Q2 2025 Xponential Fitness Inc Earnings Call
Speaker #1: Greetings and welcome to the Xponential Fitness second quarter, 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
Speaker #1: If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.
Speaker #1: It is now my pleasure to introduce your host, Patricia Nir, Investor Relations. Thank you, Patricia. You may begin.
Speaker #3: Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness's second quarter, 2025 financial results. I am joined by Mike Nuzzo, chief executive officer; Mark King, former chief executive officer; John Khawaja, president of North America; and John Meloun, chief financial officer.
Speaker #3: 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 statements, including discussions of our business outlook and financial projections.
Speaker #3: 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 #3: For a more detailed description of these risks and uncertainties, please refer to our annual report on Form 10K for the year ended December 31st, 2024, filed with the SEC and subsequent filings with the SEC.
Speaker #3: We assume no obligations to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call.
Speaker #3: 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 GAAP measures that we provide.
Speaker #3: 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 #3: Please also note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted. 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 pro forma basis.
Speaker #3: 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 30th, 2025, this includes BFT, Club Pilates, Cycle Bar, Lindora, Pure Bar, Rumble, Stretch Lab, and Yoga Six.
Speaker #3: I will now turn the call over to Mark King, former CEO of Xponential Fitness.
Speaker #4: Thanks, Patricia, and good afternoon to everyone. Before we discuss the quarter, I want to take a moment to share my enthusiasm for today's announcement that our board of directors has unanimously appointed Mike Nuzzo as our chief executive officer.
Speaker #4: I've had a chance to spend some time with Mike, and I couldn't be more confident in his ability to lead Xponential through its next chapter.
Speaker #4: Mike brings over 25 years' experience leading consumer, retail, and services businesses with a proven track record of driving scalable growth and expanding into both domestic and international markets.
Speaker #4: His disciplined, data-driven approach and deep commitment to franchisee success were also particularly compelling to the board. Previous leadership roles at IMART Express, Petco, and GNC clearly demonstrate his ability to build strong brands and execute at scale.
Speaker #4: Mike has joined the call today to share a few thoughts. Mike?
Speaker #5: Thanks for the kind words, Mark, and congratulations on all your accomplishments at Xponential. I also very much appreciate your help and support in getting me launched today.
Speaker #5: I am thrilled to be here and honored to be leading this great company. Today is day one, and I have a lot to learn.
Speaker #5: But as a 25-year consumer industry veteran, there is so much to love about Xponential. First, we are in great space. Boutique fitness has substantial momentum and long-term growth potential as consumers continue to invest more in their health routines.
Speaker #5: Second, we have amazing studio brands led by passionate and committed franchisees with so much upside potential. And third, Mark and team have made great progress in building a team supporting foundation and company culture to drive strong growth and financial returns.
Speaker #5: You will hear more from me over the coming months, but I know Xponential can elevate and lead the fitness space around innovation, best-in-class franchisee support, and smart and healthy unit growth and expansion.
Speaker #5: Meaningful progress has been made, but I look forward to helping the team accelerate along the journey to providing the most impactful member experience and to becoming one of the most coveted franchisee partners in the industry.
Speaker #5: Thanks, and I look forward to spending time with all of you. Now, I will turn things back to Mark and team to discuss Q2 in more detail.
Speaker #4: Thanks, Mike, and welcome to the team. With our leadership transition in place, let's now turn to the progress we've made across the business this quarter.
Speaker #4: We remain focused on execution and continue to ake progress against our strategic priorities. We advanced several initiatives we outlined at our investor and analyst day.
Speaker #4: Both during and after the quarter, including further expansion of our field operations team, a new retail partnership agreement, and the divestitures of Cycle Bar and Rumble.
Speaker #4: Together, these actions reflect the company's ongoing focus on strengthening the business and creating long-term value for our shareholders. Let's now turn to second quarter results.
Speaker #4: North American system-wide sales of 474 million were up 12% year-over-year. North American quarterly run rate average unit volumes of 659,000 were up 3% year-over-year.
Speaker #4: Total members stood at 863,000 at quarter end, up 8% year-over-year, and same-source sales were up 1%. Although year-over-year growth moderated compared to first quarter, we believe the recent strategic actions will continue to improve performance in future periods.
Speaker #4: Alongside our new retail agreement, which John Khawaja will speak to in more detail shortly, the recent divestiture of Cycle Bar and Rumble brands represent another important step in sharpening our strategic focus.
Speaker #4: These actions enable us to focus our company resources on the brands that generate the highest ROI, including our core brands, Club Pilates, Pure Bar, Yoga Six, and Stretch Lab.
Speaker #4: With a leaner, more focused portfolio, we expect to see improvements in overall portfolio health, a reduction in closure rates, and an increase in average unit volumes.
Speaker #4: While there will be a period of transition as we right-size back office operations, this evolution will ultimately position us to operate more efficiently and focus on our highest return brands.
Speaker #4: Before turning it over to John Khawaja, I want to take moment to express how proud I am of what we've accomplished at Xponential Fitness during my time here.
Speaker #4: I'm confident in both the company's long-term potential and Mike's capabilities to deliver on the operational optimization required for Xponential to become the franchisor of choice in health and wellness.
Speaker #4: Thank you for your time today. John?
Speaker #5: Thanks. I want to take a moment to thank Mark. It's been an honor working alongside him. His leadership has set a strong foundation that we're excited to continue building on.
Speaker #5: And of course, a warm welcome to Mike. With that, I'll provide a brief update on our new retail agreement with FitCommerce. Which has been a key focus area of mine since joining Xponential.
Speaker #5: And was executed post-quarter end. As many of you ow, our wholesale retail business, historically managed in-house, has posed challenges over recent quarters. While our retail operations have contributed to revenue in the past, it has always been a low-margin portion of our business that carries significantly more risk and required a ant amount of management's attention.
Speaker #5: As part of our new agreement, we will outsource this non-core underperforming segment to FitCommerce who will be able to deliver elevated design, development, and merchandising.
Speaker #5: Ultimately, enhancing service to our business, our franchisees, and our customers. This transition allows us to reallocate resources toward higher-margin, scalable areas with long-term upside that better align with our strategic priorities.
Speaker #5: As Mark alluded to, this will allow us to focus on building strong brands and experiences while supporting studio-level franchisee operations. Importantly, this partnership will reduce our selling general and administrative expenses while introducing annual minimum guaranteed commissions that will scale over time.
Speaker #5: Totaling over $50 million in the initial five-year contract period. Resulting in higher operating margins than our prior retail strategy. In addition, FitCommerce will purchase the remaining inventory we have on hand, freeing up working capital.
Speaker #5: This is a win for our franchisees and certainly a win for Xponential as we expect to see consistent growth in revenue and margin while significantly lowering our retail business's sensitivity to market cycles.
Speaker #5: FitCommerce is required to satisfy certain capital requirements by the end of October for the retail agreement to be effective. I'll turn to some recent updates across a few of our brands.
Speaker #5: As Club Pilates matures, we are actively focused on strengthening the brand by enhancing monetization strategies better utilizing existing capacity bringing larger operators into the franchisee system and improving our marketing to deliver same-source sales growth.
Speaker #5: With Club Pilates at record high utilization, we have the potential to drive revenue growth through enhanced pricing strategies that reflect demand for classes. We continue to invest in Club Pilates' long-term growth through product innovation, technology integration, targeted marketing, including experimenting with a new pricing tier and membership types to determine right mix of driving additional revenue.
Speaker #5: The brand's attractive unit-level economics have also resulted in several private equity groups acquiring studios. These franchisees have access to growth capital and employ professional operators who understand how to operate efficiently and effectively market within their footprints.
Speaker #5: Lastly, we are using Club Pilates' significant scale and access to a deep marketing fund to launch a major Club Pilates brand marketing campaign to build brand awareness and expand interest in Club Pilates.
Speaker #5: It's worth noting that in its entire operating history, Club Pilates has never had a national brand campaign. Pure Bar continues to deliver a strong performance, supported by strong same-source sales growth this quarter.
Speaker #5: With the brand's 25th anniversary year approaching, we are planning major marketing campaigns throughout year to commemorate the milestone. An initiative we anticipate will further accelerate growth in the coming quarters.
Speaker #5: It's a testament to the passion and dedication of our Pure Bar community that the brand continues to grow same-source sales nearly 25 years after its founding.
Speaker #5: Our strong base of existing members have a deeply devoted dedication to our brand with extremely high levels of engagement and member satisfaction. Interest in Bar as a modality has also increased in the last year among younger demographics that are new to Bar.
Speaker #5: Yoga is another modality with significant momentum. Which Yoga Six is capitalizing on. Same-source sales continue to perform well and we are continuing to innovate in the brand.
Speaker #5: We have implemented new teacher training programs to reinforce our category leadership. To attract a broader audience beyond the traditional yoga enthusiast, we've launched a new signature class, Mobility, which blends yoga and functional movement.
Speaker #5: On Stretch Lab, we have been focused on diagnosing the challenges facing the brand and are exploring solutions to help support franchisees achieve higher AUV levels.
Speaker #5: We are planning to introduce cross-studio memberships where access to one studio will unlock access to all studios. As previously previewed, we are also focused on introducing state-of-the-art Mobility and Recovery equipment which would enable members to come into the studio space outside of their scheduled one-on-one sessions for unassisted stretching.
Speaker #5: This will be further supplemented by personalized at-home stretching routines available to members in between studio visits. Members will track their progress via centralized technology.
Speaker #5: Importantly, we expect these changes to drive higher engagement and utilization without adding additional cost beyond the initial investment. The tests are running through Q3, and we expect to start rolling out changes to the model in Q1 of 2026.
Speaker #5: Turning to our field operations team, the initiative is underway as planned. The team is currently training and hitting the road next week. We've completed the first wave of hires with a second wave planned to begin in the fourth quarter.
Speaker #5: We are also making meaningful progress to re-engage or terminate licenses that are lagging over 12 months behind their contractual obligated development schedule. Which makes up approximately 40% of our backlog.
Speaker #5: We do anticipate the number of terminations will be higher in the second half of this year. Our focus remains on partnering with franchisees committed to opening new locations and ending legacy agreements where franchisees' commitments have not been fulfilled.
Speaker #5: On the sales side, we've implemented a new licensed sales team focused on awarding licenses based on criteria to ensure more timely studio openings. We've also changed our franchise sales process.
Speaker #5: So franchisees are only required to put a non-refundable development fee payment on multi-unit purchases. Reducing the franchisee's committed working capital which will support getting their first unit open more quickly.
Speaker #5: We're confident these changes will have a positive impact on the health of our development pipeline. We continue to expand on our international efforts, with a few noteworthy highlights to call out from the quarter.
Speaker #5: To start, Club Pilates recently crossed a milestone during Q2 hitting 150 international studios open. Club Pilates is performing well internationally, and we are confident we have a significant runway to continue this trajectory.
Speaker #5: BFT is also gaining further traction crossing the 50th studio opening in New Zealand in Q2. As part of this growth, we are providing additional support to our master franchisees across the globe.
Speaker #5: This includes the hiring of a managing director of Xponential Europe, who is based in London, in April. Along with the goal to hire an individual to lead our Asia operations, by the end of the year.
Speaker #5: Thank you for your time. I will now turn the call over to John Meloun, to discuss our Q2 results and 2025 outlook in additional detail.
Speaker #5: Thanks, John, and I'd like to also thank Mark for his leadership and partnership. It's been a pleasure working alongside him during this important chapter for the company.
Speaker #5: Mike, I'm rilled to partner with you as we embark on the company's next chapter. We ended the quarter with 3,327 global open studios with 86 gross new studio openings during Q2.
Speaker #5: With 66 in North America and 20 internationally. There were 57 global studio closures in the second quarter, or about 1.7%, representing an annualized closure rate of 6.9%.
Speaker #5: 27 or nearly half of the closures in quarter were in Cycle Bar and Rumble brands. We sold 58 licenses during the second quarter, which were largely concentrated in Club Pilates both in North America and internationally.
Speaker #5: The pace of license sales increased from last quarter as we started selling licenses again in the United States after a temporary pause during which time the 2025 franchise disclosure documents, or FDDs, were issued.
Speaker #5: At present, we have paused franchise sales in United States except for sales by exemption as we work to issue FDD amendments to address the hiring of our new CEO among other updates.
Speaker #5: The FDD amendments will be ready for use immediately upon issuance in non-registration states while the FDD registration process with the franchise registration states typically involves more time to process.
Speaker #5: Our base of licenses sold and contractually obligated to open is over 1,400 studios in North America and we also have over 1,000 international master franchise obligations.
Speaker #5: As John mentioned, approximately 40% of our global licenses are over 12 months behind their applicable development schedule. And we have started to actively terminate a certain number of these licenses.
Speaker #5: We believe the actions we are taking related to the management of our licenses will be elevated in the third quarter, but normalized in the fourth quarter.
Speaker #5: But noting that terminations can take time given requirements around notification timelines. Second quarter North America system-wide sales of 474 million were up 12% year-over-year with growth driven primarily by the 1% same-source sales increase within our existing base of open studios, coupled with growth from net new studio openings.
Speaker #5: Approximately 80% of system-wide sales growth was driven by a higher number of actively paying members and approximately 20% by higher pricing and/or mix shifts.
Speaker #5: North American run rate average unit volumes 659,000 in the second quarter increased 3% from 638,000 in the prior year period. The increase in AUVs was largely driven by a higher number of actively paying members and higher pricing for new members.
Speaker #5: Given high levels in demand for many of our brands and Club Pilates in , we believe is a significant opportunity to increase revenues through more dynamic pricing methodologies including new price tiers, more stringent cancellation policies, and new package offerings.
Speaker #5: On a consolidated basis, revenue for the quarter was 76.2 million down 1% from 76.9 million in the prior year period. 82% of revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory revenues and equipment revenues.
Speaker #5: Given these materially occur upfront before our studio opens. Turning to the components that make up revenue, franchise revenue for the quarter was 45.4 million up 5% year-over-year.
Speaker #5: This growth was primarily driven by an increase in royalty revenue as system-wide sales were supported by an 8% increase in year-over-year actively paying memberships and an 11% increase in total visits offset by lower revenues from license terminations in the period.
Speaker #5: Equipment revenue was 9.5 million declining by 26% year-over-year, this decrease was primarily the result of a 39% year-over-year lower volume of global installations in the period compared to the same period prior year.
Speaker #5: Merchandise revenue of 5.6 million was down 8% year-over-year. The decrease year-over-year was due to lower sales volumes. As John mentioned earlier, we recently entered into an agreement with FitCommerce that will have a transformative effect on our retail margins with benefits to our financials expected in 2026.
Speaker #5: FitCommerce will be handling all fulfillment and as a result, we will no longer have to bear the cost of operating our retail warehouse and the associated overhead.
Speaker #5: FitCommerce is also committed to purchasing our remaining inventory, which will free up working capital. Franchise marketing fund revenue of 9.5 million was up 13% year-over-year primarily due to continued growth in system-wide sales from a higher number of operating studios in North America in addition to increased sales on a per-studio basis.
Speaker #5: Lastly, other service revenue, which includes sales generated from rebates from processing studio system-wide sales brand access partnerships, company-owned studios, Xpath, and Xplus, among other items, was 6.3 million down 3% from the prior year period.
Speaker #5: The decrease was primarily due to lower brand access fees. Turning to our operating expenses for the quarter, cost of product revenue were 10.5 million down 25% year-over-year.
Speaker #5: The decrease was primarily driven by a lower volume of equipment installations and merchandise sales during the period. Cost of franchise and service revenue were 4 million down 32% year-over-year.
Speaker #5: The decrease in franchise sales commissions was largely due to lower international franchise license sales and lower commission expense from North American franchise license terminations.
Speaker #5: Selling general and administrative expenses of 24.1 million were 35% lower year-over-year. The decrease in SG&A was primarily lower due to decrease in legal expenses driven by non-recurring insurance recovery receivables and lower restructuring charges.
Speaker #5: As indicated in our AK filing on July 2nd, 2025, the SEC informed the company that it had concluded its investigation without action. We still expect to receive $15 million in cash reimbursement from our professional insurance policies in the second half of this year.
Speaker #5: This reimbursement was accrued for as of the end of the quarter and will have no impact to GAAP earnings or EBITDA once received. At present, we have entered into and paid for lease settlement agreements of approximately $31.1 million through the second quarter.
Speaker #5: As of June 30th, 2025, we have approximately $14 million of lease liabilities yet to be settled. We expect most of the remaining liabilities will be settled during the remainder of 2025.
Speaker #5: Depreciation and amortization expense was 3 million down 34% compared the prior year period. Marketing fund expenses were 8.9 million up 13% year-over-year afforded by higher system-wide sales and associated marketing fund revenue contributions.
Speaker #5: Acquisition and transaction credit was 1.9 million compared to a credit of 1.2 million in the prior year period. 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.
Speaker #5: We marked a market the earnout each quarter and adjust our accruals accordingly. Note that this earnout will persist despite the recent divestiture of the brand.
Speaker #5: We recorded net income of 1.3 million in the second quarter or a loss of 1 cent per basic share compared to a net loss 14.3 million or a net loss of 30 cents per basic share in the prior year period.
Speaker #5: 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 #5: Adjusted net income for the second quarter was 14.5 million or adjusted net income of 26 cents per basic share on a share count of 35 million shares of Class A common stock.
Speaker #5: Adjusted EBITDA was 28.1 million in the second quarter up 14% compared to 24.7 million in the prior year period, primarily driven by an increase in high-margin royalties in our franchise revenues.
Speaker #5: Adjusted EBITDA margin was 36.9% in the second quarter up from 32.1% in the prior year period. Turning to the balance sheet, as of June 30th, 2025, cash, cash equivalents, and restricted cash were 38.7 million up from 26 million as of June 30th, 2024.
Speaker #5: For the six months ended June 30th, 2025, net cash provided by operating activities was 8.3 million which includes 1.9 million in lease settlements. Net cash used in investing activities was 2.9 million with 2.8 million used on the purchase of property and equipment and intangible assets.
Speaker #5: Net cash provided by financing activities was 0.5 million which included 10 million on borrowing of long-term debt, 2.7 million in payments on long-term debt, 3.8 million in payments on preferred stock dividends, and 2.1 million in payments for taxes related to net share settlement of restricted stock units.
Speaker #5: Total long-term debt was 377.8 million as of June 30th, 2025, compared to 33.1 million as of June 30th, 2024. The increase in long-term debt is primarily due to the company drawing 10 million in additional debt in the first quarter of 2025 for general working capital purposes and 25 million in additional debt in the third quarter of 2024 to address the lease termination payments on previously owned studios and for general working capital purposes.
Speaker #5: Let's now turn to our outlook for 2025. Our updated guidance reflects the following considerations which, taken together, have prompted us to be more conservative.
Speaker #5: First, the impact of recent brand divestitures and timing of transitioning back office functions. Second, a more conservative revenue outlook in light of current headwinds from the FDD renewal process and a more unpredictable macro environment for the second half of the year.
Speaker #5: Third, a commitment to increased levels of marketing spend, particularly in Club Pilates and StretchLab; and fourth, room for some organizational realignment with a new incoming CEO.
Speaker #5: For the full year, we are increasing guidance for our global net new studio openings and reducing guidance for system-wide sales revenue and adjusted EBITDA.
Speaker #5: We now project North America system-wide sales to range from 1.78 billion to 1.8 billion representing a 13% increase at the midpoint from the prior year when removing Rumble and Cycle Bar from the comparison for comparability.
Speaker #5: And down 155 million from the previous guidance of 1.935 billion to 1.955 billion which included approximately 120 million for Rumble and Cycle Bar. For avoidance of doubt, note that in this updated system-wide sales estimate for fiscal year 2025, we have removed any impact from Rumble and Cycle Bar, including system-wide sales generated by the brands in the first six months 2025.
Speaker #5: We expect 2025 global net new studio openings, which is net of closures, to be the range of 170 to 190 representing a 37% decrease at the midpoint from the prior year, again removing Rumble and Cycle Bar for comparability.
Speaker #5: We now expect the number of closures to be approximately 5% of the global system this year as a percentage of total open studios with any impact from Rumble and Cycle Bar brands removed.
Speaker #5: Total 2025 revenue is now expected to be between 300 million to 310 million representing a 5% year-over-year decrease at the midpoint of our guided range and down from previous guidance of 315 to 325 million.
Speaker #5: Adjusted EBITDA is now expected to range from 106 million to 111 million representing a 7% year-over-year decrease at the midpoint of our guided range and down from previous guidance of 120 million to 125 million.
Speaker #5: This range translates into roughly 35.6% adjusted EBITDA margin at the midpoint. We expect total SG&A to range from 130 to 140 million excluding the one-time lease restructuring charges and regulatory legal defense expenses.
Speaker #5: We are expecting SG&A of 110 to 115 million. And a range of 95 to 100 million when further excluding stock-based costs. In terms of capital expenditure, we anticipate approximately 10 million to 12 million for the year or approximately 4% of revenue at the midpoint.
Speaker #5: For the full year, our tax rate is expected to be mid to high single digits, share counts for purposes of earnings per share calculation to be 34.8 million, and 1.9 million in quarterly cash dividends related to our convertible preferred stock.
Speaker #5: A full explanation of our share count calculation and associated pro forma earnings per share and adjusted earnings per share calculation 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.
Speaker #5: We anticipate our unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditures to grow the business.
Speaker #5: We continue to expect our anticipated interest expense in 2025 will be approximately 49 million, tax expenses to be the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members.
Speaker #5: approximately 10 million, including
Speaker #5: And approximately 8 million in cash dividends related to our convertible preferred stock resulting in levered adjusted EBITDA cash flow conversion of 28%. This concludes today's prepared remarks.
Speaker #5: Thank you all for your time today. We'll now open the call for any questions. Operator?
Speaker #1: Thank you. We will now be conducting a question and answer session. If you would ike to ask a question, please press star one on your telephone keypad.
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Speaker #1: questions. Thank ou. Our first question comes from line of Randy Koenig with Jeffries. proceed.
Speaker #7: Hey. thanks lot. Thanks for taking my estions. just a Please couple of quick things. On the, the same-source sales, number in the quarter relative to, prior quarter, just any kind of color you can provide on, you know, what drove the, the change in trend line there would be super helpful.
Speaker #7: and then on the, the Club Pilates commentary, are you talking about, looking to take prices up there that you're ing to reach? You know, some capacity so you have the ability to kind of drive up some more revenues?
Speaker #7: per day or per per unit there. Just, just curious on what you were trying to get at with, as it pertained to Club Pilates.
Speaker #7: And I guess just lastly, on the 40% of the backlog that's behind schedule, is there a specific banner in or a couple of anners that are kind of accounting for most of that?
Speaker #7: you know, of those units being behind schedule? just a little color there would be super helpful. Thanks.
Speaker #8: Hey, Randy. It's John. thanks for thanks for the question. So in relation to same-source sales, Q1 was at 4%. You know, reporting Q2 at 1%.
Speaker #8: What was kind of the shift there? we did see, albeit Club Pilates still in the mid-single digit and performing very well, it did it did have a decrease from the first quarter.
Speaker #8: So that was, one of the indications or reasons why same-source sales was down in Q2. And then as well as Stretch Lab, we did see, you know, a little bit a, a greater negative same-source sales comp in the second quarter, so those are kind of the two, I would say, scale brands that had a material impact.
Speaker #8: On the shift from from Q1 to Q2. I'll answer your second question or your third question first. and then I'll it over to John to talk about pricing.
Speaker #8: The 40% backlog, it does include banners like Rumble and Cycle Bar. So when we report on this in Q3, we'll definitely be adjusting, any licenses that would have transferred to the new owner, so that that'll be a significant, reduction just based off of us transferring those those those brands over to the new owner.
Speaker #8: And then from there, the remaining banners would include, Club Pilates, Stretch Lab, and, some amount of Yoga Six is in there. So you you have to remember a lot of the delinquency around our backlog came originally from COVID as that kind of shifted a lot the original licenses that were sold prior to COVID out at two years.
Speaker #8: So it kind of naturally or organically forced the, the backlog into delinquency and we've been focused on, franchisees and kind of getting them mobilized, this year.
Speaker #8: So, but in in short order, Cycle Bar and and Rumble will create a lot of the the delinquent that'll come out in Q2. And then the balance is going to be in Stretch Lab, Yoga Six, and Club Pilates.
Speaker #9: Hey, Randy. 's John. with respect to pricing, at Club Pilates, yeah, we're, you ow, the studios get to a high level of productivity very ickly.
Speaker #9: And so we're intending to lean into pricing and monetization strategies, to move same-source sales growth, -source sales, we're oking at membership pricing structures. We're looking at cancel and late fees.
Speaker #9: And, also looking at dynamic pricing.
Speaker #8: Got it. And then I guess lastly, John, if you think about the closure rate, I think you said 57 in the quarter. Half of those were Cycle Bar and Rumble.
Speaker #8: Any kind of feel for just high-level when we should kind of see the the closure rate kind of bottom out and we we kind of move away from that?
Speaker #8: Is that like a 20, mid to late 2026 item in your in your opinion based on the numbers you're looking ?
Speaker #9: Yeah. think in the second half of 2025 or this year, you're going to start to see the closure rate start to get into closer to that 5% range.
Speaker #9: You know, the the majority of the closures that we're eing, in the present time is is, you know, now excluding the Cycle Bar and Rumble effects, is probably going to be in your, international, which BFT has a material, presence there.
Speaker #9: So they have some amount of closures that they contribute. And then domestically, you know, you Stretch Lab and Yoga Six are the two brands that are kind at scale.
Speaker #9: Where we continue to see, some amount of what we would call kind of the bottom 10% that are that are, closing. But I think you'll e about a 5% closure rate for the year, it'll start to to trend down, over the second half and and probably to answer your question, 2026 is probably, well, you'll you'll to see us trend down into that.
Speaker #9: Mid to low single digit as, you know, the the majority of the brands that are opening, particularly Club Pilates, both domestically and internationally, these are brands that have healthier AUVs.
Speaker #9: So you're getting stronger performance, across the portfolio and hence the closure rate will come down.
Speaker #8: Awesome. Thanks so much, guys.
Speaker #1: Thank you. Our xt question comes from the line of John Himmenbakel with Guggenheim Partners. Please proceed.
Speaker #10: Hey, hey John. can you walk through you listed four items that, are impacting, I I ess, by design here, profitability in '25. Can you provide a little more detail on those four?
Speaker #10: And then, you know, when you think about, how many of those kind of have a wraparound into '26, you ow, maybe speak to that.
Speaker #10: Try to think about what the what the EBITDA base for '25 really is heading into '26.
Speaker #9: Yeah. Hey, John. you know, I think first and foremost, it was important for us when we divested, Rumble and Cycle Bar to keep operations supporting those brands to ensure a a smooth transition to the new owner.
Speaker #9: Now, with that having happened, you know, there's a rationalization of the corporate support functions, and services that we provide that get allocated to the brands that now need to get, relooked at.
Speaker #9: So that that that I think will largely have that contained in 2025 as we ramp those down. So shouldn't have lasting effects in '26.
Speaker #9: system-wide sales, you know, the adjustment to the guide around, system-wide sales and the royalty impact, that's something we're eing more in the present. you know, we did talk about same-source sales in Q2.
Speaker #9: albeit really healthy for Club Pilates and, but we're seeing little bit of softness as we roll the third quarter. That the compounding effect of that obviously lasts, unless there's some sort of, shift or reaction that, makes the trend head back to where we had forecasted.
Speaker #9: So we are seeing a compounding effect in the second half related to lower system-wide sales and, and obviously, the royalty impact that that has.
Speaker #9: So the reaction to that is, you know, we are spending, about 25% more marketing dollars in the second half than the first half to try and mitigate, those impacts, which, there's nothing built into the guide related to, you know, some of the possible upsides related to that marketing investment.
Speaker #9: But again, to be conservative, you know, we're iding the street down a little bit on the system-wide sales impact. the fourth piece around that is really just, you know, with the incoming CEO, you know, we've we've spent some time talking about the strategy.
Speaker #9: I think we're largely aligned there, but we do want to give Mike the opportunity to get him arms around the business. So we've taken a conservative approach around SG&A, particularly in regards to the the the costs and and what we've built in for the full year, so those are kind of the four areas.
Speaker #9: As far as how much of that lasts into 2026, I think the real, item is is really around system-wide sales and whether or not the marketing investments could, you ow, create a different trend as as we roll into 2026.
Speaker #9: But most of the the Rumble and Cycle Bar divestitures, as well as the marketing spend, and as well as the, the additional guidance for the CEO, those should be largely contained to this year.
Speaker #8: And, just as a follow-up to that, I mean, at what the marketing spend is predominantly what, you know, in terms of, I don't I don't think it's it's not brand awareness, right?
Speaker #8: So is that, is that local, social, promotions, how does that sort of break out?
Speaker #9: Yeah. This is John. It's, traditional performance marketing. generating leads, and, and, generating conversion of those leads. for our Club Pilates business, we're going to be, launching a brand campaign, at beginning of October.
Speaker #9: as as we mentioned on the call, it's the first time, the the company's made an investment of of that nature. and that is for brand awareness.
Speaker #9: you know, 's a competitive vironment. Pilates and, and we believe it's the right time to make that investment.
Speaker #8: All right. Thank ou.
Speaker #1: Thank ou. Our next question comes from the line of Zoe Altobello with Riemann James. Please proceed.
Speaker #11: Thanks. Good afternoon, guys. I I guess first question, can you kind of walk us through where we are on the FDD renewal process? It seems like, you ow, we start to make progress, and then unfortunately, that progress seems to stall.
Speaker #11: So kind of what's what's taking so long and what needs to happen in the back half?
Speaker #9: Yeah. Hey, y Joe. I mean, with the changing of the CEO, it is required that you would have to amend your FDDs. so from that perspective, you know, this is a process that we have to follow to be compliant with that.
Speaker #9: So there are registration states and unregistration states. you know, the the, the non-registration states should be what I believe a fairly quick, filing. And and amendment, that will get approved.
Speaker #9: The registration states have to go through their review. based off of the state's requirements. As far as license sales, you know, we did have an impact in the first half as we got the 2025 ones sold.
Good afternoon. Um, Janna just want to follow up, could you maybe just update? Um, I think previously on same store sales, you're thinking in the mid single digit range, just any, any update there in terms of what you're embedding and the guidance, um, and then just, you know, the moderate slow down. You've seen, have you been able to diagnose or pull out any any Trend or, um, anything worth mentioning on on drivers of the? The the the trend that you see there,
Yeah, so on the same store sales. Yeah, I think historically, we've kind of wrapped our head around a mid single digit, you know, given the lower same store sales comp in Q2, the guy does a California low single digit. Uh, as we roll into the second half again, you know, with the additional marketing spend, we haven't really built any upside, uh, into the second half. You know, we typically do see Q2 and Q3 being the slower quarters, given, uh, it's summer. And a lot of people are on vacation. You typically see a lot of members e either freeze their accounts or you see lower lower visitation. Um you know for us we continue to see good systemwide sales growth. It's just the comp that is is a little bit low and again it's um
It it is, you know, we do have Brands like, you know, Club Pilates and Yoga 6 and Pure Barre that are still pumping uh at very healthy ranges. Um but you know, with some of the the other brands like stretch, so I'm having a negar competence pulling it down. So um at the end of the day, I think you should assume about a low single digit same store sales comp for the second half.
Okay, appreciate that.
Go ahead.
No. Did you have a follow-up question? John, I thought on that.
yeah, if if if I could just um wanted to, you know, change subjects and ask about just you know, the focus of the investor day building out you know better capabilities is that
Best-in-class franchise or just just any any feedback from the system and franchises, you know, post some of those updates and you know the early rollout or some of the field field initiatives, just any feedback there and then um Mark or or Mike if if if you're there. Welcome. Um just curious. You know as we think about transition here sort of you know key steps and you know near-term roadmap there. Uh thanks again.
Sure, this is John. Um, yes, we've... excuse me.
Hang out, uh, our field operations team, uh, over the last 3 months. Um, we've got the first wave hired and trained, um, and they are ready to hit the road next week, so we'll be deploying, um, you know, over over over double digit, number of, um, field operations people in the field. It's been really well received uh, by this, by the system. They're looking forward to the help. They're looking forward to um having people in their Studios sharing best practices. Uh, I'm excited to get that launched.
Then, uh, the question on the transition. Uh, this is my K. Jonathan. Um, yeah, it's it's day 1 but I have been prepped extremely well. Uh, I'm excited to dig in and I I feel like I'm coming into the business at a really great time. The team has done some really smart things to position the company for, uh, for health portfolio management, the new retail merchandise deal and putting more focus on operations as we were just talking about marketing healthy franchise, sales and unit growth. So obviously there's still some things to fix and enhance. But overall, I think this is a great foundation for a strategy to build on and it will allow me to get a really quick start.
Yeah, appreciate the color right now. Thanks to all
You. Our next question comes from the line of Chris. Okay, cool with steeple. Please proceed.
Chris, you may be unmuted on. I mean, muted on your end.
Sorry about that. Um,
Um, welcome to the call, Mike, and uh, thanks for taking my questions. Um, my first question is on Club Pilates?
Given the high utilization rates and the class demand, why not be more aggressive in terms of infilling markets, which could arguably capture incremental demand, while making it harder for competitors to enter the market and especially given the Returns on the club. Playshow club Pilates studios are already extremely high so I'm just curious why not be more aggressive with unit openings?
Yeah, thanks. This is John. Uh, we plan to do just that uh, we think that there's um there's a significant amount of uh White space um uh remaining 4 Club Pilates. Um, we're working with larger more sophisticated. Um, um, franchisee investors. Um, we just recently sold a 60 pack, um, of Club Pilates. Um, and so we we do, we we agree. We think that there's
A lot of opportunity there. Um, and you know, these Studios each cohort, consistently outperforms, the previous years, um, and these Studios get to a high level of productivity very, very quickly. Um, and so it's a very strong business, um, and and we're bullish about the growth.
Okay, and then you mentioned rolling out some marketing campaigns for Club Pilates For the First Time Ever. Can you just elaborate on the channels? You plan to utilize maybe with the level of initial spin could look like
Sure, um, we're really looking at all different mediums. Um,
The the the spend, um, is significant in the third and fourth quarter, um, over 20 million dollars. Um, and so, um, um, we we think that it's the right time, uh, to introduce a brand campaign to strengthen, uh, brand awareness and to really position Club Pilates as the leader in the space, that it is.
Okay. Um,
and then John maybe just help. I mean, I apologize if I missed this earlier but I was hoping you could just Bridge the current system sales guidance to the prior guidance. And how much of that is due to the Devastators? And how much is due to expectations for softer sales at, um, the the core brands?
Yeah, I mean 120 million of the drop in the guide is carving out, cycle bar and Rumble. Um, the balance is what you can consider the, the the softness in in how we see the back end of the year.
Okay, great. Thanks guys. And congrats mark on the retirement. I hope you enjoy more time on the course.
Thanks Chris.
Thank you. Our next question comes from the line of Ryan Myers with Lake Street Capital markets, please proceed.
Fit Commerce partnership. It sounded like that won't be making an impact until 2026. But just so we get a good understanding of kind of the cost savings. That that drives for you guys. I think that'd be helpful.
Sure, this is John khawaja. Um, so the the deal is, we're really excited about the deal it. It kicks off on December the 1st. Uh, so yes, the the most of the impact, uh, is going to be felt next year, although we will be, um, selling um, essentially all of our, um, retail inventory, um, to fit Commerce, prior to the, um, to the start of the deal. Um, for modeling purposes, it's it's a $50 million. Minimum guaranteed, royalty over 5 years. Uh, the first year is around 7 and it scales up from there, um, and um, um, and the payments happen monthly. So it's it's, it will be helpful to cash flow in 2026 and Beyond.
Okay, got it. And then now that you guys were able to get the SEC investigation resolved, does that help speed up the debt refinance at all.
Uh, yeah, I mean with the FCC behind us, you our focus is gone, uh, or shipped it over to, you know, starting the process of getting a refinancing done. So, uh, active in that space and and looking to try and get something done as soon as we possibly can.
Great. Thanks for taking my questions.
Thanks Ryan.
Thank you. Our next question comes from the line of Richard, Magnus with B Riley Securities. Please proceed.
Hi, thank you for taking my call. I just have 1 question, you know, in the past you've
Um, tested different types of variations in studios such as smaller units. So I was wondering, are there any particular variations in these different Studios or different brands? You know whether it's a smaller unit or specific Arrangements, a layouts within a studio that have been providing sign, significantly greater efficiencies or other performance that you can talk about.
Yeah. There's a couple of things that we're looking at. Um, we've been we're ready to roll out, uh, double what we call them, double wides. Uh, um, double Club Pilates essentially, um, because of the, the, the really strong utilization, um, in studio with that brand. Um, we're we're really curious to to see um, you know what, what, that's going to drive. Um, we've also uh, begun um um the utilization of smaller footprint in stretch lab uh where we've gone to 8 bench Studios as opposed to 10 um which which lowers um you know, um construction costs, it lowers um uh ongoing um ongoing rent and and makes it um uh a better proposition for a better Financial.
Proposition for our franchisees with the smaller footprint.
All right. Thank you.
Thank you. Our next question comes from the line of JP wman with Ross, Capital Partners, please proceed.
Hi. Thanks for taking my questions guys. Um, if we could just start maybe on the kind of pricing opportunity. I just wanted to understand how much, you know, when you think about the different levers there, you know, price, cancellation fees tears. How much is that? An opportunity? Just for Club pilates versus some of the other brands and maybe like just 1 of those, levers is an opportunity for the other brands. Like, can you just kind of break that down?
Yeah, we're focused on Club Pilates because of the high utilization in that brand. Um, as we've said, um, the studios, get to a high level of productivity very quickly, um, which presents a challenge on same store sales, the, the lever to, to push is pricing and monetization. Um, and we're really curious about Dynamic pricing, um, we we think there's an opportunity to to Value. Um, you know, the, the times of the day, when where the the classes are most popular, um, to create a model that will increase revenues, um, as far as
That that thinking across, um, other brands. Of course, you know, we, we look at pricing and we look at membership tiers, um, across all of our Brands. And, uh, um, we're, we're always looking at those things. I think Dynamic pricing is, is the area across, really all of our business that has, uh, upside opportunity
Thanks for the color and then 1 more, you know, maybe for you mark. Maybe it's best for John with kind of the 10 year but as we just kind of think postmortem on some of the devest like,
Just come down to incorrect modality, you know, is it bad franchise operators that are drawn to the concept? You know, what can you kind of share about your thoughts post? The fact
I'll I'll take a stab at that. I mean, my observation is you know, we we typically buy these brands with small Footprints, um, you know, and I think
When you think about growing and distributing the brands at times, the the brand awareness around the concept and what it is is it becomes a challenge. Uh body fit training is a perfect example where you have a very successful um brand that was International but very unknown in the US, we had a concept, uh, that we introduced in Santa Monica bft and we rather than selling it out of like Southern California, creating a little bit of momentum and then expanding into other markets, we kind of just generally launched it across the US. So the awareness of consumers isn't there and I think that these first generation of franchises that you know got opened. Um they struggle and then you kind of it's It's hard to get someone to want to buy when there's not a validation in that second generation of prospective franchisees coming in. So I think that was probably 1 of the bigger the bigger challenges on some of the smaller Brands. Um you know, cycling as a modality I think that 1 you know, that was a CO impacted modality, you know. It was doing just
As well as call Pilates prior to Coe, and just really didn't see the re ramp. So I I think there's both how you decide to grow some of these Brands and then, you know, shifts and Trends shifts in consumers that could impact them. But for me, um, you know, that's how I kind of view on some of the smaller ones. We acquired
Yep, great color. Best of luck going forward, guys.
Thank you.
Thank you. Our next question comes from the line of Owen Rickert, this Northland Capital markets, please proceed.
Hi. This is Ben on for Owen, are you seeing any change in churn or retention patterns, post, q1 promotions. Um, especially as those trial members transition into full memberships,
No. The as far as like memberships and as far as like Trends around cancellations or freezes? Um, no real shift in Trend. That's out of out of cycle for seasonality. You do typically see Q2 and Q3 being slower, just because of the summer months, as I mentioned with a lot of people on vacation or holiday um and that typically picks up late Q3 and and again it's uh Q4 and q1s are usually your busiest quarter so no off Trend shifts in memberships at this moment.
Uh, thank you for that. I'll return to you.
Thank you. There are no further questions at this time. I'd like to pass the call back over to John for any closing remarks.
Great. Thank you. Uh thank you all for your time today. We look forward to meeting with many of you at the upcoming marketing events in September. And again, in November, when we report our third quarter results,
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
All right.