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CEO Leaves Xponential; Company Cites Probe

Xponential Fitness Inc. (NYSE: XPOF) on May 10 said it indefinitely suspended founder Anthony Geisler as chief executive, after reporting a federal criminal investigation into the company­.

The Irvine-based fitness studio franchiser said that on May 7, it received notice of an investigation by the United States Attorney’s Office (USAO) for the Central District of California. The details of the probe weren’t disclosed.

Xponential had previously disclosed an investigation by the Securities and Exchange Commission (SEC) in December. The company’s board has formed a special committee of directors to investigate both matters.

After the news was announced at noon Pacific Standard Time May 10, the shares dropped 32% in the last hour of trading to $8.50 apiece. At press time, the shares traded around $8.84 and $427 million market cap.

After the company went public in 2021 at $12 a share, it soared to as high as $33 each and a market cap that topped $1 billion.

Xponential has about 3,156 studios at its 10 fitness brands, such as Rumble, AKT and Club Pilates; earlier this year it acquired Irvine-based Lindora and 31 of its weight management clinics.

While Geisler did not comment on the specifics of the investigations, he told the Business Journal that he is stepping down as CEO and spoke optimistically of the change in leadership.

“Since I founded Xponential Fitness in 2017, we built the company into the largest global franchiser of boutique fitness brands. I am incredibly proud of all that we accomplished and excited to go build what’s next for me,” Geisler told the Business Journal.

“Although I am stepping down as CEO, I will do everything in my power to help Xponential Fitness continue on its path of success and clear its name, as the new leadership team manages the company’s pending subpoenas with the U.S. Attorney’s Office and the Securities and Exchange Commission.”

No Defense

The last time Xponential shares suffered such a big decline was 38% last June when a short trader called Fuzzy Panda Research issued an 11,000-word report claiming the company was “a house of cards” that’s misrepresented the health of its franchisees and omitted past business practices of Geisler.

After the Fuzzy Panda report last year, Xponential Chairman Mark Grabowski praised Geisler, saying “I couldn’t speak more highly of his passion, commitment to excellence and professionalism.”

Grabowski is the company’s largest shareholder, with 22% of the Class A common stock; the May 10 stock drop caused a one-day drop of $26.4 million to his Xponential holdings, which now total about $60.8 million.

In the May 10 statement, Grabowski said nothing about Geisler, who owns 2% of the Class A shares.

Instead, Grabowski praised the firm’s interim CEO Brenda Morris, who joined the board in 2019.

“Over the last five years, Brenda has been a deeply involved board member as we have pursued Xponential’s mission to make health and wellness accessible to everyone,” Grabowski said in a statement.

“The board and I have every confidence that Brenda will be an excellent leader during this period, and we look forward to working alongside her.”

Morris, 58, counts more than 37 years in board and executive roles, including well-known local companies such as a board director at Irvine-based Boot Barn Holdings Inc. (NYSE: BOOT) and chief financial officer at Costa Mesa-based 5.11 Tactical. Morris is currently a partner at CSuite Financial Partners, an executive services firm.

The operator said it has also retained an executive search firm to find a new CEO.

Retained Outlook

Only a week before, Xponential on May 2 reported its first-quarter revenue rose 12% to $79.5 million; it reported adjusted EBITDA climbed 30% to $29.8 million from the same period a year ago.

“2024 is off to a strong start,” Geisler told analysts on a conference call. “Xponential had another strong quarter as we execute against our four key growth drivers: selling franchises, opening studios, increasing AUVs, and optimizing SG&A.”

After announcing the leadership shift, Xponential reaffirmed its full-year 2024 guidance of opening between 540 to 560 new studio locations and achieving around $1.7 billion in North America systemwide sales. Xponential said the latter would mark the highest North America systemwide sales in the company’s history.

What exactly the federal investigation is about hasn’t yet been revealed. Analysts said they are waiting for more details to appear.

“If there were broader implications, one would think there would be more executives impacted, and they wouldn’t be going out and maintaining guidance,” Joseph Altobello, a managing director at Raymond James & Associates, told the Business Journal.

“It does give us some confidence,” the analyst added.

Altobello had a “strong buy” rating for Xponential following its first-quarter results with a target price of $30. After Geisler’s removal, Raymond James on May 12 placed its rating, target price and estimates under review.

Another firm, Piper Sandler, lowered its price target from $12 to $9.

Altobello noted the first SEC investigation most likely concerned allegations about Xponential’s key performance indicators and it could be related to the probe by federal prosecutors.

“There’s not enough information to have enough confidence to have a rating or forecast out there,” Altobello said. “I don’t think this was on anyone’s bingo card.”

He added the current focus is for any sign from the company about the target of the investigation.

“We’re not sure what the endgame is.”

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