Xponential Fitness Q1 2024 Earnings Call Transcript

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Xponential Fitness First Quarter 2024 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Avery Wanamaker from Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' Q1 2024 Financial Results. I am joined by Anthony Geisler, Chief Executive Officer Sarah Luna, President and John Malone, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor. Exponential.com.

Speaker 1

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 are forward looking statements based on management's current expectations and involve risks and uncertainties that could cause 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 obligations to update the information provided on today's call. In addition, we will be discussing certain non GAAP financial measures in this conference call.

Speaker 1

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 also 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 Geissler, Chief Executive Officer of Xponential Fitness.

Speaker 2

Thanks, Avery, and thank you all for joining us this afternoon. After closing 2023 with solid momentum, we've had a strong start to 20 24 with adjusted EBITDA margins expanding to 38% of revenue fueled by continued growth in our studio footprint and leaner operating expenses. As of the end of Q1, we had 3,156 studios operating globally with 6,365 licenses sold across our portfolio. In the Q1, we have completed the acquisition of Lindora and are on plan with the integration activities. As Sarah will speak to you shortly, we are very encouraged with the initial demand for Lindora franchises.

Speaker 2

We have already sold almost 40 licenses since we started selling Lindora in March and we are particularly encouraged to see the strong demand coming from both existing and new franchisee groups. During the quarter, total members in North America grew 17% year over year to 783,000 while our total visits increased 18% to a total of 14,900,000 in studio visits for Q1. This drove North American system wide sales to over $400,000,000 in the quarter, an increase of 25% over the Q1 of 2023. North American run rate average unit volumes of 596,000 in the Q1 increased 9% from 547,000 in the prior year period, while same store sales increased 9% for Q1. Same store sales for studios older than 36 months came in at 10%, primarily due to continued growth in our scaled brands.

Speaker 2

During the Q1, net revenues totaled $79,500,000 an increase of 12% year over year. Adjusted EBITDA totaled $29,800,000 or 38 percent of revenue, up 30% from $22,900,000 or 32% of revenue in the Q1 of 2023. As we discussed previously, optimizing growth in existing studios drives profitability in our asset light highly leverageable franchising model. In addition, along with our transition studio strategy shift complete, we remain firmly on track to reach our targeted 40% adjusted EBITDA margins this year and growing to 45% by 2026. Let's now discuss another key growth driver, the increase of our franchise studio base.

Speaker 2

We ended the quarter with 3,156 global open studios, opening 111 gross new studios during Q1 with 85 in North America and 26 in international markets. As mentioned on our last call and in line with typical seasonality cadence, we expect openings to be more back end weighted with a gradual increase in each quarter of 2024. We currently have over 400 North American leases and LOIs signed for studios not yet open, which resulted in new studios in the coming quarters. We sold 173 licenses globally in the Q1 and our pipeline remains robust with almost 2,000 licenses sold and contractually obligated to open in North America, plus an additional over 1,000 master franchise agreement obligations. We also continue to expand our overall TAM.

Speaker 2

Along with a growing addressable market for our brands, the acquisition of Lindora has increased our access to the broader health and wellness market. Buxton's latest analysis illustrates our current TAM in the United States alone is at approximately 8,400 studios. Buxton estimates room for an additional over 800 Club Pilates locations in the United States and Lindora is now included at over 1,000 potential locations. As Xponential continues to grow, we continue to focus on optimization of our portfolio of brands and remain open to opportunities to both acquire and divest brands that align with the desired long term growth trajectories of our business. At this time, we are not including any further locations for AKT or RowHouse in the 8,400 location TAM estimate and Stride has been removed from TAM also following its divestiture in the Q1.

Speaker 2

Turning to our international expansion efforts. At the end of the Q1, we have over 1,000 studios obligated to open under master franchise agreements. In April, we opened our 4 hundredth international studio. We are starting to build a significant presence in select international markets, which will help drive consumer awareness in economies of scale. For example, we have over 2 20 studios in Australia.

Speaker 2

In Japan, we now have 50 Club Pilates studios open. The same master franchisee who has overseen development of those 50 locations has an additional 115 Club Pilates locations to be developed in Japan, 130 locations to be developed across our Cycle Bar, Rumble and AKT brands in Japan as well as development rights in Singapore. Our recently hired international President and team have been focused on supporting our existing master franchise relationships, while continuing to seek out new markets for our brands expansion. In the Q1 alone, our master franchisees sold 53 new sub franchise licenses. Our international business made up 31% of license sales 23% of new openings in the Q1.

Speaker 2

I'd also like to mention how pleased we are to have recently completed our first board meeting with our newest Director, Geoffrey Lawrence. Jeff brings decades of leadership experience at some of the most well known consumer brands. In addition to his deep financial acumen and track record of value creation, he brings expertise in executing franchise expansions on a global scale. Jeff previously served as Executive Vice President and Chief Financial Officer at Domino's Pizza, where he supported the brand through its technological transformation and global expansion, and he currently serves on the Board of Shake Shack. We expect he will be a great asset to Exponential as we continue expanding globally, and I look forward to working with him on our strategic initiatives moving forward.

Speaker 2

In summary, Xponential had another strong quarter as we execute against our 4 key growth drivers: selling franchises, opening studios, increasing AUVs and optimizing SG and A. And with that, I'll pass the call on to Sarah.

Speaker 3

Thank you, Anthony. Our studios are a critical part of our members' routines and their continued interest in our brands is demonstrated by our Q1 total visits and total actively paying members in North America. We saw strong growth in both metrics, both overall and at a per studio level. Total actively paying members and total visits both grew by 18% year over year. Average active members per studio and average studio visits per member also increased, while membership freezes remained low, declining year over year.

Speaker 3

Running a portfolio of consumer facing brands, it is imperative that we keep the consumers' interest front of mind and ensure our offerings and class formats remain relevant to what members are looking for. Changing a class format to one that better aligns with our members' interest is one way we can produce a meaningful positive change in AUV. We introduced a new strength focused class format at CycleBar in January, which has been received very positively. On average, cycle bars that adopted this class format witnessed a strong increase in AUVs during Q1. Similarly, Pure Bar Studios that have adopted the new strength training class format defined have exhibited strong increases.

Speaker 3

We're also excited about the growth prospects of our newest brand, Lindora. Xponential is now approved to sell Lindora in 44 states, and we have launched the brand across major broker networks. As Anthony mentioned, since beginning to sell the brand in March of this year, we've already sold almost 40 licenses. In Q1, we put a Lindora specific team in place that is ready to lead the charge for growth. In addition to growing the number of Lindora locations, we also have several initiatives underway to improve service and product offerings, as well as the overall customer experience to ultimately drive higher AUVs and unit level profitability.

Speaker 3

Our existing Glendora locations have seen month over month gross revenue increases every month since our January acquisition. We are currently expanding hormone replacement therapy or HRT and testosterone replacement therapy or TRT across the Lindora Studio base. HRT is a medical treatment used to balance and supplement hormone levels in the body, which can involve replacing hormones that the body is no longer producing adequately or adding hormones to address specific health concerns. TRT is used primarily to address symptoms of low testosterone levels in men. Lindora offers HRT and TRT services through recurring memberships subject to a prescription provided by a licensed medical professional.

Speaker 3

Finally, we are in the process of constructing a mobile app and upgrading Lindora's website to improve our members' experience, enhance marketing and accelerate lead generation. I'll now turn the call over to John to discuss our quarterly financial results in more detail. John?

Speaker 4

Thanks, Sarah, and thank you to everyone for joining the call. 1st quarter North America system wide sales of $401,100,000 were up 25% year over year. The growth in North American systemwide sales was driven by the 9% same store sales within our existing base of open studios that continue to acquire new members as well as new studio openings. Further, 96% of the system wide sales growth came from volume or new members, which has remained consistent with historical performance and 4% coming from price. We are still anticipating same store sales will normalize to mid to high single digit percentages in 2024.

Speaker 4

On a consolidated basis, revenue for the quarter was $79,500,000 up 12% year over year. 73% of revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory fee revenues 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 $41,800,000 up 27% year over year. This growth was primarily driven by an increase in royalty revenue as system wide sales reached all time highs.

Speaker 4

In addition, an increase in franchise territory fee revenue was due to accelerated revenue recognition on terminated licenses, including those from the Stride brand. Equipment revenue was $13,900,000 up 6% 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 $8,200,000 up 14% 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.

Speaker 4

Franchise marketing fund revenue of $7,800,000 was up 26% year over year, primarily due to continued growth in system wide sales from 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, XPath and X Plus amongst other items was $7,900,000 down 30% from the prior year period. The decline in the period was primarily due to our strategic move away from company owned transition Studios last year, resulting in a lower other service revenues. Importantly, the savings related to the Studio operating expenses exceeded the decline in revenue, resulting in improved EBITDA margins. Turning to our operating expenses, cost of product revenue were $14,400,000 up 3% year over year.

Speaker 4

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, as well as increased cost of goods sold on higher merchandise revenues. Cost of franchise and service revenue were $5,100,000 up 27% year over year. The increase was driven by higher franchise sales commissions that were accelerated from terminated licenses, including those from the Stryd brand. Selling, general and administrative expenses of $37,200,000 were up 7% year over year. The increase in SG and A was primarily associated with restructuring costs from settling leases on company owned transition studios where we have ceased operations.

Speaker 4

As previously discussed, we have shifted our strategy on company owned transition studios, which will decrease run rate SG and A expenses and improve EBITDA margins. The number of company owned transition studios have declined from 86 at the end of the Q1 of 2023 to only one studio remaining as of the end of the Q1 of 2024. With some of these studios having been refranchised to new owners and some having been closed permanently, the net operating losses associated with the company owned transition studios have been materially eliminated. For the non operating lease liabilities that are being treated as one time restructuring, we are planning to enter settlement agreements with landlords by the end of the year. The investments we are making to streamline operations back to a pure franchise model will optimize forward looking SG and A expenses, resulting in enhanced margin levels.

Speaker 4

Depreciation and amortization expenses was $4,400,000 an increase of 6% from the prior year period. Marketing fund expenses were $6,500,000 up 30% 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 city owned 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 increase in marketing fund expenses over time.

Speaker 4

Acquisition and transaction expenses were $4,500,000 down 71% from the Q1 of 2023. 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 $4,400,000 in the Q1 or a loss of $0.30 per basic share compared to a net loss of 15,000,000 dollars or a loss of $1.38 per basic share in the prior year period. The improved net loss was a result of $5,600,000 of higher overall profitability and $11,200,000 decrease in non cash contingent consideration, primarily related to the Rumble acquisition and a $2,100,000 decrease in non cash equity based compensation expense, offset by an $8,100,000 increase in restructuring costs from our company owned transition studio and $300,000 increase We continue to believe that adjusted net income is a more useful way to measure the performance of our business.

Speaker 4

A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the Q1 was $9,100,000 which excludes the $4,500,000 in acquisition and transaction expenses, primarily related to the non cash contingent consideration for the Rubble acquisition, dollars 600,000 related to the 1st quarter remeasurement of the company's tax receivable agreement, dollars 300,000 related to the loss on divestiture of Stride and the $8,100,000 restructuring and related charges. This results in adjusted net earnings of $0.15 per basic share on a share count of 31,100,000 shares of Class A common stock after adjusting for income attributable to non controlling interest and dividends on preferred shares. Adjusted EBITDA was $29,800,000 in the Q1, up 30% compared to $22,900,000 in the prior year period. Adjusted EBITDA margin grew to approximately 38% in the Q1 compared to 32% in the prior year period.

Speaker 4

As Anthony mentioned, we have positioned the company for higher margins and increased operating leverage going forward and we continue to expect margins to reach 40% this year. An attractive element of our franchise business model is the ability to generate substantial free cash flow. During Q1, our unlevered free cash flow conversion exceeded 90% of adjusted EBITDA as we require minimal capital expenditures to grow It is worth mentioning that the company has approximately $160,000,000 in federal and state net tax loss carryforwards that will result in a minimal cash tax burden for the coming years. Our anticipated interest expense in 2024 will be approximately $45,000,000 assuming no additional debt pay down and we assume negligible working capital impacts on cash flow. For the full year, we would expect levered adjusted EBITDA cash flow conversion of over 60%, excluding any effects for preferred dividends and one time restructuring and will convert to over 70% in the coming years.

Speaker 4

We will continue to prioritize cash usage on settling leases from our transition studios. As we make progress on settling these leases, we will assess when the appropriate time will be to begin executing on our stock repurchase program. Turning to the balance sheet, as of March 31, 2024, cash, cash equivalents and restricted cash were 27,200,000 down from $28,100,000 as of March 31, 2023. Material cash usage in the period included the 8 point $5,000,000 acquisition of Lindora and the previously discussed $4,500,000 restructuring lease settlements. Total long term debt was $331,400,000 as of March 31, 2024 compared to 266 point $7,000,000 as of March 31, 2023.

Speaker 4

The increase in total long term debt is primarily due to the repurchase and immediate retirement of approximately 2,600,000 shares under our accelerated share repurchase program in Q3 and Q4 of 2023. 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 reiterating guidance for the current year as follows. We expect 20 24 global new studio openings to be in the range of 540 560. This range is in line with prior year studio openings.

Speaker 4

We project North America system wide sales to range from $1,705,000,000 to $1,715,000,000 or a 22% increase at the midpoint from the prior year and the highest North America system wide sales in our history. Total 2024 revenue is expected to be between 340,000,000 dollars to $350,000,000 an 8% year over year increase at the midpoint of our guided range. Adjusted EBITDA is expected to range from $136,000,000 to $140,000,000 a 31% year over year increase at the midpoint of our guided range. This range translates into roughly 40% adjusted EBITDA margin at the midpoint. We anticipate revenue, adjusted EBITDA and new studio openings will gradually increase throughout the year similar to the ramps in 2023 and we continue to anticipate same store sales will normalize to a high single digit by the Q4.

Speaker 4

We expect total SG and A to range from $135,000,000 to $140,000,000 range or $110,000,000 to $115,000,000 range when excluding the one time lease restructuring charges and under $100,000,000 when further excluding stock based costs. In terms of capital expenditure, we anticipate approximately $9,000,000 to $11,000,000 for the year or approximately 3% of revenue at the midpoint. Going forward, capital expenditure will be primarily focused on the integration of Lindora and maintenance 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 $31,500,000 $1,900,000 in quarterly dividends to be paid related to our convertible preferred stock. A full explanation of our share count calculation and associated pro form a EPS and adjusted EPS calculation 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.

Speaker 4

This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for any questions. Operator?

Operator

Thank you. We will now be conducting a question and answer

Speaker 5

John, I wanted to start with, I know you talked about the free cash flow conversion rate, but maybe talk about the dollar amount, right? So I think the idea might have been $60,000,000 or $65,000,000 of free cash flow dollars in 'twenty four. Is that about the right number? And then sort of suggested your commentary that the that will be focused on debt reduction with no buyback this year, right, or minimal buyback. And then what's your what's the latest thought on timing of possibly a financing?

Speaker 5

Is that do you think that's very late this year or not likely at all?

Speaker 4

A couple of questions there. So the first part about the cash production, yes, so the cash generation this year is going to be around that $65,000,000 range. The use of cash and again, this is pre restructuring, right? The intent of how we deploy the cash is going to be to address the lease liabilities, 1st and foremost, on the transition studios. As far as the stock repurchase, there is the opportunity for us to do some of the repurchasing in the second half of the year as we talked about in the last earnings call, but we want to prioritize getting rid of the lease liabilities first.

Speaker 4

In regards to a refinancing, we did get an extension done earlier this year throughout 2026. We are continuing to monitor and look at interest rates and look at opportunities for us to get a refinancing done that would allow us to take advantage of lower interest rates as they start to set in. Obviously, with some of the more recent announcements, it seems like they're kind of holding flat. But we are looking at opportunities and where we could potentially draw down on the interest rate and get more of a long term fixed financing in place at a much cheaper cost.

Speaker 5

Maybe secondly for Anthony, right, if you think about the 1,000 locations that Buxton has for Lindora, I mean, how do you I'm just sort of curious, how do you think that stage is, I know you sold 40 and you got to sell them, right? They'll be front loaded selling and then you'll open them later. But how do you think that plays out right over the next 2, 3 years? And I guess would you does that cannibalize all franchisee interest in opening other brands you think no, it just because it expands the TAM, there's no cannibalization on selling other licenses?

Speaker 2

No, there's definitely no cannibalization on selling other licenses. And the majority of our franchise sales come from about 500 plus franchise sales brokers we have, independents across the country. And they're generating new lead flow of people that are not in the Xponential system. People that could be looking at, well, anything franchised kind of across the country. So there's definitely no cannibalization in there.

Speaker 2

Buxton has a high level of integrity in what they do when they do their TAM work. And so we tend to see the numbers be very conservative with them. For instance, original Club Pilates was just a bit short of 1,000 in total. And today, we've got about 50% more than that, even pre sold, right, with 1,000 already open. And so what we find is that we're very constrictive in the beginning on how many we sell, where we sell them.

Speaker 2

And as we get those stores out and get them open, we see AUVs be stable and increase, then we're willing to release more and more TAM. So if you look at kind of Club Pilates now, several years later, Club Pilates TAM continues to increase by about 100 ish or so new units every year on the TAM. So we expect the Club Pilates TAM will get to 2,000. Buxton's comment to us when they ran the cohorts for Lindora based on the Lindora current membership, that they were synonymous with Stretch Lab and Club Pilates. So we expect that we will see the TAM of Lindora head to those numbers, which will be somewhere in the $1500,000 to $2,000 range over time, provided that we get out, we get the stores open, but the 40 close to 40 you're seeing today that are sold, you'll start to see those open, some of those open in Q4 most likely of this year.

Speaker 2

So that's probably what you would see.

Speaker 4

All right. Thank you.

Operator

Thank you. The next question comes from Megan Alexander from Morgan Stanley. Please go ahead.

Speaker 6

Hey, good afternoon. Thanks for taking our question. I wanted to ask about the comp a little bit. You talked about a low double digit type expectation when you guided in February. So were you running low double digit then?

Speaker 6

And did the comp decelerate over the balance of the quarter? Or were you expecting the comp to accelerate and it didn't? I guess, can you just give us a little bit more color over the cadence of that comp during the quarter? And maybe what drove the downside versus your expectations?

Speaker 3

Sure. I can jump in on that one. So for studios that were over 36 months of maturity, we did see double digit same store sales comp. The majority at 9% or the system at 9%, it was a little bit lower than what we were aiming for. We mentioned in our Q4 call that we expected this number to normalize from the 2023 mid teens growth rates to double digit, sorry, to the low double and high single growth rates in 2024.

Speaker 3

But really what we saw in Q1 was we had a great quarter from a KPI standpoint. So visitations and membership trends were high, freezes were low, but we did see a pull forward in packages sold in Q4, primarily in StretchLab as well as Pure Bar who had really successful Black Friday promotions. So we did see a little bit of pull forward that will start to normalize over the next quarter or so.

Speaker 6

Okay. And then, John, I think you talked about normalizing still to that high single digit type level by the end of the year. I mean, depending on your definition, 9% could be high single digit. So has your expectation for 2 to 4Q changed at all on the comp? And how should we think about maybe can you talk a little bit about the exit rate and how should we think about 2Q?

Speaker 4

Yes. I think when you look at the from Q1 to Q2, how to think about it, I think what the assumption that I'm using right now based off of the information is you'll probably see something similar to Q1 and Q2. It'll stay flat in the is the assumption I'm using. Again, it really comes down to the packages that were sold in Q4 between Pure VAR and StretchLab when those people either re up or if they join as members. And then that will be kind of a because of the size and scale that will be an influencer in Q2.

Speaker 4

I do believe for the full year that you're still looking in the mid to high single digits by Q4, But the overall year, I still believe, is going to be a high single digit same store sales comp.

Speaker 6

Got it. Thank you.

Operator

Thank you. Your next question comes from Ryan Mayes from Lake Street Capital Markets. Please go ahead.

Speaker 7

Hey, guys. Thanks for taking my questions. First one for me is, Anthony, you talked about adding strength into cycle bar and pure bar that drove sort of 80 feet in the quarter. I just wondered what kind of optionality you guys have to do that within other brands?

Speaker 2

I mean, some brands like BFT obviously already have it. And so we don't really need to drive that into Club Pilates today. So we'd be putting it into those brands where it makes sense where it wasn't, which kind of drives really all that we have today. We already have strength training in brands like RowHouse and things of that nature. So we won't be, of course, doing it in anything like Lendora or StretchLab or things of that nature.

Speaker 2

So that's where we are on that.

Speaker 7

Got it. And then just wondering if you can talk about if you've seen any changes to the opening mix by brand as we progress throughout this year and then maybe how you think about that into next year, especially as now that we have the Lindora acquisition?

Speaker 4

Yes, I could take that. In Q1, one of the largest openers was Club Pilates. It actually was the highest number of openings domestically for Club Pilates in the last five quarters. So it was a little bit over indexed in CP in Q1. I think when you look at the overall mix in 2024 as we go through the quarters, you'll see about onethree of the openings still being Club Pilates, which is very similar to last year.

Speaker 4

And then as you move forward, StressLab will make up about 25% of the mix. And then Yoga 6 has shown really strong performance from an AUV perspective lately, but also from an openings perspective. I think that will be in the 5% to 10% range of the total openings. And then both Rumble and BFT, I think will be in the 5% to 10% range for this year and then the balance is made up of the other brands. So when you look at it, a third, Pilates, maybe about 25% StretchLab and then between Yoga 6, Rumble and BFT about 5% to 10% of the total mix.

Speaker 4

So you're seeing kind of a concentration of the openings among those brands.

Speaker 7

Got it. Thank you for taking my questions.

Speaker 4

Yes.

Operator

Thank you. The next question comes from Jonathan Komp from Baird.

Speaker 8

Baird. Yes. Thank you. Good afternoon. John, if I could follow-up just on the full year profit outlook.

Speaker 8

I know that the full year is for about 40% adjusted EBITDA margin. So could you maybe just share any more insights or any other color to call out as we think about the progression from mid-thirty 7 percent in Q1 to 40% for the year?

Speaker 4

Yes. It hasn't changed much from the first earnings call or I guess the last earnings call, the Q4, 1 of last year. We said mid to high 30% to 5% to 40% in Q1. It should get close to crossing 40%, if not crossing 40% in Q2. Q2 to Q3 will be relatively flat.

Speaker 4

The summer months are a little bit more. If you look at the cadence of how 2023 performed, you'll see Q2 and Q3 stay relatively flat in performance to each other. And then in Q4, we have a lot of equipment installed that happened in Q4, which is a little bit margin dilutive being that they range in that 30% to 35% margin range. So it has a little bit of a dilutive impact on top of our national conferences in the Q4. So you'll see 38% in Q1, expect to see north of 40% to low 40% in Q2 and Q3.

Speaker 4

And then in Q4, it'll be a little bit pull back a little bit because of the convention and just the equipment install dilution in the Q4. And then when you roll into 2025, you'll see it be in the mid to low 40% range and climb from there over the next 8 quarters as we still are on track to achieving the 45% by 2026. So it will be kind of a grind from here each quarter getting a 1% or 2% better from a cadence perspective.

Speaker 8

Okay, great. And then just one separate question maybe for Anthony or Sarah. We noticed the FDDs this year included concept level monthly churn, which I believe was new. Just wanted to maybe follow-up, but I don't know if you could share any color as we think about differences in churn by concept, maybe what drives the path? Or and maybe as a follow-up, as you think about churn overall across the system, any comments on what you're seeing or any trends positive or negative from a churn perspective?

Speaker 8

Thank

Speaker 4

you. Yes, I'll take the lead on this one. When you look at the brands, I mean, on average, you're seeing somewhere between 5% to 7% churn across the brands. Some of the and those are really in the core brands is where you see that. And then but we typically look at churn from 12 months or after 12 months because that's really when the core customer is kind of attached to the brand or their location.

Speaker 4

In that case, you see attrition rates in the low single percentage digits. We always look at it between 2% to 4%. When you look at it within 12 months, I mean, you get your New Year's resolution type people that come in, you get your vacation type people that are trying to get ready for summer months, weddings, those kind of things. So you do see in that, let's call it, 5% to 7% churn on some of our more scaled brands. But when you look in the post 12 months kind of core consumer, it's in the low single percentage digits on a monthly basis.

Speaker 8

And has that held stable over the last few quarters and into 2024? Any changes that you've noticed?

Speaker 4

Yes. When we look at the trends, you really haven't seen even since kind of post COVID, the consumer kind of behaviors have been very stable, Even from a freeze perspective and attrition perspective, it's been very consistent. So we haven't seen overall trade downs in what the consumers are spending. So if you look at a 4 pack, 8 pack, unlimited, what we are seeing is that there getting more price on a pack this in Q1 of 2024 versus Q1 of 2023. But the consumers and what they're purchasing or their wallet spend has been up as we progress through the quarter.

Speaker 4

So in essence, we're able to take a little bit more price as new members come on, old members are trade out because utilization and capacity is less in the studios, we're getting more wallet share on the new consumers than we did a year ago, but very, very stable utilization and very stable kind of visit patterns from the consumer.

Speaker 8

Okay. Thanks again.

Operator

Thank you. Your next question comes from Chris O'Cull from Stifel. Please go ahead.

Speaker 9

Thanks. Good afternoon. John, just as a follow-up to an earlier comment, is the comp currently trending similar to the Q1 level or does it need to improve to get to that level?

Speaker 4

From 10 Q2 is what you're asking for?

Speaker 10

Yes.

Speaker 4

Yes. I haven't provided any like forward looking Q2 comments, but the assumption that we're looking for is that Q2 will be similar to Q1 from a comp perspective. And then I still see the full year around that high single digit, but I do expect as we roll into Q4, it will taper down to the mid to high singles. When you look at what comps were pre COVID, the 8 quarters pre COVID is we're in a much more normal environment. They averaged 8%, the 8 quarters prior to COVID.

Speaker 4

So that's kind of the assumption that I'm using going forward in my model is that they will even though they're at 9%, they were modeling 9% for Q2. I think getting back to that, let's call it, 5% to 8% by Q4, again being somewhat conservative in the way I do my modeling is the assumption I'm using. Conservative in the way I do my modeling is the assumption I'm using.

Speaker 9

Okay. I was thinking more of like the current trend. Is the current trend currently around the level you saw in the Q1? Or do you are you expecting it to accelerate from this to get to that high single digit level?

Speaker 4

Possible. We're looking at obviously the impacts of we've got Lindora in the mix, stride is no longer in the mix, we're opening a lot of stretch lives in club Pilates last year. So they started to enter the club this year as we go through the quarter. So in order to make the model work, I understand what you're asking. Yes, you'd have to probably see a slight uptick in Q2 to get to that full year 9%.

Speaker 4

So it's probably a safe assumption. But for conservatism, I think in again, in my model, I'm looking at it Q1 to Q2. It's probably going to be in the same range in Q2 as it was in Q1, plus or minus 5%. So yes.

Speaker 9

Okay. We noticed the run rate average unit volume essentially held flat on a sequential basis relative to the Q4. Can you talk about what drove that dynamic?

Speaker 4

Yes. That was what Sarah was kind of mentioning is when you look at the Black Friday deals that were offered in Q4, Pure Bar and SwatchLab had really strong AUVs in the 4th quarter. So they were in essence pulling in a lot of sales into the 4th quarter that you normally would have expected to get in Q1. So consumers attached to those promos. So the sales for Q1 for Pure Bar and Swet Shop being a larger brand weren't there in Q1 because they were already there in Q4.

Speaker 4

So we expect visitation was really high and that's what kind of led us to believe that when you look at these promotions, let's just say they did too well, but that's a good thing because you brought in consumers sooner. So now it's a function of as these consumers visit the studios, trying to get them converted into a membership. So you get the reoccurring revenue from the Black Friday promotion. So you're seeing a little bit of a flatness in Q4 to Q1 from Q4, but it's based off of the promotions of those brands. Club Pilates didn't do a lot of promotions where they saw a spike.

Speaker 4

It was pretty normal run rate activity. But in those other brands, they had a little bit more promo, probably drove more package type volume, which impacted Q1 because it pulled into Q4.

Speaker 9

Okay, that's helpful. And then I think you mentioned Buxton added 800 Club Pilates locations to the TAM. And I'm just curious what the main enablers of that expansion was in terms of demographics or psychographics that you're capturing

Speaker 2

now? Yes. When we as I said earlier on the call for another question, when we look at original TAM, we keep cannibalization percentages from ourselves and other competitors very low. As you've seen with that brand, as we've expanded over the last 9 years, the AUV has climbed from $250,000,000 to 1,000,000 dollars So that means ultimately it was a little too conservative potentially to begin with, meaning we kept cannibalization very low kept density of our core customer very high in that surrounding area. And so what we'll do is we'll start to release that by a point or 2 percentage point or 2 and see what the TAM does, sell that additional TAM, let more stores open and make sure we're kind of properly doing it.

Speaker 2

One of the designators in there is designed for a certain AUV. That was originally that brand was originally designed at $605,000,000 of AUV and it's obviously well above that at about 1,000,000 So we can play with AUV, potentially AUV of the store, cannibalization and density. But we don't want to do that early on over sell an area and see AUVs either be flat or go backward, if that makes sense.

Speaker 9

That's helpful. Thanks.

Operator

Thank you. Your next question comes from Alex Perry from Bank of America. Please go ahead.

Speaker 11

Hi. Thanks for taking my questions here. I guess I wanted to follow-up on the studio opening cadence for the year. Should we expect sort of the same percent of openings in each quarter versus last year? And then how many net studio openings this year?

Speaker 11

So I think the gross numbers stayed the same. Has your expectation on net studio openings changed at all? Thank you.

Speaker 4

Yes. So we guided $540,000,000 to $560,000,000 for the full year, which is right in line with 2023 at the midpoint. The cadence is still at 45% in the first half, 55% in the second half from a kind of a cadence perspective. So you'll see Q1 being the lowest quarter, which was similar to Q1 of 'twenty three. It'll build in Q2, slightly build in Q3.

Speaker 4

And then Q4, again, just like last year, we saw a large volume of openings as people conceptually get open for the New Year from a New Year's resolution standpoint, you typically see that in franchising and we expect to have that same phenomenon in 2024. And from a net perspective, we don't have a lot of historical trends on closures. When you look at the number of closures in Q1, it's just over 0.5%. So cumulatively, as you build through the year, when you look at franchising, we're still kind of of the mindset that the 3% to 5% on the high end is kind of a normal range. We've modeled 3% into the way we did our guidance.

Speaker 4

But 3% to 5% is how we're thinking about it. Q1 on a pro rata basis is favorably ahead of schedule, meaning lower closures than we when we spend that assumption. So we'll continue to drive the business, support franchisees and getting studios open and helping studios that are struggling improve AUVs so they don't close. So $550,000,000 is the midpoint, 45 percent first half, 55% second half and think of closures at around 3% for the full year.

Speaker 2

And from a dollars perspective, obviously, the cohort of the AUV of cohorts that are closing is totally different than the cohort of AUVs that are opening. So you can't really model them on a one for 1 KPI net unit basis in the model or you'll be off.

Speaker 11

That makes a lot of sense. And then can you just remind us on sort of the financial implications of the wind down of the transition studios? Like what is the net savings expectation that you're expecting for the year? And is that sort of coming in line with how you're thinking about 3 months ago?

Speaker 4

Thanks. Yes. As far as if you pro form a 2023 and assume that there was no transition studios last year, your revenue would be about $25,000,000 lighter. Your other service revenue line would be about $25,000,000 lighter. Your SG and A on the normal four wall operating expenses would be about $37,000,000 lower.

Speaker 4

So the net net EBITDA impact last year was around 12,000,000 dollars So if you assume this year, you're kind of starting at $117,000,000 as your starting point in adjusted EBITDA and then building to the $136,000,000 to $140,000,000 range that we guided The Street to.

Speaker 11

That's incredibly helpful. Best of luck going forward.

Operator

Thank you. Your next question comes from Jeff Van Sinderen from B. Riley Securities. Please go ahead.

Speaker 10

Thanks. So just to clarify on AUV, when you look at it

Speaker 5

Or maybe what should

Speaker 11

we expect for AUV

Speaker 10

progression for the remainder of

Speaker 5

the year? Or maybe what should we expect for AUV progression for the remainder of the year?

Speaker 4

Yes, the model does assume that AUVs will continue to increase in 2024 on a quarterly basis. As we look at Q1 and how we finished the quarter at that 5 kind of that mid or the high 5 70s, I do believe that as you kind of move into the later half of twenty twenty or you'll start to see us push into the higher ranges from an AUV perspective, trying to cross over into the 600,000 and driving our way towards 700,000. I don't believe you'll get to based off of the assets, the brands we have today and the mix, I don't think you'll cross $700,000 at this point in 2024, but I do think you'll start to threaten towards the high 600 as we progress through this year. A lot of the growth you got to remember is Club Pilates has kind of been in that $900,000 to $1,000,000 range. Your stretch lives, we opened a lot of stretch lives last year.

Speaker 4

Those studios get to a 600 AUV very quickly as we open up more Rumbles, BFTs and now we have Lindores that will start to show up in the later part of this Q4 kind of timeframe, albeit a very small sample set, but it is just studios entering at high AUVs. Those will continue to pull up the overall AUV. Brands like Yoga 6 have done very well over the last coming quarters. They've actually kind of accelerated a little bit from an openings perspective. The AUV continues to grow there.

Speaker 4

We got really great response to Purovar, so those AUVs. So you're getting a lot of support in all the brands that are at scale doing fairly well. AUVs right now as they sit today, they were relatively flat to Q4. But with the studios that will start entering the 6 months of age and they enter the calculation probably midway through the year, they'll start pulling up the AUV because they're performing very well right out of the gate.

Speaker 5

Okay. That's helpful. And then of course, you sold 40 Lindor licenses, and I'm sure you're selling more as we speak. Can you give us any more color around the sort of the trends in other brands in terms of the composition of new licenses sold in Q1?

Speaker 4

Yes. Of the 173 licenses sold in Q1, about 55% of them are Club Pilates. So there was about 100 that we sold of Club Pilates, again, over indexed in Club Pilates, Lindora, as you mentioned. And then BFT, there was about 20 BFTs that were sold in the Q1. StretchLab had about 15.

Speaker 4

And Purabar, as we mentioned, the performance in Purabar has led to new license sales. So we saw 11 new license sales in Purabar. So the balance was with the rest of the brands, but 173 licenses in Q1 is with about 55% of them in Club Pilates. It's not a surprise given where the license sales are coming from, because they're coming from brands that are performing very well with high EVs. So franchisees are very motivated to buy more licenses and whether you're a new franchisee or an existing trying to expand your existing portfolio.

Speaker 10

Okay, great to hear. I'll take

Speaker 5

the rest offline. Thank you.

Operator

Thank you. Your next question comes from Warren Chiang from Evercore ISI. Please go ahead.

Speaker 10

Sorry about the guys. Hi John, hi Anthony. Hey Warren. I just wanted to follow-up on your comment that you saw some pull forward of some of the Pure Bar and StretchLab packages in 4Q. So it sounds like you're talking about mismatch between when those numbers bought their packages and when they use them and you bought them earlier because the sales were so good.

Speaker 10

So if we look at so I just wanted to clarify. If we look instead of looking at revenues, if we just looked at visits, order stretch line of Pure Bar, was that in line with what you expected 3 months ago?

Speaker 4

Yes. Business were up in the Q1. And that was the one thing we were interested about because we've heard on other earnings calls, people kept talking about weather. So we knew it wasn't weather because at the end of the day, visitation was really high. So people wouldn't come to your studio that they couldn't get to them.

Speaker 4

So when we look across on a national scale, like we didn't see visits fall off. We actually saw class offerings high. We saw visitations high. When you look at Q1 Q1 of 2024 versus Q1 of 2023, visitation was up 6% on average per studio. So you actually have more engagement from consumers in Q1.

Speaker 4

So it really led you down the path. And when you look at the individual brands, just Purebar and Stretsov had this kind of effect where we did see the sales in essence get pulled into Q4 versus Q1. So it's a good thing because you got the revenue faster earlier, The consumers are now using whatever they purchased and with the expectation now is the franchisees have the opportunity to convert them to members and get them more on to that reoccurring membership from a growth perspective.

Speaker 10

Got you. And then my follow-up is on Lindora. It's great to see 40 licenses signed out of the gate here. Can you help us understand what normalized what you expect normalized AUV to look like? Because I know those are pretty high AUV in year 1.

Speaker 2

I mean, look, their AUVs are close to $1,000,000 They're about $980,000,000 and change. So we haven't really gotten our hands around or on to tech lead flow, closing percentages, attrition, all the things that we do really well as the sales and marketing engine. So all that stuff is just starting to get implemented. Our teams are together, starting to work together, all that kind of type of stuff. So I don't think we've really seen a lift really from us yet on stores, but

Speaker 4

Yes. And when we kind of built it into the model, and to Anthony's point, there's a lot of when we start nationally deploying this, there's a lot of learning curves as you put it into different markets. Right now, the assumption we've built into our models, they perform very much like StretchLab, which is better around that 600 ks AUV. It's above the 500 ks that we designed from a unit economics perspective, but similar to StretchLab is how we've kind of modeled in their growth curve. We've always tended to lean on the conservative side, but the consumers are and the franchisees kind of map very similar to like our Club Pilates kind of franchisees and members.

Speaker 4

So we'll see how they perform. But right now, we're just assuming they get to 600. The existing portfolio that we that joined when we acquired, as Anthony mentioned, they're just right under 1,000,000 So if they do anything north of $600,000 it's upside for the business.

Speaker 10

Got you. Thanks guys. Good luck.

Operator

Thank you. Your next question comes from Karin Wolfsmiher from Piper Sandler. Please go ahead.

Speaker 1

Hey, good afternoon guys. Thanks for taking the question. My first one is not to harp on this pull forward of promotions too much, but I am curious when you like laid out expectations a couple of months ago, did you already recognize that there was this pull forward or is this kind of a new realization? And then what's the historic you're talking about like a conversion of full time members. What's the historic conversion you've seen with these types of promotions?

Speaker 1

And what gives you confidence that these people will end up converting? Thanks.

Speaker 4

From a I guess, from a guidance perspective, no, I would say we did not anticipate it's hard to tell because when you look at every Q4 over the last couple of years, the promotions do very well. And we've approached them differently year to year, like do very well. And we've approached them differently year to year, like we used to do more promotions in Club Pilates. We really don't do that anymore because the demand is so high. You don't really need to.

Speaker 4

As you're trying to fill capacity in brands and offer different things, you get different reactions. So in January February, it did appear to us that things did look a little bit lighter. People kept talking about weather. We seeing weather as the issue, but then also in March, you saw the AUV start to climb again and we're like, okay, so then we kind of look back at the data and these two brands just really stood out from a performance perspective. The key there with promotions is you're getting people into your studios, using your studios and falling in love with the product and it gives the franchisees an asset to convert them.

Speaker 4

So we typically have seen Q4 and Q1 be our strongest quarters and then early on in Q2. So the jury is out as far as whether or not we'll see that same impact this year as we kind of come back into more of a normal environment since COVID. But again, those brands have done really well. So we expect a good percentage of these consumers will either re up their package if that's how they approach the business or convert to a member.

Speaker 3

Got it. Thank you.

Speaker 1

And then on Lindora, can you just give us a little bit of color on where these licenses will end up building and like where you're expecting the new units to get built up? Is it still more California or are you starting to see interest in other states? Thanks.

Speaker 3

Yes. We sold across, I think it was 6 or 7 ownership groups across 6 or 7 different states. So, it's starting to spread to the Midwest and the East Coast.

Speaker 1

Great. Thank

Operator

you. Thank you. Your next question comes from JP Willam from Roth MKM. Please go ahead.

Speaker 7

Hi, thanks for taking my questions. Good afternoon. If I could first start, I believe and you correct me if I'm wrong, I believe you're changing the online booking platform and maybe that's already underway. But could you just elaborate a bit on sort of how big of an IT challenge that is, kind of what you're doing to prepare for that and prepare franchisees for that? And then just what the advantages are of switching?

Speaker 3

Yes, I can definitely speak to that. So we have we had an exclusive agreement with our point of sale vendor Club Ready. We are now out of that exclusive agreement and have the opportunity to go out to market for an RFP. Really the ClubReady system is a booking and point of sale management system. What we've done over the last couple of years is we've built all of our consumer facing applications and websites on top of the club ready infrastructure.

Speaker 3

So in terms of the transition, we won't be needing our customers to learn a new booking system or a new application. We'll actually lift our entire customer ecosystem and plug a new point of sale system underneath it or behind it. So it's been a lot of work already to ensure that we're minimizing any sort of disruption that could occur. I think what you'll see is maybe some learning curves at the front desk or operationally at the studio level. But we've got about, a minimum of 18 month runway to be able to select a good partner, put some tests in place and then ultimately decide a go forward pathway.

Speaker 3

And this would be for domestic operations. We are open to, of course, a global solution, but this is primarily focused on our domestic operations.

Speaker 7

Great. And then maybe just stepping back in terms of kind of high level industry thought and maybe more geared towards you, Anthony. The Orangetheory merger a few months ago and I think just this last week, there were some potential rumors about Berry's considering a sale. Is there any read through on this in terms of the boutique fitness industry and just any considerations regarding those news items?

Speaker 2

No, I think they're kind of mutually exclusive. Dave and Chuck have been running Self Esteem and Orangetheory for a long time. They're great operators, but they've been running that business for a long time. Roark has owned both of those for a while. And I think you can see publicly, right, they merged those together, I think, took a $480,000,000 whole business securitization out of there.

Speaker 2

So I think they just merged those together because it's kind of left pocket, right pocket for Roark. But put together, so it's more compelling and obviously Orange Dairy is an amazing brand and Dave is a great operator. And they could bring kind of him and Chuck together under like really together under one roof. And I think they're looking for somebody to kind of run both of those as well. So I think that's totally separate.

Speaker 2

North Castle's owned Berry's for a while now. They owned it pre COVID and then kind of came through COVID. And I think like any private equity firm, they're looking to close out their fund and see some upside from their acquisition. But other than that, I mean, I think those are 2 separate kind of things happening. But nothing that I see really to read into those together.

Speaker 2

Okay.

Speaker 7

Yes, fair enough. Thank you and best of luck going forward.

Speaker 4

Thank you.

Operator

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Anthony Geisler for closing remarks.

Speaker 2

Thank you everyone for joining today's earnings call and for your support. We look forward to seeing many of you at upcoming investor conferences in May June, and we'll speak to you again on our Q2 earnings call in August.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Earnings Conference Call
Xponential Fitness Q1 2024
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