The reopening of the economy stands to benefit all kinds of businesses that involve gathering in public, especially indoors.
could be a winner even within that group.
People returning to the gym could boost the stock (ticker: XPOF) and help the company double in size, according to Gregory Kitt, general partner, investments, for Pinnacle Family Office Investments. He prefers it to other gym stocks, such as
(PLNT), he said, because the company is growing faster.
Xponential currently has 1,839 gyms, or studios, globally. It could open “a 100% more stores over the next five years,” he said.
Xponential, during the pandemic, bought some of its franchised units. The company also committed to refranchise all the units that aren’t profitable, or at least breaking even, by the end of this year, Kitt said. If Xponential fulfills this commitment, refranchising gyms with higher costs, investors will see operating expenses go down next year, he said.
“I like franchise concepts because they can generate a lot of cash,” Kitt said.
Pinnacle, of Dallas, is the family office of Barry Kitt, Gregory Kitt’s father, who controlled the hedge fund The Pinnacle Fund. The elder man closed the hedge fund in 2010 to focus on the Pinnacle Family Office, which invests the family money.
Pinnacle mainly focuses on small-cap stocks; it invested in Xponential at $12 a share in July. “It’s been a really good investment for us,” said Gregory Kitt, who describes himself as a former gym rat.
Shares of Xponential, based in Irvine, Calif., have soared nearly 82% since going public in July at $12 a share. They closed Monday at $21.79. Planet Fitness stock is down 7% since hitting a year-to-date high near $96 early this month, but has also gained nearly 13% since Oct. 18.
Launched in 2017, Xponential buys up fitness brands like Pure Barre, Club Pilates, Rumble, and Yoga Six. Xponential last month announced its 10th acquisition, adding Body Fit Training, a fitness franchiser from Australia, for $44 million.
Not only does Kitt like Xponential’s faster growth, relative to other fitness businesses, he also sees a shorter path to profitability. Xponential’s individual studios could reach break even on an operating basis much faster than many other franchise concepts, he said. The studios are expected to generate cash-on-cash returns—a ratio comparing total cash earned with total cash invested—of 40% in year two.
Xponential also earns a percentage of franchised studio revenue as a royalty, while other franchise concepts receive a flat fee annually. “Xponential’s percentage royalty fee is more friendly to franchisees early in the life of a new studio and allows Xponential to continue generating more high margin royalty revenue as the studio grows over time,” he said.
Last week, Xponential reported that losses widened to $8.9 million, or 38 cents a share, for the third quarter, from $1.9 million in the same quarter a year earlier. The company increased its outlook for store openings, revenue, and earnings before interest, taxes, depreciation, and amortization for the year ending Dec. 31. It now anticipates opening 230 to 250 new studios, compared with the 215 to 235 studios it had expected.
Xponential foresees revenue of $147 million to $148.5 million, up from its previous guidance of $135.5 million to $137 million. Earnings before interest, taxes, depreciation, and amortization, or Ebitda, are expected to jump to $25 million to $26 million, compared with the $22 million to $23 million it had anticipated.
Analysts are expecting Xponential to report $201 million of revenue in 2022, with Ebitda of $68 million and net income of $34 million. The calls for 2021 are for $148 million of revenue, $25.5 million of Ebitda, and a net loss of $25 million.
“They’re not profitable now but they’ll be profitable next year,” Kitt said.
The only danger is if another pandemic, or a worsening of the current one, causes gyms, and businesses, to shut down again, he said. “That would be the biggest risk,” Kitt said.
Xponential, which has $25.5 million of cash and $100 million in debt, spends most of its money on buying brands. Kitt expects them to have “lots of cash” in the future, making it possible for capital to be returned to shareholders through share repurchases or dividends.
Xponential could bring in $250 million in revenue in 2024, while Ebitda could soar to $100 million, he said. “We think Xponential could be a $40 stock in 2024,” Kitt said.
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