Good afternoon, everyone. Thank you for joining. We've got another great session here. Really excited to be joined by the management team at Xponential Fitness. With us today, we have the interim CEO, Brenda Morris, and CFO, John Meloun. Xponential is a boutique fitness franchisor. They own a collection of nine different banners spanning across yoga, Pilates, HIIT workouts, and they've even added weight loss clinics now with the addition of Lindora. They're the first to bring a very systematic and repeatable multi-brand platform approach to the business of fitness franchising. So welcome, Brenda, John. Maybe I'll start out. Last year, at this same conference, you had just reported 20% AUR growth, and I asked at that time about the health of your consumer in a pretty tough environment. We're sitting here a year later, AUV is another 10% higher. So I'll start with the same question.
What's your diagnostic of the health of your consumer today? As I look forward, your guidance calls for mid to high single-digit comps in the second half. What gives you confidence you can continue to deliver there?
Yeah, I'll take it from the consumer's perspective. I mean, one of the things that we continue to evaluate is how they use our studios. And when you roll from Q4 into Q1, obviously you get New Year's resolution-type people, and a lot of people try to set the New Year off on a good foot. But we've been monitoring that throughout Q1 and into Q2. And what we've seen is that the foot traffic in the studios has remained strong to up, meaning that consumers are using our products. AUV growth will continue into the second quarter. There was a little bit of anomaly in Q1 related to some promotions in the brands, but you'll see in the Q2 earnings call that the business has continued to perform. The number of members per studio continues to grow, which tells us that consumers are prioritizing their health and wellness.
You have heard about weakness with some of the macros and some of the pressure consumers have had, but the wallet share that we get from consumers, they do prioritize wellness. I think they may be making trade-offs in other parts of their lives, but it hasn't come through in relation to our studios' performance and not making the trade-off in fitness. I think everybody, if you have a regimen of being healthy and living a healthy lifestyle, it's just not something you walk away from because of pressures in other areas and costs in other areas.
Got it. That's a really useful color. And then, Brenda, you hinted last week that the search for the next CEO could potentially be a little bit speedier of a process than some of us might have expected. Can you give an update there? And then, can you also tell us what you see as the top priorities for the new CEO once they're on board?
Sure. Not a problem, Warren. So like all good boards, CEO succession planning is our number one priority. And so it wasn't as if we started from ground zero. There's always conversations about what that would look like in the event that at some point you need a leadership change or a CEO decides to depart an organization. And so we already have a very, very strong pipeline of candidates that are relatively far along in the process. And one of the things that I've shared with folks, Warren, is that by this being a public leadership transition, we've had people literally raising their hands and saying, "Hey, pick me.
I'm here and I'm really well experienced, and I think this is a great opportunity," which I think is a testament to the business, the testament to the fundamentals of the business, and the fact that even though we've got some of this overhang with some of the investigations out there, that the business is going to be a ton of fun for someone to lead and a ton of fun for someone to come and take to the next level. So I at this point would say we're significantly far along. It's close to six weeks now since the process really effectively kicked off. And so we have made it a priority and have moved quickly. And then as far as the key things, first and foremost is taking care of people, right?
Our own internal teams and making sure that it's a great culture builder, a great leader, a great coach, a great mentor. Obviously, our franchisees and being able to build relationships with them, nurture them, take care of them, and support them and understand how important they are to our business is also a big part of it. So that people piece is incredibly important. Process optimization and just looking for those opportunities to fine-tune the business and increase our efficiencies, increase, again, our processes for developing and supporting our franchisee base is really important as well. So we'll look for someone. We have looked for someone that has deep experience from a leadership standpoint, has been in a large company, typically a public company, not required, but that's always great experience to have as well. And then someone who will come in and really focus on those key initiatives.
It's not a turnaround. It's not a fix-it. That makes it a really nice opportunity for someone to come in and drive the business forward from what's already a really great position.
Thanks. That's really helpful color. And just one question on the investigation. You know, I thought it was really interesting when you said recently that you wouldn't have taken on this interim CEO role if you hadn't done a full diligence in the areas of concern raised by the U.S. Attorney investigation. I know you're also the lead independent director on the board and the chair of the audit committee. Could you just elaborate on that comment and some of the diligence you've done?
Yeah, sure. I mean, first of all, I've been involved with the company for five and a half years. I joined the board five and a half years ago. Have really walked the journey of us going through the process of preparing for an IPO, navigating through COVID, shelving the IPO for a bit, coming back to it and launching and going through the registration process. So something to just think about is just where we are in the timeline as a public company. When the short report came out a year ago, Warren, we had not been a public company for two years, right? We hadn't even hit our second year anniversary. So most people are aware of the amount of diligence and work and just fiduciary responsibility that goes into doing an IPO and getting a registration statement across the finish line.
It's tons of work with underwriters, investment bankers, attorneys, right? Your financial team and typically consultants look at every metric and every element of the SEC reporting, our auditors, Deloitte, by the way, the SEC themselves before they'll actually sign off on a go-live on a registration. And so that work in itself gave us a great deal of comfort that was literally less than two years off of the press. And so if you think about it, it wasn't like we were a long-term mature public company where we'd changed our definitions a whole bunch and sort of changed how we reported things. We hadn't even been public for 24 months. So that's the first point.
The second point is that as we went through the process of evaluating the information in the Fuzzy Panda report, the short report specifically, we looked at every single line in that report and went back and recalculated, revisited what we had done in the past couple of years around background checking and, I would say, facts that were mischaracterized in the Fuzzy Panda report, and then obviously KPI references that were just completely inaccurate and untrue. So that work was done at a very diligent level and included all of those same partners that we had gone through the process to go through our registration statement less than two years before.
Great. It's really useful to hear the level of detail there. So maybe if we could switch gears and talk about the portfolio a little bit. Your most recent acquisition, Lindora, it's a little bit different than the rest of your brands. It's more of a health clinic than a studio. What attracted you to that asset? And then as we look forward, does this open up the aperture a little bit for what you can do?
Yeah, I mean, the business has been constantly kind of reassessing the portfolio and looking for optimization. One of the things is we're very highly concentrated in fitness, right? And we have StretchLab as a wellness concept, but we really were looking to, when we go through the M&A process, what's a good fit for longevity in the portfolio? What's not cannibalistic, complementary, fits our business model, which is typical in line retail, something that we could franchise at scale? We were looking at a number of concepts in the wellness space. We were looking at IV hydration. We started looking at some of the hormone replacement stuff. When we came across Lindora, which Anthony, our former CEO, he spent a lot of time kind of nurturing a lot of these companies and staying in contact with them.
This was one that he had a relationship for some time. Looking at where they were and where they are today, I mean, this business has been around for 50 years. The clinics that they have, they have roughly 30 clinics doing almost $1 million AUVs, very consistent even prior to some of the most recent pharmaceuticals that have been in some of the headlines across various outlets. These were doing very well. We said, "This is a great opportunity to get more concentration in a portfolio on the wellness side, start thinking about longevity, metabolic health." There's great cross-collaboration within our portfolio, bringing in leads on the Lindora side, moving them to the fitness side and vice versa. So we were able to acquire the business for about $8.5 million.
We looked at it as a way to diversify, but really kind of deploy a metabolic health, longevity wellness system or distribution system across the US for which, as there's breakthroughs in various ways of being healthier or diet, you could layer on and take off of this system. So from our perspective, we were able to buy a business that had weight loss management, included some of the most recent developments with some of the pharmaceuticals. They've already started exploring and offering services on hormone replacement therapy. They have IV hydration therapy. They have laser sculpting. So they have a lot of services that consumers today are relevant. But we looked at it as more things become relevant down the road, we could layer it onto the system and vice versa. So for us, it was very complementary as an acquisition.
We got it at a really great, we believe, a really great value. And it's something that's not a fad, right? Being healthy and understanding how to eat well and exercise, it's something that was missing in our portfolio. And now we could start cross-marketing with the actual boutique fitness and educating consumers that it's just not fitness. It's also about what you put in your mouth and some of the health benefits there, so.
Can you talk a little bit about the potential franchisees that could open a Lindora studio? Does this plug in kind of the same way that your other studios plug in? Could the same franchisees, that same skill set or your platform benefits translate as easily?
Yes. I mean, the answer is there's a lot of commonality between the franchisee. Again, we're looking for corporate refugees, people who are business people who have a passion for what we're franchising. So there is a lot of commonality between our StretchLab and Club Pilates franchisees that we've seen. Brenda's had a lot of conversations with franchisees that are interested in it, and she's been talking to them about the Lindora opportunity. So maybe I'll let her comment on that. But really, at the end of the day, what's important is the person, the franchisee that does come in, does the franchisor have the expertise to make sure they could be successful? We just need the right business sense from a franchisee's perspective. So Brenda, I'll let you comment on some of the franchisees you've dealt with.
Yeah, I've actually spoken to a lot of our pipeline candidates for Lindora just because of sort of some of the transition that we've navigated through and just them getting a sense of confidence that we still have the support systems in place to be able to navigate that, which of course we do. We've signed 60-ish deals since we closed in January, so are pleased with the pipeline. To John's point, it's a variety of people that are looking at it. And the beautiful part is us being the franchisor will help them with sort of the corporate practice of medicine and some of the other things that they'll need to navigate as that.
But we have people who have some medical in their background or feel like this is a great opportunity for them from, again, something that will allow them to layer on lots of different opportunities in the future. Like John said, we have all of this set of offerings inside, but as trends change, right, it's the perfect platform to plug in or remove things that may be trend or let's say medications that get improvements or have new opportunities, sublinguals, things along those lines that will replace it. And so people look at it as a very scalable and flexible model and high, high productivity.
Right. Yeah, it's really interesting to see that level of nimbleness in the portfolio. Maybe just switching gears, I wanted to ask about your process for handling underperforming stores. So we can see how healthy your overall AUV trends are. We can see that by banner from the franchise disclosure documents, which give a lot of transparency really down to the monthly level. So on an overall basis, we can see kind of how healthy things are. But if we just focus on those studios that find themselves at the tail end of the curve for a second, can you just walk us through your curing process when a studio underperforms and give us a little bit of context of how often that happens?
Yeah, I mean, when you look at across the portfolio, and we do this on a monthly basis, we actually run a histogram report by brand to kind of show where is the system settling in at. Listen, every franchise system has a bottom 10%, and there's a reason why, right? And really, the goal of the franchisor is to try and fix really the 80% and move it because those are the ones that really can make a difference financially. But it doesn't mean you ignore the bottom 10%. And we have a team specifically designed to focus in on what's going wrong in the bottom 10%. You have to remember, these are independent entrepreneurs who own and operate these studios. And there's a lot of, let's call it volatility and variety for reasons why people fail. There are life issues that happen. People pass away. There is divorce.
There are natural disasters. There are breakages in pipes or something like that that could put a studio out of commission for a while. So there's reasons why that happens. So let's put those aside and really just talk about what I think you're getting at is the franchisors that are just failing because they're not operating correctly. We have a Tiger Team that is directly tasked with going out to these franchisees, helping them understand why are you not performing like the rest of the system. The easiest place to start is get the franchisee's P&L. Are they marketing? And if they're marketing, are they generating leads? And if they're not generating leads, let's go look at what they're doing from a marketing perspective. If they are generating leads, but they're not converting, okay, now we need to go pay attention to the salesperson at the front desk.
Are they a good salesperson? Let's just say they're converting, but we're seeing members leave really quick. Okay, what's the bedside manner of the instructors? Are they having a good experience? What's the quality of the clinic? Is it dirty? Is it clean? So I think there's a lot of reasons that you know this as a general consumer. If you go to a restaurant, you have a bad experience, you don't go back. So it really comes down to using this Tiger Team to identify some of those anomalies and get them corrected to get the franchisees back on track. So we do have a lot of support systems. We have a lot of data that provides a lot of forensic ways of looking at the business to understand the key issues. But our goal at the end of the day is not to see studios fail.
We obviously are in it from a recurring revenue perspective as the franchisor. So we're looking for them to grow AUVs and we get our royalty share from that. So we do have a vested interest in their outcome and their success, but we do have a lot of different ways to support the franchisees.
Got it. Thanks for that insight. Maybe switching gears again. Pricing has held up exceptionally well here. It's been a pretty steady mid-single digit source of comp tailwind for you. Can you talk a little bit about how pricing decisions are made and then what gives you confidence that you can maintain pricing as an element of the algorithm going forward?
Yeah. You asked that question in the first one and I missed it, so I was trying to figure out a way to come back to it. We've consistently got about 5%-6% price growth in our system-wide sales. Where does that come from? When a studio opens, typically when a first studio opens, that's the lowest price that someone can come in and buy a membership because the way we do it, we have a little bit more of pricing as capacity decreases, meaning as more members join a specific location, we raise price constantly. So the franchisee is always benefiting from the next person coming in. They charge a little bit more than the one before. So as you have attrition with older members, the newer ones are always coming in at higher. So you're replacing them at a higher.
So we typically see 5%-6% of price. So when you think about same-store sales growth over time, I've mentioned to the street like, "Hey, listen, I believe mid to high single digits is very attainable and sustainable in the long run because of this pricing." But that's how pricing works for us. So as you become, again, Warren, as you come in as a member, your price is fixed as long as you stay a member. If you leave and come back, you're going to pay a higher price. Or if you came in and then your friend comes in a year later, they're probably going to come in at a higher price.
We do this because at the end of the day, we do want to raise prices over time, but we don't ever want to retro-apply prices because it is disruptive and has proven through some of the studies that we did that it aggravates members, and we don't want to aggravate members. We want to encourage and reward ones that come in and stay for a long time. That's how the pricing kind of works. There are tiers too. If you're in a market where there is a clustering of studios and they've kind of established the pricing tier and you're coming in as a new franchisee kind of in the same DMA or in that area, you will automatically start kind of where the other franchisees are already at. You get the benefit of, so there's not price competition within locations within a certain DMA.
So you get the benefit of some of the work that the prior franchisees did before you actually opened your doors.
Gotcha. And somewhat of a philosophical question on the next one here. So you've built a platform that can help almost any fitness franchise raise their margins, accelerate their growth just by plugging into your infrastructure. The boutique fitness industry, obviously a very fragmented industry. Has there been any thought about making acquisitions, bolt-on acquisitions, sort of like a normalized element of the algorithm and just continuously growing the number of brands over time? Because it seems like you have the tools to consolidate the industry in a healthy way and just wondering if there's any kind of cap where 10 or roughly 10 is the optimal number?
Yeah. I mean, at the end of the day, we did an acquisition this year, right? And I think you have to, we also have to be disciplined around capital allocation. I want to be clear on that. We like to buy things smaller in size. We do a good job of selling franchises. We do a good job of opening. I mean, we open over 500 a year for the last couple of years. And even the year before COVID, we got really close to 500. So we do a really good job of opening and deploying, but you also want to do it in a controlled way where you're not too aggressive. If you buy too many things too fast, there's a lot of integration work and there's a lot of moving parts.
So yes, I think there is an algorithm here to kind of maintain a long-term growth projection, but there's also a point where you also have to at times downsize when things aren't working. And we've done that with Stride. We did it with Row House. Good brands. We got them over to really good operators, and we're really happy about that because the franchisees are now in good hands with somebody who's more focused on a smaller brand. They were kind of small for a big portfolio like ours as far as what their growth trajectory was. But yeah, I think you'll see, let's just say on average, we'll probably look at maybe doing an acquisition a year. Not a guarantee we'll do it, but we'll constantly keep some sort of growth.
When you look at the portfolio and the way it was built, it was kind of like that. It was all staggered over time. The intent there is you always have new inventory to sell with a concept that is relevant and has longevity. So yeah, I think there is an algorithm about one a year, but not a guarantee. We did Lindora this year, so we're kind of done. We're going to focus on the assets we have, really focus on operation, optimizing performance for the remainder of the year. Then as we roll into 2025, we'll take a look and see if there's anything interesting out there that is a good use of capital. If not, we announced that we potentially can buy back up to $100 million in shares, so we could use capital for that. We could pay down debt.
There's a lot of things that we could do with the cash we're going to generate.
Thanks. Then a quick note for the audience. If anyone has any questions, there should be a little chat box at the bottom of your screen. We'll get to some audience questions at the end here. Can you share with us, if you're a new franchisee, just from a new franchisee perspective, what the Xponential infrastructure brings to the table, what the platform benefits are? And then are there any areas you've identified where there might be room to improve the franchisee experience?
Yeah. I mean, we're soup to nuts, right? The intent of a franchisor is you provide a business model in a box, right? We don't expect franchisees when they come in to know how to do a lot of stuff. So we've got to be the support system for them. So from the earliest point of selling a franchise, the intent is to give the prospective buyer a full transparent view of like, here's what a life as a franchisee looks like and what you will be responsible for. If they make that decision to move forward and we like them as a potential partner, everything from identifying where you should put your studio, right? They'll identify where they want to operate. They'll buy protected territories or let's just say one protected territory and it's for specific DMA. We help them with their real estate lease.
So most people have never signed a retail lease in their lives. So we've got to be the hand that helps them make sure they get into a good deal, they get a right size. You help them with the build-up, the blueprint, everything from their equipment purchases. We provide that relationship through preferred vendors. Same thing with retail. Same thing with marketing. So really the benefit of being part of a franchise system is you get the benefit of all the mistakes, the learnings from those mistakes. We've already gone through those throughout our history. So you get the accelerated learnings and the accelerated support. Also, when you think about Lindora as a brand versus Club Pilates, we've learned a lot about Club Pilates over time, and we've been able to take those learnings and get the brands to perform better, faster because we've learned from them.
So there's a lot of key benefits from buying a franchise, and mostly what it is, it's experience and knowledge that you get access to that you don't get if you're trying to do this independently as a fragmented mom-and-pop operator. And once you're open, you think about you have access to a mobile application, a digital website. You get continuous support. Any franchisee at any point in time can call anybody in our corporate office and/or set up meetings and come to it and get support, right? You don't have that if you're an independent operator. So that's really the key benefits of why our franchisees do really well is because they do get a lot of support from the back office.
Got it. And then are there any areas where you're looking to improve or bolster processes? Yeah.
I'll let Brenda talk to that because she's got to do it. We're not perfect for sure, but there's opportunities.
Yeah. Yeah. I think, like I said, whether it's myself in this seat over the past few weeks and then our incoming final CEO candidate, the company grew really fast, right? I mean, 10 brands in less than 10 years, right? And a lot of growth within all of those brands. And my analogy is we built the plane while it was flying through the sky, right? And so there's always an opportunity. Obviously, it's like our yoga classes, right? Let's take a moment. Let's review, renew, refresh. And we have that opportunity across the board. John talking about studio performance.
It's one of my passions is that I think we can continue to do better in helping studios that may not be optimizing their performance based on our playbook and the expertise that we have in the team to continue to grow, which helps them, helps us, obviously perpetuates our pipeline of opportunities and such, right? And I think that it's just all fine-tuning. It's just nuances. It's taking a moment to pause. It's parking the plane and checking out the equipment and making some adjustments and updates and then navigating forward. But nothing that's broken. It's just a lot of opportunities, I think, to learn from best practices. And again, like I said, it's one of the high priorities for our new CEO candidate is the ability to come in and process optimize and look at that.
Great. Thanks. John, maybe this one's for you. You're on track to reach 40% EBITDA margins this year. Your comps are still running double digits. I know there's a little bit of an expectation of normalization from here just a little bit. But can you give us some updated thoughts on how to think about the sales and earnings algorithm from here?
Yeah. I mean, the top line is going to continue to grow. And the one thing that's exciting about it is the place where it's growing is royalties. It makes up about 35% of the total revenue for the business. As you kind of progress into 2026, it'll be north of 40% of our total revenue. That's a 100% margin. So when you think about the algorithm of growth, what you're really seeing is, yes, we'll continue to open 500-600 units a year, but you're really just replacing the equipment revenue with the same units you opened up from the year before. It's really about scale. So as we continue to open up more studios, you're going to get the royalty collection off those studios. AUVs have continued to grow on the install base, which means 3,000 studios go into 3,500.
You're getting the incremental benefit on the pass-through there. Retail. Retail is a huge opportunity. I still feel like we haven't optimized yet in this business where we have Lululemon, we've got Alo, we've got Spiritual Gangster, there are a lot of really great brands that we sell retail in, but how do we do a better job at that kind of on the retail front? The real key here is continue to grow top line in control SG&A. We've done a good job last year of getting SG&A down to what I've told the street is less than $100 million when you exclude the one-time restructuring and you exclude stock-based comp. We demonstrated that in Q1. You'll see Q2 and Q3 that we will be holding SG&A. So as you go out to 2026, I think you'll see a little bit of inflation on some labor components.
But overall, I think we got our SG&A in the right realm of like a sub 30%, and I'd say mid- to high 20% of revenue over the next couple of years. And what that does is, to your point, it drives the margin expansion. So we talked about getting to 45% margin by 2026. I believe we're on track to do that. We saw a good lift in Q1. We're going to stay focused on it for the rest of this year and get across that 40% mark as I talked about. And then really it's over the next two years driving a couple of percentage points a year to get to 45. So we've got the framework in place. It's all about opening studios, growing AUVs, controlling SG&A, margin expansion, and high cash flow generation is what we're set up to do.
Great. I'm going to try to squeeze in a couple of audience questions here in the last few minutes. The first one sounds like it's just a clarification question. At the beginning of the call, John, you said same-store sales would grow. Does that mean, I guess that's a kind of a first or second-order question. Do you mean grow positive or grow accelerate from the current level?
Yeah. For clarification, same-store sales will be in the mid to high single digits. System-wide sales will continue to grow and AUVs will continue to grow as we open up more studios. Listen, at the end of the day, we're seeing the studios that we open, they're opening up at really strong AUVs. Pure Barre is a case study that I've laid out there. I mean, when you look at the Pure Barre that were opening up in the last cohorts, the 2023 and even the 2024 cohorts, they're starting out in like $35,000-$40,000 sales per month in month three, which implies a 4,500K AUV, which is great. That's well above the historical average. And a lot of the brands that we're opening up, I mean, the highest volume of studios coming in 2024 and are like '23 is Club Pilates, StretchLab, the Body Fit Training.
We're seeing really strong brands with really strong AUVs, the volume of studios that are coming, which is going to pull up AUVs.
Got it. Okay. Another question here. What's the exposure of your business to macro? Would you be able to provide a little more insight on who the customer is, age, income, how many times a week they go to class?
Yeah. It depends on the membership that they buy. So there's 4 times a month, 8 times a month, and unlimited. So unlimited come about just under 8 times a month, 8 times a month come around 7, and 4 come around 3. So that's the kind of the usage from a member. As I mentioned in the beginning of the call, we've seen really good utilization. There was a lot of talk about weather in Q1, and that's why same-store sales. We did not see that. So if there was weather, our members were getting up, getting out of bed and walking through the weather and coming to studios. So it wasn't a weather issue for us. I think some of the macro issues people are starting to feel is that the consumer is shifting where they want to direct their money.
As I mentioned, they're not trading off their fitness and their wellness because a gallon of milk costs more than it did six years ago. I think there is a prioritization. Our concepts are a place to get healthy. It's communal. It's where you go to hang out. You actually get your entertainment there now. So from our perspective, I think there's a lot of value in the product we offer. It's about $130 a month for a membership. It's mainly women. They are affluent, which means they have good household income. So the $130 a month is not a huge trade-off for them. College-educated, so this is a different kind of consumer. It's not a high-volume, low-price consumer. It's more of a fluid consumer.
Gotcha. And then maybe the question we'll end on is just a question on partnerships. That was an area of focus the last couple of years. How are you thinking about brand partnerships going forward? If you look at the partnerships you've done, are there any verticals that are most attractive?
The insurance ones have been great for us because at the end of the day, it provides a differentiator for the carriers to go to their clients. And as we continue to grow, the benefit we get, we get paid on a per-unit basis. So the bigger the system is, obviously, the bigger the revenue stream for us. Lululemon, great. We have Lululemon in all our studios. So it provides them an outlet to sell more of their stuff, but they pay an access fee, a brand access fee to do that. You look at Princess. It's a great marketing tool. So we really use the brand access multiple ways to kind of get people exposed to the brands. It is an area of focus for us. And I think we'll continue to look for opportunities to partner with other big companies to grow the exponential brands.
Great. I think that's all the time we have. Brenda, John, appreciate the insights. We'll leave it there. Thanks, everyone.
Great.
Thank you.
Thank you.
Thanks for having us, Warren. Appreciate it.