussions suggested within an individual brand there is a very wide range of potential start up and operational costs. While the FDD may provide some general expectation of costs, our discussions suggested that many owners were able to come in well below cost as they did things themselves, hired cheaper contractors and obtained various concessions. Additionally, we learned that for acquired brands, in many cases the cost of the original box (referred to as V1, or version 1) was dramatically higher than the current cost. The reason for this is that when Xponential acquired a brand, they significantly downsized the square foot of the box (in one case from two rooms to one) and removed many costly items, like showers. Obviously, construction costs vary depending on location, with costs in major metropolitan areas higher than in more rural areas. One franchisee told us that he doesn’t know anyone whose start-up costs were close to what the shorts have stated, and if it was, he would not have opened up any studios.  

Regarding operating costs, again, we found a pretty wide range among various franchisees. Notably, costs were above average in large metropolitan areas vs more rural areas for everything from construction costs to labor. Many franchisees did not take out loans, so they were not incurring interest costs. With most franchisees owning multiple studios in an area, we heard repeatedly how they share resources, administrative personnel and instructors among their different facilities to lower costs. Also, while the FDD indicated hiring a GM, many franchise owners possessing an entrepreneurial spirit to maximize their earnings potential, especially those with a professional background (which are most owners), told us they both take on this role themselves and do many costly things themselves, like accounting/bookkeeping, writing/reviewing contracts, legal, etc. Also, in certain brands where the owners, and co-owners, themselves are passionate about the modality (most notably in Pure Barre), they take on the role of the instructor(s), which significantly reduces labor costs. 

Thus, on balance in our discussions with various franchisees, we heard that for the most part, Xponential’s FDD disclosures painted a realistic picture regarding the costs to open and operate a studio with a major swing factor being the success of the franchisee in filling up classes. 

• Management Is Hiding Closed Stores: The short thesis contends that while management says it had never closed a studio, they claim have been a number of studios that have been permanently closed to try to make a case that management has been lying to hide what they claim are franchisees that have been and currently are closing numerous unprofitable stores. 

There are several factors at play here. A number of the studios have changed their location within a specified area, not permanently closed. This is commonplace in the franchise business and can be done for many reasons, including a lease expiring or obtaining a more favorable location/rent deal. While the old location closure was noted to try to make their point, what was not noted, was the new location the studio moved to. 

Additionally, the debate comes down to a definition of a “closed” store. Management had stated in the past that they have never closed a store. While this is true, the company had temporarily taken over a small number of stores and re-franchised them. Again, importantly, this is commonplace in the franchise industry. There are several reasons why this is done, from owners needing to sell due to personal issues (death, divorce, etc.) or mismanagement. Noteworthy, this is not something management has been trying to hide as it has been highlighted in the company’s SEC financial filings. Note the following from the 2022 10-K report: 

 “Operating company-owned studios is not a component of our business model. Following the significant disruption to the global fitness industry caused by the COVID-19 pandemic, however, we took ownership of a greater number of studios than we would expect to hold in the normal course of our business. While operating studios is not a component of our business model, we currently hold a small number of strategic transition studios as, on occasion, we take ownership of such studios for a limited time while facilitating the transfer of these studios to new or existing franchisees ("company-owned transition studios"). As of December 31, 2022, 2021 and 2020 we had 55, 25 and 40 company-owned transition studios, representing 2.1%, 1.2% and 2.2% of the global studio base, respectively.”

Recently management has indicated in a change in strategy that they will no longer operate transition studios and will move to close all of these studios. Management has stated that closing all the studios could take into early 2024 due to working thru lease settlements with landlords. From a level of 87 earlier in the year (which represented just ~3% of the studio base), this number declined to 22 at the end of Q3 (excluding LA Fitness studios), with only a handful left to close currently.

Our research indicates that over 90% of franchisees are profitable, and that many of the 10% or so that may not be profitable are usually in their first 12 months of launch, which is a normal ramp up period. Noteworthy, most major successful franchisors have annual closing every year for various reasons. For example, Wendy’s, McDonald’s, and Domino’s have historically closed around 1-2% of the overall system annually. So, closing underperforming locations is not something unusual or specific to Xponential, despite the shorts claiming this is the case with the company and a sign of widespread weakness among all franchisees. We think going forward Xponential’s average store closures will be a similar rate to its larger listed peers. 

• Underperforming Stores Are Being Excluded From Xponential’s KPI Calculations: Another element of the short thesis is that XPOF is excluding underperforming studios to artificially inflate its reported AUV’s and same store sales KPI’s. Discussions with management indicate that reported AUVs and same-store sales reflect all North American studios currently open 13+ months, and contrary to the short report, Xponential is not excluding underperforming stores but simply stores that are temporarily closed, which is consistent with retail industry reporting policies. Noteworthy, management indicated that even if all stores were included, AUV in in FY23 would be about the same either way. Thus, this is another example of taking a standard industry policy, and sensationalizing it to make it look nefarious, when in fact the difference is meaningless. 

• The Majority of XPOF's Revenue Is Nonrecurring: The shorts have also claimed that 60%+ of revenue is one-time and non-recurring. Given the nature of any franchise business like XPOF’s being royalty driven, this claim appears to make no sense to us. Management confirmed that as of Q3 FY23 ~78% of the company's revenue is recurring (includes royalty fees, training fees, technology fees, marketing fund fees, other service revenue, and merchandise revenue), with the balance stemming from equipment revenue and franchise territory fees (see below chart for the breakdown). Management has consistently illustrated and broken out the elements of its recurring revenues in its investor presentations. Additionally, 90% of members are on recurring memberships.

• Vendor Kickbacks: The shorts mention repeatedly that XPOF receives “vendor kickbacks”, which they claim are pressuring franchisee profitability. Here again, the short report uses a sensationalized word to try to vilify what appears to be standard industry practice. As is the case with most franchise organizations, they try to have uniformity across a brand. In the case of the equipment used repeatedly in a commercial environment, there is also a safety factor to having high quality equipment that can stand up to continued daily use. The company partners with various vendors and receives preferred volume pricing, which it passes on to franchisees because it provides vendors with larger orders and access to its franchisees. Xponential then receives commission rebates from vendors, which is a standard operating procedure and a way for the business to generate additional margin. Management discussed how it provides franchisees with high-quality equipment that is meant for commercial use, which is often more expensive than retail equipment. As illustrated below, the company has been transparent on this issue and clearly states this in multiple places in its 10-K filings:  

“For certain non-branded merchandise sales, we earn a commission to facilitate the transaction between the franchisee and the supplier. For such non-branded merchandise sales, we are the agent in the transaction, facilitating the transaction between the franchisee and the supplier, as we do not obtain control of the non-branded merchandise during the order fulfillment process. We record non-branded merchandise commissions revenue at the time of shipment.” 

It's Hard To Square the Circle Between The Various Short Accusations And XPOF’s Strong KPI’s and Growing Pipeline Of Contractually Obligated New Studio Openings: Importantly, we find a significant inconsistency and difficulty in squaring the circle between the accusations in the short thesis of widespread losses and dissatisfaction among Xponential’s franchisee base with the combination of the company’s factually strong same location sales, continuously growing AUV’s and new licensing agreement sales. We believe the key KPI’s of any healthy franchise organization are the combination of strong organic sales and net new unit growth, which Xponential excels in both categories. Another interesting statistic is that despite new franchisees entering the Xponential system, the percent of new studios that were opened by existing franchisees over the last few years has remained relatively consistent at roughly two-thirds. We note the comment from our discussion with the franchise industry consultant who suggested the acid test of any strong franchise organization is if franchisees continue with their obligations to open new locations, which he said continues to be true in the case of Xponential. 

Ask yourself, if overall franchise economics were as bad as portrayed in the short report, why are:

• same location sales growing at a very healthy mid-double-digit pace, 

• AUV’s continuously increased in the 10 quarters since the pandemic lows (most recently growing at ~15% y/y) and hitting record highs,

• existing franchisees (which the bears claim, over half are unprofitable) opening additional studios at such a rapid rate, and 

• all franchisees voting with their wallets and signing new licensing agreements to open more locations? 

The strength of the following KPI’s strongly conflict with the short thesis and illustrate the health of Xponential’s business.

The SEC Review Appears Limited To Prior Discussed Issues That Have Been Approved By Two Different Auditors: On 12/5/23 Xponential said it was contacted by the SEC “requesting that the Company provide it with certain documents”. We find it interesting and strange that certain media outlets knew of an SEC investigation (through “unnamed sources”) even before the company did, which leads us to believe the various media outlets targeting Xponential were the ones who convinced the SEC to initiate the investigation. 

Management has indicated that the documents requested by the SEC relate to the company’s non-GAAP KPI’s that they provide to shareholders. It appears that the SEC request relates to accusations by certain bears, who have questioned the validity of such things as the company’s saying that it never closed a store, as well as its AUV and same store sales calculations.  Our understanding is that the investigation is narrow in scope to these issues and is not broader in scope to encompass other Xponential business practices or their financial filings. 

Management has indicated to us that when these issues first arose earlier in the year, they proactively reached out to their auditors (Deloitte) to both re-review the calculations and have a second party review them as well to make sure the KPI’s were consistent with both GAAP and general industry practices and that the review came back with a clean bill of health. 

Another thing to consider regarding the SEC review is that Xponential’s business has significant momentum across the board on a number of fronts. Typically, companies like Xponential, who are executing well and have a lot of momentum, are not the type that need to play fast and lose with their KPI’s to try to impress investors. 

Thus, given the facts as we understand them, we believe the SEC review will not amount to anything material. However, while the review is in process it will continue to create a cloud over the shares, with the timing of a conclusion and the communication of such, uncertain.  

Management Has Established An Excellent Post IPO Track Record of Growth & Financial Execution: In analyzing the short accusations, we think that any Xponential investor should reflect upon the outstanding track record of both significant growth and excellent execution that management has established as a public company since its IPO in July 2021. The following table highlights some of management’s key achievements in increasing the base of open studios, growing the pipeline of new license sales (equating to a +5 year growth runway), increasing AUV and system sales, and most impressing in our view increasing adjusted ABITDA profitability from a reported $27.3 million in FY21 to an estimated $106 million in FY23. 

In the same light, investors should also keep in mind management’s track record of quarterly & yearly financial execution over the last 2+ years and 10 quarters as a public company. Noteworthy, as illustrated below, in each of these 10 quarters Xponential has beaten both consensus revenue and adjusted EBITDA estimates and over this period management has regularly increased its financial guidance.

What makes all of the growth and financial achievements all the more impressive is that they were accomplished when the country and the world was just coming out of the pandemic with significant lingering issues and uncertainty. Also, it is important to point out that Xponential’s growth was not just aided by industry tailwinds, as its largest boutique fitness competitor (Orangetheory Fitness) has not shown much growth over the same period and another major public competitor (F45 Training) is effectively out of business. In Jefferies’ 12/15/23 Fitness Tracker report they noted that while web visits to Club Pilates increased ~29% y/y in November (vs. +34% in October) and visits to Pure Barre also increased ~36% y/y (vs. +29% in October), foot traffic to Orangetheory Fitness, declined ~4% YoY in November (vs. -5% in October). 

Xponential’s Long-Term Story Has Been Overshadowed By The Short Accusations, And Is Worth Reviewing: We believe the constant stream of short accusations has overshadowed Xponential’s solid long-term growth and margin/profit expansion story.  Noteworthy are the following key points:

• The company has a contractually obligated new license pipeline of 3,100+ licenses (which is continuing to grow), which at the current average opening rate of ~550 new studios per year, equates to a 5.4 year backlog. 

• Xponential has recently been growing same store sales (SSS) at a 15%-20% rate, underscoring the health of its business. Note, the company’s SSS growth compares with its major competitor, Orangetheory, which we understand has seen negative SSS trends. We believe Xponential’s SSS growth will likely moderate in the future from current oversized rates, however, we still expect it will stabilize at a healthy MSD to HSD y/y growth rate similar to the company’s pre-pandemic levels. 

• Xponential has recorded a continuous rise in it’s AUV’s over the last 10 post-pandemic quarters and we believe there is further room for upside. One of the things that will help AUV’s grow in the future is that some of the fasting growing new studio opening brands have among the highest AUV’s in the Xponential brand portfolio. 

• The combination of new studio openings and organic SSS growth and increasing AUV’s will drive healthy system sales and revenue growth in the next couple of years.

• Xponential has signed 41 independent MFA's across 23 countries around the world. This represents ~1,000+ additional contractually obligated licenses to get open studios on top of the ~400 that have already have open internationally. Not only should this fuel both top line growth, but carry oversized flow thru margins. International licenses are more profitable as the company does not have the same support infrastructure, which is handled by the master licensee. Thus, the majority of the revenues fall directly to Xponential’s bottom line. 

• Xponential has a highly scalable corporate infrastructure, including only 4 employees heading each brand. Thus, management has indicated that it can grow its existing brands with very little additional costs. So, the impact of all the organic growth factors combined with new studio opening incremental royalties/revenues should help fuel further margin expansion. Additionally, as discussed previously, the closing of company owned transition studios (which have pressured margins in FY23), which cost the company $10 million, will have a meaningful positive impact on margins beginning in FY24. The chart illustrated below shows the company’s margin leverage over the last three years. We estimate margins will increase from an estimated 34% in FY23 to 45%+ over the next 3 years in FY26. Note, if management hits it’s FY26 EBITDA margin target, this would translate into upside potential relative to consensus forecasts.

• As a franchisor with a stream of recurring royalty revenues, Xponential has a highly cash generative financial model, with an AEBITDA to FCF conversion ratio of ~45%, which should increase in the future. We project that over the next 3 years, Xponential could generate roughly $300 million in free cash flow. This strong cash flow gives the company a lot of financial flexibility to help fund future acquisitions, pay down debt or repurchase shares.

In an effort to show the company’s financial visibility given the backlog of new licensing agreements, in September of this year at the company’s investor day management issued the following 3-year financial targets:

• New studio openings of 500 per year (vs. 550-560 in FY23);

• North America system-wide sales of $2.330 billion (vs. FY23 consensus of $1.4 billion);

• Revenue of $405.0 million (vs. FY23 consensus of $310 million); and

• Adjusted EBITDA of $190.0 million (vs. FY23 consensus of $106 million).

We view these forecasts in a conservative light given management’s history of continually overachieving on prior financial guidance and they assume modest new studio openings, no additional acquisitions or no incremental business, such as new international master franchise signings or 3rd party B2B agreements.

Lindora Acquisition Consistent With Diversification Strategy: On 12/4/23 Xponential announced it has agreed to acquire metabolic health brand, Lindora. The company was founded in 1971, operates 31 units across California and Washington, and provides a variety of wellness services including hormone replacement therapy and IV hydration. The deal is expected to close in early 2024 and management expects the acquisition to be immediately accretive on an AUV and adj. EBITDA basis.

The Lindora acquisition is consistent with management’s discussed strategy of diversifying into the health & wellness sector (although Stretch Lab somewhat positioned them in the market previously) and finding a sub-100 unit brand to scale up over time. In addition to Lindora’s core weight-loss plan subscriptions (46% of revenues), 24% of revenues come from nutrition products (protein bars & shakes) ~19% of clinic revenue are derived from compounded semaglutide GLP-1 drug formulations and 11% from other services, such as IV Hydration.

Our understanding is that Xponential acquired Lindora at a low 4x multiple and that the company has an AUV of $900k+, which is well above the company’s corporate average. While Xponential plans to make Lindora a national brand, given some differences in how Lindora operates (they require at least one licensed and registered nurse practitioner and one licensed vocational nurse) we believe the company will take some time to roll out the brand. We also suspect that Lindora’s TAM will be more limited than some of the company’s other brands and target larger major metro markets initially.

There Is A Startling Disparity Between Xponential’s Fundamental’s & KPI’s And It’s Valuation On Both A Public & Private Market Comp Basis: The short attacks on Xponential have been successful, as the share price has declined significantly despite the company posting 2 strong beat & raise quarters. Since hitting a high of ~$33/share in April, the shares have dropped over 60% to ~$12/share due to the steady stream of short attacks on the company. During this period, the shares have gone from trading at approximately 19x its 2023 consensus EBITDA estimate prior to the first published short report, which interestingly coincides with roughly where the peer group currently trades, to approximately 7x consensus 2024E EBITDA today. As illustrated below, the shares are trading at a historic low on an EV/EBITDA basis.

Companies that more than quadruple their EBITDA in 3 years should not see a contraction in their EBITDA multiple of ~65%. Despite this jump in profitability over the last 2+ years, the shares are trading only at about the same price as its July 2021 IPO price of $12/share. As noted in the table below, compared with other franchise public companies, Xponential has among the highest EBITDA margins and is expected to grow faster than all of its peers in 2024, but has an EV/EBITDA multiple of only about one-third of its peers. We find such a disparity between the company’s financial performance and KPI’s and its valuation somewhat startling. Given Xponential’s significant TAM and tangible growth runway and its above average KPI’s, we believe the shares of XPOF should at least trade in line with its peers. 

Even more notable is the valuation discount of Xponential compared with recent franchise transactions in the private market. The table below shows that rent private market transactions for platform type franchise operators have ranged from 13x (for a company with internal issues) to 25x or more for higher growth platforms (similar to Xponential).

A SOTP Analysis Underscores Xponential’s Crown Jewel Assets Are Unrecognized & Egregiously Undervalued: To underscore how undervalued the shares of Xponential are, we believe that it’s three major brands alone – Club Pilates, Pure Barre and Stretch Lab – which we estimate account for roughly 2/3rds of profitability, would at current private market valuations be valued at about double the current market cap. All three of the brands are crown jewel assets, that would be in high demand, especially in the PE community, and would be valued at the upper end of private market valuations. Thus, the market is assigning negative value to all of the company’s other brands. While one could argue that certain of these other brands are challenged, some of Xponential’s younger brands – notably Rumble and BFT, which combined comprise about 12% of open studios – have been well received by franchisees and shown very strong growth (see the Appendix for comments on these brands). So, combining both the well established very successful brands with the young high growth brands comprises roughly 80% of Xponential’s brand portfolio.  

Thus, by our analysis, these five brands alone would produce FY24 EBITDA of approximately $95-100 million (given their higher royalty rates). Assuming a 20x-25x multiple on just these “crown jewel” assets translates into a XPOF share price of roughly $30-35/share, or 2.5x-3.0x the current share price. 

Our Letter To Xponential’s Board Of Directors To Initiate A Strategic Review Process: Recently we sent a letter to Xponential’s Board of Directors to say that despite management’s track successful record in growing the business and increasing profitability and intrinsic value, we believe that as a result of the short attacks misrepresenting the health of the franchise network and impinging the character of CEO Anthony Geisler, the shares are significantly undervalued and urged them to take formal steps to hire a banker and explore strategic alternatives, including the private market valuation of the company. We highlighted a number of the previously discussed public and private market comps as well as the value of certain of the company’s “crown jewel” assets and suggested divesting struggling brands that are currently accorded negative asset value.  

We have spoken with other shareholders who feel similar to our views and would not be surprised to learn that other investors have done the same. Given the below fair value of the shares and the Board’s fiduciary responsibility to maximize shareholder value, we believe that our suggestions will be strongly considered and believe some actions will be taken on our suggestions. We think the board understands what fair value is, and is very driven to get the stock to where it needs to be. 

Given the large and diverse M&A activity and interest by PE firms in the franchise space, which we highlighted in the prior private market valuation comp’s table, which included transaction activity by such deep pocket players as KKR, TPG, Harvest Partners, L Catterton & Roark Capital, we believe interest in Xponential’s assets, in whole or part, would be high. 

Normally, valuation discrepancies as large as the one that exists between Xponential’s intrinsic value and those in both the public and private market normally don’t last long and are normally corrected one way or another. And when they do so, the price and valuation gap tend to close very rapidly. We believe the same will be true in the case of Xponential as well. 

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Appendix

Appendix Of Quotes & Notes From Franchisee & Related Party Discussions: The following are quotes from discussions with various franchisees, former employees and related parties. We discussed such things as: their profitability, degree of satisfaction, start-up and operating costs, how realistic they found the company’s FDD documents and their thoughts/interactions with senior management. Note, we did not ask management for a list of franchisees to speak with and selected our own group. When reviewing the comments, ask yourself if the comments listed below are representative of an organization where 8 of the 10 brands are losing money and over 50% of all franchisees lose money.

Franchise owner & operator of 6 Stretch Lab’s & a franchise owner since 2019

“So you know what those estimates are. And I found them to be close to accurate [FDD documents]”

“So for me [start-up costs], probably spent about $180k on the first couple of studios.”

“Yes, we have been pretty steady [membership growth in 2023], steadier than you would expect. They just get a little bigger each month, and there's not a lot of vol to that, a lot of volatility to the revenue. There's some seasonality where we are where we tend to be weaker in the summer. So we've recognized that the last couple of years, and we're little nervous coming into this one. But so far, it's going okay.”

“On a same-store basis, we're probably 10% to 15% year-to-date [revenue growth]. And it seems like it's continuing to grow. And the big thing holding it factor in COVID was staffing. So as that's gotten easier, we're finally able to fulfill those roles and most of our studios are busy.

“So basically, the way it ends up shaking out [profitability] is, we pretty easily get to like 20% four-wall margins. And that's nothing compared to what Club Pilates will do or any group class kind of business that's successful because we're one-on-one.”

“So probably the way to think of it is [monthly labor costs] more like $25,000 per store per month.”

“I would say ours was more like we opened with 90 members and spent the next two months getting to breakeven.”

“Yes [moving ahead to open additional studios]. We handed in hard and decided that we're going to go ahead and open the rest. And as a group, we together had nine licenses, we decided we're going to open the rest. And we've gone ahead and signed those leases…. So we've signed on a nice schedule where things are going to deliver about every six months, and we're going to do two this year and two next year, and we've already pretty much signed the leases. So it's good to go. And then our rough plan is to do one, the year after that. And there's takeovers that we also look at that we'd be interested in… we'll go from five to six to nine studios over two years and see where we are then.”

“So obviously, you guys read the [short] report and have, and there's always people who are happy and people who are unhappy. I would say within Stretch Lab, people are pretty happy…. But I think for Stretch Lab, people are pretty optimistic. Some people do fantastically well.”

“If I had to guess, I'd say like 5% [unprofitable Stretch Lab franchisees]. And that's low, but those are the ones that stuck. And then I think there's probably 25% that they make money, but it's never enough.”

“I felt like their [short] report was kind of loaded with cheap shots. Like it's not that surprising. So some of that stuff has been sort of sleazy, I mean, that's not that surprising. And they've got a lot of anonymous unhappy franchisees, okay…. But I don't know, I didn't think they had any substance…. I'm surprised it {the stock] hasn't come back. I texted some people who don't have any reason to avoid it. And I said this is BS. This company grows like crazy, and I wouldn't be afraid to buy it.”

Owner/Operator of 2 Stretch Lab franchises and 1 Pure Barre franchise

“We initially signed our contract with Stretch Lab October of '21. Then from there, we opened our first location April of '22. Then our second Stretch Lab was April of '23, this year. And then Pure Barre, we bought it from the initial owners that had owned it for five years. We bought it from them September of '22, but it had already been operating for five years. And they were profitable all five years.”

“All three are profitable. All three, doing well…. We're profitable. We're making money out of the gate.”

“When I read through that article [short report], in my mind, a lot of it was just a guy or a group of people trying to take advantage of a short sale and they did. And I feel like a lot of the stuff that they were saying was baseless, not accurate…. anytime you read stuff like that, it puts a little pit in your stomach, there's no question. But I believe they just put out a statement, right, to combat that, and it makes sense, right, like disproving all of it. But the reality is that article did exactly what they wanted it to do, the stock price dropped 40% in a day. I'm sure they shorted it and got out before that statement can get out. Unfortunately, it’s just part of the game.”

“My experience has been very positive with Xponential Fitness. And seeing that article, of course, had concerns. But I think we've all learned that you can't believe everything you see in the Internet. And especially, this day and age, there's always like a hidden agenda. And there's no secret what their agenda was with that article.”

“From what I have seen, in any franchise you're going to have superstars, you're going to have people in the middle of the pack and then you're going to have people that struggle. And the reality is it's a business. And it comes down to people…. It's not the product, it's not Xponential Fitness, it just comes down to the variability of the owners and how they run their business and how they treat their employees…. What I have seen is that the top-performing people either, this isn't their first business that they've ran. They have a true understanding of treating people the right way and not taking advantage of their people…. So it's not that the Xponential Fitness model doesn't work, it's just the operators can't quite figure it out.”

Franchise Owner of 3 Club Pilates locations

“So’ my Club Pilates locations, one opened in February of 2021, the other opened in January of 2022. Both are continuing to increase in attendance, in revenue…. One of my locations is set to make $120,000 in top line revenue this month, and the other location is at $96,000 now, so they're closer to $100,000. But we're performing very strong.”

Profitability: “$40,000 a month.”

“In general, in the Club Pilates system, everyone is happy. Like when I go to the conferences and you walk in the room of franchise owners of Club Pilates, everybody's upbeat, talkative, happy. I mean people are making good money. So, there's not much to complain about. I'm sure in every workplace, there are top performers, most people are probably average and then there are low performers.”

“So, in Club Pilates, I think that, that is what you'll find. But in general, the Club Pilates system does very well, and people seem overall very happy. That's not to say, I'm sure some locations don't do as well or I don't know them. But that's my take there.”

“In the Pure Barre system, I would say a different answer. And I have not been able to get the Pure Barre studios to get back to what I was [pre-COVID]. I think that most studios are probably about breakeven, some probably make a couple of grand a month in profit…. I actually think Pure Barre is one of the stronger brands in Xpo…. I have friends that are opening Pure Barre locations now, and it seems like if you don't have that blemish of having existed prior to COVID, it seems like those new studios are actually doing better.”

“At my Pure Barre, my wages are more like $9,000 a month.”

“So, I mean there definitely are stronger brands than others. And Club Pilates is definitely one of them. I honestly think Pure Barre is one of Xpo's stronger brands. And I know that Stretch Lab is as well anecdotally from other owners who own Stretch Labs and my brands…. so I think that Rumble is probably a strong brand.”

“A lot of these brands are young brands, they're in development. And not to anyone's thought, they just haven't fully launched yet, and they're exciting brands.”

“But in general, what I seem to hear as I chat is you're always going to have franchisees griping about the franchisor. They take so much money. There's not enough support. Like that part is normal friction that exists in this model. But you do have a lot of support. You'll never find me telling you Xpo doesn't support you. We have marketing support. We have sales support. We have support we never had.”

“I actually had a call night before the [short] report came out, and I told them how great it all was and how I'm really excited because I love my job.”

Former Director of Franchise Development, at Xponential Fitness, leaving in February 2022.

“So, Club Pilates and Stretch Lab definitely were the leaders in terms of franchisee performance, revenues, payback periods. And then there were some brands that I think the franchise partners did have a difficult time or longer time seeing those returns.”

“Cycle Bar as a whole, really, I believe, was acquired as a distressed asset as a brand. So I think prior to Xponential, the franchisees and the brand were not doing well. Back then, start-up costs were double, triple than what they are today. They were much larger footprints, equaling higher initial investment. So one of the big things that Xpo did after the acquisition was reduced the footprint to try to make the start-up costs more palatable for franchisees because I think a lot of them were losing money.”

“It was very transparent from the get-go that this particular brand was going to be a sales and marketing engine, more than any other brand. I mean, to compare, Club Pilates to our formers in its studios, 12 spots per class that they need to fill. Cycle Bar has about 40, 45 bikes in its studio. So a lot more volume of leads and conversions to members that, that brand needs. So I think just the core of the offering in that modality is just a bit more challenging.”

“During my time there, no, we didn't have any permanent closures. Now there were temporary closures due to COVID, but what I experienced, no, there were no permanent closures. Definitely, there were franchisees that were losing money. But again, that's any business. And I do think Xponential at the brand level as well, did significant amount of legwork and support to go in and see the needs of that struggling franchisee and determine what was the area that they could help support them with, whether it was training, operations, the personnel, more marketing support. So there were a lot of support avenues for that.”

“I mean, in a way to prevent some of those permanent closures, Xponential did take on a handful of corporate studios, at least in the interim to prevent that permanent closure while finding a new owner. I was there, it was probably 50 plus, but that would include all types of retails and transfers, not necessarily distressed studios or owners who were handing over the keys. It also included very profitable locations that were selling for 5x EBITDA, making a great return on their investment. So it wasn't just bucketed to underperforming locations.”

“So, what they'll do is open a new location in the same market and consider that a relocation. So that's something that many other brands do, was not a full recognition of a closure, but it's a relocation. And obviously, the new change of ownership or the transfer.”

“Club Pilates and Stretch Lab were the strongest in terms of AUVs and great investments for the franchisee. But from a growth perspective I think Yoga Six sold like hotcakes. Stretch Lab, same thing, very quickly. A lot of multiunit owners are jumping in with that brand. And then even Rumble and BFT as well.”

“All of my experiences [business culture] there were pleasant. I mean I had the fortune of being in the corporate office working very closely with each brand president and all of their teams. If we're looking at all the brand presidents, more than half of them were female. The leadership team, I think, really did a good job in creating a pretty equal culture. And again, my experience was very pleasant.”

“Stretch Lab probably is another probably 300 territories available that they haven't sold, I would say, conservatively. I mean, what the mindset is with Xponential is wherever there's the Club Pilates, they can put any one of their other brands.”

“I still see this company as one to keep an eye on in a positive note. While I was there, yes, the focus was, okay, we need to grow and sell territories, but they also put an emphasis and focus on that support of getting these old territories open. There's a lot of franchise businesses out there that will just sell, sell, sell, and do not support their owners or put focus on getting those units open. So I think there's a lot of support and leverage that the Xponential provides that I have not seen in many other franchise brands. And I've been in a few different industries and in brands since.”

Former Director of Finance at Xponential Fitness, leaving in July 2022.

“So, I was actually the one doing KPIs. And no, KPIs were never overstated or fake or anything like that. If anything, we would always go after operations people and actually deduct some of the KPIs from them.”

“So, I kind of still think that XPOF did not close a single store like in my opinion, just because I remember like how he was going and like I was dealing with all of those instances. And there was usually a rationale as to why there is a permanent closure of the doors of the store, but that store with a new name or a new franchisee or the new address or new lease is going to pretty much open elsewhere or if it's leaving a system for like litigation reasons. So it's just not black and white.”

“No, that's not true. Half of the franchisees do not lose money. I think that's kind of like a huge overstatement. There are franchisees who struggle I know that for a fact, but that's driven by a lot of reasons…. So to say like eight brands are losing money and 50% of franchises are losing money, it's not accurate, it's blown out of proportion.”

“And Pure Barre, for example, specifically, the concept where you make money just because the franchise owners are also trained as GMs because Pure Barre owners statistically, I think like 95% are women, and they just decided to open the studio just to follow their passion.”

“Yoga Six is a good concept…. But I also know Yoga Six was selling licenses left and right.”

“It [Cycle Bar] didn't bounce back after COVID as good as we thought it would.”

Owner/Franchise Coach/Consultant at FranChoice

“I've been doing this type of consulting where I work with individuals or groups since 2005, and I've got 30 years in franchising. And I've owned fitness myself. So it's an industry, I'm pretty comfortable in… probably 70%-30% [mix of new/existing franchisees]… I go back in terms of my working with Xponential actually back to when guys first acquired Club Pilates.”

“Xponential has a unique difference in their overall infrastructure and that plays very well with most franchisees because they're looking at this from the perspective of that 70% have not previously owned the business. They want that strong playbook that Xponential has. So, I see that as being a significant differentiator. And then just the fact that they've got each brand, for the most part, focused on a specific modality, the XPASS and their digital product…. very strong brands from unit economics, they're on a different [competitive] playing field.”

“It's interesting. When I was like on the Angry Panda, I expected to get a lot of questions about that from people that are currently looking at one of the Xponential brands that I'm working with. And then I also kind of expected to get some calls of concern or questions from the people that I've placed in the past. From those that are currently looking, I have not had a single question which again, I find really interesting.”

“So, as I read the [short] report, like anyone, I thought. All right. There's a lot of concerning allegation in here. There were some of the points that I just wouldn't know one way or the other, but there were others that were just completely contrary to what I have seen and observed and heard from franchisees that I've placed in the various brands. So my initial gut was the feels like a hatchet job.”

“And so, I've talked with Anthony [Geisler]. I've talked with Sarah Luna, who's the President. I talked with several of the franchisees. And from my overall impression of what I gathered, I went and bought more stock.”

“The things that I saw [in the short report] an immediate disconnect was how him [Anthony Geisler] treats people. I've never seen that. I've seen the opposite. I've seen him do things that nobody would typically be aware of, and he did them because they were the right thing to do. He had opportunity a couple of times to not pay me because there were -- it would have been easy for them not to. And in one situation, in particular, I wouldn't have necessarily even expected it. The claims that he treats women very poorly. I had one of the franchise development reps [female] who've been around for a long time, she called me in tears just upset that was now out there and how unfair she thought that was. So I've not ever seen anything that would substantiate those sorts of character issues.”

“I will put 12 to 15 franchises into exponential this year. And I probably average 10 to 15 with them every year. I will have somebody do a single, but most of them are 3 to 5 packs.”

“The feedback that I get is the support is good….I know all of the brand presidents and they're strong. If I compare them to what I see other presidents [other competitors] they're just -- they're a step above, much above what I see.”

“I'm very confident if you follow the playbook, you'll do well. I literally would put family into those brands.” 

“So those claims [in the short report] of that very high percentage of franchisees losing money, and that studios are never getting open. I'm not seeing it in my little world… how you could hide it for any length of time. Maybe there's a way to play a shell game for a few months, but you'd have to get so many people to go along with that narrative. I just -- I don't see how -- if that were true [the claims in the short report], I don't see how you could possibly keep a cover on it…. anybody that did 3, 4 hours of due diligence would have learned that… I don't see any plausibility there.”

“I think what they [the FDD documents] provide is an accurate representation of reality.”

“There was that accusation [in the short report] that it's a secret [franchise resales]. It doesn't appear to be much of a secret. So yes, I mean we've received notification that they got corporate resales that they are trying to transition into a new franchisee hands…. it's 3%, 4% of the system, which statistically that's about right [compared to other franchise organizations in general]….That's where it ought to be.”

“I think very positive [the future outlook for Xponential]. Very positive, both from franchise growth. So I think they've got good solid fundamentals. They've got a good executive team. They've got a good product. They've got a good playbook that wins the day.”

“I bought [the stock] initially and when they pushed the price down, but I doubled that. I put my money in yes. I didn't buy just a little. I bought a pretty fair amount. So I'm very bullish on what they're doing.” 

Former Corporate Executive at Xponential Fitness

“I worked with all parties that were interested in joining the brand as franchisees, the initial contact, taking them through the approval process and getting them onboarded. I was not bound to a particular brand. I worked with all 10 and got to know each brand team level support pretty well.”

“I mean you've got your legacy brands in the system. I mean Club Pilates and Pure Barre from a unit count in terms of open units as well as territories sold. And I'd say legacy as in reaching potential for that capacity to fill the market, more so on the Club Pilates side than Pure Barre. And then obviously, on the other end, we've got maybe about six of the brands that still have quite a bit of runway in terms of growth opportunity and potential for new location openings.”

“So, from profitability between the brands, I would say, Club Pilates and Stretch Lab were probably the two leaders in terms of profitability. I think there were some of the younger brands that did struggle just, I think, due to lack of brand awareness.”

“So, I mean when I was there, it definitely was not 50% [the % of franchisees new & old that are unprofitable]”  

“I know with some of the acquisitions of the brands that maybe had larger footprint pre-acquisition, they definitely reduced the footprint size of the studios. A good example is Yoga Six, they used to have two rooms per studio. And then once Xponential acquired the brand, they just consolidated to a single room studio to help reduce start-up costs.”

“I do know that Yoga Six and actually Stretch Lab were probably the fastest selling brands in terms of new territories and licenses.”

“I know a lot of the existing franchisees and the other brands in the Xponential portfolio were diversifying and buying a BFT or a Rumble license.

“One of the big factors also has to do with the studio owner-operator and how they allocate their labor. The recommendation was always to have a general manager, sales team and then your instructors. So, some of the owners fulfilled their own role as the GM [to lower labor costs].”

“I would probably say Pure Barre had a much higher, probably 80% owner-operators rate…. Pure Barre seems to be one of the less profitable ones if you're not running it yourself.”

“I would say that's pretty accurate. Definitely with a robust pipeline that comes through, I don't want to say Xponential's picky, but they are pretty particular about who the new franchise partners are going to be in the system. And just because you have cash and look ready to write a check doesn't mean that you're going to be approved.”

“I do [Does the company have a long growth runway?]. And I think there's quite a bit of available territories with most of the brands. They have sold large amounts of territories to some large operators. And I say large as in people were being sold five to 10, 15 licenses for big territories to develop… So, I think there's still a lot of opportunity in run rate for most of the brands…. And then honestly, I do see Anthony acquiring more brands.” 

Franchise Owner of 5 Club Pilates/Pure Barre locations.

“Whenever you speak to a franchisee, you're always going to have complaints about a franchisor. I think that's almost the nature of franchising. But Xponential Fitness really delivers on what they say they'll do. They are executors from the top to the bottom. It was very impressive to see the level of support there was during COVID.”

“But in terms of if you follow Xponential's plan, you will be profitable like they say, that is true. But then where you have differences, obviously in every workplace, as certain people are better at executing the plan and then certain people are better at motivating others to also execute the plan.”

“I have two open Club Pilates studios. One is two years old, one is one year old. The two-year-old one is on track to make $120,000 this month in a regular month. And then my other studio that's a year younger is making $95,000 this month and it's on track to do better… You're looking for sure at like probably $45,000 to $50,000 [in expenses] or if you're really overspending maybe $55,000 or $60,000, but still look how much you're making.”

“They love it. I mean, it's hard not to like it [feedback from other Club Pilates owners].”

“At Pure Barre, so typically, you're looking at a top line of between $25,000 and $30,000 a month in total gross revenue. You're kind of ranging between a couple of grand and $10,000 in a great month for profitability.”

“Pure Barre has huge retail. It's a secondary source of income. I would call it the cherry on top.”

“So, if a studio opens now [Pure Barre], I actually think it has a much better chance of doing well long term than if it had been opened prior to COVID, lost all its members, and now has to rebuild.”

“But yes, it was noticeable [seeing an acceleration in revenues in the last few months]. I don't know if it was the sun coming out or what caused it, but about March or even April of this year, I thought to myself, this is going to be our best month next month that we've had in three years at every location…. And I can see it. They send out monthly number reports for both brands and I can see it on those as well…. But like, for example, a couple of the metrics that in both brands are up, is attendance is up. Year-over-year, like attrition is down. So that's really good. Then also the total number of active members is up between 10 and 20 in Pure Barre, which that is huge.”

“If I lived in an urban area, I would look [opening] a Rumble Boxing. That's a really interesting brand. It's hot. It's trendy. Boxing is huge right now. I would definitely invest in one of those. I think that Yoga Six is a really interesting brand. I think that yoga is really easy to sell. Everybody knows what yoga is. It appeals to all sexes and it's easy to find teachers who know how to teach yoga anywhere you go. That sounds easy to me. I've heard that Stretch Lab does really well. I wouldn't think that would be successful, but I have heard from Stretch Lab owners or like a Club Pilates owner who also owns a Stretch Lab that, that is profitable. That's seems like a hot brand. Cycle Bar does not seem like a hot brand. While it's fun, and I really enjoy it, it's a very high cost of entry, and it's hard to make that money back in a very crowded space. It's also a large footprint when you're looking at real estate. That's expensive. And then the equipment and the audio is expensive. Other brands that we have now. I think BFT is Australian. That one will probably do really well. Row House is a split mix. It seems like some of them do really well and then some don't, and I don't know if that's because the owners are good or not.”

“I think Xponential's a really safe bet. They execute on what they say they will. I've never seen them fail at something they said they would do publicly.” 

Multi-unit Franchise Owner of various XPOF brands including 6 Stretch Lab’s & 1 Rumble Studio’s

“I stay in touch with quite a few other franchisees, and we're on the call like once a month and we discuss this kind of stuff all the time.”

“I have two left on the Stretch Lab side and two left on the Rumble side.”

“I think they did a pretty good job [in the FDD] of trying to give you a realistic cost of what it would cost to run your business…I don't see people complaining about expectations of what the franchisor kind of laid out in the FTD versus what the real life experience is.”

“$8,000 a month in net income {per studio]… I'm not a top 10% performer [among all Stretch Las’s].”

“There definitely are Stretch Lab studios that are doing over $100,000 a month in sales. One thing you might want to look at is how many active members or how many members can a unit have. But I see probably one of the top performing, the one with the most members looks like it might be about 400. I see a handful of studios that are kind of in the mid-400s. I think what you do is, there's a few studios that are above $100,000 a month. There is one that's probably the top-performing studio might be about $163,000 a month.”

“So, the problem is there's a bunch of new studios. Take it for what it's worth, about $50,000 is what the average studio is doing.”

“I would say that's probably maybe you want to use a range of 8% to 15% [for operating margins]. I know some studios are doing 8%, not all of them are doing 15% margins, and you can maybe kicking the numbers that way by using some of those inputs.”

“So, you could sell your [Stretch Lab] franchise license for maybe double what you got it for.” 

Former President & COO at Rumble Fitness (prior to the acquisition)

Had run the legacy US 15 studios that prior Rumble management had run, which were transferred to Xponential. Left the company in July 2023. Sold over 300 Rumble globally, 50-65 currently opened and operating, another roughly two dozen in pre-build.

The brand is in a strong position, it had received great reception from an early pre-sale membership. The 300 licenses sold out of the gate is a record for Xponential for any brand. The franchises flew off the shelf faster than anyone expected.

Boxing as a modality is in its early stages, Rumble is the first to put the Apple touch on what had been on old sweaty smelly gym club sport and appeals more to a younger customer. There is a lot of room for growth. Once you get people to try it; very rarely is it a one and done experience.

The legacy studios opened since 2017. A couple have opened post-acquisition. 

New studios are opening up with 300-350 members, an opening investment of ~$1 million, with an estimated 1 -1 ¼ year breakeven. The old big box 600 square foot signature version of Rumble with showers and art was about $4 million to open. (Note: the short report shows an estimated Rumble studio start-up of ~$3.774 million, which appears to be the investment for the old larger signature boxes).

There are 5 tiers, depending on location, where membership fees and labor costs vary.

Relative to the personal accusations in the short report, his business dealings thru the merger has not given him reason for pause or belief he was led astray. He has been nothing but pleased with his interactions with Anthony [Geisler].

Relative to the Rumble FDD, he believes it paints a fair picture, if a franchise is diligent, nothing should come as a surprise, and would be more of their own doing.    

Current Franchise Owner of 10 Yoga Six Locations, Former CFO Yoga Six (prior to Xponential’s acquisition)

Began 2016, now President & CFO of ownership group.

Their original studios were the old model of a bigger box with 2 rooms, then opened new smaller box studios after the acquisition. 

Their studios are about 90% recovered in membership and profitability vs pre-COVID.

Most older studios were hit hard by COVID, most are below pre-COVID membership levels. Studios that opened during COVID are struggling.

The studios that are opening now presale are opening strong with 300-400 members, one with 700 members a couple of months ago, and are cash flow positive. These owners are happy.

New studios cost ~$300k-500k to open.

Making $30-40k a year in profits.

Xponential can open 30-50 location a year. They need to build Yoga Six as a national brand, which may take a while.

Franchise Owner of 5 Stretch Lab’s

Franchisee since 2019, owner of five studios in the Northeast.

He found the FDD’s “close to accurate”.

Invested ~$180k to open studios, focused on keeping opening cost low (Note this is below the FDD and the short report).

His studios are close to average membership levels and revenue of ~$50-$55k/month. The breakeven is a at ~$40k (in their experience reached after ~5-6 months) and he believes is 4-wall operating margins are ~20%.

70% of the business is recurring.

His membership levels have shown steady growth since opening. He said “we don’t really have to do anything and revenue grows”.

Recently he has seen an upward trend in revenue in May & June. Same store sales this year are up 10-15% and continuing to grow.

The big thing holding growth post COVID has been staffing. As they have hired stretching professions, he says it does not take long for their book to fill up.

His group decided to go ahead and open up the remaining licenses they have. They plan to open 2 studios next year, two in 2025 (with leases already signed) and about 2 stores a year due to liquidity issues. 

From his discussions with other Stretch Lab franchisees, he said franchisees are “pretty happy”.

He felt the short report “was kind of loaded with a lot of cheap shots” and not surprised there are a lot of unhappy franchisees. He said he told friends the report was “BS” and “he would not be afraid to buy it [the stock].

Franchise Owner – CycleBar since 2016

Pre-acquisition, his group purchased a package of 10 originally under the St. Gregory Group ownership. Under old management’s rules, it was challenging to operate profitable, opened and sold 3 locations, currently he has one location.

He is the 3rd highest generating Cycle Bar franchise, with annual revenue of ~ $1 million and bring a little north of $200k to the bottom line.

Xponential purchased Cycle Bar in September 2017. Things definitely improved after the acquisition, prior owner was terrible at franchise operations; Xponential was a net positive.

He understands that many Cycle Bar locations are challenged from an economic return perspective, especially those franchisees that opened under the prior management. The V2 (smaller box, lower cost, focused on selling memberships, etc.) locations that opened more recently are doing better. He believes that indoor cycling probably impacted indoor cycling more than other boutique fitness modalities.

In his market he understands that the Club Pilates, Stretch Lab and Pure Barre franchisees are doing well.

Recently he has seen an increase in membership. About a hundred members above pre-COVID. This year his business is up ~5%. 

Follow -up call: Owner/Franchise Coach/Consultant at FranChoice

“As to fitness, I think it's proportionate where we continue to see a lot of interest in fitness. “

“BFT, Rumble, those are the two newer brands that are performing really well. The brands that have more maturity in their system, Club Pilates, StretchLab, they validate really well.”

“The challenge is just the availability. Club Pilates recently looked at where their units or where their studios are and have come out recently with some additional territory. So, I think that will provide some opportunity for that particular brand to see some additional growth that wasn't possible six months ago or when we last spoke. So, I think we may see some lift there. I would be surprised to not see those be taken pretty quickly just because the validation there is exceptional.”

“But then YogaSix, it feels like that brand has slowed on just new growth. I don't see a lot of activity with STRIDE.”

“It's [overall demand for the Xponential brands] consistent with what I've seen in the past. And I'm almost surprised that I've yet to have any candidate that I'm working with bring up the Fuzzy Panda report. I expect it to have at least some that questioned it. Nobody. So, in terms of the franchise development, I haven't seen where that had any material impact whatsoever.”

“I haven't seen anybody make the decision to wait or not move forward [due to the rise in interest rates]…They're factoring in the cost of money into their projections. And I think that there is some optimism that rates will come down over time.”

“The feedback [from the franchisees that have opened Xponential studios] has continued to be consistent….The overall Xponential experience and I've got some that are great operators, they're exceeding that. I've got a couple. They're just okay, but they're healthy. They're profitable…..everybody is doing pretty well.”

“At the end of the day, people can say whatever they want, but what I pay attention to, are they staying on their development schedule? If you go in and you open up unit number one, and you don't have the results that both were expected and then probably more importantly, what are needed to be able to open up subsequent units, then it doesn't matter what development rights you went in with, you never open up more than the first one.”

“What I see from Xponential is consistent. What they do is consistent, how they deal with franchisees. I think just stepping back, looking at franchisors across the board, my evaluation is they're a good operator.”

“I got a call from another consultant two or three weeks ago, who knows that I have bought some of the Xponential stock. He owns a little bit of it and was asking my thoughts and opinion on buy, sell, hold. I told them I've been buying. So, I'm not quite certain what's holding the stock and the pattern that it's in. But I think that the fundamentals of the business are strong, and my expectation is it should break out.”

Catalyst

• Reporting strong Q4 and future earnings reports
• Announcing a strategic process to enhance shareholder value
• Short covering 
• A sale of the company or some of its smaller assets
• The ending of the SEC inquiry
• Management providing greater information on the profitability & health of individual brands
• Share repurchases