Everybody, it's Randy Konik again. We're continuing throughout our day. We're about halfway done with our day. Hope everyone's getting a great education on everything that is fitness and wellness at our seventh annual summit. Very pleased to have with us for our next session, the management team of Xponential. We have Anthony Geisler, the company's CEO, as well as John Meloun, the company's CFO. So, over the next 30 minutes, we're gonna get some good conversation going with the company, get some good perspective, and with that, why don't we have Anthony and John welcomed into the conversation? What's up, guys?
Hey, how you doing?
Hey, Randy, how are you?
Great. Great as always. So I want to kind of just start off, just, just maybe for you, Anthony, just with your just general thoughts on where we are, given you're an industry leader with the broader fitness industry right now. How do you feel? How does it feel today? How do you feel like where we're going in the next couple of years? Just give us your thoughts.
Yeah, I mean, we're really bullish on the market, obviously, as we should be, being in the industry that we are in. But, you know, industry is doing great pre-COVID. It has come back stronger post-COVID for us. I mean, you're seeing single-digit, high single-digit comps in a pre-COVID world, and you're seeing, you know, kind of sustainable mid-teens, you know, this year. So, you know, we're seeing that across brands. You know, so we're happy with where the market is. You know, everyone's been waiting for, you know, a recession, and, you know, how would that affect the business? But it's been two years that we've been kind of waiting for that or seeing that, and it's very resilient.
You know, this boutique fitness space in particular, you know, it's, it's a very small percentage of someone's overall household income, right? About 1% of what they're spending. And so, you know, for us, I said this in 2008, I was an operator in boutique fitness franchisor of LA Boxing in 2008. And I said there would be breadlines before people give up their gym memberships. You know, they, they're viewed as a God-given right these days. This is not like the 1980s, and you had a country club membership, and you would get rid of that and, you know, and it may be a bad macro. This is where people have their entertainment dollars and really get their community, and it's where they get their workout, and that's a lot to give up for 1% of your income.
Great, so bullish on the industry, things feel good. This is great timing for this session today because you just had your Analyst Day a few days ago, a week ago. Maybe give us your thoughts on just overall kind of key takes or key highlights that you thought about from that Analyst Day, and the key takes you want us or the investors on the line to kind of bring, what they should have took away from that day, last week or so.
Yeah, I mean, we obviously put together a very conservative, you know, kind of three-year outlook, which, you know, looks at, at us opening sort of, you know, steady state as we are, you know, today, with no acquisitions, you know, going forward. Because how do you kind of model out what you're acquiring and when you're acquiring it, and what the AUVs are, and those kind of things? But the reality is, you know, we're a growth company, and we'll continue to buy. We've taken the last year off of acquisitions as investors were concerned about the macro, as they're concerned about inflation. You know, nobody knew what kind of inflation we were gonna see, and nobody knew what kind of macro we're going into.
Over the last 30-45 days, investors' questions have turned back to kind of where they were in a pre-IPO or at the IPO, which is, you know, "When are you guys gonna get an 11th brand, right? How are you looking to maximize growth?" And so, you know, we'll see that, right? We haven't acquired something for almost two years. You know, we bought BFT in October, right after the IPO, and then we've been growing that, and we probably would have acquired something, you know, one year ago, if it wasn't for, you know, inflation risk and upset, you know, kind of around the macro.
And so as that seems to be leaving investors' minds, and that growth mindset is starting to come back, which is great for me, because that's what I do, is buy and scale companies. And so, I'd be happy to get back to the M&A world.
Great. Then maybe, John, to follow up, you know, around the guidance that you provided, just kind of maybe kind of get a little deeper on that and provide a little bit more of the color around the assumptions that underpin that kind of guide. And if we had to think about areas of potential conservatism or not, where are those areas of conservatism or not in the model and from your perspective, over the three or the three-year horizon?
Yeah. So to kind of just baseline everybody, I mean, when you get to the 2026 targets, the first major shift that we're doing from 2023- 2026 is, as we talked about, moving away from transition studios and having more of a proactive approach. You know, we currently today have, you know, a number of studios, a portfolio that we own and operate, and it carries SG&A. So to get to kind of the 2026 EBITDA, the one major shift we did is we're lowering our SG&A, as you know, and we'll remove those costs. You know, SG&A will relatively stay flat in the target through 2026 because we have other cost offsets that we will, you know, be able to take advantage of.
Things like our legal costs, our insurance on our D&O, those kind of things will offset inflationary things in labor. So that is one assumption, is that SG&A will remain relatively flat. You know, by 2026, it'll be sub-30% of our revenue, when you exclude stock-based comp. then the next assumption is that the largest growing component of our revenue stream is royalties, and that's really gonna be on the back of us opening 500-600 studios a year for the next three years, and that's based off of the pipeline that we have today and just the 10 brands that we have today.
We will not need to add additional SG&A to do that. We do that today, so we'll be able to do it with the existing staff that we have. So as those studios open and the existing install base of studios are comping in the mid- to high-single digits, you know, starting in late 2024, you know, you'll see our royalty contribution as a percent of total being over 40%. And that's 40% at over 100% margin.
So when you just think about that, 40% of our revenue flows right to the bottom line, because it doesn't get eaten up in SG&A. So from that perspective, the royalty, the revenue mix will change, with royalties being the largest growing component. We do have a large portion of our revenue being flat, and that's our equipment revenue. If obviously, if we're opening 500-600 studios a year, with the current brands that we have, you're just replacing the revenue you have year to year. So from that perspective, that part of our revenue won't have a high CAGR, but your royalties are growing at a 20% CAGR. So at the end of the day, when you look at your gross profit, you're generating higher revenues at much better gross profits.
So that is one of the more meaningful things that's actually happening in our revenue that will drive margin expansion in the bottom line. Things like brand access fees, things like international. As the international gets more and more larger and kind of grows, that'll contribute more and more to the bottom line. From a conservatism standpoint, yeah, I do assume mid- to high-single digits. We comped 8% prior to COVID. You know, we've, in the last couple of quarters, we've been in, you know, 20%, mid-teens. You know, we expect to hold that, you know, for a couple more quarters before I assume that, you know, we'll just start kind of meeting, you know, more of our traditional 8% same-store sales.
So if we continue to perform at high levels and see some of our younger brands or growth brands starting to you know, open up more and contribute at higher AUVs, I do expect to see upside in things like system-wide sales and royalties, which will drive additional margin. So from that perspective, the you know, royalties could be, and system-wide sales could be a, an additive benefit. And then the last is international, you know, and M&A. You know, if international grows at a faster pace and we buy an eleventh brand or twelfth brand, then obviously that layers on top of the 2026 target, which would move it well above that and grow revenue as well.
That's very comprehensive and super, super helpful.
Yeah.
I think it makes a lot of sense, on, on being not only able to hit those numbers, potentially, exceed those as well. When you think about, just unit growth, you talked about 500 units a year. Just kind of give us a reminder and perspective on, you know, how do you think about the break up. the breaking out of that unit expansion between the scaled brands, and the growth brands? How should we be thinking about that, going forward over the next few years?
Yeah, it's most likely gonna come from, you know, Club Pilates, StretchLab, Rumble, and BFT. You know, it'll have some YogaSix kind of sprinkled in there. You know, Club Pilates, we just released or are releasing this week, you know, 200 more locations of TAM out to existing franchisees. We're doing the same thing at StretchLab. Rumble and BFT have increased some TAM, but we're still, you know, continuing to sell through TAM that we have in those brands. You know, we sold a CycleBar yesterday, two Pure Barre the day before. Like, it's, you know, we're still selling in those brands, but you don't have kind of all that white space that you have at Rumble and more so BFT. We bought BFT two years ago, started franchising it really about a year and a half ago.
And so that's been about 18 months of selling. Got about 700 of those, sold, with about half that open globally. So you know, it, it's coming from all of them, right? This is not, I think a lot of times people look at Club Pilates, and they're like: "Oh, Club Pilates, the AUV is high, and it has 900 open." It's like: Yeah, and it's also eight years old. And so how do you compare that to something that's two years old? And I've said this a lot of times: like, my, my eight-year-old daughter is a lot smarter than my five-year-old daughter, right? That's a big, that's a big three-year difference, right? I've got my five-year-old just got done worrying about eating snacks, and my eight-year-old thinks she's a preteen, right? So it's just like it's a completely different shift.
Yes, Club Pilates does the best, and yes, it has the most open. Yes, it has the highest AUVs, and yes, it is the oldest in the system by a landslide. You know, well, but BFT and Rumble are starting out at $500k+ AUVs, where Club Pilates start at $250k. So those brands are being born twice as smart. You know, let's take the over-under on where Rumble is in 6 years or where BFT is in six or seven years. We feel very confident that we've got a lot of horses, both young and old, and in between, pulling the wagon, and that's what we want. You know, we don't want it to be all brand-new brands. We don't want it to be all old brands.
It's a growth business, and there's no shortage of brands for us to go buy and scale. That's what I think people don't think about, too, is that if you have a couple of brands that aren't doing very well you know, it happens in a portfolio play, and you shed those, and you get brands that are doing well, you know? And so if you want 10 amazing brands, you might need to own 13, right? To get the 10 that are amazing and the three that you're trying to develop.
I'd love to say that we're gonna hit 10 out of 10 with million-dollar AUVs all day long, but the reality is, the majority of our brands, you know, have stores that do over $1 million. And so that's pretty crazy to do out of 1,500 sq ft. So we're, you know, we're kind of proud of it all over.
When you look at unit development, what stood out about your business versus others is, you know, you talk about the ability to open 500, and you're actually able to do it, and you've shown remarkable stability and good fundamentals on top of that. So when we look out over the last, I don't know, 12-18 months, and considering inflation and things like that, you know, how have you been able to do that, and why do you think you've been able to do it versus, let's say, I don't know, an F45, or what have you, that hasn't been able to do it? Give us your perspective there.
Yeah, I mean, look, even F45 as, I mean, you know, you work out there, it's, it's a great brand. It's a great workout. It was just a bad public story, and a bad public story only because, you know, they said they're gonna open 7,000 locations or 40,000 locations globally, and that, that was just a lot, and they put that much out there, and of course you're gonna underdeliver. It's actually great that they open. If they open, now nobody knows what they opened, but let's say they opened 300 locations under one brand last year, still good, right? I mean, that's not a bad thing. If they would've said, "Hey, we're gonna open 300," and they opened 300, they would probably still be around as a public story. Less market cap, right?
But I think that, you know, one of the basic fundamentals is getting good franchisees and supporting them, right? And so when you look at the amount of, you know, franchise lead flow that comes in versus what we take, it's a couple percentage, right? That we'll take of the lead flow that comes in, and that's either because we don't choose them, or they don't choose us, and we're okay with that. We don't look at it as a sales process, we look at it as an education process, so we guide them through what the first six, nine, 12 months of their life is gonna look like. And for some people, they're like: Hey, look, you know, maybe being a parent is not for me.
If that's what the first few years of being a parent looks like, maybe I just won't have kids, right? But we give them the actual reality of what it's going to be because we want them to go in eyes wide open. And so, you know, for some franchisees, you know, it's more difficult for them to operate, and for some, it's a lot easier than they thought, just kind of depending on who they are. But we're choosing the best franchisees, we're supporting those franchisees, and that's why you're seeing that AUV grow, right? And so we continue to push on lower CAC, lower CPL. We did our deal with VaynerMedia that we announced last week with Gary at the Analyst Day to show, like, hey, look, we are still bringing in bigger and better marketing.
We're in the business of driving leads, closing leads, and keeping them. And so, you know, that was a part of the business where we're driving them. You're obviously seeing us close leads, you're seeing AUVs climb, you're seeing comps, you know, way higher than they were in a pre-COVID world, and so, you know, we'll continue to do what we do.
How about you know, a question we always get in this environment, given where interest rates are, is just and your business model's franchised, people will ask, you know: What's the health of the franchisee base in XYZ company that is a franchisor? So maybe give us your perspective on, you know, what you perceive to be the health of the franchisee base at the moment, and just what are the franchisees kind of saying, and just give us your perspective there. It'd be super helpful.
Yeah, I can take that one. I mean, when you look at the health of the franchisee is really driven by AUVs. You know, at the end of the day, a franchisee and how much money they make depends on how much the top line grows and continues to grow. We have brands, you know, that do, as we mentioned, seven of our 10 brands have studios that do over $1 million. That's, that's not the expectation for all our studios, but it shows the potential. You know, when you look at brands like Club Pilates and StretchLab, and even the early BFTs and Rumbles, you know, those brands are doing well over $500,000 AUV, which means they're, you know, generating, you know, well north of 30% margins, you know, at those levels, which is very healthy.
You know, the misconception I think a lot of people have is, well, if they're not doing that kind of level of performance, they're not making money, and that's just not true. When you look at brands like Pure Barre, it typically tends to be on the lower end of the AUV level, but the average franchisee's been in business for over seven years, and nobody stays in business for seven years and doesn't make money. And the reason why they still make money at lower AUVs is they run a different model. You know, they run an owner-operator model, where the franchisee works inside the studio, you know, and takes home their salary that way versus, you know, the semi-absentee model, where the owner brings home their profit, you know, after they've paid all their employees.
So if you work in your studio, you have the ability to make sufficient living at home or, you know, working in the studio, versus just kind of sitting on the couch and letting somebody else do that. The other good indicator that we always look at is same-store sales, and brands like Pure Barre, you know, over the last, you know, six months, you know, has, on average, generated over 10% same-store sales month after month after month, so this is a brand that's continuing to grow. You know, a lot of people think just 'cause it's at a lower AUV, it's not gonna grow.
And as Anthony mentioned, as brands mature over time, just like Club Pilates, you will expect to see AUVs continue to climb as there's greater brand awareness, and you, and you grow out your membership base in your studio. So AUV is a good indicator. Same-store sales is a good indicator, but it's not, it's not the only indicator. One last point, you know, is also where a studio is located from a DMA perspective, has a huge indication of, you know, what the AUV needs to be to make a profit. A studio operating in New York City obviously needs to generate a higher AUV because the rent expense and the labor cost is higher.
Where if you're operating in Kansas, as an example, your rent expense will be much lower, as will your labor costs, therefore, you can operate at a lower AUV and still be profitable.
Helpful. How about, you know, one thing that I've noticed over the last couple of years is just the, the accelerating demand, internationally for your, for your brands, within the portfolio and your signing of, master franchise agreements around the world. So can we just get an update on that? You know, where have we come from? Where are we today with international MFAs? And just what are the brands, I'm sure most of them, if not all, are resonating with these, franchisees out there. Just like, give us the lay of the land, 'cause it seems like a very large, long-term opportunity that you're, you're executing on and capitalizing on right now.
Yeah. So obviously, every country has a different capacity, right? New Zealand is different than Australia, even though they're neighbors. And so we've identified 50 top-tier countries that obviously we have 10 brands that can go into. So we look at the kind of TAM internationally today as 500 master franchise agreements, right? And that would mean, you know, 50 countries, 10 brands, right? And inside those, you'll have different unit counts. Some will be five, some will be 55, some will be 100. So it's kind of all over the board. Today, we're operating, you know, in 19 countries total or have agreements in 19 countries total. You know, we're operating across pretty much all brands, you know, globally.
So there's AKTs in Mexico, there's StretchLab in Australia, there's Boxing Kangaroo statues for Rumble in Bondi Beach in Sydney. There's beautiful locations in Portugal and Barcelona and the U.K., and so, you know, we, we are open and operating across brands, right? StretchLab, you know, is doing well in APAC. You know, Club Pilates, out of the gate, is doing very well in Japan. And so, you know, for us, much like most U.S. operators, you operate in the U.S., and then the international business starts to come, right? And that's how we were operating until we bought BFT, which was 99% international and two locations in the U.S.
So we kind of flipped that model on its head, which was great for M&A because we wanted to prove we can go buy that international business and then just scale it in the U.S., as opposed to trying to scale a U.S. business and then wait for years to get 300 open of a brand international, right? You know, we did well with that, and now we're in the market hiring a president of international. You know, we hope to have that hire complete in the next 30 days. We've begun to build real infrastructure internationally over the last year from the construction perspective and marketing perspective, operations. We've always had franchise sales on the international piece with John Kersh, who's kind of second to none in the industry.
But now we want to bring in a, you know, very well-groomed President of International to start putting all those pieces together and really driving that 500, you know, kind of MFA opportunity. But today, we're in 19, call it, you know, 18, 19 of the 50, so almost half-baked on top-tier countries. But we're only out of the, you know, the 500 ability, we're only about, you know, 7% or 8% tapped on the 500 MFAs, right? And so, a lot of big upside, another 90+% to go against those, those 500, MFA potentials.
That's, that's exciting and a lot of good color. I guess, John, in terms of thinking about, studio economics or, any thoughts there versus domestic versus internationally, any material differences to think about, as it relates to that? And, I think from a go-forward unit development pipeline, domestic versus international, remind us how we should be thinking about the proportion of openings that you should expect or we should expect, on the buy and sell side, per year, domestic versus international.
Yeah, I'll touch that one first. I mean, right now, we have about 10% of the studios are international, about 90% are domestic. The 10% is largely in the BFT brand. Club Pilates and StretchLab, as Anthony mentioned, are and Rumble are growing brands, that we'll see more units of, you know, in the coming years. When it comes to in the future, I think you'll start seeing more 25%, 75% studio openings. That's kind of what we've been seeing in the last couple of quarters. So you'll see more like 25% of the studios and licenses sales coming from internationally, and 75% will be domestic. That mix, though, will largely say that the amount of growth coming from international versus domestic, it's largely gonna stay on the domestic side.
The economics, two points here. To the franchisor, the economics are very favorable on the international side of the business because we don't have to carry the SG&A. The master franchisor puts in their own infrastructures, you know, carries their own SG&A. Therefore, for us, the royalties and the equipment and the various rev share that we get off those deals is very profitable to the franchisor. The economics of the franchisees is not that much different. They carry a lot of the same franchisee fees, the 7% royalty to the franchisee. They have tech fees, they have all those, the same thing that we do in the U.S., the 2% marketing fee, so they're not that different.
From an AUV perspective, the international AUVs that we've been tracking for the studios that have been open are about, I would say, about 1-2 quarters behind the U.S. And what I mean by that is, you know, what we did in more or less Q4 of 2022 is kind of where the AUVs are for the international franchisees that have opened. And they kind of keep trending, you know, about two quarters behind. So it's roughly, you know, I'd say about 85% of where we're at in the U.S. is kind of how they're moving along, but still profitable, doing very well in their countries. You know, like as Anthony mentioned, Asia Pacific is one of the more concentrated areas, but we've already expanded into the Caribbean, we'll be in Mexico, in Europe.
So we'll continue to see good growth in the coming years from the international.
Great! And then, you know, a question we always get with all businesses right now, not just fitness businesses, but in terms of just thinking through the current macro backdrop, and you look at, I don't know, member joins, frequency of workouts, stuff like that, any material changes have been taking place? You know, the numbers have been obviously very strong, but anything that you can kind of point to that says, you know, you're not seeing anything, things are stable? Just your thoughts there, just on the current macro.
Yeah. I mean, as far as our in the domestic front, the members per studio, the classes being held, the utilization, it's all remained very consistent and growing. We have more members per studio today than we had, you know, pre-COVID. The classes, the utilization, it hasn't changed at all. So any indication of any sort of macro headwinds, it doesn't seem to be affecting the consumer. I think the consumer at this point is well educated on the benefits of health and wellness. And obviously, it's a lifestyle. People, you know, who work out, you know, it's gonna be one of the last things that they give up. So we haven't seen any trade downs, we haven't seen any sort of mix shift, you know, in related to consumer behavior.
We just did our Analyst Day and did a tour, you know, of a bunch of studios. In one of the Pure Barre, we actually stopped in to talk to the lady working the front desk, and she said that they're seeing more and more consumers in Manhattan that never did boutique fitness in Pure Barre, and they're joining. So, that, that's, I think, a very positive sign that people are just more smart about the fact that they need to do something in regards to maintaining a healthy lifestyle. And, and we're seeing more and more people join boutique fitness, you know, post-COVID than we saw pre-COVID.
It's great to hear. My last question, because we only have a few minutes left, is maybe a two-parter. Just number one, maybe give us your perspective of how you think about M&A. Just high level, what you kind of always look for, what you've looked for in the past, just to give us some perspective on how you might. that might inform how you think about the future around M&A. And then second, just, you know, I guess a reminder on the transition studio strategy, just that's changing, obviously. Just a reminder, maybe take that first, of, you know, how that impacts the numbers or not, and how many of those, if any, you have left, just for us to know about.
Yeah. So I think people make a bigger deal out of this shift in strategy. There really wasn't some massive shift in strategy. We always-
Yep.
We were always trying to get corporate studios to zero, right? In a post-COVID world, at one point, they were at five. It's not like we had greenfield studios, and we decided to start, you know, getting out of that business. We always had some weapons in a situation that a store isn't doing well, right?
Yep.
We could resell the store to somebody else. We've always had studio support. Maybe we fly people in or handle some marketing or whatever it might be. So we've always had studio support. And then if all that didn't work, or we saw an opportunity, we would buy the store back and operate it, resell it into the system. And so, that weapon is just one we're not going to use now is doing that. We've always been selling the studios down. We reported the last at, you know, the high 30s, coming down from mid-80s in Q2 into Q3.
We're continuing to sell them down, and, you know, we'll continue to do that. It's been the strategy since I got into this business 20+ years ago. We'll still have studio support. We'll still sell, you know, resell franchise stores. We just kind of looked at, you know, it was always low single digits, call it 2%-3%. In 1,000 stores, that's 20 or 30. At 3,000, that's 90. Going to 5,000-6,000 stores over the next several years, it's gonna be 180 stores. We didn't want to carry the NOLs, and so, you know, we're not gonna carry them. It's not some massive shift of, you know, closures or this or that or, or whatever drama. On the M&A front, you know, we started as H&W InvestCo. It's in our S-1 filing. That's Health and Wellness Investment Company. It's not super hard to figure out.
And we've been in health and wellness, right? Fitness brands and wellness brands like StretchLab, and so you could see us go into something like hydration. You could also see us go into something like HIIT or boot camps. And so, you know, the M&A world's kind of our oyster. And like I said, the last year, M&A has kind of been dormant just because people are watching inflation, but that's over. Franchise investors are asking us, franchisees are asking us to do M&A, and I think that's something that'll definitely be in our future, although we didn't model it out in the future forecast. A lot more upside.
Super helpful. Anthony and John, I thank you for your time. Just so everyone knows, our next session's in five minutes. We're with The Gym Group for that fireside chat. So, again, I just want to thank Anthony and John for their time today. It was a super helpful discussion. And everyone, you can log off and then log back on to the next session. Thanks, guys. Thanks, guys.
Thanks, Randy. Thank you, everyone.