Xponential Fitness (XPOF): Can Operational Reinvention Overcome Franchise Headwinds?

Xponential Fitness (XPOF), a leading operator of boutique fitness brands like Club Pilates and Pure Barre, faces a pivotal crossroads. After years of aggressive expansion, the company is now shifting gears to prioritize operational efficiency and franchisee health. The question is: Can this pivot stabilize its financials and justify a buy rating, or are the risks of underperforming brands and franchisee struggles too great?

Closure Rates: A Critical Litmus Test

XPOF's Q1 2025 results revealed a stark reality: a 6% annualized studio closure rate, with 51 closures concentrated in weaker brands like StretchLab and CycleBar. While management aims to reduce closures to the “low to mid-single digits” by year-end, this requires addressing systemic issues. Over one-third of licensed studios globally are lagging behind development schedules, prompting a campaign to terminate underperforming licenses—a move that could boost EBITDA through accelerated revenue recognition.

The closure rate remains a red flag. If not curbed, elevated closures could erode system-wide sales growth, which are projected to rise only 13% in 2025. Investors must monitor whether the new field operations team, now 12 managers strong, can deliver results. These teams, reallocated from corporate roles, audit studios, enforce operational standards, and support underperforming franchisees. Early signs are mixed: Average Unit Volumes (AUVs) rose 8% to $659,000 in Q1, but same-store sales grew just 4%, down from 9% a year earlier.

The Field Operations Gamble

The field operations initiative is central to XPOF's turnaround. By embedding managers directly with franchisees, the company aims to replicate successes seen in its top brands—Club Pilates and Yoga Six—while reviving weaker ones. For instance, StretchLab is experimenting with smaller studios, adjusted pricing, and labor models to improve profitability.

However, execution risks loom large. The team's effectiveness hinges on its ability to quickly address operational gaps without adding costs. Early savings from HQ reorganization (e.g., reduced legal settlements and SG&A) are offset by lingering debt ($379 million) and litigation accruals ($25 million). The May 2025 Analyst Day provided little clarity on near-term closure reduction targets, leaving investors to question whether the pivot is a long-term bet or a stopgap.

Brand Turnaround: The StretchLab Struggle

StretchLab, once a growth star, now exemplifies XPOF's challenges. Despite strong consumer reviews, operational inefficiencies—like oversized studios and high labor costs—are dragging performance. Management's plan to test smaller formats and pricing tiers is a start, but results may take “several quarters” to materialize. Meanwhile, CycleBar's closures suggest market saturation in some regions, raising concerns about the company's ability to turn around weaker brands without costly restructurings.

In contrast, Club Pilates continues to drive momentum. Accounting for over half of 2025's projected net new openings, it benefits from strong franchisee demand and private equity interest. This bifurcation between core and struggling brands highlights the need for disciplined portfolio management.

Financial Health: Margins Matter

XPOF's Q1 2025 adjusted EBITDA fell 9% to $27.3 million, but management expects a 5% annual increase to $120–$125 million by year-end. This relies on stabilizing franchisee health, reducing closures, and accelerating license sales. With North American system-wide sales projected to grow 13% in 2025, the path to margin expansion is clear—if operational fixes take hold.

Risks: Franchisee Health and Tariff Exposure

The company's reliance on franchisees makes their financial health existential. Elevated closures and delayed openings in weaker brands could strain relationships, especially as XPOF tightens licensing terms. Additionally, tariff risks remain, though the cost-plus pricing model is designed to pass through input cost increases.

International expansion—particularly in Asia—adds execution complexity. While markets like Spain and Japan show promise, scaling without replicating U.S. operational issues will require careful oversight.

Investment Thesis: A Cautionary Buy

XPOF's stock trades at $13.84, below the $14.86 consensus target, reflecting skepticism about its turnaround. The key bullish case rests on three pillars:
1. Field operations delivering closure reductions, stabilizing AUVs and same-store sales.
2. Core brands (Club Pilates, Yoga Six) driving predictable growth, offsetting weaker segments.
3. Debt reduction and margin recovery, supported by EBITDA growth and settlements.

However, risks are substantial:
- Near-term EPS volatility due to legal costs and delayed openings.
- Uncertainty around StretchLab's turnaround timeline.
- Competitor encroachment in the $40 billion boutique fitness market.

Final Verdict

XPOF's operational pivot is a necessary gamble. While its focus on franchisee support and portfolio optimization aligns with long-term health, execution remains unproven. For investors with a multi-year horizon and tolerance for volatility, the stock could offer asymmetric upside if closures decline and margins stabilize. However, with valuation multiples stretched relative to peers, a cautious buy rating is warranted, with a price target of $16–$18.

Monitor closely: EBITDA trends, closure rates by quarter, and the Analyst Day's follow-up updates. Without clear progress on these fronts, the risks may outweigh the rewards.