International Franchising And Digital Memberships Will Transform Boutique Fitness

Key Takeaways

• Rapid scaling of operations, analytics integration, and outsourcing are set to boost margins, accelerate growth, and improve recurring revenue quality beyond current expectations.
  
• Enhanced membership ecosystem and international expansion strategy position the company for accelerated customer growth and global replication of past profitability.
  
• Shifting consumer preferences, rising costs, delayed franchise growth, market saturation, and governance issues all threaten profitability, revenue growth, and investor confidence.

Catalysts

Through its subsidiaries, operates as a boutique fitness brands franchisor in North America.

• Analyst consensus expects the new field operations team to incrementally improve franchisee performance, but with a rapidly scaling and data-driven deployment, these teams could drive a step-function increase in same-store sales and significant net margin improvement much faster than currently forecasted, especially as best practices are institutionalized across the network.
  
• While the consensus expects the new Chief Development Officer to enable smoother franchise expansion, a more bullish view sees integration of franchise sales, real estate, and construction with advanced analytics accelerating unit openings and materially increasing royalty-driven recurring revenue, as execution bottlenecks are rapidly removed and conversion rates on license openings rise above prior cycles.
  
• Outsourcing retail and merchandise operations to Fit Commerce is poised not just to lift operating margins, but could also transform cash flow and working capital conversion-by shifting $50 million in minimum guaranteed commissions to higher-quality recurring revenue and freeing up capital for reinvestment in growth drivers like international and digital expansion.
  
• Xponential's shift to a true membership ecosystem-through cross-studio memberships, new pricing tiers, unassisted use of facilities, and personalized app-driven engagement-uniquely positions it to benefit from the rise in subscription-based, health-focused consumer spending, supporting accelerated growth in member count and industry-leading customer lifetime value, which will enhance both top-line and bottom-line results.
  
• With international expansion led by on-the-ground senior hires and the Club Pilates "playbook," there is clear potential to replicate past North American scale and profitability in major global markets, implying a multiplier effect on both system-wide sales and brand equity, well ahead of analyst models anchored in more gradual, legacy-franchise assumptions.

Xponential Fitness Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Xponential Fitness compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Xponential Fitness's revenue will grow by 2.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -18.2% today to 20.7% in 3 years time.
• The bullish analysts expect earnings to reach $70.3 million (and earnings per share of $2.25) by about August 2028, up from $-57.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.2x on those 2028 earnings, up from -5.6x today. This future PE is lower than the current PE for the US Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.91%, as per the Simply Wall St company report.

Xponential Fitness Future Earnings Per Share Growth

Risks

• Boutique fitness is vulnerable to shifts toward home fitness and digital wellness offerings, as increasing consumer preference for connected equipment and digital subscriptions could cannibalize demand for brick-and-mortar studios, leading to potential declines in system-wide sales and recurring royalty revenue.
  
• The company faces rising labor and real estate costs, which may compress franchisee margins and erode profitability for both franchisees and Xponential Fitness, ultimately weighing on consolidated margins and net income.
  
• Franchisee profitability and unit growth remain at risk as approximately 40 percent of franchise licenses are more than 12 months behind schedule, reflecting larger challenges in franchisee execution and possible elevated studio closure rates, threatening future royalty revenue growth and EBITDA.
  
• Aggressive brand expansion and overlapping market coverage may result in brand saturation and cannibalization, causing lower same-store sales and diminished average unit volumes across the portfolio, which would negatively impact organic revenue and earnings growth.
  
• High leverage and a history of regulatory and governance scrutiny, including past SEC investigations and reliance on debt for working capital and lease settlements, raise concerns about rising interest expense, reduced free cash flow conversion, and potential investor skepticism that could limit valuation multiples and equity appreciation.

Valuation

• The assumed bullish price target for Xponential Fitness is $19.39, which represents two standard deviations above the consensus price target of $12.33. This valuation is based on what can be assumed as the expectations of Xponential Fitness's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $339.5 million, earnings will come to $70.3 million, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 10.9%.
• Given the current share price of $9.14, the bullish analyst price target of $19.39 is 52.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.