XPONENTIAL FITNESS: SHAPING THE HEALTH AND FITNESS INDUSTRY?
Xponential Fitness, Inc. (NYSE: XPOF) is the largest global franchisor of boutique fitness brands. It operates a diversified platform of ten brands spanning across verticals including Pilates, indoor cycling, barre, stretching, rowing, dancing, boxing, running, functional training and yoga in more than 2600 locations.
In partnership with its franchisees, Xponential offers personalized workout experiences led by highly qualified instructors in studio locations across 48 U.S. states and Canada, and through master franchise or international expansion agreements in 14 additional countries.
The Company’s portfolio of brands includes Club Pilates, the largest Pilates brand in the United States; CycleBar, the largest indoor cycling brand in the United States; StretchLab, a concept offering one-on-one and group stretching services; Row House, the largest franchised indoor rowing brand in the United States; AKT, a dance-based cardio workout combining toning, interval and circuit training; YogaSix, the largest franchised yoga brand in the United States; Pure Barre, a total body workout that uses the ballet barre to perform small isometric movements, and the largest Barre brand in the United States; Stride, a treadmill-based cardio and strength training concept; Rumble, a boxing-inspired full-body workout; and BFT, a functional training and strength-based program.
Market Cap: $1.43B; Current Share Price: $28.70
Data by YCharts
We will discuss 4 key factors which indicate that Xponential is headed on an impressive upward trajectory.
- Rapidly Expanding Boutique Fitness Industry
The boutique fitness segment of the broader health and fitness club industry encompasses a social, supportive community of coaches and consumers engaging through class-based programming in small studio spaces (typically 1,500-2,500 square feet). A boutique fitness workout typically offers more customized programming and a more intensive experience complemented by increased levels of personal attention and guidance relative to a traditional health and fitness club.
This boutique fitness industry is large and growing – as per 2022 IHRSA Global Report, from 2015 to 2019, the boutique fitness industry grew more rapidly than the overall $97Bn global health & fitness club industry. In the U.S., it is expected to reach a total market size of ~$24Bn in 2023, and grow at a CAGR of more than 5.3% from 2023 to 2025.
Xponential is already the largest global franchisor in this $20Bn+ boutique fitness industry, and they saw continued growth and gained share even during Covid (December 2019 to December 2021), when the rest of the industry contracted. About 30% of U.S. boutique studios closed permanently during this time, but Xponential opened 1,066 new studios globally between April 2020 and December 2022. Their member base today is approximately 70% larger than it was before the onset of the COVID-19 pandemic.
The Company is committed to a growth plan that will allow it to strengthen its leadership position and increase market share even further.
As of January 2023, 64% of the U.S. population lives within 10 miles of an Xponential studio – in other words, a large number of the Company’s studios are already situated within easy reach of existing and potential consumers. Additionally, it is estimated that there is potential for ~7,900 more Xponential studios in the U.S. alone. Further, the LA Fitness Agreement allows for Xponential studios in 500+ gym locations. And finally, as of December 2022, Xponential franchisees are contractually committed to opening 1,939 new North American studios.
All this will greatly help Xponential grow franchised studio base across all brands in North America, however, the Company has an actionable plan for growing its brands and studio base internationally as well.
Xponential partners with experienced master franchisees in attractive international markets with the largest opportunity – in fact, it already has contracts in place in a total of 16 countries including Australia, New Zealand, Singapore, Saudi Arabia, Japan, Spain, the Dominican Republic, South Korea, and the United Kingdom.
As recently as October 2021, the Company acquired Australian brand BFT, which has also helped to accelerate its global growth trajectory. Thus, it seems that Xponential is taking adequate steps to profit from the growing opportunity offered by the boutique fitness industry – nationally, as well as internationally.
- Proven and Robust Franchise Model
The Company operates a highly attractive asset-light business model that offers predictable, recurring revenue. The Selling, General and Administrative Expenses for the business model are mostly fixed, which in turn supports long-term margin potential across a growing, diversified platform. In fact, the model provides platform synergies for all stakeholders, which makes it extremely attractive to both franchisees and customers.
The Company’s popularity amongst customers is evidenced by the fact that they have a 590K+ growing membership base, with ~90% of members on recurring memberships. Xponential has a passionate and loyal consumer base which is attracted by the flexible and attractive offers of the Company.
As far as franchisees are concerned, as of December 31, 2022, on a cumulative basis since inception, Xponential had 5,450 franchise licenses sold globally, compared to 2,132 franchise licenses sold as of December 31, 2018 on an adjusted basis to reflect historical information of the brands they have acquired. Specifically, in North America, the franchise network grew rapidly from 985 franchisees as of December 31, 2018 to 1,714 franchisees as of December 31, 2022, representing a CAGR of 15%.
This is primarily due to the compelling studio level franchise economics offered by the Company (as shown below):
Since the Company’s business model offers strong value to both franchisees and customers, it would be easy for Xponential to achieve its aim of growing franchised studio base, and also driving system-wide same store sales and increasing average unit volumes through various measures such as acquiring new customers, increasing membership penetration, driving increasing spend from customers, and so on.
This in turn would again contribute to increasing revenues and improving market position.
- Brand Diversity
Over the years, Xponential acquired a variety of brands that now provide it with a significant competitive advantage in a fragmented market composed primarily of single-brand companies focused on an individual fitness or wellness vertical.
The Company’s brands appeal to a broad range of consumers across ages, fitness levels and demographics and are positioned at an accessible price point. The strength of the brands is highlighted by the numerous accolades they have received, with four brands (Club Pilates, Pure Barre, CycleBar and StretchLab) being listed among Entrepreneur’s 2022 Franchise 500 rankings, four brands (Club Pilates, Pure Barre, StretchLab and YogaSix) being listed among Entrepreneur’s 2022 Fastest Growing Franchise rankings, and BFT being voted the 2021 APAC Fit Summit Franchise of the Year.
This diversified brand offering expands the total addressable market and translates into increased use occasions for consumers, driving increased share of wallet and enhancing consumer lifetime value across the Company’s portfolio.
- “Exponential” Revenue Growth
For FY22, the Company’s revenue 58% to $245.0 million, and North America system-wide sales increased by 46% to $1.03 billion, compared to FY21.
At the same time, the Company reported net income of $2.9 million, compared to a net loss of $51.4 million, the previous year. Adjusted EBITDA for FY22 was $74.3 million, compared to $27.3 million for FY21.
For FY23, the Company provided an outlook of revenue in the range of $285.0 million to $295.0 million, or an increase of 18% at the midpoint; and Adjusted EBITDA in the range of $101.0 million to $105.0 million, or an increase of 39% at the midpoint. Also, for this time period, North America system-wide sales are expected to be in the range of $1.34 billion to $1.35 billion, or an increase of 30% at the midpoint.
In other words, the Company is expected to continue to expand its revenues and footprint at a significant pace, as it has done in the recent past.
Also, since Xponential has highly predictable and recurring revenue streams and limited on-going capital requirements, it is expected that the Company will have enough cash to service debt obligations.
Overall, it seems that with the current rate of revenue expansion, and with an effective growth plan, Xponential is quite likely to achieve it three-to-five year growth targets, which include
- 500+ Annual Net New Studio Openings
- Mid to High Single Digits Same Store Sales Growth
- Low to Mid Teens Revenue Growth
- 20% – 25% Adj. EBITDA Growth
- 40% – 45% Adj. EBITDA Margin
This, along with the fact that Xponential is already a market leader in global boutique fitness brands, make the Company worth watching out for.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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