Xponential Fitness, Inc. (NYSE:XPOF) Q4 2023 Earnings Call Transcript
Xponential Fitness, Inc. (NYSE:XPOF) Q4 2023 Earnings Call Transcript February 29, 2024
Xponential Fitness, Inc. misses on earnings expectations. Reported EPS is $0.08 EPS, expectations were $0.11. Xponential Fitness, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Xponential Fitness Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Avery Wannemacher, from Investor Relations. Thank you. You may begin.
Avery Wannemacher: Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness fourth quarter and full year 2023 financial results. I am joined by Anthony Geisler, Chief Executive Officer; Sarah Luna, President; and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations.
For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. Please note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted.
I will now turn the call over to Anthony Geisler, Chief Executive Officer of Xponential Fitness.
Anthony Geisler: Thanks, Avery, and thank you all for joining us this afternoon. During 2023, we experienced substantial growth in revenue and adjusted EBITDA, while further streamlining our business and better positioning Xponential for an even stronger year in 2024. As the largest health and wellness franchise door as of year-end, we had 3,062 studios operating globally with 6,255 licenses sold across our portfolio. In 2023, we opened an average of 1.5 new studios each day and we have the pipeline to continue at that rate in 2024. North America run rate average unit volume or AUVs continue to rise and Xponential members have time and time again demonstrated their consistent commitment to their health and wellness routines.
During the year, total members across North America grew 21% year-over-year to 717,000 while our visitation rates increased 31% to a total of 51.5 million in studio visits for 2023. This drove North American system-wide sales to over $1.4 billion in 2023, an increase of 36% over 2022. North America run rate average unit volumes of $590,000 increased 13% from $522,000 in 2022, while same-store sales increased 16% for 2023. Same-store sales growth was strong across our studio vintages and not limited to just new studios. In fact, studios older than three years increased 17% in 2023, demonstrating the value of adhering to our operating model and the durability of our modalities. We are pleased to see this continued growth at the studio level and while we do not yet know the maximum potential of our AUVs over 350 North American studios across our portfolio achieved $1 million or higher AUV in Q4, with another 160 exceeding $900,000.
While these high AUVs are predominantly concentrated in Club Pilates, there are studios in StretchLab, Rumble, Pure Barre, YogaSix and CycleBar, and of course Lindora that have crossed a $1 million AUV threshold. We remain focused on driving AUVs higher as we execute on our in-studio growth strategies. Beginning with revenue, in 2023, net revenue totaled $318.7 million, an increase of 30% year-over-year. Adjusted EBITDA totaled $105.3 million or 33% of revenue, up 42% from $74.3 million, or 30% of revenue in 2022. As we continue to open more studios, our model continues to scale, enabling us to leverage our centralized back office and improve margin. Though the 2023 margins were shy of the 35% we sought as we worked through our restructuring efforts, we remain on track to reach our 40% target in 2024.
Let's now turn to our first strategic growth driver, the increase of our franchise studio base. We ended 2023 with 3,062 global open studios opening 557 in new studios during the year, with 438 in North America and 119 international. We currently have over 400 leases and LOIs signed for studios not yet open. We sold 805 licenses globally in 2023 and our pipeline includes almost 2,000 licenses sold and contractually obligated to open in North America, plus an additional over 1,000 master franchise agreement obligations. We were particularly encouraged to see that almost half of our 2023 North American studio openings came from existing franchisees, with existing open studios highlighting our franchisees continued reinvestment in and commitment to our brand portfolio.
While this phenomenon was the most prevalent in Club Pilates, it was also true across all of our other scaled brands; including CycleBar, Pure Barre, YogaSix and StretchLab, as well as Rumble 2 despite the brand's relative young age, we already had existing franchisees open additional locations in 2023. We take pride in the support we provide to our franchise operators and we kicked off this year by holding franchisee forums with franchisee selected representatives from each brand to discuss what they believe is and isn't working. The franchisee reps were selected by a popular vote by each brand's franchisees and have started spending time in-person at our headquarters to formulate a targeted action strategy that we plan to execute on by the end of Q2.
We are encouraged by the conversations and the opportunity to further streamline our support and offerings across the system, and we plan to continue holding regular strategy sessions with these franchisee representatives. We have already started franchising our recently acquired brand Lindora, a leading metabolic health provider. The health and wellness market is large and growing and supported by strong secular trends. Lindora has ideally positioned us to continue tapping into the broader consumer demand for holistic and comprehensive approaches to health. We believe consumers increasingly understand the connection between regular fitness routines, metabolic health, nutrition and overall wellbeing, and pursue lifestyles that align to those values.
Through Lindora, we are able to offer consumers a more comprehensive wellness solution. We see the Lindora acquisition as the foundation for our long-term broader strategic expansion into health and wellness, and we're excited at the growth prospects in this market. There are 42.5 million addressable households for Lindora. Based on using existing Xponential trade areas nationwide, we are finding that 69% of the 42.5 million of Lindora's national core member households are captured by an existing Xponential Fitness studios trade area. Lindora has a lot of runway where Xpo has already proven to be successful. We are actively working with Buxton, a data driven real estate Analysis Company to identify the clinic potential across the U.S. Buxton from preliminary work sees the greatest similarities between the Lindora member profile and our current Club Pilates and StretchLab member profiles.
Buxton expects that the TAM for Lindora will be similar to the TAM of our other brands. As a company, we continuously evaluate our portfolio to ensure profitable growth, optimize global customer experiences and drive long-term value creation for our stakeholders. We think about successful portfolio construction not just from the perspective of acquiring new brands and opening new studios, but also from the perspective of ensuring alignment with our three-year financial growth targets. As part of our optimization efforts, we recently announced a divestiture of STRIDE Fitness to Stride Fitness Franchising, Inc., which is owned by Shaun Grove, the current President of Rumble Boxing. Stride accounted for less than 1% of our studio base and system-wide sales in 2023 and after considering potential alternatives for Stride; we found that transaction was the best option for both Xponential and the Stride brand.
We are particularly pleased to transition Stride to an experienced franchise owner and operator. Another optimization effort that will result in immediate margin expansion is the refranchising of company-owned transition studios and the elimination of related operating losses. We had previously committed to fully exiting our portfolio of company-owned transition studios and as of today, we have only a small number of corporate studios remaining. It's also worth noting that as part of no longer operating studios and wanting to concentrate our resources around the growth of our traditional studios, we have exited our corporate-owned LA Fitness locations in the first quarter 2024. Note that existing franchise LA Fitness locations will continue operating.
Finally, I wanted to provide an update on our litigation with ClubReady. Xponential has resolved this litigation at the end of 2023 and is in the process of launching an RFP to ensure that our studios have access to best-in-class point of sale technology. Let's now discuss our second growth driver international expansion. During 2023, we expanded into seven new countries, bringing our total country count to 23. At year-end, we have over 1,000 studios obligated to open under master franchise agreements and will continue expanding our brands into new and existing countries under the leadership of our recently hired international President and team. Earlier this year, we announced that Pure Barre and YogaSix are entering the Japanese market through a master franchise agreement with Sunpark Co., who is the current master franchisee for StretchLab in Japan.
This brings our brand count in the country to seven, the largest count of Xponential brands outside of North America. Japan has demonstrated strong demand for our concepts where Club Pilates alone has opened 45 locations with the potential of an additional more than 100 studios obligated to open for Club Pilates alone. We are encouraged to see that even though our average Club Pilates studios in Japan is less than a year old, with most of them having opened in 2022 and 2023, run rate AUVs are already well exceeding $500,000. From a brand evolution perspective, these AUVs are already well exceeding the performance that we saw for Club Pilates domestically in year three of operations. As a reminder, our international business provides Xponential with nearly 100% margin flow-through.
The model is asset-light with Xponential receiving a revenue share from the master but carrying minimal corresponding SG&A given that the studio, SG&A and CapEx is fully funded by the master franchisee. In summary, we are proud of our 2023 performance in the strategic realignment we have achieved and we are entering 2024 from a position of strength. We remain on track to achieve the projections laid out at our Analyst and Investor Day in September of last year, and we expect our refocus on core operating activities to result in strong cash flow and significant margin expansion in 2024 and beyond. Before turning the call over to Sarah, I'd like to take a moment to highlight our annual franchisee convention, which took place in Las Vegas in early December.
During the event over 2,000 attendees came together to celebrate achievements in 2023, share best practices, and set the strategy for 2024. It is always great to experience the excitement of the event and speak with franchisees from all over the world. Thank you to our franchisees and employees for all your hard work and dedication, which have helped make Xponential Fitness what it is today. And with that, I'll pass the call on to Sarah.
Sarah Luna: Thank you, Anthony. Xponential continued to produce exceptional results within the fourth quarter of 2023, with visitation rates in North America growing 27% year-over-year and our North American actively paying membership base growing 22% year-over-year. Our studios are an essential part of our members' weekly routines and as such frozen memberships have remained consistently low. We've continued to see strong visitation trends so far in the first quarter of 2024. New member acquisition and retention is important for growing and sustaining AUVs and we know that customer experience and satisfaction ultimately drive engagement. Over the last few months, we have focused our efforts on introducing new class formats as a few of our brands and repurposing existing equipment as a means of engaging and retaining members.
New and improved class formats create a better experience for our members and we are excited to continue innovating within our studios so that we stay both relevant and cutting edge. In 2023, we introduced a new class format at Pure Barre that resulted in 15% North America's same-store sales growth for the year. We are also testing the rebranding of AKT into KINRGY Studios with new dance class formats and studio branding, launching in March, in an effort to replicate the success we had at Pure Barre. Julianne Hough, who is well known among dancing enthusiasts from Dancing With the Stars is behind the KINRGY concept, which we believe will help revitalize our dance modality. Julianne has been instrumental in helping drive awareness for the rebrand, engaging and energizing her network both in-person and online.
Similarly, at CycleBar, we launched a new strength focused class format this January. The strength class was the highest utilized class in January, which helped drive the 11% year-over-year increase in North American visits per studio and resulted in the highest number of visits per studio since COVID. In addition, except for Lindora, all Xponential Fitness brands are now available on Gympass. We are excited to have access to the Gympass membership network, which allows our studios to fill access inventory and further expose Xponential's brands to an even greater audience. Now turning to Lindora, for over 50 years, Lindora has helped tens of thousands of people with healthier lives through its suite of services that support metabolic health, including weight management programs that incorporate nutrition, lifestyle, and the latest innovations in weight loss medications, IV hydration, hormone replacement therapy and other services.
As a reminder, the Lindora transaction is immediately accretive to earnings and EBITDA, enhances Xponential's AUV and catalyzes future unit growth. At present, Lindora has 31 locations with run rate AUVs of roughly $900,000 as of Q4, and January showing particularly strong performance. 30 of the 31 locations are located in Southern California, which gives Xponential large amount of white space to sell new franchises as virtually all geographies in North America are untapped. Since acquisition, we have already built a pipeline of prospective franchisees who have expressed interest in acquiring the rights to develop Lindora franchises. Unit level economics are compelling with the average cost to build a Lindora being an approachable upfront investment and in line with our other concepts.
A clinic is approximately the same size as our current average studio footprint of 1,500 to 2,000 square feet. As a result, clinics can be placed in the same retail locations as our other brands such as large shopping centers and grocery-anchored real estate, which allows us to leverage our existing real estate and brokerage relationships. In fact, one of Lindora's locations already shares a shopping center with an existing Xponential studio. With Lindora has a diverse revenue base that is comprised of subscription memberships, nutrition products, medications and other services, leaving us with several avenues to pursue additional AUV growth. Lindora can also serve as a distribution platform for any new health and wellness concepts that emerge and have been at the forefront of the latest metabolic health development since the 1970s.
While investors have frequently asked us about Lindora's exposure to increased interest in weight loss medications, we think it is worth noting that the company operated successfully at $900,000 AUVs prior to the introduction of the most recent weight loss medications in March of 2023. We expect Lindora to offer a cross-selling opportunity with our existing studios. Working out is an essential part of any weight loss regimen and we expect to fully capitalize on the opportunity to bring Lindora members into our boutique fitness studios. Conversely, many of our members are interested in nutritional offerings and we are thrilled to now have a brand to refer them to. It really is a win-win. Thank you for your time today. I'll now turn the call over to John to discuss our fourth quarter results and 2024 outlook.
John Meloun: Thanks, Sarah, and thank you to everyone for joining the call. In the fourth quarter, North America system-wide sales of $384.6 million were up 31% year-over-year. The growth in North American system-wide sales was driven primarily by the 14% same-store sales within our existing base of open studios that continue to acquire new members coupled with 169 gross new studio openings. Further, 94% of the system-wide sales growth came from volume or new members, which has remained consistent with historical performance and 6% coming from price. On a consolidated basis, revenue for the quarter was $90.2 million, up 27% year-over-year. 75% of the revenue for the quarter was recurring, which we have consistently defined to include all revenue streams except for franchise license sales and equipment revenues given these materially occur upfront before a studio opens.
All five of the components that make up our revenue grew during the quarter. Franchise revenue was $39.1 million, up 22% year-over-year. This growth was primarily driven by an increase in royalty revenue as system-wide sales reach all-time highs. In addition, an increase in monthly tech fee revenue and instructor training revenue was due to more studios operating domestically. Equipment revenue was $16.4 million, up 42% year-over-year. This increase in equipment revenue is the result of a higher mix of equipment intensive brands, which have a higher price point compared to the same period prior year. Merchandise revenue was $10.1 million, up 27% year-over-year. The increase during the quarter was primarily driven by a higher number of operating studios and inventory purchases by existing studios to address the demand for retail as consumer foot traffic has grown compared to the prior year.
Franchise marketing fund revenue of $7.5 million was up 29% year-over-year primarily due to continued growth in system-wide sales from a higher number of operating studios in North America. Lastly, other service revenue, which includes sales generated from company-owned transition studios, rebates from processing studio system-wide sales, B2B partnerships, XPASS and XPLUS amongst other items was $17.1 million, up 24% from the prior year period. The increase in the period was primarily due to higher revenues from our B2B partnerships. We significantly decreased the number of company-owned transition studios last year, resulting in the revenue generated from them ceasing along with the cost of operating the studios. This will ultimately result in improved margins for Xponential going forward.
Turning to our operating expenses, cost of product revenue were $17 million, up 39% year-over-year. The increase was primarily driven by a higher volume of equipment installations for new studio openings and a higher mix of equipment intensive brands in the period. Cost of franchise and service revenue were $4.6 million, down 5% year-over-year. The decrease was driven by lower costs of advertised franchise license commissions in the period. Selling, general and administrative expenses of $50.8 million were up 47% year-over-year. The increase in SG&A was primarily the result of higher operating costs in the period associated with company-owned transition studios and restructuring costs for studios where we have ceased operations. As previously discussed, we have shifted our transition studio strategy, which will decrease SG&A expenses and improve EBITDA margins.
Since we announced this shift at the end of the second quarter of 2023, the number of company-owned transition studios has declined from 84 to only four studios remaining as of the date of this call, with some of these studios being refranchised to new owners and some closing permanently. Within SG&A, the largest liability we continue to work through is our commercial leases. We expect this one-time restructuring will continue in 2024 and will be finalized once we have settled the remaining outstanding leases with landlords. The investments we are making to streamline operations back to a pure franchise model will optimize forward-looking SG&A expenses, resulting in increased margin levels. In 2023, net operating losses associated with transition studios were approximately $10 million, which will be materially gone in 2024.
Additionally, as projected on our third quarter 2023 call, our annual franchise convention added approximately $5 million in sequential SG&A expenses, which were largely offset by sponsorship revenues from the event that brought the net expenses down to $1.5 million for the fourth quarter. Impairment of goodwill and other assets was $4.8 million and was primarily due to the company-owned Rumble studios being reclassified as held-for-sale and the resulting write-down of leasehold improvements, reacquired franchise rights and goodwill. Depreciation and amortization expense was $4.2 million, an increase of 2% from the prior year period. Marketing fund expenses were $6.4 million, up 39% year-over-year, driven by increased spending because of higher franchise marketing fund revenue.
As a reminder, each of our franchise locations contributes 2% of sales to our marketing fund. Therefore, as the number of studios and system-wide sales grow, our marketing fund increases. Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into an increase in marketing fund expenses over time. Acquisition and transaction expenses were a credit of $0.5 million versus an expense of $8.2 million in the fourth quarter of 2022. As I have noted on prior earnings calls, this includes the contingent consideration activity, which is related to the Rumble acquisition earn-out and is driven by the share price at quarter end. We mark-to-market the earn-out each quarter and accrue for the earn-out.
We recorded a net loss of $9.1 million in the fourth quarter or earnings of $0.10 per basic share compared to a net loss of $0.4 million or a loss of $1.13 per basic share in the prior year period. The higher net loss was the result of an $8.8 million increase in restructuring costs from our company-owned transition studios, $6.6 million of lower overall profitability, and a $4.9 million increase in impairment of goodwill and other assets, offset by an $8.8 million decrease in non-cash contingent consideration primarily related to the Rumble acquisition and a $2.8 million decrease in non-cash equity-based compensation expense. The impairment of goodwill and other assets, as previously mentioned was primarily due to the company-owned Rumble studios being reclassified as held-for-sale.
We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the fourth quarter was $4.2 million, which excludes the $0.5 million gain in fair value of non-cash contingent consideration, a $0.1 million liability increase related to the fourth quarter remeasurement of the company's tax receivable agreement, the $4.9 million impairment of goodwill and brand assets, and the $8.8 million restructuring charge. This results in adjusted net earnings of $0.08 per diluted share on a share count of 55.4 million shares of Class A common stock after accounting for income attributable to non-controlling interest and dividends on preferred shares.
Adjusted EBITDA was $30.7 million in the fourth quarter, up 38% compared to $22.2 million in the prior year period. Adjusted EBITDA margins grew to 34% from the fourth quarter compared to 31% in the prior year period. As Anthony mentioned, we have positioned the company for higher margins by increasing the operating leverage going forward, and we continue to expect margins to reach 40% in 2024. Going forward, we'd like to provide a comprehensive summary of our annual results each year that will include more granular brand level metrics and data. It is important to note that this additional data will only be provided during our Q4 calls. At times, I will discuss our scaled brands in our portfolio or those brands with greater than 150 studios operating in North America, which currently include Club Pilates, CycleBar, Pure Barre, StretchLab and YogaSix.
In 2023, the strongest license sales occurred in Club Pilates with 361, StretchLab with 159 and BFT with 149. These three brands represented 83% of the 805 licenses sold this year. Most licensed sales occurred in North America with 78% and the balance of 22% internationally. For openings, Club Pilates with 167, StretchLab with 163 and BFT with 71 represented 72% of the 557 new studio openings this year. Like license sales, new studio openings largely occurred in North America with 79% and the balance of 21% internationally. System-wide sales are driven directionally by the number of studios operating and the maturity of those studios. It is expected that the brands with a growing number of studios will continue to generate higher proportions of our system-wide sales as AUVs increase.
Our scaled brands represented 92% of North American studio operating at year-end and contributed 95% of the system-wide sales in 2023. Club Pilates with 905 studios operating at year-end contributed 52% of our total system-wide sales for the year, with Pure Barre at 638 and StretchLab at 436 studios operating making up approximately 30%. Run rate average unit volumes continued to be strong amongst the scale brands and overall Pure Barre had the highest year-over-year increase and was up 24% with Club Pilates and YogaSix up 15% and 13%, respectively. CycleBar AUV decreased 1% year-over-year, negatively impact by studios that had most sales and subsequently closed in the fourth quarter of 2023. StretchLab AUVs decreased 4% year-over-year, primarily driven by a higher number of young ramping studios entering the AUV calculation given the high number of new openings in that brand.
Same-store sales across all the scale brands were positive in every quarter throughout 2023, with Club Pilates, Pure Barre and YogaSix again realizing the highest increases. Going forward, total same-store sales are expected to normalize from the 2023 mid-teens growth rates to the low-double and high-single-digit growth rates in 2024. Turning to the balance sheet, as of December 31, 2023, cash, cash equivalents and restricted cash were $37.1 million, down from $37.4 million as of December 31, 2022. Total long-term debt was $328.5 million as of December 31, 2023, compared to $137.7 million as of December 31, 2022. The increase in total long-term debt is primarily due to the repurchase of 85,340 shares of convertible preferred stock at a price of $22.07 per share announced in January of 2023.
These shares prior to the repurchase would have been convertible into 5.9 million shares of Class A common stock. While we assessed a possible whole business securitization as an option to achieve a lower interest rate, given the current high rate environment and not wanting to enter into a fixed longer-term commitment, we recently completed a two-year extension on our term loan, with our current lender to preserve our optionality. The extension gives us the ability to float down with interest rates while in parallel preparing the company to opportunistically enter into a lower fixed cost arrangement later. Let's now discuss our outlook for 2024. Based on current business conditions and our expectations as of the date of this call, we are initiating guidance for the current year as follows.
We expect 2024 global new studio openings to be in the range of 540 to 560. This range is in line with the prior year studio openings and relatively equal at the mid-point over 2023. We project North America system-wide sales to range from $1.705 billion to $1.715 billion, or a 22% increase at the mid-point from the prior year and the highest North American system-wide sales in our history. Total 2024 revenue is expected to be between $340 million to $350 million, an 8% year-over-year increase at our mid-point of our guided range. Adjusted EBITDA is expected to range from $136 million to $140 million, a 31% year-over-year increase at the mid-point of our guided range. This range translates into a roughly 40% adjusted EBITDA margin at the mid-point.
It is worth noting that we anticipate Q1 will be the lowest revenue adjusted EBITDA and have the fewest new studio openings quarter for 2024 and will gradually increase throughout the year similar to the ramp in 2023. And as I just mentioned, we anticipate same-store sales in Q1 will be in the low-double-digits and will normalize to the high-single-digits by the fourth quarter. We expect total SG&A to range from $135 million to $140 million range or $110 million to $115 million range when excluding the one-time lease restructuring charges and under $100 million when further excluding stock-based costs. In terms of capital expenditure, we anticipate approximately $9 million to $11 million for the year, or approximately 3% of revenue at the mid-point.
Going forward, capital expenditures will be primarily focused on the integration of Lindora and maintenance of other technology investments to support our digital offerings. For the full year, our tax rate is expected to be mid to high-single-digits, share count for purposes of earnings per share calculation to be $31.5 million and $1.9 million in quarterly dividends be paid related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the back of our earnings press release, as well as our corporate structure and capitalization FAQ on our investor website. Finally, before turning the call over for questions, I want to communicate that the company is in the process of putting in place a new two-year and up to $100 million share repurchase program.
Given the high cash generation expected over the coming years, we want to be in a position to opportunistically use excess operating cash to buy back shares at low valuations. This share repurchase program will not impact the company's ability to execute on opportunistic M&A targets and will be 100% funded using excess operating cash and not through additional leverage. Thank you all for the time today. We will now open the call for any questions. Operator?
Operator: Thank you. And at this time, we'll conduct our question-and-answer session. [Operator Instructions]. Our first question comes from Randy Konik with Jefferies. Please state your question.
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