Adopting Predictive Analytics And Investing In Club Pilates Will Strengthen Future Operations

Key Takeaways

• Strategic international expansion and investments in top-performing brands are expected to drive significant revenue growth and enhance net margins.
  
• Data-driven decision-making and operational efficiency improvements aim to increase franchisee profitability and boost overall profitability.
  
• Rapid growth challenges, cultural shifts, legal costs, inconsistent brand performance, and studio closures threaten profitability and revenue growth at Xponential Fitness.

Catalysts

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

• Expansion of international footprint with a focus on significant markets like Japan and Australia is expected to drive substantial revenue growth in the future.
  
• Adoption of improved data capabilities and predictive analytics to enhance operational efficiency and member experience is likely to optimize net margins.
  
• Implementation of data-driven decision-making and real-time operational insights aims to increase franchisee profitability, which can enhance earnings.
  
• Strategic investments in top-performing brands, such as Club Pilates and StretchLab, while potentially divesting underperformers, could improve overall portfolio performance and positively impact net margins.
  
• Shift towards a marketing and operations-driven culture, with a renewed focus on franchisee support and reducing operational costs, is anticipated to boost long-term net margins and overall profitability.

Xponential Fitness Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xponential Fitness's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.6% today to 14.3% in 3 years time.
• Analysts expect earnings to reach $58.2 million (and earnings per share of $1.77) by about January 2028, up from $-24.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $70.3 million in earnings, and the most bearish expecting $44.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from -21.4x today. This future PE is lower than the current PE for the US Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 12.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.61%, as per the Simply Wall St company report.

Xponential Fitness Future Earnings Per Share Growth

Risks

• Rapid growth challenges are evident in infrastructure and process shortcomings, which could hinder efficient operations and support for franchisees, potentially affecting profitability.
  
• There is a significant cultural shift required from a sales-first to a marketing and operations-driven approach, which may lead to transitional challenges impacting revenues and net margins.
  
• The performance of some brands within the portfolio is inconsistent, leading to possible divestiture considerations if performance gaps persist, potentially impacting overall revenue growth.
  
• Legal costs and regulatory inquiries are contributing to increased SG&A expenses, threatening net earnings and overall profitability.
  
• The high rate of studio closures, at an expected 3% to 5% of the global system, reflects challenges in sustaining franchisee operations and may reduce anticipated revenue growth.

Valuation

• The analysts have a consensus price target of $19.35 for Xponential Fitness based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $36.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $406.6 million, earnings will come to $58.2 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 8.6%.
• Given the current share price of $16.35, the analyst's price target of $19.35 is 15.5% 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.