Xponential Fitness, Inc. Form 10-Q Summary
Business context and reporting period
Filed August 7, 2023, for the quarter and six months ended June 30, 2023. Xponential Fitness operates one reportable segment and franchises ten boutique fitness brands, including Club Pilates, StretchLab, Pure Barre, YogaSix, Rumble and BFT. The company owned 67% of XPO LLC at quarter-end, with the remaining 33% represented as noncontrolling interests.
- 2,892 operating studios globally at June 30, 2023, versus 2,354 a year earlier.
- 2,520 North American studios and 372 international studios.
- 261 gross new studio openings during the first six months; franchisees were contractually committed to open more than 1,900 additional North American studios and 1,045 international studios.
- System-wide sales increased to $341.3 million in the quarter and $659.0 million year to date.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|
| Total revenue | $77.3 million | $59.6 million | 29.9% increase |
| Operating income | $36.5 million | $36.1 million | 0.9% increase |
| Operating margin | 47.1% | 60.7% | Down 13.6 percentage points |
| Net income | $27.5 million | $31.5 million | 12.6% decrease |
| Net income attributable to Xponential | $18.4 million | $16.8 million | 9.2% increase |
| Diluted EPS | $0.09 | $0.50 | Decreased |
| Adjusted EBITDA | $25.3 million | $17.6 million | 43.2% increase |
| Adjusted EBITDA margin | 32.7% | 29.6% | Up 3.1 percentage points |
| Metric | Six months 2023 | Six months 2022 | Change |
|---|
| Total revenue | $148.0 million | $109.9 million | 34.7% increase |
| Operating income | $29.2 million | $21.4 million | 36.9% increase |
| Operating margin | 19.8% | 19.4% | Up 0.4 percentage points |
| Net income | $12.5 million | $16.3 million | 23.0% decrease |
| Net income attributable to Xponential | $8.4 million | $9.3 million | 9.9% decrease |
| Diluted EPS | $0.08 | $0.26 | Decreased |
| Adjusted EBITDA | $48.1 million | $32.1 million | 49.9% increase |
- Q2 revenue growth reflected higher same-store sales, more open studios and increased company-owned transition studios.
- Same-store sales increased 15% in Q2 and 18% for the first six months. Last-twelve-month AUV rose to $539, compared with $456 in the prior-year periods.
- Franchise revenue increased 27.2% in Q2 and 28.2% year to date; other service revenue increased 62.2% and 66.4%, respectively, partly because of package and membership revenue from transition studios.
- Interest expense increased to $8.6 million in Q2 and $16.6 million year to date, compared with $2.9 million and $5.7 million, respectively, primarily because of higher debt balances and interest rates.
Cash flow, debt and liquidity
- Six-month operating cash flow was $30.6 million, compared with $26.2 million in the prior-year period.
- Investing cash flow was negative $5.6 million, including $4.4 million of capital expenditures, $1.4 million of intangible-asset purchases and studio acquisitions.
- Financing cash flow was negative $22.1 million. The company borrowed $126.1 million, repurchased preferred stock for $130.8 million, paid $8.1 million of taxes related to equity awards and paid $2.6 million of preferred dividends and deemed cash dividends.
- Cash, cash equivalents and restricted cash totaled $40.2 million at June 30, 2023, including $7.1 million of restricted cash. Cash and cash equivalents excluding restricted cash were $33.1 million.
- Long-term debt principal outstanding was $265.9 million, with a carrying value of approximately $261.8 million. The debt bears interest at a variable rate, stated as 11.74% at June 30, 2023, and is secured by substantially all assets of certain subsidiaries.
- The company was in compliance with its debt covenants at quarter-end and stated that available cash and expected operating cash flow should meet anticipated obligations for at least the next twelve months.
Material changes, outlook and unusual items
- In January 2023, the company issued $130.0 million of incremental term loans and used $130.8 million to repurchase 85 shares of convertible preferred stock. Preferred stock outstanding declined from 200 shares at December 31, 2022, to 115 shares at June 30, 2023.
- The company acquired 14 Rumble studios to operate temporarily as company-owned transition studios. The transaction added $4.9 million of goodwill and resulted in a $7.2 million write-down of franchise-related intangible assets, partially offset by $3.5 million of gain from terminating existing franchise agreements.
- Acquisition and transaction income was $31.3 million in Q2 and $15.5 million year to date, primarily reflecting noncash reductions in contingent consideration. These items materially affect reported operating income and comparability.
- Company-owned transition studios increased to 84 from 14 a year earlier. Management intends to refranchise these studios but may close studios that remain unprofitable, potentially causing lease-termination, severance and related charges.
- No formal numerical revenue, EBITDA or earnings guidance is provided in the filing text.
- Subsequent to quarter-end, the company approved a $50.0 million accelerated share repurchase program and borrowed $65.0 million under a new credit amendment, receiving $63.0 million of net proceeds.
- Material contingencies include a $3.3 million maximum obligation under franchisee lease guarantees, a $0.75 million standby letter of credit with a $0.15 million accrual, and a potential cancellation fee relating to BFT master-franchise rights that could be material if specified repurchase rights are not exercised.
- The company has a full valuation allowance against deferred tax assets. Approximately $79.3 million of potential tax receivable agreement liability was not recorded because realization of the related tax benefits was not considered more likely than not.
Important facts for investors to verify
- Whether rapid studio growth and contractual development commitments convert into timely openings and sustainable royalty growth.
- The profitability, cash requirements and eventual refranchising results of the 84 company-owned transition studios.
- The effect of variable-rate debt, the $265.9 million principal balance and subsequent $65.0 million borrowing on interest expense and liquidity.
- The extent to which reported operating income depends on noncash acquisition and contingent-consideration gains.
- Whether same-store sales and AUV remain strong as the comparison base matures and consumer discretionary spending conditions change.
- Potential dilution from Class B shares, restricted stock units and remaining convertible preferred stock.
- Related-party transactions, including the shareholder receivable of $21.8 million and revenues from affiliated franchisees.
- Legal, lease-guarantee, BFT cancellation-fee and tax receivable agreement exposures not fully reflected in recorded liabilities.
