Mark King's Leadership And Strategic Shifts Set To Propel Business Growth And Profitability

Key Takeaways

• Mark King's appointment as CEO suggests strategic shifts aimed at operational improvements and business growth, without mentioning specific performance metrics.
  
• International expansion through a master franchise agreement in Scandinavia highlights a focus on earnings diversification and revenue streams without quantifying projected impact.
  
• Dependency on consumer spending and managing multiple brands, along with regulatory scrutiny, higher studio closure rates, and a strategic shift to franchises, could negatively impact revenue and margins.

Catalysts

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

• Mark King's appointment as CEO signifies a strategic shift with his successful track record in enhancing sales and market share, indicating a potential for operational improvements and business growth, impacting future revenue.
  
• Xponential Fitness' decision to focus on growing its existing portfolio of brands rather than pursuing additional acquisitions suggests a strategic refocusing which could lead to better resource allocation and improved net margins through operational efficiencies.
  
• The emphasis on franchisee profitability and health as a core operational focus could enhance franchisee satisfaction and operational success, potentially leading to increased sales and a stronger, more resilient franchise network, positively affecting revenue and net margins.
  
• The reduction in SG&A expenses as a part of shifting away from company-owned studios to a more franchisee-support focused model suggests a strategic move to improve EBITDA margins through reduced operational costs.
  
• International expansion, particularly with the new master franchise agreement in Scandinavia, represents a forward-looking growth catalyst that could significantly contribute to future revenue streams and earnings diversification.

Assumptions

• Analysts are assuming Xponential Fitness's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $59.2 million (and earnings per share of $1.59) by about September 2027, up from $13.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $76.8 million in earnings, and the most bearish expecting $47.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, down from 28.4x today. This future PE is lower than the current PE for the US Hospitality industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 3.58% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.53%, as per the Simply Wall St company report.

Risks

• The dependency on consumer spending in the retail sector, as indicated by a slowdown in retail purchases at the studio level, could negatively impact merchandise revenue.
  
• The challenge of managing the complexity of multiple brands under one roof at the headquarters may hinder operational efficiency and potentially affect net margins.
  
• Regulatory scrutiny and issues, as mentioned, could lead to unforeseen operational and legal expenses, impacting earnings.
  
• Higher anticipated studio closure rates may result in reduced revenue and earnings growth if the company cannot stabilize and improve the performance of its existing franchisees.
  
• The shift in strategy away from acquiring company-owned studios to focusing on franchisee support requires significant execution risk, which could impact revenue if the company fails to efficiently execute the transition and adequately support franchisee success.

Valuation

• The analysts have a consensus price target of $20.0 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 2027, revenues will be $404.8 million, earnings will come to $59.2 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $12.27, the analyst's price target of $20.0 is 38.6% 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.