2023-04-09 08:22:40 ET
Summary
- F45 Training remains a mess, and probably will for some time.
- It's vastly underperforming the sector in profitability and momentum, and there are no signs that is going to change in the near future.
- With a new management team in place, it has yet to be known what exactly it'll do to turn things around, beyond the steps taken by prior management.
- At this time the best move may be to accept an unsolicited proposal from Kennedy Lewis to acquire the company.
F45 Training Holdings Inc. ( FXLV ), which competes as a fitness franchisor, has been experiencing a prolonged period of musical chairs with its top management and board members, and after the recent closing of a $90.00 million subordinated debt facility, naming of a new CEO, appointing of a new Chairman to the Board, and adding four new independent directors, it's time for the company to lay out its strategy for long-term, consistent and sustainable growth.
As for the unsolicited proposal from Kennedy Lewis to acquire the company for $4.00 per share, that was put on hold until the financing was secured. Management did say in the press release that it hasn't received anything further from Kennedy Lewis on its initial proposal. That said, affiliates of Kennedy Lewis Management LP led the financing, confirming there remains significant interest from KLM concerning F45.
On the performance side of things, the company has been going through a period of restructuring for the purpose of cutting costs. Most of the costs associated with the effort are now behind it, pointing to an expected normalization of its P&L numbers.
The combination of the capital raise and cost reductions should help the company to further support its vital franchisee network, which is the core of its business model.
In this article we'll look at some of the company's trends, the changes in management, and what the long-term prospects of the company look like.
Performance trends
In its last earnings report FXLV reported revenue of $29.3 million in the third quarter of 2022, compared to revenue of $27.2 million in the third quarter of 2021, up 8 percent year-over-year, and beating by $4.12 million.
What was important about that as far as how revenue trended is, the increase didn't come from a boost in franchise revenue, which the company needed, but rather from equipment sales. Equipment revenue was $10.8 million, up 24 percent year-over-year. Total franchise revenue was flat at $18.6 million as measured against the third quarter of 2021.
The number of franchises sold in the third quarter of 2022 dropped by 152 to 3,682 in the important U.S. market. Franchises sold by the end of the third quarter of 2022 was 2,060, due to the termination of 167 net franchises. Management stated in the earnings call that it doesn't expect any more meaningful terminations associated with multi-unit franchise deals.
As to the why of the big drop in terminations, it was from the terminations of franchisee financing facilities.
The major reason the health of its franchisees is so important is because they generate more revenue and higher margins than equipment sales, and the growth of equipment sales is normally dependent on the number of franchisees the company has.
Concerning gross profit margin, that dropped from 73.4 percent in the third quarter of 2021 to 67.9 percent in the third quarter of 2022. That was directly attributed to the increase in lower-margin equipment sales.
What's important to understand here is, it's not the increase in the low-margin equipment sales that was the issue at hand, but the decline in the number of higher-margin franchises.
Even so, even equipment sales experienced a decline in gross margin, falling from 33.6 percent in the third quarter of 2021 to 26.1 percent in the third quarter of 2022. That came as the result of higher storage and shipping costs, as well as discounting equipment prices sold to its franchisees.
That's apparently the reason for the jump in revenue from equipment sales, and the accompanying decline in margin, i.e., the company had to lower prices in order to trigger more sales. Management said it doesn't think it'll continue to discount its equipment, but that remains to be seen in the current economic environment and ongoing struggles of the company.
Net loss in the reporting period was -$(60.00) million, or -$(0.62) per share, compared to a net loss of -$(130.25) million, or -$(1.52) per share in the third quarter of 2021.
At the end of calendar 2022 the company had cash and cash equivalents of $16.7 million, compared to cash and cash equivalents of $42.00 million at the end of calendar 2021.
The company held long-term debt of $88.4 million at the end of calendar 2022. The revolver of the company was fully drawn at the end of 2022.
As for guidance for full year 2022, the company is looking for revenue to be in a range of $120.00 million to $130.00 million. With revenue for the first nine months of 2022 being at $109.4 million, even in the best-case scenario it points to a significant decline from the third quarter of 2022.
While the company has presumably, for now, stabilized much of its management team, it still has an interim CFO in Bob Madore. I think in light of the uncertainty and recent instability in top leadership, it's important for a permanent CFO to be installed, and for the current management team to remain in place for a prolonged period of time in order to give the company a chance at implementing its business plan and strategy.
Last, the market needs to see its next earnings report to provide insight into how the company is doing after making cost reductions and doing a makeover of much of its management.
Profitability Grade
Profitability and cash burn are major issues for F45, and while it has taken care of raising additional capital, improving the profitability of the company is going to be a daunting challenge.
Concerning profitability metrics as measured against the sector median, it vastly underperforms. In net income margin ((TTM)) it stands at -(45.32) percent, compared to the sector median of 4.56 percent.
EBITDA margin ((TTM)) was 25.81 percent, compared to the sector median of 11.43 percent.
Return on equity ((TTM)) was -(101.18), compared to the sector median of 11.79 percent. Return on capital ((TTM)) was -(26.34) percent, compared to the sector median of 6.35 percent, and return on total assets ((TTM)) was -(34.32), compared to the sector median of 4.00 percent.
Cash from operations was -$(91.95) million, compared to the sector median of $150.2 million.
Net income per employee was -$(317.94k), compared to the sector median of 11.02k.
In the net income per employee metric that's especially important, which is one of the main reasons the company engaged in restructuring costs, part of which was a significant reduction in its employee base.
If the company is able to boost the number of its franchisees going forward, which in turn will increase equipment sales, it has a chance at turning things around.
It should be noted that equipment sales aren't a headwind for the company, but a nice income stream that has been underperforming because of the company needing to generate revenue there by reducing prices.
With an increase in higher-margin franchise revenue, along with moving away from discounting equipment, the company would go a long way toward improving its top and bottom lines.
Conclusion
There's no way to spin it - FXLV is a mess at this time, and while taking some of the right steps to turn things around, it's a long way from proving it can execute on its strategy.
We have yet to hear from the new management or receive an update on the earnings from the first quarter of calendar 2023. Investors need to look at the numbers and commentary from management as to the how the company is doing and the way forward. The next earnings should provide a lot more needed visibility and clarity.
Now that the company has secured financing, the other significant issue is whether or not it has positioned itself to being taken over by Kennedy Lewis. The problem there is the stock has dropped in value since the offer, and there's no certainty the same offer is still on the table or not.
The company lacks tailwinds as it stands, and it needs to significantly increase the number of franchisees in the future in order to give it a shot at success. If it's able to do so, the equipment sales will take care of itself.
With the addition of actor Mark Wahlberg as 'Chief Brand Officer,' it could generate more interest and brand awareness in the company, but that still must be leveraged into sales. Wahlberg a likeable man who is in good shape, which provides credibility to his appointment, but only time will tell if it pays off or not for FXLV.
It seems to me the best thing management could do for shareholders would be to seek to sell the company. It does have some potential to grow in the years ahead, but the hole it has dug itself into is so deep, there's no guarantee it'll survive, let alone thrive.
The company is without a doubt in desperation mode based upon the moves it has made, and that could be a positive if it can be translated into the type of motivation that drive the performance of the firm.
But even with its share price plunging to a little over $1.00 per share, it's still highly risky to take a position in the company, and until it proves it can execute on its strategy, it's a stock I would stay away from.
For further details see:
F45 Training: Why Desperation Mode Could Be Positive