Boutique health franchisor Xponential Health, Inc. (NYSE:XPOF) has been a well-liked vacation spot for health goers in 2022. Complete membership grew yr on yr by 32% to 590,000 members throughout over 2,600 areas, rising whole income by 58% YoY to $245 million. The inventory has rewarded traders 43.09% in returns over the past yr.

Analysts predict a median one-year inventory worth of $31.27 with a excessive estimate of $43. To date, issues are falling into place for XPOF. It has been very profitable at buying prime health manufacturers, managing and rising them, attracting and onboarding well-performing franchisees, increasing its buyer base, and discovering artistic development alternatives by B2B partnerships. XPOF has raised its steerage going into the monetary yr 2023 and was not impacted by the detrimental shopper discretionary market sentiment, indicating that XPOF is a vital a part of its prospects’ way of life. It has a extremely predictable enterprise, promoting licenses with multiyear development visibility. I stay bullish on this inventory.

Enterprise mannequin and development potential

In my earlier article, I gave an overview of XPOF. Inside a short while it has grow to be the most important franchisor throughout the boutique health trade within the USA. Whereas many shares, akin to competitor F45 (FXLV), had related development ambitions, health shares typically do poorly on the inventory market. There are just a few the reason why XPOF stands out as an organization with quite a lot of development potential.

Firstly it has a diversified portfolio of main vertical manufacturers. XPOF is buying the dominating gamers within the boutique health trade; for instance, Membership Pilates is 9 instances bigger than its closest competitor. XPOF’s most up-to-date acquisition of BFT is essentially the most important participant in Australia and South East Asia. We will see that Membership Pilates makes up many of the open studios, adopted by Pure Barre and Stretch Lab. The benefit of such a various set of manufacturers is that XPOF can faucet into health tendencies whereas sharing the chance throughout less-performing manufacturers.

Secondly, it has a observe document of rising and managing manufacturers. Its legacy model Membership Pilates has grown from twelve to 826 research in twelve years. XPOF explains that 85% of the spine of every model is comparable, with 15% centered on particular person options of the vertical, making it simple for franchisees to broaden into new manufacturers. Over 55% of its franchisees personal multiple unit and a number of manufacturers. These franchisees profit from sharing prices, akin to entrance desk workers. One other effort to extend model development is the XPASS, a subscription of $249 per thirty days, which supplies prospects entry to all manufacturers. Under we will see the income combine, with 71% in recurring income, which brings in money to reinvest within the manufacturers and opportunistically purchase new manufacturers.

Thirdly the corporate is run by a strong and bold administration group led by a CEO with over twenty years within the health trade. Every model has its centered administration group to run the ins and outs of the completely different verticals.

Moreover, XPOF has a really loyal buyer base. Though a boutique membership charge is way larger than a normal fitness center subscription, the standard buyer spends lower than 1% of their revenue on a membership charge and sees health as a vital a part of their way of life, typically shoppers have a tendency to construct an in depth neighborhood inside these studios that enhance loyalty to the model.

XPOF is doing very properly, AUV is at an all-time excessive, new studio openings are at an all-time excessive, and the overall retailer depend is rising with a predictable multiyear pipeline. The corporate doesn’t see a slowdown in system-wide gross sales on the patron or the franchisee facet. The enterprise has a really engaging, predictable enterprise mannequin that’s proving inflation and recession-resistant because of the cash-heavy recurring income mannequin and recession-resistant as a consequence of its prosperous shopper base.

XPOF has been artistic in its B2B partnerships to extend development. Under we will see varied efforts with a number of well-recognised firms. It has not too long ago signed a five-year contract with Princess Cruises to develop the manufacturers onboard its 15-ship fleet. It has a small footprint within the worldwide markets with an enormous alternative to develop its market share with many contracts already in place to open up new shops.

Financials and valuations

XPOF is a younger firm going by a major double-digit development section throughout key efficiency indicators akin to new studios opening, new licenses in place, and new members. This has improved the corporate’s prime and backside line efficiency, and the expansion pattern seems set to proceed because it has barely scraped the floor in its worldwide markets and will onboard extra manufacturers sooner or later. We will see that whole revenues grew by 58% YoY to $245 million, and whole system-wide gross sales for North America grew 46% YoY to $1.0 billion. For 2022 the corporate achieved a internet revenue of $2.8 million, and earnings per share improved to detrimental $0.87.

If we have a look at the corporate’s stability sheet, we will see that the overall debt is considerably larger than money availability. Nevertheless, we must be conscious that the enterprise is investing in its development and that its recurring income mannequin will rapidly enhance general EBITDA and working margins, decreasing the online leverage ratio.

As mentioned above, we’re already seeing an upward levered free money stream pattern. XPOF had a optimistic free money stream of $23.8 million for the total monetary yr 2022, and we will anticipate this to proceed into the brand new monetary yr, which can make sure that the corporate can make investments additional into the enterprise, repay bills and reward traders with inventory repurchases which are sometimes seen in franchise enterprise mannequin shares.

XPOF has an enterprise worth of $1.22 billion and an FWD price-to-earnings ratio of 28.89. If we evaluate XPOF to FXLV, a boutique health peer that went public across the identical time, and Planet Health (PLNT), a bigger, extra established conventional fitness center format with a less expensive on a regular basis fitness center cross, we will see that XPOF has a a lot decrease P/E to PLNT. If we evaluate the FWD EV to EBITDA ratio, contemplating debt, we see that XPOF has the bottom valuation of the three, indicating that it could be undervalued.

Dangers

Though XPOF has a various model portfolio, many of the enterprise is from its prime three manufacturers. One of many important dangers that stand out for XPOF is whether or not the recognition of its health manufacturers is sustainable in the long term. Nevertheless, to this point, the enterprise has efficiently grown the manufacturers and purchased in style new manufacturers. Constructing onto this, a foul model acquisition might be expensive for the corporate. The administration group have famous that they intend to chorus from taking up important transformational acquisitions, as an alternative sustaining their technique of add-on acquisitions. As the corporate goals to extend the variety of manufacturers, one of many dangers might be that it turns into exhausting to handle successfully. Lastly, the aggressive market is rising, that means extra alternate options at decrease costs. On-line apps akin to Peloton Interactive (PTON) present on-line boutique lessons for a lower cost, and extra gyms are beginning to supply boutique lessons. Though prospects consider these alternate options present a lesser high quality, buyer preferences are unpredictable and might change rapidly.

Closing ideas

XPOF has simply posted a sturdy set of monetary outcomes and has confirmed its enterprise mannequin to be inflation resistant, and the recessionary surroundings has not impacted its prospects. XPOF has solely scratched the floor of its worldwide market potential. It has a substantial backlog of shops assured to open and a various portfolio of name verticals, which spreads the chance of less-performing manufacturers. XPOF has pushed by the pandemic challenges and has out a stronger firm with the power to take up extra market share as a lot of its prior opponents headed out of business in 2020. With a observe document of buying, managing and rising its manufacturers, guaranteeing franchisee and buyer development, I consider there may be nonetheless quite a lot of upside potential for this inventory and stay bullish.