Xponential Fitness Stock Is a Play on Reopenings, and Growth

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Exponential gains stand out as more people are able and willing to exercise in groups indoors.

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Sarayuth Punnasuriyaporn/Dreamstime.com

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Businesses of all kinds benefit from the reopening of the economy, including those gathering in public, especially indoors. Exponential Fitness could be a winner within that group as well.

According to Gregory Kitt, investment, general partner for Pinnacle Family Office Investments, returning gyms can boost the stock (ticker: XPOF) and help the company double in size. He said he prefers it to other gym stocks like Planet Fitness (PLNT), as the company is growing rapidly.

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As of the end of September, Exponential had 1,907 gyms or studios globally. It could open “100% more stores in the next five years,” he said.

Exponential bought some of its franchise units during the pandemic. Kitt said the company is committed to restarting all units that are not profitable, or at least breaking even, by the end of this year. Exponential Management on its third-quarter earnings conference call committed to restarting or closing all non-strategic corporate-owned studios by the end of the year, a spokesperson said.

If Exponential meets this commitment, investors will see lower operating expenses next year by revamping the high-cost gym, he added.

“I like franchise concepts because they can generate a lot of cash,” Kitt said.

Dallas’s Pinnacle is the family office of Barry Kitt, father of Gregory Kitt, who controlled the hedge fund The Pinnacle Fund. Big man Hedge fund closed in 2010 Pinnacle to focus on the family office, which invests the family money.

Pinnacle primarily focuses on small-cap stocks; It invested in Exponential in July for $12 a share. “It’s been a really good investment for us,” said Gregory Kitt, who describes himself as a former gym rat.

Shares of Exponential, based in Irvine, Calif., have risen nearly 82% since going public in July, at $12 per share. They closed on Monday at $21.79. Planet Fitness stock is down 7% from its close at $96 earlier this month, but has gained about 13% since October 18.

Launched in 2017, Xponential bought fitness brands such as Pure Barre, Club Pilates, Rumble and Yoga Six. Exponential announced its 10th acquisition last month, adding body fit training, an Australian fitness franchisor, for $44 million.

Kitt not only likes Exponential’s rapid growth compared to other fitness businesses, but he also sees a short path to profitability. He added that Exponential’s individual studios can reach the break on an operational basis much faster than many other franchise concepts. The studio is expected to generate cash-on-cash returns – a ratio comparison Total cash earned plus total cash invested– 40% in year two.

Xponential also earns a percentage of franchised studio revenue in the form of royalties, while other franchise concepts receive a flat fee annually. “Xponential’s percentage royalty fee is more favorable to franchisees over the life of a new studio and allows Xponential to continue to generate more high-margin royalty revenue as the studio grows over time,” he said.

Last week, Exponential reported that losses increased to $8.9 million, or 38 cents per share, for the third quarter, from $1.9 million in the same quarter a year ago. The company increased its outlook for store opening, revenue, and earnings before interest, taxes, depreciation and amortization for the year ended December 31., This Now 230 to 250 new studios are expected to open, compared to 215 to 235 studios expected.

Exponential forecasts revenue of $147 million to $148.5 million, up from its previous guidance of $135.5 million to $137 million. Earnings before interest, taxes, depreciation, and amortization, or EBITDA, are expected to jump from $25 million to $26 million, compared with estimates of $22 million to $23 million.

Analysts expect Exponential to report revenue of $201 million in 2022, with EBITDA of $68 million and net income of $34 million. Calls for 2021 are for revenue of $148 million, EBITDA of $25.5 million and a net loss of $25 million.

“They aren’t profitable right now, but they will be profitable next year,” Kitt said.

The only danger is if gyms and businesses close again due to another pandemic, or a worsening of the current one, he said. “That would be the biggest risk,” Kitt said.

Exponential, which has $25.5 million in cash and $100 million in debt, spends most of its money buying the brand. Kitt hopes they will have “a lot of cash” in the future, which will make it possible to return capital to shareholders through share repurchases or dividends.

He said Exponential could bring in $250 million in revenue in 2024, while EBITDA could grow to $100 million. “We think Exponential could be a $40 stock in 2024,” Kitt said.

Improvements and Amplifications: Exponential Fitness has 1,907 studios. An earlier version of this article incorrectly stated that they had 1,839.

Write to Louisa Beltran at [email protected]

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