Xponential Fitness, Inc. annual report, FY2023

Xponential Fitness, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report, not a standalone fourth-quarter filing; quarterly metrics are included where disclosed.

Business context

Xponential is a global franchisor of ten boutique fitness brands, including Club Pilates, Pure Barre, CycleBar, StretchLab, YogaSix, Rumble and BFT. The company operates an asset-light franchise model and reports one operating segment. At year-end, the system had 3,062 operating studios globally, including 2,651 in North America and 411 internationally, across 49 U.S. states and 22 additional countries.

• Franchisees opened 557 studios globally in 2023, versus 513 in 2022.
• Franchisees were contractually committed to open 1,963 additional North American studios.
• Master franchisees were obligated to sell licenses for 1,055 additional international studios; 242 licenses had been sold but not yet opened.
• System-wide sales were $1.400 billion, up from $1.033 billion.
• Actively paying members increased 22% year over year to more than 649,000; total studio members were approximately 717,000.

Financial performance and key metrics

Metric	2023	2022	Change
Total revenue	$318.7 million	$245.0 million	+30.1%
Operating income	$39.7 million	$15.1 million	+162.1%
Operating margin	12.4%	6.2%	+6.2 percentage points
Net income (loss)	$(1.7) million	$2.9 million	Declined to a loss
Adjusted EBITDA	$105.3 million	$74.3 million	+41.8%
Adjusted EBITDA margin	33.1%	30.3%	+2.8 percentage points
Operating cash flow	$35.4 million	$51.7 million	Down $16.2 million

• Franchise revenue increased 24.6% to $143.6 million, including $95.0 million of royalties, $21.9 million of territory fees, $15.7 million of technology fees and $11.0 million of training fees.
• Equipment revenue increased 29.9% to $56.5 million; merchandise revenue increased 26.1% to $34.1 million; marketing fund revenue increased 33.9% to $27.3 million; and other service revenue increased 47.5% to $57.2 million.
• Approximately 75% of 2023 revenue was considered recurring, compared with 71% in 2022.
• Same-store sales increased 16%, compared with 25% in 2022. Last-twelve-month AUV rose to $596,000 from $494,000, while quarterly run-rate AUV rose to $590,000 from $522,000.
• Interest expense rose to $38.7 million from $13.0 million, reflecting higher debt balances and interest rates. Impairment of goodwill and other assets increased to $16.7 million from $3.7 million.
• Reported net loss included substantial unusual and non-cash items. Acquisition and transaction income was $18.0 million, primarily from changes in contingent consideration, while restructuring and related charges were $15.5 million in the adjusted EBITDA reconciliation.

Liquidity, debt and capital allocation

• Cash and cash equivalents were $27.8 million at December 31, 2023; cash, cash equivalents and restricted cash totaled $37.1 million, including $9.3 million of restricted cash.
• Total principal debt was $328.5 million, with a stated interest rate of 12.14% at year-end and scheduled principal payments of $4.8 million in 2024 and $323.8 million in 2025 under the then-current maturity schedule.
• The company was in compliance with its credit agreement covenants at year-end. A February 2024 amendment extended the credit facility maturity to March 15, 2026 and refinanced approximately $38.7 million of term loans.
• Operating, investing and financing cash flows were respectively $35.4 million, $(12.6) million and $(23.1) million. The company stated that available cash and expected operating cash flow should meet anticipated needs for at least the next twelve months, but noted risks from debt service, refinancing and business performance.
• The company repurchased and retired 2.599 million Class A shares for $50.0 million under an accelerated share repurchase program, at an average price of $19.24 per share.
• The company paid $130.8 million to repurchase 85,340 shares of convertible preferred stock in January 2023 and paid $7.1 million of preferred stock dividends during 2023.

Material changes versus the prior comparable period

• Revenue, operating income and adjusted EBITDA increased substantially, supported by studio growth, higher same-store sales and greater AUV.
• Operating margin improved, but net earnings declined from $2.9 million to a $1.7 million net loss because of higher interest expense, restructuring costs, impairment charges and other expenses.
• Operating cash flow declined 31% despite higher revenue, driven by lower net income after adjustments and unfavorable working-capital changes, particularly lease liabilities, deferred costs and deferred revenue.
• Company-owned transition studios declined to 22 from 55 as management began exiting or refranchising these locations.
• Goodwill impairments were recorded for the Stride and Row House reporting units, and additional Rumble-related asset impairments were recognized.
• License sales declined to 805 globally from 1,026, including 628 North American licenses versus 806 in 2022, although the contracted development pipeline remained substantial.

Outlook, unusual items and risks

• The restructuring plan is expected to continue throughout 2024. Management expects additional restructuring charges of approximately $23 million to $27 million and estimates annualized gross savings of approximately $13 million to $15 million after completion. Actual costs may be higher because lease termination negotiations remain unresolved.
• The Lindora franchisor acquisition closed January 2, 2024 for $8.5 million in cash plus up to $1.0 million of contingent consideration. Management expects the acquisition to be immediately accretive to AUV and adjusted EBITDA, but the filing does not provide a quantified forecast.
• Xponential acquired Xponential Procurement Services for $9.9 million, consisting of $3.5 million in cash and a $6.5 million promissory note payable in 2024 and 2025.
• On February 13, 2024, the company divested the Stride brand to a member of management and a stockholder for no consideration and expects to make approximately $265,000 of transition-support payments.
• The SEC requested documents from the company in December 2023. The company is cooperating but cannot assess the timing, outcome or potential financial impact of the investigation.
• A securities class action was filed in February 2024 alleging misstatements and omissions in financial statements, press releases and SEC filings. The company cannot estimate a potential loss.
• Key operating risks include franchisee financial health, the conversion of sold licenses into operating studios, consumer discretionary spending, competition, financing availability, brand reputation, cybersecurity and reliance on third-party systems, regulatory compliance, litigation, high leverage and the ability to refinance debt.
• The company’s convertible preferred stock ranks senior to common stock, carries a 6.5% cash coupon or a 7.5% PIK rate, and can create board-appointment and mandatory-redemption consequences following specified defaults.

Important facts for investors to verify

• Reconcile adjusted EBITDA to GAAP results and assess the recurring nature of the large adjustments, particularly acquisition income, restructuring charges, litigation costs, impairments and stock compensation.
• Review 2024 debt maturities, interest expense, covenant headroom and the practical effect of the February 2024 refinancing amendment.
• Track whether the 1,963 North American commitments and 1,055 international obligations convert into studios, given historical license terminations and lengthening opening times.
• Assess the cash cost and timing of the restructuring plan, lease exits and transition-studio closures against the projected savings.
• Monitor the SEC investigation, securities litigation, employment litigation and related legal expenses or reserves.
• Evaluate Lindora’s regulatory exposure, including healthcare, medical-practice, privacy, fee-splitting and licensing requirements, and compare realized results with management’s accretion expectations.
• Review franchisee same-store sales, AUV, active membership, studio closures and franchisee profitability for evidence that system growth is translating into sustainable royalty growth.
• Consider dilution, preferred-stock claims, noncontrolling interests and the tax receivable agreement, under which approximately 85% of realized tax savings may be payable to TRA parties.