Thank you. Good morning, everyone.
Good morning.
All right, that's a little better. Welcome to today. This is a big day for Xponential Fitness. We're very excited that you're here and the people that are joining online. We've got a lot to talk about today. We're really excited about the plan that we're going to lay out in front of you. Let me start with the end. These events, there's so much work that goes into them. I really want to call out our IR partner, Ado, and team for all the work that they've done, and Andrej Amihic, who just does the work of 10 people. Thank you for putting this all together. Really nice. In addition to that, we have our three illustrious board members right up here in the front, which is a little intimidating that they wouldn't sit in the back.
We have Chelsea Grayson, Bruce Haas, and our Chairman, Mark Rybowski. Welcome, everyone. Thank you. All right, before we start, we are going to run a little video, and then we will get right into it.
Our mission is simple. If you're successful, we will be successful.
The boutique fitness and wellness industry is booming, already a $40 billion market and projected to reach $85.9 billion by 2030. Demand for community-driven, personalized wellness experiences has never been higher.
Xponential is one of the world's leading global franchisers in boutique fitness and wellness. We do not just build studios. We empower entrepreneurs with a proven, scalable model designed for profitability and long-term success. With eight brands and more than 3,300 studios across the globe, we deliver complete studio storefronts, retail operations, and class sessions designed to engage and inspire. We are helping shape the future on a global scale. The health and wellness franchisor of choice. A world-class member experience, data-driven strategy, innovation that redefines the industry, and exciting international expansion. We have the team, the strategy, the passion, a proven business model that scales boutique fitness, an asset-light, high-growth franchise model built for sustained success, and a passionate, loyal, and growing consumer base driving unstoppable momentum. The opportunity is here, and the future is ours to shape.
Okay, welcome one more time. I'm going to start with what everybody is probably thinking. About a month ago, I informed the board that I was going to step down, fighting a few health issues. Nothing overly serious, but something that I just didn't want to have to deal with while I was working. I just want you all to know that. I really would prefer to talk about the business, not my health, as we get to the Q&A a little bit later on. We had to make a decision then about a month ago. Would we go forward with this day, or would we push it out into the future? The team has done so much great work, and I think there's a lot of interest in what is the plan going forward?
How are we going to really grow the phase two of Xponential's growth? What is it going to look like? What are more of the details? I know we've talked about it at a few of the earnings calls and a lot of the meetings that we've had. Today, you're going to really go deeper into what we plan on doing, both from a strategic standpoint, operational standpoint, and then how does it all roll up to the money? I think today will be a really informative day for all of you as you start to look at what does Xponential look like in the future. In 2017, I think the company was founded, Mark, and then grew.
In 2021 went public and then had this explosive growth over the next four years, to the point where I think we really fell behind in terms of the infrastructure and the processes and how we were going to run the company going forward and be able to manage this growth because the growth was so rapid. About a year ago, the founder CEO left the company, leadership change, and then I entered the picture. How did I get here? I was recruited by Chelsea to be on the board. When the CEO left, I talked to the board, and we decided that I could help. I really thought I could help the company kind of stabilize, build the right infrastructure, the right processes to really go into the next phase of growth for Xponential. I excitedly joined the company.
The board really asked me to do three big things. One was to stabilize because when the CEO left, leadership left, it was really a turbulent time in the building. How were we going to manage that? To stabilize the business, number one, then build a new leadership team, and then build a plan going forward. Those were really the three big charges that the board gave me. We made it through the end of 2024. We had some choppy waters, as you all know, at the end of last year, but we made it through that. Somewhere in the fall, we started to really build out the team. I just want to call out this oop, sorry. There we go. Here is the team that we have put together. Andrew Hagopian and John Meloun, you all know, they have been here for a while.
We've brought in John Kawaja, a really seasoned executive. Luis Ocasion, our new CMO, is a brilliant marketer, and I mean that sincerely. Fabian was helping us and then came on full-time running HR. Kevin Begi is not with us here today, but brings a lot about, he's really a data scientist and an AI specialist. You're going to hear a lot today from Tim Wiedenhoff, who's really, really an expert in franchising, and I think that will come through today. It's a really amazing team. There are two people not on the screen. Bob Kaufman's in the back. He runs our international business. And Natasha Gafulio runs all of our corporate communications. They're in the back. Make yourself, let's meet them at the break and at lunch and get to know them a little bit. I think it'll be really great.
The team and the reason that we were comfortable going forward with today is because the plan you're going to see is not my plan. Really, the team has put the plan together. That is why I think today we're really excited to share this with you. We did share this last year. Really, the ambition for Xponential for me is we're one of the largest franchisors in the boutique fitness space. Our ambition is to be the leading. The leading means the best franchisor in the fitness space. What you're going to see today, everything ladders up to that. We built five pillars. I introduced this last fall. The first one, and Tim's going to talk a lot about, become the franchisor of choice. What does that mean? More importantly, how are we going to do that? What does that mean?
How does it roll up financially? World-class member experience, which is really why we brought Luis in. We're all about the consumer. At the end of the day, it's about our members. We really need to pay more attention there. Data, we have a lot of data, but how do we use that data? That's why Kevin joined the company. I'm a big believer that innovation drives everything when you're in the consumer business. You're going to see how innovation, we're starting to talk about how innovation will drive some of our brands. We think it's a big opportunity, the international business. We're going to take it very seriously. It's not something that scales quickly, but it's something that we can build over time. We think that's a big opportunity for us. What are we going to do today?
Can everybody see that in the back? We talked to a lot of you leading up to this. What was important for us to talk about? What did you want to hear about? We have broken it down into five big categories. One is you are going to hear a lot about our four core brands, our scaled brands, and the significance they represent to the company, not only from a growth standpoint, but also from a financial standpoint today. A lot about our four core brands. Club Pilates. Everybody is interested in Club Pilates. What does it mean to us? How do we continue to grow it? What is the financial impact, the significance of it? You are going to hear a lot about Club Pilates today and the future of Club Pilates. Tim is going to talk a lot about best-in-class operator.
That's really, I think, our biggest opportunity for improvement is how do we support franchisees so they can operate and drive profitable studios. We'll talk a little bit about our international plans and how that looks. John will really go over in more detail than you've probably seen a lot of the key metrics and financial metrics that you're all interested in and what that looks like going forward. It's a really cool day. A lot of information. We'll just get started. With that, I'm going to have John Kawaja come up, our President of our North American business, and talk about our four brands and a lot of other things. Thank you.
Thank you, Mark. Good morning, everyone. As Mark mentioned, in this $40 billion fitness industry, we're one of the largest franchisors in the business. It is our intention to lead the industry, not only in revenue, number of members, studio profitability, but operational know-how, being able to operate at a high level and provide outstanding and interesting consumer experiences, customer experiences in our stores. We have eight brands. We have 3,300 global studios. We will talk a little bit more today about a focus on our four core brands. I will share a little bit about where those brands are, where they're going, and some interesting metrics on where we are today. Our vision is to operate a world-class platform of premium franchise brands, offering unique and curated experiences for over 850,000 members that we have today.
Our mission, really simple, deliver everything a franchisee needs to open and grow by providing strong brands, by providing a great in-studio experience for our members and our guests, and making sure that those brands are premium positioned and deliver really great value. These are some company highlights and company numbers. Certainly, John is going to get into the detail of this more significantly. These are actually just last 12-month numbers. System sales of over $1.7 billion, pretty amazing considering the company is only eight years old, $318 million in expo company revenue, and last 12 months adjusted EBITDA of $114 million. We have one crown jewel brand that everyone knows, Club Pilates, but we really have four core brands that contribute meaningfully to our revenue, as you can see from the information on the screen.
Today is really about explaining and articulating how we're going to make this shift into Expo 2.0 from a hyper-growth company that was really good at licensing, selling, and opening stores to being a world-class franchisor to not only sell, build, and open, but operate, market, and support our franchisees in a world-class way. Over the next 45 minutes or so, we'll share with you how we're going to become world-class. At the core, Xponential is a portfolio management company. We have eight brands. We are constantly looking at the health of our brands, the development of our portfolio. We really look at it through three lenses. The first is, is it an enduring modality? Is it popular? Is it trendy? Does it have volume, total addressable market? Is it growing? Does it have momentum? Does it have staying power?
All important factors in considering whether a brand is working or needs work. The second lens is profitability, studio-level economics, build-out and operating costs, class size and frequency, and pricing and monetization. Excuse me. The third is scalability. Does the modality have global reach, global relevance? Is it something that can be taken into urban markets and suburban markets? Is it franchisable, if you will? I think the most important question, can we lead the category? We want to lead every category that we're in. When we apply these lenses to our portfolio, there are four core brands that emerge. Four core brands that contribute. The first brand that we'll talk about is YogaSix. Yoga is the largest. It's the oldest modality. It's been around for 100 years. It'll be around for 100 more. It's a massive market size.
are over 16,000 yoga studios in North America. It is very fragmented. We have 200 studios at YogaSix. We are number two. The largest market share brand in the yoga space has 220 out of 16,000. It is a very fragmented market. Our YogaSix business is starting to build some really significant momentum. We have had strong same-store sales growth year over year, plus 5%. Our visits in Q1 of 2025 were up 12% year on year from Q1 2024. It is once again a growing network. We are adding stores. Our store count is up. We just launched a new mobility class, which we think is going to expand our ability to attract both male and female consumers that are looking for a different experience in the yoga space. This year, we made a decision to refocus on yoga teacher training.
It's a part of our business that it generates about $3.5 million of revenue for us. More importantly, it positions us really as the expert, and it reinforces our category leadership in the space. Finally, we've made a tweak in our build-out of new studios to have an option. As I think most everyone knows, YogaSix is a hot yoga concept. We've recently started building out to where we're able to offer both hot and warm yoga. Some people do not like hot. It's an opportunity for us to, I think, attract more customers. Our business is starting to show the effects of that. Second brand I want to talk about is Pure Barre. Barre is a bit of a niche modality. There are only 2,000 barre studios across North America. Pure Barre has 620-some-odd stores. A dominant number one in the space.
What's really cool about the barre modality and Pure Barre specifically is that it has a hyper-loyal, hyper-engaged, and committed community. This is a business, if you're a barre person, that consumer is really dedicated to barre. We see that with the merchandise sales, as an example, that happen in studio. Higher merchandise sales as a percentage of revenue of all of the eight brands that we manage. This modality also has some heat. If you look at Google searches for barre, year over year, it's up 50%. Google search for Pure Barre is up 22% year over year. This modality is starting to pick up. It's really creating a lot of momentum. As the dominant number one, we're seeing some really nice metrics that we're delivering.
It's neck and neck with Club Pilates for same-store sales growth year on year, which is in the high single digits. The Pure Barre system is approaching $400,000 in AUVs, not on the higher side across the portfolio, but we have a lot of operators that are owner, operator, and teacher. They only do 25 classes. They're happy with that. We've got $300,000 AUV studios and $350,000 AUV studios that do very well. We have franchisees that are very happy with that. In April, Pure Barre did a campaign called Barre Stronger. Barre Stronger was an invitation to our members and our guests to visit Pure Barre 20 times in the month. It resulted in over a million visitors to Pure Barre in the month of April.
Just kind of, I think, is an example of how committed barre people are and our Pure Barre customers are. It's a very sticky membership. It's our stickiest membership across our eight brands. Our consumers love the Pure Barre experience. We deliver it better than any of our competitors. How much love is there for Pure Barre? We did an NPS study late last year, had 42,000 surveys go out. We had 12,000 respondents. We had an NPS score of 92. I've been doing this a long time. I've worked for some great brands. I spent 27 years with the Adidas Group. I worked at TaylorMade, which is probably the strongest global golf brand. I've never seen 92. I've never seen 92 from any brand. I think it really speaks to just how much love we create, how much community we create with our Pure Barre business.
Okay, let's shift the attention to StretchLab. StretchLab is our brand that kind of straddles fitness and wellness. It's sort of a tweener. This business of assisted stretch competitively is really a two-horse race. We're neck and neck with our competitor for one and two. It's a massive addressable market. If you think about our other modalities, our other brands, they're more fitness-focused. It's obviously studio, but this is a gym fitness consumer. For StretchLab, it's the weekend warrior. It's the pickleball player, the tennis player, the runner, the golfer. The total addressable market is massive. If you have a body and you want to keep your body mobile and flexible, you need assisted stretch.
I think there's a real opportunity for us to do some education to have consumers understand what StretchLab can deliver, what assisted stretch can deliver for injury prevention, for performance improvement, and for general well-being. We believe that assisted stretch isn't something that you start in your 50s or 60s when you start to feel the aches and pains. This is something you should be starting at a young age, as a high schooler in your early 20s. It's really a lifelong thing. We think that stretch is in the early innings. We think it's really our responsibility to educate consumers on the benefits.
It's our intention to really embed this business in a significant way into HSA programs so that we can introduce people that are looking for and being prescribed things to help them stay mobile and stay flexible, that we can deliver service to those kinds of consumers and deliver lifelong benefits. We do have some challenges to this business model. As opposed to our other modalities where there are class-based and we have a leader of a class and a class of 14 or 20 or 40, this is one-to-one. We have a flexologist that works one-to-one with our member consumer. So labor costs are high. We have the second-highest openings across our network at StretchLab, but we also have the second-highest closures. So it's suggesting that we need a tweak. We've seen AUVs in this business go from the mid-600s to the low 500s.
We've done a lot of work to test different ways to change the experience, to enhance the experience, and to deliver an evolution and an innovation to assisted stretch and stretch in general. We're looking at a couple of different ways to handle this. For our new studios, we're looking at eight-bench and six-bench options. Traditionally, every StretchLab that exists today has 10 benches. Looking at eight-bench and looking at six-bench solutions reduces overheads, reduces build-out costs. The recurring monthly rents will be lower on a smaller footprint. We do not think we're going to lose anything in terms of efficiency. We think we're going to pick up in efficiency, operational efficiency, because there are very few studios that tell us that 10 benches have been used at one time. We think there's a nice, elegant solution there. That's for new studios.
For existing studios, we're looking at a retrofit of the box to be able to create a different in-store experience that doesn't require a one-to-one assisted stretch. We're looking at Power Plate. We're looking at the Super Stretch Machine. We've got stretching sticks. These have all been in test. We're ready to roll these out to new and existing studios. We have franchisees that are anxious to kind of shift this model to be able to create a new class of membership. Think about a woman who's on her way to the golf course or on her way to play pickleball, and she's feeling a little tight. Hips don't quite feel mobile.
She can drop in with a monthly membership, use the equipment that we have in studio, maybe get a five-minute stretch from a flexologist, and be on her way and be able to enjoy her day. We think that there's an opportunity for us to make these studios more profitable by enhancing the in-store experience with unassisted stretch, if you will. We also have a technology play here. We have a technology partner called PhysioTrac. Whenever you go into a StretchLab, the first thing that happens is you get an assessment. It measures your flexibility. It measures your mobility. We're on the final stages of developing and enhancing that technology to create a program where we'll be assessing you all the time.
Monthly assessments, being able to track progress, being able to provide programs that can be done between your studio visits at home to be able to improve. And we'll collect that data. We'll share that data with our members. We'll be rolling out an app to support that in the very near future. As I said, early innings. We think that this business has a path to 1,000 studios and done in a profitable way, i.e., 15%+ EBITDA margins per studio basis. Okay, let's get to the crown jewel. Club Pilates is the crown jewel of our portfolio, system-wide sales of $1.2 billion. We recently opened our 1,200th studio. To put that in context, there's about 7,200 Pilates studios in North America. That number is growing more rapidly than any other modality.
If you do the math, we're at about a million-dollar AUVs on average. We have some stores that are doing north of a million-five. We're 10 times larger than our nearest competitor. It's our fastest-growing brand. It's not just our biggest brand. It's our fastest-growing brand. The studio economics are outstanding. As I mentioned, average million-dollar AUVs, average plus or minus 40% EBITDA margins on a studio basis. A very healthy studio network. We're 98% booked to capacity on average. Think about that. Now, that's not show to capacity. That's booked to capacity. We're about 98% booked. We're about 82% show to capacity. What that suggests is that there's significant white space for us to grow, infills, and new territories. We think that, hey, 98 booked, that's a first-world problem. Some of our members can't get into class, which means we need more studios.
Our recent cohorts, every year from 2021 to this year, the cohorts in each of those years, the metrics have improved. This business, this brand is only getting stronger. It suggests, again, significant opportunity for growth and expansion. Club Pilates represents over half of our company revenues. It has our highest EBITDA margins and contribution. We're really bullish on the Pilates space. We see it attracting a wider group of consumers, younger consumers that are looking for they understand the benefit of Pilates, that Pilates delivers, and they want to work out. We think that it really creates an opportunity for innovation in the space, which we're looking at really hard. These are our core brands. They're strong and leading brands, as I said. They're the economic engine of our expo business.
They're really the focus of our attention, our energy, our resources as we go forward. Shifting now, I want to spend some time articulating how our company is evolving into Expo 2.0. For eight years, we've been focused on launching brands, selling licenses, opening franchise studios. We've opened 3,300 of them. We've done it very successfully. We're still a growth-focused company, certainly. Now we have an opportunity to focus on becoming a world-class franchisor. The team will highlight for you the things that we're doing to become more world-class as a marketer, become more world-class as an operator, how we approach partnerships and how we think about partnerships. Finally, I'd like to share an update on where we're going with our retail business. When we think about the fitness business, it's really characterized by some seasonality.
There's certainly trends, like in any industry. It's trend-driven. And there's a lot of member churn. Marketing in this business is typically focused on performance marketing, in-funnel marketing, being able to measure against key performance indicators. We're focused on improving our studio-level economics by evolving our digital strategies and tactics. Admittedly, there's a lot of work to be done here. Louise and I will speak about that in a minute. Concurrently, we also want to invest in our brands to build on our strengths, to differentiate the class experience, which we think we do better than anyone, and to build fierce loyalty to these brands, to build community and loyalty that can't be broken.
To share some of these ideas and some of Luis's first impressions, I'd like to ask Luis Ocasion, our new CMO, to come up and share some perspective on her now seven weeks with the company.
It's the start of the eighth week. Yeah.
Louise, when you came in, I know what we've talked about when you first came in, your curiosity was around, what do we know about our members? There's 850,000 of them. That's a great data point. What do we know about them? What do we know about where they shop, what the adjacent brands are, where else they work out, when they work out? All really critical questions. Consumer insights, I think, was on your mind. And then how do we exist and how do we show up in the life of our member? How do our brands show up on a mobile screen? How do we show up in their lives? Share, if you will, some initial thoughts about the company and where you think the opportunities are.
Happy to. Happy to. I think John mentioned consumer insights. I think marketing strategy starts with understanding who your consumer is. Who is our core consumer? What are their preferences and needs? At the same time, we're redefining our brand's positioning because we really want to understand why consumers love our workouts and then call out those unique differentiators so that we stand out against our competition. This allows us to approach marketing and communication more strategically with precise targeting and relevant content that really addresses the needs of our consumers. Instead of broadly targeting everyone, we really want to hone in on who our core audience is with the right messaging at the right time and place. The goal here is to really drive conversion, engagement, and retention. We have a great portfolio of brands. John just took us through them.
We really need to communicate that. Our goal is to be in more places with stronger messaging so that our brands remain top of mind. Being top of mind is really critical, especially in a consumer's fitness journey. Just overall, looking at the way we're approaching marketing, we want, of course, our consumer to have an amazing experience when they're in the studio. Once they leave the studio, we need to continue to engage with them. We want to create an ecosystem of loyal members who really feel a sense of community. This is how we're going to do that. First, we're going to build a robust digital presence. We need to stand for aspirational journeys within the fitness ecosystem. We need to have a stronger presence. We need to communicate why our brands are better than our competition.
We will also employ other tactics like influencers, which we really have not explored, so that we could expand our reach. We also need to establish our brands as the authority and trusted source in our modalities. Regardless if you are a member of our studios or participate in our brands, we should be the authority that consumers go to to understand about assisted stretching, about barre, etc. As I mentioned, we want to continue engagement through the entire customer path to purchase. With insights, we are actually digging deeper on the different ways consumers interact with our brands and why they want to be part of our brands. We want to build a deeper relationship with our members, really driving loyalty and brand advocacy. The best way people hear about our workouts is from their friends and their family.
That is what we want to drive moving forward. The other piece of it, in this world of digital marketing, everything is measurable. We are going to take data-driven actions with clear, measurable goals and continually optimize our media to ensure that our spends are effective. Lastly, we need to implement a full-funnel marketing strategy. Traditionally, our company really focused on bottom-of-the-funnel tactics, which, do not get me wrong, are really critical, like lead generation and conversion. Really, to build long-lasting, evergreen brands that people love, people talk about, that are relevant, we really need to drive full-funnel marketing complemented with brand awareness-building campaigns. That is really critical. We want our brands to be top of mind. We want consumers to have an emotional connection with our brands. Our studios should be the destination of choice for anyone in their fitness journey.
Ultimately, what that does is it drives member growth, drives retention, higher sales, and lifetime value. More to come on that in the coming months.
Thanks, Louise. Okay, I want to talk about partnerships. I think the company has shared partnership information with this group in past investor days. We're really looking at our partnerships in a more focused way, a more strategic way, I would say. We bucket it into three groups. The first group is the aggregators, the ClassPass, the GymPass. This is an important part of revenue for some of our brands. For others, if you're at 98% booked to capacity, you don't really need ClassPass. Some of our brands do. It's not the highest margin business, but it's important. It drives incremental revenue. These are important partners for us to work with. The second bucket is health and HSA and partners like Optum and American Specialty. This also is an important partnership for us. It delivers consumers that otherwise probably wouldn't visit the studio.
There's a subsidy that gives them an opportunity to frequent our studios perhaps more frequently than they would have without that kind of support. It is a really important part of our business. We intend to double down on our opportunity to partner with our HSA partners going forward. The third bucket is strategic partnerships. Here's what's different. I think in the past, we would look for partners that would provide value to Xponential. We would provide access to 850,000 members. It was not a great two-way street. I think in some cases, we left out the franchisee as a value for the franchisee, which is the most important thing we can deliver if we're a franchisee-focused organization. We are going to look at our future partnerships through the lens of it's got to work for everyone. It's got to work for Expo.
It's got to work for our partner. And it has to work for our franchisee. I want to share with you some results of a partnership that we did recently, just maybe six weeks ago. We ran a promotion with Lululemon. Everyone knows Lululemon, obviously, an adjacency to our business and a brand that many of our members know and love. We did a program with Lulu that was focused on their loyalty members. They have 17 million loyalty members as part of their company marketing. And we extended an opportunity for a free class visit. Not to 17 million. I don't know how many got the offer. But we had 21,000 leads that resulted from this. We had 7,700 classes booked, of which 5,200 class visits happened. And we converted that into 625 new memberships.
A lot of leads, a lot of new memberships, being able to create recurring revenue for our franchisees. We only did this over two brands. We did it at YogaSix and Club Pilates. I think a really good example of the future of the way we look at partnerships, where it can work for everybody. Next, I want to share a strategic, significant move relating to our merchandise business. That is the wholesale retail business that we have. At our core, we are a franchisor and a builder of strong brands and experiences. Merchandise sales matter. It contributes important studio revenue. I think more importantly, it helps build brand and build community. People that are proud of being a part of the community like wearing the brand as part of their lifestyle. However, it is not core to what we do. It is not core to our mission.
We are currently working on a comprehensive partnership with a potential entity to be our exclusive merchandise licensee. This partnership, which would take effect later in 2025, would deliver significant guaranteed royalty revenues, improve merchandise quality, design, and service levels. Importantly, it would eliminate related Expo overheads, including our managed distribution facility, which is located in Irvine. It would eliminate plus or minus $5 million of capital that is tied into inventory and, of course, the related exposure to reserves and markdowns. It gives us an opportunity to focus on our core. We see this potential partnership coming to fruition later this year and having a financial impact on our business. Maybe John can touch on that a little bit starting in 2026. With that, we are going to take a quick 10-minute break. You can fill up your glass. You can have a bite to eat.
We will start again in about 10 minutes. Thank you.
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Everybody agrees. I'll stare directly at the sun, but never in the mirror. It must be exhausting, always rooting for the anti-hero. I can feel you losing hope. You've been hanging on a rope. Something tells me you've got known. Baby, just keep holding on. I can feel you losing hope. You've been hanging on a rope. Something tells me you've got known. Baby, just keep holding on. Just save you my love. Just save you my love to keep you from falling down. Just save you my love. Just save you my love to keep you from falling to the ground. Call me up, I'll take you home. I've been waiting by the phone. Don't you know that you're not alone? Don't you know you're not on your own? Just save you my love. Just save you my love to keep you from falling down.
Just save you my love. Just save you my love to keep you. 'Cause I don't care how far. I'll run to wherever you are. 'Cause I don't care how far. I'll run to wherever you are. Just save you my love. Just save you my love to keep you from falling down. Just save you my love. Just save you my love to keep you. Just save you my love. Just save you my love to keep you. Just save you my love. Just save you my love. Just save you my love. Gone and closed the curtains 'cause all we need is candlelight, you and me, and a bottle of wine to hold you tonight. We know I'm going away and how I wish, I wish you were some to take this wine and drink with me. Let's delay our misery. Save tonight and fight the breakup.
Don't come tomorrow. Tomorrow I'll be gone. Save tonight and fight the breakup. Don't come tomorrow. Tomorrow I'll be gone. There's a log on the fire and it burns like me for you. Tomorrow comes with one desire to take me away. Oh, it's true. It ain't easy to say goodbye. Darling, please don't start to cry 'cause, girl, you know I've got to go. Oh, Lord, I wish it wasn't so. Just save tonight and fight the breakup. Don't come tomorrow. Tomorrow I'll be gone. Save tonight and fight the breakup. Don't come tomorrow. Tomorrow I'll be gone. We're going to get started, everyone. Take your seats. Introduce yourself. Yeah, make sure I say hi. Tomorrow comes to take me away. Oh, yeah, yeah, yeah, yeah. Oh, like Jefferies in selling telling me right now.
Welcome back, everybody. Thrilled to be here. My name is Tim Wiedenhoff.
I'm the Chief Operating Officer for North America. I'm looking forward to continuing the conversation and just diving into our franchisee first mindset pillar and what we're all about there. As Mark discussed previously, as companies go through high growth stages, as Xponential did between 2021 and 2024, some core franchising tenets were missed. By shifting to a franchisee first mindset, we're able to capture those pain points and focus to solidify the foundation that makes franchising so great. Having a franchisee first mindset means we're focused on multi-level communication strategy. This ensures franchisees receive timely updates from leadership, enables two-way communication for feedback and notes, fosters alignment across all levels of the organization, and truly drives additional innovation through idea sharing. Next, a franchise management system was needed to be put in place.
This streamlines operations and performance tracking, provides easy access to key resources and data, and supports accountability and continuous improvement. Continuous improvement will be something that I focus on quite a bit through the conversation about iterative process to continually improve what we do. Next, a robust training program equips franchisees and their teams for success. All new training programs are being finalized for rollouts this year, and I'll go into more detail later on in the conversation. I'll discuss more about this later in the conversation. Field operations support is another key tenet. Dedicated field teams with up-to-date business coaching that aligns with industry trends not only in franchising, but in fitness as well. This helps troubleshoot challenges in real time while building a more impactful relationship with our franchisees. This will also drive consistency and operational excellence.
Franchisees are at the center of everything that we do. Everything we build is designed to empower franchisees. We succeed when our franchisees thrive. You heard Mark say that. You heard it in our video. When they win, we win. Our partnership is the foundation of each brand's growth, is how that franchisee continues to execute that playbook. Now, when we're thinking about a franchisee first mindset, I think it's important to understand the reality of the stages a franchisee goes through. The franchise lifecycle can be broken down into four stages, the first being pre-opening or site selection. Second would be build-out and studio launch. Operating the business, which that operating stage, stage three, is the longest portion of the franchisee's lifecycle. Last but not least, exiting and selling the studio.
We have focused our operations around these four stages of the franchisee's lifecycle to drive excellence and performance from day one for franchisees. Learning from the past while keeping a very close eye on the future, these stages offer an opportunity for us to provide a white-glove level of service for our franchisees. If they open stronger, they'll get to profitability quicker, and they'll be positioned for long-term sustainable growth. We have curated an improved experience and created processes that were not in place through each stage and will highlight more details throughout the conversation today. The overview of the four stages of the franchisee lifecycle are first and foremost the selection process. What goes into this selection process is going to be the outline of the investment level and financial requirements, the communication of day-to-day operational expectations, and provide extensive training.
We'll go into more detail on each one of these stages, but this is just to give you an overview to understand what we're talking about here. Stage two with build-out and studio launch. This is again all about site selection support, vendor negotiations, launching a successful opening, dialing in operational playbooks, and focusing in on employee training and education for the franchisee. Stage three is onboarding. This is about improved and enhanced lead generation. You heard Luis talk about the focus of a full-funnel marketing approach. This is where the largest level of impact will be in that stage three of the franchisee's lifecycle. We also offer a 24-hour support line, which will allow for 24/7 access for any kind of communication that a franchisee feels the necessary need to share with us.
We're also dialing in field operations, including field audits, and focusing in on improved retention of franchisees and their members. Fourth, the exit. A robust sales program, preparing businesses before they have the desire to sell, as well as providing resale leads to avoid future costs for the franchisee. This also helps save franchisee profits in all four stages as they continue to move through their lifecycle. Let's dive in a little bit deeper. The most critical component of the franchise business is picking the right franchisees and supporting them for long-term sustainable sales growth. Loyalty creation through profitable revenue generation at the studio level is the most attractive return for us as the franchisor and for the franchisee themselves, thus binding us to a shared and common goal.
This produces more attractive returns for both of us, and the best way to do that is via an internal franchise sales team. By having an internal franchise sales development team, we have team members with a vested interest in our brands first versus a broker network that has the vested interest of their client first, meaning that the broker will showcase 10 to 12 brands, and basically, if they sell one of those brands, they feel it's successful, whereas our internal team is focused on our brands and finding the right fit for the right folks and the right brand. How we're going to specifically get there as Expo is going to be through these five steps. First, building the necessary infrastructure for smart franchisee growth, which includes, one, a more robust process for all new license sales.
This process includes an increase in the minimum liquid asset requirements for candidates, a debt ratio analysis that's conducted in partnership with our finance department to ensure the franchise candidate has a solid balance between work and life debt. Three, a multi-unit expansion form, which gets filled out at the brand team level for operations and marketing to complete to determine if the existing franchisee within our ecosystem is actually ready to be awarded a new license, looking at operational, marketing, and legal compliance along with their organizational structure and what resources they have to continue growth. Last but not least, a sign-off on the package of all responsible parties. That includes legal, real estate, finance, and brand representation, including the brand president. The next step that we're taking is the building of a robust resale program. This will help franchisees exit the system.
As a franchisor, we want to have responsibility across all four stages of the franchisee's lifecycle and support franchisees throughout all four stages of their lifecycle, including building toolkits like a seller's guide to selling your business, matching up sellers with buyers when opportunities arise, especially internal, and then helping with financing options through preferred finance vendors, which rolls right into the next step, which is the development of a comprehensive financing program, improving our relationship with the lending community to give our franchisees more lending options at the absolute best rates. Using third parties to validate our story about the new support measures and what the new management team has been working on has been helping our franchisees gain more credibility when dealing with those lenders. We have done this through an industry partner, FranData, that is very well known within the franchising industry.
Along with this, we've also begun reworking our financial performance representation of our item 19 of our FDD to show a more complete view of the economics of our units. We plan on expanding this in the future to show P&Ls submitted so that candidates can come into this opportunity with eyes wide open. One key action on that required P&L submission across all brands is going to be that we're in negotiations with a partner that will produce a platform for us that will help share this information across locations while still taking into consideration privacy and infosec considerations. Last but not least, a renewal process to ensure the proper LLCs, structures, and franchisees are in place, a protected territory review, and a refresh upgrade check-in.
These updates will provide more attractive returns for franchisees and the franchisor by ensuring that we have a higher quality of capitalized franchisees via improved recruiting methods. Let's talk about how we're going to find those people through these improved recruiting methods. We've executed a partnership with a best-in-class franchise development marketing agency to help work through lead generation and also to conduct two very specific things on improving our franchise recruiting process. First was an audit and benchmark of our current marketing and advertising strategy in the B2B space and the agency, including our website traffic, SEO, and digital marketing pieces. Second, they created the identity, helped us create the identity and personas of our best operating franchisees. Now we can go and develop a messaging and a strategy for capturing buyers, not leads, that match our best operating franchisee personas.
Capturing buyers that have those same qualities will give us an ability to continue to build strong and sustainable brands by starting on the right foot with the right partners every time. By internalizing our franchise sales strategy and improving our recruiting methods, we have taken actionable steps towards improving stage one of the franchisee lifecycle. Now let's jump into the second stage of the franchisee lifecycle, which is build-out and opening. The opening process is complex, and one of the main ways that franchisors drive value to candidates becoming franchisees is through this process. Within the second stage of the franchisee lifecycle, there are also three steps that are critical for these franchisees. First and foremost, site selection, which is all about identifying the correct trade areas, finding the right shopping centers with those targeted areas, but also identifying the right space within the shopping center.
Here's what we're doing now to impact that. When it comes to identifying the correct trade areas, we brought in a new Director of Real Estate Analytics to re-look at the current real estate methodology and the real estate equations to help make placing units in areas where they have the best chances for success. You heard some of the really great problems that we have with utilization in some of our brands, which says there's a lot of opportunity for continued growth. This also will include analyzing proper demographics, cycle analytics, and core customer counts. We will look at hundreds of data points to determine the top 7-10 characteristics of our best-performing units so as to replicate and utilize those data points for continued new build-out.
Finding the right shopping center and the right site to ensure we're conducting the proper due diligence and support for our franchisees, we're requiring a site selection package that includes demographics for the site, pictures of the shopping center, where the space is located within the shopping center, cannibalization rates, and so on. To support identifying the right space within the shopping center, we have also created a real estate committee that will approve real estate site packages. The REC is going to consist of brand operators, marketing team, brand presidents, development, and our construction team. This allows the site to be looked at through a multitude of business lenses to ensure that we're getting the absolute best and efficient process possible.
From a construction standpoint, we're also working on lowering our costs for our franchisees by modifying square foot requirements to maximize revenue growth and revenue per square foot and lowering our build-out costs while auditing all of our current FF&E vendors to ensure we're receiving the best-in-class pricing that we can for our franchisees. The second step to the opening process is onboarding. Onboarding includes a weekly touchpoint with new franchisees to guide them through a series of actions needed to get to soft opening and then to be successful at grand opening. That includes new franchisee training, a transfer franchisee training, GM training, and staff training that all comes online during this time period and is scheduled to align with milestones throughout the build-out and the opening process. This way, training remains fresh and actionable at soft opening.
Third, in addition to training, a weekly touch base will allow for new franchisees to learn best practices, connect with multiple departments through their onboarding manager, and be connected with other franchisees that are also in the same lifecycle stage so that there's the building of community within our own network. The third step is a successful launch, the whole reason that they're doing what they're doing. Each brand has its own benchmark of requirements before soft opening can be scheduled. This includes the number of members needed to launch successfully, the completion of training, and the results of their local store marketing program leading up to grand opening. Soft opening happens first, and this is followed by grand opening between 30 and 45 days afterwards.
This allows the operators to kind of work out some of the kinks before we full-fledge drive a tremendous amount of consumers into the business. As you can see, there's a lot that goes into a successful opening. I want to discuss some of the updates to training that we've done and how we're preparing franchisees for success. At the heart of our new franchisee's opening journey is our robust training program. We've aligned with a new learning management system platform that will allow us to centralize on-demand training to go along with our in-person training and newly planned field-based operations teams.
This will allow us to revamp new franchisee training, an overview of what to expect as a franchisee of an Expo brand, not just a playbook of how to run a specific modality, a weekly meeting with onboarding specialists who create a white glove experience from new store training to studio soft opening and grand opening, new GM training, which once a site has been determined, the franchisee will have the opportunity to bring on a studio GM via our new GM training program. Fourth, the final stages of onboarding after the GM is determined is when we will institute the local store marketing training. Last but not least, continual in-location training via business coaches will be fluid and dependent on the franchisee's acumen and personal needs.
Not every franchisee is going to come with the same set of experiences, so our business coaches will be tailor-fitting that training based off of what the franchisee needs. Building on this foundational content, we move into the longest stage of the franchisee's lifecycle, and that's operating the business and operating their studio successfully. How are we helping franchisees be more successful? First, we're supporting franchisees throughout the lifecycle stages in a cyclical way that is connective throughout with an iterative process around improvement towards becoming a learning organization. A learning organization is one that is constantly looking to gain additional knowledge and impact that knowledge within their business. New support tools and actions are as follows, and we have already developed brand playbooks, but these brand playbooks do not just discuss workouts or modalities.
They also help to effectively manage working capital, increasing their initial success rate on how to stretch that capital, improving on lead conversion strategies so that their pre-sales numbers are hitting the ground running faster, sooner, and stronger at the beginning of the opening. P&L training. There are many, many operators in franchise businesses that struggle in this area. As a common practice, P&L training will be huge. This will also help us with reducing needs for calls to studio support center because our franchisees will have more actionable resources right away at the beginning. That is how we will successfully launch studios. Once launched, operational support will continue to have the studio support 24/7 aligned, which allows for immediate flagging just in case someone has an issue at midnight in Alaska. We can still get that right away first thing that started business the next day.
Field operations teams visiting on a quarterly basis to support franchisee business planning and profitability. Sharing best practices across those brands, locations, and geographies will help support franchisees in operating their studio with continued success. We also need to ensure brand safety and compliance. Even though we need to do that, we also have studio visits that are collaborative but firm when needed, meaning that we ensure policy compliance. We highlight and plan focused based off of their P&L collection. We flag potential issues for remediation, identify revenue lines that need to be accelerated, and find costs that can be eliminated. What I really hope you're hearing from this is a very proactive stance on how we're supporting franchisees moving forward. A continuous improvement focus that is never-ending and always innovating will be a key part to that.
Continuous improvement can breed collaboration, and it can also breed feedback across all stakeholder groups. In preparation for that feedback that will be coming, we want to make sure that we're instituting and creating a positive feedback loop. That continuous feedback loop starts here at Xponential, executed through our field operations team, and then, in partnership with our FAC or the Franchise Advisory Council, will provide another angle of feedback for us from a peer-to-peer perspective. These groups of franchisees, and each brand has their own, are critical feedback gatherers for each system that they represent. By having a group of four to six franchisees on a council, we gather more system-wide feedback and data versus just an individual point of view. Now, the individual franchisee's point of view is still a great place to get feedback from and still an important mechanism for us.
We can really dive into those mechanisms via feedback collection in meetings in person, by going into studios, monthly webinars, emails, and one-on-ones. Member feedback is received at Expo through surveys, consumer insight platforms, and much more, as you heard Luis discuss of what our future plans are, and then that starts the loop again. This loop does not have to go only one way. At the core of who we are becoming, a franchisor of choice in the boutique fitness space, communication, feedback, and connectivity with our field of franchisees is critical. I have walked through the first three stages of the lifecycle. Stage four of exiting the system will be supported through our new franchise development team, again, those new internalized franchise sales folks. They will help out through not only resale but also renewal of franchise agreements.
By focusing on the first three stages of the lifecycle, though, is where we'll become the best-in-class franchise system. That is because we'll be focused in on organizational improvement and productivity. This is focused into four areas. First, culture. We're changing the status quo internally. We're shaking things up quite a bit. You saw a lot of new faces here today. That is because we believe that change is a very positive thing, especially when it comes to the culture of our business. Innovation centers of excellence for operations, marketing, and development have already been institutionalized. Focus on franchisee-first mindset is at the core of what we're doing. We're also doing more with less. We are doing more with less by embracing shared services model. We have repurposed headcount in the organization across different brands, thus leveraging some tacit knowledge and experience while also increasing efficiency.
We leverage our scale across markets with field operators as well that are not brand agnostic. A business coach is a business coach, regardless of what the product is that you're selling. We're also building process improvement into everything that we do. Shared services allows for higher levels of collaboration across our brands and our departments. Our improved training platform and robust team that we've invested in will also help with this. By continuing to look at improving, we're eliminating duplication and inefficiency. Last but not least, investing in new technology increases our productivity. To lead this important change, as you saw at the beginning from Mark, we brought in a new Chief Technology Officer who is improving and building up on our data warehouse, as well as we'll be bringing in a tremendous amount of value through AI-assisted platforms.
As we evolve our organization to a franchisee-first mindset, it's important to define clearly where we are, where we're changing, and where we will be. Where we're at right now is the vast majority of our scaled brands, the four brands that John Kawaja went through, are profitable. Initial build-out costs, though, still remain too high, and we want to continue to focus in on improving ROI for our franchisees. Franchisees, because of that ROI, have hesitated to open second or third licenses that were sold during that growth period.
What we're changing is how we're selecting franchisees, more experienced franchisees, improving the franchisee and instructor training across all brands, building out a franchise operations team that includes the manuals and playbooks, considering reducing fees in certain geographies and brands, but overall focusing in on reducing building costs by shrinking the footprint or the equipment packages to maximize revenue per sq ft, and also controlling member count at soft opening so that we're ensuring a sufficient starting point for franchisees versus starting with not enough members and having to really have a negative impact on AUV for that first year.
Now, where we want to be and where I will say we will be is that franchisees that will follow our playbooks are going to be profitable, which is going to equal higher member retention, consistently introduce new class formats to the field, impact our payback to be improved from an ROI perspective, and then system growing organically because franchisees will see the value in what they're opening and open additional licenses and locations. This all starts with the focus on the franchisee first. With that, I thank you very much for your time, and I'll pass it back to Mr. John Kawaja. Thanks.
Thank you, Tim. I want to spend a few minutes talking to you about our international business. As you saw in the house, which represents our brand mission, vision, and strategy, one of the pillars, one of the five pillars of the house, is growing our international business. It's a significant opportunity. We have brands that have global relevance, and we're looking for ways to maximize our global footprint, but do it in an efficient way and a smart way. I'll just leave you with a few thoughts here on our international business. One, it's an opportunity that we're going to take very seriously. It's an important part of our long-term growth.
The strategy is built around MFAs, so we'll have franchisee partners that we will build this network out with, which allows us to scale and take advantage of the global relevance of our brands, but do it with not much SG&A that we're taking on ourselves. We'll do that by finding strong partners, well-capitalized, strong operating capabilities, and good partners. We've found those partners in many territories around the world already. As you can see on the map, we operate in over 30 countries already. We're going to focus on two brands. We're going to focus on BFT and Club Pilates. You might be thinking, "BFT?
I didn't hear about BFT about an hour ago. BFT is an important part of our international strategy because of the fact that there's already over 300 BFTs open around the world, focused mainly in Australia, which was the birthplace for the brand, and throughout, I'd say, Pan Asia. Club Pilates, because there's all kinds of global interest in our strongest brand, that will be the focus. We'll focus on those two brands. The last thing I wanted to leave you with was we're really building a lot of momentum, particularly in Japan. We've got over 300 licenses in Japan. Across continental Europe, we found some great partners, and we're starting to build that network out. It's just under 500 stores today.
We believe down the road our international business will represent 25% of global license sales, 25% of global open studios, 8% of revenue, and 10% of adjusted EBITDA. Certainly a significant and important part of our business. With that, I will turn it over to the guy you've probably been waiting to hear from, John Meloun. John.
Okay. Good morning, everybody. Over the past couple of years, we've really kind of refocused the business on being a 100% franchise model, driving high reoccurring revenue, expanding our footprint, putting in place more of a stable cost basis around SG&A so you could really leverage it and drive profitability at the bottom line. Today, about 80% of our revenue is reoccurring. The largest growing component of that is our royalty stream, which virtually has a 100% margin for the business. Looking at our SG&A, one of the things we really need to get refocused back on is leveraging it, stabilizing it. As we continue to grow top line, being able to add minimal headcount to support the franchisees, doing a lot of the initiatives that John and Tim spoke about earlier. It's an asset-like business, being 100% franchised.
The franchisees bring the capital to the game, so it requires very minimal investment on our part to grow the system. All these things combined drive high free cash flow conversion. Today we sit about 90%, only spend about $10 million a year in CapEx. A real profitable model if we can maintain a growing top line and a stabilized SG&A. All right. Today we generate revenue through kind of five major categories. The biggest one, which is kind of illustrated here with the circle around the pie chart, is our franchise revenue. Included in our franchise revenue is the revenue we generate from license sales, which get amortized over 10 years. Royalties, as I talked about, the largest growing portion of our revenue stream. We also have technology fees. We have transfer fees when studios exchange hands from one franchisee to another, and instructor training.
Those are all in the franchise revenue line. Equipment revenue, we sell equipment direct to our franchisees. We also receive rebates back from our vendors. We have merchandise revenue. We sell both branded and unbranded retail to our franchisees that, in turn, sell it to their members. We also get rebates from preferred vendors. Marketing fund revenue, 2% of gross sales, allows us the opportunity to provide national branding and advertising for our franchisees. Lastly, our other service revenue. That includes rebates. The primary driver of that is the 1% credit card rebate we roughly get on our system-wide sales from processing studio revenues in the franchisee studios. We have our brand access or partnership revenues that are encapsulated in this line. Company-owned studios, historically, we had company-owned studios. We've gotten out of that game, but historically, they've been recorded here.
XPass, we've sunsetted that program as well, but historically, revenues have been captured there for XPass. And then our XPlus, which is our on-demand product. As I mentioned, 80% of our revenue is reoccurring. The fact that our revenue is reoccurring, or the majority of it, it makes it very easy to predict and model and forecast. What I want to give you guys today is kind of walking through the revenue lines, how to think about the drivers here, and how to think about the gross profit targets, and again, gross profit targets that we aim as we drive the business forward. Franchise territories. We sell franchise licenses for $45,000-$65,000. Typically, we've sold three packs, so the average is about $45,000 today. We amortize that over 10 years.
Historically, we've paid broker commissions, so we walk away with about 60% margin on our license sales. It's the IP that we give to our franchisees. Royalties have ranged from 6% to 8%. The total system today on a weighted average is about 7%. Club Pilates and StretchLab, two of our growing core brands, are 8% royalties. Over time, you will start to see that percentage kind of grow over the coming years, but today it's about 7%. Royalties are virtually a 100% margin flow through to the business. Tech fees. We charge about $300-$700 a month for tech fees. Each franchisee per month pays that as part of the support that we give them on the POS, the mobile applications, our digital platform. It's about 50% gross margin.
When you actually burden that with a lot of the investment we make in CapEx, which is highly invested in technology, the overall cash outflow or margin of that is lower, but at a gross profit level, 50%. Training. We provide upfront training, ongoing training for franchisees who are looking to replace or hire new instructors. We make sure they certify them, so the brand standard and the way we operate is very similar. About 90% gross profit on training. Again, there is labor down in SG&A that supports that, so that's not the true walk-away margin on training, but at a gross profit level, 90%. As I mentioned, we sell equipment direct to our franchisees. Equipment packages could vary. You have brands that are lighter equipment, like Pure Barre and YogaSix, heavier, which are things like CycleBar, BFT, Rumble.
They could range from $24,000 for an equipment package to $240,000. We do target about a 30%-35% gross profit on our equipment margins. Retail. We talked about retail. There is a shift as we kind of look at retail going forward, but historically, and the way you should think about it for now, is retail will be about 8% of revenue, and we typically generate around 25%-30% gross profit on retail. Again, fully burdened with some of the costs in SG&A. It's not our true walk-away, but from a gross profit, about 25%-30%. Marketing fund, 2% of system-wide sales. The beautiful thing about marketing is system-wide sales keeps growing. We get to spend more on marketing to really kind of continue to drive brand building and advertising for our franchisees. It's a 0% pass-through. There are periods for which we may bring in more.
Like in a quarter, we may bring in more marketing fund and not spend as much. There are other periods where we spend more but not bring in as much, depending on timing and what we're trying to do from an approach there. In essence, in the long term, marketing fund, what comes in, goes out. You'll see in our P&L kind of going forward, pretty much everything that's coming in now, we're kind of matching and spending to ensure that we deploy those dollars. Our other service revenue, think about this as all else. The one big driver in there is the credit card processing at our POS. As I mentioned, it's about 1% of our system-wide sales. We have our brand access and partnership revenues that are here. XPlus, our on-demand product. XPass has historically been in this line. It's sunsetting.
There's really immaterial dollars that are being recorded there around XPass. Then historically, our company-owned studio revenue is recorded there. Today and going forward, you could think about other revenues being about 8% of our total revenue, and it's about 95% margin. High-margin business. International. International is a little bit different in the way we think about how we generate revenue. It has a little bit more of a cash treatment aspect to it, but kind of walk you through the phases of how we generate revenue on the master franchise international approach. As John kind of just spoke to, we identify a master franchisee in a territory. We typically sell them the rights to act as mini exponentials in those markets. They pay us an upfront fee for the rights to be able to operate as us.
We take that initial fee and we spread it over 20 years. Typically, they're 10-year agreements, but with the assumption that if master can possibly sell a franchise on the very last day of their 10 years, that franchisee has a 10-year franchise agreement. The 10 for the master plus a potential 10 exposure with a license on the back end gets us 20. That's why it's amortized over 20. That specific is not treated like cash. It has a longer amortization on that revenue. Once you engage the master, they start selling licenses to sub-franchisees in those markets. We typically negotiate an upfront rev share or margin split with the master, usually around 30%. When a master sells a license for $60,000, we take a 30% cut, which comes to us because we don't have the obligation to, in essence, serve that sub-franchisee.
Our obligation is to the master. We're able to recognize that 30% upfront. Lastly, when that franchisee then gets open, they'll buy an equipment package. They'll start buying some merchandise in retail. They'll start generating royalties. The 30% margin share that we have with that master will typically apply to these lines as well. The beautiful thing about the international business is you have mini exponentials or mini masters that are spread around the globe, growing your footprint internationally. They are the ones who are burdened with the SG&A cost of operating it. We just get a rev share off the top. Now, we do have costs associated with international expo, but the burden of really growing the footprint is on the master. It's a very highly cash-generative business that we continue to keep focusing on.
One thing I've gotten this question a few times is all the revenues that we generate on the international front, license sales, retail, equipment, royalties, those all get recorded in the same P&L lines as we do in North America. We don't have a special breakout and treatment. They're actually buried in the lines respective to what they are. The actual amount we charge for the upfront master franchise agreement really varies on the size of the market. Something like Spain will have a different total cost of buying the rights for that territory versus something like Australia that has a much larger potential. We price the MFAs based off of the size of the opportunity. All right. Let's talk about royalties and our revenue stream over time. As I previously mentioned, about 75%-80% of our revenue is reoccurring.
The mix of revenue continues to gravitate towards higher margins, and this is being driven by royalties. Royalty generation has grown on average $20 million a year since 2021 to 2025, and royalties are expected to make up this year about 42% of our total revenues. The increase is being driven by not only our current install base of studios, which is continuing to comp at positive same-store sales. We're seeing AUVs grow, but we're seeing new studios being added to the portfolio, and they're coming on in brands with higher AUVs. The core ones we've been talking about, 50% of most of the openings are Club Pilates, StretchLab, YogaSix. These brands are coming on at higher AUVs, which contribute to more meaningful royalty production.
In periods where you have higher studio openings, you'll see that our equipment historically has been a larger proportion of our total revenue, but now we're focused on really opening up studios in brands where the franchisee health is stronger. Even though our overall revenue is getting better from a margin perspective, you will see ebbs and flows depending on how many studios we're opening in a given period. When you look at our gross profit, it was 73% in 2021. The key takeaway on this slide is really showing that as we continue to operate and see really strong health of our franchise system and royalty production, the revenues may be flat from 2024 to 2025, but you're seeing the gross profit get better. You have juicier revenue streams that are growing as we drive more royalty production.
All the other revenue streams have been virtually kind of stable over the last couple of years. All right. So, where is the growth in system-wide sales coming from? It's not only coming from the net new studios that we're adding, but you can see some of our older cohorts are still driving healthy system-wide sales growth, which converts into royalty production. As the growth in system-wide sales over time has come from maturing install base, as depicted here, the layering of new cohorts of studios has continued to drive and compound every year higher system-wide sales. All right. Focusing on, okay, we know the install base is growing. We know that the new studios are helping drive growth. What are the brands that are really driving this?
So, again, focusing back on the core four brands, Club Pilates, Pure Barre, StretchLab, YogaSix, they're making up almost 90% of the system-wide sales in the most recent periods. This is why these four brands are so important. With 90% in the most recent periods, the overall growth in studio count in these four brands, which carry higher AUVs, means we're looking at a portfolio of studios that are actually becoming healthier as we expand the system. All right. The key message on this slide is the AUVs that we look at are really the key performance indicator on the health of the franchise system. The overall health of the system is very right-leaning. What I mean by that is when you kind of draw a line in the sand as where's the break-even from our franchisees.
We designed the studios to generate a $500,000 AUV and generate around 25%-30% margins on average, which means that you probably have a break-even point or need to generate about $360,000 a year of revenue in order to be at break-even. The majority of our studios are far to the right of that break-even point. If you run a Pure Barre model, which we talked about, and run more of an owner-operator model, the break-even point can actually be a little bit more to the left, and these studios still can generate positive EBITDA or profit. When you look at Club Pilates and some of the growth that we've seen there, our class of $1 million plus studios has continued to grow over the last couple of years.
As we bring on more studios, again, I want to reemphasize the point that our whole portfolio is actually getting healthier as the system has continued to grow on a net basis. Yeah. I think I'll leave it at that. I mean, one of the key things too is we have seen a lot of closures in the portfolio over the last year and a half. The one good thing about getting these out of the system is you are starting to see a healthier system overall. As we do expect to see probably about 6%-8% closures this year, it's going to be in this end. This is when we talk about the bottom 10%. You're talking about studios that are probably $250,000 and less. These are probably studios that won't persist and will end up closing.
Once we kind of manage through this part of the process this year, you'll start to see that the closure rate will start to decline in the coming periods. Let's kind of double-click on the four core brands. About 75% of the studios, our total studio base, is in these four core brands. The overall distribution really illustrates that this is a healthy base of studios in the four brands. Club Pilates has the best profile. Again, break-even point, the majority of these studios are to the far right. We talked about Pure Barre being a little bit unique as when we bought that brand, kind of the first generation of franchisees that entered. They ran it more like a hobby. They run it much lower AUVs. It's an owner-operator model.
The break-even point is a little bit on the lower end because of that, but the far majority of these franchisees are to the right of their break-even point, which we kind of think is closer to $250,000-$300,000. These franchisees, as far as being in operation, have been in operation for years. They have found a way to be able to operate at lower operating costs. The franchisees in Pure Barre that have come on since we have bought it, if you look historically, their AUVs are more to the far right. The newer franchisees that are opening are doing much better. One interesting thing about Pure Barre, and we talked about this a little bit earlier, is in the first quarter, their AUVs were the highest in that brand's history. This is a brand that has shown really strong same-store sales, increasing AUVs.
Even into Q2 of this year, right now, they're showing really strong same-store sales comp. Really like the attractiveness of the brand and what it could possibly do over the coming quarters and years. YogaSix, really steady eddy brand, good solid growth, AUVs, majority to the far right, good same-store sales comp, just a good distribution of franchisee performance in that brand. StretchLab overall has a healthy distribution. We have seen a pullback in AUVs and some negative same-store sales in that brand in the last couple of quarters, but we do feel like we've made a lot of the right adjustments, and we're starting to see AUVs now stabilize around that $500. The goal is to get it back up to $650, so franchisees are generating a higher level of profit at the studio level. All right.
We talked about the four brands, healthy distribution of AUVs. Where's the future pipeline of growth coming from? When you look at the 1,500 sold but not open licenses in North America, Club Pilates, StretchLab, YogaSix, and Pure Barre make up 900 of those licenses. This is where you're going to see that growth. You're going to see it in brands that are performing very well. International has another 1,000 licenses that are obligated to get open through our master franchisees. When you look at kind of the blue columns there, the active, non-delinquent opening obligations, these are studios that are actively looking. We expect to get open, but there's about a third missing in each of those columns that is not active.
When we talked about on the Q1 earnings call, we have a real kind of approach now that we're taking to re-engage with these franchisees, find out why they're not moving forward, try to get them moving forward. If we see no action, the likelihood is we'll end up terminating those licenses. I want to make sure that's clear that we are actively trying to get these franchisees who are delinquent on their development schedule moving again. Talking about future franchise license sales, we were dark in Q4 and Q1 of this year. We're now active in most states and selling licenses again. What is the expectation around franchise license sales going forward?
It will take us a couple of quarters to get the pipeline up and running again, start getting prospective franchisees into the system, but the expectation should be that we have almost an evergreen approach to our backlog, meaning if we open 100 studios in a quarter, we want to try and sell about 100 licenses, if not more, to kind of keep a nice evergreen approach to growth. Today, about 75% of the license sales are North American, 25% international. I feel that's about the same mix that you'll see for the coming years. All right. We talked about growing top line, reoccurring revenue. The second component of really the success of growing profitability and leveraging adjusted EBITDA to continue to expand is getting control of SG&A. You could see our top line there, total revenue has almost doubled or overdoubled over the past five years.
SG&A has been very volatile in the last five years. There's a lot of one-off things that you guys have given us feedback on. It's like, how do we kind of stabilize SG&A? We've talked about like, hey, we do believe we have a stabilized run rate, but we got to start kind of nipping in the bud some of these one-time things that create this volatility in SG&A. What have those things typically been? We've done financial transactions, whether it's refinances or secondaries, restructuring costs. We spent some time over the last kind of 12 months going through a little bit of restructuring. Company-owned studios, operating expenses. In prior years, in 2023, you could see that the SG&A was much higher. We had a lot of company-owned studios that we were dealing with. We've ended that.
We've been working a lot in the recent kind of 2024 and 2025 of getting these leases settled. That's created some volatility. Obviously, the one-time legal defense and settlement costs continue to kind of be part of our SG&A. The good news is, if we can get these one-time things behind us, both the legal and the restructuring, you kind of remove your equity-based compensation, you could see, as I've been talking to you guys, we do believe that this $100 million run rate, SG&A, is about the right level. This does include all the costs associated with the initiatives that John and Tim and Mark have been speaking to. As we've kind of laid out these initiatives, what we've done is we've really reduced costs in one area and added it in another and kind of reinvested in the business.
We continue to keep gravitating towards this $100 million. So, we feel like that's the right level going forward. As you focus on 2026 and 2027, there may be some inflation around labor and SG&A, people costs. But outside of that, you should not see, once all these one-time things have concluded, a lot of volatility in our SG&A. All right. Probably the most important slide that we are going to give to you guys. I have not provided this level of detail historically, but it should be pretty revealing that these brands, these four core brands, have a lot of value. Club Pilates, StretchLab, Pure Barre, YogaSix, they make up 75% of our total open studios. Healthy AUVs, good distribution of AUVs, profitable franchisees. 90% of the system-wide sales, 90% of the royalty generation is coming from these four brands.
Same-store sales, three of the four brands, positive same-store sales. StretchLab, we're addressing that. You roll into Q1, these brands, positive same-store sales. Rolling into Q2, positive same-store sales outside of StretchLab. We are still continuing to see in a more volatile macro, these brands continuing to perform. Adjusted EBITDA in these four brands, before the corporate allocation, $160 million of adjusted EBITDA. The other four brands make up 11% of the total system and drive $5 million of adjusted EBITDA before the corporate allocation. International, another 15% of our total system and $9 million today of adjusted EBITDA. You heard me talk about $100 million of SG&A. The corporate allocation or the corporate overhead at Xponential is $57 million. What that means is $43 million of the SG&A is already embedded in the brands.
This is the amount that we allocate down to the brands on the expo platform. So, when you think about $57 million divided by 8, maybe you divide it by 9 if you want to include international in that mix, this is where we talk about brand rationalization, where if these other brands can't support the corporate overhead or start growing in revenue, we need to think about a different alternative to rationalize these brands in the portfolio. Do they belong? Can they grow? If not, we need to think about a different strategy there. The key takeaway here is you look at Club Pilates, last year, this is 2024 numbers, did over $100 million itself in adjusted EBITDA. All right. Let's talk about free cash flow. Where's the cash going and why don't we have more of it on the balance sheet?
Adjusted EBITDA is kind of the top line, little rainbow line going up and to the right. It has continued to grow over the past couple of years. We spend $8-$10 million a year in CapEx, so our free cash flow conversion is about 90%. When you start looking at it levered, which you look at adding your interest, your taxes, your dividend payments, you could see that our levered free cash flow has kind of been in the 40% range over the last couple of years. Our actual cash flow has been somewhat anemic over the last five years. What's driving that? Same thing. We have done a lot of brand acquisitions. This is good. We have added some really good brands to the portfolio, but we have used cash to do that. We have run a number of financial transactions. It has consumed cash. Restructuring.
We've done some restructuring, but that's over now. We have been paying off a lot of company-owned leases. Last year, over $30 million in cash went out the door to settle leases. Still doing a little bit of that this year. We talked about on the last earnings call, there's about $14 million of holding value of leases on the balance sheet. We believe we'll settle those for much less than the $14 million, but still cash usage that's in the business, but should be resolved this year. Obviously, the one-time legal and defense and settlement costs, those are still going to exist until we resolve those issues. The good news is we do have insurance that is, in effect, offsetting most of the costs that we have this year. A little bit of timing issue with the insurance companies, but we're getting through that.
Kind of pointing at 2025, if you just simply look at the levered free cash flow, we should generate around $40 million. Our projection is of $19 million right now. We're still evaluating that. We think we could do a little bit more as we kind of assess how much insurance dollars we're going to get back on some of the legal stuff. I want to kind of pinpoint on the $40 million on the levered free cash flow as we look at the coming years. Going forward, the ability for this business to generate cash is really strong. We've got to get these one-time things to come to an end. If you assume that by the end of this year, we get a refinancing done, our levered free cash flow should increase to 50% or over 50% in 2026.
With the business continuing to grow, 2027, over 60% levered free cash flow. The EBITDA numbers here are consensus. It's what you guys have put out there. We feel very comfortable with what you guys have kind of put out there from a 2026 and 2027 number. So, we're using those. If we're actually able to see somewhat of an appreciation in our stock price at some point, we'll be able to eliminate the $8 million dividend, which would further improve the 2026 and 2027 levered free cash flow. This is a very highly cash-generative business. As long as we could be more disciplined on the one-time stuff that have been kind of plaguing SG&A, this business should be putting off a significant amount of cash towards next year and the following year going forward. All right. So, what do we do with all that money?
The prioritization of capital allocation in the short term is simply going to be accumulated on the balance sheet. As we position the company to return to growth in 2026, I want to make sure we have the right capital to reinvest back in the business and really just support organic growth in these four core brands. Our preference on paying down debt versus share repurchase is really a function of what is our cost of debt and the share price when we have the ability to do either of these things. At this point in time, that'll be a decision we'll make in the future, but it is a function of the cost of capital between those two at a future point. We are going to remain opportunistic around M&A, but in the near term, there shouldn't be any expectation that we're going to buy another brand.
Our focus right now is on the four core assets, growing those as quickly and as fast as we can. All right. Let's talk about kind of our expectation around debt leverage. As we continue to grow the brand, continue to drive more EBITDA, we should get more cash production. Again, using the same consensus for adjusted EBITDA. Today, we are about three times levered. We guided the street to $120 million-$125 million, so we will call it $120 million. Two and a half for 2025, three times levered. On a net debt basis, assuming the debt we have today and generating cash, by 2027, this business could be one-time levered or less than one-time levered in just two years out. It really shows you the power of the production of cash that is built into this business model. Guidance. We are reaffirming guidance today.
Given today's outlook on the business, NetNew Studios, system-wide sales, revenue, and adjusted EBITDA, we're very comfortable with what we put out there. This guidance does reflect the current business conditions, so we do believe this is an accurate portrayal of where this business is going to land. We mentioned in our Q4 earnings call that 2025 is really a reset year for this business. We want to make sure we make the necessary investments, the things that John and Tim and Mark have talked about, to kind of transform this business to be able to grow in 2026. We feel this is a really relevant and probably the correct range for you guys to expect the business this year. How do you think about the business going forward? We did this analyst meeting three years ago, provided three-year targets. We're not going to do that today.
What we really want to give you guys is there's so many moving parts in this business as the way we're trying to transform it and get it returned to growth. We think it's more appropriate to give you guys more of a growth algorithm of how to think this business growing from 2025 to 2026, 2026 to 2027. That being said, we want to put a more sustainable, predictable growth profile in front of you guys and really focus on franchisee performance to drive exponential financial performance. Going forward, the company is going to target NetNew Studio openings at about 10% growth per year. What that means, as an example, if we have 3,000 studios open, we want to try and grow next year by 300 studios, 10%.
System-wide sales, mid to high single-digit % year on year, again, being driven by the current install base, copying at a positive rate, mid-single-digit %, and adding new studios. Revenue growth to be in the high single to low double-digit %. Adjusted EBITDA to grow 10% annually. We feel that's a really good conservative kind of stable growth that does allow us to continue to reinvest back in the business as needed. Adjusted EBITDA margins to be in the 40-45% range. We talked about 45%. Is that an achievable adjusted EBITDA? It actually is. In Q1, we had a number of months that actually we achieved over 40% adjusted EBITDA margins. Again, there's volatility quarter to quarter, but we do believe getting to 40-45% over time is a very achievable range. Levered free cash flow we talked about, over 50% next year, growing to 60%.
Again, being able to get a refinancing done is key for this business to drive more cash. Then, obviously, at some point, being able to convert the preferred shares and eliminate the $8 million a year dividend that we pay will help drive additional cash into the business. All right, lastly, summarizing the walkways from today, the company has been really focused on realigning the business to return to growth in 2026. We're focused on strong top-line growth coming from a healthier franchise system. We're focusing on new studio openings and brands where we've proven them to be successful. We're enhancing the performance across all our studios by growing revenue streams that have higher margins. Again, revenue, royalties being the bigger portion of our revenue distribution. We continue to expect to see that. Doing this all on a stable SG&A base.
So, all these actions will result in increased profitability and cash generation over the coming years. With that, we're going to pause and take a break so we can set up for Q&A, and then we'll be back in a few minutes.
I love it when you call, please, in your deep thought. I wish I could pretend I didn't need you, but every touch is ooh, la, la, la. It's true, la, la, la. Ooh, I should be running. Ooh, you know I love it when you call, please, in your deep thought. I wish it wasn't so damn hard to leave you, but every touch is ooh, la, la, la. It's true, la, la, la. Ooh, I should be running. Ooh, you keep me coming for you. Acting that hotel. There's just some things that never change.
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Hold you tight, squeeze you right, tell you what I want. Put me in your bedroom and I'll sing a little song. Hold you tight, squeeze you right, give you all I've got. See you in the morning, over coffee, we'll talk about. Is it ever going to change? Am I going to feel this way forever? Are you going to be around for me to count on? Is it ever going to change? Am I going to feel this way forever? Are you going to be around for me to count on, count on? So she said, "What's the problem, baby? What's the problem? I don't know where. Maybe I'm in love, love. Think about it every time I think about it. Can't stop thinking about it. How much longer will it take to cure this? Just to cure it 'cause I can't ignore it.
If it's love, love makes me want to turn around and face me, but I don't know nothing about love. Come on, come on, turn a little faster. Come on, come on, the world will follow after. Come on, come on, because everybody's after love. I said, "I'm a snowball running, running down into the spring that's coming. All this love melting under blue skies, belting out sunlight, shimmering love." Baby, I surrender to the strawberry ice cream. Never, ever ender. All this love, it didn't mean to do it, but there's no escaping your love. These lines of lightning mean we're never alone, never alone. No, no. Come on, come on, move a little closer. Come on, come on, I want to hear you whisper. Come on, come on, settle down inside my love. Come on, come on, jump a little higher.
Come on, come on, if you feel a little lighter. Come on, come on, every once upon a time in love. We're accidentally in love. Accidentally in love. Accidentally in love. Accidentally in love. Accidentally in love. Accidentally. Come on, come on, spin a little tighter. Come on, come on, and the world's a little brighter. Come on, come on, just put yourself inside her love. I'm in love. Anything I don't know about, I'm kicking him.
No, no, I always kicked it. I supposed to.
Is a, okay, live. Test. Testing, testing.
You do not get paid extra.
Testing.
I'll have John take that. I'll have John take that.
All right, we'll let Randy and Dean help me in.
Testing. All right, we're good.
Thanks, everybody. I thought the presentation was actually very thoughtful and very clear.
I wanted to talk about the, you know, breaking down the business in terms of the culture and the processes and just give us some perspective on where we are with that internally. But then also, more importantly, how are the, how has that messaging come across to the franchisee base, the existing franchisee? Have they felt that yet, the changes that have been taking place so far? And then I have a follow-up. No, go ahead.
Yeah, I think, you know, changing our culture is probably the most significant thing that we're in the process of right at the moment. We're definitely hearing it from franchisees. I think they, I think they're, you know, from what they were used to, you know, they're respecting the fact that there's a more common sense approach to how we run the business, how we think of their business.
We've, you know, in general, really good response to the changes that we're making. I think everyone understands that, you know, it's a transformation. It's not a quick change. Generally, I'd say very well received.
Great. The one thing that's different about this presentation from a couple of years ago is there was a lot of focus on the core four businesses and the disproportionate amount of financial impact on the total corporation. There was a lot of non-focus on those other businesses. Maybe give us some perspective on the decision-making processes around those other non-core four brands and what options may be in the cards for those brands. What are the different routes you can take to do something there? That'd be helpful. Thank you.
Yeah, I mean, looking at it through a financial lens, it's really about where do you allocate your capital. Being a portfolio platform kind of business, we need to make sure we're being efficient with the way we're spending our dollars. You look at Club Pilates today and it's generating, you know, $100 million of EBITDA as a standalone business. Do you invest $10 million in Club Pilates to grow it, which we've seen really good success? Or do you spend $10 million trying to turn around a brand that's like, let's say, CycleBar, for example, that's shown a lot of struggle? You have to figure out if that's possible and it's worth spending the money and the ROI is there, is that where we want to put the money? You know, we've spent a lot of time thinking about this.
You know, at our peak, we've had 11 brands in the portfolio. We're at 8 today. Directionally, I think we'll have less brands in the future than we have today. We could really focus all our resources, not only the people resources, but the capital resources on the things that are going to generate the best ROI for our investors, our shareholders. We want to focus on things that can be successful. From my lens and perspective, you know, the four core is where I see the growth coming from. It's where you're seeing the success with the franchisees. The more successful they are, the more likely they are to open more business. The ROI starts compounding just on that.
The brands that are not kind of covering their fair share of the corporate allocation, if they can't turn around in a short amount of time, you know, we need to think about what strategic alternatives are there. The strategic alternatives we've done in the past, like AKT, we just kind of divested off and there's still AKT's operating, but they're not affiliated with Xponential. We sold off Row House to another buyer. We do feel like some of these brands that we have created have a lot of value. Probably, you know, when you look at this, they're worth more than our total market cap as a public company. Some of these other brands, even though they don't generate a lot of EBITDA, have real value still. There is the potential that we could, if we decided to sell these off to a buyer and get proceeds.
We're not going to get rich by selling off some of these brands if we decided to do that, but you know, they will generate some amount of cash inflow to the business. The nice thing about rationalizing the portfolio is the overall health on average gets better. You know, our closures should go down. AUVs will go up. Some of these brands that have negative same-store sales, you just start to see a more healthier portfolio. It's like a stock portfolio. You keep the good ones, you get rid of the bad ones, you know. Same kind of a logic applies here. Thank you.
Thanks. Good morning. I guess first question just to follow up on that, John, if my math is right, the four non-core brands are roughly a drag of about $20 million on your corporate EBITDA. Is that correct?
Is it realistic if you did divest those brands that you could effectively rationalize their corporate overhead? Yeah, that's a key point. I'm glad you asked that question because I didn't really mention, you know, in the SG&A, if we did decide to downsize the portfolio, there is an action that would be required to avoid deleverage in SG&A to reduce the size of our SG&A. There is a drag when you actually do allocate some of the corporate head onto these brands. It really comes down to the logic. You know, we've argued internally, like how much corporate allocation should you put on Club Pilates versus, you know, CycleBar versus Pure Barre? Is it the size of the studios? Not really, because Club Pilates is, it's on cruise control as far as it just grows on its own. Franchisees have opened their first unit.
When they open their second and third, there's really not a lot of burden on SG&A. There is a little bit of debate internally on how you allocate the SG&A. Yes, you're kind of right. If you do put even just an even split of corporate overhead onto these brands, they do turn into a negative drag on the business. If we did rationalize a couple of brands out, we would also rationalize SG&A down to avoid deleverage and EBITDA going backwards.
Got it. Just to follow up, Mark, you led off the meeting talking about your pending departure. I'm curious, and I know we talked about this a little earlier in the break, but what are you looking for in your next CEO in terms of franchise experience, fitness experience, CEO experience, etc.? I think it's a very similar profile to myself.
I think it's a seasoned operator. There's still a lot of execution to go here. You know, I'm really proud of the work the team has done to, and you heard most of it, not all of it today, but you heard a lot of what we're going to be doing. I just think we need an experienced public company CEO. I think that's the profile. Thanks.
Thanks. Appreciate the question. You guys mentioned on the merch business, that was one thing you talked about, John, and trying to move to a kind of capital light system. Maybe just to contextualize it, what does merch contribute in, I guess, EBITDA today? And directionally, how do you view the kind of strategic shift in terms of like potential EBITDA contribution? Maybe you could go to either, John, really.
What do you view the kind of incremental EBITDA contribution, both from whatever this new deal is, plus whatever SG&A you save, blah, blah, blah? Go ahead.
I got this one. You know, in 2024, you know, we try and get around a 30% gross profit on retail. You know, last year it was kind of our Achilles heel, particularly in Q2 when we just got to a point where inventory levels were too high. We did a lot of, we had a lot of pricing pressure. We wrote off a lot of inventory. In a normal business, you know, with the burden of the warehouse, by the time you get to the bottom line, there is really not a lot of EBITDA contribution on our retail.
It becomes, to John's point, more of a distraction to the core business than probably better suited to get it into somebody who does this as part of their specialty. As you think about a transition from the way we do it today, which contributes zero EBITDA to maybe a more capital light third party who does this, you know, the arrangement that John spoke to, I think you could probably assume after we are able to remove some of the operating costs in the business today by 2026 to see somewhere north of $5 million of actual EBITDA contributions. I'm saying that conservatively because, you know, I want to make sure we give ourselves room to continue to execute, but you'll turn a zero profit business into at least a five, an incremental, if not more, $5 million adjusted EBITDA benefit.
When you think about a licensed business like that, is that just a fixed royalty? Is it depending on scale of whoever takes on the business, like their performance, kind of how does that kind of arrangement get structured?
Yeah, the thing that what we're in discussions at the moment is we're contemplating a structure that would pay a minimum guaranteed royalty. There's a, and that's based on a, you know, kind of a set volume that we would expect to do in the year. Anything over and above that volume would pay incremental royalties. We're contemplating as well a piece to this that we're really quite curious about and we think there's a lot of opportunity and that's a direct-to-consumer play. As you can appreciate, our studios are small. They have really, you know, kind of not much room to merchandise product.
Yet we think that there's demand fr
om members to buy things that aren't necessarily on the wall or, you know, on the fourway. It will be a system where we can attribute where the member's coming from so that we can look after the franchisee. We think there's upside there.
I think over time the direct-to-consumer piece can be as big as the wholesale piece.
Maybe the last one I'll pass it on is just on StretchLab. You've had a few months now to try implementing some new strategies. Have you seen that resonate in the market yet? Have you kind of, I guess with respect to AUVs and trajectory, you see any kind of green shoots you see based on, you know, initial actions?
Our AUVs have started to creep back up, not to a level anywhere near where we want them to be.
We're, you know, as much as that business is in the early innings, we're in the very early innings of implementing some of these things that we've been testing. I think the business will benefit, you know, back half of this year, but conservatively, I think we'll start to see an impact on th
e business in 2026.
Hi guys, appreciate you taking my questions. Maybe one for Tim, if we could start kind of on the conversation around reducing some build costs. I think potentially you said in there some potential royalty changes for certain geographies. Just wondering, you know, if we can break down how much does that apply to kind of the four core brands versus maybe all the other brands and, you know, how drastic of changes are you thinking really are possible, especially when we think about the core brands?
Yeah, good question, JP. Thanks. I want to clarify reducing of fees does not necessarily mean royalty, right? Royalty is one of our best EBITDA generators. So royalty I would look at as a sacred cow that I'm not going to mess with. But there are opportunities for us in our install packages and our costs to directly to franchisees to reduce fees and to help them execute quicker, stronger, and better from the get-go, as well as just a rationalization of what the square footage looks like to be as profitable revenue generating as possible, meaning even simple things like the amount of signage that we require, the size and layout of lobbies versus the areas where modalities are actually utilized.
Okay, fair enough.
John, maybe for you just, you know, the conversation about the refi, not sure how you want to address it, but just, you know, what's your confidence that something like that could be possible coming out of the year this year?
Yeah, I mean the refinancing for us, we've gone two different approaches, a direct bank lending and then we also have been looking at a securitization. We feel both of those are good options. One, you could execute quicker. One has a little bit longer of a tail. The opportunity for us to get a refinancing has really kind of been hung up in the regulatory issues that the company's addressing. The sooner we can get those resolved, the sooner I think we could activate on a refinancing.
Listen, I don't know, you know, we continue to be supportive on that process, but outside of that, the timing's kind of out of our control. I do feel we're making good progress, you know, as we've worked with these various agencies. You know, I'm hopeful that by the end of this year we should be able to at least start getting activated on some sort of refinancing.
Sorry, just to follow up on that, is there a way to think about those two different options and do both of those require all regulatory issues to be done or is there flexibility around one of those options giving you more freedom to get it done sooner?
I think the approach that we've kind of worked with, like on the direct lending with the banks, for example, they really want to see us address one of the issues, have one of those be resolved. You know, on a direct bank kind of lending, you know, they want to stay three times under leveraged and if there is some sort of implication where there'd be, you know, a need or a fear of fine or something related to that, they don't want us creeping up from a leverage perspective. It really is just getting to a point where we could resolve, you know, one of the issues. I think gives them comfort that, okay, there's not a leverage issue here and they can move forward. I think it's just, it's time, you know, the business is performing well.
We just need to resolve one of the issues and I think we can get active on a refi. Great, thank you.
Hi, thank you for taking our questions. Just a quick one for John Meloun on the unit growth algorithm you gave about getting back to 10%. I know you did not put a timeline on it, but should we think of that as a 2026 issue once you get these closures out of the way or just when you think that you could get to that algorithm?
Yeah, I think when, you know, even this year, you know, we guided to, you know, just under 200 units. We will open, you know, somewhere between 350-400 new units this year, but the closures are obviously a little bit higher.
The 10% system, I think, you know, we have to get the license sales kind of back up to their normal run rate levels. You know, I think maybe not on a full year basis for 2026, but I think as you start getting on a quarterly basis and annualize that, we'll start getting to that 10% per year. Give us a little bit of time to start giving you feedback on how our license sales are coming. They're going to come in those four core brands primarily. International will contribute about 25% of the license sales. It takes about a year for those licenses once they're sold and they get their lease to get open. It's going to be probably more towards the back half or on an annualized basis. We'll start getting to that 10%.
2027, I feel comfortable thinking that we should be able to get there.
Thank you. I guess a little bit more broader of a unit question when you've talked about the core four driving most of the unit growth for the future. Where do you feel with the maturity of each of the four brands, particularly with Club Pilates since that's been, as you put it, the shining star of the portfolio?
I think Club Pilates, as we discussed earlier, has there's a lot of white space still. I mean, when you think about the, you know, kind of a ridiculously high booked to capacity number, 98%, and we know every day that the struggle that we have with that business is disappointing members that they can't get into class. It all suggests that there's a lot of white space for Club Pilates to grow.
I think there's a lot of space, you know, in the Pilates modality for growth. And so, yeah, we're bullish on our ability to continue to grow that business.
Yeah, I think when you think about Club Pilates and having about 1,000 open, we see a tan there easily today of twice that. So you're probably in, if you're talking innings, you're probably in the fourth, the fifth inning there. And that's based off of just the consumer today. And as that Pilates has continued to grow, I think some of the innovation and addressing a different demographic in Pilates could further expand, you know, where we stand there. StretchLab, you know, once we return those studios to a more profitable AUV, you'll see those franchisees want to open their second and third units. I think that's still in the, you know, the probably the first half.
I don't know if you call it the third or fourth inning, but a lot of room for StretchLab as we kind of innovate and drive there. YogaSix, very highly fragmented. I think we could, you know, there's a lot of YogaSix studios. I think, again, our ability to continually grow, drive good AUVs and profit, I think you'll see more people come into yoga and open studios. Pure Barre is an interesting one because we've sold a lot of Pure Barres, opened a lot of Pure Barres. There's not a huge snow related to Pure Barre, but the brand itself is kind of seeing a resurgence.
If you were to ask me maybe a year ago, I would say we're probably in the seventh or eighth inning, but I think you're starting to see extra innings with that brand as we continue to drive better profitability. Even if some of our older franchisees are starting to express an interest in wanting to open up more, I think there's a lot of white space in barre. It's one of the highly searched things when we look at, you know, what are people looking at for workouts. I think Pure Barre has a second wind to it.
Short answer, I think across these four core, there's a lot of room for us to still grow domestically and internationally is pretty much wide open, focusing on Pilates and BFT, but I definitely think you'll start to see our brands start to pop up more internationally as the brands become more recognized.
Great, thanks again for all the detail.
Okay, thank you very much. Any additional questions? Okay, cool.
Hey, thanks for taking my question, guys. How are you working more closely with weaker performing franchisees to improve their financial performance? And can you dive a bit deeper into some specific strategies or support, you know, being provided to them to help them succeed?
Yeah, absolutely. One of the first things we instituted at the beginning of this year was a PIP program or a performance improvement plan.
One of the key tenets in my history of working in franchising is building that partnership of their plan together, right? It's an influence strategy on how they can really own their results versus us trying to, you know, lead a horse to water per se. But the performance improvement plans have seen some really good success. And to the earlier question around culture, it is also a shift that we're saying, hey, we want to help ahead of time before you're trying to raise the white flag. And it's been exceptionally well received with a multitude of franchisees across multiple brands. Thank you. Any more questions?
Oh, man. I figured if the floor is open, you'll take it.
You talked about access to kind of health plans as one of the strategies, especially on StretchLab.
I know last year one of the big health plans kind of moved off and obviously we're lapping some of that impact now. Are you in, is there anything specific, I guess, that you're in discussion with? I know that would be whatever, like a third of the market or something, but is there a, I guess, possibility of that plan coming back or do you view other possibilities?
We miss them and they miss us. You know, these things can only be designed on an annual basis because of Medicare timing and things. It is an issue that we're working on now. We believe pretty strongly that we're going to be back in that game with that partner. And it's significant to your point.
If you look at the, you know, kind of the drag on StretchLab in same store sales, it represents about half of the move downward. So it's significant. So we will fix that.
Got it. That's helpful. And then I guess on the closure rate, the 6-8%, is there a way to like disaggregate how much of that is coming from the non-core brands? Like for example, like a CycleBar, how much is that contributing to the 6-8%? And what are the AUVs even at a CycleBar that's closing?
Yeah, I mean a studio that's closing has low AUVs, right? It's not profitable. So as franchisees eventually just run out of money. That's it. So the AUVs could be anywhere from zero to less than $30,000 a month. It just depends on when the franchisee has a breaking point.
CycleBar, I would say, you know, when you look at Q1, the distribution was CycleBar, StretchLab, and then BFT on the international is kind of where a lot of the closures came from. You know, off the top of my head, it's always hard to predict which studios will close. You can again look at the histogram and anything short of the 360 is something we should be focusing on when you exclude Pure Barre from the mix. My guess would be about a third of the closures would be on CycleBar as a guess.
You probably have another 20-25%, you know, sprinkled through some of the more scaled brands, not Pilates, but you know, I think once you kind of get past that and you can again see on the histogram, there's about 10% of the system, you know, Pure Barre is included in there. That's where we're getting that 6-8% from. I think as we kind of go through this year, the real important point, you know, that I mentioned is the overall portfolio on average is healthier post these closures. They need to happen because they're going to happen at some point. If we could accelerate to get them out of the system, that's actually helpful because it creates an overall healthier profile to our business. About a third is what I would guess on CycleBar of the 6-8% this year.
Got it. I guess just on the from like a franchisee perspective, you know, a franchisee itself is quite operate, like quite operationally levered in the sense that positive same store sales helps them significantly just in terms of like incremental profitability. I guess looking at Club Pilates seems, you know, well ahead of where it needs to be from a profitability standpoint. StretchLab is being remediated, but I guess on YogaSix and Pure Barre, I guess how do you, relative to where it ended in Q4, say, like how are you thinking about same store sales growth in those brands? Do you guys have like AUV targets for where you think they will end? Obviously AUVs will benefit from both trimming the weakest units and growing those that remain.
I guess how do you view the AUV evolution of those two brands by the end of this year?
Probably easier to answer that in a same store sales because the AUVs, you know, Club Pilates, again, you're running into capacity issues, right? You saw the ramp curves. They get really quickly to a million dollar AUV and it's, other than really taking price, it's hard to kind of grow AUVs without either adding more classes or doing a side-by-side expansion, which some of the franchisees have done. Club Pilates today has continued to have between 5-10% same store sales. It's a very healthy brand. Pure Barre today is competing with Club Pilates on the same store sales.
I love kind of pitting the presidents against each other as a competition because Pure Barre has really kind of come out of the, like out of the, you know, broke out and really had positive same store sales. Again, 5-10% in Pure Barre. I mean, this is a brand that's somewhat mature and we're seeing really good growth there. YogaSix, I think, is a mid-same store sales kind of business. StretchLab today is negative. You know, we talked about that. We have some issues with some of the partners that we've dealt with. We've seen a little bit of retraction because of labor issues with flexologists and we need to get more of them and make it cheaper for franchisees to hire flexologists by bringing down the training costs. I think, you know, today it's negative.
If we can get, you know, StretchLab to zero to 5% same store sales, you know, in the next, you know, 12 to 18 months and really start turning around that brand, I think that would be ideal.
Each of us add a little bit to that. I mean, there are some levers for same store sales. One is pricing and we're not very sophisticated in how we do our pricing, which is a big initiative for Luis to look at. We worked with a consultant last year and that was the number one thing they identified for same store sales was the opportunity to take pricing. That's number one. Number two is, and again, it's on Luis's plate, it's all about member experience. It's not just while they're in the class, it's after the class and how do they, we become emotionally engaged with them.
I think that's a big part. The third is, and we've experienced this at Pure Barre, is new innovation in the actual exercising. We do very little of that. That's why for me, innovation really needs to be driven into all these modalities because when you're dealing with consumers at this level, it's new, fresh, and cool. If you're new, fresh, and cool, you'll drive it, then you can take pricing and AUVs grow. I guess I'll ask one more too. A couple of things. The franchisee lawsuit and the SEC investigation. Any idea on timing of resolution and potential out-of-pocket costs for you guys?
No. I wish I knew the timing myself.
I mean, listen, we continue to be supportive of the process, engage with these guys and, you know, try and get them to whatever conclusion they're trying to get to. The franchisee, we announced in our Q1 that we did come up with a construct with the franchisee class. The construct was $25 million settlement. Half would be paid upon court approval. So $12.5 million this year. The remaining $12.5 million would be over the next three years. So very manageable from a cash position. There are some insurance coverage that we expect somewhere between $5 million-$10 million to offset that. It's really just a function of when the courts approve it. It's the timing around that. I think we're estimating sometime later this year.
But the SEC, listen, at the end of the day, we're doing everything we can to move that along as fast as we can and be supportive.
Okay, thank you. Thank you for coming. Bye-bye.
Anyone else? Go ahead.
Oh, one more. One brand we didn't touch on today is Lindora. I'm wondering what you see for that brand going forward.
They always give that one to me, so I'll take that one. I think when we bought it, there was a big vision for how we could really kind of put fitness and wellness together. A lot has happened since we bought that brand. One is a lot of the business has gone to GLP-1s and that is a very uncertain future on what's going to happen with GLP-1s when they're compounded. That is an issue going forward. The space has just become very clouded.
There's a lot of entries. It's, you know, there's all kinds of different things that people are putting into these wellness centers, not really sure where it's going to play out. That's one that would really require a lot of capital and investment over a long period of time. We're taking a hard look at what's the future of that for us.
I'll ask one more and maybe a somewhat unfair one, but, you know, boutique fitness has obviously been very popular across categories. You've seen kind of Solidcore trade relatively recently. You've had fitness in general also be relatively popular. You know, Crunch also just traded, I guess. Being public has been tricky.
Have you had, I guess I'm kind of thinking just as you think strategically about the business, have you had, and maybe this is a board question, but have you had interest from private equity or outreach and kind of how do you think about engaging with options strategically? Listen, it's all yours. You know, yeah, we've had a tricky public, you know, past, but I think, you know, we're doing the right things to get this business on track and back to, you know, it continues to grow and expand. Listen, I think the valuation today is quite low in my opinion, but I understand why given some of the historical issues the company's been faced with. You could rest assured we have a very engaged board and we've had a lot of engaging discussions on the long-term direction of this company.
You know, at this point we're focused on driving profit and driving cash, and we'll let the cards kind of fall where they lay on whether we stay public or private. At this point we're a public company and that's our focus is to really just drive shareholder value. Well done.
No more.
That was an unfair question. That's it. Yeah. Okay. Thank you everyone. Thanks everyone.