2023-03-05 08:39:49 ET
Summary
- Xponential Fitness delivered double-digit growth across multiple KPIs through its diverse ten-brand portfolio franchise business model, tapping into multiple new B2B partnerships for additional opportunities.
- The management team has a successful track record of acquiring, managing and growing leading vertical fitness brands in the USA and more recently internationally.
- Cash rich recurring revenue business model has proven to be inflation-resistant, with customers unaffected by the recessionary environment, and the company forecasting serious growth for the financial year 2023.
- Cautious of the long-term sustainability of fitness brands and the increase in competitively priced alternatives.
Boutique fitness franchisor Xponential Fitness, Inc. ( XPOF ) has been a popular destination for fitness goers in 2022. Total membership grew year on year by 32% to 590,000 members across over 2,600 locations, increasing total revenue by 58% YoY to $245 million. The stock has rewarded investors 43.09% in returns over the last year.
Analysts predict an average one-year stock value of $31.27 with a high estimate of $43 . So far, things are falling into place for XPOF. It has been very successful at acquiring top fitness brands, managing and growing them, attracting and onboarding well-performing franchisees, expanding its customer base, and finding creative growth opportunities through B2B partnerships . XPOF has raised its guidance going into the financial year 2023 and was not impacted by the negative consumer discretionary market sentiment, indicating that XPOF is a crucial part of its customers' lifestyle. It has a highly predictable business, selling licenses with multiyear growth visibility. I remain bullish on this stock.
Business model and growth potential
In my previous article, I gave an overview of XPOF. Within a short time it has become the largest franchisor within the boutique fitness industry in the USA. While many stocks, such as competitor F45 ( FXLV ), had similar growth ambitions, fitness stocks often do poorly on the stock market. There are a few reasons why XPOF stands out as a company with a lot of growth potential.
Firstly it has a diversified portfolio of leading vertical brands. XPOF is acquiring the dominating players in the boutique fitness industry; for example, Club Pilates is nine times larger than its closest competitor. XPOF's most recent acquisition of BFT is the most significant player in Australia and South East Asia. We can see that Club Pilates makes up most of the open studios, followed by Pure Barre and Stretch Lab. The advantage of such a diverse set of brands is that XPOF can tap into fitness trends while sharing the risk across less-performing brands.
Secondly, it has a track record of growing and managing brands. Its legacy brand Club Pilates has grown from twelve to 826 studies in twelve years. XPOF explains that 85% of the backbone of each brand is similar, with 15% focused on individual features of the vertical, making it easy for franchisees to expand into new brands. Over 55% of its franchisees own more than one unit and multiple brands. These franchisees benefit from sharing costs, such as front desk staff. Another effort to increase brand growth is the XPASS, a subscription of $249 per month, which gives customers access to all brands. Below we can see the revenue mix, with 71% in recurring revenue, which brings in cash to reinvest in the brands and opportunistically acquire new brands.
Thirdly the company is run by a solid and ambitious management team led by a CEO with over twenty years in the fitness industry. Each brand has its focused management team to run the ins and outs of the different verticals.
Furthermore, XPOF has a very loyal customer base. Although a boutique membership fee is much higher than a standard gym subscription, the typical customer spends less than 1% of their income on a membership fee and sees fitness as a crucial part of their lifestyle, often consumers tend to build a close community within these studios that increase loyalty to the brand.
XPOF is doing very well, AUV is at an all-time high, new studio openings are at an all-time high, and the total store count is growing with a predictable multiyear pipeline. The company does not see a slowdown in system-wide sales on the consumer or the franchisee side. The business has a very attractive, predictable business model that is proving inflation and recession-resistant due to the cash-heavy recurring revenue model and recession-resistant due to its affluent consumer base.
XPOF has been creative in its B2B partnerships to increase growth. Below we can see various efforts with several well-recognised companies. It has recently signed a five-year contract with Princess Cruises to develop the brands onboard its 15-ship fleet. It has a small footprint in the international markets with a huge opportunity to grow its market share with many contracts already in place to open up new stores.
Financials and valuations
XPOF is a young company going through a significant double-digit growth phase across key performance indicators such as new studios opening, new licenses in place, and new members. This has improved the company's top and bottom line performance, and the growth trend looks set to continue as it has barely scraped the surface in its international markets and may onboard more brands in the future. We can see that total revenues grew by 58% YoY to $245 million, and total system-wide sales for North America grew 46% YoY to $1.0 billion. For 2022 the company achieved a net income of $2.8 million, and earnings per share improved to negative $0.87.
If we look at the company's balance sheet, we can see that the total debt is significantly higher than cash availability. However, we should be aware that the business is investing in its growth and that its recurring revenue model will quickly increase overall EBITDA and operating margins, lowering the net leverage ratio.
As discussed above, we are already seeing an upward levered free cash flow trend. XPOF had a positive free cash flow of $23.8 million for the full financial year 2022, and we can expect this to continue into the new financial year, which will ensure that the company can invest further into the business, pay off expenses and reward investors with stock repurchases which are often seen in franchise business model stocks.
XPOF has an enterprise value of $1.22 billion and an FWD price-to-earnings ratio of 28.89. If we compare XPOF to FXLV , a boutique fitness peer that went public around the same time, and Planet Fitness ( PLNT ), a larger, more established traditional gym format with a much cheaper everyday gym pass, we can see that XPOF has a much lower P/E to PLNT. If we compare the FWD EV to EBITDA ratio, considering debt, we see that XPOF has the lowest valuation of the three, indicating that it may be undervalued.
Risks
Although XPOF has a diverse brand portfolio, most of the business is from its top three brands. One of the critical risks that stand out for XPOF is whether the popularity of its fitness brands is sustainable in the long run. However, thus far, the business has successfully grown the brands and acquired popular new brands. Building onto this, a bad brand acquisition could be costly for the company. The management team have noted that they intend to refrain from taking on significant transformational acquisitions, instead maintaining their strategy of add-on acquisitions. As the company aims to increase the number of brands, one of the risks could be that it becomes hard to manage effectively. Lastly, the competitive market is growing, meaning more alternatives at lower prices. Online apps such as Peloton Interactive ( PTON ) provide online boutique classes for a lower price, and more gyms are starting to offer boutique classes. Although customers believe these alternatives provide a lesser quality, customer preferences are unpredictable and can change quickly.
Final thoughts
XPOF has just posted a robust set of financial results and has proven its business model to be inflation resistant, and the recessionary environment has not impacted its customers. XPOF has only scratched the surface of its international market potential. It has a considerable backlog of stores guaranteed to open and a diverse portfolio of brand verticals, which spreads the risk of less-performing brands. XPOF has pushed through the pandemic challenges and has out a stronger company with the ability to take up more market share as many of its prior competitors headed into bankruptcy in 2020. With a track record of acquiring, managing and growing its brands, ensuring franchisee and customer growth, I believe there is still a lot of upside potential for this stock and remain bullish.
For further details see:
Xponential Fitness: Diverse Fitness Brands Drive Growth