Xponential Fitness at 37th Annual ROTH Conference: Strategic Franchise Focus

On Tuesday, 18 March 2025, Xponential Fitness (NYSE: XPOF) presented at the 37th Annual ROTH Conference, outlining a strategic realignment aimed at enhancing franchisee success and optimizing brand performance. The company is deploying field operations teams to support franchisees and reassessing its brand portfolio. While these initiatives may affect short-term EBITDA, they are expected to strengthen long-term brand health.

Key Takeaways

• Xponential Fitness is prioritizing franchisee success with new field operations support.
• The company is focusing on brands with profitable units, reducing its portfolio from 11 to 8.
• Strategic investments in technology and marketing, particularly for Club Pilates, are underway.
• Xponential aims for a 40% free cash flow this year despite high cost of capital.
• StretchLab’s AUVs have decreased slightly, but growth potential remains strong.

Financial Results

• Revenue from franchise fees increased by approximately $20 million year-over-year.
• Modest EBITDA growth was reported, with strategic investments impacting short-term figures.
• Investments include headcount increases in technology and field operations.
• Marketing funds are being reinvested into brand building, especially for Club Pilates.
• The company anticipates achieving 40% free cash flow this year.

Operational Updates

• Xponential is deploying over 30 field operations personnel to support franchisees, each covering around 75 locations.
• The sales process for licenses is being revamped under a chief development officer.
• The company aims to visit franchise locations two to three times annually for audits and guidance.

Brand Optimization

• Xponential has reduced its brand portfolio to focus on profitable and strategically valuable brands.
• Club Pilates reported a 12% growth in same-store sales, driven by increased utilization.
• Merchandise strategies are being reconsidered, with potential outsourcing for efficiency.

Future Outlook

• Xponential plans to invest gradually, with a pricing opportunity of 15-20% for Club Pilates over time.
• The current pipeline supports opening around 200 studios annually for the next four to five years.
• The company is considering debt repayment or stock buybacks to manage its high cost of capital.

Q&A Highlights

• Xponential is focusing on reaching younger generations and leveraging influencers in its marketing strategies.
• CEO Mark King emphasized the importance of franchisee-first mentality for sustainable growth.

Readers are encouraged to refer to the full transcript for a detailed understanding of Xponential Fitness’s strategic directions and financial outlook.

Full transcript - 37th Annual ROTH Conference:

Operator: Are are we good then?

George Kelly, Analyst, Roth: Okay. Hi, everybody. I’m George Kelly with Roth. Excited to have the team from Xponential Fitness with me on stage. From the company, Mark King is CEO and John Malone is CFO.

So thank you both for being here. We’ve got twenty five minutes or so. I’ll pause a few times to take questions. So if you have questions in the group, please shout them out. But maybe if we could start, Mark, with your tenure, you’ve been in your seat now for nine months or so.

I would imagine it’s been a lot of work. There’s a lot to figure out, and if you’re listening and trying to sort of formulate a plan. And it seems to be coming together. And you announced just recently when you reported some changes to the platform and kind of how you will support franchisees. And so I was hoping we could start by going through that sort of some of the announcements that came out on the recent call.

And I guess more specifically, it’s the field operations team. It’s a different sort of sales and development, team. So maybe if you could walk through a couple of those things that were first announced. And I guess broader, I keep talking here, but I like that. What what what is the the longer term goal for how you see your platform and franchise support changing?

Mark King, CEO, Xponential Fitness: So first of all, I I started about nine months ago, and the company had a pretty good history of hyper growth, I would say, selling a lot of licenses, opening a lot of studios. And I’m sorry to interrupt.

Operator: Can you flip your your microphone on? To go up. Yep.

Mark King, CEO, Xponential Fitness: Got me now? Okay. I joined the company about nine months ago, hyper growth over the past few years, open selling a lot of licenses, opening a lot of studios, and building a a really fantastic business almost overnight. One of the challenges I think with any company that grew as fast as Xponential is can you build an infrastructure on the inside to keep up with that pace? And can you support in our model, we have franchisees that are all franchise.

How can we support franchisees to make give them the best chance to be successful? So when I came in, the first thing I said is, hey, we really have to have, on top of this this growth mentality, we’ve we’ve got to have this take care of franchisees first. So how do we do that? Well, we make sure that they’re more they’re qualified. They have enough capital.

They have enough capability. They’re committed to being an entrepreneur. So that’s kind of the first thing that we did is said, what is the profile of our of our franchisee? Then how do we support them? So we’ve redone the entire sales process of license.

So we’ve put it under one umbrella, chief development officer, sales, real estate, and construction all under one, and trying to be much more strategic about selling licenses to whom and to and where. So that’s kind of the start of the process. Then once they sign a a lease and they’re about ready to open, how do we help them? Well, most of our operations people, not most, all of them are inside our headquarters. So we’re deploying ops people outside of, into the marketplace to really help franchisees, especially at the beginning of their process, open the right way, have the right number of members, have the right operating model, know how to deploy labor and just make sure they get off to a good start.

So those are kind of the fundamental changes at the beginning of the process that we’re looking

Operator: one one one one one one one me Are we good then? We’re good.

George Kelly, Analyst, Roth: Okay. Hi, everybody. I’m George Kelly with Roth. Excited to have, the team from Xponential Fitness with me on stage. From the company, Mark King is CEO and John Malone is CFO.

So thank you both for being here. We’ve got twenty five minutes or so. I’ll pause a few times to take questions. So if you have questions in the group, please shout them out. But maybe if we could start, Mark, with your tenure.

You’ve been in your seat now for nine months or so. I would imagine it’s been a lot of work. There’s a lot to figure out, and if you’re listening and trying to sort of formulate a plan. And it seems to be coming together. And you announced just recently when you reported some changes to the platform and kind of how you will support franchisees.

And so I was hoping we could start by going through that sort of some of the announcements that came out on the recent call. And I guess more specifically, it’s the field operations team. It’s a different sort of sales and development team. So maybe if you could walk through a couple of those things that were first announced. And I guess broader, I keep talking here, but I’ll keep going.

What is the longer term goal for how you see your platform and franchise support changing?

Mark King, CEO, Xponential Fitness: So first of all, I I started about nine months ago, and the company had a pretty good history of hyper growth, I would say, selling a lot of licenses, opening a lot of studios. And I’m sorry to interrupt.

Operator: Can you flip your microphone on? It’s it’s there you go.

Mark King, CEO, Xponential Fitness: Got me now? Okay. I joined the company about nine months ago. Hyper growth over the past few years, open selling a lot of licenses, opening a lot of studios, and building a a really fantastic business, almost overnight. One of the challenges I think with any company that grew as fast as Xponential is, can you build an infrastructure on the inside to keep up with that pace?

And can you support in our model, we have franchisees, they’re all franchise. How can we support franchisees to make give them the best chance to be successful? So when I came in, the first thing I said is, hey. We really have to have, on top of this this growth mentality, we we’ve got to have this take care of franchisees first. So how do we do that?

Well, we make sure that they’re more they’re qualified. They have enough capital. They have enough capability. They’re committed to being an entrepreneur. So that’s kind of the first thing that we did is said, what is the profile of our of our franchisee?

Then how do we support them? So we’ve redone the entire sales process of license. So we’ve put it under one umbrella, chief development officer, sales, real estate, and construction all under one, and trying to be much more strategic about selling licenses to whom and to and where. So that’s kind of the start of the process. Then once they sign a a lease and they’re about ready to open, how do we help them?

Well, most of our operations people, not most, all of them are inside our headquarters. So we’re deploying, ops people outside of, into the marketplace to really help franchisees, especially at the beginning of their process, open the right way, have the right number of members, have the right operating model, know how to deploy labor and just make sure they get off to a good start. So those are kind of the fundamental changes at the beginning of the process that we’re looking at.

George Kelly, Analyst, Roth: And let’s start with the sales process in finding new franchisees. How much your franchisee mix or profile change as you’re looking out over the next few years? Is there something about the current base of franchisees that you think might sort of morph?

Mark King, CEO, Xponential Fitness: I don’t know that it’s a profile change. I think there’s three things that are really important. One is, is the franchisee really committed to running the business? And in a lot of cases, we have franchisees that thought they could kind of be kind of involved, but not involved, maybe keep their job, do things, but really to be successful, they have to own that business and be in there every day. Second is, do they have the capability themselves or do they have a general manager that they’re going to bring on with them to be able to operate this business and know how to work with the landlord and know how to work with the city and all of the things that come with being a small business operator.

And then the third is the capital requirements to open because the biggest failure for small franchisees is they start, they’re all excited, they go through a tough patch of four, five, six months where revenue is not what they thought and all of a sudden they’re behind the eight ball. So we want to make sure they have enough capital to withstand a year or two from operating capital.

George Kelly, Analyst, Roth: Okay. Understood. And then you also mentioned the field operations teams. How big do you envision that effort? And what’s it going to I mean, is this people that will be traveling all across the country interacting with locations?

Or like what’s that going to look like?

Mark King, CEO, Xponential Fitness: Yeah. I’m not sure exactly how many, but it I think if in the next eighteen months, we should deploy probably 30 plus field ops people, maybe about 75 locations per person. And they need to go in there two, three times a year, audit the facility, making sure that all of the brand standards are being upheld, that they know how to operate, that they were giving them help and guidance on how to run their business. So I think that’s the one thing that will really help the franchisees in their in their path to success is to have people out there working with them every day, helping them understand and teaching them.

George Kelly, Analyst, Roth: Okay. And then how question for John. How are these, investments factored into the guidance that you just put out? And if I kind of slice and dice the numbers, your EBITDA is up the guidance you just announced is up modestly year over year. But your revenue your highest margin revenue, the franchise revenue, is up $20,000,000 roughly.

And so is that I mean, is most of that kind of bridge is it the investments that he’s been referencing? Maybe there’s something else in there that’s suppressing some of the EBITDA growth?

John Malone, CFO, Xponential Fitness: No, you’re thinking about it the right way. I mean, with the growth in system wide sales, that’s giving us the benefit of pretty high flow through margin from royalties. But one of the things that we wanted to make sure we did this year is provided enough room in the guidance to make sure these investments that Mark’s not handcuffed to us a Wall Street number that were really being driven by what’s in the passengers of the business and making the change that needs to happen so the franchisee health does get better. So the growth is coming in SG and A kind of in two areas. One is on headcount as we talked about adding a little bit more headcount in areas like technology, field ops.

So we make sure that he has the staffing there. But we’re also making an investment in marketing fund dollars. There’s been, over since kind of COVID, called Pilates has done extremely well in regards to its growth in system wide sales, but the pace at which we’ve been kind of spending the marketing fund dollars hasn’t capped. So we want to start reinvesting those dollars around brand building with Club Pilates, really making sure that we protect the Golden Goose, because we do have surplus marketing fund to spend. So that those two items are kind of the large contributors to why you saw royalties contribute more top line and more EBITDA, but some of the salary and wages and marketing fund spend is kind of bringing it back down into a modest increase in margin.

Better margin expansion though than previous years, so we’re continuing to see that flow through.

George Kelly, Analyst, Roth: Okay. And then with these investments, should we think about them being sort of front loaded this year? Not as far as how the year progresses, but do you anticipate like, I mean, is this going to be a multi year sort of increase to the operations teams and everything else?

Mark King, CEO, Xponential Fitness: No. I think it’s going to be a build as we invest and test and see what works with field ops, what works with the redeployment of marketing dollars in different places. So I don’t think we’re going to overinvest upfront. I think we’re going to build over time.

George Kelly, Analyst, Roth: Okay. And then, another exercise that we haven’t talked about thus far that you’ve been going through is sort of brand optimization. So if you could tell us what inning you know, there’s already been a few that you’ve exited. How much more is there left to do? And I guess maybe before getting to that, what is the overall goal?

And how do you see this as, like, you know, generating shareholder value? I don’t know sort of what you’re aiming for.

Mark King, CEO, Xponential Fitness: Well, I think what we’re aiming for as a franchisor is to have brands that have profitable units because the only way we can grow long term is if franchisees open studios and they make whatever desired margin, let’s just say 20% operating margin. And if we have that, then that brand can grow. So what we’re looking at right now is we have eight brands. So eighteen months ago, I think we had 11 and divested three. So now we’re down to eight.

And we’ve come into this year, we were very vocal about it at the end of last year that we’re going to look at all the brands. And can they be accretive to the bottom line or do they add some kind of strategic value to the portfolio. But the goal is very simple. The brands that we have have to have growth attached to them and they have to be profitable at the franchisee level. That’s the goal.

George Kelly, Analyst, Roth: Okay. So I think in the maybe what’s different than is in the past, if a brand was contributing and helping you leverage your overall platform, then it was worthwhile. But now it seems like maybe there’s more rigor on, like, it needs to be a growth brand and profitable.

Mark King, CEO, Xponential Fitness: I think it starts with what I started with. It’s about franchisee first mentality. If a if we can have a brand, and that’s why I I don’t know if the number is five or six or seven or eight. I don’t know. But it’s all about, can the franchisees make money.

And if they make money, the brand will grow, and we will benefit from it. So it’s not about leveraging overhead.

George Kelly, Analyst, Roth: Okay. And then still on the same topic, in the past, there’s been an effort to, from a consumer standpoint, leverage the brands into things like XPass and try to sort of keep people in your house of brands. You know, it’s been I don’t know that it was sort of the, smoothest launch. Is there is that some place you’re focused? Do you

Mark King, CEO, Xponential Fitness: think there’s an opportunity? On paper, it sounds great. But the reality is franchisees own their consumer, and they really don’t want to share them with anybody. So although there is some benefit to it, there’s there’s benefit at the consumer level for sure. But at the franchisee level, the ones that have to execute it, they really struggle with that.

So I I worked at Yum! Brands for five years, and we had four brands, and we had no crossover programs that if you went to KFC, you could go to Pizza Hut or Taco Bell or the Habit. We didn’t have any of those types of programs because it’s really a franchisee owned business, and I think we really have to honor that.

George Kelly, Analyst, Roth: Okay. Okay. Understood. And a last question on the topic is, your leverage is deleveraging a goal of your brand monetization. Is that something that you would put in the top few sort of you want to take that?

John Malone, CFO, Xponential Fitness: I’ll take it. I mean, our cost of capital today, we just announced that we extended our agreement with MST. It is and it’s expensive. Over time, this business will kick off a lot of free cash flow, 40% this year, with the ability to get a cheaper cost of capital by doing something like a direct lending with a bank, or even a securitization down the road should be able to allow us to drop our cost of capital significantly. And then I think it becomes a trade off between, do you pay down debt or is a stock buyback the right way to go?

The business is going to deleverage on its own. We’re about three times levered today. I think it just comes down to what is the cost of capital versus the cost of our equity at the time with at the time we’re sitting on excess cash.

George Kelly, Analyst, Roth: Okay. Any questions from the group? No? Okay. So then let’s talk about a few specific brands.

Club Pilates, as you mentioned, been a huge success for several years now. How do you continue growing comp at Club Pilates? How do you map out, like, what just over the course of a year, maybe it’s through advertising. You talked about sort of getting brand advertising, putting more emphasis there. Is there anything else you can do to to help drive it?

Mark King, CEO, Xponential Fitness: Yeah. I I think whenever you’re talking about consumers, they’re really interested in something that’s new, cool, and exciting and fresh. So I think what we need to drive not only into Club Pilates, but into all of our brands is how do we bring newness to the experience? How do we understand our consumers at a deeper level to really know how should we be curating these these experiences that really makes them want to come back more? My fear for most retail is when they become the only reason you come is for the deal.

And I think Club Pilates is really sits above that. Secondly, I think we do have pricing ability to bring more pricing to drive same store sales. We’re really, really low price compared to some of our competitors. So I don’t think we should rush to do that, but we do have some pricing ability to drive price up. And then we have more units, right?

And I know that’s not driving same store sales, but it certainly will drive system wide sales.

George Kelly, Analyst, Roth: How much pricing opportunity do you think you have? Not that you want to just go there.

Mark King, CEO, Xponential Fitness: Yes. I would say probably somewhere between 1520% over time. Yes. We’re very, very low priced.

George Kelly, Analyst, Roth: Okay. So did you start to tweak around your pricing model? I mean, could it it’s already pretty there’s a big range, I think, nationally, right, with pricing. But how did some regions start to take more?

Mark King, CEO, Xponential Fitness: We took some price last fall a little bit to test it and see. And of course, the franchisees are very concerned because their studios are very successful today, very profitable, and they don’t want to rock that boat and they don’t want to lose members. And there was a small price increase at some of the studios and no impact at all on number of members and visits. So I think there is this ability to take some price over the coming years.

George Kelly, Analyst, Roth: Okay.

Mark King, CEO, Xponential Fitness: But I think it’ll be a gentle we’re not going to rush to it because we don’t need to.

George Kelly, Analyst, Roth: I think the most recent, same store sales growth there was is it 12%?

Operator: Do I

Mark King, CEO, Xponential Fitness: have that price? Last year, yes.

George Kelly, Analyst, Roth: So how much of that was price?

Mark King, CEO, Xponential Fitness: Very little. It was mostly utilization.

George Kelly, Analyst, Roth: Okay. And then as far as unit growth on Club Pilates, maybe talk about the opportunity in The US and then the opportunity internationally.

Mark King, CEO, Xponential Fitness: Well, they’re both big. So today, we have a little over a thousand, studios open in The U. S. We believe we have probably close to 2,000 as an opportunity. About 500 of those are sold not open yet, so we’re halfway there.

And most of those will open for sure. We’re really confident about that. So if we’re gonna open 200 plus around 200 studios a year, we’ve got four, five years of growth at the current pipeline. So, we feel really good about that. Internationally, all kinds of interest in club Pilates.

We’re doing really, really well in Japan, really, really well in Spain, The UK. We just saw sold a master franchise agreement in Mexico. So there’s a lot of interest. We our team was over at this Paris franchisee conference and all kinds of interests coming out of that this past week. So we’re excited both here and outside The US.

George Kelly, Analyst, Roth: Okay. And then, a slightly different topic on merchandise on, you know, selling stuff through through your franchise base. You announced on this most recent conference call, it sounds like you’re considering sort of some alternative form for how you monetize that. Maybe, John, first question, how is it structured now and what’s the margin profile? And like what are you assessing?

John Malone, CFO, Xponential Fitness: Yes. So today, we have both branded and unbranded retail that we run through a warehouse. Franchisees can also go direct to vendors, and then we get a rebate from the vendors that they buy from. And anything that they buy direct from us goes through our wholesale warehouse, carries about a 30% margin on the business. In 2024, we ended up carrying a little bit more inventory than we wanted.

So one of the things that we spent a lot of time at the back half of last year is really trying to liquidate and turn the inventory into cash. We did have some margin pressures around retail. And what it kind of really highlighted to us is we probably don’t have the right structure to be running a retail business being that we’re primarily running a franchisor. So what alternatives could we look at that would potentially lead to less working capital tied up in inventory, but also keep our focus on supporting franchisees and less on buying and trying to do merchandising of retail.

Mark King, CEO, Xponential Fitness: I would add this. We’re a franchisor, not a wholesaler. And I spent most of my career as a wholesaler, and that is a culture, it’s a mindset, it’s a know how, it’s an expertise, and we don’t really have that. So what we’re looking at is what does the consumer need? Because we’re a consumer based company, right?

And what does the consumer need? Some of the brands like Stretch Labs, not big to have merchandise in a Stretch Lab. There’s products that they might like. Purebar is very, very big into hoodies and t shirts and socks and all of the things. So it really starts at the consumer level.

How can we fulfill that with a really unsophisticated retailer? Because the boxes aren’t really set up. The studios aren’t really set up for retail, they’re set up to do their classes. So it’s a very small area in the front. So what we’re looking at is what’s the consumer opportunity, what’s the retail opportunity and then how do we service that.

So one alternative would be to outsource the whole thing, find a third party to be able to do it all. That’s one area. The other is to have this mall, and which we have today to go online and simplify the offering, which would be one really great thing. So we’re looking at all kinds of different opportunities, but it starts with what benefits the consumer and what drives profitability for the franchisee.

George Kelly, Analyst, Roth: And on merchandise, how much do you think, because like you said, it’s not your expertise, How much better could someone else do it? So I guess how much have you left, unmonetized, I guess, because you haven’t had the right products there or whatever it might be?

Mark King, CEO, Xponential Fitness: It’s a really good question. And I don’t think we have enough data to have that, but I would say it’s probably pretty significant.

George Kelly, Analyst, Roth: Okay. And then let’s talk StretchLab quickly. Comp, the same store sales growth there has dipped a bit. I think it’s my own read is partly just as you broaden your store. I mean, you’ve grown so many units recently.

It’s been such a rocket ship brand. What can you do to drive same store sales growth at StretchLab? Like what inning do you think that process is right now?

Mark King, CEO, Xponential Fitness: I’ll take it. Go for it. There’s a few things with StretchLab that we’re addressing. One is we really need to be able to qualify flexologists more rapidly. It’s expensive to be qualified.

It takes time. And then if they start in a job and they leave in three months, the franchisee is really in a tough spot. So being able to provide the right instructor all the time is really a challenge for franchisees. Second is, I think there’s an awareness problem here. I mean, it’s not a big category.

There’s really only two people that are in it in a big way, and big is probably overstated. So I think there’s an awareness problem. So we’re looking at how do we redeploy marketing dollars more effectively, and it’s probably more in the community. We’re also looking at do we do things differently there, like use influencers or people who actually can benefit. And then the third thing is we have to be able to show people that go in that there’s a long term benefit to stretching, not just I’ve got a bad back, I’m gonna stretch my IT band because it’s gonna solve my back problem, and then they go away.

So we really need to educate consumers on there’s a benefit to longevity for stretching. So I think it’s all of that. But I do think five fifty or whatever we have today, close to five fifty, and it’s grown very fast, and their AUVs have come down a little bit. But what we do know about the consumer is they love StretchLab. They really like their experience.

And to me, it always starts with the consumer.

George Kelly, Analyst, Roth: And your pipeline of stores that have yet to open, is it how much of that is StretchLab? And have those I know that in this most recent conference call, you said I think 30% of your pipeline is late. Are a lot of StretchLab stores late?

John Malone, CFO, Xponential Fitness: Yes. I mean, when you look at the mix of openings, obviously, 50% roughly were Club Pilates and then it kind of goes to BFT and StretchLab is the number three opening brand. The mix should be very similar to what it was in ’twenty four and ’twenty five. I don’t have the exact sold but not open backlog, but it really comes down to in that brand doing the things Mark mentioned to drive AUV. And I think you’ll get the organic growth out of the licenses we’ve already sold from those franchisees.

So you probably have a fair percentage of existing franchisees waiting to see how we make some of these corrective movements around AUV before they step in to open their second or third units. A lot of our snow did age because of COVID. People weren’t opening, so there was a kind of a natural event that happened that pushed the timeline out for a lot of these franchisees. But now you’re it’s kind of coupled with performance as well. So we’ll need to unlock the performance to get that moving again.

George Kelly, Analyst, Roth: Okay. And the cost base of StretchLab, you’ve given the 30,000 a month. I imagine it’s higher. It’s more of a one on one.

John Malone, CFO, Xponential Fitness: Yeah. Because of because, you know, 30,000 is the line in the sand. We kind of draw as, like, a good back of the napkin what it costs to operate across the the North America in any of our brands. Because stretch lab is one on one stretching, they do need to carry a slightly higher AUV. So at the $5.50 AUV today, they’re making money, but margins are slimmer than what is desirable.

So we definitely need to push it back into the 600s

George Kelly, Analyst, Roth: where it used to be. Okay. And then one last one for me, and then I’ll open it up again. What’s your view of the consumer right now? The market’s going crazy.

Everyone’s trying to figure out what’s going on with spending and sentiment. How do you feel generally?

Mark King, CEO, Xponential Fitness: I feel great. I do because I’ve spent forty years in the consumer markets. And when you have something that’s new, fresh and cool, regardless of where the macro economy is, you will do okay. And so as a as a a brand owner, it’s our responsibility to bring that to the consumer. And so you can cut through the difficult times when you do that.

So for me, I’ve never looked at we have to follow the macro trends. I think if we do the right things, we bring the right experience, we can we can win during those times.

George Kelly, Analyst, Roth: Okay. Any questions from the group?

Operator: Yeah.

John Malone, CFO, Xponential Fitness: Yes. I think the consumer, because of COVID, is way more educated than maybe I was when I was growing up. Did you definitely see a lot more of the younger generation participating in fitness, whether it is at home, whether it is boutique fitness or even the big box. We have dabbled in energy drinks and those kind of things to sell in the studios. It doesn’t make up a large part of the sale, so it’s not an area we’re focused in.

We haven’t really leveraged influencers in our part of the business, but you can definitely see if you’re out on YouTube or any of those things that they do play a role in driving business. So as we kind of relook at our marketing, it’s something that we’ll definitely pay attention to. But one thing for certain is people today are way more educated because of COVID around living a healthier lifestyle, eating better, and that’s the reason why coming out of COVID, we did so well with AUV growth.

George Kelly, Analyst, Roth: Let’s end it there. Thank you. Thank you, everyone. Thanks.

Mark King, CEO, Xponential Fitness: Thank you so much. That was good.

George Kelly, Analyst, Roth: Thank you. Thanks, sir. Thanks.

Operator: One one one one

George Kelly, Analyst, Roth: This presentation has now finished. Please check back shortly for the archive.

Operator: One one

George Kelly, Analyst, Roth: Okay. Hi, everybody. I’m George Kelly with Roth. Excited to have the team from Xponential Fitness with me on stage. From the company, Mark King is CEO and John Malone is CFO.

So thank you both for being here. We’ve got 25 or so. I’ll pause a few times to take questions. So if you have questions in the group, please shout them out. But maybe if we can start, Mark, with your tenure.

You’ve been in your seat now for nine months or so. I would imagine it’s been a lot of work. There’s a lot to figure out, and if you’re listening and trying to sort of formulate a plan. And it seems to be coming together. And you announced just recently when you reported some changes to the platform and kind of how you will support franchisees.

And so I was hoping we could start by going through that sort of some of the announcements that came out on the recent call. And I guess more specifically, it’s the field operations team. It’s a different sort of sales and development team. So maybe if you could walk through a couple of those things that were first announced. And I guess, broader, I keep talking here, but I’ll keep going.

What is the longer term goal for how you see your platform and franchise support changing?

Mark King, CEO, Xponential Fitness: So first of all, I I started about nine months ago, and the company had a pretty good history of hyper growth, I would say, selling a lot of licenses, opening a lot of studios. And I’m sorry to interrupt.

Operator: Can you flip your microphone on? It’s it’s there you go. It

George Kelly, Analyst, Roth: needs to go up.

Operator: Yep. There you go.

Mark King, CEO, Xponential Fitness: Got me now? Okay. I joined the company about nine months ago. Hyper growth over the past few years, open selling a lot of licenses, opening a lot of studios, and building a a really fantastic business, almost overnight. One of the challenges, I think, with any company that grew as fast as Xponential is, can you build an infrastructure on the inside to keep up with that pace?

And can you support in our model, we have franchisees, they’re all franchise. How can we support franchisees to make give them the best chance to be successful? So when I came in, the first thing I said is, hey. We really have to have, on top of this this growth mentality, we’ve we’ve got to have this take care of franchisees first. So how do we do that?

Well, we make sure that they’re more they’re qualified. They have enough capital. They have enough capability. They’re committed to being an entrepreneur. So that’s kind of the first thing that we did is said, what is the profile of our of our franchisee?

Then how do we support them? So we’ve redone the entire sales process of license. So we’ve put it under one umbrella, chief development officer, sales, real estate, and construction all under one, and trying to be much more strategic about selling licenses to whom and to and where. So that’s kind of the start of the process. Then once they sign a a lease and they’re about ready to open, how do we help them?

Well, most of our operations people, not most, all of them are inside our headquarters. So we’re deploying, ops people outside of, into the marketplace to really help franchisees, especially at the beginning of their process, open the right way, have the right number of members, have the right operating model, know how to deploy labor and just make sure they get off to a good start. So those are kind of the fundamental changes at the beginning of the process that we’re looking at.

George Kelly, Analyst, Roth: And let’s start with the sales process in finding new franchisees. How much your franchisee mix or profile change as you’re looking out over the next few years? Is there something about the current base of franchisees that you think might sort of morph?

Mark King, CEO, Xponential Fitness: I don’t know that it’s a profile change. I think there’s three things that are really important. One is, is the franchisee really committed to running the business? And in a lot of cases, we have franchisees that thought they could kind of be kind of involved, but not involved, maybe keep their job, do things, but really to be successful, they have to own that business and be in there every day. Second is, do they have the capability themselves or do they have a general manager that they’re going to bring on with them to be able to operate this business and know how to work with the landlord and know how to work with the city and all of the things that come with being a small business operator.

And then the third is the capital requirements to open because the biggest failure for small franchisees is they start, they’re all excited, they go through a tough patch of four, five, six months where revenue is not what they thought and all of a sudden they’re behind the eight ball. So we want to make sure they have enough capital to withstand a year or two from operating capital.

George Kelly, Analyst, Roth: Okay. Understood. And then you also mentioned the field operations teams. How big do you envision that effort and what’s it going to I mean, is this people that’ll be traveling all across the country interacting with locations or, like, what’s that going to look like?

Mark King, CEO, Xponential Fitness: Yeah. I’m not sure exactly how many, but it it it I think if in the next eighteen months, we should deploy probably 30 plus field ops people, maybe about 75 locations per person. And they need to go in there two, three times a year, audit the facility, making sure that all of the brand standards are being upheld, that they know how to operate, that we’re giving them help and guidance on how to run their business. So I think that’s the one thing that will really help the franchisees in their path to success is to have people out there working with them every day, helping them understand and teaching them.

George Kelly, Analyst, Roth: Okay. And then how question for John. How are these investments factored into the guidance that you just put out? And if I kind of slice and dice the numbers, your EBITDA is up the guidance you just announced is up modestly year over year. But your revenue your highest margin revenue, the franchise revenue, is up $20,000,000 roughly.

And so is that I mean, is most of that kind of bridge, is it the investments that he’s been referencing? Maybe there’s something else in there that’s suppressing some of the EBITDA growth?

John Malone, CFO, Xponential Fitness: No, you’re thinking about it the right way. I mean, with the growth in system wide sales, that’s giving us the benefit of pretty high flow through margin from royalties. But one of the things that we wanted to make sure we did this year is provided enough room in the guidance to make sure these investments that Mark’s not handcuffed to us a Wall Street number that were really being driven by what’s in the best interest of the business and making the change that needs to happen so the franchisee health does get better. So the growth is coming in SG and A kind of in two areas. One is on headcount as we talked about adding a little bit more headcount in areas like technology, field ops.

So we make sure that he has the staffing there. But we’re also making an investment in marketing fund dollars. There’s been, over since kind of COVID, Club Pilates has done extremely well in regards to its growth in system wide sales, but the pace at which we’ve been kind of spending the marketing fund dollars hasn’t capped. So we want to start reinvesting those dollars around brand building with Club Pilates, really making sure that we protect the Golden Goose, because we do have surplus marketing fund to spend. So those two items are kind of the large contributors to why you saw royalties contribute more top line and more EBITDA, but some of the salary and wages and marketing fund spend is kind of bringing it back down into a modest increase in margin.

Better margin expansion though than previous years, so we’re continuing to see that flow through.

George Kelly, Analyst, Roth: Okay. And then with these investments, should we think about them being sort of front loaded this year? Not as far as how the year progresses, but do you anticipate, like, I mean, is this going to be a multi year sort of increase to the operations teams and everything else?

Mark King, CEO, Xponential Fitness: No. I think it’s going to be a build as we invest and test and see what works with field ops, what works with the redeployment of marketing dollars in different places. So I don’t think we’re going to overinvest upfront. I think we’re going to build over time.

George Kelly, Analyst, Roth: Okay. And then another exercise that we haven’t talked about thus far that you’ve been going through is sort of brand optimization. So if you could tell us what inning you know, there’s already been a few that you’ve exited. How much more is there left to do? And I guess maybe before getting to that, what is the overall goal?

And how do you see this as, like, generating shareholder value? I don’t know sort of what you’re aiming for.

Mark King, CEO, Xponential Fitness: Well, I think what we’re aiming for as a franchisor is to have brands that have profitable units because the only way we can grow long term is if franchisees open studios and they make whatever desired margin, let’s just say 20% operating margin. And if we have that, then that brand can grow. So what we’re looking at right now is we have eight brands. So eighteen months ago, I think we had 11 got and divested three. So now we’re down to eight.

And we’ve come into this year, we were very vocal about it at the end of last year that we’re going to look at all the brands. And can they be accretive to the bottom line or do they add some kind of strategic value to the portfolio. But the goal is very simple. The brands that we have have to have growth attached to them and they have to be profitable at the franchisee level. That’s the goal.

George Kelly, Analyst, Roth: Okay. So I think in the maybe what’s different than is in the past, if a brand was contributing and helping you leverage your overall platform, then it was worthwhile. But now it seems like maybe there’s more rigor on, like, it needs to be a growth brand and profitable.

Mark King, CEO, Xponential Fitness: I think it starts with what I started with. It’s about franchisee first mentality. If a if we can have a brand, and that’s why I I don’t know if the number is five or six or seven or eight. I don’t know. But it’s all about, can the franchisees make money.

And if they make money, the brand will grow and we will benefit from it. So it’s not about leveraging overhead.

George Kelly, Analyst, Roth: Okay. And then still on the same topic, in the past, there’s been an effort to, from a consumer standpoint, leverage the brands into things like XPASS and try to sort of keep people in your house of brands. You know, it’s been I don’t know that it was sort of the, smoothest launch. Is there is that some place you’re focused? Do you think there’s an opportunity?

Mark King, CEO, Xponential Fitness: On paper, it sounds great. But the reality is franchisees own their consumer, and they really don’t want to share them with anybody. So although there is some benefit to it, there’s there’s benefit at the consumer level for sure. But at the franchisee level, the ones that have to execute it, they really struggle with that. So I I worked at Yum!

Brands for five years, and we had four brands, and we had no crossover programs that if you went to KFC, you could go to Pizza Hut or Taco Bell or The Habit. We didn’t have any of those types of programs because it’s really a franchisee owned business, and I think we really have to honor that.

George Kelly, Analyst, Roth: Okay. Okay. Understood. And a last question on the topic is, your leverage is deleveraging a goal of your brand monetization. Is that something that you would put in the top few sort of you want to take that?

John Malone, CFO, Xponential Fitness: I’ll take it. I mean, our cost of capital today, we just announced that we extended our agreement with MST. It is and it’s expensive. Over time, this business will kick off a lot of free cash flow, 40% this year, with the ability to get a cheaper cost of capital by doing something like a direct lending with a bank, or even a securitization down the road should be able to allow us to drop our cost of capital significantly. And then I think it becomes a trade off between, do you pay down debt or is a stock buyback the right way to go?

The business is going to deleverage on its own. We’re about three times levered today. I think it just comes down to what is the cost of capital versus the cost of our equity at the time with at the time we’re sitting on excess cash.

George Kelly, Analyst, Roth: Okay. Any questions from the group? No? Okay. So then let’s talk about a few specific brands.

Club Pilates, as you mentioned, been a huge success for several years now. How do you continue growing comp at Club Pilates? How do you map out, like, what just over the course of a year? Maybe it’s through advertising. You talked about sort of getting brand advertising, putting more emphasis there.

Is there anything else you can do to to help drive it?

Mark King, CEO, Xponential Fitness: Yeah. I I think whenever you’re talking about consumers, they’re really interested in something that’s new, cool, and exciting and fresh. So I think what we need to drive not only into Club Pilates, but into all of our brands is how do we bring newness to the experience? How do we understand our consumers at a deeper level to really know how should we be curating these experiences that really makes them want to come back more? My fear for most retail is when they become too transactional, too promotional.

It’s the only reason you come is for the deal. And I think Club Pilates is really sits above that. Secondly, I think we do have pricing ability to bring more pricing to drive same store sales. We’re really, really low price compared to some of our competitors. So I don’t think we should rush to do that, but we do have some pricing ability to drive price up.

And then we have more units, right? And I know that’s not driving same store sales, but it certainly will drive system wide sales.

George Kelly, Analyst, Roth: How much pricing opportunity do you think you have? Not that you want to just go there.

Mark King, CEO, Xponential Fitness: Yeah. I would say probably somewhere between 1520% over time. Yeah. We’re very, very low priced.

George Kelly, Analyst, Roth: Okay. Yeah. So did you start to tweak around your pricing model? I mean, could it it’s already pretty there’s a big range, I think, nationally, right, with pricing. But how did some regions start to take more?

Mark King, CEO, Xponential Fitness: We took some price last fall a little bit to test it and see. And of course, the franchisees are very concerned because their studios are very successful today, very profitable, and they don’t want to rock that boat and they don’t want to lose members. And there was a small price increase at some of the studios and no impact at all on number of members and visits. So I think there is this ability to take some price over the coming years.

George Kelly, Analyst, Roth: Okay.

Mark King, CEO, Xponential Fitness: But I think it’ll be a gentle we’re not gonna rush to it because we don’t need to.

George Kelly, Analyst, Roth: I think the most recent, same store sales growth there was is it 12%? Do I have

Operator: that price?

Mark King, CEO, Xponential Fitness: Last year, yeah.

George Kelly, Analyst, Roth: So how much of that was price?

Mark King, CEO, Xponential Fitness: Very little. It was mostly utilization.

George Kelly, Analyst, Roth: Okay. And then as far as unit growth on Club Pilates, maybe talk about the opportunity in The US and then the opportunity internationally.

Mark King, CEO, Xponential Fitness: Well, they’re both big. So today, we have a little over a thousand, studios open in The U. S. We believe we have probably close to 2,000 as an opportunity. About 500 of those are sold not open yet, so we’re halfway there.

And most of those will open for sure. We’re really confident about that. So if we’re gonna open 200 plus around 200 studios a year, we’ve got four or five years of growth at the current pipeline. So, we feel really good about that. Internationally, all kinds of interest in club Pilates.

We’re doing really, really well in Japan, really, really well in Spain, The UK. We just saw sold a master franchise agreement in Mexico. So there’s a lot of interest. We our team was over at this Paris franchise franchisee conference and all kinds of interest coming out of that this past week. So we’re excited both here and outside The US.

George Kelly, Analyst, Roth: Okay. And then, a slightly different topic on merchandise on, you know, selling stuff through through your franchise base. You announced on the this most recent conference call, it sounds like you’re considering sort of some alternative form for how you monetize that. Maybe, John, first question, how is it structured now and what’s the margin profile? And like what are you assessing?

John Malone, CFO, Xponential Fitness: Yes. So today, we have both branded and unbranded retail that we run through a warehouse. Franchisees can also go direct to vendors and then we get a rebate from, the vendors that they buy from. And anything that they buy direct from us goes through our wholesale warehouse, carries about a 30% margin on the business. In 2024, we ended up carrying a little bit more inventory than we wanted.

So one of the things that we spent a lot of time at the back half of last year is really trying to liquidate and turn the inventory into cash. We did have some margin pressures around retail. And what it kind of really highlighted to us is we probably don’t

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