Boutique fitness studio franchisor Xponential Fitness (NYSE:XPOF) reported revenue ahead of Wall Street’s expectations in Q3 CY2024, but sales were flat year on year at $80.49 million. On the other hand, the company’s full-year revenue guidance of $315 million at the midpoint came in slightly below analysts’ estimates. Its non-GAAP loss of $0.04 per share was 113% below analysts’ consensus estimates.

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“Following my first 100 days, I’m looking forward to sharing my vision for the Company with all of you this afternoon,” said Mark King, CEO of Xponential Fitness.

Company Overview

Owner of CycleBar, Rumble, and Club Pilates, Xponential Fitness (NYSE:XPOF) is a boutique fitness brand offering diverse and specialized exercise experiences.

Leisure Facilities

Leisure facilities companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted their spending from "things" to "experiences". Leisure facilities seek to benefit but must innovate to do so because of the industry's high competition and capital intensity.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last four years, Xponential Fitness grew its sales at an incredible 31.6% compounded annual growth rate. This is a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or emerging trend. Xponential Fitness’s annualized revenue growth of 21% over the last two years is below its four-year trend, but we still think the results were good and suggest demand was strong. Note that COVID hurt Xponential Fitness’s business in 2020 and part of 2021, and it bounced back in a big way thereafter.

We can dig further into the company’s revenue dynamics by analyzing its three most important segments: Franchise, Equipment, and Merchandise, which are 55.2%, 0%, and 0% of revenue. Over the last two years, Xponential Fitness’s revenues in all three segments increased. Its Franchise revenue (royalty fees) averaged year-on-year growth of 26.3% while its Equipment (workout equipment sold to franchisees) and Merchandise (apparel sold to franchisees) revenues averaged 11.7% and 1.3%.

This quarter, Xponential Fitness’s $80.49 million of revenue was flat year on year but beat Wall Street’s estimates by 5.3%.

Looking ahead, sell-side analysts expect revenue to grow 1.8% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and shows the market thinks its products and services will see some demand headwinds.

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Cash Is King

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Xponential Fitness has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.2%, subpar for a consumer discretionary business.

Xponential Fitness’s free cash flow clocked in at $3.39 million in Q3, equivalent to a 4.2% margin. The company’s cash profitability regressed as it was 3 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Xponential Fitness’s cash conversion will improve. Their consensus estimates imply its breakeven free cash flow margin for the last 12 months will increase to 20.3%, giving it more optionality.

Key Takeaways from Xponential Fitness’s Q3 Results

Xponential Fitness exceeded analysts’ revenue expectations this quarter, but its Franchise sales (the most lucrative part of its business) fell short of Wall Street’s estimates. This helped contribute to an EPS miss as profitability was lower. Overall, this quarter could have been better. The stock traded down 2% to $12.45 immediately after reporting.

Xponential Fitness didn’t show it’s best hand this quarter, but does that create an opportunity to buy the stock right now? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.