Backed by action movie star Mark Wahlberg and operating a fast-growing subscription model, newly public gym company F45 Training (FXLV) has seen a rapid stock market rise and equally swift fall following its Aug. 26 second-quarter 2021 earnings report. The company's revenue grew by over half year over year, yet its bottom line registered a loss, missing Wall Street consensus earnings-per-share (EPS) estimates by over a dollar. There are several reasons why Fools might want to remain cautious at this point, but also watch future developments closely.
Some metrics are looking strongly positive, others less so
On the bright side for F45 Training, its top line revenue rose 54% year over year, while its same-store sales grew by an explosive 126%. Most of the company's revenue for the quarter came from sales of franchises. Out of $26.8 million in net sales, $20.6 million came from franchise revenue, with 554 new franchises sold. Equipment sales accounted for the rest of its revenue.
During the company's Q2 earnings conference call, CEO Adam Gilchrist expressed his confidence that, "based on our white space analysis, we believe there is long-term studio potential for us to open over 7,000 studios in the U.S." He claims the overseas total will eventually reach 16,000, indicating a potential overall network of 23,000 franchises.
Image source: Getty Images.
Significantly for future growth, F45 is "actively pursuing potential opportunities to partner with major universities, high schools, corporations and military facilities" with "29 studios located in major university campuses" and "our first studio in the government military base in Miramar, California" according to Gilchrist.
On the downside, bottom-line net income was $5.9 million in Q2 2020, but in Q2 2021 had a $30.5 million net loss despite the all-time high revenue generated. F45's balance sheet reveals selling, general, and administrative expenses (SG&A) more than doubled year over year, which cut sharply into income. Quarterly net income from operations was $3.07 million this year versus $5.58 million last year.
What put overall net income into negative territory, however, was $23.1 million in losses on derivative liabilities, plus surging interest expense. As the company explained in its detailed 10-Q quarterly report to the SEC, these liabilities were a swap agreement used to hedge against its debt. When it launched its July 14 IPO, the debt liabilities were converted into 14.8 million shares of common stock, while their change in fair value was recorded as a loss on its balance sheet.
F45 has both advantages and disadvantages versus Peloton
F45 Training is competing against another significant fitness company, high-profile remote workout provider Peloton Interactive (PTON -1.26%). Peloton's long upward trajectory of growth seems to have faltered as America reopens, while problems with its treadmills have taken another bite out of its gains. This might represent an opportunity for F45.
Peloton may have an advantage in home workouts thanks to its prominence in the field and its large library of streaming content. Some research surveys suggest only a little more than 30% of pre-pandemic gym members have returned to physical gyms even with lockdowns lifted and COVID-19 vaccination widespread. One source indicates around 19% have canceled their memberships, and 40% more say they are mulling cancellation. Other data from an UpSwell Marketing survey, however, suggests 80% of former gym-goers are potentially ready to return to brick-and-mortar workout establishments.
Physical gyms can't duplicate the extreme scheduling flexibility, lack of judgmental third-party observers, and time-saving convenience of streaming workouts at home. But, although Peloton has a first-mover advantage in this field, F45 might challenge it here, too. The newly public gym company has its own home workouts, combined with a healthy meal plan backed up by online ordering.
In the physical space, F45's team workouts likely appeal to hardcore fitness enthusiasts looking for maximum motivation. Adding in the kaleidoscopic variety of workouts it offers against Peloton's limited bike or treadmill workouts gives even more of a possible edge to F45. F45 has over 6,000 exercises available, along with appropriate equipment. As the company noted, clients can theoretically choose to never have the same workout twice, while Peloton's selection is very limited because of its strategy of a very narrow, and online-only, focus.
The takeaway on F45 Training
With its mixed results, heavy dependence on franchise sales growth, and net loss, F45 appears to be a stock investors may want to be cautious about for the time being. With only one quarterly report as a public company, it seems much too early to go all-in on the company -- or to write it off entirely.
The enterprise has some significant assets, after all, including the camaraderie of its team workouts, plus its plethora of exercises. There are enough hints of a bull case to keep an eye on developments in F45's next few quarterly reports, but probably not enough at this stage to risk buying into the company at a significant level when choosing among consumer discretionary stocks in this sector.
