Q2 2024 Xponential Fitness Inc Earnings Call
Speaker Change: Greetings and welcome to the Xponential Fitness, Inc. 2nd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Operator: conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Operator: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Avery Wannamaker, Investor Relations. Thank you. You may be seated.
Speaker Change: It is now my pleasure to introduce your host, Avery Wanamaker, Investor Relations. Thank you. You may begin.
Avery Wannamaker: Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' second quarter 2024 financial results. I am joined by Brenda Morris, Lead Director, Mark King, Chief Executive Officer, and John Meloun, Chief Financial Officer. Sarah Luna, President, will join Mark and John for the question and answer portion of the call.
Avery Wanamaker: Thank you, Operator. Good afternoon and thank you all for joining our conference call to discuss Xponential Fitness second quarter 2024 financial results. I am joined by Brenda Morris, Lead Director, Mark King, Chief Executive Officer, and John Meloun, Chief Financial Officer.
Speaker Change: Sarah Luna, President, will join Mark and John for the question and answer portion of the call. A recording of this call will be posted on the Investor section of our website at investor.xponential.com.
Avery Wannamaker: A recording of this call will be posted on the Investor section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call.
Speaker Change: We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections.
Speaker Change: These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations.
Speaker Change: For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call.
Avery Wannamaker: In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. Please note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted.
Speaker Change: In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide.
Speaker Change: A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call.
Speaker Change: Please note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted.
Avery Wannamaker: As a reminder, in order to ensure period-over-period comparability and consistent with our reporting methods since IPO, we present all KPIs on a fully pro forma basis, meaning for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended June 30, 2024, This includes AKT, BFT, Club Pilates, Cycle Bar, Lendora, Pure Bar, Rumble, Stretch Lab, and Yoga 6.
Speaker Change: As a reminder, in order to ensure period-over-period comparability and consistent with our reporting methods since IPO, we present all KPIs on a fully pro forma basis.
Speaker Change: Meaning for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period.
Speaker Change: For the period ended June 30, 2024, this includes AKT, BFT, Club Pilates, Cycle Bar, Lendora, Pure Bar, Rumble, Stretch Lab, and Yoga 6.
Brenda Morris: I will now turn the call over to Brenda Morris, Lead Director of Xponential Fitness. Thanks, Avery, and thank you all for joining us this afternoon on Xponential's second quarter 2024 earnings conference call. During my brief tenure as interim CEO, I enjoyed the opportunity to speak with many of you. On behalf of the entire board, we thank you for your engagement and patience during our leadership transition. Prior to announcing Mark King as the new CEO, we had been in active discussions for some time about adding him to our board of directors. During that process, we got to know him well, and we are thrilled that he agreed to assume the CEO role in addition to joining the board.
Speaker Change: I will now turn the call over to Brenda Morris, Lead Director of Xponential Fitness.
Brenda Morris: Mark has succeeded wherever he has been, rising from a territory sales representative to CEO in his 34 years at TaylorMade, growing sales and market share at Adidas, and, most recently, adding 1,400 new locations and increasing international growth during his tenure at Taco Bell. The board is equally impressed with Mark's career-long focus on workplace culture, on franchisees, and on exceeding end-user expectations. We have full confidence in his ability to lead the company moving forward and to further Xponential's mission of making health and wellness accessible to all.
Brenda Morris: Thanks, Avery, and thank you all for joining us this afternoon on Xponential's second quarter 2024 earnings conference call.
Brenda Morris: During my brief tenure as interim CEO , I enjoyed the opportunity to speak with many of you. On behalf of the entire board, we thank you for your engagement and patience during our leadership transition.
Speaker Change: Prior to announcing Mark King as the new CEO , we had been in active discussions for some time about adding him to our board of directors.
Brenda Morris: During that process, we got to know him well, and we are thrilled that he agreed to assume the CEO role in addition to joining the board.
Speaker Change: Mark has succeeded wherever he has been, rising from a territory sales representative to CEO in his 34 years at TaylorMade.
Speaker Change: growing sales and market share at Adidas, and most recently, adding 1,400 new locations and increasing international growth during his tenure at Taco Bell.
Speaker Change: The board is equally impressed with Mark's career-long focus on workplace culture, on franchisees, and on exceeding end-user expectations.
Speaker Change: We have full confidence in his ability to lead the company moving forward and to further Xponential's mission of making health and wellness accessible to all.
Brenda Morris: I'll now turn it over to Mark to share some high-level reflections from his first six weeks at the company. I appreciate the warm introduction, Brenda, and thank you for all your help since my arrival. I look forward to continuing to work with you and our Board of Directors. And a good afternoon to all of you.
Speaker Change: I'll now turn it over to Mark to share some high-level reflections from his first six weeks at the company.
Mark: I appreciate the warm introduction, Brenda, and thank you for all your help since my arrival. I look forward to continue to work with you and our Board of Directors.
Mark King: I am thrilled to be the CEO of Xponential Fitness, and my excitement has only grown since I got here. So, first things first, why am I here?
Mark: And a good afternoon to all of you. I am thrilled to be CEO of Xponential Fitness and my excitement has only grown since I got here. So first things first, why am I here?
Mark King: When you think about what, for example, Adidas and Taco Bell were like when I joined, you get an idea of what I look for. Strong, growing brands, passionate stakeholders, scalable teams, and models that are poised to generate significant cash with a little bit of fine-tuning. I saw all of the same things in Xponential prior to me joining the company, and now that I'm here, I'm confident I am in the right
Speaker Change: When you think about what, for example, Adidas and Taco Bell were like when I joined, you get an idea of what I look for.
Speaker Change: Strong, growing brands, passionate stakeholders, scalable teams.
Speaker Change: and models that are poised to generate significant cash with a little bit of fine-tuning. I saw all of the same things in Xponential prior to me joining the company, and now that I'm here, I'm confident I am in the right place.
Mark King: Over the past six weeks, I have spoken to so many people, franchisees, employees, and vendors, to get a better understanding of our business. Throughout the process, I have been impressed by the passion, the hard work, and the expertise of Xponential's franchisees and employees. While I obviously haven't yet had sufficient time to develop a detailed strategy, I thought it would make sense to share some early observations.
Speaker Change: Over the past six weeks, I have spoken to so many people, franchisees, employees, vendors, to get a better understanding of our business.
Speaker Change: Throughout the process, I have been impressed by the passion, the hard work, expertise of Xponential's franchisees and employees.
Speaker Change: While I obviously haven't yet had sufficient time to develop a detailed strategy, I thought it would make sense to share some early observations.
Mark King: To start with, Xponential has a strong stable of core brands that have significant growth and profit potential. For the foreseeable future, we will be focusing on growing our existing portfolio of brands rather than pursuing additional acquisitions. This will ensure that 100% of our management team's focus is on supporting the growth of our existing brands and franchisees. The single greatest determinant of our future success is the underlying health and profitability of our franchisees.
Speaker Change: To start with, Xponential has a strong stable of core brands that have significant growth and profit potential. For the foreseeable future, we will be focusing on growing our existing portfolio of brands rather than pursuing additional acquisitions.
Speaker Change: This will ensure that 100% of our management team's focus is on supporting the growth of our existing brands and franchisees.
Speaker Change: The single greatest determinant of our future success is the underlying health and profitability of our franchisees.
Mark King: We will put franchisees at the front and center of our operational processes and support efforts. Helping to ensure that franchisees thrive will not just be a single initiative but rather our core focus across all operations every day. I mentioned a minute ago that I haven't yet had the time necessary to develop a detailed strategy to share with you today.
Speaker Change: We will put franchisees at the front and center of our operational processes and support efforts.
Speaker Change: Helping to ensure franchisees thrive will not just be a single initiative, but rather our core focus across all operations every day.
Speaker Change: I referenced a minute ago that I haven't yet had the time necessary to develop a detailed strategy to share with you today.
Mark King: What I can tell you, though, is that high-growth companies like Xponential need to constantly innovate and adapt their cultural mindset to the pace at which marketplaces evolve in today's economy to not just grow, but scale profitably. So the strategic initiatives I will be developing and sharing with you in the coming quarters will be focused on that, ensuring long-term predictable profitability. Lastly, I think it's important to also be matter of fact that refining how high growth companies scale and mature doesn't take place in a vacuum. Together with John, the rest of the team, and our key stakeholders.
Speaker Change: What I can tell you, though, is that high-growth companies like Xponential need to constantly innovate and adapt their cultural mindset to the pace at which marketplaces evolve in today's economy to not just grow, but scale profitably.
Speaker Change: So the strategic initiatives I will be developing and sharing with you in the coming quarters will be focused on that, architecting long-term predictable profitability.
Speaker Change: Lastly, I think it's important to also be matter-of-fact that refining how high-growth companies scale and mature doesn't take place in a vacuum.
Mark King: We're also going to be navigating around the change in leadership away from a founder-led business amidst some regulatory issues that the company has previously disclosed. As John will discuss in greater detail, they've had an understandable impact on the business in the near term, and our outlook needs to reflect that. From my vantage point today, though, I share John's confidence that those issues aren't going to meaningfully impact our multi-year goals, nor will some of the consumer spending issues we saw in the retail segment of the business. I will now turn it over to John to discuss our second quarter results and 2024 guidance. Thanks, Mark.
Speaker Change: Together with John , the rest of the team, and our key stakeholders.
John: We're also going to be navigating around the change in leadership away from a founder-led business amidst some regulatory issues that the company has previously disclosed.
Speaker Change: As John will discuss in greater detail, they've had an understandable impact on the business in the near term, and our outlook needs to reflect that.
John: From my vantage point today, though, I share John's confidence that those issues aren't going to meaningfully impact our multi-year goals, nor will some of the consumer spending issues we saw in the retail segment of the business.
Speaker Change: I will now turn it over to John to discuss our second quarter results and 2024 guidance.
John Meloun: It's great to have you on board, and thank you to everyone for joining the call. While we had hoped this wouldn't be the case, we are confronted with a reality where the business is facing some short-term disruptions from a change in leadership and continued regulatory uncertainty. In addition to some distractions at our senior leadership level that followed the resignation of our former CEO, we are also leveling the playing field how we operate more broadly under new leadership.
John: Thanks, Mark. It's great to have you on board, and thank you to everyone for joining the call. While we had hoped this wouldn't be the case, we are confronted with a reality where the business is facing some short-term disruptions from our change in leadership and continued regulatory uncertainty.
Speaker Change: In addition to some distractions at our senior leadership level that followed the resignation of our former CEO , we are also level setting how we operate more broadly under new leadership.
John Meloun: We are excited about the long-term opportunity all this represents, but we will have to work through some shorter-term challenges as we transition away from a founder-led organization. Both the weaker second quarter results and the reduced guidance for the year should be considered in that context. Importantly, with regard to the second quarter, while some specific headwinds pressured our top and bottom lines in Q2, which I will detail shortly, the core studio operating KPIs that we used to measure the strength of the franchise system remain strong, including total member growth, total visits, as well as run rate AUVs, which have all achieved new historical levels.
Speaker Change: We are excited about the long-term opportunity all this represents, but we will have to work through some shorter-term challenges as we transition away from a founder-led organization.
Speaker Change: Both the weaker second quarter results and the reduced guidance for the year should be considered in that context.
Speaker Change: Importantly, with regards to the second quarter, while some specific headwinds pressured our top and bottom lines in Q2, which I will detail shortly, the core studio operating KPIs that we used to measure the strength of the franchise system remained strong, including total member growth.
Speaker Change: Total Visits, as well as Run Rate AUVs, which have all achieved new historical levels.
John Meloun: North America run rate average unit volumes of 638,000 in the second quarter increased 10% from 581,000 in the prior year period. AUV growth continues to be driven by a higher number of actively paying members and the continued favorable trend of proportionate studio openings coming from our scale brands that generate high levels of sales. The improvement from MIX can be attributed to the growth of our higher AUV brands like Club Pilates and Stretch Lab and further attributed to the recent optimization of the brands in our portfolio. Over the past eight months, we have acquired Lyndora, and we have divested Rowhouse and Stride as we aim to own brands that best fit Xponential Fitness' long-term growth goals.
Speaker Change: North America run rate average unit volumes of 638,000 in the second quarter increased 10% from 581,000 in the prior year period.
Speaker Change: AUV growth continues to be driven by a higher number of actively paying members and the continued favorable trend of proportionate studio openings coming from our scale brands that generate high levels of sales.
Speaker Change: The improvement from MIX can be attributed to the growth at our higher AUV brands like Club Pilates and StretchLab, and further attributed to the recent optimization of the brands in our portfolio.
Speaker Change: Over the past eight months, we have acquired Lyndora, and we have divested rowhouse in stride as we aim to own brands that best fit Xponential Fitness' long-term growth goals.
John Meloun: Today, we are also announcing the winding down of our AKT brand. We expect this to be completed in the third quarter of this year. At the end of the second quarter, AKT had eight open studios and was not a significant contributor to revenue and EBITDA. Therefore, this winding down will not have a material impact on our financials. Furthermore, we will not be pursuing the Kinergy rebranding partnership for AKT, as we will instead focus our resources on our remaining brands.
Speaker Change: Today, we are also announcing the winding down of our AKT brand. We expect this to be completed in the third quarter of this year.
Speaker Change: At the end of the second quarter, AKT had eight open studios and was not a significant contributor to revenue and EBITDA. Therefore, this winding down will not have a material impact on our financials.
Speaker Change: Further, we will not be pursuing the Kinergy rebranding partnership for AKT, as we instead will focus our resources on our remaining brands.
John Meloun: We ended the quarter with 3,102 global open studios, opening 108 gross new studios during Q2, with 89 in North America and 19 internationally. There were 85 studio closures in the period, and as a reminder, we previously shifted our strategy regarding studio closures and are no longer taking on any company-owned studios. Rather, we are concentrating resources on helping franchisees identify and resolve issues as early as possible to improve operations and their success within our systems.
Speaker Change: We ended the quarter with 3,102 global open studios, opening 108 gross new studios during Q2, with 89 in North America and 19 internationally.
Speaker Change: There were 85 studio closures in the period.
Speaker Change: And as a reminder, we previously shifted our strategy regarding studio closures and are no longer taking on any company-owned studios. Rather, we are concentrating resources on helping franchisees identify and resolve issues as early as possible to improve operations and their success within our system.
John Meloun: As a reminder, we are estimating normal annual closures in the range of 3 to 5% of the global system, but we expect closures to come in towards the higher end of the range this year. We sold 87 licenses globally in the second quarter, which trended lower due to approval delays in our annual Franchise Disclosure Renewal Cycle, in addition to elevated concerns in the franchise sales process around ongoing regulatory scrutiny. Despite these hurdles, which we believe will normalize over time, we still have over 1,800 licenses sold and contractually obligated to open in North America, plus an additional over 1,000 master franchise obligations internationally.
Speaker Change: As a reminder, we are estimating normal annual closures in the range of 3 to 5 percent of the global system, but we expect closures to come in towards the higher end of the range this year.
Speaker Change: We sold 87 licenses globally in the second quarter, which trended lower due to approval delays in our annual Franchise Disclosure Renewal Cycle, in addition to elevated concerns in the franchise sales process around ongoing regulatory scrutiny.
Speaker Change: Despite these hurdles, which we believe will normalize over time, we still have over 1,800 licenses sold and contractually obligated to open in North America, plus an additional over 1,000 master franchise obligations internationally.
John Meloun: This backlog of already sold licenses at our current rate represents over five years of future studio openings globally. On the international front, the company executed a new master franchise agreement for our BFT brand in Scandinavia. The growth expectations for Scandinavia will be 30 studios over the next 10 years.
Speaker Change: This backlog of already sold licenses at our current rate represents over five years of future studio openings globally.
Speaker Change: On the international front, the company executed a new master franchise agreement for our BFT brand in Scandinavia. The growth expectations for Scandinavia will be 30 studios over the next 10 years.
John Meloun: Second quarter North America system-wide sales of $421.5 million were up 24% year-over-year, with growth driven primarily by the 7% same-store sales increase within our existing base of open studios, coupled with growth from new studio openings. Roughly 95% of the system-wide sales growth came from volume, or new members, which has remained consistent with historical performance. And approximately 5% came from price. On a consolidated basis, revenue for the quarter was $76.5 million, down 1% year-over-year.
Speaker Change: Second quarter North America system-wide sales of $421.5 million were up 24% year-over-year, with growth driven primarily by the 7% same-store sales increase within our existing base of open studios, coupled with growth from new studio openings.
Speaker Change: Roughly 95% of the system-wide sales growth came from volume, or new members which has remained consistent with historical performance, and approximately 5% came from price.
John Meloun: This was primarily driven by equipment, merchandise revenues, and other service revenues, which I will discuss shortly. 73% of the revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory revenues and equipment revenues, given these materially occur up front before a studio opens. Franchise revenue was $43 million, up 22% year-over-year. The growth was primarily driven by higher royalties generated by the increase in system-wide sales on a larger base of operating studios and healthy same-store sales growth. In the quarter, we also recognize favorable franchise territory revenues driven primarily by the terminated licenses from the Roehouse brand. Equipment revenue was $12.9 million, down 10% year-over-year.
Speaker Change: On a consolidated basis, revenue for the quarter was $76.5 million, down 1% year-over-year. This was primarily driven by equipment, merchandise revenues, and other service revenues, which I will discuss shortly.
Speaker Change: 73% of the revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory revenues and equipment revenues, given these materially occur up front before a studio opens.
Speaker Change: Franchise revenue was $43 million, up 22% year-over-year. The growth was primarily driven by higher royalties generated by the increase in system-wide sales on a larger base of operating studios and healthy same-store sales growth.
Speaker Change: In the quarter, we also recognize favorable franchise territory revenues driven primarily by the terminated licenses from the Roehouse brand.
John Meloun: With installation volumes being the same year-over-year, the decrease in revenue was driven by a higher proportion of installations in the period occurring in brands that are less equipment-intensive. Merchandise revenue of $5.9 million was down 30% year-over-year and came in below our expectations. In the period, we did see a slowing in retail purchases by members at the studio level, which resulted in lower merchandise purchases from our franchisees to replenish inventory. The company instituted early in Q2 a one-time promotion and, most recently, in July, offered a semi-annual sale intended to stimulate franchisee merchandise buying. While we believe the lower sales are being driven by a general softness in consumer spending, that is impacting retailers across different sectors.
Speaker Change: Equipment revenue was $12.9 million, down 10% year-over-year. With installation volumes maturely the same year-over-year, the decrease in revenue was driven by a higher proportion of installations in the period occurring in brands that are less equipment-intensive.
Speaker Change: Merchandise revenue of $5.9 million was down 30% year-over-year and came in below our expectations.
Speaker Change: In the period, we did see a slowing in retail purchases by members at the studio level, which resulted in lower merchandise purchases from our franchisees to replenish inventory.
Speaker Change: The company instituted, early in Q2, a one-time promotion, and most recently, in July , offered a semi-annual sale intended to stimulate franchisee merchandise buying.
Speaker Change: While we believe the lower sales are being driven by a general softness in consumer spending, that has been impacting retailers across different sectors. This softness in merchandise revenue did not carry over to membership growth trends in the period.
John Meloun: This softness in merchandise revenue did not carry over to membership growth trends in the period. We are excited by Mark's depth of experience in optimizing wholesale and merchandising as we evaluate additional ways to drive our merchandise sales for our franchisees and Xponentials. Importantly, Q2 year-over-year growth in membership and visits increased 17% and 20%, respectively. This demonstrates that traffic remains strong in our studios and our members continue to view Xponentials' health and wellness offerings as an essential part of their routine.
Speaker Change: We are excited by Mark's depth of experience in optimizing wholesale and merchandising as we evaluate additional ways to drive our merchandise sales for our franchisees and Xponential.
Speaker Change: Importantly, Q2 year-over-year growth in membership and visits have increased 17% and 20% respectively. This demonstrates that traffic remains strong in our studios and our members continue to view Xponential's health and wellness offerings as an essential part of their routines.
John Meloun: Franchise marketing fund revenue of $8.4 million was up 27% year over year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America. Lastly, other service revenue, which includes sales generated from company-owned transition studios, rebates from processing studio system-wide sales, B2B partnerships, XPath, and Xplus, amongst other items, was $6.3 million, down 51% The decline in the period was primarily due to our strategic move away from company-owned transition studios over the last year, resulting in lower package and membership revenue.
Speaker Change: Franchise marketing fund revenue of $8.4 million was up 27% year-over-year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America.
Speaker Change: Lastly, other service revenue, which includes sales generated from company-owned transition studios, rebates from processing studio system-wide sales, B2B partnerships, XPath, and Xplus, amongst other items, was $6.3 million, down 51% from the prior year period.
Speaker Change: The decline in the period was primarily due to our strategic move away from company-owned transition studios over the last year, resulting in lower package and membership revenues.
John Meloun: Turning to our operating expenses, cost of product revenue was $12.9 million, down 10% year-over-year. The decrease was primarily driven by a lower volume of installations in equipment-intensive brands and lower volumes of merchandise sales during the period.
Speaker Change: Turning to our operating expenses. Cost of product revenue were $12.9 million, down 10% year over year. The decrease was primarily driven by a lower volume of installations in equipment-intensive brands and lower volumes of merchandise sales during the period.
John Meloun: Given the softness of the merchandise sales in the period, the company recorded a $0.5 million write-down of slow-moving merchandise inventory, which did contribute to higher costs. Cost of franchise and service revenue was $5.8 million, up 57% year-over-year. The increase in franchise sales commissions was driven primarily by terminated licenses from the Roehouse brand.
Speaker Change: Given the softness of the merchandise sales in the period, the company recorded a .5 million write-down of slow-moving merchandise inventory, which did contribute to higher costs.
Speaker Change: Cost of franchise and service revenue were $5.8 million, up 57% year-over-year. The increase in franchise sales commissions was driven primarily by terminated licenses from the Roehouse brand.
John Meloun: Selling general and administrative expenses of $37 million; we're down 1% year over year. The decrease in SG&A was primarily associated with a net lower cost from operating company-owned transition studios where we have ceased operations, offset by restructuring costs from settling the leases from the company-owned transition studios and increased legal fees to address regulatory issues. Our strategy to shift away from taking on company-owned transition studios has decreased run rate SG&A expenses and improved even the margin.
Speaker Change: Selling, general, and administrative expenses of $37 million were down 1% year-over-year.
Speaker Change: The decrease in SG&A was primarily associated with a net lower cost from operating company-owned transition studios where we have ceased operations.
Speaker Change: Offset by restructuring costs from settling the leases from the company-owned transition studios and increased legal fees to address regulatory issues.
Speaker Change: Our strategy to shift away from taking on company-owned transition studios has decreased run rate SG&A expenses and improved EBITDA margins.
John Meloun: We continue to make progress on the remaining leases and expect to have entered into settlement agreements with landlords for substantially all remaining lease liabilities by the end of the year. We have entered into settlement agreements on approximately $17 million of the original estimated $25 million in lease termination payments.
Speaker Change: We continue to make progress on the remaining leases and expect to have entered settlement agreements with landlords for substantially all remaining lease liabilities by the end of the year. We have entered into settlement agreements on approximately $17 million of the original estimated $25 million in lease termination payments.
John Meloun: The company has paid approximately $13 million through the second quarter. Impairment of Goodwill and other assets was $12.1 million, up 67% year-over-year, primarily due to a decrease in Psycho Bar's actual and forecasted cash flows, resulting in the value of Goodwill exceeding its fair value. Depreciation and amortization expense was $4.5 million, an increase of 5% from the prior year period. Marketing fund expenses were $7.8 million, up 44% year-over-year driven by increased spending afforded by higher franchise marketing fund revenue.
Speaker Change: The company has paid approximately $13 million through the second quarter.
Speaker Change: Impairment of goodwill and other assets was $12.1 million, up 67% year-over-year, primarily due to a decrease in cycle bars actual and forecasted cash flows, resulting in the value of goodwill exceeding its fair value.
Speaker Change: Depreciation and amortization expense was $4.5 million, an increase of 5% from the prior year period.
Speaker Change: Marketing fund expenses were $7.8 million, up 44% year-over-year driven by increased spending afforded by higher franchise marketing fund revenue.
John Meloun: As a reminder, as the number of studios and system-wide sales grow, our marketing fund increases. Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into an increase in marketing fund expenses over time.
Speaker Change: As a reminder, as the number of studios and system-wide sales grow, our marketing fund increases. Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into an increase in marketing fund expenses over time.
John Meloun: Acquisition and transaction expenses were a credit of $1.2 million compared to a credit of $31.3 million in the second quarter of 2023. As I've noted on prior earnings calls, this includes contingent consideration activity which is related to the Rumble acquisition earn out and is driven by the share price at quarter end. We mark to market the earn out each quarter and accrue for the earn out. We recorded a net loss of $13.7 million in the second quarter, or a loss of $0.29 per basic share, compared to a net income of $27.5 million, or earnings per basic share of $1.44 in the prior year period. The net loss was the result of $4.9 million of lower overall profitability and a $30 million decrease in acquisition and transaction income, which includes non-cash contingent consideration primarily related to the Rumble acquisition.
Speaker Change: Acquisition and transaction expenses were a credit of $1.2 million, compared to a credit of $31.3 million in the second quarter of 2023.
Speaker Change: As I've noted on prior earnings calls, this includes the contingent consideration activity which is related to the Rumble Acquisition Earnout and is driven by the share price at quarter end. We mark to market the earnout each quarter and accrue for the earnout.
John Meloun: A $2.3 million increase in restructuring and related charges from our company-owned transition studios. A $4.9 million increase in impairment of goodwill and other assets, primarily associated with cycle bar. And $0.9 million increase in loss on brand divestiture, partially offset by a $1.9 million decrease in non-cash equity-based compensation expenses. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings pressroom.
Speaker Change: We recorded a net loss of $13.7 million in the second quarter, or a loss of $0.29 per basic share, compared to a net income of $27.5 million, or earnings per basic share of $1.44 in the prior year period.
Speaker Change: The net loss was the result of $4.9 million of lower overall profitability, a $30 million decrease in acquisition and transaction income, which includes non-cash contingent consideration primarily related to the Rumble acquisition.
Speaker Change: A $2.3 million increase in restructuring and related charges from our company-owned Transition Studios.
Speaker Change: A $4.9 million increase in impairment of goodwill and other assets, primarily associated with cycle bar, and $0.9 million increase in loss on brand divestiture, partially offset by a $1.9 million decrease in non-cash equity-based compensation expense.
Speaker Change: We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings press release.
John Meloun: Adjusted net income for the second quarter was $0.7 million, which excludes $1.2 million in acquisition and transaction income, $0.3 million expense related to the remeasurement of a company's tax receivable agreement, $12.1 million related to the impairment of goodwill and other assets, a.9 million loss on brand divestiture, and 2.3 million restructuring and related charges. This results in an adjusted net loss of $0.03 per basic share on a share count of 31.8 million shares of Class A common stock, after accounting for income attributable to non-controlling interests in dividends on preferred shares.
Speaker Change: Adjusted net income for the second quarter was $0.7 million, which excludes $1.2 million in acquisition and transaction income, $0.3 million expense related to the remeasurement of a company's tax receivable agreement, $12.1 million related to the impairment of goodwill and other assets,
Speaker Change: $0.9 million loss on brand divestiture and $2.3 million restructuring and related charges. This results in an adjusted net loss of $0.03 per basic share on a share count of 31.8 million shares of Class A common stock.
Speaker Change: After accounting for income attributable to non-controlling interest and dividends on preferred shares.
John Meloun: Adjusted EBITDA was $25.4 million in the second quarter, up slightly compared to $25.3 million in the prior year period. Adjusted EBITDA margin was approximately 33% in the second quarter and flat with the prior year period. The results were below our expectations primarily due to lower equipment revenues on a higher mix of less equipment-intensive installs, as well as unforeseen headwinds related to the previously mentioned softness in merchandise revenue. Due to this softness, we also wrote down slow-moving retail inventories.
Speaker Change: Adjusted EBITDA was $25.4 million in the second quarter, up slightly compared to $25.3 million in the prior year period. Adjusted EBITDA margin was approximately 33% in the second quarter, and flat with the prior year period.
Speaker Change: The results were below our expectations, primarily due to the lower equipment revenues on a higher mix of less equipment-intensive installs, as well as unforeseen headwinds related to the previously mentioned softness in merchandise revenues.
Speaker Change: Due to this softness, we also wrote down slow-moving retail inventory.
John Meloun: During Q2, our unlevered free cash flow conversion exceeded 90% of adjusted EBITDA as we require minimal capital expenditures to grow the business. As a reminder, the company has approximately $160 million in federal and state net tax loss carry forward that will result in a minimal cash tax burden for the coming years. We continue to expect that our anticipated interest expense in 2024 will be approximately $45 million, assuming no additional debt is paid out, and we anticipate negligible working capital impacts on cash flow.
Speaker Change: During Q2, our unlevered free cash flow conversion exceeded 90% of adjusted EBITDA as we require minimal capital expenditures to grow the business.
Speaker Change: As a reminder, the company has approximately $160 million in federal and state net tax loss carry forward that will result in a minimal cash tax burden for the coming years.
Speaker Change: We continue to expect that our anticipated interest expense in 2024 will be approximately $45 million, assuming no additional debt paydown, and we anticipate negligible working capital impacts on cash flow.
John Meloun: For the full year, we would expect levered adjusted EBITDA cash flow conversion of over 50%, excluding any effects of preferred dividends and one-time restructuring costs, and this will convert to over 70% in the coming years. Turning to the balance sheet, as of June 30, 2024, cash, cash equivalents, and restricted cash were $26 million, down from $40.2 million as of June 30, 2023. Material cash uses in the period included $5 million related to the settlement of company-owned transition-studio leases and $11.5 million for debt, principal, and interest payments.
Speaker Change: For the full year, we would expect levered-adjusted EBITDA cash flow conversion of over 50%, excluding any effects for preferred dividends and one-time restructuring costs, and this will convert to over 70% in the coming years.
Speaker Change: Turning to the balance sheet, as of June 30, 2024, cash, cash equivalents, and restricted cash were $26 million, down from $40.2 million as of June 30, 2023.
Speaker Change: Material cash uses in the period included the $5 million related to the settlement of company-owned transition studio leases and $11.5 million for debt, principal, and interest payments.
John Meloun: Total long-term debt was $330.1 million as of June 30, 2024, compared to $265.9 million as of June 30, 2023. The increase in total long-term debt is primarily due to the repurchase and immediate retirement of approximately 2.6 million shares of Class A common stock under our Accelerated Share Repurchase Program in Q3 and Q4. We continue to evaluate different financing options with potential lenders in efforts to lower our interest expense.
Speaker Change: Total long-term debt was $330.1 million as of June 30, 2024, compared to $265.9 million as of June 30, 2023.
Speaker Change: The increase in total long-term debt is primarily due to the repurchase and immediate retirement of approximately 2.6 million shares of Class A common stock under our Accelerated Share Repurchase Program in Q3 and Q4 2023.
Speaker Change: We continue to evaluate different financing options with potential lenders in efforts to lower our interest expense.
John Meloun: Let's now discuss our outlook for 2024. Based on current business conditions, the second quarter shortfalls, operational impacts stemming from regulatory issues, our CEO leadership transition, and our expectations as of the date of this call, we are adjusting guidance for the current year as follows. We expect 2024 Global News Studio openings to be in the range of 500 to 520, down from 540 to 560 and representing an 8% decrease at the midpoint from the prior year.
Speaker Change: Let's now discuss our outlook for 2024.
Speaker Change: Based on current business conditions, the second quarter shortfalls, operational impacts stemming from regulatory issues, our CEO leadership transition, and our expectations as of the date of this call, we are adjusting guidance for the current year as follows.
Speaker Change: We expect 2024 Global News Studio openings to be in the range of 500 to 520, down from 540 to 560, and representing an 8% decrease at the midpoint from the prior year.
John Meloun: We project North America system-wide sales to range from $1.705 billion to $1.715 billion, unchanged from the previous $1.705 billion to $1.715 billion and representing a 22% increase at the midpoint from the prior year. Total 2024 revenue is expected to be between $310 million to $320 million, down from the previous $340 to $350 million and representing a 1% year-over-year decrease at the midpoint of our guided range. Adjusted EBITDA is expected to range from $120 million to $124 million, down from $136 million to $140 million and representing a 16% year-over-year increase at the midpoint of our guided range.
Speaker Change: We project North America system-wide sales to range from $1.705 billion to $1.715 billion, unchanged from the previous $1.705 billion to $1.715 billion, and representing a 22% increase at the midpoint from the prior year.
Speaker Change: Total 2024 revenue is expected to be between $310 million to $320 million, down from the previous $340 to $350 million, and representing a 1% year-over-year decrease at the midpoint of our guided range.
Speaker Change: Adjusted EBITDA is expected to range from $120 million to $124 million, down from $136 to $140 million, and representing a 16% year-over-year increase
John Meloun: This range translates into roughly a 39% adjusted EBITDA margin at the midpoint. We expect total SG&A to range from $135 to $140 million, or $110 to $115 million when excluding one-time lease restructuring charges, and under $100 million when further excluding stock-based costs. In terms of capital expenditure, we anticipate approximately $8 million to $10 million for the year, or approximately 3% of revenue at the midpoint. Going forward, capital expenditure will be primarily focused on the integration of Lendora and maintenance of other technology investments to support our digital offering.
Speaker Change: at the midpoint of our guided range. This range translates into roughly 39% adjusted even a margin at the midpoint.
Speaker Change: We expect total SG&A to range from $135 to $140 million, or $110 to $115 million when excluding one-time lease restructuring charges, and under $100 million when further excluding stock-based costs.
Speaker Change: In terms of capital expenditure, we anticipate approximately $8 million to $10 million for the year, or approximately 3% of revenue at the midpoint.
Speaker Change: Going forward, capital expenditure will be primarily focused on the integration of Lyndora and maintenance on other technology investments to support our digital offerings.
John Meloun: For the full year, our tax rate is expected to be mid to high single digits, the share count for purposes of the earnings per share calculation to be $31.8 million, and $1.9 million in quarterly cash dividends related to our convertible stock, or $2.2 million if paid in kind. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the end of our earnings press release, as well as in our corporate structure and capitalization FAQ on our investor website. This concludes my prepared remarks today. Thank you all for your time today.
Speaker Change: For the full year, our tax rate is expected to be mid to high single digits, share count for purposes of earnings per share calculation to be $31.8 million, and $1.9 million in quarterly cash dividends related to our convertible preferred stock, or $2.2 million if paid in kind.
Speaker Change: A full explanation of our share calculation and associated proforma EPS and adjusted EPS calculations can be found in the tables at the end of our earnings press release, as well as our corporate structure and capitalization FAQ on our investor website.
Operator: We will now open the call for any questions. Operator. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone. You may press star 2 if you would like to remove your question from the... Yeah, I wanted to start two quick things. Then you talked about disruption and distraction. So the manifestation of that. Yeah, where is that shown up?
Speaker Change: This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for any questions. Operator?
Unknown Executive: Maybe the bulk of the revenue was that merchandise? Got it. Thank you for taking my question. Our next question comes from Korinne Wolfmeyer with Piper Sandler. Please proceed with your question.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: We ask that analysts limit yourselves to one question and a follow-up so that others may have an opportunity to ask questions.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please, while we pull for questions.
Speaker Change: Our first question comes from Randy Konik with Jeffries. Please proceed with your question.
Speaker Change: Hey, good afternoon, everybody, and Mark, welcome.
Randy Connick: I guess, Mark, I want to kind of focus on you and kind of maybe will be very helpful to the audience.
Speaker Change: is, you brought up the word fine-tuning, um, and you have these other great experiences in your history, uh, leading these other companies, uh, and very, very different types of companies at that.
Mark: So I guess what would be really helpful is you give us some perspective on maybe some of the problems you saw maybe at Adidas or at Taco Bell at the time and some of the fine tunings you implemented there and maybe some of the issues you see here, the items you see here as an opportunity for you to fine tune here at Xponential to start. Thanks.
Speaker Change: Thanks, Randy. First of all, I think when I went to the Adidas business, it was very broken. So it really was a turnaround, which this is nothing like a turnaround.
Randy Connick: The Taco Bell business was very robust.
Randy Connick: I think the challenge at Taco Bell was how do you grow same-store sales and how do you continue to grow
Speaker Change: A store base that's already at over 7,000. So those were the challenges there. As I come here and I look at after just, this is my sixth week on the job.
Speaker Change: I came here because there was so much good about this business. The brands are great.
Speaker Change: The momentum is very positive and if you really look at the numbers of Q2, most of the big indicators are very positive.
Speaker Change: I think what I see is the growth has been very, very rapid, and internally, our processes, our ability to manage the complexity of the multi-brand strategy, those are things to me that need fine-tuning. I think you'll pick up GNA as we become more efficient and more effective. I think as we really focus on franchisee development, I would say the first week here, I was able to spend...
Speaker Change: 4 hours with 7 of the 8 brands and some of the franchisees and was really able to hear some of the challenges that they have, which allows us then to come back inside and say how do we really organize around these challenges, which is around communication, training, coaching, getting some of the franchisees to understand how to make money in their studios. Those are things we've always done, but maybe to have it at a higher priority.
Speaker Change: Super helpful. And then how do you think about just international, you know, obviously a lot of experience there. Give us some of your thoughts on what you see as kind of opportunities as you assess international going forward. Thanks.
Speaker Change: Okay, Randy, a big opportunity in international, I heard that coming in, but now I really see it. The first thing I know from managing multi-brands over my life is that if a brand is very popular here in the United States, like Club Pilates, it transfers to other nations really nicely, and I think we're seeing that. And then you have an opportunity with BFT, which started in Australia, to really grow that internationally. And really the key internationally is to find really great...
Speaker Change: Master Franchises. That's really the key as the great partner, because you don't have as much oversight when you leave the country, and I think I was able to do that at my last job, and really looking forward to finding those opportunities here.
Randy Connick: Super helpful, and again, welcome. Thanks, Mark.
Speaker Change: Our next question comes from John Heinbockel, Guggenheim Partners. Please proceed with your question.
John Heinbackel: Hey, I wanted to start two quick things. You talked about disruption and distraction, so the manifestation of that...
John Heinbackel: And then as a follow up right maybe John if you can talk through you took revenue down $30 million you took EBITDA down 16, obviously those two relate to each other but.
John Heinbackel: Maybe the bulk of the revenue was that merchandise.
Speaker Change: Q2, then you're assuming the same thing in back half was was that the biggest piece and then what else is in the $16 million.
Speaker Change: So you know whether there's a you know SG&A or.
John Heinbackel: Some other impact if you could flush that out that'd be helpful.
Speaker Change: Yes to kind of give you an idea of the way we're looking at it I mean in Q2, the significant portion of the Miss was in retail.
John Heinbackel: Not only did we see below.
John Heinbackel: Kind of.
John Heinbackel: Volumes of sales in the quarter. We also ran a promotion to kind of stimulate buying.
John Heinbackel: Buying from franchisees and we did it at the at the cost of margin.
John Heinbackel: One of the other things that we did given the slow moving inventories we did take a reserve against the slow moving inventory so.
John Heinbackel: We're not kind of put in a position where later.
John Heinbackel: I have to take that we figured we'd just do it now while we saw the volumes down.
John Heinbackel: The openings did come in a little bit less than we expected in the second quarter against shifting out into the future periods. So that did have an impact and then royalties were not there for the most part of the business is performing very high from a kpis the royalties were just.
Speaker Change: Yeah, I'm, a little bit more optimism in our forecast when we were looking for.
Speaker Change: As you look out into the future in the second half given a little bit of the uncertainty around the consumer and what we saw in retail we did take a pretty conservative approach in the second half and brought down retail sales. So I would say the biggest chunk of this shift in the guidance is coming from the Q2 mis but than retail in the in the law.
John Heinbackel: Or half of the year as well as the pull down over the number of openings. So for the equipment revenue installs. This having an impact there that's really where it's focused SG&A.
Speaker Change: In the second quarter was well within our control I think it's for the first time in.
John Heinbackel: In a while given that we don't have the transition studios kind of creating volatility in the numbers has made it really easy to predict so.
John Heinbackel: It really was just kind of a Q2 topline issue.
John Heinbackel: And then taken a pretty conservative approach on retail and equipment into the future that also being said you know we wanted to make sure that we had enough conservatism in the model for mark to kind of make any necessary fine tuning adjustments.
Speaker Change: As he kind of re lays out a strategy. So you know as we kind of put more arms around what that looks like in the coming weeks and months, we will have a better idea of the full year picture, but we wanted to make sure. We took a conservative approach in the second half to give mark the ability to make whatever adjustments he sees to drive the business forward.
Speaker Change: Makes sense. Thank you.
Speaker Change: Our next question comes from Ryan Meyers with Lake Street Capital. Please proceed with your question.
Ryan Meyers: Hey, guys. Thanks for taking my questions.
Ryan Meyers: First one for me John you know, you're just kind of talk on the last question that a lot of the studio opening kind of got pushed into Q3, but overall you know for the full year. This new studio openings were taken down a little bit.
Speaker Change: So maybe just unpack that is there you know a less of a willingness for franchisees to open up more studios or how should we kind of understand that.
Speaker Change: Hey, Ryan it's just more of a timing thing when you think about I don't want to say the quarter was kind of taken off but the distraction with all the change a lot of people kind of put themselves on hold whether they were signing leases are moving forward with development. So everything just kind of shifted 90 days. So the you know the way we look.
Speaker Change: At it as you know.
Speaker Change: Given the push out of Q2, we do see the backend coming back with you know roughly about 300 openings in the.
Speaker Change: In the second half.
Speaker Change: That's how we're kind of looking at it so it's not that they're going away. It's just that everything kind of shifted to the right the momentum of where we're going with the distractions around Q2 people.
Speaker Change: People kind of paused for a little bit of time, so kind of getting that engine, removing talking to franchisees, making sure they're comfortable that everything is fine there's no issues with the with the business and that they could prove forward. It just kind of took us a little bit of time to get that rolling again, but we do expect in the second half you know the the cadence of openings to grow quarter on quarter.
Speaker Change: Again, seeing roughly you know about the 300 ish openings in the second half from where we are in the first half.
Speaker Change: Got it that's helpful. And then is there any change in the same store sales expectation for the second half of the year.
Speaker Change: No as we've always said that we expect same store sales to kind of normalize in the mid to high single digits, where kind of their seven 5% in the second quarter.
Speaker Change: I think youll still see you know kind of mid to high single digits, probably more in the middle of that range.
Speaker Change: As we kind of normalize to end of the year. So expectations are fine businesses normalizing as we should as I said on previous earnings calls I think where we're finally in a year, where you're getting normal kind of normalization of same store sales without COVID-19, having prior year prior impacts.
Speaker Change: The business is doing well club pilates continues to be an above average performer when it comes to the same store sales so that necessarily.
Speaker Change: Does pull up the average in relation to the mid to high single digits, but.
Speaker Change: That's what you should continue to keep thinking about it very similar to Q2 and a little bit normalization in Q3 and Q4.
Speaker Change: Got it thank you for taking my questions.
Speaker Change: Our next question comes from Craig <unk> with Piper Sandler. Please proceed with your question.
Craig: Hey, good afternoon, guys. Thanks for taking the question.
Speaker Change: Thank you touched on it.
Craig: But lower in March revenue that you cited in some consumer weakness that you're not really seeing it in me.
Craig <unk>: The membership trends and I guess the question is what gives you confidence that it's not going to essentially translate in membership and what gives you confidence that your consumer is still kind of going to be coming and even if they do you have to cut costs and you're already seen them have to cut costs.
Craig: Yeah, I think Cory and the way we're looking at this very different ways. It was definitely a retail impact in the quarter, but one of the things that is giving me confidence is when we continue to look at our new studio openings and the cohorts.
Speaker Change: Q1 cohort has performed very well actually better than the prior cohorts in 2023.
Speaker Change: Q2, one, albeit they've only at most been opened three months is showing very similar strong trend. So as we continue to open up more locations. We're seeing really good ramps in relation to new members, joining so first and foremost the new growth is showing strength. So when you look at the existing install base of studios are <unk>.
Speaker Change: Store sales in studios that were opened 36 plus months was 8%. So the the older Studios are still outperforming studios that are less than three years old. So from that perspective, you see good aging even in more mature units.
Speaker Change: Overall membership has grown.
Speaker Change: It didn't decline you know were still seeing net more members at the end of every month and quarter. So.
Speaker Change: Conservatively I think we could sit here and say listen we have yet to hear about the consumer weakening to the point, where they're not they're going to start trading in their gym memberships, we haven't seen that in the data.
Speaker Change: So from the way we stay here you know, we do typically get around 5% price in the majority of the system wide sales growth is on volume that hasn't shown any change in trends have shifted.
Speaker Change: We talk about consumers and.
Speaker Change: This is part of their lifestyle and in there and what they do for as part of their well being and wellness. So we haven't seen any willingness of members to want to kind of trade that off due to cost.
Speaker Change: Got it very helpful. Thank you and then.
Speaker Change: The investigation.
Speaker Change: You you've been undergoing I think when we last spoke you were communicating that a lot of it was on Kpis of the business could you just provide an update on how you're addressing those and.
Speaker Change: I guess, how far along in the process are you too and cleaning that out.
Speaker Change: Yes, Craig this is mark.
Speaker Change: We can't comment on that on an investigation right now.
Speaker Change: Got it thank you.
Speaker Change: Okay.
Chris <unk>: Our next question comes from Chris <unk> with Stifel. Please proceed with your question.
Chris: Thanks, Good afternoon guys.
Speaker Change: John the 3% to 5% closure rate is pretty high when you consider club pilates and stretch lab or probably not closing any stores and the remaining brands.
Speaker Change: Not that large of systems. So can you discuss about talking about what is driving those closures and then what youre doing to reduce that rate of closures in those brands.
Speaker Change: Yes.
Speaker Change: In the quarter, we had around 85 closures I think what you're really seeing here, Chris is that we shifted strategies.
Speaker Change: In the second half of last year to try to start winding down the company taking over transition Studios. In addition, we've started.
Speaker Change: Kind of lowering the fee.
Speaker Change: Amount of studio support that we provide to franchisees that need it and really starting to focus our efforts on.
Speaker Change: Providing better support better processes to help franchisees understand like why theyre, having troubles or what their issues are.
Speaker Change: I would call it speed bump that you're seeing in Q2, I think is really just a lagging catch up related to.
Speaker Change: The studios that are now kind of coming into that point, where they probably should have.
Speaker Change: <unk> ramped down or closed over time.
Speaker Change: The majority of the closures are in the cycle bar brand a lot of these franchisees are ones that kind of pre existed the the acquisition of cycle bar, probably in rent space and in other areas that have higher operating cost.
Speaker Change: From that point their breakeven is a little bit more challenge and the modality of cycling hasnt fully recovered pre.
Mark: Pre COVID-19 post COVID-19, so youre seeing the fallout primarily in that brand. So the way what we're doing now as you know mark as he mentioned like our focus going forward is to really put more energy into what do we need to do to kind of fix these processes and make franchisees more successful that's where we're putting the resources right now I think it's just a little.
Speaker Change: Bit of a tennis ball in the snake in regards to the 3% to 5% as I said on the call. This year will probably be leaning more towards the high end of that range I do feel that Q2 based off of the data that we have or looking at was kind of a high point of closures in the year then it should start to ramp down in the second half.
Speaker Change: Okay, and then Mark you mentioned the company had no plans for acquisitions, but would the company consider making additional divestitures.
Mark King: So Chris, let me say this, in the short term for me coming in, I really like the brands that we have right now. Some are performing at a high level, others are developing. In the short term, I'd just like to see us maximize the return, not only on the ones that are developing, but also find ways to grow, for example, Club Pilates. We're not really talking about any more divestiture right now, and we're also not talking about acquisition, but I think that will change as time goes on. But for right now, I would say I'd like to build these brands.
Speaker Change: So Chris Let me, let me say this I think short term for me coming in I really like the the brands that we have right now some are performing at a high level others are developing I think short term I'd just like to see us maximize the return not only on the ones that are developing.
Speaker Change: It also find ways to grow for example club pilates.
Speaker Change: We're not really talking about any more divestiture right now and we're also not talking about acquisition, but I think that will change as time goes on but for right now I would say I would like to build these brands, we need our infrastructure here at headquarters to be able to catch up to this rapid growth that Expo has had over the last.
Unknown Executive: We need our infrastructure here at headquarters to be able to catch up to this rapid growth that Xpo has had over the last four or five years. So these are the short term to me, and I think that will provide plenty of short term growth, and then we can look at acquisitions as we go forward. Okay, great. Yeah, hi, good afternoon.
Speaker Change: Four or five years. So those are short term to me and I think that will provide plenty of short term growth and then we can look at acquisitions as we go forward.
Speaker Change: Okay, great. Thanks, guys.
Speaker Change: Our next question comes from Jonathan Komp with Baird. Please proceed with your question.
Unknown Executive: And Mark, welcome. A level for a concept like Xponential may be, and in part, my question relates to prior analyst day targets for the company where, you know, the plan was to sustain high teen system-wide sales growth. If that's sort of... It's really helpful to understand your process. Thank you. Give some more detail on how to think about modeling, you know, some of the different revenue lines given the implied revenue decline on a total basis. Thank you.
Jonathan Komp: Yes, hi, good afternoon, and Mark welcome.
Jonathan Komp: I wanted to follow up some of your introductory remarks, I know you talked about some short term issues really not impacting the multiyear goals could you maybe just shed a little more light on your thinking there I know it's early but.
Speaker Change: Maybe if you have any perspective on what sort of a high growth are appropriate growth.
Speaker Change: That level for a concept like exponential maybe.
Speaker Change: And part of my question relates to <unk>.
Speaker Change: Analyst day targets for the company, where the plan was to sustain high teens system wide sales growth.
Speaker Change: Sort of.
Speaker Change: You know realistic or do you think there might be more of a pause in the short term before returning to that type of growth.
Speaker Change: Jonathan Nice to meet you first of all I think it's a little early for me to have that kind of an outlook.
Speaker Change: I guess, what I meant in my opening comments is if you look at the big indicators.
Speaker Change: The growth year on year is up 10% system wide sales up over 20%.
Speaker Change: Visits memberships continuing to grow and we have a pipeline of licenses to open 1800 more in the United States and 1000 outside the United States. So I think theres plenty of opportunity to deliver the growth expectations that we've been talking about.
Speaker Change: Then I think we once we stabilize that and really get back to getting past. Some of these short term headwinds than I think we can look at what the growth rates should be one of the things I really want to do though is to come back with a predictable growth rate. So we can have some stability around expectations and I'm not really sure where that is yet.
Speaker Change: Jonathan but I think that's my goal here in the next few quarters.
Jonathan Komp: Great. That's really helpful to understand your process. Thank you.
John Heinbackel: And then John one follow up just thinking about the guidance change for the year could you comment on whether <unk> or by how much. If it has your outlook for the franchise revenue has changed if at all and as we think about the total revenue implied second half implied lower year over year or so could you maybe just.
Speaker Change: Give give some more detail on how to think about modeling some of the different revenue lines given given.
Speaker Change: Given the implied revenue decline on a total basis. Thank you.
John Meloun: Yeah, so the full-year revenue guide, you know, we did the 300 to three, or excuse me, the 300 to 310. I think the way to think about the cadences is that you will see Q3 and Q4 kind of get back to where the street was kind of expecting Q2 to be. So from that perspective, revenue does, and will continue to grow. The cadence is going to really be driven by two things.
Speaker Change: Yes, so the full year revenue guide you know we did the 300 to three or excuse me a 300 310.
Speaker Change: But I think the way to think about the cadence as you will see Q3, and Q4 kind of get back to where the street was kind of expecting Q2 to be so from that perspective. The revenue does it will continue to grow.
Speaker Change: Cadence is going to really be driven by two things. One is the continued growth with studio openings. Because then we get the benefit of the install so equipment revenues will be a driver in Q3 and greater in Q4, we typically open the most amount of series in the fourth quarter like.
John Meloun: One is the continued growth in studio openings because then we get the benefit of the install. So equipment revenues will be a driver in Q3 and greater in Q4. We typically open the most number of studios in the fourth quarter, like we did last year. The royalties will continue to comp, you know, in that mid to high single-digit range. So you'll get that benefit.
Speaker Change: Like we did last year.
Speaker Change: Royalties will continue to call it that mid to high single digits, So you'll get that benefit equipment, our merchandize revenue.
Unknown Executive: Equipment or merchandise revenue is going to be similar to Q2 and is how we're kind of looking at it. You know, we're not going to get aggressive on the assumptions around the revenue on the merchandise until we can just get a better handle on what's going on with the consumer and franchisee buying of retail. So, outside of that, I think, you know, Q3 and Q4 look much like how the street was kind of looking at Q2 and Q3 again, just everything's just shifting out around 90 days. But you will see overall revenue growth much higher in the 2nd half than in the 1st half of this year. Sounds like it.
Speaker Change: There's going to be similar to Q2.
John Heinbackel: Is how we're kind of looking at it we're not going to get aggressive on the assumptions around our revenue.
Jonathan Komp: Merchandise until we can just get a better handle on whats going on with the consumer and franchisee by retail so outside of that I think you're really seeing Q.
Jonathan Komp: Q3, and Q4 look much like how the street was kind of looking at Q2 and Q3.
Jonathan Komp: Again, just everything is just shifting out around 90 days, but you will see overall revenue growth.
Jonathan Komp: Much higher in the second half than the first half of this year.
Jonathan Komp: Okay.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from Warren Cheng with Evercore ISI. Please proceed with your question.
Warren Cheng: Hey, good morning, and welcome aboard Mike.
Warren Cheng: I was wondering if you can talk a little bit about what's embedded in the updated guidance in terms of pricing or their behaviors in terms of either elasticity or pack sizes that youre seeing that youre embedding them somehow.
Jonathan Komp: Yeah.
Speaker Change: Hey, Lauren I'll take that I mean embedded in the guidance around pricing I mean, you remember our members when maybe when they first joined their rate is initially locked in so from that perspective. There is no intention at this point to go back and raise rates a raise prices on existing members most of the price <unk>.
Speaker Change: <unk> that we get is coming from new members in essence, theyre coming in at a higher price.
Speaker Change: As we open up these studio so the assumption around price is going to be consistent with what we've historically generated which is about 5% of the growth in system wide sales.
Speaker Change: Got it Thanks, and then my follow up was just on the franchisee process changes or opportunities around.
Speaker Change: Changing the processes it sounds like the biggest opportunity there is around communication.
Speaker Change: Giving the franchisees more of a voice.
Speaker Change: Are there opportunities also around.
Speaker Change: Steps you can do to to help with unique now makes for the franchisees or sort of like the onboarding processes.
Speaker Change: I think the video on the platform.
Speaker Change: I'll take that one yes, I think it's I think it's all of that.
Speaker Change: First of all I do think exponential has done a really great job of communicating with the franchisees I think when they begin to struggle then they look to us for.
Speaker Change: For solutions and I think we have to be really attentive to what theyre asking for and not just money support but understanding of P&L and how do they drive profitability and looking at their P&L with them to find savings on labor or build out costs or things that they might be spending.
Speaker Change: Money on so that really is what came through loud and clear meeting with all the different groups and I think we have we have the talent to do it and it's just about how do you prioritize your support and I think thats going to be one of the big priorities going forward.
Speaker Change: Thanks, Mark Thanks, John and good luck. Thank.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Joe <unk> with Raymond James. Please proceed with your question.
Joe <unk>: Thanks, Hey, guys good afternoon.
Speaker Change: I understand maybe maybe the cadence of.
Joe: How the quarter trended for Houston.
Joe: Guidance.
Speaker Change: And you were on the conference circuit.
Speaker Change: So it seems like some of the weakness you saw it sounded like it happened late in the quarter maybe.
Speaker Change: One is that true and then two things.
Unknown Executive: Did things actually normalize in July? Okay, thanks for that. And then just, I guess wondering if there's any more you can give us on maybe the incoming trend and member-focused KPIs versus the outgoing trend in the quarter and then also what you're seeing so far in Q3. In other words, are they steady or are they slowing overall with comps or just any other color you guys can give us? Hey, Jeff, it'
Speaker Change: Things actually normalize in July the way that you expected.
Speaker Change: Hey, Joe I'll take that yeah. So when we were.
Joe: Kind of looking at early April.
Speaker Change: There was a promotion that was put in place around retail is we did see a little.
Joe: Noticed a little bit of a weakening as far as consumer spending.
Joe: At the point of sale inside the studio so that promotion was put in place to stimulate.
Joe: Yeah.
Joe: Retail orders.
Joe: The wholesale corporate level as we can continue to progress through the quarter. We did see further and further declines around retail we did start to see as let's just call. It as the Q2 kind of progressed a little bit more of the.
Speaker Change:
Joe: Let's call it the disturbances or distractions related to some of the the the headline stuff that was going on in the transition of the CEO. So when you looked at like equipment installs and you looked at retail they kind of progressed and I wouldn't say snowballs as you got later into the quarter as you get to June and why as we sit here in July.
Joe: We do we are being more proactive on the retail front, a more conservative as well as the way we're looking at the business I do feel like we've got the retail now into the outlook more at kind of the base level that we're seeing so we've been conservative there in regards to openings and the cadence around that yes, I think we got the kind of.
Joe: Motion going or getting the momentum back with franchisees moving forward and getting studios opened so.
Joe: It's again Q2 was a little bit more of a I would say a stall in the sense that everything just pushed to the right I do think we've stabilized retail in the outlook that we've just provided and then we've kind of recast of the openings in the second half.
Joe: Respective of what we see now with franchisees I think a lot of the noise that we heard in the second quarter around steel and just concerns around some of the headline stuff is gone we're not hearing that much from franchisees and they're kind of back and re engaged again with with moving the business forward. So.
Joe: Again going back to the cadence, you'll see higher revenue higher higher EBITDA in the second half when you kind of look at the margins in the second half, we talked about getting to 40% margins.
Joe: This year.
Joe: The margins in the second half, we're actually exceeding that when you kind of recast the outlook and you see that.
Joe: Revenues do come back in EBIT and profit does come back and have better margins because we have a good handle now on SG&A.
Speaker Change: Got it very very helpful. And then maybe a second question on the studio openings that you're expecting in the second half how much visibility you have into those openings at this point.
Joe: Yeah like we've always had really good visibility are the key to this is Joe as lease signings right. So, we do understand which franchisees signed leases and which brands.
Speaker Change: We are seeing.
Speaker Change: To our benefit from both.
Speaker Change: The opening and a royalty performance perspective club Pilates continues to be one of the key drivers to our growth. So there was kind of an over shift to pilates openings in Q2, and we're seeing that for the rest of the year. So.
Speaker Change: We do have good visibility into the openings in the second half we did take down.
Joe: The the total openings for the year given the shift in the distraction from Q2.
Joe: But we did it in a way that we felt was conservative in the sense that we want to make sure that we're making decisions in the best interest the franchisees when they get open and make sure they're ready to get open. So we did take a conservative approach on the total openings.
Joe: For the full year so.
Joe: The 500 to 520, we feel is a very achievable number.
Joe: And it does take into account some of the recent distractions and kind of regaining momentum with the system.
Speaker Change: Got it thank you.
Speaker Change: Our next question comes from Jeff fan from Darren with B Riley Securities. Please proceed with your question.
Joe: Hi, everyone and welcome Mark.
Speaker Change: Realize it's early but can you give us maybe a little more color on what you think is missing in terms of infrastructure at the headquarters kind of at the corporate level and do you need to increase SG&A to invest in some of those areas that are lacking.
Joe: Hey, Jeff how are you.
Joe: Okay.
Jeff: Alright couple things strike me right off the bat one is that the complexity of having eight brands.
Jeff: In one building is it's challenging you have the Expo culture, you have a culture of every one of those brands and then you also have the administration of every one of those brands. So that's an area that I think we have to look at.
Jeff: To be to kind of simplify the operation and look for efficiencies and effectiveness and no I don't think it's about more G&A I think it's about better use of the G&A. So that's the first thing I would say second thing is what hurt us in Q2 merchandise sales is again, we're kind of a.
Jeff: Victim of the fast growth over the past four or five years, and we don't really have the right infrastructure to service 3100 studios from the way, we're structured and set up from whats the range how do we source how do we find the right margins. So I think there's some really low hanging fruit there.
Jeff: <unk> got a lot of great people, killing themselves every day to do a good job and I think it's around a little bit better structure.
Jeff: Looking for efficiency and effectiveness and I think if we find that those are those are the really the two big areas that I think short term that I think we can really address here in the next quarter and make some real improvements.
Speaker Change: Okay. Thanks for that.
Speaker Change: And then just I guess Im wondering if theres any more you can give us on maybe the incoming trend in member focused kpis versus the outcome in China in the quarter and then also what you're seeing so far in Q3 in other words are they steady or are they slowing overall with comps or just any other color you guys can get us there.
Sarah Luna: We're seeing that all the studio level KPIs are strong and continue to be the strongest that they've been. So average membership is up per studio, total membership count is up, and total revenue is up. So we are starting and continuing to see that those KPIs are incredibly strong, and we're really proud of all the work that we continue to put into the brands and the strength of the brands at that level. Okay, I understand.
Sarah Luna: Hey, Jeff it's Sarah.
Speaker Change: We're seeing that all of the studio level Kpis are strong and continue to be the strongest what they've been so average membership is up her studio total membership count is up total revenue was up so we are starting and continuing to see that our kpis are incredibly strong and.
Speaker Change: We're really proud of all the work that we continue to play into the brands and the strength of the brands on that level.
Speaker Change: Okay. Thanks for taking my questions.
Speaker Change: Okay.
Speaker Change: The next question comes from George Kelly with Roth Capital Partners. Please proceed with your question.
George Kelly: Hi, everybody thanks for taking my questions.
George Kelly: First one for you curious if you could give us an update just on the status of a potential refi.
Speaker Change: And just wondering is it kind of on hold until the investigation is clear or is it still.
Speaker Change: Sort of actively exploring it.
Speaker Change: Yeah, we got a dual path that I mean, our optimal goals together a securitization, that's that's where even focus for quite some time that was kind of disrupted with.
George Kelly: Some of the regulatory inquiries that the business encountered but we've been dual pathing what is the best option for the company I can tell you there are options on the table multiple options, we're just trying to kind of.
George Kelly: Determine what's in the best interest in the company long term could we.
George Kelly: Continuing on kind of a similar path that we're on today, which is kind of a direct lending or can we get a securitization done.
Speaker Change: In the near term that's really what we were kind of balancing as do we lock in something now or do we can do to kind of lean into.
Speaker Change: The current issues and get those resolved so that we can go ahead and get a securitization done. So we are working on it. It is front of mind, we've been having I brought mark up to speed when I first got here, we are engaged with the board.
Speaker Change: We've had a lot of discussions we understand the path for which we need to move forward I do believe that youll see some sort of refinancing.
George Kelly: In play.
Speaker Change: When it's appropriate, but we're taking our time to make sure we're making the right long term decision for the company to get cheaper capital.
Unknown Executive: And then second question, John, on prior calls, you've walked us through the ramp in EBITDA margin. I think it was in 2025; 45% is what we are marching towards. But to talk about 2024's second half, you know, we talked about reaching 40% adjusted EBITDA margins in the year, and as I previously mentioned, in the second half, we will get there. So this kind of Q2, you know, kind of shortfall does not have an impact on our ability to meet that kind of guidance or instruction as far as the cadence is concerned.
Speaker Change: Okay understood and then second question.
Unknown Executive: John in prior calls you walked us through the ramp in EBITDA margin.
Speaker Change: For this fiscal year I was curious if you could do that for <unk> for the third and fourth quarters, just kind of what what high level is baked into your guidance and then the bigger question is are you still comfortable with 40 plus percent EBITDA margin in fiscal year 'twenty five.
Unknown Executive:
Speaker Change: I think it was in 2025 was 45% is what we're marching towards but to talk about 2020 for second half, we talked about reaching 40% adjusted EBITDA margins in the year.
Unknown Executive: I previously mentioned in the second half we will get there. So this kind of Q2.
Unknown Executive: Kind of shortfall does not have an impact on our ability to meet that kind of guidance or instruction as far as the cadence is concerned the second half of 2024, we do see.
John Meloun: The second half of 2024, you know, we do see, you know, above 40% adjusted EBITDA margins in our model. So, and I have a pretty high degree of confidence that, you know, we'll continue to keep marching after 2024 in 2025 closer to 45% margin. Now, that is, you know, pre all the fine tuning that Mark will, you know, kind of relay out with us in the leadership team.
Unknown Executive: Above 40% adjusted EBITDA margins in our in our model, so and I have a pretty high degree of confidence that we will continue to keep marching after 2024, and 25% closer to 45% margin now that is.
John Meloun: All of the fine tuning that mark will kind of relay out of us in the leadership team, but based off of the model of what we're looking at today you will continue to see the cadence of adjusted EBITDA in client overtime.
John Meloun: But based on the model, what we're looking at today, you will continue to see the cadence of adjusted EBITDA incline over time. And, again, the key driver here is the growth in system-wide sales. You know, the model at this point is very simple; we have a pretty fixed SG&A, you have 500 plus openings a year, you're seeing good same store sales comp, and good system-wide sales growth. And you're going to see royalties as a percent of your total mix continue to increase.
Mark King: Again, the key driver here is the growth in system wide sales you know the model at this point is very simple we have a pretty fixed SG&A you have 500, plus openings a year youre seeing good same store sales comp.
John Meloun: System wide sales growth and youre going to see royalties as a percent of your total mix continue to increase and they're virtually 100% accretive and leverage to the model. So as we continue to open more stores continue to make improvements in our sales at our franchisee level and they generate higher sales and royalties. This thing just continues to leverage so.
John Meloun: And they're virtually 100% accretive and leverage to the model. So as we continue to open more stores and make improvements in the sales at our franchisee level, and they generate higher sales and royalties, this thing just continues to leverage. So second half greater than 40% adjusted EBITDA margin is what we're expecting for the second half. And I do believe in 2025, you'll continue to see the adjusted EBITDA margin close ramp up closer to 45% in that year. Okay, that's helpful. Thank you.
John Meloun: Second half greater than 40% adjusted EBITDA margin is what we're expecting for the second half and I do believe in 2025, you can see it to continue to see the adjusted EBITDA margin close to ramp up closer to 45% in that year.
Speaker Change: That's helpful. Thank you.
John Meloun: We've now reached the end of our question and answer session I would now like to turn the floor back over to Mark King CEO for closing comments.
Speaker Change: Hey, Thank you to everyone for joining today's earnings call and for your continued support of exponential fitness I really look forward to meeting many of you at the upcoming investor events in September and speaking with you again on our third quarter earnings call in November. Thanks.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
John Meloun: [music].
John Meloun: Yeah.
John Meloun: [music].
John Meloun: Okay.
John Meloun: [music].