Okay, great. We'll get started here. Thanks everyone for joining. I'm Jonathan Komp, Senior Analyst covering the active lifestyle sector. I'm very pleased to have Xponential Fitness with us today, including Interim CEO and Director Brenda Morris, and CFO John Meloun. Xponential Fitness, as you may know, is a leading franchise operator in the boutique fitness space, with more than 2,600 U.S. locations open, spanning 8 concepts, you know, actively growing, you know, across all of the important modalities in the industry.
The company came public in 2021. They've roughly tripled or more the adjusted EBITDA since then, and you know, but they have faced some transition, you know, in the short term here. So certainly look forward to discussing that more today. Thanks for joining us.
Great. Great to be here.
I'll lead the Q&A. There's also the opportunity, session three at RW Baird, if you wanna add questions, I'll get them up here and I'll relay those on. But I really wanna start off, you know, Brenda, I'd love to really, you know, take a moment, if you wouldn't mind, expanding on the recent developments at the organizational level, and you know, the actions taken by the board and you know, maybe the overview of sort of where the company stands today.
Yeah, great. Thanks so much, John. It's great to be here. So I think just to probably provide the context that you're looking for, most of you are aware, about a month ago, we received a grand jury subpoena from the U.S. Attorney's Office. As a result of that, the board made a decision to suspend our CEO, Anthony Geisler.
Part of the reason, the main reason for that is, you may all have followed our news over the last year with the Fuzzy Panda report and kind of that continued regurgitation of the same allegations in the Fuzzy Panda report. We had the SEC investigation that began in December. Again, a result we believe, of the media and news around the same short seller report that came out in June that just kept getting regurgitated.
I call it irresponsible journalism and irresponsible research, unfortunately. But it is out there, and it is continued to be a big distraction for the organization. When the U.S. attorney subpoena came out here about a month ago, the board's decision was to allow Anthony to set his leadership aside for a period of time, so that the company could just get back to focusing on driving the business.
This has been a year of distraction around credibility hits, KPI concerns, et cetera. None that we believe have any risk, and quite honestly, as a board member, we'd spent a great deal of time digging into every single allegation that came into the short report, that subsequently was reprinted through The Capital Forum and Bloomberg, and a couple other media avenues as well.
We wanted to start to distance the company and its day-to-day operations from the distraction of that. Anthony took some time over the week or so following that suspension and made the decision to resign from his position as the CEO. The board, when we suspended Anthony, asked me to step in. I've been on the board for about five and a half years, so been a significant part of the growth story over the last five and a half years.
I've been our lead independent director since we went public, and our audit committee chair, since I joined the board five and a half years ago. Would never have said yes to the seat if I thought we had anything to worry about from an SEC reporting or a KPI reporting standpoint.
We feel like this leadership transition can lead to a lot of opportunities for the organization. We've been public three years. We've scaled. Anthony built an amazing company, and we're super grateful for him, and we wish him the best, and we believe he wishes the company the best as well. He's still a significant shareholder, and this would be an opportunity for the company to grow to the next stage with all of our amazing leadership, all the excellent fundamentals of the business, and continue to drive forward.
Maybe to follow up a little bit. Could you just talk, and we'll talk more about the brands and the performance of the business in a bit, but just the structure of Xponential as a portfolio of brands. Can you talk about the remaining leadership? You know, it's been very stable. If you could talk maybe about the brand operating structure, and really, I think the question on many minds is: Does a change at the top lead to disruption risk for the, you know, the day-to-day business?
Sure. I'll take it, and then, John, feel free to backfill. So, again, always concerns when there's a leadership transition. There's a lot of loyalty to especially a founder-led organization. We haven't lost any leadership. Right now, we don't expect to lose any leadership.
One of the things that I've done since I've taken the seat is spend a lot of time with our executive team, a lot of time with our brand presidents, a lot of time with all of our functional and support functions across the organization. And so really emphasizing the value of our people, the value of our teams in their execution. We have an unbelievable team of people at Xponential Fitness who knows how to sell, who knows how to open, and who knows how to support our franchisees.
Even more important is just talking to our franchisees. I'm talking to our franchisees daily. Anybody that emails me, that's a franchisee, I get on the phone with them and have a conversation. I'm talking to our candidates that are in the pipeline, who, of course, are doing their diligence and asking questions about what we've got happening. We don't expect that we'll lose any of our executive leadership team or our brand presidents.
We have a really strong group of brand presidents, and they're all very motivated, both from an equity and compensation perspective, as well as the opportunity here at Exponential. When we bring in the new CEO, will there be some transition? It's always possible, right? As we all know, when there's a change in leadership, they may have somebody that they wanna bring in, or somebody just doesn't like that person's style.
We don't expect any mass exodus or any of our leadership to leave, and that hasn't happened, and I'm talking to literally our, like every day, probably 10 of our team members each day, personally, individually, I'm in the office and talking to them, and I feel like morale is good and that this has been a bit of a distraction, but now we're really refocusing on, "Don't be distracted by these investigations. We think the risk is very, very low. Let's keep driving an amazing business," which they've been doing all along, and continue to do that. John?
Yeah, kind of touching on, I think you talked about the portfolio and some of the work we've done around brand rationalization. That work really started last year. As we shifted away from the transition studios, we really started focusing on: Where is our growth concentrated at? We provided a lot of information over the last couple earnings calls, including our Investor Day last year.
When you really look at the portfolio, five brands make up a significant portion of the system-wide sales, a significant portion of the growth and the future growth. So some of the divestitures that we did recently were kind of preceded last year. We've executed on them, you know, over the past few quarters. So we've divested Stride, we've divested Row House. You know, we have a couple other brands that we're continuing to look at.
You know, we think we're getting down to the core modalities that we really see a potential for. You know, one of our last brands that we, you know, continue to look at is, like, AKT. We've done a test case with KINRGY. We're evaluating the performance there, but, you know, that's the portfolio, though. As we continue to grow as a company, we will do more acquisitions, I'm sure, in the future.
We'll do divestitures in the future. Just like, like any stock portfolio, you just want to get the best of the best, and focus your resources and capital against those assets. So, over time, you know, you should expect to see the portfolio contract and expand based off of the modalities that we find have the best viability and long-term growth that supports our growth picture.
Maybe last question, just, to the extent you're willing to or able to share any insights. In terms of timeline and next steps, how should investors think about, you know, the board's actions, the search for a permanent CEO, and, and, you know, maybe the qualifications you're looking for, any other, you know, color you can share?
Sure, John, happy to. So first of all, as you all know, a board's number one priority is CEO succession, right? So making sure we have the right person in the seat. We hired Spencer Stuart, which is a leading executive search firm. They obviously have a really big Rolodex of fantastic people.
Part of the public nature of our leadership transition also has allowed us to have a lot of inbound interest in this role, so our pipeline of candidates is really full, and really awesome, and very experienced people that we're excited about. I think the thing I keep saying is, I mean, this isn't a turnaround. This isn't something that needs fixed. The fundamentals of the company are excellent. We've performed every quarter since we went public.
The risks around these investigations, once people get to understand them and understand that it's really just looking at the Fuzzy Panda report over and over, and recognizing that there really isn't any fire where there seemed to be smoke, and that gives people a lot of sense of confidence of wanting to step into this seat. 'Cause it's a really amazing opportunity for them to come in and just improve and optimize our existing processes and get us to the next level.
Like John said, we've got immature brands that have a ton of white space. We have mature brands that still have a lot of white space and a lot of opportunity. So we've got a lot of enthusiasm and excitement around the CEO opportunity, and a lot of really great candidates.
The qualifications, to be honest, we're looking at somebody who really understands taking care of people, right? That includes our team members, and our employees, and our franchisees. We feel like there's a real opportunity to build relationships with our franchisees, existing franchisees, future franchisees, and, that's a, an important qualification for our candidate, is that they understand how important that relationship is and how to nurture that, as well as obviously taking care of our leadership
team, mentoring and coaching our leadership team, and, and working to retain great talent, and to make sure we have the right team to continue to grow and scale. Process efficiency and optimization is something that's also on our spec, is we grew super fast. You know, we really went from, you know, zero brands to 11 brands we acquired.
We're now at nine brands, after a couple of divestitures, but that's a lot of growth for an organization, all the while navigating COVID, and then going public, and then obviously the busyness of this last year with some of the irresponsible media that's out there.
The person who comes on board has an opportunity to come in and just refresh and renew some of our processes, and the way that we communicate, and the way that we evaluate best practices, and cross-pollinate that amongst the brands. So that's a really important element of the candidate as well. I am a betting person. I like to go to Vegas. I think that we will have a final candidate in the seat somewhere between 30 and 60 days.
Okay, great.
We think that would be fantastic. Like, we're gonna pick a great candidate. It allows the team to know who their leader is going to be going forward. It allows all of you as investors, allows our franchisees, to build a relationship with that person and takes an uncertainty off of the list.
Great. Maybe to you know, pull it back a little bit here and talk more about the underlying business. You know, Brenda or John, whoever wants to take it, could you maybe just share a little bit more for those in the room maybe new to the story, you know, what attracted the company to you know, boutique fitness, and now the portfolio, how it's positioned to capitalize on the broader trend that you see within the categories?
Yeah, I mean, the Xponential was founded on the backs of Club Pilates. Anthony identified, you know, Club Pilates a long time ago, really saw some really strong growth, and really, I think the thesis behind it was, you know, do the success that you had at Club Pilates, replicate it in other modalities. So as leads came in to buy more Club Pilates, but those markets were sold out, it's like, what do you do with those leads?
Well, there's other modalities that we felt we could just copy and paste the franchising boutique fitness model, and continue to just grow the business. So, you know, at our peak, you know, we got up to 10, 11 brands. As we've found modalities that worked, you know, we'll continue to invest resources in those.
The ones that don't work, you know, we'll go ahead and divest those, which we have. You know, we've done a lot in the boutique fitness space. Most recently, we did an acquisition of Lindora, to get more onto the wellness side. We do have StretchLab as a product. It's done really well, good AUVs, good financial performance for the franchisees.
But we also looked at, there's an opportunity here for a little bit of, like, cross-marketing in the sense that Lindora is a metabolic health concept, Southern California, 30 units, today, doing $1 million AUVs. They've been around for 50 years, and what they really do is focus on weight loss management, living a healthier lifestyle. They do also things around hormone replacement therapy and IV hydration. They do laser sculpting.
So there's a lot of services that they provide, and we looked at this as, you know, as some of the new, more recent pharmaceuticals came out, you know, they've played in that space as well, that we look at this as an opportunity to create a distribution system for longevity, to help people understand how to live a better life, better weight loss management. And by the way, we also, you can't just take pharmaceuticals your whole life. You actually have to change the way you eat, the way you exercise. Well, guess what?
We have a fitness portfolio that allows people to be directed to there, and vice versa, the other way around, where we can get leads into our fitness studios and people who need additional help to deal with weight loss management or any other kind of service that they provide, we could cross-sell over to Lindora. So, the TAM on Lindora is 1,000 units. We're very excited.
The AUVs are very strong. Been in the early stages of selling licenses. I think we're up to 50 or 60, year to date in license sales. You'll start to see those units open up at the end of this year in small, small, small numbers. Much bigger in 2025 and 2026, I think is when you'll start seeing the lion's share of that distribution system, kind of coming to market.
At what point, I noticed, I believe there's a location open in Washington, a test location. How long has that been open? Is it too early to get a read on Lindora, since it's your newest concept?
Yeah, it's not a traditional box in the way you think Lindora will be distributed. It's more of a pop-up to small-size footprint. I would consider it a test case and not a case. You'll see Lindora be more like our traditional 1,500 sq ft locations in retail centers, large anchor will be present. It's kind of the model that we'll be deploying from a franchise perspective.
The license sales so far, we've been really pleased. I mean, they've been all around the country. There's no real concentration. So, the Washington location, our medical officer, that's her hometown, and so there was a bit of a personal connection for opening that particular unit.
Would you say, at a higher level, Exponential, the company is the best at identifying the next trend and participating, or is it really the, you know, the operations, the systems, the, you know, the know-how, how to operate a strong franchising system?
Yeah, I think the one thing... Yeah, listen, this, this is all built on a lot of experience. I mean, franchising is kind of the business of making mistakes and learning from them. And when you did Club Pilates, and then we bought more brands, we're getting better and better and better at it. And the way we know that is because when you look at these brands and the cohorts of franchisees that are opening, the AUVs are stronger, faster.
So it tells us that we're doing something right. So from that perspective, we run a centralized kind of SG&A, where all of our brands leverage back office support, whether it's accounting, finance, real estate, retail, legal, HR, franchise sales, technology. When we do something in one brand, we replicate it across all 10.
So you get the benefit of kind of learning at scale. If we see a marketing program that works great in one brand, we can leverage it across all 10 brands, and that's something you don't get when you're a single concept. And I think that's really what makes us very successful when we launch brands, is that we could take the benefit of experience and learnings to replicate it faster, so you come up the learning curve faster.
When it comes to identifying brands, we look at a lot of M&A targets. There's always, I would say, 5-10 in the hopper that we're always looking at and paying attention to. We don't-- we, we like to be very disciplined in our capital allocation. When most of these acquisitions we do are, you know, less than $10 million, they're fairly inexpensive.
We like to look at opportunities, watch them for a little bit, see how they resonate, see what DMAs they are in. I mean, you can't just necessarily assume something very successful in L.A. is gonna work in Nebraska. So if there's multiple locations, that helps. But we do spend a lot of time doing diligence around brands. We don't like to do fad-type things. I think a lot of people believe boutique fitness is fad, but it's kinda like cycling is not a fad.
Yoga is not a fad. I mean, these things have been around for a long time. So we like to keep our focus on things that we know have longevity and are not something that can come and go in the consumer's eyes. We want to stay relevant with consumers, and those are the kind of opportunities that we pursue.
Maybe, could you share a little more detail on the unit opening plans? I think you've got it another year, around 550 openings-
Mm-hmm.
-with a range around that. Yeah, what level of visibility do you have to that rate continuing? And then, you know, related, I think you've been selling licenses a little faster than the openings recently. Is that a sustainable pace, any plans?... trend that you're seeing in terms of the license sales?
Yeah. The one thing for us that's very predictable is, one, our revenue, and two, our openings. The reason why is we have a very healthy pipeline of already signed leases. On our last couple earnings calls, we continued to talk about there's always about 400 leases in the U.S. that we have signed, and we kind of—it's like an evergreen backlog. Those are the studios that are coming this year.
Talked about 45% of the openings will be in the first half, 55% in the second half. I could tell you we're on pace to do exactly that. It's kinda like COVID. When gyms were closed, we still opened studios. This business has a lot of momentum already built into it because our franchisees, a lot of the openings are coming from returning franchisees opening their second and third units.
Some of the newer franchisees are coming in, are opening up some of the newer concepts that we bought. So feel really confident about the 550 at the midpoint, as far as the number of openings. License sales, Q2 is typically, a more challenged quarter or from a license sales perspective, 'cause you have to renew your FDD, so there's a blackout period.
So just from that perspective, you end up building more of a backlog of people are waiting for the FDDs to get renewed before they could actually buy a license from you. I would assume that license sales over time will decline if you keep the same number of brands, because you sell out territory. So if you think of Club Pilates from that perspective, you know, we've sold...
I think we're up to 1,300 licenses sold in Club Pilates, and don't quote me on that, but pretty close. And at the end of the day, as the TAM grows, you could sell more licenses. But when you think about, like Miami, when you sell out Club Pilates, you can't put more Club Pilates without cannibalizing your brands and, or your locations, and we just won't do that.
So as there's population shifts, as you grow certain cities, you can expand new territories and make them available for sale. But at this point, license sales will just decline over time as inventory declines to be able to sell it. But if you buy another brand, like we did with Lindora, that has a TAM of 1,000, there's now another 1,000 licenses you can go sell.
So over time, it'll decline, but there's a healthy pipeline of already sold licenses, you know, 3-4 years that we can get open. Now, with Lindora, there's still a healthy amount of BFTs and Rumbles, and there's a good opportunity for us to continue to keep a healthy amount of license sales compared to, you know, some of our, you know, comps that are out there.
I wanna ask about some of the near-term indicators you're seeing in the business. You know, the portfolio has driven same-store sales growth pretty consistently. Q1 was +9%, with maybe some volatility.
Mm-hmm.
- month-to-month. You did give April membership, which I think hit a new high and was up sequentially, it looked very solid.
Mm-hmm.
Relative to normal seasonality. So just, you know, what are you seeing from the core consumer, especially for, you know, investors who see a range of updates from consumer companies these days?
Yeah. The one thing we're not seeing is a weakening in AUVs. You know, Q1, there was a little bit of anomaly that you're alluding to, where we did some promotions in the Q4 that kinda pulled forward, sales out of Q1 into Q4. It's fine. We saw really good utilization in Q1. We saw good member growth in Q1.
I could tell you, Q2, that momentum has continued, so we're not seeing the consumer weakening, we're not seeing, you know, any type of slowing in the business from a consumer's perspective. Same-store sales will normalize to the mid to high single digits over time. I've been saying that for a long time. Anthony's done a really good job, when he was here, proving me wrong.
But the business is getting big, and the numbers are getting larger, so it's harder to kinda get studios that are like a Club Pilates that's already at a $1 million AUV, it's hard to get it to grow 10%, right? I mean, that's those are $100,000 per studio average increases you'd have to generate. That gets challenging. So expect to see same-store sales in the mid- to high-single digits.
We typically get about 5%-6% as price, so that's been very consistent. So I think, you know, that kind of to me is where I view the low point, is we'll always get that 5%-6% price every quarter, and then it's just a function of how much more volume can we get above that. But the business hasn't slowed.
Some of the more recent things in the news and the headlines, it doesn't impact consumers, it doesn't impact franchisees, 'cause they—if I was here or not here, they don't care. Like, really, franchisees are focused on opening up their studios, making money, servicing their customers. Our customers are only concerned about going and getting a good workout, so it doesn't change the momentum of this business.
Maybe a broader question, more fitness trend or theme-related as we look at the shape of your portfolio. You mentioned before you've exited a couple of the smaller concepts, you've repositioned and started to add exposure to health and wellness.
What should we make of—and then you've also, you know, looked at optimizing some of the classes and adding class, different classes at some of your concepts. What are you seeing from a broader theme and usage and, you know, overall consumer perspective, you know, given that you sit at the center of a bunch of different, you know, modalities within fitness?
Yeah, I mean, I think one good test case is when you look at Pure Barre. Pure Barre is a brand that's been around for a long time. AUVs have been, you know, relatively stable for a while. And we kind of realized, like, as you pay attention to trends in health and wellness, specifically on the fitness side, weights and muscle building has become... toning has become more relevant with consumers and what they're looking for.
So we introduced that in Pure Barre, and saw a great lift in the Pure Barre AUV and continue to see good positive same-store sales growth in that brand. When you look at some of our other concepts like cycling, cycling was really impacted by COVID.
It, you know, Peloton, in fact, you know, everybody went to Peloton, and when you came out, like the AUV in CycleBar just did not recover as fast in that modality as others. So consumers shifted away from that. One of the things that we've been doing around CycleBar is introducing weights in cycling, so it's you're not on the bike the whole time.
There is some weight components, there's weight components while you're on the bike. Again, just to introduce something more that is what consumers are looking at today. Kind of crossing over on the wellness side, the acquisition of Lindora. You know, we looked at that. That was a very strategic acquisition for us because what we looked at Lindora as is a health and wellness distribution system.
Like, you have all these clinics that you could develop nationally across the U.S., and as new trends, whether it's the latest pharmaceuticals or any other kind of services that become relevant to the consumer, we could take things onto that system and take things off of that system. So it gives us a lot of flexibility in making sure on the wellness side, we stay relevant with the consumer of whatever the most recent trend is.
It is a corporate practice of medicine, that does add some complexity there, but the one thing we really like about the acquisition is the Lindora, you know, owners that did it, they were operating in California. It's a very highly regulated state. They've done a great job of maneuvering through that regulatory environment.
We're gonna maintain that same consistency, even in other states across the U.S., to keep a very high level of integrity to kind of navigate that. So we're, we're really excited about that. It's gonna take some time to develop that, but, when it does hit the market, I think we're gonna see really good success there.
Question over there. Yeah, and I've got one more just from the audience here. To follow up, what's the right rate of closures for the business? I think you've given a little more definition around that. And the related question, just to ask specifically, I think if you're seeing a low single-digit closure rate, does that imply sort of an average retention of a franchisee, you know, in a 25- or 30-year horizon-
Mm-hmm.
Essentially viewed differently? Just any more color there.
Yeah, I mean, historically, what we used to do is when a franchisee was struggling or challenged, the company would step into the studio and run it for the, on behalf of the franchisee, meaning they would exit, and we would take on the operations with the intent of fixing it and refranchising it. We went away from that strategy last year.
It was too expensive. It drove NOLs, took a lot of distraction from the core business, the franchising business, so we've exited that. We really don't have a historical run rate because of doing that on what our closures look like. We do believe, based off of looking at the portfolio today, that you'll see about a 3%-5% closure rate.
Now, in the Q1, I think we closed—it was, like, almost about 0.5%, or I think it was just over 0.5%, so cumulatively throughout the year, we'll continue to track that and see how that builds. But we think it's around 3%-5% when we look at the portfolio today. And those happen for a whole host of reasons. Franchisees, you know, they have personal things that go on in their lives that cause them to need to close. People relocate. People just don't renew their leases.
You could see a shift in a major anchor in a retail center where just it's not a viable location anymore. So there's a whole host of reasons why franchisees close. It's not specific to us. This is franchising in general, like, life happens. You know, all franchisees have closures.
Our strategy going forward is to get upstream, help franchisees as much as we can with the operating systems and data and resources we have to try and prevent closures, but it's just not possible to sustain that forever. So we do expect to see closures in the 3%-5% range.
Thank you. We'll take one here, too.
Yeah, just, on a really high level, I need to understand sort of the opportunity for scale and the margin improvement. I would expect it's easier to excel if you just have one concept, like Planet Fitness, where you have, like, 10 different concepts and brands. But why is it smart to have so many studios than just one?
I would agree with you, it's easier, and why it's easier is because the business is less complex. But if you put the right systems in place, the scaling effect and the margin benefit is good. So in essence, when we bought Rumble, BFT, Lindora, there was no change to the back office. We did not add 10 more accountants and 5 more real estate people, and you don't have to do that because you really just look at it as... I always talk about it like Baskin-Robbins.
We're just really scooping ice cream. That's all we're doing. It doesn't cost us any more to do vanilla versus chocolate versus strawberry. So the economies of scale you get from a centralized back office by running a portfolio allow you to get better leverage in the business.
So you'll see as over time, as we open more of these brands and more of these locations, the SG&A from this point forward is gonna stay relatively fixed. We did a great job last year of already getting rid of a lot of the costs. You saw margin expansion in Q1 in our P&L. Over time, as I talked about in our Investor Day, by 2026, you'll see us approach the 45% range of adjusted EBITDA margin of revenue. So the portfolio business allows you to get these leverages and scale and better margins.
That's great. I think that's a good point to end on. I want to thank Brenda and John. Thanks for being here and answering the questions about everything g`oing on. Awesome. Thank you. Thanks, John. Thanks, everyone.