International Expansion Leveraging Club Pilates Will Improve Member Experience

Key Takeaways

• Strategic integration of franchise sales, real estate, and construction aims to enhance franchise expansion and revenue growth.
  
• International expansion with local leadership in Europe and Asia, leveraging existing brands, promises increased international revenue.
  
• Weak financial controls, missed growth targets, studio closures, and high debt levels indicate operational challenges and potential strains on revenue and profitability.

Catalysts

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

• Establishing field operations teams across North America to work directly with franchise partners is anticipated to improve studio operations and drive profitable growth, potentially boosting revenue and margins.
  
• Integrating franchise sales with real estate and construction under a new Chief Development Officer aims to create a more strategic and efficient development process, likely enhancing revenue growth through more effective franchise expansion.
  
• Rethinking studio layouts to maximize productivity and customizing formats to local markets is expected to drive studio profitability and customer traffic, potentially improving both revenue and net margins.
  
• Focusing on data and analytics with enhancements to enterprise applications and becoming a data-centric company should lead to operational efficiencies and an enhanced member experience, potentially boosting earnings.
  
• Expanding internationally with on-the-ground leadership in Europe and Asia, especially leveraging the existing Club Pilates presence, is expected to increase revenue from international markets.

Xponential Fitness Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xponential Fitness's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -22.7% today to 10.7% in 3 years time.
• Analysts expect earnings to reach $41.2 million (and earnings per share of $1.23) by about April 2028, up from $-72.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.5x on those 2028 earnings, up from -3.3x today. This future PE is greater than the current PE for the US Hospitality industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 6.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.38%, as per the Simply Wall St company report.

Xponential Fitness Future Earnings Per Share Growth

Risks

• The restatement of financial statements and identification of accounting errors over previous years highlights potential weaknesses in financial controls, which could impact investor confidence and future financial reporting, particularly earnings.
  
• The company faced a miss in gross studio openings and adjusted EBITDA for 2024, attributing it to an organic timeline for studios and cost issues, impacting revenue growth and EBITDA margins.
  
• Elevated studio closures in certain brands such as Stretch Lab, CycleBar, and Yoga Six could indicate brand-specific operational challenges or market saturation, which may affect revenue and profitability.
  
• The company plans for a foundational, low-growth year in 2025, necessitating heavy investments in restructuring and brand management, potentially compressing margins and delaying earnings improvements.
  
• Debt levels and expected high interest expenses can strain cash flow and leverage, hindering the ability to fund growth investments and recover net margins.

Valuation

• The analysts have a consensus price target of $14.3 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 $32.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $383.5 million, earnings will come to $41.2 million, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 10.4%.
• Given the current share price of $7.2, the analyst price target of $14.3 is 49.7% 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.