Xponential Fitness Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Xponential Fitness Second 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adri Wannemacher, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' Q2 2023 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 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 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 you 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 Geisler, Chief Executive Officer of Xponential Fitness.

Speaker 2

Thanks, Avery, and good afternoon, everyone. We appreciate you joining our Q2 earnings conference call. I'm proud to share yet another consistent quarter of results that continue to highlight the On the call today, we will address several key concepts aimed at providing additional clarity on the business. We will also be speaking about these items in more detail at our Analyst and Investor Day on September 6, when we will provide a full overview of the business and financial performance, Layout company strategy and discuss longer term growth metrics. Let's turn to our 2nd quarter results.

Speaker 2

Exponential franchisees now operate nearly 2,900 studios globally with over 5,800 licenses sold across our 10 leading fitness brands. We have franchise, master franchise and international expansion agreements in 19 countries outside of North America. Total members across North America saw growth of 29% year over year to a total of 697,000 at the end of the 2nd quarter. Over 90% of these customers are actively paying members. Along with growth in our membership base, North American studio visits for the 2nd quarter increased by 32% year over year, reaching a total of $12,900,000 This drove record North American system wide sales of $41,000,000 which represents a 37% increase over the Q2 of 2022.

Speaker 2

Q2 North American run rate average unit volumes of 561,000 were up 17% from 480,000 in Q2 of 2022, Our 12th straight quarter of AUV growth. We continue to believe that AUV growth is the most direct measure of our franchise systems health. North America same store sales growth remains strong at 15% in the 2nd quarter and we are particularly pleased with the performance of our more mature cohort with studios over 3 years old, increasing same store sales by 16%. Now that we are further removed from COVID impacted time periods, we believe this metric has begun to normalize. John will speak about these calculations in more detail shortly.

Speaker 2

Turning to revenue. For the quarter, net revenue totaled 77,300,000 An increase of 30% year over year. Adjusted EBITDA totaled $25,300,000 in Q2 or 33 percent of revenue, up 43% from $17,600,000 or 30 percent of revenue in the prior year period. Let's now turn to our 4 strategic growth areas. I'll discuss the first three and then turn the call over to Sarah to discuss the 4th.

Speaker 2

Beginning with the increase of our franchise studio base, We ended Q2 with 2,892 Global Open Studios, opening 141 net new studios in the 2nd quarter. We sold 234 licenses globally in Q2 2023 with about 30% of licenses bought by existing franchisees, Bringing total sold licenses to 5,872. We also continue to have an increasing pipeline With almost 2,000 licenses sold and contractually obligated to open on a global basis, excluding our master franchise agreement obligations, We are always pleased when an existing franchisee purchases additional licenses as it reinforces their satisfaction with our model and the success of their businesses. In fact, over 56% of our studios have owners who have purchased multiple Exponential licenses. Looking at this in a bit more detail, our average franchisee has bought 2.6 licenses with 1.3 studios currently open.

Speaker 2

Turning to our next growth driver, international expansion. We have over 1,000 studios obligated to open under master franchise agreements. Of note, just recently, we announced the signing of a master franchise agreement in France for our Club Pilates brand, which represents our 19th country side of North America. The agreement gives the master franchisee the opportunity to license a minimum of 75 Club Pilates studios in France over the next 10 years As a reminder, our MFAs are structured to provide Xponential with high margin flow through. We typically receive a percentage of revenue share with very little corresponding SG G and A.

Speaker 2

Exponential is currently targeting approximately 50 countries with our 10 existing brands or 500 different MFA opportunities, which provide significant white space for future growth. Our 3rd key growth driver is to expand margins and drive free cash Adjusted EBITDA margins again increased to 32.6% during the Q2, demonstrating continued operating leverage. As we continue to scale, holding company owned transition studios will create headwinds when optimizing margins. Therefore, going forward, we no longer will take on company owned Transition Studios. As of the date of this call, we are operating 38 company owned transition studios and have 9 corporate L.

Speaker 2

A. Fitness studios Club Pilates and StretchLab brands. We plan to continue operating these 9 studios in order to prove out the LA Fitness nontraditional studio concept. The company owned transition studios currently generated immaterial amount of net operating loss. We plan to franchisee studios down to 0 and we will no longer take on any company owned transition studios going forward.

Speaker 2

We are confident This shift in strategy will drive additional leverage to SG and A expenses, while also benefiting AUVs in the long run. Importantly, as John will speak to shortly, we are raising guidance on several of the guided metrics for the year. We remain on track to achieve adjusted EBITDA margins in the 35 to 39% range by year end and adjusted EBITDA margins of 40% in 2024. We look forward to providing an overview of the business and financial performance, lay out company strategy and discuss longer term growth metrics at our Analyst and Investor Day on September 6 at the New York Stock Exchange. With that, I'll pass the call on to Sarah to discuss our 4th and final growth driver, increasing our same store sales and AUVs.

Speaker 3

Thank you, Anthony. We drove strong in studio performance in the Q2 and further built out our ecosystem of B2B partnerships, Strengthened our omni channel fitness offering and continued refining our XPath and X Plus services. During the Q2, North America visitation rates grew 32 year over year and our North America actively paying membership base grew to over 628,000 members. With our product continuing to be very sticky and playing an integral role in our members lifestyle, Xponential continues to retain its membership base. Exponential aims to ensure that members have access to a boutique fitness experience that matches their individual needs and interests.

Speaker 3

Let's now discuss how our omni channel offerings help drive customer engagement resulting in higher same store sales in AUVs. Our XPath offering is one way we enhance customer engagement by having frictionless access to all 10 of our brands on a single recurring monthly Inception to date, there have been over 60,000 bookings made on XPass. XPass is beneficial for both consumers and franchisees. It provides consumers with flexibility to snack across fitness modalities, While driving new lead generation for in studio memberships. This quarter, we will be introducing an advertising channel into the X Pass app To give Exponential Studio customers access to 3rd party exclusive offers, launching in categories such as mental health, apparel and healthy foods.

Speaker 3

This initiative will drive further benefit to our members while serving as another means for driving incremental lead flow to the studios. X Plus is the 2nd critical element of our omnichannel approach. X Plus allows our customers to access digital classes at all ten of our brands including those who have subscriptions through their brick and mortar memberships. We are constantly developing new content for our X Plus platform And we're excited to see this digital channel continue to translate into increased consumer stickiness and brand affinity. Also during the quarter, we solidified an X Plus licensing deal with our master franchisor for BFT, which enables us to offer on demand classes to members We are excited to introduce our omnichannel experience to global consumers And expect to pursue similar licensing deals with other MFAs.

Speaker 3

B2B partnerships like our relationship Princess Cruises are the 3rd key element of Exponential's omnichannel strategy. These partnerships provide a means of reaching new audiences, Generating revenue and creating lead flow with little or sometimes negative acquisition costs. As of the end of Q2, Pirabara, Yoga and StretchLab have been launched across the entire fleet of Princess Cruise ships. In addition, in September, we will have our first One of a kind seagoing retreat for Club Pilates, which is to set sail in Alaska. Club Pilates classes will be offered by top notch instructors amidst Alaskan Glaciers and Mountains and in conjunction with Royal Princess' culinary entertainment and activity options.

Speaker 3

This experience is already selling itineraries and we intend to launch future retreats across our other brands. The renewal we announced with Lululemon in June is another great example of a B2B partnership that is helping to grow exponential. Members of Lululemon Studio can stream a diverse range of workouts featuring Purebar, Rumble, AKT and Yoga 6 classes, as well as take advantage of discounted classes at the brick and mortar locations of these brands across North America. The cross promotional offering is an efficient and effective way of introducing new customers to our brands and building an enduring interest in Exponential Fitness' modalities. In the second half of twenty twenty three, we will continue to explore additional B2B partnerships to enhance our X Plus and XPass offerings to further build out our omni channel fitness capabilities.

Speaker 3

Through these offerings, we look forward to expanding the breadth and depth of Tools available to our franchisees to bring people into the Xponential ecosystem, drive higher customer retention and create a world class fitness experience. As a portfolio company, we have the ability to leverage our scale, our vendor relationships, our omnichannel offerings and partnerships across all our brands to ultimately achieve the goal of driving more members into the franchisees studios. Importantly, our performance data quarter results and 2023 outlook.

Speaker 4

Thanks, Sarah. It's great to speak with everyone today. Before diving into our results for the quarter, I'd like to discuss our calculations for average unit volumes and same store sales, both of which have been consistently defined and calculated throughout our history. I will also provide clarity on historical and go forward treatment of Sidio closures under KPI reporting and how they would be categorized as well as provide an overview on how to think about brand level economics. Starting with North American quarterly run rate average unit volumes.

Speaker 4

We define this as the average quarterly sales activity for all studios that are at least 6 months old at the beginning of the respective quarter multiplied by 4 to get an annualized number. Studios with 0 sales in the period as well as our 19 LA Fitness locations are and have always been excluded from this calculation. With that said, inclusion of 0 sales studios and non traditional locations would not result in a material difference to AUVs. For Q2 2023, our calculation for run rate AUV of $561,000 included 99% of our entire North American studio base older than 6 months. When including 100% of studios, Run rate AUV would have been just 1% lower.

Speaker 4

Similarly, when calculating our North American same store sales, We have followed the industry standard practice of including only studios that have 13 months of continuous sales activity As disclosed in our SEC filings, our Q2 2023 same store sales 15% included 97% of our North American studio base older than 13 months. For Q2 2022, Same store sales of 25% included 98% of these studios. Turning to the go forward treatment of studio closures under KPI reporting. Any studio that does not have sales for 9 consecutive months will now be deemed closed for KPI reporting purposes. We have provided a full reconciliation of City accounts under this new method in the 10 Q.

Speaker 4

It's important to note that applying this new method to historical figures results in minimal differences. Turning to brand level data, Xponential has always taken a portfolio approach to its brands where there is a diversification of modality and varying levels of revenue performance depending on the maturity of the brand. We will be providing more detail on the unit level economics That underpin our portfolio of brands, which we will discuss at our upcoming Analyst and Investor Day. It is important to point out that our well established Brands in North America at scale, meaning brands that have over 150 open studios in North America, which include Club Pilates, StretchLab, Purebar, CycleBar and Yoga6 represent more than 90% of our total studio base at quarter end and generate weighted average AUVs Approximately 578,000, these brands have existed for several years and have had time to develop a strong following among members, Typically driving higher AUVs. Our 5 growth brands, which include RowHouse, Rumble, BFT, Stride and AKT account for less than 10% of our Sidio base in North America at quarter end.

Speaker 4

These brands have had the benefit of exponential support system for shorter time periods, yet continue to mature in the brand awareness and membership base. Our established brands generated 16% Q2 2023 same store sales and make up 94% will improve as the largely uniform operating expenses are leveraged, noting some slight variations driven by labor and other expense items. Our brands have roughly the same monthly operating expenses and these expenses can vary across designated market areas. For example, rent and labor costs in New York City would typically be higher compared to Louisville, Kentucky. The exception to the operating occurs more frequently in our StressLab and Pure Bar brands.

Speaker 4

StressLab has a higher labor cost given the mostly 1 on 1 model, but also generates higher AUVs. Purivar has more of an owner operator model that allows the owner to internalize some of the expenditures they would otherwise have for labor. In some instances, franchisees of lower AUV concepts have transitioned from semi absentee to owner operator in order to reduce labor costs and internalize more of their overall spend. Now turning to our results North America system wide sales of $341,300,000 were up 37% year over year. The growth in North American system wide sales was driven primarily by the 15% same store sales in the existing base On a consolidated basis, revenue for the quarter was $77,300,000 up 30% year over year.

Speaker 4

Reoccurring revenue for the quarter was 74%, 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. That being said, all 5 of the components that make up our revenue grew during the quarter. Franchise revenue was 35 point Tech fees that will continue to increase as we open more studios domestically. Equipment revenue was $14,400,000 up 17% year over year. This increase in equipment revenue is a result of continued higher volumes of global equipment installations, in addition to a higher mix of equipment intensive brands Like BFT and Rumble.

Speaker 4

Merchandise revenue was $8,400,000 up 24% year over year. The increase during the quarter was primarily driven by a higher number of operating studios and increased foot traffic compared to the prior year. Franchise marketing fund revenue of $6,600,000 was up 34% year over year, primarily due to strong system wide sales from Higher number of open studios in North America. Lastly, other service revenue, which includes rebates from processing studio system wide sales, B2B partnerships, XPath and XPath, amongst other items was $12,800,000 up 62% from the prior year period. The increase in the period was primarily due to increased revenue from sales generated in our company owned transition studios, increased rebates from the processing of Cost of product revenue were $14,200,000 up 5% year over year.

Speaker 4

The increase was primarily driven by a higher volume of equipment were $3,700,000 down 18% year over year. The decrease was driven by fewer license terminations in Q2 of 2023. Selling, general and administrative expenses of $44,400,000 were up 52% year over year. As a percentage of revenue, SG and A expenses were 57% of revenue in the 2nd quarter, up from 49% in the prior year period. As Anthony spoke to earlier, we expect our shift in strategy regarding company owned transition studios will begin to have a positive impact in the second half on this line item and drive leverage in SG and A.

Speaker 4

We are already executing on the plan to ramp down these studios and we'll share additional details on The positive impact this will have at the Analyst and Investor Day. Depreciation and amortization expense was $4,300,000 an increase of 20% from the prior year period. Marketing fund expenses were $5,500,000 up 34% year over year, Driven by the increased spend afforded by higher franchise marketing fund revenue, acquisition and transaction expenses We're a credit of $31,300,000 versus a credit of $31,600,000 in the Q2 of 2022. As I noted on prior earnings calls, the contingent consideration 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.

Speaker 4

We recorded net income of $27,500,000 in the second quarter compared to a net income of $31,500,000 in the prior year period. The slightly lower net income was the result of 5,300,000 of higher overall profitability offset by $400,000 increase in non cash contingent consideration primarily related to the Rumble acquisition. A $1,600,000 increase in non cash equity based compensation expense And a $7,200,000 increase in write down of brand assets associated with taking on a number of Rumble founder Owned Transition Studios in the period. 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.

Speaker 4

Adjusted net income for the 2nd quarter was $4,200,000 which excludes the $31,300,000 gain in fair value of non cash contingent and the $7,200,000 non cash write down of brand assets. This results in adjusted net earnings of $0.05 per basic share on a share count of 33,000,000 shares of Class A common stock after accounting for income attributable to non controlling interest and dividends on preferred shares. Adjusted EBITDA was $25,300,000 in the 2nd quarter, Up 43% compared to $17,600,000 in the prior year period. Adjusted EBITDA margin grew to 33% in the Adjusted EBITDA margins reaching the 35% to 39% range and we expect this number to grow to 40% in 2024. Turning to the balance sheet.

Speaker 4

As of June 30, 2023, cash, cash equivalents and restricted cash were $40,200,000 up from 29 $3,000,000 as of June 30, 2022. Total long term debt was $265,600,000 as of June 30, 2023 compared to $131,700,000 as of June 30, 2022. The increase in total long term debt is primarily due to the repurchase 85,340 shares of convertible preferred stock at a price of $22.07 per share announced in January. These shares prior to the repurchase would have been convertible into 5,900,000 shares of Class A common stock. As mentioned on previous earnings calls, the company remains focused on optimizing our capital structure.

Speaker 4

If market conditions prove Favorable. The company intends to pursue a whole business securitization of our repeating revenue streams, which will provide cheaper access fixed rate financing in place of our existing floating term loan debt. Now turning to our outlook. Based on current business conditions and higher levels of performance in the Q2, we are increasing our full year 2023 guidance for system wide sales, Revenue and adjusted EBITDA and we are reaffirming guidance for new studio openings as follows: We expect 2023 global new studio openings to remain unchanged in the range of 540 to 560. This range represents the highest number of studio openings in our company's history and an 8% increase at the midpoint over 2022.

Speaker 4

We now expect North America system wide sales to range from $1,385,000,000 to 1.39 $5,000,000,000 up from the previous $1,370,000,000 to $1,380,000,000 or a 35% increase at the midpoint from the prior year. Total 2023 revenue is now expected to be between $295,000,000 to $305,000,000 up from the previous $290,000,000 to $300,000,000 a 22% year over year increase at the midpoint from the prior year. Adjusted EBITDA is now expected to range from $102,500,000 to $106,500,000 up from 100 $2,000,000 to $106,000,000 a 41% year over year increase at the midpoint from the prior year. This range translates into a roughly 34.8 percent adjusted EBITDA margin at the midpoint. In terms of capital expenditures, we anticipate approximately $10,000,000 to $12,000,000 for the year or approximately 4% of revenue at the midpoint.

Speaker 4

Going forward, capital expenditures will be primarily focused on the BFT integration, XPath and X Plus new features And maintenance on 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 $32,700,000 $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 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 our Board of Directors on August 1st Has authorized a new up to $50,000,000 share repurchase. Our lender, MSD Capital, has already amended our term loan financing agreement And is funding the capital to complete the repurchase.

Speaker 4

Pro form a adjusting for this incremental $50,000,000 in term loan debt, The company will have less than 3x net debt to adjusted EBITDA for the full year 2023 based on the midpoint of our guided range. Thank you for your time today and for your support of Exponential. We will now open the call for questions. Operator?

Operator

Thank you, sir. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question is from Randy Konik of Jefferies. Please go ahead.

Speaker 5

Hey guys, thanks a lot. Very thorough presentation, lots of good data for us to dig in on. So I guess one thing that really Struck me on the AUV side was, A, it's very strong. And then B, you talked about Strength in visitation growth during the quarter. So maybe could you give us some perspective if you think about that AUV strength In the quarter year over year, can you give us some balance it out with how much is like visitation growth, some pricing, Maybe mix shift with the higher AUV concepts.

Speaker 5

Just want to get your perspective on what's driving that overall number?

Speaker 4

Yes, I'll take that. So the system wide sales growth that you saw from Q1 to Q2, again, as consistent with prior quarters, You're getting 95% of system wide sales growth 2 different ways. 1, from obviously opening up new studios, but 2, It's volume, it's not price. So it's simply the 95%, 5% did that calculation reaffirming Q2 is very similar That is 95% volume. And visitation, when you think about visitation, in the summer months, you typically see more families take vacation.

Speaker 4

So visitation was Flat roughly to Q1, but you still had the benefit of growing system wide sales and members. So you'll see that kind of in the early part of Q3 as well, July is more of a summer travel month, while kids are out of school, parents tend to take more vacation. So visitation in the summer months is relatively flat. But When you look at historical patterns and seasonality, August September, you see when kids come back to school, parents usually have more time and they kind of return back to They're workout regimens, but visitation is still greater than Q1, but it is flat when you look at it from like June to July.

Speaker 5

Understood. And then on the additional country, I guess France up to 19 countries now, maybe give us some flavor on What's been developed so far? How that's been going? What maybe differences you're seeing from your MFAs in the different regions or countries? And then kind of how you're thinking about the pace of new country openings, let's say, over the next 3 to 5 years?

Speaker 5

That'd be very helpful. Thank you.

Speaker 1

Yes, I can take

Speaker 3

that one. We've got a lot of development out there in terms of potential. We mentioned that there's 50 countries that we've identified times 10 brands, so 500 total MFAs that we can go out and develop and pursue. In terms of the recent MFAs, we've got Switzerland, Ireland as well as France. Those are existing franchise partners of our domestic studios that have decided to open abroad, which is really exciting to see.

Speaker 3

And they're in the early Stages of going out and looking for leases and developing out those studios. So we should know soon how they perform, but we feel very confident in the performance of our franchise partners given that they're

Speaker 4

And the follow it up, Randy, like looking into the future in regards to your question around what is the openings internationally look like compared to domestic, It's going to follow suit. We've been right now, the total mix is around ninety-ten with 90% domestic, 10% international, but we've been selling and opening Closer to $75,000,000 So assuming long term metrics north of 500 units a year, could probably assume about 25% of those will come internationally over the coming years.

Speaker 5

Super helpful. Again, thanks for all

Speaker 6

the data, guys. Appreciate it.

Operator

Thank you. The next question is from Joe Altobello of Raymond James. Please go ahead.

Speaker 5

Thanks. Hey, guys. Good afternoon. Just first question, I want to dig a little deeper into studio economics. What percentage of your studios That are open more than a year or longer than a year are profitable on a 4 wall basis?

Speaker 4

Yes. So When we talk about Studio Economics, you'll typically see in the 1st 12 months, Studios ramp to about 380,000 ish, Which is above the breakeven level and we've provided that information before. So the majority of our students and our students majority of Our studios arrive at that in the 1st year and then they typically comp in the mid to high single digits after that. We saw 8% On average pre COVID, the model largely reflects that, that studios get to, like I said, 380,000 In their 1st year and then they typically comp around 8% after that per year.

Speaker 5

Okay, helpful. And then maybe second Question, you mentioned that you do expect to get transition studios down to 0 at some point. What timeframe are you thinking about?

Speaker 2

Yes. Well, Joe, as we said, the studios are the actual unit count of the studios are down about half From what they were in Q1 and recently in Q2. So the remaining balance in the Folio doesn't lose any material money. So we've never looked at the unit count of Studios is an indication of franchisee health. The unit number itself, it's always what are the NOLs and what is the headwind The SG and A that we're concerned with, we're not concerned with the actual number.

Speaker 2

And so these stores that we have now, the 30 plus Stores that are kind of our 4 wall brick and mortar stores don't lose a lot of money for us. And so there's not a lot of pressure to Offload those right away, but we will be doing that in balance and making sure that the winners and the losers that are left in Portfolio are giving us the least amount of headwind and that's what we're focused on, right, is SG and A and NOLs. So in other words, we don't want don't want to sell all the winners and be left with all the losers and that's been the strategy from the beginning. And If I had to throw a guess out there, we're targeting by the end of the year or kind of Q1 of next But we want to do good deals that are accretive to the company. Some of these stores we've bought for a lot less than what they're And so we'll be going out and making sure that we do the best deals possible for the company.

Speaker 2

But Given that there's not a lot of leakage, we're not trying to necessarily offload them Real quickly. And then the 9 LA Fitnesses we're operating, 8 of which are Club Pilates and one of which is a stretch lab. We'll continue to probably operate those A little bit longer as we're just proving out that concept because franchisees want to see that the concept works. We do have Several franchisees that are operating LA Fitness' and doing very well with them, but we want to be operating them here locally In Southern California.

Speaker 5

Okay. Thanks, guys.

Operator

Thank you. The next question is from Alex Perry of Bank of America. Please go ahead.

Speaker 7

Hi. Thanks for taking my questions here. I guess just first to follow-up on some of the earlier questions. Can you talk about sort of franchisee profitability and cash on cash returns Sort of by concept versus pre COVID, is it fair to say sort of like the clubs that have the concepts with Most tenure like you call Pilates have better cash on cash returns and maybe like a row house or some of the more nascent concepts. Just Any more color you can give us on sort of the economics by concept would be really helpful.

Speaker 7

Thanks.

Speaker 4

Yes, Alex. So we will double click on that in the Investor Day. We debated whether or not this was the right form to dive into that and it's just it's too much data to try and I'm doing a 5 minute kind of Q and A session. But to think about it, we've talked about 40% cash on cash returns at certain levels of AUVs. We are seeing a lot of our brands produce more than that from an AUV perspective and we continue to keep climbing.

Speaker 4

The scale brands for sure. As we talked on the call, north of $575,000 roughly on a weighted average AUV. So their cash on cash returns are much higher Then the as designed model, which we've largely spoke about, you have brands in the, we'll call it, not at scale, BFT, Rumble, those are already coming out, Opening at 500,000 plus AUVs, so in year 1. So you could actually expect to see the cash returns better there. We do have brands in the unscaled like Stride, RoHS AKT, Different model.

Speaker 4

And I talked to in the call in relation to how those studios can operate at lower AUVs, we get generate similar margins if they go More of an owner operator model versus, a SiF and T model. So definitely, we'll provide lot more detail on that in the Investor Day and give more clarity to you guys so you could see it more at brand level, how we think about the business and how they're performing. So I would say stay tuned on that, but we're excited to kind of delve into that in about a month.

Speaker 7

Perfect. And then I guess just my follow-up question is a 2 parted. How much visibility is there into unit growth Outlook for this year, is that sort of based on leases that have already been signed? So you have a high degree of confidence there. And Maybe one more for you, John.

Speaker 7

Just the $7,200,000 add back of write down of brand assets, can you just give us a little more color What that is, that'd be really helpful. Thanks.

Speaker 4

Yes. I'll start with 7.2. In Q2, The original Rumble Founder Studios, those were as part of our agreement when we purchased that business. They would be exiting at a certain point. That happened in Q2.

Speaker 4

We did assume those studios. So the ones in a lot of the major markets, we have those. So we will be looking to Get those refranchised over time. So that was one of the that was what the 7.2% reflects. In essence, when we bought the brand, The intangibles were assigned to the franchise agreements, because that's what was outstanding.

Speaker 4

Now that we own the studios, the franchise agreements no longer outstanding. Therefore, you would not hold them on to your balance sheet from an accounting perspective. And apologies, what was the first question?

Speaker 7

Just the visibility into the growth outlook for this year?

Speaker 4

Yes. So really strong. I mean, we've always About the fact that lease signings is the greatest early indicator of how many studios you're going to have open. We consistently signed and have been Signing lease agreements from the beginning of this year. We knew how many we signed kind of going into in Q3 and Q4, so how many were coming into this year.

Speaker 4

So for our perspective, the visibility into the openings is very strong. We usually have about a good 6 to 9 month forward looking view. So we can almost tell Not only what's going to happen in Q3 and Q4, but we pretty much have a good idea in Q1 of next year already. So the guidance around city openings we said at the beginning of the year, it's unchanged. We've moved guidance around in regards to revenue and adjusted EBITDA and system wide sales.

Speaker 4

We've raised those as we've Continued to perform in Q1 and Q2, but we haven't moved the studios because the visibility we have is pretty strong. I mean, it's pretty structured in the sense that when somebody Signs of franchise agreement, they go out, they acquire a lease, and there is that 6 to 8 months where they're building up the studio and getting open. So You're always kind of looking at things a couple of quarters ahead of time. So once we sign the lease, we already know in about 2 quarters when that city is going to open. So it's Pretty static from that perspective.

Speaker 4

So short answer to your question, feel really strong and really good about the guidance that we put out there for new studio openings this year.

Speaker 7

Perfect. That's really helpful. Best of luck going forward.

Speaker 4

Thank you.

Operator

Thank you. The next question is from Brian Harbour of Morgan Stanley. Please go ahead.

Speaker 8

Yes, thanks. Good afternoon. John, could you just comment on SG and A expense given where you're running Year to date and then any impact of the kind of the transition studio strategy?

Speaker 4

Yes, great question. So SG and A Q2 was higher than it was in Q1. That has to do with the number of transition studios that we had on the books. Looking forward into Q3 and Q4, as we've made this shift in strategy, as we start now lowering SG and A costs, Because we don't have the operating costs of rent and labor in our SG and A, you'll expect SG and A to start coming down over time. So in the second half, you'll see that Apparent pretty quickly.

Speaker 4

So the way you can kind of think about it is, we were I think it was close to high 50% range in Q2. I would expect to see as we ramp down these studios that the SG and A as a percent of total revenue will hit below 30%. So It is a function of how quickly we kind of ramp down these studios. As Anthony mentioned, the goal Loose goal that we kind of talked about is it'd be great to have them all done by the end of the year, but you will see it get into the low 30% range as we kind of refranchise these studios back out.

Speaker 8

Okay. Yes, makes sense. And Just with that, are you how will it change going forward in the sense that are you just going to take a more active role in kind of brokering Franchisee to franchisee deals, do you think that there might be occasional closures if you can't find a suitable buyer, like how might we see the impact of that?

Speaker 4

Yes. As we said in the earnings script, We will be triaging, I guess, studios differently in the sense that if we feel that we could, in a reasonable amount of time, Get the studio either refranchised or turned around. We will invest resources and the time to do that. If the studio there are situations where studios just no longer make sense, if they were in a large grocery anchor that The anchoring moved or the center just kind of for whatever reason doesn't really have a lot of foot traffic. It would be in the best So the franchisee to relocate that to a better location, but in situations where it's just not a viable Studio anymore, I think you will start seeing the company look to closures as a path.

Speaker 4

But in the short term, we're going to go ahead and focus on getting The studios ramp down on our side and then we'll work with franchisees to assess what's the best option for them in operating their studio going forward. But yes, we will be Obviously with Tools and Resources from a sales perspective, make sure they're following the model, look at relocations if it's more of a center issue to kind of address Studios on a case by case basis.

Operator

Okay. Thank you. Thank you. The next question is from Jonathan Komp with Baird. Please go ahead.

Speaker 9

Yes. Hi, thank you. Good afternoon, everyone. I want to just ask about the same store sales trend that you're seeing. And Your first quarter you're at 20%, 2nd quarter at 15%, strong numbers, but obviously different ways you can interpret The trend in trajectory.

Speaker 9

So can you give any more insight in terms of the trend that you're seeing for same store sales? And then Color, what we should expect going into the back half?

Speaker 4

Yes. So, Q1, obviously 20%, as you mentioned, 15% in the 2nd quarter. I do see obviously system wide sales as they continue to grow. I do expect to see same store sales normalize over time. I mentioned on previous calls that I do believe in 2023, you're still benefiting from a pretty strong Growth perspective on studios getting into as they kind of grow into maturity, as they continue to have more studios, you're going to see elevated Same store sales over the coming quarters, mid to high single digits is still my long term kind of Guidance or expectation on how stood yields will perform, but I do expect 2023 to be in the mid teens, The 15%, 16% range in same store sales.

Speaker 4

You look in the second half of this year, As I mentioned, Q3 is typically a strong quarter when you look at it quarter on quarter and you see strong growth. So I do expect Q3 and Q4 to stay somewhat elevated As you benefit from people, as I mentioned, the seasonality going back to kids going back to school, parents start going back to their workouts from vacation. And then also in Q4, we always have our Black Friday holiday promotions and we typically see strong sales in that quarter. So I expect 16 percentage range for the full year. I think Q3 and Q4, you'll see around that level as well.

Speaker 4

And then as you kind of roll into 2024, as we kind of continue to monitor, assess, measure, see how studios are opening up, we'll get a better idea. But Long term mid to high single digits as you start looking beyond 2023.

Speaker 9

Got it. That's helpful color. And then I want to follow-up to ask about the Board's decision to initiate the buyback program and to do so with Taking on incremental debt, just any thoughts to the process there and weighing the different options relative to Using internally generated cash or further simplifying the capital structure, I know you bought back some of the preferred shares in the past or the convertible debt, Excuse me. So just any additional thoughts on the thought process and how the Board may have settled on the path that it did?

Speaker 4

Yes. I mean, we finished the quarter with $40,000,000 in cash. Obviously, we announced a $50,000,000 repurchase. The long term Goal was always to kind of put in place a more efficient capital structure with the securitization. So we had always talked about the preferred shares and wanting to repurchase those.

Speaker 4

It's all to me, it's all fungible, whether it's Class A, Class B, preferred. The ultimate goal is to have as few shares out there as possible, I guess, from an anti dilutive perspective. So for us, The way we looked at it is, the debt was available to us. We have a great partner, MSD, You offered to say, hey, listen, we'll be willing to give you guys the capital to do the shares because they also see this as shareholders from their perspective, but they also see it as Stock being undervalued at these levels. So, it was easy access for us to get the cash.

Speaker 4

Would we ideally would have loved to just done all the repurchase of shares on the preferred under a securitized model? Yes, that makes it easier, but given the timing and the share price, We'll go ahead and take the debt in the short term. We were going to refinance that out anyway. So to me, it's just a timing issue of being able to do it now at a lower price Taking advantage of that. Yes.

Speaker 4

And not to mention, our leverage is pretty low. We're just over 2x. So even borrowing the $50,000,000 we're still Roughly just under 3 times levered. So it makes it easy for us to do it.

Speaker 9

Got it. I appreciate the color. Thanks again.

Operator

Thank you. The next question is from Ryan Myers of Lake Street Capital. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking my questions. First one for me, just wondering if you can comment on if you've seen any changes in the willingness Potential franchisees to open up more studios?

Speaker 4

Yes. So I have some data on that related to the number of licenses we So I mean, the licenses we sold in Q2, about a third of them came from existing franchisees. When you look at the number of That opened in Q2, 50% of them came from existing franchisees. So you're continuing to see new franchisees Opening studios and buying licenses, but the existing franchisee and installed base we have, They most of them buy around 3 licenses. They're continuing to open those license.

Speaker 4

And again, like I said, half of them that opened in the quarter were existing franchisees And a third of the license sales that we sold this quarter came from existing franchisees. So they're continuing to come back to buy more.

Speaker 5

Got it. That's helpful color. And then can you maybe talk about how multiunit franchisees perform relative to single franchisees? Is there any differences there? Just kind of as a follow-up to my last question.

Speaker 4

Yes. Typically what you see is Franchisees that own multiple locations, the benefit to them is they get to they get the economies of scale, right? So there's the ability from like a marketing perspective To market across all three of theirs versus just one specifically. So there's actually benefits to the franchisee Operating more, even from a general manager perspective, you could manage that across 3. So you get the benefit of sharing labor resources, Coverage in case of the instructor called off 6.

Speaker 4

So there's actually a lot of benefits for operating multiple. Not to mention if you open 1, you typically will open the second one better and the third one better than that because you get the benefit of kind of experience and learnings from the first one to the second one, the third one. So you typically see franchisees who open their second one, they actually perform better out of the gate because they have all these Lessons that they've learned and actually opening the first one.

Speaker 5

Got it. That makes sense. Thanks for taking my questions.

Operator

Thank you very much. The next question is from John Heinbockel of Guggenheim. Please go ahead.

Speaker 10

Hey guys, this is Julio Marquez on for John Heinbockel. If you guys could touch on, you mentioned the improved costs in product and franchise revenue, but if you think about profitability of product equipment, How could that improve with scale? Any levers that we can pull there? And then to follow-up, any thoughts on the weekly KPIs? Any signs of Changing member behavior would be great.

Speaker 10

Thank you.

Speaker 4

Yes. In regards to retail equipment margins, we did Kind of back in coming out of COVID, we spent some time with our equipment manufacturers and made sure that as there were supply chain issues that we had the sufficient Equipment packages available to meet the demand of the number of studios we're opening. So we can in lieu of negotiating I'm kind of passing on price increases. What we did is we did more firm commitments on volume to manage Price increases. So we've done a good job of stabilizing prices across our equipment, roughly again 30% margin.

Speaker 4

When you look at retail, We use a mix of both branded and non branded vendors. The branded vendors like Alo as an example, franchisees could order directly from the vendor. In return, we get rebates for volume associated with the purchases and facilitating that relationship. We have an entire warehouse here in Tustin, California, where we actually inventory both branded and unbranded as well That our franchisees have the ability to buy at a lower cost than they could if they went to certain vendors directly because we have pre negotiated Costs with them and then they in return our franchisees could turn around and sell the wholesale inventory they purchase for us at a Retail price and make margin, typically, we recommend somewhere closer to 40% to 50% retail margins If they follow the recommendations we provide. So our margins, equipment retail combined is 30%.

Speaker 4

I largely believe that will remain unchanged, and that's really intended the margins we make are really intended to manage the supply chain, which is Everything from vendor negotiations to the cost of the warehouse to the cost of the staff doing the packing and shipping and all the a lot of the inbound freight getting it from our suppliers. So largely margins will remain unchanged into the future.

Speaker 10

Awesome. Thank you. And just very quickly on the weekly KPIs, any changes that you're seeing?

Speaker 4

Weekly CapEx, yes. Following up on that, no. As I mentioned, visitation is, I would say, seasonally flat due to the summer months. We haven't seen any like increases in cancellations. You do typically see in the month of July More phrases on your memberships because people are out of town, so rather than getting charged their monthly membership, they could avoid Paying it while they're on vacation, you typically see August September that ramps back up.

Speaker 4

Year on year, when you look at July Of 2023 versus July of 2022, our freezes are actually less than they were prior year. So it does show that members are still staying somewhat engaged More so than they were last year in the same month of July, but it is more of a seasonal impact. But nothing indicates any sort of Shift or change in our member behavior, it's just more seasonal. So August September, we'll be able to have a better indication of how people have come back and return back to But classes, system wide sales, same store sales continue to show really strong momentum into Q3.

Operator

Thank you. The next question is from Warren Chiang of Evercore. Please go ahead.

Speaker 5

Hey, good evening, John, Anthony. I was wondering what kind of cost inflation your franchisees are seeing in their cost of new build. One of your publicly traded competitors talked about some pretty significant increases in cost of new film. Obviously, you reiterated your studio opening guidance, But I'm just curious what level your franchisees are seeing as they build new stores compared to Eiryu?

Speaker 2

Yes. On percentage, We're all going to see the same kind of thing, but in real dollars for us, it's not massive. And the reason is, is when you think of our box, it's 1500 square feet, not 15,000 or 25,000 or 50,000 or if it's a life It can be bigger than that. And so, they build a lot of there's a lot of showers and bathrooms and things like that. So it's a much bigger box.

Speaker 2

So there's a lot more walls, there's a lot more electricity, there's a More plumbing, which means a lot more engineering and planning and all that stuff. And so, it's the percentages will be the same, but the build outs Are really cheap, just given the size and the scale that they are. If you think given their most complex builds, you really have Two walls or 3 walls, you're really building a box inside a box. So in some cases, you're building a wall just straight across the back or you're building a wall that out of the middle and goes to the left. And so there's just not

Speaker 5

a lot of walls, a

Speaker 2

lot of dry walls. There's something like a stretch lab called Pilates, Purabar, Yoga 6, there's not a lot of electric work that has to get done in the StretchLab, for instance, which is a lot of our openings This year, the only thing that really plugs in is the front computer. And then our little Maps program is on an iPad that But those are only kind of the 2 pieces of electric. So a lot of electric wiring, you have a single bathroom or a men's and women's bathroom depending on the size of the box. So Not a lot of work to do, so it has less dollar impact.

Speaker 5

That makes sense. Thanks, Anthony. My follow-up question was just on Randy's question earlier on the higher visitation. How are these new members finding your studios? You've developed a lot of new sources of new generation recently.

Speaker 5

I'm just curious if there's certain ones that are most fruitful for driving visitation Driving the numbers.

Speaker 3

Yes, great question. We're leveraging all of our B2B partners. Of course, Constantly improving SEO and digital marketing efforts, but really looking at the overall blended CAC Making sure that we've got grassroots initiatives that are coupled with digital marketing initiatives that are coupled with our B2B partnerships. So all of that is now starting to Really tick and push leads into the studios. Of course, our XPass and X Plus also are net new leads bringing into the system as And then recycling those leads through those channels to kind of bring them back to life so that they're excited to come back into our studios again.

Speaker 5

Thank you. Good luck.

Operator

Thank you. The next question is from Jeff Van Sinderen of B. Riley Securities. Please go ahead.

Speaker 6

Hi, everyone. Just to clarify regarding the company owned studio count decline from Q1 to Q2, All of those studios were sold, correct?

Speaker 4

It was flat from Q1 to Q2, roughly around 85 Studios we had in at the end of Q1 and the same amount in Q2. The studios that we talked to in the earnings Release earlier was the ones that we've already sold. So we've already about half of those have already been sold off to a new operator. So we're on the way of already kind of executing on that strategy to unload and refranchise the studios that we have.

Speaker 2

To be more detailed, no, they weren't closed. They were sold to existing franchisees. Yes.

Speaker 6

Okay. Okay. Just want to clarify that. Thank you. And then I know this is maybe something you want to say until the Analyst Day, but just last anyway regarding your individual brands.

Speaker 6

Can we say that all of your brands are comping positive with increasing AUV? And then I guess any insight you could share around Retention, member add metrics around any of the individual brands that were maybe stand ups favorably Or not as favorably?

Speaker 4

Yes. So when you look at Q2 and let me explain something. BFT as a brand actually had a negative comp, but that's There's really only like a handful of studios and one of the original studios when we bought the brand, which is in Santa Monica, it does like 1,000,000 plus In AUV, so you start opening more younger brands that are falling into or more studios that are in the comp, it naturally will just kind of average out. So When you look at Q, if you take that out of the mix, 9 out of the excuse me, 8 of the 9 remaining brands all had positive same store sales in the quarter With 1 with a negative. And it was like minus 2%.

Speaker 4

And it was a brand that has, I would say, It's an unscaled brand that doesn't have a lot of studios open. So it's really just noise.

Speaker 6

Okay. So We would think that as that one scales, it should start to comp positive and so forth.

Speaker 4

Yes. As you get more and more, I guess, you can say Data points, we've continually see and it was just in that quarter that it was, I would say, flat at 2% on a nominal number of studios. But Kind of reinforcing that, our scaled brands, they generate 90% of the studios that are open and 90 Percent plus of the system wide sales are generated out of more of a concentration of 5 brands.

Speaker 6

Okay. Well, that's helpful. Sounds pretty healthy to me. Thanks for taking your questions.

Speaker 4

Thank you very much. Thanks.

Operator

Thank you. The next question is from George Kelly of ROTH Capital Partners. Please go ahead.

Speaker 10

Hi, everyone. Thanks for taking my questions. So first one for you. John, in your prepared remarks, you talked about A lot of your studios being owner operated. So I was just curious if you have sort of a ballpark estimate of Your total studio base, what percent of them are operated that way?

Speaker 10

Or asked another way, if that's too much detail, which brands Our most concentrated there.

Speaker 4

Yes. To give you a concept, that's really directed more at the Purimar brand pre acquisition. As I mentioned, most of our the sales we do in expo is we recommend franchisees by 3, right, because they get the economies of scale and the benefit of operating multiple locations. Pure Bar originally when we acquired the brand, most of the franchisees that existed bought 1. It's more of It's not like a 3 to 1 franchisee for 3 studios, there's more 1 franchisee to 1 studio.

Speaker 4

The model at which they And I wasn't here back then, but it appears the model that they did is they would be owner operator kind of model. So it's largely the Purebar account That you could say fits that. Now when you look at post Expo acquisition, the AUVs for the Pure Bar franchisees that have opened up post our acquisition is much higher. It largely reflects the overall expo average from that perspective. So it is just a difference in whether or not a franchisee is running their studio more as a Personal business versus kind of something that generates a lot more sales when they run it to try and build, I would say, a mini enterprise of 2 to 3 units generate more profit.

Speaker 4

So different benefit model, different strategy. Now the one thing that's really interesting about our model and we proved this out during COVID The model does have flexibility where if a franchisee does want to be more involved in the day to day operations and work within the studio, they have the ability to do that and lower their OpEx cost. But largely we promote a semi absentee kind of model from an operations perspective and encourage franchisees To operate more than just one studio.

Speaker 10

Okay, excellent. And then second question for you is on XPAS. I think that You said there's been 60,000 cumulative bookings through XPass. So curious if I heard that right. And the part 2 is, What is your plan to accelerate that business?

Speaker 10

As you're looking at 2024 or beyond, like, Are we getting to the point where you've seen enough where you feel comfortable maybe boosting marketing spending or something else behind it? That's all I

Speaker 4

had. Thank you.

Speaker 3

You did hear that correctly. So we've had 60,000 bookings to date and we'll actually have More to talk about and dive into at the Analyst Day coming up in September. We've got some new initiatives there with XPath.

Operator

Thank you. Our next question is from Corinne Wolfmeyer of Sandler Piper. Please go ahead.

Speaker 11

Hey, good afternoon team. Thanks for taking the question and congrats on the quarter. So just quickly, just one for me. I wanted to touch a little bit

Speaker 3

on the CAC and maybe this

Speaker 11

is more of an Investor Day question as well. But can you just talk about like is there a way to quantify the level of Like that negative CAC you are getting from your B2B partnerships. Obviously, that other category has been growing nicely and I've seen some of that is baked into that. And then as you think about the longer term trajectory of these B2B partnerships and that negative CAC you're generating, how are you thinking about the longer term And how big that really can get over time? Thanks.

Speaker 3

Yes. It's really going to And on each of the partnerships and the type of lead flow that they are bringing in, we've already got partnerships like ClassPass, which brings in lead flow And then some of our other B2Bs that will have new leads coming into the system are kicking off. To put it into perspective, we did see that Year over year, there was a decline in CAC and CPL. So from an annual standpoint, we're seeing things moving in the right direction, specifically

Speaker 10

given that our B2B

Speaker 3

partnership and our strategic business division, Given that our B2B partnership and our strategic business division really just launched about a year or so ago. So Now those deals are done. They're launching and we're starting to see the benefit of that across the system.

Speaker 1

Thank you.

Operator

Thank you very much. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the floor back over to Anthony Gosler for closing comments.

Speaker 2

Thanks again for joining today's earnings call and for your support. As we alluded to earlier, we'll be hosting an Analyst and Investor Day on Wednesday, September 6, The New York Stock Exchange. At the event, we plan to give the investment community an in-depth look at our business and drill down further on the company's long term We hope to see many of you there. And for those unable to attend in person, a live video webcast will be available on our Investor Relations website. In closing, we remain very bullish on the direction of Exponential Fitness is heading and look forward to continuing to support our franchisees, partners and customers every step of the journey.

Speaker 2

Thank you.

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Earnings Conference Call
Xponential Fitness Q2 2023
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