For those of you that don't know me, I'm Alex Perry from BofA Global Research. I'm really pleased and excited to have Xponential Fitness with us here today, including Anthony Geisler, CEO, and John Meloun, CFO. Xponential Fitness is the largest provider of boutique fitness globally with 10 brands and over 2,600 studios open across multiple different modalities. XPO has fully recovered from the pandemic, with a run rate AUVs now 10% above 2019 levels. I'm going to lead off some Q&A, and then I'll open it up if we have any audience Q&A. Thanks again for joining us today. Just first, it seems like the, you know, portfolio is pretty broad-based now with the BFT acquisition. Can you talk about how you're thinking about, you know, the broader portfolio and how you think about maybe scaling current brands versus, you know, another potential acquisition?
Yeah. I mean, where the company sits today, we've got about a four to five-year backlog. You know, we've sold about 2,000 franchise units that are yet to be opened in the United States. Those are currently in development. The size of the business will almost double if we don't, you know, sell another franchise. Given kinda the macro headwinds that people are talking about, and we're not seeing those in our business. Our AUVs are at all-time high. Franchise sales is at an all-time high. Store opening is all-time high. We're comp 25% last year, 17% in Q3 and Q4. We're looking at the headwind, we're seeing the macro. We're not seeing it in our business.
Our business continues to excel, quarter-over-quarter and kinda hit, you know, company records. We know investors are, you know, concerned about interest rates, inflation, now banks. Given that, we don't, you know, wanna give anybody any worry.
Mm-hmm.
About any future risk or executional risk and those kind of things. I, like I said before, if the company was private it would probably have 11 or 12 brands today. There's definitely, you know, acquisition opportunities out there and dialogue that I'm having.
Mm-hmm.
You know, at any time, we're probably 30 - 45 days away from, you know, being able to acquire something, you know, kinda in the mix. When the opportunity arises, you know, everything out there is, you know, probably not getting more expensive, as time goes on. We'll just continue to keep our heads down, continue to keep, you know, hitting our 500 - 600 openings and continue to keep increasing AUV.
Could you maybe we'll step back and talk about your sort of journey through the pandemic? I think you sort of led the overall fitness recovery. You were the first, you know, publicly traded fitness company to sort of surpass, you know, 2019 key metrics. We had an Omicron spike in January of last year that obviously wasn't great for the industry. Maybe talk about, if maybe there's not as much seasonality in your drawing periods, but how you were able to recover so quickly coming out of COVID?
I mean, I think we recovered so quickly coming out of COVID because we went into COVID very slow, you know, we had to make a decision on whether, you know, it was gonna be a fight or flight kinda type position. Some of our competitors said, "Hey, we're just gonna close up and basically, you know, kinda wait this thing out, wait the storm out." I got all the franchisees together on a call, and I said, "This is our Lieutenant Dan and Forrest Gump moment." "The storm is big, but the boat's bigger and so we're gonna go out. We're not going in for safe harbor. We're not tying up. We are gonna close when we absolutely have to close, and we are gonna open the moment we're absolutely able to open.
Mm-hmm.
You know, it's public record that, you know, the state of Arizona, the governor there shut us down for no reason. I sued the governor in federal court to get our stores back open.
Yeah.
You know, no other fitness company did that. No other franchisor did that for their franchisees, right? You need to be there when you need to be there for the franchisees. You know, we made sure that we recovered quickly because we were still in the game. We shifted everybody from physical memberships to digital memberships 'cause everybody thinks of the pandemic when they think back about it like it happened at some time and then it went through and then it unhappened, right?
Mm-hmm.
It came back. Really it was, you know, indoor, outdoor, and digital because it was two weeks to bend the curve, then it was 30 days to bend the next curve and 30 days to bend the next curve then we don't really know. Stuff opened, then it closed back down again. Stuff reopened. So there was a lot of variance. We found that it didn't have to do with a, you know, a federal government situation, even at a state level or county level. It came down to a local police officer level.
You know, we had one Pure Barre where the officer came in and said, "Hey, we got a report that you guys are spreading COVID here, and so I'm here to report." We look around, "Is there COVID here?" He said, "I need to take a look and look for him." He looked throughout the store and said, "I don't see COVID, so I think my job is done here." We said, "Okay, great." Literally across the street, we went to reopen a Pure Barre when we pulled up, the police department was backed in in the front. We tried to do a 6:00 A.M. opening and they were like, "Nope, still can't open." Right?
Wow.
I found that the permutations really came down to local law enforcement, cities, mayors. It was really granular. We still processed about almost $450 million in 2020. We still grand opened 350 clubs. We just kind of took the approach that it was business as usuaal except for that thing called COVID, and we're just gonna keep, you know, pumping through. We closed where we legally had to, but we didn't do it any sooner than we needed to, and we opened as fast as we could. We stayed in the game, which allowed us to recover faster. Some of our competitors when COVID was quote unquote over, right?
They had to fly back to where their boats were, untie them, dust them off, get a new crew, and then go out to try and chase us. We just kind of got out first because we never came in.
Yeah, that makes a lot of sense. Could you maybe just talk about any trends you're seeing within your brand portfolio? Is Club Pilates, you know, outpacing growth? You've taken the royalty rate up on Club Pilates. I think that would signify that you're seeing some trends there that you really like. Maybe just talk about where you're seeing the growth within portfolio, as well as the benefit of having 10 different brands across multiple different workout formats.
We look at the 10 brands as, you know, 10 flavors of ice cream, right? You'll always have your vanilla, chocolate, strawberry that'll be your favorite, but if some little kid comes in, I wanna have cotton candy, bubblegum or whatever I, you know, whatever I need. The franchise fees are the same, the royalties are the same. We're kind of agnostic as to what flavor we scoop, right? It's all the same cost, it's all the same labor. We're just happy when they buy a triple scoop and get it open, right? That's really what we're looking for. When you talk about growth from this point forward, Club Pilates probably is one of the brands that has, you know, a lot of growth potential inside of AUV still.
We have about 825 of the about 1,200 stores open, right? What I get excited about, you know, that brand, when I bought it in 2015, it was doing $250K AUV at 6%. Today it does over $800K AUV at 8%, right? I like that, and that's what we, that's what we wanna replicate where we can, right? Now, modalities like dance or rowing or things like that may not be as mainstream or popular as yoga or what Pilates is today. You know, when I started the Pilates business eight years ago, people thought the reformers were rowing machines. They called it Pilates in a lot of parts of the country. You know, there's an education that had to happen.
Mm-hmm.
with that as well. Inspired by today is that our newest brands like Rumble and BFT, that have the most white space because they're our newest brands, right?
Mm-hmm.
We can still sell probably 2,000 between, you know, those stores in an aggregate, and there's only about a quarter of that sold, right? You still have another probably 1,500 units combined between those two, and you only have, you know, a few hundred open between all of them. A lot of room there. Those stores are coming out at $500,000-$550,000 AUVs. The way I look at it is they're being born twice as smart as Club Pilates was, right?
Mm-hmm.
Club Pilates started at $250 and has tripled. These are starting at $500+ and are continuing to grow.
Yep. Last quarter you talked about, and you just mentioned the 2,000 domestic studio backlog that are contractually open, contractually obligated to open.
Mm-hmm.
Can you just maybe give us some more color on the timing of when we can see those units open? Then just remind us why the delta exists between that drives the backlog?
Mm-hmm.
Also, do you see that 2,000 studio backlog building over time? 'Cause I think it's built basically since you guys have been public.
Yeah. Usually, when you look at a franchisor and they have a big backlog of stores it means that they can't get funding or the franchisees don't wanna open. That's usually when they're selling 100 or maybe 200 franchises a year if they're doing a great job.
Mm-hmm.
We're selling 1,000. We've continued to sell 1,000. In 2019, we sold almost 1,000. That's our pace. When you look at our backlog, it's really two years of sales.
Mm-hmm.
You know, somebody else, they could have 200 in their backlog, and that could be two years of their, kind of their gross sales franchises. We sell them quickly to people, and we sell them in a multi-pack, right? We sell a three-pack. They have to open their first one in six to eight months, their second one another incremental Six to Eight months, right? Their third, another incremental six to eight months. When you think about the 1,000 that we sold domestically last year, think of that as 333 people who bought three, right? Six to 8eight months from now, the 333 get open, six to eight months, the 333 get open. That's kind of why you're seeing this sort of 500 to 600 range on openings.
I think, you know, as we go forward into this year, we've told everybody that since we're not acquiring an 11th brand.
Mm-hmm.
right now, keeping up with selling 250 a quarter on 10 brands alone is not gonna keep happening.
Mm-hmm.
most likely, because we're starting to run out of inventory, right? The demand is still there for franchise sales. The inventory is starting to run out, right?
Yeah.
You can only sell kinda your A markets once. I don't wanna go put three or four Club Pilates in the ground and end up, you know, taking the AUV from 800 - 200, right? We wanna make sure that, you know, we're being pragmatic about where do we put these stores so that it really becomes an incremental financial opening for us and for the franchisees, so they kinda continue to open.
Maybe let's talk about that. I mean, I think Club Pilates we know is the most mature. It sounds like A-tier and maybe most of the B-tier has been sold again.
Mm-hmm.
Where do we have, the most runway in terms of, you know, still premium opening space? Within that 2,000 studio backlog, what's the sort of density by brand?
Yeah. Density by brand is, you know, is tough.
Mm-hmm.
I'd have to go through it.
Mm-hmm.
You know, I don't have the percentages of all 10 of them memorized. You know, the majority of those will not be Rumbles and BFTs 'cause we just started selling those, right? They won't be Club Pilates, because there's, you know, there's only a couple hundred of those. It's really a mix across, right? You know, there's a lot of StretchLab still to open. We've got about 300-ish of those open today. You know, we open a store in the United States every 17 hours. You know, we continue to do these pretty quickly. They continue to perform. When you look at the openings this year, you'll see openings still in Club Pilates, StretchLab, Rumble, and BFT.
You know, we've got about 500 sold already to open of StretchLab, a couple hundred of Club Pilates, couple hundred of Rumble, and then, you know, 100 and change of BFT. The mix for 2023 will primarily be those four brands, which is great because Club Pilates obviously operates well. StretchLab is like a 750K AUV. It's one of our top-performing AUV brands. The other two brands, like I mentioned, are opening at 500K, 600K AUV.
Yeah.
All kind of, you know, holistic AUV drivers f or the company.
Should we see a mixed benefit for AUVs this year based on the brands that you're opening, that could accelerate, you know, where you landed in 4Q alongside just, you know, organic member acquisition?
Yeah, because the disproportionate amount of new studios opening are in the favorable AUV brands.
Mm-hmm.
Brands like Pure Barre carries a lower AUV, that one's like 90% opened as far as openings to license sold. There's not gonna be as many Pure Barres coming. To Anthony's point, you're opening up all the favorable AUV brands. As a proportion of those continue to get open, they're gonna carry up the overall AUV.
Yep. Just remind us what the domestic sort of white space opportunity potential is, in the U.S. based on, you know, the 10 brands that you have now.
Yeah. Today it's 7,900. We use Buxton technology to actually go in and research our customers specifically. We learn a lot about our customers, you know, LTV of their home mortgage, what credit cards they use, cars they drive, just all sorts of stuff. It's pretty crazy. They go and get their information from Experian's public files.
Mm.
It's really almost like credit checking, every member. You learn a lot about them, not just that they're, you know, an affluent, you know, predominantly white female that's educated, that makes X, right?
Mm-hmm.
That's kinda the easy stuff. We really dig into what this real core customer is, and then we go back out to the U.S. map and we say, "Hey, given this is our core customer, and we're gonna give them a two mile protective radius or 50,000 people, whichever comes first, show me all these circles," right? "All these geographies that have my core customer in a dense enough way that allows us to yield a $500K AUV or higher," right?
Mm.
We did that originally in Club Pilates. It gave us, you know, 938 pins on a map with longitude and latitude. Those are the 938 franchises we sold at Club Pilates. Once we had 800+ open, you go back and you say, "Okay, the modality has grown, the brand has grown. You're seeing AUVs way higher than the way, you know, we designed them as a minimum.
Mm-hmm.
What is 475 as a minimum yield? The change in, you know, kind of brand and modality expansion, and it yielded 200 more locations for us. It kinda increased the TAM there by about 25%. We sold those to our internal franchisees and some external. I think that's what, you know, you'll continue to see from the company as we do that across all the additional brands. We've done that for the brands that come up with the 7,900. We literally have longitude and latitude pins for 7,900 stores. This isn't like we took the population of some state or some.
Yeah
C ounty and then solved for X based on population. It's very specific on where we sell a store, where we put a store, and then when we open that store, what part of that circle we market to. A lot of times people make the mistake, they open up, they're in a 2-mile radius. They're like, "Oh, the rich people live over there, so, like, let's.
Mm-hmm
Let's start targeting the Northeast," when really your customer might live in the South.
Yeah.
Right? We wanna know where the customer is in that protective radius so that we market to that low-lying fruit first.
Yeah, that's actually an interesting point, and I didn't realize that. Beyond the 938, did you recreate like a Club Pilates Lite that was designed to operate on sort of different metrics in terms of like maybe not the base AUV rate? Does it still run at the same operating model as.
It's the exact same store. It's just that the core customer is less dense.
Mm-hmm
Could potentially yield a minimum of $475 versus $500. Even at Club Pilates, when it was as designed at $500K, the stores perform at over $800.
Yeah.
Right? If the stores perform at $775 in a $475, great, right?
Yeah.
Be it. The way our franchisees looked at it is they had two or three or four Club Pilates, and then they can't expand anymore, right? We said, "Hey, we're gonna have this bucket of stores." We're not operating the business any differently. We're just going into a market, eyes wide open, saying there's a tad bit less.
Mm-hmm
Of our core customer in this market. Those 475 stores will still yield, you know, more than 475.
The ones that are designed for the lower AUVs, do they still run at similar operating margins as...
Mm-hmm.
Okay.
Yep. Yeah, it's literally the exact same thing. It's just dirt, you know, we weren't willing to sell in the beginning until the modality and the brand really helped expand that TAM.
Yep. Then just shifting gears to internationally, you know, I think you have 1,000 studios contractually obligated to open internationally. Maybe just give us more color there on the operating model internationally with the MFAs, the margin flow through you see there, and then sort of maybe any color on what's embedded in terms of the guidance, you know, coming from international.
Yeah. I'll give you the op side of how we set up, and I'll let John handle the last half. Think of it as about 25 countries so far as, you know, kinda optimal places that we're looking to go. You've got 10 brands, right? That's 250 master franchise agreements that you could sign, right, internationally. You know, today, we're operating in 16 of those 25, right? There's another nine that can go. We're not operating all brands in all the countries, right? There's a lot of upside, for us still in signing more master franchise agreements. What we do is we go in and we find somebody to be us.
We find somebody who's been a franchisor, who's developed brands in their country, who has the capital, and we sign a master franchise agreement with them. They typically pay about $400,000 upfront per brand, per country. They start to sell what we call an SFA, which is a sub-franchise agreement, which is basically what we sell here. We're the franchisor. We're kind of our own master franchisor, right? We sell a franchise agreement here. They do the same thing, so they become Xponential there, right? They become the parent of Rumble or whatever it might be in Australia or whatever country it may be, and they start to sell these sub-franchise agreements. We will make a deal with a master that says, "You'll sell 100 Rumbles. Sell or open 100 Rumbles over the next five years in Australia.
Mm-hmm.
Right? And then they go out and sell sub-franchise agreements. They open stores themselves. We, you know, we collect the economics. I'll let John kinda walk you through that.
When you look at the international component, largely it's 100% margin for us. There is about a department of about five people that support the international growth. We guided the street to 285-295. About 10% of the studios open are international today out of the 2,600. When you think about, you know, going forward, about 25% of the studios that'll be opening last year, this year, will be international. From an economic standpoint, the way it kinda works is we sell a license internationally. We're not the end provider of the service, because the master franchisor acts as us in Australia as an example, they're ultimately responsible for serving that sub-franchisee. When they sell a license, we get a rev share.
That ranges somewhere between 30% and 50%, depending on each MFA agreement. For example, we sell a license for 60,000 in Australia, we get $30,000 from the master franchisor. They send it to us. Rather than amortizing it over 10 years like we do in the U.S., we get to recognize it immediately. The economics are the same in total, but the recognition is much more accretive on a per-period basis. All the other lines like margin on equipment, we get 50% of the margin that they make, 50% of the merchandise. Royalties, we get half. The benefit we have is we don't have the SG&A.
When you think of guiding the street from 285-295 with 10% roughly of the studios being international about 10% of the guidance we gave is international in our P&L, but it's carries a higher margin than the 35%-39% we kind of, you know, indicated to the street that we'll perform at this year.
Just to summarize that, so $400K upfront fee per brand, 30%-50% sub-license fee, 50% of a normalized equipment margin, and then call it a 3.5% royalty rate?
Correct.
Gotcha.
With no SG&A.
Yeah.
Very little.
Very little.
All the same exact revenue lines here as we do internationally, but we get half the revenue and none of the SG&A.
Mm-hmm.
Think of it that way.
Perfect. That's really helpful. In terms of, I guess maybe just shifting back to the AUV progression, you did $522K was, like, the reported for Q AUVs. How can you maybe talk to us about the components of that growth? Is most of it being driven by memberships? You know, how much of that is pricing?
You want me to take this?
Go for it.
When you actually look at. When you become a member, you lock in your membership price. Therefore, it doesn't. We don't come back to you and say, "We're gonna raise your membership price." 95% of all the system-wide sales growth we saw this year was volume. We're actually adding more members per studio, not just because we're opening more studios, actually more members per studio than, you know, we have. Only 5% is price. Really the price is coming from a member leaves. They. If they come back or the replacing member comes back, they're coming back at a higher price. We attribute the member coming back as neutral, but the incremental revenue that we're picking up on that member is. The 5% is price.
The good thing about us is, you know, as we continue to add more and more studios, the install base continues to grow on top of that, generating a lot of system-wide sales and additional flow through from a royalty perspective.
Perfect. I ran some numbers. If I'm right here, you make about $146 per member per month with about 256 members per studio. Is that roughly right? I guess the question is where could that $146 ultimately go? It's actually probably lower than what some high-end big box gyms are charging for memberships. Then where i s that 256 like an at capacity number or is it like these studios have the ability to have 300 members?
Yeah. Yeah. When you look at depending on how you ran your math, the one thing you're probably missing is we have a lot of member or non-members that come into our studio, walk-ins, that kind of stuff. There's additional upside on, you know, the walk-in member that comes in.
Mm-hmm.
Where you actually can start realizing more benefit is we do retail in our studios. You know, getting, like Pure Barre, for example, is a very high retail brand. Getting, you know, all the brands to be, you know, perform at a higher retail. We are doing a lot of B2B deals which I think you've been aware of. Things like, you know, C4, for example, you know. We're starting to sell more and more product inside our studios. Taking more wallet share, from an in studio perspective is another opportunity. Always have the ability to kind of raise price on our members but it's probably just like your cable bill. Like, you always get aggravated when you raise price on a member, so not something we probably do in the near term, but there always is that opportunity. We take price all the time.
Mm-hmm.
Again, when a member leaves, we adjust our pricing over time. As capacity in the studio fills out, we raise price. It's the supply and demand. The first member is probably paying the least. The last member who just came in is probably paying the most. As that first member leaves, that next one to come in is gonna be paying more than the one previous. You continually take price along the way, which will drive up AUVs.
Presumably to go beyond the sort of 250 members per box, you can just add class capacity, and that could get north of 300.
Yeah.
is that the way of thinking about it? It's definitely possible. It became more possible and then post-COVID, where you do have some work from home.
Mm-hmm.
Even where you have, you know, in-office work, employers have become more flexible, let's call it.
Mm-hmm.
Given the market. If somebody had to, you know, leave at 4:00 P.M. at the end of the day now to hit a 4:00 P.M. class versus a 5:00 P.M. class.
Yeah.
Or a 6:00 class, that's kinda doable. In some businesses You know, you could go work out at noon during your lunch or, you know, whatever it might be. You know, my assistant all the time will say, "We have to be in at 8:30 that day or, you know, can I go take a class?" You know.
Yeah.
Of course, really hard in our industry to say, "No, you can't go take a class." You know, employers are becoming, you know, kind of more and more tolerant of that, especially when it's a health and wellness thing, right? If it's like, "Hey, I wanna come in late 'cause I wanna take a long breakfast with a friend," that's probably less flexible. If they say they're going to take a class, a workout and those kind of things, then, they're a little bit more happy to hear that.
In terms of, you mentioned B2B partnerships. I think that's become a larger part of the story, this past year. Maybe just talk to us about the evolution of that, the economics of those partnerships, you know, maybe which ones you're most excited about.
I think what we do a great job at XPO is figuring out, hey, you know, our day job is we open gyms, right? What do you do for a living? Well, we open these boutique fitness studios, and we try and make as much money as we possibly can. I ask everybody, "Well, what's your night job and what are you doing on weekends?" Right? Like, what's XPO's side hustle, right? That's where you see things like XPLUS, our digital business or the XPASS that allows you to buy ONE pass and go to all 10 brands, I wouldn't say at the same time but you have the optionality to do them all.
You know, we look at that, and then we, you know, kind of develop those and we went past that and we said, "Okay, well, how do we monetize these in a different way?" Right? 'Cause when you look at customer acquisition costs, we're just out there buying Facebook PPC ads or search or whatever it might be and, you know, kind of everybody's chasing the bottom in the CAC world. We said, "Well, you know, is there a way to monetize XPLUS in a different way?
Is there a way to monetize XPASS in a different way and our relationships? You know, the majority of what you see in that B2B partnership today is a deal I did during COVID where I went back to our credit card processor, and, you know, I've been in this business for 20 years, and so our credit card processor is our credit card processor ’cause they were a startup 20 years ago when I was a startup. You know, we're processing $1 billion last year and $1.3 billion or more this year, right?
Mm-hmm.
That's a lot of money. We went back to them during COVID and said, "Hey, look, we wanna do a multi-year partnership with you, but you're gonna have to pay us a chunk of money up front, and we're gonna take 1% of the credit card processing on a go-forward basis," right? As you see system-wide sales start to grow, 1% of it is coming back to us in a rebate from the credit card processor. We went out and did deals like lululemon, where we basically took our XPLUS and, you know, relicensed it back out, right? Now you'll find our XPLUS at lululemon MIRROR. You'll also find it at, you know, on Google Play. You'll find it on every LG TV when you buy a new LG TV now. We continue to do that.
We license out XPLUS to the 23,000 staterooms on Princess Cruises. When they leave Princess Cruises, they get an XPASS. When on the ship, they get a workout in a brick-and-mortar gym. So we're really trying to push XPO to be a health and wellness kinda lifestyle business, right? We want people to get sick of seeing us so that, you know, if they saw us on a cruise ship, they turned on the TV in the house and they saw us, and they walked into the lululemon store and saw our content. I was just working out at a hotel in Laguna a couple days ago, and they had a MIRROR on the wall. When I walked in, it's playing our content, right?
Everybody that was in that gym is exposed to it on the MIRROR, right? The MIRROR sits in Nordstrom stores where there's lululemon retail. We really like it because it's helping lower our customer acquisition cost, right? I've kinda coined a term called negative CAC which, you know, these people are paying us. You know, lululemon pays us a lot of money to then, you know, market our four-wall business to their MIRROR customer. Same with Princess. Princess paid us a lot of money, and they continue to pay us, you know, on an ongoing basis in each of these B2B deals, but it's driving lead flow, free lead flow into the brick-and-mortar businesses. I really like, and what it gets me excited is about how we've leveraged, you know, some.
You make a 60-minute video, you're able to relicense that video FIVE different ways, as well as on our own XPLUS platform that has people just paying for it directly.
Yeah.
Continue to see that from us on.
Mm-hmm.
on a go forward.
I wanted to ask about XPASS as well. Maybe just talk to us about the evolution of XPASS and where you see that going over time and how it differentiated itself from the other class aggregators out there, like a Wellhub, which seems to be, at least in New York City, taking off pretty good, and a ClassPass.
Yeah. I mean, Wellhub is kinda starting to pick up where ClassPass, I think, left off.
Mm-hmm.
You know, with all the aggregators, even with XPASS, it really is to fill the last butts in seats. That's what it's designed to do. It's not designed to replace my unlimited member who's paying a lot of money on a Monday at 5:00, and now they can't get a class because, you know, ClassPass or Gympass or XPASS even is filling that seat. It really is to get the aggregate together, and allow that aggregated inventory to get sold off, right? For us, the way XPASS works is, let's say, somebody comes in and buys a $100 XPASS. We take 20% off the top, and we put that $80 into an.
an escrow, so when the member goes around and uses their XPASS we pay down a class fee to the franchisee. Typically, it's a recurring subscription, right? It's use or lose it by the end of the 30-day period. Typically, there's about 10% breakage. We end up with $0.30 or 30% of every dollar that comes in via XPASS and goes to the store, as opposed to if that member goes into the store, we get 7% royalty, right? That comes up. We make four times as much money on a percentage basis when somebody comes via XPASS. XPASS has been awesome as well for, you know, customer acquisition, right? 'Cause there's kinda two people t here's, you know, the people that are snackers, right?
That say, "Hey, look, I wanna do a barre class today. I'll do a cycle class tomorrow. I'll do yoga the next day," right? We get to take those people. They're not out having to buy a membership at, you know, CorePower Yoga and then one in Orangetheory Fitness and one in something else, right? To be able to create their own XPASS would be very expensive for them to do, whether it was inside or outside of our network. It draws people to our ecosystem, right? Because it's the only one that really gives you that pass across 10 different brands. You know, we'll continue to utilize it for that. You have your people that don't know if, you know, they want to do cycling or they wanna do Pilates or yoga.
They know they wanna do something, so they buy the XPASS and then come in and, you know, snack around like the snackers do, and then they find a home, and then they end up signing up there. It's working as, you know, as customer acquisition or a negative CAC for the franchisees as well, so.
Yep. I wanted to ask a little bit about the health of the franchisee base, especially around sort of margins at the franchisee level and how those compare to pre-pandemic. I think in the filings, they're designed to operate around 25%-30% operating margin. Is that where you see the base right now? Is it above that, below that?
Yeah, I mean, you're arguing that you're going above that now from the standpoint of the studios are designed to generate that at a 500K AUV. Now they've exceeded that. You take brands like Club Pilates that are doing, you know, $800,000, they're definitely doing above 30% margins, operating margins. I think as you continue to see AUVs climb, obviously, the franchisee will end up making more money because they have a fixed cost. They're just charging more per member based off of what we talked about earlier. AUV is health. I think the way to really think about how healthy our franchisees is closures. We don't have closures.
Mm-hmm.
In our studios. From the time we've owned them, we've never had zero closures. If they weren't making money, they'd be going away, and obviously they're not because, you know, we haven't had any closures in the system. I would say the overall health of the franchisees is strong and getting stronger.
Yeah. If somebody isn't making margin they're not running the business properly, we will take those stores back, and we will transition those back out into the franchise network. If we have to relocate a location or something like that.
Mm-hmm.
The franchise unit itself, you know, stays alive and open and then we'll re-franchise them back out. A lot of franchisors like closures because then they can turn around and sell another $60,000 franchise in that area, right?
Yeah.
We're hooked on royalty. We're not hooked on the upfront franchise fee.
Mm-hmm.
you know, it has to be recognized over 10 years. Yes, we get the cash, we don't necessarily need the cash that we wanna put some franchisee in, kind of in harm's way, right? For us, we'll buy those stores back for $1 or something if that's what we need to do.
Mm-hmm.
We'll re-franchise them back out to someone else.
That's a good segue. Actually, I wanted to ask about Transition Studios. I think you had reported in the K around 55 Transition Studios, roughly 2.1% of the overall base. Is that the right number we should think about? Should we see that 55 come down over time, or you see it operating in that sort of 2% of your overall studio mix?
It depends on, like, what day and microsecond you wanna take a snapshot. You know, we sold 25 of them last week.
Mm-hmm.
You know, number goes down. It ranges anywhere. At one point, we had five.
Mm-hmm.
You know, during the pandemic, I think we had 75 or something, with people moving and doing all sorts of things. I don't know that it's a fixed number amount or a fixed percentage. I'd say our range has probably been, in the past years, from a 0.5% to, you know, 3% something. You know?
Mm-hmm.
The other day it was at 1.8% when I checked. Our resale teams are selling stores daily, right? It kind of varies. The numbers, by number, will probably get larger as the system gets larger.
I just wanted to ask about unit build-out, both around the costing side, I think, you know, $350,000 on average to build out a unit. Have you seen that change at all? Others are calling out, you know, rising construction costs. Are any hesitancy from the franchisees to open units with, you know, what we're seeing from a rate environment?
None, really. I mean, you're seeing where we just opened more stores last year than we ever have. You know, the rate's been going up for the last year plus, we did better than we did the year before. Yes, rates are going up on franchisees. Yes, construction is going up. We don't do a lot of construction. We're 1,500 sq ft, right? A lot of times people say, "Oh, well, Planet Fitness, they can't get open because, you know, they have air conditioning issues. What's your air conditioning issue?" I'm like, "We just turn on the air conditioning when we go in." If it was a dress store or an ice cream shop before or whatever it was, we come in, right? Yes, construction has gone up, but the majority of our brands, we don't build any walls.
Yeah.
Right? In StretchLab, nothing even plugs in. Right? You have benches sitting in the middle of a room. You know, there's not a lot of walls to build. There's not a lot of construction. You know, majority of the things we get have four walls, right? 'Cause they're part of a shopping center. They typically have to have a bathroom already 'cause they had to be ADA compliant at some point.
Mm-hmm.
For us, it's a lot of paint and flooring and signage.
Mm-hmm.
Minimal construction. Yeah, it goes up, but we're not spending a lot on construction, so the actual dollar amount doesn't end up being a lot.
How are the franchisees typically financing the build-outs? Is it mostly done through SBA loans? Are they using their own, you know, liquidity?
It's a mixture. Right now we actually put in a preferred vendor last year, who has about an entire quarter's worth of loans, like, in process to go ahead and get franchisee funding. They've seen about an interest rate hike from about 6%-8%, but they don't borrow. A lot of franchisees have to have equity in the business for them to qualify. From that perspective, they're borrowing, you know, $100,000-$200,000, so that increase in interest rates is pretty nominal to the overall decision of whether or not you even wanna get open. They do have access to that. They do use the SBA. They do personal financing whether they're taking loans on their HELOCs from their house or their 401(k) or however it is.
You know, most of our franchisees are financially qualified before they even buy a license. From our perspective, we know they have the capital and the wherewithal to be able to open studios.
Yeah. We're only converting 2% of our lead flow into franchisees, so we have a very stringent process. It really works two ways. One, we weed them out on our own, 'cause we don't like what they say or how they say it or what they're thinking, right? How they believe something or not. We feed them with a fire hose, with education of what life is really going to be like as a franchisee, and some people don't like that.
Mm-hmm.
They exit on their own, and we're okay with that, because we want people to go into it eyes wide open, right? Like this is not a business that you're opening so that your kids that can't get a job somewhere else can come work the front desk 'cause nobody else wants them. Like this is not an education for whoever to go learn how to run a business. This is not. You know? We go through all of that 'cause sometimes people show up and they believe they're gonna spend $350,000 and it's just gonna be a lot of fun, and they're gonna sit on the couch and collect a check.
Mm-hmm.
It's not like that. It's still a business, still a startup, still has risk, still has to do work. We make that very clear to the franchisees. So we discount people out and we also scare a lot of people with reality. So we only end up converting about 2%. Some of that reality is you're gonna put money in, you have to have liquidity. You're not, you know, you're not gonna have 100% financing.
Yep. I wanna squeeze in one more. Can you just talk about how leverageable the model is and how much you think you need to scale SG&A as, you know, as the business continues to grow?
Yeah. I mean, we opened 500 studios last year. We didn't scale SG&A at all. Same process this year when we guided this street. There's very little SG&A growth in the model at all because we run a back office, centralized SG&A. Everything from your accounting, finance, HR, legal, real estate, retail, franchise sales, they all support all 10 brands. When we bought BFT when we bought Rumble, we added no additional SG&A. When you start seeing the margin expansion on the bottom line, it's really us just generating more top-line revenue, more margin, it falls to the bottom line. Opening up 550 studios at the midpoint of the range, you know, really zero SG&A for back office SG&A that needs to be added, 'cause we could support the model with what we already have in place.
Yeah. Eighty percent of the org chart is shared services. When we bought Rumble, we hired a brand president, a chief marketing officer, someone in charge of selling memberships nationally and someone in charge of instruction nationally.
Mm-hmm.
That's what we hire at the brand level, and then everything else is on shared services.
Yeah.
We were able to acquire two new brands, sell hundreds of locations, get a bunch of stores open. You know, there's a few hundred, you know, BFTs open internationally. We're able to bring in eight people on the brand side, no SG&A on the shared services side, and then, you know, go run two great brands.
Yeah. you're seeing less l ike in 2021 we were at 70%. Last year we improved to 30%. This year we'll be in the high thirties. By 2024 we'll cross into the 40% margins, that's just all leveraging SG&A.
Perfect. Well, thanks again, Anthony and John, for joining us and for a great discussion. Really appreciate it.
Thanks .
Thank you.
All right.