10-Q: Xponential Fitness Narrows Losses, Divests Brands Amid Regulatory Scrutiny

Xponential Fitness reported a narrower net loss and improved operating income in Q3 2025, driven by strategic brand divestitures and cost reductions, despite a slight revenue decline and ongoing regulatory challenges.

Summary

• Net loss significantly narrowed to $6.7 million in Q3 2025 from $18.1 million in Q3 2024, and to $8.1 million YTD 2025 from $36.2 million YTD 2024.
• Operating income turned positive, reaching $3.6 million in Q3 2025 compared to a $6.6 million loss in Q3 2024, and $28.1 million YTD 2025 compared to a $1.7 million loss YTD 2024.
• Total revenue decreased slightly by 2.1% to $78.8 million in Q3 2025 and by 2.2% to $231.9 million YTD 2025, primarily due to declines in equipment and merchandise revenue.
• Franchise revenue increased by 16.7% to $51.9 million in Q3 2025 and by 9.2% to $141.1 million YTD 2025, partly due to higher royalty rates and revenue recognized from franchise agreement terminations.
• The company divested the Lindora, CycleBar, and Rumble brands in Q3 2025, following Stride and Row House divestitures in 2024, to focus on core brands.
• Adjusted EBITDA increased to $33.5 million in Q3 2025 from $30.8 million in Q3 2024, and to $88.9 million YTD 2025 from $85.4 million YTD 2024.
• An ongoing restructuring plan is expected to continue throughout 2025, with estimated annualized savings of $13.5 million to $15.5 million.
• Material weaknesses in internal control over financial reporting persist, related to accounting personnel, goodwill/intangible impairment assessment, and contract completeness.
• Ongoing legal and regulatory investigations by the U.S. Attorney's Office (USAO), Federal Trade Commission (FTC), and New York Attorney General (NYAG) continue, while the SEC investigation concluded without action.

Sentiment

Score: 4

Explanation: While the company showed improved net loss and operating income, these were largely influenced by non-recurring items and cost reductions rather than robust revenue growth. Significant declines in key revenue streams (equipment, merchandise), slowing studio openings, decelerating same-store sales, and persistent material weaknesses in internal controls, coupled with ongoing legal and regulatory challenges, present substantial headwinds. The strategic divestitures are positive for focus but reflect past underperformance of those brands.

Positives

• Net loss significantly narrowed to $6.7 million in Q3 2025 from $18.1 million in Q3 2024, and to $8.1 million YTD 2025 from $36.2 million YTD 2024.
• Operating income turned positive, reaching $3.6 million in Q3 2025 compared to a $6.6 million loss in Q3 2024, and $28.1 million YTD 2025 compared to a $1.7 million loss YTD 2024.
• Adjusted EBITDA increased to $33.5 million in Q3 2025 from $30.8 million in Q3 2024, and to $88.9 million YTD 2025 from $85.4 million YTD 2024.
• Strategic divestitures of non-core brands (Lindora, CycleBar, Rumble) aim to streamline operations and focus on core business priorities.
• The SEC investigation concluded without action on July 1, 2025, and the Washington DFI investigation was resolved via Consent Order on August 12, 2025.
• Mike Nuzzo was appointed as the new Chief Executive Officer and Director on August 7, 2025, bringing over 25 years of executive leadership experience.
• Franchise revenue increased by 16.7% to $51.9 million in Q3 2025 and by 9.2% to $141.1 million YTD 2025.
• System-wide sales increased by 10.4% to $432.2 million in Q3 2025 and by 15.4% to $1,299.5 million YTD 2025.
• Average Unit Volume (LTM as of period end) increased to $701 thousand from $666 thousand.
• Cash, cash equivalents, and restricted cash increased to $41.463 million as of September 30, 2025, from $32.739 million at December 31, 2024.

Negatives

• Total revenue decreased by 2.1% to $78.8 million in Q3 2025 and by 2.2% to $231.9 million YTD 2025.
• Equipment revenue decreased significantly by 49.2% to $7.5 million in Q3 2025 and by 32.4% to $28.1 million YTD 2025.
• Merchandise revenue decreased by 27.0% to $4.8 million in Q3 2025 and by 20.8% to $16.7 million YTD 2025.
• New studio openings globally decreased to 78 in Q3 2025 (from 116 in Q3 2024) and 263 YTD 2025 (from 315 YTD 2024).
• Same-store sales growth decelerated to 1% in Q3 2025 (from 6% in Q3 2024) and 2% YTD 2025 (from 8% YTD 2024).
• Substantial impairment charges of goodwill and other noncurrent assets totaled $17.6 million in Q3 2025 and $32.4 million YTD 2025.
• Legal accruals significantly increased to $26.8 million as of September 30, 2025, from $14.7 million at December 31, 2024.
• Ongoing legal and regulatory investigations by the USAO, FTC, and NYAG introduce significant uncertainty and potential liabilities.
• The company is unable to offer and sell franchises in Maryland (since April 26, 2024) and Illinois (for Club Pilates only) due to compliance issues.
• Approximately 40% of global license obligations are over 12 months behind the applicable development schedule, indicating significant delays in studio openings.
• Material weaknesses in internal control over financial reporting persist, indicating deficiencies in accounting personnel, goodwill/intangible impairment assessment, and contract completeness.

Risks

• Disruptions in the availability of financing for current or prospective franchisees, including the U.S. federal government shutdown affecting Small Business Administration (SBA) loans, could adversely affect business, results of operations, cash flows, and financial condition.
• The company may not be able to fully realize the anticipated cost savings and benefits from its restructuring plan, or charges may be greater than expected.
• Ongoing legal proceedings and government investigations could have a material adverse effect on the company's business, results of operations, financial condition, or cash flows.
• The Pure Barre reporting unit's goodwill of $42.548 million is at a heightened risk of future impairment if its fair value decreases due to lower cash flows, inability to execute business strategies, or adverse market conditions.
• Future increases in the company's international footprint may increase its exposure to foreign currency exchange risk.
• Inflation, particularly if it results in rising interest rates, may have an adverse impact on operating results and financial condition.
• The company's ability to service its indebtedness, including its credit facility, or to make anticipated capital expenditures, could be adversely affected by future economic conditions and financial, business, and other factors beyond its control.

Future Outlook

The company expects its restructuring plan to continue throughout 2025, aiming for annualized savings of $13.5 million to $15.5 million. It plans to focus resources on core brands and other opportunities that align with long-term strategies. The company believes its available cash and cash generated from operations will be adequate to meet anticipated debt service requirements, obligations under its Tax Receivable Agreement (TRA), capital expenditures, and working capital needs for at least the next twelve months and beyond, based on current business plans.

Management Comments

• "This strategic initiative shifts management of the franchisee retail experience from in-house teams to a dedicated e-commerce provider, allowing the Company to focus on its core business priorities." (Regarding Retail Supply Agreement)
• "We believe the divestiture allows us to better focus and utilize our resources on our core brands and other opportunities which better align with our long-term strategies." (Regarding brand divestitures)
• "We expect to incur approximately $850 of costs in the fourth quarter of 2025, primarily related to termination charges arising from severance obligations." (Regarding Reduction in Force)
• "We believe that our remediation plan, once fully implemented, is sufficient to remediate the material weaknesses, such a conclusion cannot be reached until applicable controls have been designed, implemented and have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively." (Regarding internal control remediation)

Industry Context

The company operates in the boutique health and wellness franchising industry. Its strategic divestitures and focus on core brands suggest a move towards specialization and efficiency in a competitive market. The slowdown in new studio openings and same-store sales growth could reflect broader macroeconomic pressures or increased competition within the fitness sector. The outsourcing of retail merchandising indicates a trend towards leveraging specialized third-party providers for non-core functions, allowing the company to concentrate on its core franchising model.

Management Changes

Corporate Governance

Legal Proceedings

• The SEC informed the company on July 1, 2025, that it had concluded its investigation without action.
• Ongoing investigations by the U.S. Attorney's Office for the Central District of California (USAO), the United States Federal Trade Commission (FTC), and the Office of the Attorney General of the State of New York (NYAG) continue.
• The Washington State's Department of Financial Institutions (DFI) investigation was resolved via a Consent Order on August 12, 2025, with a $5 thousand payment for investigation costs.
• Ongoing discussions with the Office of the Attorney General of the State of Maryland (MAG) and the Virginia Division of Securities and Retail Franchising (VDSRF) regarding compliance with applicable franchise laws.
• A federal securities class action lawsuit, alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, is ongoing, with an amended consolidated complaint filed on May 6, 2025.
• Three shareholder derivative lawsuits (Akande, Ayers, Nelson) have been consolidated, alleging breach of fiduciary duty, unjust enrichment, gross mismanagement, and other violations.
• An agreement in principle was reached on April 22, 2025, to settle a class action lawsuit with non-opt-out franchisees for $25.0 million.
• A Telephone Consumer Protection Act (TCPA) class action lawsuit was settled for $18 thousand on June 24, 2025.
• Legal accruals increased to $26.8 million as of September 30, 2025, from $14.7 million at December 31, 2024.
• The company recorded an insurance receivable of $10.0 million for legal expense reimbursement.

Related Party Transactions

• The Rumble Sellers (a shareholder of XPO Inc.) made a partial payment of $2.435 million in October 2025 toward a receivable from shareholder.
• The company recorded $678 thousand (Q3 2025) and $1.460 million (YTD 2025) of interest-in-kind from the Rumble Sellers, which increased the receivable from shareholder within equity.
• Spartan Fitness Holdings, LLC, which is partially owned by a special purpose vehicle controlled by a company board member, generated $3.984 million (Q3 2025) and $10.483 million (YTD 2025) in revenue for the company.
• In May 2024, the company sold a vehicle to its former Chief Executive Officer for $275 thousand, paid via a reduction of Tax Receivable Agreement payments owed to him.

Stakeholder Impact

• Shareholders face potential dilution from future equity issuances, uncertainty from ongoing legal and regulatory proceedings, but may benefit from strategic focus and cost reductions.
• Franchisees are impacted by the divestitures of certain brands, potential for improved support for core brands, challenges in obtaining financing (e.g., SBA loans), and regulatory compliance issues affecting franchise sales in some states.
• Employees are affected by the initiated headcount reduction in force in October 2025, leading to severance costs.
• Creditors benefit from the extension of debt maturity to August 1, 2027, and the application of divestiture proceeds to debt repayment, but face increased quarterly principal payments.
• Customers (members) may experience a more focused and potentially improved service offering from the company's core brands, but could also be impacted by studio closures or delays in new openings.

Next Steps

• Continue the restructuring plan throughout 2025, with expected additional charges of $7.3 million to $11.0 million.
• Confirm satisfaction of financing conditions for the Retail Supply Agreement with Fit Commerce, effective December 1, 2025.
• Continue cooperation with ongoing USAO, FTC, and NYAG investigations.
• Negotiate proposed settlement structure and material terms for the $25.0 million class action settlement with non-opt-out franchisees.
• Remediate material weaknesses in internal control over financial reporting.
• Address ongoing discussions with the Maryland Attorney General and the Virginia Division of Securities and Retail Franchising regarding franchise law compliance.
• Implement a headcount reduction in force in Q4 2025, expecting to incur approximately $850 thousand in termination charges.

Key Dates

Recommendation

Xponential Fitness is undergoing a significant strategic transformation, divesting non-core brands and implementing a restructuring plan to improve efficiency and focus. While these actions have led to a notable improvement in net loss and operating income, and increased Adjusted EBITDA, the underlying revenue growth is weak, with declines in equipment and merchandise sales and a slowdown in new studio openings and same-store sales. The company faces substantial ongoing legal and regulatory challenges, including multiple government investigations and class-action lawsuits, which introduce considerable uncertainty and financial risk (evidenced by increased legal accruals and impairment charges). Furthermore, persistent material weaknesses in internal controls are a red flag for investors. The new CEO's appointment is a positive, but the company's ability to execute its strategy, resolve legal issues, and fully remediate internal control deficiencies remains critical. A 'hold' recommendation reflects the mixed signals: potential for long-term improvement from strategic shifts, balanced against significant operational and legal headwinds that could hinder near-term performance and create volatility.

Keywords

Xponential Fitness, XPOF, Franchise, Boutique Fitness, Wellness, SEC 10-Q, Financial Results, Brand Divestitures, Impairment, Legal Proceedings, Regulatory Investigations, Internal Controls, Restructuring, Debt, Corporate Governance