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Culmination of the thesis

I believe Xponential Fitness, Inc. (New York stock market :XPOF) is currently undervalued. The demand for personal fitness has grown rapidly in recent years, as evidenced by our nearby friends and families. XPOF gives us the opportunity to ride this wave. His its market-leading position, diverse portfolio of brands and track record of execution give it confidence that it will continue to gain market share in the industry.

Company presentation

XPOF, as a curator of renowned fitness brands in various verticals, with ten distinct brands under its umbrella, provides specialized training in an environment that motivates the customer to achieve their fitness goals. Getting in shape and staying in shape is hard enough. However, in a community environment, the client is encouraged to continue. Given the vast benefits inherent in physical fitness, XPOF aims to make its services accessible to as many people as possible.

Benefits of investments

XPOF occupies a leading position in the market

With over 2,000 studios operating across 10 major brands like Club Pirates, Pure Barre, Cycle Bar, and more, XPOF is the big kid in the fitness industry in the United States. The three best-known brands sold by XPOF are all market leaders. According to management estimates, Club Pilates, Pure Barre and CycleBar were at least twice the size of their closest competitors as of March 31, 2021. Eager for more expansion, XPOF was able to ride the waves of its current reputation. to achieve more sales from studios to their franchises and attract more customers. Management believes that continued and aggressive expansion strengthens the company’s competitive position in the marketplace. This makes the brand attractive for potential franchises and studios to come under its wings.

XPOF was able to extend its tentacles across 48 states and the District of Columbia. The Buxton Company claims that more than 60% of the US population, excluding Alaska and Hawaii, lives within 10 miles of an Xponential studio (data from XPOF S-1). Any competitor will have to work their lungs to catch up with this feat.

Portfolio of leading brands to capture multiple fitness verticals

XPOF has a portfolio of diverse brands that span different verticals like Pilates, Barre, Cycling, Stretching, Rowing, Yoga, Boxing, Dance and Running. This is another advantage he holds over the rest of the pack. When a brand only uses a yoga vertical, it can offer yoga services to those who pass by. Due to its practical variety, XPOF is able to meet multiple customer needs. The franchised studios are positioned close to each other for easier access.

Another benefit of its diversification is that XPOF is able to cater to all customers based on parameters such as age, fitness levels, allergies, preferences, and demographics. Xponential Fitness studios are able to build customer loyalty through this, improving their CLV (Customer Lifetime Value). They have been able to cultivate a relationship with customers that ensures they will continue to patronize the brand.

The reputation of the brands working with XPOF can be seen in the fact that three of the ten brands (Club Pilates, Pure Barre and Cycle Bar) have earned a place in the Entrepreneurs Franchise 500 2021 ranking (quoted from XPOF S-1).

Brands

June 30, 22 investor presentation

Plenty of space available in the US for XPOF to grow

XPOF is not resting on its laurels anytime soon. Its leadership includes visionaries who believe that to stop improving is to stop being relevant. Companies that last are companies that adapt and grow. XPOF is here to stay.

It has managed to expand its reach by leveraging brands and verticals. Another factor is the ability to move from region to region, bringing service right to customers’ doorsteps. If there’s anything this tells us, it’s that the value offered by the brand was able to connect with customers across all ages, demographics, markets, and income levels.

XPOF has been able to move quickly, but he recognizes that there is still a lot to do. According to Buxton Company, franchises could have as many as 7,900 studios in the United States alone (data from XPOF S-1). This means 7,900 potential locations and markets in the United States, based on customer profiles and brand performance.

Growth opportunity

June 30, 22 investor presentation

Attractive industry with an attractive and loyal consumer group

In my opinion, members of boutique fitness studios are a very desirable and dedicated demographic. While the fitness industry as a whole is popular with people of all ages, millennials are disproportionately represented among boutique fitness customers (60% of whom are between the ages of 25 and 44, according to XPOF filings S -1). Member of a boutique fitness studio spend more money than the typical health and fitness club customer. Customers of boutique fitness studios are not only the most financially committed fitness demographics, but also among the most physically active. XPOF S-1 statistics show that 65% of people who use boutique fitness visited more than one boutique fitness center before their clinical validity data collection period began.

Systematic playbook to ensure quality

Another factor that has contributed to XPOF’s rise as a fitness industry powerhouse is its playbook. This has helped the company provide franchisees with higher levels of experience and profitability. The process of integrating new franchises into the system is made easy and transparent thanks to the investments that have been made in the franchisor. That is why the studios are able to accumulate enviable success. The Xponential Playbook is a blueprint that contains procedures for onboarding, designing, and operating franchises. This model allows a franchise to generate at least $500,000 by the second year of operation. Only then did it reach its basic maturity. However, with the Xponential Playbook at work, this could be shortened to a minimum of 6 months. Then it grows beyond that.

Franchise Unit Economy

June 30, 22 investor presentation

Asset Light franchise model improves profitability and provides predictable revenue

Compared to a corporate model, the asset-light franchise model accelerates system-wide unit growth. As a franchise, XPOF has several predictable revenue streams and low expense levels. After obtaining an operating license in a region, XPOF received a one-time, non-refundable payment from the franchises so that they could open a studio under it. It is one of the sources of income. Other recurring sources include royalty streams, technology streams, merchandise sales, marketing expenses, and instructor and executive training revenue.

Evaluation

Price target

My model suggests a price target of around $50.44 or around 160% upside in year 25 from the current stock price of $19.47. This assumes revenue will grow in the mid-teens through 2026e, EBITDA margins will improve to 45%, and the forward EV/EBITDA multiple will be 16x in FY25e.

Evaluation

Image created by the author using data from XPOF repositories and own estimates

For FY22e I used the midpoint of the management tips at 2Q22. Moving from FY22e to FY26e, I assumed revenues would continue to grow in the mid-teens and adj numbers. EBITDA margins would increase over time due to the leverage of fixed costs, based on management’s long-term guidance (shown in the September 22 investor presentation).

In terms of valuation, XPOF is currently trading at 16x forward 2-year EBITDA. I looked at the forecast EBITDA over 2 years, because XPOF would then have fully recovered from any covid impact. Therefore, I assumed that XPOF would continue to trade at the same level in FY25.

Tips

June 30, 22 investor presentation

Risks

Change in consumer behavior

Due to the impact of the COVID-19 pandemic, consumers still have reservations about fitness classes. They fear coming into contact with a COVID patient and getting infected. This fear persists even after the lifting of government orders. Therefore, it extends to the interior activities of the studio.

This situation has pushed consumers to embrace home workouts. The downside is that it will reduce the number of times they attend studio practice classes. A drop in attendance can affect the financial capacity of studios. A resurgence could be around the corner, but it cannot be predicted with certainty.

Growth dependent on franchisees

Another point of risk is that the growth of the business depends on the growth of the franchises. Think of franchises as the cells of a body. The body cannot exist outside of cells, so can’t XPOF exist outside of its franchise network? If franchises can’t find and secure sites for new studios, it will have a big effect on the rate of revenue growth.

Another way franchises could be risky is in the process of opening studios in high-cost markets. This will put a strain on XPOF’s finances. The higher level of invested capital may prove detrimental in the long term.

Conclusion

I believe XPOF is undervalued as of today. XPOF’s mission is to create a healthier world where people can live longer and better lives. Coupled with the public’s enthusiasm for this mission, XPOF is a juicy fruit that rewards the investor. The smartest investors know how to ride the waves of change. Do you?