Xponential Fitness, Inc. (NYSE:XPOF) Q1 2024 Earnings Call Transcript

Xponential Fitness, Inc. (NYSE:XPOF) Q1 2024 Earnings Call Transcript May 4, 2024

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Operator: Greetings, and welcome to the Xponential Fitness First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Avery Wannemacher from investor relations. Thank you. You may begin.

Avery Wannemacher: Thank you, operator. Good afternoon and thank you all for joining our conference call to discuss Xponential Fitness first quarter 2024 financial results. I am joined by Anthony Geisler, Chief Executive Officer; Sarah Luna, President; and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These are forward-looking statements based on management’s current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations.

For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided on today’s call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. Please also note that all numbers reported in today’s prepared remarks refer to global figures, unless otherwise noted.

I will now turn the call over to Anthony Geisler, Chief Executive Officer of Xponential Fitness.

Anthony Geisler : Thanks, Avery, and thank you all for joining us this afternoon. After closing 2023 with solid momentum, we’ve had a strong start to 2024 with adjusted EBITDA margins expanding to 38% of revenue, fueled by continued growth in our studio footprint and leaner operating expenses. As of the end of Q1, we had 3,156 studios operating globally with 6,365 licenses sold across our portfolio. In the first quarter, we have completed the acquisition of Lindora and are on plan with the integration activities. As Sarah will speak to shortly, we are very encouraged with the initial demand for Lindora franchises. We have already sold almost 40 licenses since we started selling Lindora in March, and we are particularly encouraged to see the strong demand coming from both existing and new franchisee groups.

During the quarter, total members in North America grew 17% year-over-year to 783,000, while our total visits increased 18% to a total of 14.9 million in studio visits for Q1. This drove North American system-wide sales to over $400 million in the quarter, an increase of 25% over the first quarter of 2023. North American run rate average unit volumes of $596,000 in the first quarter increased 9% from $547,000 in the prior-year period, while same-store sales increased 9% for Q1. Same-store sales for studios older than 36 months came in at 10%, primarily due to continued growth in our scaled brands. During the first quarter, net revenues totaled $79.5 million, an increase of 12% year-over-year. Adjusted EBITDA totaled $29.8 million or 38% of revenue, up 30% from $22.9 million or 32% of revenue in the first quarter of 2023.

As we discussed previously, optimizing growth in existing studios drives profitability in our asset-light, highly leverageable franchising model. In addition, along with our transition studio strategy shift complete, we remain firmly on track to reach our targeted 40% adjusted EBITDA margins this year and growing to 45% by 2026. Let’s now discuss another key growth driver, the increase of our franchise studio base. We ended the quarter with 3,156 global open studios opening 111 gross new studios during Q1 with 85 in North America and 26 in international markets. As mentioned on our last call and in line with typical seasonality cadence, we expect openings to be more back-end weighted with a gradual increase in each quarter of 2024. We currently have over 400 North American leases and LOIs signed for studios not yet open, which result in new studios in the coming quarters.

We sold 173 licenses globally in the first quarter, and our pipeline remains robust with almost 2,000 licenses sold and contractually obligated to open in North America, plus an additional over 1,000 master franchise agreement obligations. We also continue to expand our overall TAM. Along with the growing addressable market for our brands, the acquisition of Lindora has increased our access to the broader health and wellness market. Buxton’s latest analysis illustrates our current TAM in the United States alone is approximately 8,400 studios. Buxton estimates room for an additional over 800 Club Pilates locations in the United States, and Lindora is now included at over 1,000 potential locations. As Xponential continues to grow, we continue to focus on optimization of our portfolio of brands and remain open to opportunities to both acquire and divest brands that align with the desired long-term growth trajectories of our business.

At this time, we are not including any further locations for AKT or Row House in the 8,400 location TAM estimate, and STRIDE has been removed from TAM also following its divestiture in the first quarter. Turning to our international expansion efforts; at the end of the first quarter, we have over 1,000 studios obligated to open under master franchise agreements. In April, we opened our 400th international studio. We are starting to build a significant presence in select international markets, which will help drive consumer awareness and economies of scale. For example, we have over 220 studios in Australia. In Japan, we now have 50 Club Pilates studios open. The same master franchisee who has overseen development of those 50 locations has an additional 115 Club Pilates locations to be developed in Japan, 130 locations to be developed across our CycleBar, Rumble, and AKT brands in Japan, as well as development rights in Singapore.

Our recently hired International President and team have been focused on supporting our existing master franchise relationships, while continuing to seek out new markets for our brand’s expansion. In the first quarter alone, our master franchisees sold 53 new sub-franchise licenses. Our international business made up 31% of license sales and 23% of new openings in the first quarter. I’d also like to mention how pleased we are to have recently completed our first board meeting with our newest director, Jeffrey Lawrence. Jeff brings decades of leadership experience at some of the most well-known consumer brands. In addition to his deep financial acumen and track record of value creation, he brings expertise in executing franchise expansions on a global scale.

Jeff previously served as Executive Vice President and Chief Financial Officer at Domino’s Pizza, where he supported the brand through its technological transformation and global expansion, and he currently serves on the Board of Shake Shack. We expect he will be a great asset to Xponential, as we continue expanding globally, and I look forward to working with him on our strategic initiatives moving forward. In summary, Xponential had another strong quarter, as we execute against our four key growth drivers; selling franchises, opening studios, increasing AUVs, and optimizing SG&A. And with that, I’ll pass the call on to Sarah.

Sarah Luna: Thank you, Anthony. Our studios are a critical part of our members’ routines and their continued interest in our brands is demonstrated by our first quarter total visits and total actively paying members in North America. We saw strong growth in both metrics, both overall and at a per studio level. Total actively paying members and total visits both grew by 18% year-over-year. Average active members per studio and average studio visits per member also increased, while membership freezes remained low, declining year-over-year. Running a portfolio of consumer-facing brands, it is imperative that we keep the consumer’s interest front of mind and ensure offerings and class formats remain relevant to what members are looking for.

Changing a class format to one that better aligns with our members’ interest is one way we can produce a meaningful positive change in AUV. We introduced a new strength-focused class format at CycleBar in January, which has been received very positively. On average, CycleBar’s that adopted this class format witnessed a strong increase in AUVs during Q1. Similarly, Pure Barre Studios that have adopted the new strength training class format, Define, have exhibited strong increases. We’re also excited about the growth prospects of our newest brand, Lindora. Xponential is now approved to sell Lindora in 44 states, and we have launched the brand across major broker networks. As Anthony mentioned, since beginning to sell the brand in March of this year, we’ve already sold almost 40 licenses.

In Q1, we put a Lindora specific team in place that is ready to lead the charge for growth. In addition to growing the number of Lindora locations, we also have several initiatives underway to improve service and product offerings, as well as the overall customer experience to ultimately drive higher AUVs and unit level profitability. Our existing Lindora locations have seen month-over-month gross revenue increase every month since our January acquisition. We are currently expanding hormone replacement therapy, or HRT, and testosterone replacement therapy, or TRT, across the Lindora studio base. HRT is a medical treatment used to balance and supplement hormone levels in the body, which can involve replacing hormones that the body is no longer producing adequately, or adding hormones to address specific health concerns.

TRT is used primarily to address symptoms of low testosterone levels in men. Lindora offers HRT and TRT services through recurring memberships, subject to a prescription provided by a licensed medical professional. Finally, we are in the process of constructing a mobile app and upgrading Lindora’s website to improve our members’ experience, enhance marketing, and accelerate lead generation. I’ll now turn the call over to John to discuss our quarterly financial results in more detail. John?

John Meloun: Thanks, Sarah, and thank you to everyone for joining the call. First quarter North America system-wide sales of $401.1 million were up 25% year-over-year. The growth in North American system-wide sales was driven by the 9% same-store sales within our existing base of open studios that continue to acquire new members, as well as new studio openings. Further, 96% of the system-wide sales growth came from volume, or new members, which has remained consistent with historical performance, and 4% coming from price. We are still anticipating same-store sales will normalize to mid-to-high single-digit percentages in 2024. On a consolidated basis, revenue for the quarter was $79.5 million, up 12% year-over-year. 73% of revenue for the quarter was recurring, which we define as including all revenue streams, except for franchise territory fee revenues and equipment revenues given these materially occur upfront before a studio opens.

All five of the components that make up our revenue grew during the quarter. Franchise revenue was $41.8 million, up 27% year-over-year. This growth was primarily driven by an increase in royalty revenue, as system-wide sales reached all-time highs. In addition, an increase in franchise territory fee revenue was due to accelerated revenue recognition on terminated licenses, including those from the STRIDE brand. Equipment revenue was $13.9 million, up 6% year-over-year. This increase in equipment revenue is the result of a higher mix of equipment-intensive brands, which have a higher price point compared to the same period prior year. Merchandise revenue was $8.2 million, up 14% year-over-year. The increase during the quarter was primarily driven by a higher number of operating studios and inventory purchases by existing studios to address the demand for retail as consumer foot traffic has grown compared to the prior year.

Franchise marketing fund revenue of $7.8 million was up 26% year-over-year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America. Lastly, other service revenue, which includes sales generated from company-owned transition studios, rebates from processing studio system-wide sales, B2B partnerships, XPASS and XPLUS, among other items was $7.9 million, down 30% from the prior-year period. The decline in the period was primarily due to our strategic move away from company-owned transition studios last year, resulting in lower other service revenues. Importantly, the savings related to the studio operating expenses exceeded the decline in revenue, resulting in improved EBITDA margins. Turning to our operating expenses, costs of product revenue were $14.4 million, up 3% year-over-year.

The increase was primarily driven by a higher volume of equipment installations for new studio openings and a higher mix of equipment-intensive brands in the period, as well as increased cost of goods sold on higher merchandise revenues. Costs of franchise and service revenue were $5.1 million, up 27% year-over-year. The increase was driven by higher franchise sales commissions that were accelerated from terminated licenses, including those from the STRIDE brand. Selling, general, and administrative expenses of $37.2 million were up 7% year-over-year. The increase in SG&A was primarily associated with restructuring costs from settling leases on company-owned transition studios where we have ceased operations. As previously discussed, we have shifted our strategy on company-owned transition studios, which will decrease run rate SG&A expenses and improve EBITDA margins.

The number of company-owned transition studios have declined from 86 at the end of the first quarter of 2023 to only one studio remaining as of the end of the first quarter of 2024. With some of these studios having been refranchised to new owners and some having been closed permanently, the net operating losses associated with the company-owned transition studios have been materially eliminated. For the non-operating lease liabilities that are being treated as one-time restructuring, we are planning to enter settlement agreements with landlords by the end of the year. The investments we are making to streamline operations back to a pure franchise model will optimize forward-looking SG&A expenses, resulting in enhanced margin levels. Depreciation and amortization expenses were $4.4 million, an increase of 6% from the prior-year period.

Marketing fund expenses were $6.5 million, up 30% year-over-year, driven by increased spending because of higher franchise marketing fund revenue. As a reminder, each of our franchise locations contributes 2% of sales to our marketing fund. Therefore, as the number of studios and system-wide sales grow, our marketing fund increases. Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into increase in marketing fund expenses over time. Acquisition and transaction expenses were $4.5 million, down 71% from the first quarter of 2023. As I have noted on prior earnings calls, this includes the contingent consideration activity, which is related to the Rumble acquisition earn-out, and is driven by the share price at quarter end.

We mark-to-market the earn-out each quarter and accrue for the earn-out. We recorded a net loss of $4.4 million in the first quarter, or a loss of $0.30 per basic share, compared to a net loss of $15 million, or a loss of $1.38 per basic share in the prior-year period. The improved net loss was a result of $5.6 million of higher overall profitability, an $11.2 million decrease in non-cash contingent consideration, primarily related to the Rumble acquisition, and a $2.1 million decrease in non-cash equity-based compensation expense, offset by an $8.1 million increase in restructuring costs from our company-owned transition studio, and a $0.3 million increase in loss on brand divestiture. We continue to believe that adjusted net income is a more useful way to measure the performance of our business.

A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the first quarter was $9.1 million, which excludes the $4.5 million in acquisition and transaction expenses, primarily related to the non-cash contingent consideration for the Rumble acquisition, $0.6 million related to the first quarter re-measurement of the company’s tax receivable agreement, $0.3 million related to the loss on divestiture of STRIDE, and the $8.1 million restructuring and related charges. This results in adjusted net earnings of $0.15 per basic share on a share count of 31.1 million shares of Class A common stock, after adjusting for income attributable to non-controlling interest and dividends on preferred shares.

Adjusted EBITDA was $29.8 million in the first quarter, up 30% compared to $22.9 million in the prior-year period. Adjusted EBITDA margin grew to approximately 38% in the first quarter, compared to 32% in the prior-year period. As Anthony mentioned, we have positioned the company for higher margins and increased operating leverage going forward, and we continue to expect margins to reach 40% this year. An attractive element of our franchise business model is the ability to generate substantial free cash flow. During Q1, our unlevered free cash flow conversion exceeded 90% of adjusted EBITDA, as we required minimal capital expenditures to grow the business. It is worth mentioning that the company has approximately $160 million in federal and state net tax loss carry-forwards that will result in a minimal cash tax burden for the coming years.

Our anticipated interest expense in 2024 will be approximately $45 million, assuming no additional debt pay-down, and we assume negligible working capital impacts on cash flow. For the full year, we would expect levered adjusted EBITDA cash flow conversion of over 60%, excluding any effects for preferred dividends and one-time restructuring, and will convert to over 70% in the coming years. We will continue to prioritize cash usage on settling leases from our transition studios. As we make progress on settling these leases, we will assess when the appropriate time will be to begin executing on our stock repurchase program. Turning to the balance sheet; as of March 31, 2024, cash, cash equivalents and restricted cash were $27.2 million, down from $28.1 million as of March 31, 2023.

Material cash usage in the period included the $8.5 million acquisition of Lindora and the previously discussed $4.5 million restructuring lease settlements. Total long-term debt was $331.4 million as of March 31, 2024, compared to $266.7 million as of March 31, 2023. The increase in total long-term debt is primarily due to the repurchase and immediate retirement of approximately 2.6 million shares under our accelerated share repurchase program in Q3 and Q4 of 2023. Let’s now discuss our outlook for 2024. Based on current business conditions and our expectations as of the date of this call, we are reiterating guidance for the current year as follows. We expect 2024 global new studio openings to be in the range of 540 to 560. This range is in line with prior-year studio openings.

We project North America system-wide sales to range from $1.705 billion to $1.715 billion, or a 22% increase at the midpoint from the prior year and the highest North America system-wide sales in our history. Total 2024 revenue is expected to be between $340 million to $350 million, an 8% year-over-year increase at the midpoint of our guided range. Adjusted EBITDA is expected to range from $136 million to $140 million, a 31% year-over-year increase at the midpoint of our guided range. This range translates into roughly 40% adjusted EBITDA margin at the midpoint. We anticipate revenue, adjusted EBITDA and new studio openings will gradually increase throughout the year, similar to the ramps in 2023, and we continue to anticipate same-store sales will normalize to a high single-digit by the fourth quarter.

We expect total SG&A to range from $135 million to $140 million range, or $110 million to $115 million range when excluding the one-time lease restructuring charges, and under $100 million when further excluding stock-based costs. In terms of capital expenditure, we anticipate approximately $9 million to $11 million for the year, or approximately 3% of revenue at the midpoint. Going forward, capital expenditure will be primarily focused on the integration of Lindora and maintenance on other technology investments to support our digital offerings. For the full year, our tax rate is expected to be mid-to-high single digits, share count for purposes of earnings per share calculation to be 31.5 million, and $1.9 million in quarterly dividends to be paid related to our convertible preferred stock.

A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculation can be found in the tables at the back of our earnings press release, as well as our corporate structure and capitalization FAQ on our investor website. This concludes today’s prepared remarks. Thank you all for your time today. We will now open the call for any questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from John Heinbockel from Guggenheim Partners. Please go ahead.

John Heinbockel: Hey, John, I wanted to start with, I know you talked about the free cash flow conversion rate, but maybe talk about the dollar amount, right? So, I think the idea might have been $60 million or 65 million of free cash flow dollars in 2024. Is that about the right number? And then sort of suggested your commentary that will be focused on debt reduction with no buyback this year, right, or minimal buyback. And then what’s the latest thought on timing of possibly a financing? Do you think that’s very late this year or not likely at all?

John Meloun: A couple questions there. So, the first part about the cash production, yes, so that the cash generation this year is going to be around that $65 million range. The use of cash, and again, this is pre-restructuring, right, the intent of how we deploy the cash is going to be to address the lease liabilities, first and foremost, on the transition studios. As far as the stock repurchase, there is the opportunity for us to do some of the repurchasing in the second half of the year, as we talked about in the last earnings call, but we want to prioritize getting rid of the lease liabilities first. In regards to a refinancing, we did get an extension done earlier this year throughout 2026. We are continuing to monitor and look at interest rates and look at opportunities for us to get a refinancing done that would allow us to take advantage of lower interest rates as they start to set in.

Obviously, with some of the more recent announcements, it seems like they’re kind of holding flat, but we are looking at opportunities and where we could potentially draw down on the interest rate and get out more of a long-term fixed financing in place at a much cheaper cost.

John Heinbockel: And then maybe secondly for Anthony, right, if you think about the 1,000 locations that Buxton has for Lindora, I’m sort of curious, how do you think that stage is? I know you’ve sold 40 and you got to sell them, right, they’ll be front-loaded selling and then you’ll open them later. But how do you think that plays out, right, over the next two or three years? And I guess, does that cannibalize at all franchisees’ interest in opening other brands or do you think, no, it just, because it expands the TAM, there’s no cannibalization on selling other licenses?

Anthony Geisler: No, there’s definitely no cannibalization on selling other licenses, and the majority of our franchise sales come from about 500 plus franchise sales brokers we have, independents across the country. And they’re generating new lead flow of people that are not in the exponential system; people that could be looking at, well, anything franchised kind of across the country. So, there’s definitely no cannibalization in there. Buxton has a high level of integrity in what they do and they do their TAM work, and so, we tend to see the numbers be very conservative with them. For instance, original Club Pilates was just a bit short of 1,000 in total and today we’ve got about 50% more than that even pre-sold, right, with 1,000 already open.

And so, what we find is that we’re very constrictive in the beginning on how many we sell, where we sell them, and as we get those stores out and get them open, we see AUVs be stable and increase, then we’re willing to release more and more TAMs. So, if you look at kind of Club Pilates now, several years later, Club Pilates TAM continues to increase by about 100-ish or so new units every year on the TAM. So, we expect the Club Pilates TAM will get to 2,000. Buxton’s comment to us when they ran the cohorts for Lindora, based on the Lindora current membership, that they were synonymous with StretchLab and Club Pilates. So, we expect that we will see the TAM of Lindora head to those numbers, which will be somewhere in the 1,500 to 2,000 range over time, provided that we get out, we get the stores open, but the 40 — close to 40 you’re seeing today that are sold, you’ll start to see those open, some of those open in Q4 most likely of this year.

So, that’s probably what you would see.

John Heinbockel: All right. Thank you.

Operator: Thank you. The next question comes from Megan Alexander from Morgan Stanley. Please go ahead.

Megan Alexander: Hey, good afternoon. Thanks for taking our question. I wanted to ask about the comp a little bit. You talked about a low double-digit type expectation when you guided in February, so were you running low double-digit then and did the comp decelerate over the balance of the quarter, or were you expecting the comp to accelerate and it didn’t? I guess, can you just give us a little bit more color over the cadence of that comp during the quarter, and maybe what drove the downside versus your expectations?

Sarah Luna: Sure. I can jump in on that one. So, for studios that were over 36 months of maturity, we did see double-digit same-store sales comp. The majority at 9% or the system at 9%, it was a little bit lower than what we were aiming for. We mentioned in our Q4 call that we expected this number to normalize from the 2023 mid-teens growth rates to double-digit — to the low double and high single growth rates in 2024. But really what we saw in Q1 was we had a great quarter from a KPI standpoint. So, visitations and membership trends were high, freezes were low, but we did see a pull forward in packages sold in Q4, primarily in StretchLab, as well as Pure Barre, who had really successful Black Friday promotions. So, we did see a little bit of pull forward that will start to normalize over the next quarter or so.

Megan Alexander: Okay. And then, John, I think you talked about normalizing still to that high-single-digit type level by the end of the year. I mean, depending on your definition, 9% could be high-single digit. So, has your expectation for 2Q to 4Q changed at all on the comp? And how should we think about — maybe can you talk a little bit about the exit rate and how should we think about 2Q?

John Meloun: Yeah. I think when you look from Q1 to Q2, how to think about it, I think what — the assumption that I’m using right now based on the information is you’ll probably see something similar to Q1 in Q2. It will stay flat is the assumption I’m using. Again, it really comes down to the packages that were sold in Q4 between Pure Barre and StretchLab when those people either re-up or if they join as members, and then that will be kind of a — because of the size and scale that will be an influencer in Q2. I do believe for the full year that you’re still looking in the mid-to-high single digits by Q4, but the overall year, I still believe it’s going to be a high-single-digit same-store sales comp.

Megan Alexander: Got it. Thank you.

Operator: Thank you. Your next question comes from Ryan Meyers from Lake Street Capital Markets. Please go ahead.

Ryan Meyers: Hey, guys, thanks for taking my questions. First one for me, Anthony, you talked about adding strength into CycleBar and Pure Barre that drove sort of the AUV during the quarter. I’m just wondering what kind of optionality you guys have to do that within other brands.

Anthony Geisler: Well, I mean, some brands like BFT obviously already have it. And so, we don’t really need to drive that into Club Pilates today. So, we’d be putting it into those brands where it makes sense, where it wasn’t, which kind of drives really all that we have today. We already have strength training in brands like Row House and things of that nature. So, we won’t be, of course, doing it in anything like Lindora or StretchLab or things of that nature. So, that’s where we are on that.

Ryan Meyers: Got it. And then just wondering if you can talk about if you’ve seen any changes to the opening mix by brand, as we progress throughout this year, and then maybe how you think about that into next year, especially as now that we have the Lindora acquisition.

John Meloun: Yeah, I could take that. In Q1, one of the largest openers was Club Pilates. It actually was the highest number of openings domestically for Club Pilates in the last five quarters. So, it was a little bit over-indexed in CP in Q1. I think when you look at the overall mix in 2024, as we go through the quarters, you’ll see about a third of the openings still being Club Pilates, which is very similar to last year. And then as you move forward, StretchLab will make up about 25% of the mix. And then YogaSix has shown really strong performance from an AUV perspective lately, but also from an openings perspective. I think that will be in the 5% to 10% range of the total openings. And then both Rumble and BFT, I think will be in the 5% to 10% range for this year.

And then the balance is made up of the other brands. So, when you look at it, a third Club Pilates, maybe about 25% StretchLab, and then between YogaSix, Rumble, and BFT, about 5% to 10% of the total mix. So, you’re seeing kind of a concentration of the openings among those brands.

Ryan Meyers: Got it. Thank you for taking my questions.

John Meloun: Yeah.

Operator: Thank you. The next question comes from Jonathan Komp from Baird. Please go ahead.

Jon Komp: Yeah, thank you. Good afternoon. John, if I could follow up just on the full year profit outlook. I know that the full year is for about 40% adjusted EBITDA margin. So, could you maybe just share any more insights or any other color to call out as we think about the progression from mid-37% in Q1 to 40% for the year?

John Meloun: Yeah. It hasn’t changed much from the first earnings call or I guess, the last earnings call, the Q4 one of last year. We said mid-to-high 35% to 40% in Q1. It should get close to crossing 40%, if not crossing 40% in Q2. Q2 to Q3 will be relatively flat. The summer months are a little bit more. If you look at the cadence of how 2023 performed, you’ll see Q2 and Q3 stay relatively flat in performance to each other. And then in Q4, we have a lot of lights or a lot of equipment installs that happen in Q4, which is a little bit margin dilutive being that they range in that 30% to 35% margin range. So, it has a little bit of a dilutive impact on top of our national conferences in the fourth quarter. So, you’ll see 38% in Q1.

Expect to see north of 40% to — low 40% in Q2 and Q3, and then in Q4, it will be pulled back a little bit, because of the convention and just the equipment installed dilution in the fourth quarter. And then when you roll into 2025, you’ll see it be in the mid-to-low 40% range and climb from there over the next eight quarters, as we still are on track to achieving the 45% by 2026. So, it will be a kind of a grind from here each quarter getting a 1% or 2% better from a cadence perspective.

Jon Komp: Okay, great. And then just one separate question maybe for Anthony or Sarah. We noticed the FDDs this year included concept-level monthly churn, which I believe was new. Just wanted to maybe follow up, but I don’t know if you could share any color as we think about differences in churn by concept, maybe what drives with that. And maybe it’s a follow-up, as you think about churn overall across the system, any comments on what you’re seeing or any trends, positive or negative, from a churn perspective? Thank you.

John Meloun: Yeah, I’ll take the lead on this one. When you look at the brands, I mean, on average, you’re seeing somewhere between 5% to 7% churn across the brands and those are really in the core brands is where you see that. And then — but we typically look at churn from 12 months — or after 12 months because that’s really when the core customer is kind of attached to the brand or their location. In that case, you see attrition rates in the low-single percentage digits. We always look at between 2% to 4%. When you look at it within 12 months, I mean, you get your New Year’s resolution type people that come in, you get your vacation type people that are trying to get ready for summer months, weddings, those kind of things. So, you do see in that, let’s call it, 5% to 7% churn on some of our more scaled brands. But when you look at the post-12 months kind of core consumer, it’s the low-single percentage digits on a monthly basis.

Jon Komp: And has that held stable in the last few quarters and into 2024, any changes that you’ve noticed?

John Meloun: Yeah. When we look at the trends, you really haven’t seen, even since kind of post-COVID, the consumer kind of behaviors have been very stable. Even from a freeze perspective, an attrition perspective, it’s been very consistent. So, we haven’t seen overall trade-downs in what the consumers are spending. So, if you look at a four-pack, eight-pack unlimited, what we are seeing is up there, we’re getting more price on a pack in Q1 of 2024 versus Q1 of 2023. But the consumers on what they’re purchasing or their wallet spend has been up, as we’ve progressed through the quarter. So, in essence, we’re able to take a little bit more price as new members come on, old members are traded out, because utilization and capacity is less. In the studios, we’re getting more wallet share on the new consumers than we did a year ago, but very stable utilization and very stable kind of visit patterns from the consumer.

Jon Komp: Okay. Thanks, again.

Operator: Thank you. Your next question comes from Chris O’Cull from Stifel. Please go ahead.

Chris O’Cull: Thanks. Good afternoon. John, just as a follow-up to an earlier comment, is the comp currently trending similar to the first quarter level or does it need to improve to get to that level?

John Meloun: Comp in Q2 is what you’re asking for?

Chris O’Cull: Yes.

John Meloun: Yeah. I haven’t provided any, like, forward-looking Q2 comments, but the assumption that we’re looking for is that Q2 will be similar to Q1 from a comp perspective. And then I still see the full year around that high single-digit, but I do expect as we roll into Q4, it will taper down to the mid-to-high singles. When you look at what comps were pre-COVID, the eight quarters pre-COVID is in a much more normal environment, they averaged 8%, the eight quarters prior to COVID. So, that’s kind of the assumption that I’m using going forward in my model is that they will, you know, even though they’re at 9%, they were modeling 9% for Q2, I think getting back to that, let’s call it, 5% to 8% by Q4, again, being somewhat conservative in the way I do my modeling, is the assumption I’m using.