Xponential Fitness: International Expansion and Negative CAC Drive Growth
2023-07-30
Xponential Fitness recently held an earnings call meeting to discuss various aspects of the company's performance and operations. The meeting focused on topics such as consumer engagement, class availability, partnerships, and content development. During the call, the company expressed appreciation for the strong operational execution in the first quarter and acknowledged the contributions of franchisees and the Xponential Fitness team.
One of the key highlights of the meeting was the company's ability to handle increased consumer engagement and potential frictions in terms of class availability during peak hours. This demonstrates the company's commitment to providing a seamless experience for its customers and ensuring that they have access to classes when they need them.
Another intriguing topic discussed during the meeting was the company's success in generating leads and increasing the customer base for its franchisees. The CEO introduced the concept of negative Customer Acquisition Cost (CAC), which indicates that the company is effectively driving people to its brands through various channels such as cruise ships, social media, television, and high-end hotels. This signifies a strong focus on creating brand awareness and familiarity, ensuring that potential customers are already aware of the company's identity and value proposition when they encounter its physical locations.
The meeting also shed light on the company's international expansion efforts. The CEO mentioned that the average unit volumes (AUVs) in international markets are comparable to those in the US, indicating that the company's concepts are performing well globally. Specifically, the Rumble boxing franchise in Bondi Beach, Sydney was highlighted as a successful venture.
In conclusion, the company's ability to generate leads and expand its customer base, both domestically and internationally, emerged as a crucial aspect of its growth strategy. The negative CAC and successful international expansion demonstrate the company's effectiveness in reaching and attracting customers, positioning it for continued success in the future.
The company's market outlook summary revealed expectations of similar growth patterns in Average Unit Volume (AUV) from Q1 to Q2 compared to the previous year. While remaining conservative in their guidance for the second half of the year due to uncertainties in the macroeconomic environment, the company expressed openness to adjusting their guidance if favorable outcomes continue in Q2. Although potential headwinds in the second half were acknowledged, the company anticipates opening more locations domestically for their brand, BFT, in the coming years. Additionally, the company expects the B2B contribution to revenue to remain consistent at around 25% of other service revenue. Overall, the company maintains a conservative outlook while remaining optimistic about future growth opportunities.
During the meeting, the company highlighted several key drivers of its business, including the revenue share model, margin expansion and free cash flow conversion, and increasing same-store sales and average unit volumes (AUVs). These drivers play a crucial role in the company's financial performance and growth trajectory.
The company also shared its plans for product/service development. Capital expenditures of $10 million to $12 million were allocated for integrating BFT, developing new features for XPASS and XPLUS, and maintaining other technology investments to support the company's digital offerings. The company intends to continue its current approach to pricing and promotions, focusing on various marketing strategies to attract new customers. The integration with BFT is progressing as planned, operating similarly to their normal domestic business and MFAs. Furthermore, the company has ambitious plans to open 540 to 560 studios, with a majority of the openings in the domestic market, while expecting the domestic business to remain steady.
The meeting also highlighted several important Key Performance Indicators (KPIs) that were discussed. These included international openings, interest rates, royalty rate increases, and Average Unit Volume (AUV). The company emphasized the significance of expanding its business internationally as a reflection of its growth and expansion strategy. They also recognized the potential impact of interest rate increases on borrowing costs and profitability. Furthermore, the increase in royalty rates for certain brands indicated the success and profitability of these brands. Lastly, the company emphasized the importance of AUV as a threshold for justifying royalty fee increases, underscoring its significance in evaluating the financial performance of their brands.
In terms of the company's outlook for the quarter and year, they maintained a cautiously optimistic stance. Despite a strong first quarter, they expect similar growth patterns in Average Unit Volume (AUV) as the previous year. The company's conservative approach to guidance considers external factors, with adjustments made based on observed outcomes. While potential headwinds in the second half were acknowledged, the company remains prepared to adjust their guidance if favorable outcomes continue.
The company's capital spending plans for the year include approximately $10 million to $12 million in capital expenditures, representing around 4% of revenue at the midpoint. These expenditures will primarily focus on integrating BFT, developing new features for XPASS and XPLUS, and maintaining other technology investments to support the company's digital offerings.
The participation of analysts from renowned firms such as Raymond James, Citi, Evercore ISI, Lake Street Capital Markets, Robert W. Baird and Company, and ROTH Capital Partners further highlights the significance of the call. Their presence suggests that the meeting likely discussed Xponential Fitness's financial performance or other important updates.
During the call, the company also addressed its engagement with consumers and how it affects class availability and scheduling. They offer classes throughout the week, with options for virtual or on-demand classes to accommodate different scheduling demands. The company mentioned that if there is a backlog of customers, they can backfill with more expensive members who are willing to accommodate different scheduling demands. Additionally, the company is exploring challenges and other ways to engage members and prevent churn. The partnership with LG TV and the performance of the Mirror brand were also discussed, with thousands of downloads through the partnership noted, although it is too early to determine how many of those downloads will convert into sustained subscribers.
Overall, the earnings call meeting provided valuable insights into Xponential Fitness's performance, growth strategies, and future outlook. The company's ability to generate leads, expand its customer base, and effectively handle increased consumer engagement positions it for continued success in the dynamic fitness industry.