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Tuesday, Sep 26, 2023

Xponential Takes Hit On Short-Seller Report

Xponential Fitness Inc. (NYSE: XPOF) spent much of this year and last being the only Orange County company, among more than a dozen, to have more than doubled its share price since going public in 2021.

That all changed on June 26, when a short seller called Fuzzy Panda Research issued an 11,000-word report, alleging the Irvine-based boutique fitness franchiser is a “house of cards” that’s misrepresented the health of its franchisees and omitted past business practices of CEO Anthony Geisler.

Xponential’s stock fell 38% to $15.72 a share for a market cap of about $785 million the day after the report.

The company responded two days later, calling Fuzzy Panda’s report “misleading” and “inaccurate.” Its stock that day rebounded to close at $17.13.

At press time, shares in Xponential hovered around $17.80 apiece for an $880 million market cap.

The company went public in July 2021 at a price of $12 a share.

Growing Portfolio

Geisler has more than two decades in the health club space, including purchasing LA Boxing, a boutique boxing gym in Costa Mesa; he sold the brand for an undisclosed amount in 2012.

In 2015, Geisler purchased Club Pilates, which served as the platform on which he founded Xponential.

Club Pilates is now a part of Xponential along with other acquired brands like Pure Barre, Row House and YogaSix. The 10 brands under the company’s umbrella offer a variety of exercises like indoor cycling, barre, stretching, rowing, dancing, boxing, running, functional training and yoga.

Xponential has created partnerships with companies like Lululemon Athletica Inc. (Nasdaq: LULU) and Princess Cruises, a brand of Carnival Corp. (NYSE: CCL).

In 2021, Xponential found a believer in Michael Dell, founder of Dell Technologies Inc., one of the world’s largest tech companies. MSD Partners, the family office of Dell, was part of a group that bought $200 million of Xponential’s stock in a private placement and also lent the boutique fitness firm $212 million.

MSD Partners has “strong confidence” in Xponential, a source with knowledge of MSD told the Business Journal. The source added that MSD has increased its lending to Xponential, which has remained in good standing on all covenants under the terms of its financing agreement.

Nowadays, Xponential calls itself the world’s largest franchiser of boutique fitness brands.

The franchiser operates 2,750 studios globally, including nearly 2,000 studios that were open continuously for at least 13 months.

The Business Journal honored Geisler with an Excellence in Entrepreneurship Award in early 2021, and after Xponential’s successful IPO later that year, he was named a Businessperson of the Year.

In an interview earlier this year, Geisler told the Business Journal that his childhood pastime of distributing flyers for his mom’s cleaning company taught him “that entrepreneurial mindset of having to wake up every day and bust your butt for an honest living.”

Penny Stock CEO?

A short seller typically buys put options on a company, betting its shares will fall within a certain time period. Research-oriented short sellers often release a report on their targeted company to generate negative publicity and profit from a falling stock.

A man who responded to an email to Fuzzy Panda declined to reveal his name when he spoke to the Business Journal. He said he’s been active in the stock market for about 15 years.

His prior short attacks have been on plant biotechnology company 22nd Century Group Inc., cannabis company Terra Tech, electric vehicle maker Fisker Inc. and EV startup Workhorse. Both Fisker and Terra Tech count ties to OC.

The short trader, who has more than 19,000 followers on Twitter, cited an ABC documentary that alleged wrongdoing involving a penny stock company called Interactive Solutions Corp. where Geisler was the CEO in the early 2000s.

When Xponential filed a prospectus before going public, Geisler’s role at Interactive Solutions wasn’t disclosed. Xponential told Citibank analyst James Hardiman that while Geisler was CEO at Interactive, he was “briefly interviewed by authorities, which cleared him of any wrongdoing.”

The report on Xponential also ­contained comments from disgruntled franchisee owners who requested to be anonymous, citing a fear of retaliation.

Company, Analysts Defenses

Xponential pushed back on many of the claims made by Fuzzy Panda.

“I’ve known and worked closely with Anthony Geisler … since investing in Club Pilates at my prior firm,” Chairman Mark Grabowski said in a statement. “I couldn’t speak more highly of his passion, commitment to excellence and professionalism.”

“While some of the information released was indeed concerning, other information was misleading/inaccurate and we disagree with the primary contention that most units are unprofitable and most brands are in distress,” George Kelly, an analyst at Newport Beach Roth MKM, the largest investment bank based in Orange County, wrote in a note to investors.

“We would take advantage of weakness,” said Kelly, who while reiterating a buy, reduced his target price to $32 from $40.

Xponential has 12 analysts with a “consensus strong buy” and a $36.55 target price, according to Nasdaq.com. They expect the company’s sales to grow 22% this year to $300 million and another 17% next year to $351 million.

Baird analyst Jonathan Komp said Fuzzy Panda’s claims appeared overblown; however, he lowered its price target from $36 to $23 due to the company’s “new sentiment overhang.”
Other analysts wrote similar reports downplaying the allegations, including Citibank, Morgan Stanley, Evercore ISI, B. Riley and Jefferies.

When Fuzzy Panda was asked why none of the 12 analysts who cover Xponential have made similar claims as he did, he said it was because they were sell-side analysts who didn’t have the time to do in-depth reporting.

Franchisee Analysis

Fuzzy Panda also alleged that Xponential hides its failing franchisees from investors.
The short seller said it believes the company actively excludes underperforming stores to manipulate its quarterly financial results—specifically, its quarterly run-rate average unit volume (AUV) and same-store sales growth.

Xponential’s reported AUV has steadily increased over the past year, from $450,000 in the first quarter 2022 to $542,000 in the most recent first quarter. Its posted AUV has also seen consistent growth on a year-over-year basis.

“Studios with zero sales in the period have always been excluded in the calculation,” the franchiser said. “Inclusion of these studios would not result in a difference.”

Xponential hasn’t yet said when it will release second-quarter results, which are typically issued in the first two weeks of August.

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