10-Q: Xponential Fitness Reports Q1 2025 Results, Navigates Legal Challenges and Strategic Restructuring

Xponential Fitness announces its Q1 2025 financial results, highlighting revenue shifts, ongoing legal proceedings, and strategic restructuring efforts to optimize franchise operations.

Summary

• Xponential Fitness, Inc. reported a net loss attributable to Xponential Fitness, Inc. of $(1.923) million for the three months ended March 31, 2025.
• Total revenue decreased by 3.5% to $76.883 million compared to $79.693 million for the same period in 2024.
• The company is actively managing legal challenges, including a securities class action lawsuit and government investigations, with accruals for estimated legal liabilities totaling $28.729 million.
• Xponential Fitness is continuing its restructuring plan, expecting additional charges between $5.2 million and $9.0 million throughout 2025, while anticipating annualized savings of $13.5 million to $15.5 million upon completion.
• The company amended its Credit Agreement, extending the final maturity date to August 1, 2027, and obtained additional term loans of $10 million.
• As of March 31, 2025, 2,806 studios were open in North America, and 492 studios were open internationally.
• Franchisees were contractually committed to open 1,509 additional studios in North America and 1,027 internationally.
• System-wide sales increased to $466.797 million, compared to $396.444 million in the same period last year.
• The company is managing a tax receivable agreement, with $87.896 million of the TRA liability not recorded as of March 31, 2025, pending a determination of the likelihood of realizing deferred tax assets.
• The company is facing challenges with franchise sales due to ongoing inquiries from state regulators, which has slowed growth.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While there are positives such as franchise revenue growth and strategic restructuring, the negatives, including revenue decline, increased expenses, and ongoing legal challenges, balance the overall outlook.

Positives

• Franchise revenue increased by 5.1%, indicating strength in the core franchising business.
• System-wide sales increased to $466.797 million, compared to $396.444 million in the same period last year.
• The amendment to the Credit Agreement extends the debt maturity to August 1, 2027, providing financial flexibility.
• The restructuring plan is expected to yield annualized savings of $13.5 million to $15.5 million upon completion.
• The company obtained a waiver related to EBITDA levels as the Credit Agreement did not contain active exceptions for non-recurring legal expenses.

Negatives

• Total revenue decreased by 3.5% year-over-year, primarily due to declines in equipment and merchandise revenue.
• Selling, general, and administrative expenses increased by 24.4%, largely due to higher legal expenses.
• The company recognized ROU asset impairment charges of $1.915 million during the quarter.
• The company is actively involved in legal proceedings, with $28.729 million accrued for estimated legal liabilities.
• The company is facing challenges with franchise sales due to ongoing inquiries from state regulators, which has slowed growth.

Risks

• Ongoing legal proceedings and government investigations could result in material adverse effects on the company's business, financial condition, or cash flows.
• Delays in franchise sales due to regulatory inquiries could reduce anticipated royalty and franchise revenue.
• The restructuring plan may not achieve the anticipated cost savings and benefits.
• Macroeconomic factors such as inflation and recession could impact franchisee performance and consumer spending.
• The company's debt levels and compliance with covenants could be affected by various factors, including economic conditions and market factors.

Future Outlook

The company expects to recognize additional restructuring charges throughout 2025 totaling between approximately $5.2 million to $9.0 million. The company is focused on pure franchise operations and long-term margin goals.

Management Comments

• The divestiture allows the Company to better focus and utilize its resources on its other brands.

Industry Context

Xponential Fitness operates in the boutique fitness industry, which has seen increasing demand for specialized workout experiences. The company's performance is influenced by consumer spending trends, competition from other fitness and entertainment options, and macroeconomic factors.

Comparison to Industry Standards

• Comparable companies in the fitness franchising space include Planet Fitness, Anytime Fitness, and F45 Training.
• Planet Fitness, known for its high-volume, low-price model, reported total revenue of $286.5 million in Q1 2024, with a net income of $45.3 million.
• Anytime Fitness, a global franchise, has over 5,000 locations worldwide and focuses on convenience and accessibility.
• F45 Training, specializing in high-intensity interval training, has faced financial challenges and restructuring efforts, impacting its growth trajectory.
• Xponential Fitness's diversified brand portfolio and focus on boutique fitness concepts differentiate it from some competitors, but it also faces challenges related to managing multiple brands and ensuring franchisee success.

Legal Proceedings

• The Company is involved in a federal securities class action lawsuit filed against the Company and certain of the Company's officers in the United States District Court for the Central District of California.
• The Company is involved in a shareholder derivative lawsuit was filed in the United States District Court for the Central District of California by Gideon Akande, allegedly on behalf of Xponential Fitness, Inc., against certain current officers and directors as defendants, and Xponential Fitness, Inc., as nominal defendant, for alleged wrongdoing committed by the individual defendants from July 26, 2021 to December 7, 2023.
• The Company received a letter from plaintiffs counsel purporting to represent unspecified current and former franchisees requesting settlement discussions.
• The Company received a complaint on behalf of a putative nationwide class alleging violations of the Telephone Consumer Protection Act.
• The Company was contacted by the Securities and Exchange Commission (the SEC), requesting that the Company provide it with certain information and documents.
• The Company received notice of an investigation by the U.S. Attorneys Office for the Central District of California (the USAO).
• The Company received a civil investigative demand from the United States Federal Trade Commission (the FTC).
• The Company received a subpoena from the Office of the Attorney General of the State of New York (the NYAG).

Related Party Transactions

• The Company recorded franchise, equipment and marketing fund revenue aggregating $3,113 and $2,104 , during the three months ended March 31, 2025 and 2024, respectively, from studios owned by Spartan Fitness.

Stakeholder Impact

• Shareholders: The company's financial performance and legal challenges could impact shareholder value.
• Franchisees: The company's restructuring plan and regulatory inquiries could affect franchisee operations and profitability.
• Employees: The company's restructuring plan could result in job losses or changes in compensation and benefits.
• Customers: The company's ability to provide quality fitness services could be affected by financial challenges and operational changes.
• Creditors: The company's debt levels and compliance with covenants could impact its ability to repay debt obligations.

Next Steps

• Continue to manage and resolve ongoing legal proceedings and government investigations.
• Execute the restructuring plan to achieve cost savings and focus on franchise operations.
• Address challenges with franchise sales due to regulatory inquiries.
• Monitor and manage debt levels and compliance with covenants.
• Support franchisees in increasing same-store sales and improving studio performance.

Key Dates

Keywords

Xponential Fitness, financial results, franchise revenue, legal proceedings, restructuring, credit agreement, system-wide sales, EBITDA, debt, franchise