Xponential Fitness Inc. aims to get back in shape on Wall Street.
An 18-month investigation by the Securities and Exchange Commission ended July 1 with no action taken, according to a July 2 filing.
Shares jumped 35% to $10.10 in the trading session after the regulatory news was revealed. At press time, the stock traded at $10.42 and a $506 million market cap.
Founder and former Chief Executive Anthony Geisler said he was glad to see the end of the probe.
“I’m pleased that the SEC has completed its investigation of Xponential Fitness and declined to bring any actions against the company or anyone else — and that this matter is rightfully closed,” Geisler told the Business Journal in a statement.
The controversy erupted two years ago when a short trader questioned the franchisor’s business model. A separate federal probe soon followed, leading to a whirlwind of changes at Xponential, including the exit of Geisler and other top executives. The controversies led to a stock that lost three-fourths of its value, falling from more than $33 two years ago to below $7 last March.
Irvine-based Xponential has 3,298 studios as of May across eight fitness and wellness brands, such as Rumble Boxing, CycleBar, Club Pilates and Lindora.
Analysts are expecting flat sales this year at $319 million.
The investigation closure removed “a major overhang on the stock” and “clears the path forward,” according to Jefferies analyst Randal Konik.
“The company had fully cooperated with the inquiry, and this resolution effectively removes a key legal/regulatory uncertainty that had been weighing on the stock,” Konik wrote in a note to investors on July 2.
“With this uncertainty cleared and a renewed strategic focus under new leadership, we expect investor sentiment to improve.”
No Longer Fuzzy
The company, which Geisler began in 2017, went public in 2021 and its market cap topped $1 billion in 2023.
In June 2023, Xponential was hobbled when a controversial short trader named Fuzzy Panda issued an 11,000-word report claiming the company misrepresented the health of its franchisees and omitted past business practices of Geisler.
Short traders benefit when stocks fall. After the report was released, the stock fell 37% in one day to $15.72.
The franchisor was first notified of the investigation in December 2023 when the SEC requested certain documents, the filing said.
In May 2024, it received notice of another federal investigation by the United States Attorney’s Office (USAO); Geisler subsequently resigned. At press time, the status of this investigation hasn’t been revealed publicly.
A month later, the company appointed Mark King, Taco Bell’s previous leader, as CEO in June.
The fact that a well-regarded executive dismissed the short trader’s accusations sent a message of confidence to investors as the stock rebounded to over $18.
King told analysts his goal was to build an infrastructure with improved processes “that will ensure Xponential scales in a long-term, sustainable manner.”
Xponential eventually restated its 2023 financial statements to correct “accounting errors primarily related to accrued inventory, 401(k) compliance, purchase accounting, and vendor rebates.” The company added that the restatement was not a result of any changes to operations or business performance.
Xponential’s problems were a “lack of the right structure, capabilities and process,” he told analysts in March.
“They represent a combination of rapid scaling and lack of organizational maturity,” King said.
Stabilizing Business, Restarting Growth
However, King also hinted that there might be more problems.
“We have found and may continue to find legacy operational issues that need to be addressed. Some of these are and might continue to be reflected in our financial results. Our hope is that they won’t be material,” he said.
His improvement plans include hiring executives “who know how to profitably scale companies,” appointing field managers to support franchisees and using more companywide data.
“I think what we’re in the middle of is really a transformation of our business from a very aggressive sales-focused company to one that’s building a foundation of efficiency and effectiveness,” he said during the Q1 earnings call in May.
This should allow the business to stabilize and return to growth, according to Chief Financial Officer John Meloun.
However, on May 15, King announced plans to retire as CEO due to health reasons; the shares that day dropped 11% to $8.75.
“I helped stabilize the company through a focus on franchisee health and creating a customer-centric culture and laid out a strategy for the next phase of growth,” King said in a statement.
“On behalf of the entire Board of Directors, I commend Mark for his contributions and dedication to supporting franchisees and his positive impact on the Company,” Chairman Mark Grabowski added.
In the Rear-View Mirror
Raymond James analyst Joseph Altobello said after the announcement that King “has generally been a very much needed stabilizing force.”
“It was our understanding that the SEC’s investigation was focused largely on XPOF’s key performance indicators – items like same-store sales, new store openings, etc. – and how they were defined and measured rather than the company’s financials,” analyst Altobello said after it ended.
“Nonetheless, putting this uncertainty in the rear-view mirror is one (albeit large) step forward in XPOF’s efforts to move beyond some of the drama that has surrounded the company in recent years, which we believe has significantly weighed on the stock and valuation; thus, it should result in a welcome increased investor focus on fundamentals.”
Jefferies has a price target of $26 for Xponential with a “buy” rating and Raymond James rates the fitness company as a “strong buy” with a target price of $15.
King will stay on until a successor is found.
Geisler recently launched his second fitness venture called Sequel Brands.