Q3 2024 Xponential Fitness Inc Earnings Call
Speaker Change: Greetings, and welcome to the Exponential Fitness, Inc. 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation.
Speaker Change: You may be placed into question queue at any time by pressing star 1 on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: It's now my pleasure to turn the call over to Avery Wanamaker, Investor Relations. Please go ahead, Avery.
Avery Wanamaker: These forward-looking statements are based on management's current expectations and revolve risks and uncertainties that could cause our actual results to differ materially from such expectations.
Avery Wanamaker: 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.
Thank you. Thank you. Thank you.
Avery Wanamaker: In addition, we will be discussing certain non-GAAP financial measures in this conference call.
Avery Wanamaker: 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.
Avery Wanamaker: Please also note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted.
Avery Wanamaker: 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.
Avery Wanamaker: Meaning, for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period.
Avery Wanamaker: For the period ended September 30, 2024, this includes AKT, BFT, Club Pilates, Cycle Bar, Lendora, Pure Bar, Rumble, Stretch Lab, and Yoga 6.
Speaker Change: I will now turn the call over to Mark King, CEO of Exponential Fitness.
Mark King: Thank you, Avery, and good afternoon to all of you. I'm excited to speak with you today and share some updates from my first 100-plus days as CEO of Exponential.
Mark King: I want to start with what's great about Exponential, but I also want to talk about some of the challenges we're facing.
But let's get started with what's going well.
Mark King: My three key takeaways are the following. First, and perhaps most importantly, people really love what Exponential offers. On one level, that's self-evident from the growth in our membership base and total studio visits.
Mark King: But I'm beginning to appreciate just how integral our health and wellness experiences are to our members weekly routines
Mark King: Second, our domestic and international growth have been terrific, and as we'll discuss in more detail, I think I probably underestimated the extent of the future opportunity.
Mark King: Third, my feelings haven't changed at all about this, 100 days in. This is just a great business model.
Mark King: Once we've worked through some of the challenges I'm going to discuss, I expect our business to become highly profitable and cash generative at scale.
Mark King: I pride myself on being candid, so let me be equally clear about some of the challenges we're facing, many of which are commonly faced by companies experiencing rapid growth.
Mark King: When companies grow very quickly, it's hard for these things to keep pace.
Mark King: In order to achieve sustainable, profitable growth, we must implement the infrastructure and processes needed to adequately support our franchisees and studios at scale.
Mark King: Challenge number two is fostering a culture that is conducive to long-term success. At Exponential, this means shifting from a sales-first to a marketing and operations-driven culture that places franchisee success at the center.
Speaker Change: One of the main reasons we were so successful at Taco Bell was that supporting franchisees was our core focus.
Speaker Change: It drove every organizational decision we made. Everything we do must focus relentlessly on delivering a best-in-class franchisee experience and maximizing franchisee profitability.
Speaker Change: Challenge number three is figuring out where are we going to allocate our capital. Today some of our brands are clearly outperforming others.
Speaker Change: We are working to optimize performance across the portfolio, but if the performance gaps continue to exist, we will not be afraid to consider further divestitures.
Speaker Change: With this as a backdrop, I'd like to share my vision for the company, as I promised I would do during my first earnings call in August.
That vision has five key pillars.
Speaker Change: Number one, our ambition is to become the franchisor of choice in health and wellness.
Speaker Change: Pillar number three, transforming our data capabilities to become a data-driven company.
and pillar four, to create a culture of innovation.
Speaker Change: Our fifth pillar is to significantly build out our international footprint.
Speaker Change: Looking at pillar number one, first and foremost, we need to become and remain the franchisor of choice in the health and wellness category.
Speaker Change: Our portfolio must be made up of relevant and growing brands that provide franchisees with profitable investment opportunities.
Speaker Change: As I alluded to a moment ago, we're going to focus on improving every part of the Franchisee experience from the initial selection process to daily studio operations.
Speaker Change: We need to revamp the recruiting process to ensure we attract the most qualified franchisees and we need to make operating our studios easier.
Speaker Change: We plan to, by year-end, institute physical operating playbooks for all of our brands, which will include step-by-step instructions of how to open and operate profitable studios.
Speaker Change: We will also implement annual franchisee audits to ensure studio operations are evaluated for consistency and to provide coaching and support for franchisees.
Speaker Change: Our second pillar, delivering a world-class member experience, includes all of our member interactions.
be that inside or outside the studio.
Speaker Change: We need to become better at tracking our members' entire journeys and ensuring we deliver best-in-class experience at every touchpoint.
Some of our planned technology improvements will help with this.
Speaker Change: The goal here is to reduce friction for members with things like sign-up experience and scheduling.
Speaker Change: We want to make it easier for members to communicate with studios. We want to collect more feedback. And we want to do all of this in the context of continuously gathering data so we can provide a tailored experience.
Speaker Change: We expect all of this to drive increased engagement, lower attrition, and higher member lifetime value.
Speaker Change: Our third pillar is to become a data-driven company. I want us to start drawing on predictive analytics to guide our operations. I want to implement a culture of analytics-based decision-making.
Speaker Change: This will optimize franchisee operations and improve the member experience, as well as drive insights and efficiency throughout the organization.
Speaker Change: Our fourth pillar, creating and fostering a culture of innovation, is critical to all aspects of driving growth and efficiency.
Mark King: When I became president of the Taylor made golf company in 1999, only about 20% of our business was outside the U S. When I left the company International was a billion dollar business, representing approximately 55% of the company's revenue.
Additionally, and more recently during my four years at Taco Bell, we more than tripled total restaurants outside the U S. I.
I understand how to grow a business internationally and I believe exponential has all the attributes needed to capitalize on this opportunity <unk>.
Mark King: Speaking here today I see no reason why exponential shouldn't have as many studios operating outside the U S. As it does domestically.
Mark King: We believe some of the specifics for the year end call, but it's worth noting that over my career I found that growing a significant presence in select countries with large potential is more effective than focusing on many small markets.
Mark King: Japan is one of the international opportunities, where we have been successful in Japan typifies, the kind of market, where we will allocate material resources. Furthermore, it's been my experience and remains critical that we continue to identify the right International Master franchise partners, who.
Mark King: Understand their local markets and are well capitalized to rapidly scale.
Mark King: Before we get to financials, let me spend a few minutes letting you know some of the tactical progress we've achieved in my first hundred days.
Mark King: First everything we do at exponential starts with people I began augmenting the executive leadership team to ensure we are well positioned to execute on our vision I.
I hired a new head of retail John <unk>, John is a seasoned operator he was at Adidas from 1988 to 2000 and for rising all the way from footwear manager to head of marketing for North America.
Mark King: After that John spent 10 years at Taylor made where he among other things served as president when I was CEO John has held various other leadership roles since I'm confident John is the right person to optimize our retail operations I am also in the process of hiring a CMO.
Mark King: A C T O N S C O O.
Mark King: On the data driven company front, we have been working with a leading data consultancy firm. Since July we are automating the reporting of key operational data so that data can become available to our teams in real time.
Mark King: The initial data dashboards have already started rolling out within the organization for user feedback with many more coming before the end of the year.
Mark King: Finally, and perhaps most importantly since day, one everything I've done has centered on moving away from a sales driven culture and towards a marketing and operations focused organization.
Mark King: All in ultimate support our franchisees.
Mark King: Everything we do is geared towards increasing studio traffic and lowering studio build out and operating cost, which will maximize franchisee returns and translate to best in class franchisee experience needless to say by helping our franchisees win of course exponential.
Mark King: <unk> two.
Mark King: As I started out with my remarks, there are a lot of opportunities and challenges here at one point or another every hyper growth company must architect a path to sustainable profitability.
Mark King: I would venture to say that every CEO, who has been successful in that regard knows that success comes down to people processes exceeding the expectations of your stakeholders and building a culture of relentless innovation and accountability and Thats exactly what I plan.
Mark King: To do here.
Speaker Change: Before turning the call over to John I'd like to provide a heartfelt thanks to John our Chief Financial Officer for all his support prior to my arrival and over the past 100 days I don't have to tell all of you how integral John is to the success of exponential, but he has really gone up.
Speaker Change: Bhavan beyond as a partner during my first 100 days and I look forward to having him by my side as we make the most of the opportunity in front of us with that.
Speaker Change: I'll turn the call over to John.
John: Thanks, Mark and thank you to everyone for joining the call I'll begin with an overview of our third quarter results North America run rate average unit volumes of 631000 in the third quarter increased 8% from 585000 in the prior year period as we'll discuss next quarter in more detail when we provide our app.
John: Newel brand level Kpis the increase in Suvs was predominantly driven by the sales growth at our scale brands AAV growth has been driven by a higher number of actively paying members and the continued favorable trend of proportionate studio openings coming from our scale brands. We ended the third quarter with 3170.
John: Eight global open studios opening of 125 gross New studios during Q3 with 96 in North America and 29 internationally.
John: There were 49 global studio closures in the period.
John: On our previous call, we estimated closures in the range of 3% to 5% of the global system and are trending to come in at the higher end of the range for this year and future years, we do expect the number of closures as a percentage of the global system to decrease from the current level.
John: We sold 84 licenses globally in the third quarter, which trended lower due to lingering concerns in our franchise sales process around regulatory issues personnel turnover in our franchise sales team and the culture shift that mark spoke to earlier despite these.
John: These hurdles, we still have over 1700 licenses sold and contractually obligated to open in North America, plus an additional over 1000 master franchise obligation internationally.
John: This backlog of already sold licenses will provide a sufficient funnel our future new studio openings globally for the next few years.
John: Third quarter, North American system wide sales of $431 2 million or up 21% year over year with growth driven primarily by 5% same store sales increase within our existing base of open studios, coupled with growth from new studio openings, roughly 96% of system wide sales growth.
John: Came from volume or new members, which has remained consistent with historical performance and approximately 4% came from price.
John: On a consolidated basis revenue for the quarter was $80 5 million up slightly from $80 4 million in the prior year period, 72% 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.
Speaker Change: Front before a stereo opens.
Speaker Change: Let's turn to the components that make up revenue franchise revenue was $44 5 million up 22% year over year. The growth was primarily driven by a larger base of operating studios, which contribute to a higher number of franchise license revenue being amortized in addition to higher royalties generated by the increase.
Speaker Change: In system wide sales and positive same store sales growth.
Speaker Change: Q3 year over year growth in memberships and visits increased 16% and 19% respectively, demonstrating that our consumers continue to value our offerings driving healthy traffic to our studios.
Speaker Change: Equipment revenue was $14 7 million up 17% year over year. This increase was due to a higher volume of equipment installed in the period, which occur a short period before a studio is near opening and offering classes.
Speaker Change: Club Pilates and stress lab made up 67% of the total equipment installations in the period, which was in line with the company's expectations on where the growth in New studios will continue to come from.
Speaker Change: Merchandise revenue of $6 5 billion was down 23% year over year and the decrease was in line with our expectations like last quarter, we continue to focus on reducing inventory levels by selling merchandise to franchisees at lower prices inventory.
Speaker Change: Inventory levels have now reached their lowest levels since 2022, and although we are planning to continue to see similar merchandise revenues in the fourth quarter as Mark alluded to we are focused on further driving efficiencies and scalable practices that will eventually result in higher revenues.
Speaker Change: Franchise marketing fund revenue of $8 6 million was up 23% year over year, primarily due to continued growth in system wide sales from a higher number of operating scenarios in North America.
Speaker Change: Lastly, other service revenue, which includes sales generated from company owned transmission studios rebates from processing studio system wide sales BW partnerships ex path and X plus amongst other items was $6 2 million down 61% from the prior year period.
Speaker Change: The decline in the period was primarily due to our strategic move away from company owned transmission studios over the last year, resulting in a lower package and membership revenues.
Speaker Change: Turning to our operating expenses cost of product revenue were $17 1 million up 34% year over year. The increase was primarily driven by a higher volume of equipment installations and higher volumes on merchandise sales during the period.
Speaker Change: Cost of sales for merchandise were higher in the period, while merchandise revenues were down resulting in a negative wholesale retail margin in the period as we focused on reducing inventory levels.
Speaker Change: Cost of franchise and service revenue were $4 9 million up 37% year over year. The increase in franchise sales commissions was driven primarily by a higher number of studios operating in the period, resulting in a higher amortization of franchise sales commissions in the period.
Speaker Change: Selling general and administrative expenses of $46 2 million were up 5% year over year.
Speaker Change: The increase in SG&A was primarily associated with increased restructuring costs in the period from settling the leases from company owned transition studios and increased legal fees to address regulatory inquiries.
Speaker Change: With that said our strategy to shift away from operating company owned transition Studios has decreased run rate SG&A expenses compared to the prior year period.
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 $19 3 million in the original estimated $25 million in leases.
Speaker Change: The company has paid approximately $16 1 million through the third quarter.
Impairment of goodwill and other assets was $4 5 billion down 4% year over year and was primarily related to the impairment of operating lease right of use assets in connection with our restructuring plan.
Speaker Change: Depreciation and amortization expense was $4 2 million flat compared to the prior year period.
Speaker Change: Marketing fund expenses were $6 4 million up 10% year over year, driven by increased spending afforded by higher franchise marketing fund revenue as the number of studios in system wide sales grow our marketing fund increases since we are obligated to spend marketing funds and increase in marketing fund revenue will always translate into an inquiry.
Speaker Change: <unk> marketing fund expenses over time.
Speaker Change: Acquisition and transaction expenses were $3 7 million compared to a credit of $1 9 million in the third quarter of 2023 as I have noted on prior earnings calls. This includes the 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.
Speaker Change: Order and accrue for the earn out.
Speaker Change: We recorded a net loss of $18 million in the third quarter or a loss of 29 per basic share compared to a net loss of $5 2 million or <unk> 91 per basic share in the prior year period.
Speaker Change: Net loss was the result of $6 million of higher overall profitability and a <unk> 2 million decrease in impairment of goodwill and other assets.
Speaker Change: Offsetting by an $8 9 million an increase in litigation expenses of $5 6 million increase in acquisition and transaction income, which includes noncash contingent consideration primarily related to the Rumble acquisition or two.
Speaker Change: $2 6 million increase in restructuring and related charges from the company owned transfers and studios a $1 4 million increase in noncash equity based compensation expense and a <unk> 4 million increase in loss on brand divestiture.
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 and loss to adjusted net income and loss is provided in our earnings press release.
Speaker Change: Adjusted net loss for the third quarter was <unk> 2 million, which excludes $3 7 million in acquisition and transaction income <unk> 1 million expense related to the Remeasurement of the company's tax receivable agreement $4 5 million related to the impairment of goodwill and other assets <unk> 4 million loss on brand divestiture.
Speaker Change: And wind down and $9 $2 million related to the restructuring and related charges.
Speaker Change: This results in an adjusted net loss of four cents per basic share on a share count of $32 2 million shares of class a common stock after accounting for income attributable to noncontrolling interest and dividends on preferred shares.
Speaker Change: Adjusted EBITDA was $31 million in the third quarter up 17% compared to $26 5 million in the prior year period, adjusted EBITDA margin expanded to 38% in the third quarter up from 33% in both the previous quarter in the prior year period.
Speaker Change: Turning to the balance sheet as of September 32024, cash cash equivalents and restricted cash were $37 8 million down from $51 9 million as of September 32023.
Speaker Change: In Q3 of 2024, the company's cash position increased 11, 8 million, which includes the $24 3 million in net cash received from borrowing debt for lease termination liquidity in general working capital needs. The material cash usage in the period included approximately $8 8 million on tax receivable.
Speaker Change: <unk> and tax distributions to pre IPO LLC members $3 5 million promissory notes payable for vertical integration payments $1 8 million for purchases of property and equipment.
Speaker Change: $1 8 million on preferred stock dividends and $1 5 million on lease elements.
Speaker Change: Total long term debt was $353 8 million as of September 32024, compared to $329 7 million as of September 32023.
Speaker Change: The increase in long term debt is primarily due to the company drawing $25 million and additional debt to address the lease termination payments on previously owned studios and for general working capital purposes.
Speaker Change: Let's now discuss our outlook for 2024.
Speaker Change: Based on current business conditions, and our expectations as of the date of this call. We are reiterating guidance for system wide sales total revenue and adjusted EBITDA and we are lowering guidance for global new studio openings for the current year as follows.
Speaker Change: We expect 2024 global new studio openings to be in the range of $4 90 to 510, representing a 10% decrease at the midpoint from the prior year and down from previous guidance of 500 to 520.
Speaker Change: This updated range is being driven by our shift to a franchisee first organization, which would include ensuring franchisees have met minimum membership levels and preparedness prior to opening their studios.
Speaker Change: We project North America system wide sales to range from $1 705 billion to $1 71, 5 billion, representing a 22% increase at the midpoint from the prior year and is unchanged from the previous guidance.
Speaker Change: Total 2024 revenue is expected to be between $310 million to $320 million, representing a 1% year over year decrease at the midpoint of our guided range and is unchanged from previous guidance.
Speaker Change: Adjusted EBITDA is expected to range from $120 million to $124 million, representing a 16% year over year increase at the midpoint of our guided range. This range translates into roughly 39% adjusted EBITDA margin at the midpoint and is unchanged from the previous guidance.
Speaker Change: We now expect total SG&A to range from $145 million to $160 million, an increase driven by higher legal costs stemming from regulatory inquiries and onetime lease restructuring charges. When further excluding the onetime lease restructuring charges, we're expecting SG&A of 120 to 135 million.
Speaker Change: And a range of $105 million to $120 million when further excluding stock based cost.
Speaker Change: As a reminder, in the fourth quarter. The company does hold its annual franchise convention, which will result in an approximate increase in spend in SG&A of about $5 million in the period and is partially offset by about $3 million and increased other service revenues.
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 primarily be focused on our technology transformation initiative as well as the integration of <unk> and maintenance of the technology that supports our digital offerings.
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 count calculation 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 our corporate structure and capitalization faqs on our Investor website.
Speaker Change: This concludes today's prepared remarks. Thank you for all your time today, we will now open the call for questions operator.
Speaker Change: Thank you will now be conducting a question answer session.
Speaker Change: If you'd like to be placed in the question queue. Please press star one on your telephone keypad.
Speaker Change: We ask you. Please ask one question and one follow up then return to the queue.
Speaker Change: Once again Thats star one to be placed in the question Q1 moment. Please while we poll for questions.
Speaker Change: Our first question today is coming from Randy <unk> from Jefferies. Your line is now live.
Speaker Change: Great Thanks, and good evening everybody.
Speaker Change: Mark I really appreciate.
Speaker Change: The thoughtfulness and the approach.
Speaker Change: Going forward I guess, you mentioned Ah you talked a little bit about the potential to divest.
Speaker Change: Certain concepts or.
Speaker Change: Some concepts or whatever if if we're not meeting hurdles maybe give us some perspective on.
Speaker Change: Maybe some of the qualitative or quantitative factors, you're thinking about in the staffing.
Speaker Change: That decision across those different time across these concepts and maybe give us a little bit more thought thoughts around potential timing of making a decision on that across those different concepts.
Speaker Change: Thanks Jeffrey.
Speaker Change: First of all I think having been here now just a little over 120 days are right around 120 days I'm getting really much more familiar with the brands.
Speaker Change: Sure.
Speaker Change: We like all of the brands, we liked them strategically we like the potential of those brands I guess my comment was more around we're going to spend 2025 investing in different brands in different ways than we have in the past we want to give every brand a chance to gain some momentum.
Speaker Change: And I think the way, we evaluate that or it will be on a couple of fronts are the.
Speaker Change: Are the studios profitable for franchisees, which will result in us selling license and opening brands.
Speaker Change: If we start to see momentum in brands or continued momentum in brands, we wouldn't divest anything so short term there's no plan to divest any of our brands other than go into our planning process, which we're in right now looking at next year, where we want to invest and each year, we will make that evaluation.
Speaker Change: Based on performance during the year.
Speaker Change: Great last question would be around your focus on bringing up the country of Japan.
Speaker Change: Maybe you can kind of elaborate a little bit more on why you brought that up as an example for international expansion is a focus.
Speaker Change: What kind of makes it special from your perspective, obviously, you know from a golf days, but as it relates to fitness industry and just maybe elaborate on other countries you may haven't focus beyond Japan.
Speaker Change: Well. Thanks for the question, it's really based on the momentum that we have so that the biggest territory. We have today is Australia. They are approximately 240 studios that are open.
Speaker Change: Japan would be number two with 75 studios that are open and the success. There is really very positive. So theres a lot of positive momentum we have good partners in those countries and.
Speaker Change: We just signed a deal recently in Mexico for club Pilates for fit for <unk>.
Speaker Change: Master franchise deal for 50 locations. So I think Theres a couple of keys to the expansion. One is the size of the potential market and then the other is the strength of the franchisee the potential master franchisee they have to be well capitalized they have to be in the local market. They have to have local talent.
Speaker Change: We have others like Singapore is doing very well in New Zealand is doing very well. So it's really a combination of does the market have decent potential in what would that be I would say, it's a 100 plus studios does it have the potential for that and if it does then can we find the right franchise partner in those markets.
Speaker Change: Awesome. Thanks, so much.
Speaker Change: Thank you. Your next question is coming from Jon Hamm Buckles from Guggenheim Partners. Your line is now live.
Speaker Change: Hey, Mark let me start with when you think about sort of execution.
Speaker Change: I know it'll vary across brands, but when you look at that.
Speaker Change: You sort of talked about the operational playbook.
Speaker Change: How would you assess.
Speaker Change: The consistency of your execution.
Speaker Change: And do you have a view on <unk>.
Franchisee consolidation right, meaning I'm.
Speaker Change: I'm sure you're going to say that.
Speaker Change: That are operating one or two or three.
Speaker Change: We can do so well.
Speaker Change: The business would benefit from some consolidation over time or no.
Speaker Change: Yeah.
Speaker Change: Hello.
Speaker Change: I don't I don't I actually don't know if it would benefit from consolidation.
Speaker Change: It's still evaluating all of that and looking at it I think the first thing that we need to do is really.
Speaker Change: Evolve the way, we think about franchisees.
Speaker Change: And as we do that well we will look at these different brands and we will evaluate how we make them grow and also the starting point to your first question is I think the execution across the brands is a little bit different some.
Speaker Change: Pilates for example has excellent execution some of the smaller brands does not I now have the.
Speaker Change: 77 of the eight brand presidents are reporting to me I've spent countless hours this week already talking about standardizing some things across.
Speaker Change: All of the platforms all of the brands and creating this playbook that all the tabs will be the same in the playbooks, but the execution of the nuance will be dependent on the brand I think we have to go through and the brand presence are very excited about really standardizing best practices. So we have better execution, because I don't think we can.
Speaker Change: Really evaluate the brand's until we have consistent execution across them. So that's my focus right now and I've jumped in mice.
Speaker Change: Myself to help drive that process.
Speaker Change: Maybe as a follow up to that right.
When you think about sort of operational performance.
Speaker Change: I mean, obviously these are good but they're partly driven by a couple of brands. So when you think about member experience versus franchisee experience.
Speaker Change: Right, where is so is there a good member experience and a lot of places, but it's not it should be but it's not translating into.
Speaker Change: The use of user or profitability for the franchisees.
Speaker Change: How do you how do you look at that.
Speaker Change: Between the member experience and the franchisee experience.
Speaker Change: Well, they're obviously, both very very important and for me. The focus is on looking at the entire experience both for the franchisees starting now opening up my belief is we should give more support upfront so that they get out of the gates in a more positive way.
Speaker Change: We can really track if franchisees start in a bad way, it's very difficult for them to overcome that so I want to put the emphasis on pre selling opening having the right economics looking at all the build out costs looking at our vendor selection I think that's really really important on the member experience I think when you get.
Speaker Change: Actually into the studio when you do your exercising I think we do pretty well there I think the improvement opportunity is in the entire member journey. When the first time, we made contact with them leading up to when they come into the studio and when they leave the studio and the more we get to know them. The more we know why they ask.
Speaker Change: Size, what other modalities are they interested in can we really curate specific customized programs for our consumers now that's down the road a little bit but that's the ambition. So I think it's a holistic look at both the franchisee experience and the member experience.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you next question is coming from Joe out Tabella from Raymond James Your line is now live.
Speaker Change: Hey, guys. Good evening, So I guess the first question Mark earlier, you mentioned the need for infrastructure.
Speaker Change: And processes to support growth does that require meaningful spending and is the outlook still 45% or so EBITDA margins by 2026 does that impact that.
Speaker Change: Well I'll, let John comment on the EBIT margin in 'twenty six.
Speaker Change: I don't believe the infrastructure and processes is a very expensive.
Speaker Change: Evolution I think it's around discipline I think it's around people wanting to have an infrastructure that is efficient and effective I think we do that internally by looking at so for example, I'm starting to have all of the job descriptions looked at like what exactly is your job and how do your performance and how can we perform it.
Speaker Change: In a more efficient way I think the data warehouse, that's going to give us a lot of data that we don't have today in real time that will allow us to look at our efficiencies and how do we structure the infrastructure processes around disciplined management, it's not really about money investment.
Speaker Change: So I'm really comfortable I think people are asking for that because.
Speaker Change: This hyper focus on growth, which has been fantastic.
Speaker Change: A lot of a lot of the jobs are very chaotic and it's really a lot of in the moment reaction to things that happen without really building the proper infrastructure. So I think the company is very they're embracing it they're looking forward to it and we'll engage everyone in helping us in that process.
Speaker Change: And then Joe just just to kind of add.
Speaker Change: Irrespective of everything that's going on and you know it should be assumed that the performance in 2025.
Speaker Change: Be better than 2024, and the assumption around 2026 should be the same that it will build off of 2025 today as we go through the process and as Mark addressed as what investments are needed to.
Speaker Change: Execute on the five pillars, there are a lot of moving parts right now to optimize the future of the business.
Speaker Change: Noting that all the work that we are going to do is really from the perspective of protecting and growing that underlying business.
Speaker Change: The investments that we do make in the short term the expectation is is that they will generate.
Better than the status quo or improved ROI benefits.
Speaker Change: There will be probably some short term investments that may cause the SG&A to increase slightly now, but the efficiencies that we gain should improve it over the long term so into 2026. So I do think the 45% that we talked about is a very doable target still but I want to be prudent about not completed.
Speaker Change: <unk> completely committing to that right now until we go through this process. So again, just going back to that I do believe that the benefits of these investments will have a better than today's return on investment so should get us relatively within those ballparks of about 45% adjusted EBITDA margin I, just cant commit to that until we finish the op process. It will.
Speaker Change: We'll have a lot more to talk about that on our Q4 earnings call.
Speaker Change: Okay understood.
Speaker Change: Follow up on that in terms of the 500 or so openings you've got planned for this year roughly break that down by brand I mean, how about your.
Speaker Change: Pilates and stretch lab for example.
Speaker Change: Yeah, I think as you.
You saw two thirds of the openings in Q3 were pilates and stress labs that should be the same assumption for the fourth quarter and and as you look into 2025.
Speaker Change: Where the growth is coming from I mean, youll see roughly two thirds of the growth really coming from those brands body fat training and yoga six are the two I would say next in line as far as volume of openings that will make up the lion's share of that last third. So those are the four now BMT is largely going to be an international growth story.
Speaker Change: In the near term Yoga, six club pilates and stress level, primarily because of domestic growth story.
Speaker Change: But that's those are the four areas that you'll see a lot of the growth in 2025.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Your next question today is coming from Chris I'll call from Stifel. Your line is now live.
Yes, thanks, good afternoon guys.
Speaker Change: Mark I know the company Hasnt had many levers to drive comp sales in the past and I'm glad to hear you, you're obviously planning to address that issue, but can you talk about what can be done in the near term to support sales trends at the concepts that may be experiencing decelerating.
Speaker Change: Trends.
Speaker Change: Well be able to answer that a lot better in at the next call because we have challenged all the brand presidents to put together their plan for 2025 and how they want to.
Speaker Change: Drive business drive same store sales drive profitability.
Speaker Change: But.
Speaker Change: Short of that I would say it really needs to be a focus on the member that's really the short term. That's the answer here. So we're looking at how we spend our money. For example, we spent $15 $100 a month in the local market and how are we spending that and how are we helping the France.
Speaker Change: Z maximize the benefit of that in their market.
Speaker Change: And we will do that one franchisee at a time by the brand teams in the different brands. So to answer your question today. The best I can give you is it's a member focused approach. The next earnings call. We can be more specific by brand actually.
Speaker Change: What are we going to do to drive business.
In 2025.
Speaker Change: Thanks, and then just John I apologize if I missed this but can you provide some more information about the $10 million litigation expense and whether a portion or even all of it is going to be expected to be reimbursed.
Yeah. So we have about a $7 $5 million retainer on our D&O policy.
Speaker Change: Have cash outflows.
Speaker Change: To date or through the third quarter and the process working with the carriers to get some of that reimbursed going forward. All the legal cost will be I guess I would say the legal costs related to this regulatory defense.
Speaker Change: I'll come back and return alright in part related to our DNA also the Dino will cover it so the cash outflow should be pretty minimal youll see the expense show up in the P&L until we actually receive the cash in hand back from the carriers, but at this point most of the legal costs.
Speaker Change: Should be capped from a cash outflow and the P&L should show very little of this because it'll be reimbursed.
Speaker Change: To the company.
Speaker Change: Okay, great. Thanks, guys.
Speaker Change: Thank you. Your next question is coming from Jonathan Komp from Baird. Your line is now live.
Jonathan Komp: Yes, hi, good afternoon. Thank you.
Speaker Change: Can I just follow up on the closures could I and maybe if you could clarify.
Speaker Change: The expectation for the fourth quarter, and then just more broadly whats your handle on the current state of the units that are open and.
Speaker Change: The timeline or sort of comfort that the closure rate will start to lessen here at some point.
Speaker Change: Yeah, Hey.
Speaker Change: The closures in Q3 were 49, so they were down from Q2, I think Q2 was the high point given there was mostly a lot of backlog from the prior year shift in strategy.
Speaker Change: And so from that perspective, Q4, I expect to be.
Speaker Change: I would say in line to lower than Q3, as we kind of kind of work through that a little bit of a tennis ball in the snake on that.
Speaker Change: That shift in strategy from 2023 as you move into 2025 I want to make sure. It's very clear I said the estimated closure rates. We would expect to see is around 3% to 5% really meant that was for 2024 as the system continues to grow and the effectiveness of the management and supporting franchisees and just.
Speaker Change: The tail of the strategy shift from 'twenty to 'twenty three plays through you should see a much lower percent of total system closures in 2025 and beyond so we expect to be at the high end of the range. This year in 2025, I expect that percentage to decline to something much smaller so.
Speaker Change: Ideally, we'd love to be in that 1% to 2% range I think that's pretty normal for most franchisees. We got some work to do but I do believe that in 2025, it'll be lower than the 5%.
Jonathan Komp: Okay, sorry, just to clarify John do you think you could get there 1% to 2% in 2025 or three to five.
Though the range do you expect in 2025.
Jonathan Komp: Yeah Yeah.
Speaker Change: Yeah, I mean at the end of that.
Speaker Change: I think 3% is a good is a good aspirational goal to show progress there, but one to two is obviously, what we ultimately want to get back to.
Speaker Change: So short answer yes, I mean, three 3% is probably a good safe assumption.
Speaker Change: Okay, Great and then maybe a broader question just on appetite for <unk>.
Speaker Change: New openings from franchisees.
Speaker Change: As you clearly are working on putting.
Speaker Change: New processes and new programs in place here are there any gaps in sort of a short term.
Speaker Change: Appetite for openings as we think forward to 2025 or what sort of.
Speaker Change: Visibility do you have today.
Speaker Change: Good news is I mean, we've always had good visibility into our openings I mean, the key for US is we are very involved in the lease signing upfront with franchisees and supporting them through that process. So as the lease signing pipeline stays healthy then it makes it really easy for us domestically to be able to predict approximately <unk>.
Speaker Change: Months six months or so from the time they get their lease signed window approximately get open so we.
Speaker Change: We do have a good visibility into that for us even in 2024, we do want to be very.
Speaker Change: Careful about making sure our franchisees are launching as Mark mentioned earlier on the earlier comments successfully so making sure that prior to opening they get up to the right pre membership counts.
Speaker Change: We have the right training the right staffing everything is in place and when they do launch they start strong and typically when you see that video performs very well so we will be.
Speaker Change: Very careful about 2025 and not over committing on openings and making sure that it's more about the franchisee launching successfully so as part of our <unk>.
Speaker Change: Process, we'll be doing that on a brand by brand basis, and assessing wished franchisees in one but.
Speaker Change: But yes I think.
Speaker Change: Total openings for next year.
Speaker Change: Right now we've talked about 500 a year.
Speaker Change: Its a doable number but.
Speaker Change: We will provide more comments around that when we get to our Q4 earnings calls is what we think is the right range based off of the studios or the brands that are performing.
Speaker Change: And the volume of openings, we have in regards to.
Speaker Change: Our line of sight.
Speaker Change: In 2025.
Speaker Change: Okay, and sorry, just last one for me on the full year.
Speaker Change: <unk> revenue guidance for 2024, the implied range for Q4 is pretty wide and yes, I'm asking the low end.
Speaker Change: Of the implied range it would imply a sequential revenue decline, which would be a.
Speaker Change: A bit unusual so just any further color on.
The expectations in Q4 in any.
Speaker Change: Directional color within the range.
Yeah reiterate it.
Speaker Change: Yeah. It is a it is a wide range, but the expectation is sequentially. It will be an increase in Q4.
Speaker Change: Because our visibility right now shows us within the goalposts there that we didn't move that we did with the guidance at all but the expectation around Q4 will be that one Jonathan we have a lot of openings coming in the fourth quarter. So youre going to benefit from a lot of equipment revenue in the fourth quarter, we do get additional revenue related to our franchisee com.
Speaker Change: That happens in the fourth quarter, So you get an extra three.
Speaker Change: $3 million, there and rebates, obviously theres $5 million of additional cost, but you get the revenue benefit so assumption fourth quarter should be sequentially growing revenue.
Speaker Change: But within the range of the guidance that we provided.
Speaker Change: Okay, great. Thanks again.
Speaker Change: Thank you next question is coming from J P wallen.
Speaker Change: Roth Capital Partners. Your line is now live.
Speaker Change: Great. Thanks for taking my questions guys.
Speaker Change: Maybe if we could just start first I wanted to kind of touch on sort of customer.
Speaker Change: And some of the purchasing patterns.
Speaker Change: It sounds like maybe the merchandise sell through is still a challenge, but could you just share a little bit more in terms of the mix of class packs versus actual.
Speaker Change: Subscriptions and just if you're seeing any changes in terms of spending trends there or just anything else you might want to point out in terms of the customer.
Speaker Change: Yes.
Speaker Change: Hard to what we sell to the end consumer we haven't seen really any shifts there. The majority of our members are on the unlimited with about 50% and then the apacs in four packs are split 25, and 25, we do sell single base, whether it's walk in or classes, but.
Speaker Change: But the majority of our system is on our membership base in regards to the sales within the.
Speaker Change: Within the studio and talking about retail we have seen as we mentioned on our Q2 call a decline in retail sales. We do believe it's a more of a function of what we had in the warehouse and what we're selling.
Speaker Change: There could be some elements around consumers just tightening there.
Speaker Change: Purchases within the studio, but it's too early to tell given kind of the inventory situation that we talked about in Q2, we do expect that to get better obviously with the the processes and the improvements we're going to make around our retail and our supply chain.
Speaker Change: But for the fourth quarter for Q3.
Speaker Change: I think they'll look largely the same as far as kind of the performance of retail sales in the studio.
Speaker Change: Okay. That's very helpful. And then if I could just in terms of.
Speaker Change: In terms of new units.
Speaker Change: I don't know maybe I missed but just the lower guide there is there anything that we should be taking away about the current development.
Speaker Change: Environment, and whether there's anything to read through in terms of our 2025.
Speaker Change: No I don't think theres anything to read into the shift in the guidance I mean, the reason we pulled back guidance is exactly what we talked about in regard to the pillars of our franchisee <unk>.
Speaker Change: We have the ability to pull in openings.
Speaker Change: Accelerate build out pull in openings, but then what that means is the franchisee has less time to acquire members prior to opening and we're not going to do that in the fourth quarter, we're going to lap the organic opening of the studio happen the way it should.
Speaker Change: Therefore, given that we said listen, let's just be prudent and pulled down the expectations around the full year openings.
Speaker Change: Now and then we'll just continue to execute so 500 openings is still in play for sure. It's just we're not going to put pressure on the system to try and pull it openings at the sacrifice of franchisees not being ready.
Speaker Change: Okay understood. Thank you for taking my questions.
Speaker Change: Yeah.
Speaker Change: Thank you next question is coming from Richard Magnuson from B Riley Securities. Your line is that law.
Richard Magnuson: Hello, Thank you for taking my call you.
Richard Magnuson: You mentioned that you were going to do.
Speaker Change: Divestitures, I believe but in the time that you've been there.
Speaker Change: <unk> a conscious you feel strongly about.
Speaker Change: Are there any of that you feel that might be weak or alternate not such a good match for the company's goals going forward.
Speaker Change: I think strategically they make sense because if you look at how they all go together even cycle bar, which has struggled post COVID-19 still as a modality that I can't see us not being in as if we're a fitness company the new openings of cycle bar are actually doing quite well.
Speaker Change: So we're going to look at each one all the time, we're going to we're going to make the proper investment.
Speaker Change: The I like the lineup today. So today, we're not thinking about a divestiture, we're thinking about how do we get the brands that aren't really don't have much momentum how do we build that momentum and that's really the plan at this point Richard.
Speaker Change: Okay and then.
Speaker Change: I think you'd be adjusted a little bit about potential acquisitions, but.
Speaker Change: Do you see some opportunities to change their like modalities even adjacencies.
Speaker Change: Different that you would be once you acquire move into for example stretch labs is a little bit different but it seems that very well.
Speaker Change: What can you say about that type of concept.
Speaker Change: I would say this Richard I think one of the things I really want to embed here is innovation, new ideas and different thinking.
Speaker Change: And I think everything is on the table and I have challenged all the brand presidents and their teams to be thinking differently is there a way to put two brands together is there a way to cross sell just I want everything on the table to be thinking about how do we continue to grow each of these brands and exponential and if.
Speaker Change: It benefits the franchisee and the and the model.
Speaker Change: The result of the model is you have franchisees that are making money, there's going to be organic growth and people are going to want to do it. So I'm not ruling anything out I think we have a great starting point from the eight brands that we have today and I think the future is really bright for all of them, that's where that's where I sit today.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Thank you next question today is coming from Brian Wolfe Meyer from Piper Sandler Your line is now live.
Speaker Change: Hey, good afternoon. Thanks for taking the question can you provide a little bit of color on general membership in visitation trends.
Speaker Change: <unk> progressed, and then into the early parts of Q.
Speaker Change: Q4, what you saw it just to give us a little bit more comfort around the general macro state of the business.
Speaker Change: Then.
Speaker Change: Separately as we think about some of the.
Speaker Change: Opening heading into it.
Speaker Change: I guess last couple of quarters and years.
Speaker Change: Obviously core parties and check my very very heavy but what are you doing to encourage franchisees to try and open or wanting to open from the smaller brands what kind of properties are in motivation do you have in place for that thank you.
Speaker Change: Okay, you want me to.
Well first of all again.
Speaker Change: I'll do them, everyone first as far as the macro.
Speaker Change: Not seeing any any variation there when you look at the total members through Q3 on the average per studio, it's actually in line and slightly growing so the macro hasn't had an impact on our system I think again when you look at fitness. It's one of these things that people just don't trade off as part of their daily lifestyle.
Speaker Change: Due to the cost of other things in their life. So the membership growth has remained constant on.
Speaker Change: On the average per studio now obviously brands like club Pilates, they have an oversized impact on that.
Speaker Change: Given their size, but across the board you are seeing growth in members.
Speaker Change: The most part the total member count as a function of the fact that we just continue to open more studios. Therefore, you get the volume impact as we talked on the call at 94% of <unk>.
Speaker Change: Excuse me, 96% of the growth in system wide sales came from volume. So we are bringing more members into the system. We are seeing overall higher.
Speaker Change: Member count per studio through the third quarter.
Speaker Change: Briefly got a view of that for the fourth quarter and.
Speaker Change: October results look.
Speaker Change: Relatively consistent with what I just talked about in Q3, so not seeing the macro impacts.
Speaker Change: Our business in that that aligns with you what we've said on previous quarters as well.
Speaker Change: Alright, I'll comment on.
Speaker Change: Franchisees by brand.
Speaker Change: We've we're changing the license sales team and we're bringing in new people, but we're also going to make.
Speaker Change: Nuance shifts there, which is I want the brand presidents to own their own development, because rather than just have a license sales team that's going to sell the hottest brands, we really need to be putting together plans by brand that helped drive development for their brands and Thats a different.
Speaker Change: That's a different way of doing it that we have in the past and I do think that will.
Speaker Change: Really be able to have brands speak specifically to a potential franchisee on why he or she might want to be in that brand. So I think it will help all of the smaller brands sell more licenses and open it's all contingent on profitability in the model, which is part of this so we're looking at all.
The elements from the brands on how can we reduce cost find members more effective marketing spend.
Speaker Change: Because my experiences. This in the franchise World you have franchisees are making money that they expected they are going to organically grow and that is the long term vision for this is franchisee profitability a lot of help to get up and started and along the way and see more organic growth will always.
Speaker Change: Be selling through the open market, that's not something we're going to stop but that's really going to be the focus.
Speaker Change: Alright, thanks, so much.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to Mark for any further closing comments.
Mark King: Thank you everyone I want to thank you again for joining the call today, we look forward to seeing many of you at and franchises franchisees at our annual convention in Las Vegas in December this will be a great opportunity to get everyone. In the same place and continue building our vision together.
This will be my first.
Mark King: Convention with the group and I'm really looking forward to it. We also plan to meet with many of you at upcoming Investor meetings and conferences and we are planning to host an investor day sometime mid 2025, we will continue to communicate more details on this event as we get closer to the date and again, thank you for joining.
Mark King: Okay.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.