Xponential Fitness (XPOF)

Boutique fitness studio franchisor Xponential Fitness (NYSE:XPOF) announced better-than-expected revenue in Q1 CY2025, but sales fell by 3.3% year on year to $76.88 million. The company expects the full year’s revenue to be around $320 million, close to analysts’ estimates. Its non-GAAP loss of $0.20 per share was significantly below analysts’ consensus estimates.

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 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.

Competitors offering fitness experiences include private company Equinox, Life Time (NYSE:LTH), and Planet Fitness (NYSE:PLNT).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, Xponential Fitness’s sales grew at an incredible 32.2% compounded annual growth rate over the last four years. Its growth beat the average consumer discretionary company and shows its offerings resonate with customers.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Xponential Fitness’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 9.3% over the last two years was well below its four-year trend. 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 57.1%, 14.4%, and 8.1% of revenue. Over the last two years, Xponential Fitness’s Franchise (royalty fees) and Equipment (workout equipment sold to franchisees) revenues averaged year-on-year growth of 20.3% and 4.4% while its Merchandise revenue (apparel sold to franchisees) averaged 2.6% declines.

This quarter, Xponential Fitness’s revenue fell by 3.3% year on year to $76.88 million but beat Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to grow 2.9% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Xponential Fitness’s operating margin has shrunk over the last 12 months, and it ended up breaking even over the last two years. Although this result isn’t good, the company’s elite historical revenue growth suggests it ramped up investments to capture market share. We’ll keep a close eye to see if this strategy pays off.

In Q1, Xponential Fitness generated an operating profit margin of 12.6%, up 3.3 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Xponential Fitness’s full-year earnings are still negative, it reduced its losses and improved its EPS by 17.3% annually over the last four years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Xponential Fitness reported EPS at negative $0.20, down from $0.16 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Xponential Fitness’s full-year EPS of negative $0.46 will flip to positive $1.13.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Xponential Fitness has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.4%, lousy for a consumer discretionary business.

Xponential Fitness’s free cash flow clocked in at $5.35 million in Q1, equivalent to a 7% margin. This result was good as its margin was 4.6 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Xponential Fitness’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 3.3% for the last 12 months will increase to 20.5%, it options for capital deployment (investments, share buybacks, etc.).

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Xponential Fitness’s five-year average ROIC was negative 30.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Xponential Fitness’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

Xponential Fitness reported $42.57 million of cash and $379.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $114.5 million of EBITDA over the last 12 months, we view Xponential Fitness’s 2.9× net-debt-to-EBITDA ratio as safe. We also see its $22.48 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Xponential Fitness narrowly top analysts’ revenue expectations this quarter. On the other hand, its EPS missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 9.4% to $7.90 immediately after reporting.

Updated: May 21, 2025 at 10:53 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Xponential Fitness isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last four years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its operating margins reveal poor profitability compared to other consumer discretionary companies.

Xponential Fitness’s P/E ratio based on the next 12 months is 7.4x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $13.30 on the company (compared to the current share price of $8.28).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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