Xponential Fitness
(Disclosure: long)
I’d seen this name float across my Substack feed a couple times previously and had added it to my research pile. So when my Twitter feed was lighting up with “$XPOF” after they reported earnings on March 2 I decided to move it to the top of the pile.
I wish I would have gotten around to it sooner!
XPOF is a boutique fitness studio franchisor with 10 brands1 and 2,641 studios globally, nearly all of them franchises (XPOF acquired a handful of studios from their frachisees during covid but plans to re-franchise them or shut them down in 2023). The business is currently heavily U.S.-based with 2,301 U.S. studios and 340 global studios, nearly all of which are under the BFT brand, which was XPOF’s latest acquisition in October 2021.
From their March 2023 investor deck:
For those unfamiliar, the franchise model means XPOF screens and selects entrepreneurs who wish to open a new studio under one of XPOF’s 10 brands. In return for a franchise fee, XPOF provides the entrepreneur with site selection and build out, studio-level management and instructor hiring and training, customer acquisition and ongoing operational analytics and support. XPOF then continues to take a 7% royalty on studio revenue for as long as the studio is operational.
The franchisee economics looks something like this:
This is an attractive model for the franchisor, XPOF in this case, because it is asset light (they don’t need to acquire real-estate to open new studios, their franchisees do that for them) meaning the the business is not very capital intensive, allowing for high returns on invested capital. The trade-off is they don’t have full control over studio operations, as that responsibility is devolved to the franchisee; however, obviously business incentives are aligned.
The franchise is commonly deployed in the restaurant industry. Some examples of successful franchises are Chick-Fil-A, McDonald’s and ACE Hardware.
I won’t get into the full financials and growth propects of the business here, but I’ll just say that I’ve been searching for a retail or restaurant concept to invest in for a long-time because I think they are relatively simple businesses to analyze and can be great investments. If you can find a situation where the unit economics are proven and attractive (i.e. individual stores are profitable and growing at maturity) and there is ample runway for growth in the number of locations, then you have an investment that can compound for a long time.
Beyond the financials, qualitatively I’m excited about XPOF for a few reasons.
The first is, unfortunately, their competition got decimated by covid. Boutique fitness studios were one of, if not the, hardest hit areas of the economy during lockdowns and a lot of individual owned and operated studios, as well as nation-wide gym locations, never re-opened. This is sad, but it also means XPOF is in a better competitive position now than in 2019, in my opinion.
Second, I like that they have a diversified portfolio of brands, 9/10 of which I’d never even heard of (Rumble was the only one I recognized) before researching the company, despite the fact that I’ve been pretty active in the boutique fitness scene in multiple big markets. To me this means that they are nowhere near saturated even in their mature markets, and also that there is opportunity for M&A to add brands going forward.
The brand diversification I think also makes them more robust to changing fitness trends. Everyone has heard the trope that investing in fitness fads is a terrible idea that has never worked. So when you compare XPOF with yoga, barre, spin, boxing, pilates, rowing, etc. in their portfolio against something like, say, Peloton, I think you’re a bit more insultated from changing consumer preferences.
Thirdly, anecdotally, post-covid I think a lot of gen z and millenial consumers have adopted these fitness studios as their place of community, replacing the workplace to some extent. When you work where you live, like a lot of us do now, you need excuses to get out of the house, exercise, and interact on a daily basis. I think fitness classes are filling those voids for a lot of people.
tZERO
(Disclosure: long TZROP)
tZERO is a digital securities exchange owned by Medici Ventures, which was Overstock’s blockchain-focused venture portfolio that was spun-out to Pelion Ventures in April 2021.
For the unitiated, “tZERO” or T-0 is a play on asset settlement cycles. Typically, in the U.S. when you trade a stock, for example, the trade settles T-2, meaning the cash for the trade is actually credited (sell) or debited (buy) to/from your account 2 business days after you make the trade. T-0 means the trade settles same-day — i.e. the trade is the settlement.
These elongated settlement cycles are also why you always have to wait 3-5 business days to move money around from one account to another. This standard creates a tremendous amount of trapped capital and inefficiency in our capital markets and economy. As one example, when I was managing portfolios at BlackRock and a client wanted to redeem money from their portfolio, we would need to sell the securities to raise the cash two days before they actually wanted it just so we would have it to give to them in time. However, we still needed to maintain the client’s market exposure over those two days, which meant we had to take leverage investing in futures and pay all the costs associated with that.
The reason this is the case is because it takes a bunch of time for assets to move through necessary clearing houses and third-party intermediaries. If you just thought “blockchain fixes this” you’re correct!
By tokenizing assets and having ownership verified and transferred via a blockchain, you can get rid of all the legacy intermediaries (who all need to get paid for their services, mind you!) and trades can settle instantly, peer-to-peer, 24/7. No more only being able to access your money M-F 9-5. Adopting this as a global standard for stock, bond, and forex markets would free up a tremedous amount of capital that is perpetually stuck in transit for productive uses and bring more efficiency to the global economy.
Blockchain technology is a faster, cheaper way to transfer ownership and, over time, faster and cheaper always win.
tZERO is a regulated digital securities exchange taking aim at this exact issue. Backed with a strategic investment by Intercontinental Exchange (ticker: ICE; operates the New York Stock Exchange) and run by former ICE Chief Strategy Officer David Goone, they’ve got some know-how at the wheel.
Today, businesses can list their securities on tZERO as an alternative to public market exchanges like the NYSE or NASDAQ. Currently, there are 7 securities listed and trading on the exchange:
The most liquid among them is tZERO’s own security, TZROP, which is preferred stock in the exchange. This is a security that was actually distributed to OSTK stockholders back in the day, but of course most institutions didn’t have the ability to hold it and so had to just firesale it OTC to the highest bidder. The offering documents are a little hard to parse through, but my understanding is TZROP holders are entitled to a quarterly dividend of 10% of tZERO’s adjusted gross revenues for the prior quarter.
Based on other filings I calculate that today there is closer to 31 million TZROP outstanding, which at $3.40/share = ~$105 million in TZROP market cap. I don’t know the price of the common stock so I’m unable to determine the total current valuation of the venture. I’ve bought a small amount just to experiment with the exchange and speculate on tZERO’s future.
The inevitable reality to me is that eventually all securities will be tokenized and trade and settle instantaneously on a blockchain, and tZERO represents a way to invest in that future along with having the backing of ICE (if you want public markets exposure to this theme, you can own ICE 0.00%↑ or OSTK 0.00%↑ which still owns a majority stake in tZERO).
I think this future, if it comes to pass, will represent a major step-change in global financial market access and opportunity. For example, it will no longer just be local investors with access to local stock markets — for the first time, a retail investor in Brazil will be able to own U.S. stocks directly (i.e. not through an ETF), and vice-versa.
One dirty little secret of the world is that the U.S. is home to the world’s best companies, but only U.S. investors and wealthy and connected foreign investors get access to invest in those companies. On a global scale, you are exceptionally privileged to even have the choice to invest in the equity of Apple or Amazon or Berkshire Hathaway. Tokenizing these securities will open up access to the whole world.
I believe Sam Bankman-Fried knew that the world is heading to global, 24/7 tokenized security trading and is why FTX offered tokenized stock trading and had a secret business relationship with IEX, and was likely trying to build that business and shut others out.
Now, tZERO is the only game in town.
Club Pilates, CycleBar, Stretch Lab, Row House, AKT, YogaSix, Pure Barre, Stride, Rumble, BFT