Shares of Xponential Fitness, Inc. bounced sharply on Wednesday after the franchiser of boutique fitness brands, including CycleBar, StretchLab and Club Pilates, denounced a bearish investor report that led to a record selloff in the previous session.
The report from short-seller Fuzzy Panda Research on Xponential Fitness reportedly led Baird analysts to slash their price target to $23 from $36 Tuesday as shares dropped 37 percent on Tuesday following the short report, which alleges that many of the “brands and franchisees are struggling.”
Shares on Tuesday fell to $15.72 from $25.11 at Monday’s close.
On Wednesday, shares recovered $1.41, or 9 percent, to $17.13 after Xponential Fitness denied the findings and analysts at Jefferies and Evercore defended the company.
Xponential Fitness’ brand portfolio includes Club Pilates, CycleBar, StretchLab, Row House, YogaSix, Pure Barre, STRIDE, Rumble and BFT.
In its statement, Xponential Fitness said the Fuzzy Panda report was “misleading” and “inaccurate.”
Xponential Fitness said, “Together, the Board of Directors and Management of Xponential denounce the misleading report, which contains inaccurate information and caution investors not to rely on it. The Board and Management stand firmly behind the strength of the business and health of its franchisees. As the largest global franchisor of boutique fitness brands, we take great pride in our talented team and strong financial results, illustrated by solid and growing average unit volumes and same-store sales. Xponential’s scalable business model, strong free cash flow generation and history of margin expansion position the company for continued success.”
Mark Grabowski, chairman of the board of Xponential and founder of Snapdragon Capital Partners and the company’s largest investor, said, “As an investor in high-performing businesses and high-integrity management teams, I’ve known and worked closely with Anthony Geisler, CEO of Xponential, since investing in Club Pilates at my prior firm. I couldn’t speak more highly of his passion, commitment to excellence and professionalism. I am confident in the strength of Xponential’s business and the company’s continued execution and creation of long-term shareholder value.”
Xponential Fitness also provided the following information underscoring the fundamental strengths of its business and operations, which refute the related allegations in the report.
- Studio Locations. “Studios remain open, thriving and tremendously popular. In certain circumstances, Xponential relocates and/or transitions underperforming studios to other franchisees in the Xponential franchise network, during which period the stores may be temporarily closed, but those stores represent an immaterial number of stores amongst the larger Xponential system.”
- Franchisee Resales. “The franchise model has been successful. While Xponential has, in limited cases, repurchased or assumed underperforming studios, this represents a very small number of Xponential’s overall studio system.”
- Studios’ Financial Returns. “Xponential’s Q1 2023 average unit volume (“AUV”) of $542,000 provides for healthy unit economics. Franchisee unit economics are strong, with an expected 25-to-30 percent operating margin and 40 percent cash-on-cash return.”
- Studios’ Reported in AUV and Same Store Sale (“SSS”) Calculations. AUV and SSS have been consistently defined and calculated since the IPO.
- AUV Calculation: Quarterly Run-rate AUV consists of average quarterly sales for all studios that are at least six months old at the beginning of the respective quarter, multiplied by four. Studios with zero sales in the period have always been excluded from the calculation. Inclusion of these studios would not result in a material difference. For Q1 2023, recalculating Xponential’s systemwide AUV to include these studios would result in a 0.9 percent change to the AUV figure ($542,000 vs. $538,000).
- SSS Calculation: Studios are not included in SSS calculations unless they have 13 months of continuous sales. This is a common method for calculating same-store sales and is disclosed in Xponential’s audited SEC filings. The Q1 2023 data set of almost 2,000 studios open continuously for 13 months or longer as of March 31, 2023, yielded robust Q1 2023 same-store sales of 20 percent.”
Franchisor Strength and Recurring Revenue
- Debt Covenants. “The balance sheet remains strong. The company is in compliance with all of its debt covenants and is levered at a conservative 2.9x Net Debt / Q1 2023 LTM EBITDA.”
- Vendor Relationships. “Xponential partners with vendors who provide the company with preferred volume pricing because Xponential provides the vendors with larger order sizes and access to its network of franchisees. Xponential receives rebates from vendors for these benefits, which is a standard way of covering operating costs and generating margin in franchised businesses.”
- Recurring Revenue. “Revenue is solid. As disclosed in Xponential’s latest Q1 2023 Investor Presentation, 74 percent of the company’s revenues are recurring. Recurring revenue includes all revenue streams other than franchise territory fees and equipment revenue.”
Strong Governance and a Commitment to Ethics, Diversity and Inclusion
- Company Culture. “Xponential maintains a culture committed to diversity and inclusion and the highest ethical standards. 80 percent of the members of the Company’s Board of Directors are women, people of color or individuals identifying as LGBTQ+. The company strongly condemns all forms of hate, prejudice, mistreatment, misconduct and harassment of any kind. The company has strong policies and procedures in place to address any allegations that are raised and reviews complaints in line with best practices and in consultation with legal counsel.”
- Insider Ownership. “Management believes in the business and is aligned with shareholders. For example, Xponential’s CEO, Anthony Geisler, currently owns 8.2 million Xponential shares, which represents a larger shareholding than the company’s top five outside institutional investors combined.”
Photo courtesy Xponential Fitness
