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The following is an excerpt from This fund letter.
Exponential Fitness (NYSE:XPOF) is a franchisor of boutique fitness concepts such as Club Pilates, Pure Barre and Stretch Lab. The company’s shares have nearly tripled since November 2009 and it has been a popular stock market hit. The stock was expected to rise from its 2021 IPO to a high in 2023, but it became the target of prominent short sellers around the same time last year, causing its share price to plummet.
In this short report,
- Questioning the integrity of XPOF’s CEO
- They arbitrarily cherry-picked comments from disgruntled franchisees in certain industries to suggest that the entire business was at risk.
In May, XPOF’s CEO was fired and the stock price plummeted, so I took advantage of this weakness and bought a position.
Generally speaking, being a franchisor is a very good business, which explains why franchisors trade for more than 20 times EBITDA. If we were to assume that all franchisees had debt-financed 75% of their franchises during this decline and successfully sued XPOF to recover this debt, I estimate that XPOF would have traded at 12.5x its 2024 adjusted EBITDA guidance.
The idea that all franchises would be litigious was highly unrealistic because, first, many franchisees own multiple franchises and this is unlikely to be true if they are not happy with their first franchise. Second, information on franchisee/franchisor litigation is widely available, and XPOF’s average number of disputes through 2023 was less than 2 per 1,000 units. Importantly, Club Pilates, XPOF’s crown jewel, was litigious. Moreover, I believed that Club Pilates itself could be worth more in a private sale than the price the public market gave the entire portfolio of concepts.
Since we acquired them, the company has appointed a fantastic new CEO, made clear that it is open to selling underperforming businesses, and signaled that it is likely to undertake a share buyback in the near future.
Additionally, future growth is all but guaranteed as the number of global licenses sold far exceeds the number of global studios currently open. Importantly, this dynamic should cushion the business during an economic downturn as it gives licensees who have not yet opened studios an incentive to take advantage of favorable lease terms during the downturn. It is worth noting that XPOF has grown and gained market share through COVID while the industry has suffered.
While the stock has risen significantly since we purchased, there remains a great deal of uncertainty surrounding the business related to the SEC investigation initiated by the short report. I believe this investigation will resolve over time and the stock price will rise again. If XPOF continues to execute and capture the multiples of its franchise peers, the stock could rise 200%+ from here. If the market doubts the durability of the fitness concept and XPOF is trading at a discounted multiple, there is plenty of room for success.
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Disclaimer This document, being provided on a confidential basis, does not constitute an offer to sell or a solicitation of an offer to buy. An offer to sell or a solicitation of an offer to buy may only be made in jurisdictions where permitted by law upon receipt of the Confidential Private Placement Prospectus (CPOM)/Confidential Explanatory Prospectus (CEM) by eligible offerees. In the event of any conflict between the descriptions or terms of this document and the CPOM/CEM, the CPOM/CEM shall control. These securities may not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the law of that jurisdiction have been satisfied. This document is not intended for public use or distribution. All information prepared in this document is believed to be accurate, but Laughing Water Capital, LP, Laughing Water Capital II LP and LW Capital Management, LLC make no express warranty of completeness or accuracy and shall not be liable for any errors in the document. Investing in the funds/partnerships is speculative and involves a high degree of risk. Withdrawal/redemption opportunities and transferability of interests are limited, so investors may not be able to access capital when they need it. There is no secondary market for interests, and one is not expected to develop. The Portfolio is under the sole trading authority of the General Partner/Investment Manager. Some of the transactions carried out may be on exchanges outside the United States. Leverage may be used in the Portfolio, which may cause investment performance to be volatile. The Portfolio is concentrated and therefore subject to high volatility. Investors should not invest unless they are prepared to lose all or a substantial portion of their investment. Fees and expenses charged in connection with this investment may be higher than fees and expenses of other investment methods and may offset gains. There can be no assurance that the investment objective will be achieved. Furthermore, the past performance of the investment team should not be taken as an indication of future performance. Any projections, market outlooks or estimates in this document are forward-looking statements and are based on certain assumptions. Other events not considered may occur and could have a material effect on the returns or performance of the Fund/Partnership. Projections, outlooks or assumptions should not be taken as an indication of events that will actually occur. The enclosed materials are confidential and may not be reproduced or redistributed in whole or in part without the prior written consent of LW Capital Management, LLC. The information in this material is current as of the date indicated and may be superseded by subsequent market events or other reasons. Statements regarding financial market trends are based on current market conditions and will fluctuate. Any expressions of opinion constitute only the current opinions of Laughing Water Capital LP and Laughing Water Capital II LP, are subject to change, and Laughing Water Capital LP and Laughing Water Capital II LP are under no obligation to update. Due to the volatile nature of the market and otherwise, an investment in the Fund/Partnership may only be suitable for certain investors. Parties should independently research the investment strategy or manager and consult with qualified investment, legal and tax professionals before making any investment. The Fund/Partnership is not registered under the Investment Company Act of 1940, as amended, and relies on exemptions thereunder. Interests in the Funds/Partnerships have not been registered under the Securities Act of 1933, as amended, or any state securities laws and are offered and sold in reliance on exemptions from the registration requirements of such acts and statutes. The S&P 500 and Russell 2000 are indices of U.S. stocks. They are for informational purposes only and may not be representative of the types of investments the Funds may make. |
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
