Xponential Fitness, Inc. quarterly report, Q3 FY2023

Xponential Fitness, Inc. — Q3 2023 Form 10-Q Summary

Business Context and Reporting Period

Xponential Fitness is a franchisor of ten boutique fitness brands, including Club Pilates, CycleBar, StretchLab, Pure Barre, YogaSix, Rumble and BFT. The company reported for the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods.

Global operating studios increased to 2,980 from 2,481 at September 30, 2022, including 2,596 in North America and 384 internationally.
Franchisees were contractually committed to open 2,031 additional North American studios; master franchisees were obligated to sell licenses for 1,042 additional international studios.
The company operated 31 company-owned transition studios, down from 40 a year earlier, and began a plan to exit these studios and focus on franchising.

Financial Performance and Key Metrics

Metric	Q3 2023	Q3 2022	YTD 2023	YTD 2022
Revenue	$80.4 million	$63.8 million	$228.5 million	$173.7 million
Operating income (loss)	$7.5 million	$(10.4) million	$36.7 million	$10.9 million
Net income (loss)	$(5.2) million	$(13.1) million	$7.4 million	$3.2 million
Net income (loss) attributable to XPO Inc.	$(3.4) million	$(7.1) million	$5.0 million	$2.2 million
Adjusted EBITDA	$26.5 million	$20.0 million	$74.6 million	$52.1 million
Operating cash flow	Not separately provided	Not separately provided	$38.2 million	$37.5 million

Revenue increased 26.1% in Q3 and 31.5% year to date, primarily from higher same-store sales and more open studios.
Q3 operating margin was approximately 9.3%, compared with negative 16.4% in the prior-year quarter. Year-to-date operating margin was approximately 16.1%, compared with 6.3% in 2022.
Q3 net margin was approximately negative 6.4%; year-to-date net margin was approximately 3.2%.
System-wide sales increased to $356.7 million in Q3 and $1.016 billion year to date, from $264.8 million and $739.2 million, respectively.
Same-store sales increased 15% in Q3 and 17% year to date. Last-twelve-month average unit volume increased to $561,000 from $474,000.
Adjusted EBITDA margin was approximately 33.0% in Q3 and 32.7% year to date, versus 31.4% and 30.0%, respectively, in the comparable periods.

Cash, Liquidity and Capital Structure

Cash, cash equivalents and restricted cash were $51.9 million at September 30, 2023, including $8.2 million of restricted cash. Cash and cash equivalents excluding restricted cash were approximately $43.7 million.
Operating activities generated $38.2 million of cash in the first nine months, while investing activities used $8.6 million and financing activities used $15.1 million.
Long-term debt, including the current portion and net of discounts and issuance costs, was $324.2 million. Total debt principal outstanding was $329.7 million.
The term loan carried an interest rate of approximately 12.05% at September 30, 2023. Interest expense increased to $10.6 million in Q3 and $27.2 million year to date, largely because of higher debt balances and interest rates.
The company entered into $130.0 million of incremental term loans in January 2023 and $65.0 million in August 2023. Quarterly principal payments increased to approximately $1.2 million beginning September 30, 2023.
Management stated that available cash and expected operating cash flow should meet anticipated obligations for at least the next twelve months, while noting that future debt service and refinancing capacity depend on economic and operating conditions.
The company repurchased $50.0 million of Class A common stock under an accelerated share repurchase program. Final settlement on October 2, 2023 resulted in 2.599 million shares repurchased and retired at an average price of $19.24 per share.

Material Changes Versus the Prior Comparable Period

Revenue growth was broad-based: Q3 franchise revenue rose 21%, merchandise revenue 35%, marketing fund revenue 34% and other service revenue 52%.
Operating income improved substantially despite higher selling, general and administrative expenses, principally because the prior-year period included $16.3 million of acquisition and transaction expense, while the current period recorded $1.9 million of acquisition and transaction income.
SG&A increased 48% in Q3 and 33% year to date. Drivers included restructuring costs, higher payroll and occupancy costs related to company-owned transition studios, and impairment charges.
Interest expense rose 219% in Q3 and 201% year to date, creating a significant offset to operating income.
The company’s ownership of XPO LLC was approximately 66% at quarter-end, with 34% represented by noncontrolling interests.
Redeemable convertible preferred stock declined to $130.3 million from $308.1 million after the January 2023 repurchase of 85 shares for $130.8 million.

Guidance, Outlook, Risks and Unusual Items

The restructuring plan is expected to continue through 2023 and 2024. The company expects additional restructuring charges of approximately $8.5 million to $10.5 million and estimates annualized gross savings of approximately $9.0 million to $12.0 million once completed.
Management cautioned that savings may not be fully realized, charges may exceed estimates, and lease termination negotiations may not be successful. Cash outflows related to lease terminations are expected through 2024.
Q3 included $6.3 million of restructuring charges, primarily for abandoned right-of-use assets, asset disposal losses and other restructuring costs.
The company recorded $3.5 million of gain related to termination of franchise agreements with sellers of 14 Rumble studios, while also recording a $7.2 million write-down of related franchise agreement assets.
Goodwill and brand impairment charges included $3.5 million for Stride, $0.7 million for Row House, and additional intangible impairment charges. No goodwill remained for those reporting units after the impairment testing.
Contingent consideration from acquisitions decreased by $18.5 million year to date, producing acquisition and transaction income that materially benefited reported operating results.
The company faces risks from consumer discretionary spending, inflation, recession, franchisee financing and execution, studio opening delays, competition, franchisee defaults, high variable-rate debt costs and potential impairment of goodwill or brand assets.
Contingencies include approximately $3.1 million of maximum exposure under franchisee lease guarantees, a $0.75 million standby letter of credit with a $0.2 million accrual, and a potential cancellation fee related to the BFT master franchise arrangement that could be material.
The company stated that there were no material changes to previously disclosed risk factors, and that it was in compliance with its debt covenants at September 30, 2023.

Most Important Facts for Investors to Verify

Whether the restructuring plan achieves the targeted $9.0 million to $12.0 million of annualized gross savings and whether additional charges remain within the $8.5 million to $10.5 million estimate.
The sustainability of same-store sales growth, AUV expansion and the conversion of committed licenses into open, productive studios.
Cash generation after increased interest expense, preferred stock obligations, share repurchases, lease commitments and restructuring-related cash costs.
Debt balances, interest rates, required amortization and compliance with leverage, liquidity and EBITDA covenants.
The extent to which reported operating income and adjusted EBITDA depend on non-cash contingent consideration income, impairment add-backs, equity compensation and restructuring adjustments.
Potential future impairment charges for Stride, Row House and other brands, particularly if forecasted cash flows weaken.
Unrecorded tax receivable agreement exposure: the filing states that approximately $76.7 million of TRA liability was not recorded because realization of the related tax benefits was not considered more likely than not.
Final settlement effects of the October 2, 2023 accelerated share repurchase and the resulting reduction in outstanding shares.