Xponential Fitness Inc (XPOF) 2022 Q4 法說會逐字稿

Greetings, and welcome to the Xponential Fitness, Inc. Fourth Quarter and Fiscal Year 2022 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) If anyone should require operator assistance during the load. As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Kimberly Esterkin from Investor Relations. Thank you, and you may begin.

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' Fourth Quarter and Full Year 2022 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 forward-looking statements are 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.

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our fourth quarter earnings conference call. I'll begin today's discussion with an overview of our quarterly performance and operational highlights. Sara will then speak further about our progress against our core growth strategies. John will conclude with a review of our fourth quarter financials and provide our 2023 outlook.

As will be evident from the results we discussed today, 2022 was another successful year for Xponential. For the year, we achieved double-digit growth across North America membership, same-store sales and AUVs, all of which are representative of the fact that boutique fitness is considered a must-have, not discretionary spend by studio members.

The demand for our offerings is demonstrated by our North American studios generating over $1 billion in system-wide sales in 2022. We are especially encouraged by the fact that our mature studio cohorts still exhibit strong same-store sales growth and have a profile that's similar to our younger studios.

For the full year, North American studios over 3 years old comped at 25% same-store sales growth, and more recently, in the fourth quarter of 2022, North American studios over 3 years old comped at 18% same-store sales growth. While we do expect this percentage to come down over time as growth profiles normalize, we are encouraged to see this level of performance. It is clear from these numbers that each year, Xponential continues to raise the bar on its operational performance and deliver on its financial results and 2022 was no exception. Together, we have built a resilient business, and I want to thank every one of our franchisees and employees. All your hard work has enabled Xponential to reach record annual results and to continue to deliver on its mission to make boutique fitness accessible to everyone.

I had the opportunity to meet with a large number of our franchisees this past December at our annual franchise convention in Las Vegas. Over 2,000 enthusiastic attendees gathered to share best practices and discuss innovative ways to promote the growth of our brands. We are seeing this excitement reinforce in the momentum we are already experiencing in early 2023. As the largest boutique fitness franchisor globally with franchisees operating over 2,600 studios, we have grown our studio footprint by 24% year-over-year. We now have a combination of franchise, master franchise and international license agreements in place in 16 countries and will continue to grow our footprint globally.

Turning to our membership performance. Total members across North America increased by approximately 32% year-over-year in 2022 to a total of 590,000. This momentum in membership growth has carried into 2023. And in the month of January, we officially surpassed 600,000 North American members. With nearly 90% of these customers on reoccurring membership packages, these figures are representative of the long-term growth of a passionate, loyal customer base.

As our membership base has grown, so too have visits to our studios. North American studio visits for the 12 months ending in December 2022 increased by 32% year-over-year, reaching a total of 39.2 million. Increased utilization at studios resulted in record North American system-wide sales. North American systemwide sales increased 46% in 2022 and surpassed $1 billion annual sales for the first time in Xponential's history.

We believe that our studio's quarterly run rate average unit volumes or quarterly AUVs ultimately offer the most direct measure of the health of our franchise system. We ended 2022 with fourth quarter run rate North American AUVs of $522,000, up from $446,000 in Q4 of 2021. This represents the 10th straight quarter of AUV growth. While we don't know maximum AUV potential, we know that our studios have plenty of capacity to add more members and classes. The strong same-store sales exhibited by even our more mature cohorts that I discussed earlier make us confident in our studios growth prospects.

Turning to revenue. For the year, we posted net revenue of approximately $245 million, an increase of 58% year-over-year. Adjusted EBITDA for 2022 totaled $74.3 million or 30.3% of revenue, an increase of 172% from $27.3 million or 17.6% of revenue in the prior year period. With that as a background, let's turn to our strategic growth areas. I'll discuss the first 3 levers of our growth plan and then turn the call over to Sarah to discuss the fourth.

Let's begin with increasing our franchise studio base. We ended Q4 with 2,641 global open studios, opening 156 net new studios in the fourth quarter alone. For the full year, we opened 511 net new studios globally or a new studio opening approximately every 17 hours. We also experienced strong demand for our franchise licenses, selling 257 licenses globally in Q4, bringing total sold licenses to 5,450.

In North America, we have almost 2,000 licenses sold and contractually obligated to open, offering us multiyear visibility into our growth. Keep in mind that over time, as we continue to sell through prime geographic territories in each of our existing brands, we would eventually need to acquire another brand to maintain this elevated run rate of license sales.

Turning to our second growth driver, expanding internationally. On the international front, we have over 1,000 studios obligated to be opened, and we continue to gain traction. In November, we announced a master franchise agreement in Portugal to license Club Pilates Studios. Then in December, we announced a master franchise agreement in Japan for our Rumble and AKT brands to open a minimum of 100 new studios across both brands. As a reminder, our MFAs are structured to provide Xponential with high-margin flow-through, given that we require minimal incremental SG&A to support MFA growth.

Our third key growth driver is to expand margins and drive free cash flow conversion. As our business continues to grow, we are increasingly reaping the benefits of our asset-light scalable operating model, providing us with consistent and growing margin performance. We are especially pleased with where our adjusted EBITDA margins ended for the year. We continue to expect our adjusted EBITDA margins to expand into the 35% to 39% range in 2023, and we remain on track to achieve our adjusted EBITDA margin target of 40% in 2024.

Our boutique in studio offerings are exactly what consumers post pandemic are gravitating toward. Consumers have shifted their interest towards smaller classes that offer community and entertainment in a safe, healthy environment. Our members come to our studios not only to work out but also to socialize with one another and studio staff. It's this sense of community that makes our studio membership so sticky and why the thought of giving up one studio membership equates with also giving up a community and a lifestyle. People are just not willing to make that trade-off.

Furthermore, as our brands and community continue to grow, we are increasingly capitalizing on opportunities to engage with consumers far beyond just the physical studio space. As Sarah will discuss shortly, our B2B XPLUS and XPASS offerings are great examples of how we are increasingly engaging with our consumers in a more holistic omnichannel way.

With that, I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same-store sales and AUVs.

Thank you, Anthony. In the fourth quarter, not only did we continue to drive strong in studio performance. But as Anthony just mentioned, we also further established Xponentials omnichannel fitness offering. Throughout the year, we welcome numerous B2B partners while also enhancing our XPASS and XPLUS offerings. The success of our omnichannel fitness experience, which is helping drive more customers into our studios, is apparent in our growing visits. For the full year, North America visitation rates grew 32% over 2021. This momentum, as Anthony noted, has continued into the new year with our North America membership base now exceeding 600,000 in January.

So let's discuss how we continue to connect with our members, increase retention and reduced churn, all of which are essential to growing our same-store sales and AUVs. I'll begin with our XPASS offering, which provides our members frictionless access to all 10 of our brands on a single recurring monthly membership platform.

XPASS serves as a lead generator for our franchisees to drive in studio memberships. In 2022, 17% of XPASS North American members have never interacted with Xponential brands prior to purchasing an XPASS membership. In addition, 64% of XPASS North American members were inactive before purchasing an XPASS membership. We are looking forward to driving continued growth in the XPASS membership in 2023.

We are also connecting with our members virtually through XPLUS, our fitness on-demand digital offering. 2022 marked the first full year of XPLUS. And at the end of the year, we had over 117,000 subscribers. Importantly, of these subscribers, many also hold in studio memberships. XPLUS drives retention and engagement by providing subscribers the ability to work out anytime anywhere. With 72% of fitness club owners according to Club Intel offering on-demand and live stream workouts -- we understand the need to continue to invest in our XPLUS platform. We are constantly developing new content for our EXPLUS platform and our offering on Lu Lemon Studio, and we're excited to see this digital channel translate into increased awareness for our brands and studio offerings.

Speaking of partnerships, the third leg of our omnichannel offering is our B2B partnerships, which enable our brands to reach an even broader demographic. As I noted previously, we welcome numerous B2B partners in 2022, ranging from Lu Lemon Studio and Optum Health a division of UnitedHealth to Aktiv Solutions and Princess Cruises. The International Health Racket and Sports Club Association or IHRSA, reports that there are 15 million American adults who are currently inactive. So finding unique ways to connect our brands to these individuals remains one of our core areas of focus.

Our growth in B2B partnerships has continued in 2023 with LG, Territory Foods and One brands now all on board. We are particularly excited about XPLUS's new partnership with LG announced at the Consumer Electronics Show in Las Vegas since January. Under the partnership, LG televisions will feature an application providing access to our full XPLUS library, helping us reach millions of consumers globally. Xponentials partnership with LG is another example of our holistic approach to fitness, engaging with our consumers and raising awareness for our brands, far beyond the physical studio locations.

Overall, each of our B2B partnerships aligns with our long-term strategic goal of joining forces with industry-leading companies that can expand the reach of our brands, drive customer leads to franchisees at no cost and make our boutique fitness offering even more sticky. 2022 was an exciting year for Xponential's omnichannel fitness offering and 2023 is proving to be just as energizing. Thank you again for your time.

I'll now turn the call over to John to discuss our fourth quarter results and 2023 outlook.

Thanks, Sarah. It's great to speak with everyone to discuss Xponential's fourth quarter 2022 results. Fourth quarter North America system-wide sales of $294.1 million were up 38% year-over-year. The growth in North American system-wide sales was largely driven by our existing base of open sitios that continue to acquire new members, complemented by 375 net new North American studios that opened in 2022.

On a consolidated basis, revenue for the fourth quarter was $71.3 million, up 44% year-over-year. All 5 of the components that make up revenue grew during the quarter. Franchise revenue was $32.2 million, up 40% year-over-year. This growth was primarily driven by an increase in royalty revenue as member visits and associated system-wide sales are at all-time highs, and amortized revenue from franchise license sales continue to increase as we open more studios domestically and sell more franchise licenses internationally.

Equipment revenue was $11.5 million, up 64% year-over-year. This increase in equipment revenue continues to be driven primarily by higher volumes of global equipment installs. Merchandise revenue was $8 million, up 22% year-over-year. The increase during the quarter was primarily driven by the higher number of studios operating and increased foot traffic when compared to the prior year. Franchise marketing fund revenue of $5.8 million was up 42% year-over-year, primarily due to strong system-wide sales and average unit volume growth.

Lastly, the other service revenue was $13.8 million, up 57% from the prior year period, primarily due to rebates driven from processing of city-level system-wide sales, vendor sponsorships for our annual franchise conference, revenue from our B2B partnerships and revenue generated by temporarily owned transition studios.

Turning to our operating expenses. Cost of product revenue were $12.3 million, up 32% year-over-year. The increase was driven by higher equipment installations for new studio openings and merchandise revenues in the period. Cost of franchise and service revenue were $4.9 million, up 18% year-over-year. The increase continued to be driven by amortized commissions associated with franchise license sales on a higher base of Open Studios.

Selling, general and administrative expenses of $34.7 million were up 6% year-over-year. As a percentage of revenue, SG&A expenses were 49% of revenue in the fourth quarter, down from 66% in the prior year period. As projected on our third quarter 2022 call, our annual franchise convention added approximately $4.5 million in sequential SG&A expenses, which were largely offset by sponsorship revenues from the event that brought the net expense down to $0.9 million for the fourth quarter.

In addition, as I noted on prior calls, costs related to temporarily owned transition studios are included in our SG&A for the fourth quarter. We continue to optimize operating costs for these studios and to find new owners for them as we've done in the past. The Depreciation and amortization expense was $4.1 million, an increase of 23% from the prior year period. Marketing fund expenses were $4.6 million, up 23% year-over-year, driven by increased national marketing spend afforded by higher marketing fund revenues because of higher system-wide sales.

Acquisition and transaction expenses were $8.2 million, primarily related to the noncash contingent consideration as part of our acquisition of Rumble. As I noted on prior earnings calls, the Rumble contingent consideration is driven by our share price. We mark-to-market in each quarter and accrue for the earnout. We recorded a net loss of $0.4 million in the fourth quarter compared to a net loss of $29.8 million in the prior year period.

The increase was a result of $14.9 million of higher overall profitability, a $14.2 million decrease in noncash contingent consideration primarily related to the Rumble acquisition and a $0.4 million decrease in noncash equity-based compensation expense. 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 fourth quarter was $6.8 million, which excludes $8.2 million change in fair value of noncash contingent consideration and a $1.1 million liability decrease related to the fourth quarter remeasurement of the company's tax receivable agreement liability.

Adjusted EBITDA was $22.2 million in the fourth quarter compared to $8.6 million in the prior year period. Adjusted EBITDA margin grew to 31% in the fourth quarter compared to 17% in the prior year period. As a reminder, our 2023 outlook anticipates adjusted EBITDA margins reaching the 35% to 39% range, and we expect this number to grow to 40% in 2024.

Turning to the balance sheet. As of December 31, 2022, cash, cash equivalents and restricted cash were $37.4 million, up from the $21.3 million as of December 31, 2021. Total long-term debt was $137.7 million as of December 31, 2022, compared to $133.2 million as of December 31, 2021. We continue to look for ways to simplify our capital structure and have made progress already in the first quarter.

In January, we announced the repurchase of 85,340 shares of convertible preferred stock at a price of $22.07 per share, which prior to the repurchase would have been convertible into 5.9 million shares of Class A common stock. In addition, we recently completed a secondary offering of 5 million shares, which closed on February 10, 2023, followed by a greenshoe execution for an additional 0.75 million shares. The selling shareholders included Snapdragon Capital Partners, which is controlled by Mark Ribowski, the Chairman of our Board and our CEO, Anthony Geisler. Xponential Fitness did not receive any proceeds from this sale and our CEO remains Expenses largest individual shareholder.

Let's now discuss our outlook for 2023. Based on current business conditions and our expectations as of the date of this call, we are initiating guidance for the current year as follows. We expect 2023 global net new studio openings to be in the range of 540 to 560. This range represents the highest number of studio openings in our company's history and an 8% increase at the midpoint over 2022.

We project North America system-wide sales to range from $1.34 billion to $1.35 billion or a 30% increase at the midpoint from the prior year and the highest North America system-wide sales in our history. Total 2023 revenue is expected to be between $285 million to $295 million, an 18% year-over-year increase at the midpoint of our guided range.

Adjusted EBITDA is expected to range from $101 million to $105 million, a 39% year-over-year increase at the midpoint of our guided range. This range translates into roughly a 35.5% adjusted EBITDA margin at the midpoint.

In terms of capital expenditures, we anticipate approximately $10 million to $12 million for the year or 4% of revenue at the midpoint. Going forward, capital expenditures will be primarily focused on the BFT integration, XPASS and XPLUS new features and maintenance and 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 $32.3 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 calculations 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. Thank you again for your time today and your support of Xponential. We look forward to speaking with you on our next earnings call. We will now open the call for questions. Operator?

Thank you. (Operator Instructions) We'll take our first question from the line of Randy Konik with Jefferies.

I guess I have a number of questions. I just want to first attack your international prospects because you gave us some perspective. You talked about, I think, 1,000 units on tap to open over time in the international market. It seems like franchisee demand is off the charts there. Maybe give us a reminder of education around where was international, let's say, a couple of years ago? I know it's in 16 countries today. You gave us great color on the massive franchise agreement and approach. So maybe frame out where we were a couple of years ago -- and then where you think we might be with international, let's say, about 5 years from now in terms of potentially number of countries and kind of the TAM you kind of see for that -- the rest of world because it looks pretty powerful from here.

Yes. I mean, prior to, call it, pre-COVID for an easy timeframe prior to the BFT acquisition. International was obviously not what it was for us today. Thus, a big portion of that BFT acquisition was to get a bigger international footprint that we could kind of spring from. And then also, of course, with BFT not having a lot of locations in the U.S. that gave us full opportunity to scale the domestic market but also expand the international market. That's why that deal was a double great deal for what we were trying to do. And so from there, we've been springing forward.

Also in 2019, we had planted a lot of seeds in the ground internationally, but didn't have a lot of openings. And of course, with COVID, we kind of took a couple of years off as everybody was figuring everything out globally. So we're kind of seeing a couple of things happening. One, the acquisition of BFT and its expansion in primarily APAC but also U.K. and other regions. And then you're seeing the seeds that we planted pre-COVID that should have come out in '21, '22 or even 2021, '22, you're seeing those start to happen in '22 and '23. So our openings in 2021 used to be 90-10 domestic, they were 75-25 in 2022. We expect that to be pretty close to the same in 2023.

And as we get into ‘24, ‘25 and later years, we think it will probably grow to an overall kind of 70-30 split ultimately. So -- and of course, as we reiterated before, discussed before, the international footprint for us, given that we get 30%-40%, sometimes 50% of the revenues and none of the SG&A and the cash that comes over gets treated as cash without any amortization over time like we would have in the U.S., it is truly incremental to EBITDA margin as well.

So if we have a global growth kind of story, I think one thing we would get from investors, they're looking for stories with pricing power in a world where pricing power seems to be eroding for many consumer discretionary business model. So -- can you give us some perspective around your thoughts on the different levers you have at your disposal from, let's say, class pricing, royalty rate, fees, et cetera. Maybe give us some perspective there on the different levers you have at your disposal to kind of continue to kind of have that pricing power in your toolkit beyond just the nice member growth that you're seeing in traffic and utilization growth that you're seeing at the core.

I mean when you look at the top line, obviously, the scale of the business, when you look at some of the fees like on royalty, we typically charge a 7% fee across our portfolio. Club Pilates today has been moved up to 8%. As brands get to larger scales as AUVs continue to climb, it gives us the ability on future openings to consider maybe moving from a 7% to an 8% royalty. So we have a little bit of pricing power there.

When you talk about other scale items, things like our tech fee, those become opportunistic in the sense that they become what profit centers as we open more and more studios. So they'll drive higher margin pass-through to the business.

On an OpEx standpoint, we've looked at a lot of opportunities already, and we continue to explore how do we drive more margin out of things like equipment and merchandise, giving pricing power. So being able to go back to vendors and ask for discounts based off of volume commitments. And we've done that with Club Pilates. We've done that with CYCLEBAR. (inaudible) is another opportunity as we continue to open up high volumes there we could look at when you think about some of our other vendors, too, given our scale, the B2B opportunity has been really great for us because we do have so many distribution points across the U.S. It's what do you layer on top of this massive network that we have on a domestic footprint. And eventually, we can consider that on the international countries like Australia, where they have a considerable number of units. But we've done a good job so far of creating partnerships with the Lululemons of the world, the C4 beverage companies of the world, where we can now start putting them into our studios to drive higher margins. So we've looked at all areas of the supply chain. We continue to look at that. We announced a number of new partnerships related to like LG on this call, where that's another opportunity for us to use our scale and our ability to drive volume to generate higher margins.

We take the next question from the line of Brian Harbour with Morgan Stanley.

Yes. John, you had said just on the 2023 outlook, it's about a 35.5% EBITDA margin at the midpoint, but then I think there was also a comment to get to 35% to 39% in 2023. I guess the question is just what could drive some upside to that? What would enable you to perhaps do better than that on EBITDA margins?

Yes. The largest contribution to the margin expansion that will realize as royalties, right? We had really strong AUV growth in 2022. The momentum so far into 2023 is very promising. So for us, the more studios we get open, the more our installed base continues to exceed expectations, 20%, 22%, 25% same-store sales, high teens in Q4. So far in Q1, we're seeing that carry into the year. So we've taken kind of a conservative approach on same-store sales in our models given the macro and not having a crystal ball to see what it looks like in the second half of this year. But if studios continue to perform in a similar fashion as they did in 2022, that 100% royalty margin flows right to the bottom line.

So again, taking a watch-and-see approach providing the best outlook we have with the information we have right now for 2023, but top line growth driven by royalties, some B2B opportunities could be helpful for us, too. in 2023 as we start to sign more deals on that front, which carry typically very high margins. International business continuing to grow ahead of expectations, as Anthony just talked about, those are all really strong, high-margin pass-through topline items that could flow to the bottom line to push revenues into the high 30s.

And the same common apply for 2024 is when you think about how do you get to 40-plus margin. Again, it's just growing that installed base, executing on these B2B opportunities and continuing to add more studios, both domestically and internationally.

Sara, anything more you could say about just the XPASS at this point in terms of out of that member count, how many of those are XPAAS members? How much do you think that's benefiting at this point from a revenue and EBITDA perspective?

Yes. What we're continuing to see on the XPASS is that it is driving great awareness across the broader ecosystem. TAC was down, we're driving incremental leads into the system, acquiring brand-new customers into Xponential in all the brands that we haven't seen before. So it's continue to operate the way that we've anticipated it would. We will be developing a new app and gamification platform that will drive even greater awareness in 2023. But so far, we're not seeing that it's a huge revenue driver into the system.

We'll take the next question from the line of Alex Perry with Bank of America.

Congrats on another strong quarter. I guess just first, so the system-wide sales guidance at plus 30% total rev guide at 18%. I guess that would sort of imply that maybe franchise revenue growth should be higher than equipment revenue as your sort of new studio opening cadence is 8%. I guess, first is -- is that right? And should we assume sort of equipment rev growth in line with your openings? Or will it be more significant if you're opening more equipment-intensive brands? And then just as a follow-up to the last question that was asked, the high-teens same-store sales growth sort of quarter-to-date. What's been the key driver there? Is that mostly very strong January member growth versus last year?

Yes. Thanks, Alex. I'll take this one. When you look at 2022 equipment revenue was roughly about 18% of the total revenue we derived kind of moving into 2023, we'll still be in a very high heavy growth phase. So you'll see a lot of equipment installs, which we recognize that revenue at the time we do the installation, which is only a couple of weeks before Studio opens. My expectation around 2023 is that it will roughly be around 20% of our total revenue for 2023. When you look at franchise revenue, the largest component of that obviously is royalties, which made up about 30% of the total franchise revenue line. It will be slightly higher in 2023, the royalties as a percent of the total franchise revenue. So you'll continue to see equipment revenue be a large portion of the total revenue as a percent for the coming years because we're in this high-growth phase of a lot of new installations and new openings happening.

And then in regards to your comments around same-store sales or system-wide sales, 95% of the growth in system-wide sales is coming from new members. You remember when a member signs up at a studio, they in essence lock in their monthly rate unless they cancel and come back most likely because we're constantly taking price as studios have more and more members and there's less and less capacity in the studio, we raise price. So supply and demand type pricing. So 95% of the growth in the last 4 quarters has been us signing up more members per studio, 5% is price. So we have opportunity to continue to take price as we raise it in the studios, what you do every day, but the majority of the growth is coming from the fact that we are acquiring more and more members in our studios.

That's incredibly helpful. And then I guess just my second question is, what is the SG&A run rate to be using? I think it was running a bit higher last year due to more corporate run transition studios. Are we -- are you going to sort of downsize that? Like is the right SG&A run rate to be using is like low $30 million? Or where should we be there?

Yes. So in 2022, it ran roughly, excluding stock-based comp expense or equity-based compensation expense, it ran roughly about 41% of revenue. In 2023, the objective is to obviously get SG&A closer to being more efficient in line because we won't have as many costs related to some of the transfer studios. So I would assume around 35%, 36% is the optimal point for us in 2023 that will drive down to. My expectation is that Q1 and Q2 will slightly be above that 36%, and it will drive into the lower 30s as we get into Q3 and Q4. So you'll see kind of a ramp down. The average year will be about 35% to 36% on average, excluding stock-based comp.

We take next question from the line of John Heinbockel with Guggenheim Partners.

Can you guys talk to -- just remind us, right, when you think about members per studio and particularly right, how they open up, what are the outliers, right, in terms of which brands will typically start with more members versus less. And then I think if I look at your pipeline for '23, I mean, it's fairly broad-based, but is there any big difference in terms of 23 openings by brand versus '22? Will we see more Stretch Labs, which is a pretty big pipeline?

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Yes. I think you'll see Stretch Lab. You'll see Club Pilates still, you'll see Rumble and BFT. Obviously, Rumble BFT coming from the most recent sales of those brands because they're the newest brands, they're the most white space. So we start to sell those -- we started selling Rumble before BFT. So we'll start opening more rumbles before we start opening more BFTs. You see quite a decent backlog at stretch lab about 500 units. So that's why there's a lot of those 2 open. And then with Club Pilates really because that brand is doing so well, there are still a few hundred of those to open.

Okay. Maybe as a follow-up of that, right, because you talked about capacity. So if you think about maybe look at across brands, and I know they're different right in terms of capacity. But when you look at the highest AUV studios, and you think about where you can add capacity, right? Because in some cases, you can't add capacity to those classes. So you'd have to add additional classes that you don't want to add during the middle of the day, right? So when you think about where you can pick up capacity, where would that be, do you think?

I'm sorry, this is the operator. We seem to have lost the line of the management. John you may please go and ask your question again.

Yes. No, no, just it was a follow-up to the prior one, which was when you think about adding capacity, when you look at your highest AUV studios, where do you think the opportunity is to add capacity, right? Is it -- because I think it's difficult, right, to add capacity to individual classes. So you're thinking about adding additional classes adjacent to what your schedule looks like today. Is that fair?

Yes. John, did you get to hear the -- my answer to the first question on the openings.

I got part of it, but maybe half of it.

All right. So I think in a nutshell, I was saying that in 2023, you will see Stretch Labs Club Pilates, Rumble and BFT -- and when you look at those brands across, obviously, Rumble and BFT the opening because we sold the Rumbles and BFTs previously. And then Stretch Lab, we have about a 500 store backlog, CP we've got a few hundred store backlog, and we're pushing on the CP brand to make sure that we handle the terminations quickly so that we make sure we're staying on schedule with those. But then I think you had a follow-up question of that as well as far as 2022 and what we saw. Did you get the answer to that one?

No, no.

Okay. So 2022 was -- as a year was our best cohort of openings and studies ramping when you look at the ramp curves -- and when the team came back and said, "Hey, 2022 is the best year ever. I was like that's really great, but let's look at it quarter-over-quarter. And so we did in Q4 beat 3 beat 2 beat1. So now we seeing 2022 as kind of the best year in company history and the best ramps. We're actually seeing quarter-over-quarter, it gets better and better and better all the way through this last Q.

And then, John, did you want to answer the follow-up question that he asked.

Well, you talked about members typically the way we model the as kind of the ad design curve as the expectation is that we have somewhere between like 275 to 300 members in the first year and that grows to like 375 to 400 by year 2. When you look at the system as a whole, given how young it is in a number of cities we just opened, I think you're asking a question of like how will we continue to see growth there? What is the expectation? And there is still a fair amount of capacity left in the installed base for us to continue to add new members and grow AUVs. We still have the opportunity to take price as we add new members as well -- so there's plenty of opportunity for margin expansion based on us continuing to add more members per studio, which we continue to set record every quarter.

We take our next question from the line of Warren Cheng with Evercore ISI.

Very impressive result here in a really tough environment. I had a question on the new store -- the new studio openings guidance. So obviously, really strong momentum there based on your guidance. But I was curious to the extent to which macro headwinds, like inflation or these longer construction time lines or higher interest rates are affecting your franchisees and their open plans here? And whether some of that's embedded in that 540 to 560 number? And what are the biggest factors that could cause you to swing across that low end to the high end of that range?

Yes. So the only headwind that we really have, I mean, obviously, there's macro headwinds, there's construction, there's all those kind of things. And even faced with those headwinds, the company is raising guidance on its openings year-over-year into those headwinds. Financing is not an issue for us. It hasn't that hasn't been a headwind. But always for us, it's finding the best locations and then negotiating the best leases for our franchisees' long-term health and value of the business. So I had said previously kind of publicly that yes, you could open a lot more, but then you run into the risk of putting them in worse locations or having franchisees putting harm's way by signing worse leases. And so we don't have the -- some of the macro headwinds like air conditioning units or these massive build-outs of 20,000, 30,000, 40,000 square feet. You got to remember, we're building 1,500 to 2,000 square feet.

We're using whatever air conditioning was already sitting on the roof when it was a sandwich shop or a bike shop or an ice cream store or whatever it was before us. We make sure that has air conditioning and we make sure the air conditioning works. But outside of that, we don't have a certain specific air conditioning spec that we need. So we're not facing the headwinds that some others are unfortunately in the fitness industry, right, because it's tough is something you don't control. But financing has been an issue finding great locations, obviously, hasn't been an issue. But also as well, like there's not a lot of retailers that I've heard of that are opening 500-plus locations. So we also are doing an amazing job last year at 511 and doing way better than an we even would have done this last year.

And so -- they're small box pieces, there are not massive build-outs. There's not major construction that we do. It's really kind of modifying the previous use that was there into Argus. And in some brands like Stretch Lab or Club Pilates it really is just a rectangular box with no walls in a single bathroom in the back. So it's not major construction. So the construction part is low cost.

And then my follow-up, I wanted to ask about the B2B partnerships. So you've done a pretty wide range here in the last year, and it seems like the pace of partnerships is picking up a little bit. Are there certain channels that are the most fruitful for customer acquisition? And also, has there been any thought about migrating some of these partnerships into some kind of subscription or fee or economic sharing maybe over time, maybe for some of your higher engagement channels.

Yes. So I mean, look, we talked about it that this B2B partnership piece or brand access or corporate partnerships or whatever the term is that people would like to use. At the end of the day, we're teaming up and partnering with other great companies to really exploit the Xponential name and its brands to deliver what I like to call negative CAC, which is where brands actually pay us to deliver customers into our studios. So you see that with lululemon and Princess and LG and all the different deals that we're doing is really to start to make Xponential a lifestyle health of all this brand on its own with the 10 brands underneath it and also allow us to leverage the other assets. And I'd like to tell the team that what do we do for a living? -- what's our day job, like we opened gyms for a living. That's our day job.

But then what do you do on evenings and weekends, right? Like what else can we do with the assets here? Well, we have something like XPASS, it's great. And we can operate XPASS try and operate in the digital space like everybody else and trying to fight everybody for customers and drive CAC nor or we can go and do deals like we did with lululemon where we get paid from them or do deals like we do with Princess where you get paid for them. And then our XPs ends up on the mirror and it ends up playing on the mirror inside Lululemon stores or Nordstrom stores or people's homes, and then they're in 23,000 state rooms when they're on a Princess Cruise -- they go to turn on their LG TV when they get home and it's there, too.

So the idea is to really meet the customer in multiple places wherever we can. It would be our goal that by the time someone parks at Starbucks to get a coffee in the morning and they see a (inaudible) bar signed next door that they're sick of seeing that brand everywhere, right? Because they are seeing it on a cruise, they've seen on mirror. They've seen in the Lululemon store may have seen it from one of their insurers, sending them advertisements or territory foods or whoever it might be. And so we want to make sure that we're getting a lot of those touch points out there to drive customer acquisition costs down and not just be smarter than everybody else and not just sit out and compete and bring it out for the most expensive paper click we can, but find other ways that we can actually get paid and our franchisees can receive lead flow, really free of cost.

We take the next question from the line of Jeff Van Sinderen with B. Riley.

And let me add my congratulations. For 2023, did you say what's baked in your guidance or what you're targeting for sales of new franchise licenses? And then I guess, how is the evolving macroeconomic backdrop factored into that target?

Yes. In regards to the license sales, I mean when you look at what we did in 2022, we did 1,000 licenses, about 250 on average a quarter. As we look forward into 2024, we don't -- sorry, 2023, we don't guide on license sales, but we have kind of provided some forward-looking view that we continue to sell through the available inventory that's out there or white space that's out there. So as we continue to do that, you'll naturally see a decline in license sales. Brands like BFT and Rumble are still -- we're still selling through those brands given that they're relatively new, but the inventory is diminishing. So when you look at 2023, could you expect to see somewhere between 600, 700, 800 license sales? Yes, I think that's a realistic target for us to keep pushing forward. International is still a huge opportunity. There's still a lot of white based international. So as we continue to identify new MFAs and the MFAs that we have put in place for them to sell through their white space internationally, that will continue to help keep us at the high elevated levels of license sales. Does that answer your question? -- in consideration you the macro too, I should answer like we haven't really seen a slowdown on macro causing people not to want to buy licenses. That hasn't been one of the reasons we've seen. It's really more about matching a franchisee in a territory where it's available. Okay.

That's helpful. And then just sort of as a follow-up to that, I think this dovetails a little bit. Can you give us your latest thoughts on how you're approaching potential acquisitions for 2023, maybe how you're evaluating those what you're more willing to go after than not? What you're seeing out there in general? Is there any shift in multiples that sellers are willing to consider things of that nature?

Yes, I don't know that there's any massive shift in multiples that are out there. As far as acquisition goes, like John said, we have a decent still amount of inventory, selling 250 franchises a quarter. I don't know too many people that are out doing that. So even if we were selling 150 to 200 in a quarter, that's still outstanding comp compared to what else is happening out there globally. So the only real reason for us to buy the 11th brand at this point is if we're capturing a major deal, right, of getting some great deals, great opportunity in the market or if we want to pick up that franchise sales number back up to 1,000, we could do that with an 11th brand, not a problem. I'm always in talks with 4, 5 or 6 different potential targets. And so when we're ready, we'll be able to do an acquisition and then just kind of embed that into our current shared services model and begin to sell it.

We'll take our next question from the line of Jonathan Komp with Baird.

John, I want to ask just a follow-up on the adjusted EBITDA guidance. The highest I can get to is a 37% margin with the ranges you gave. So I'm just wondering, did you misspeak on the 39%? Or are you signaling there could be upside? And then when I look at the dollar growth for adjusted EBITDA compared to the dollar growth of revenue, it looks like implied flow-through rates for the year above 60%. So I'm just wondering, is there anything unique this year? Or is that sort of the flow-through rate we should think about going forward?

Yes. I mean the flow-through is coming from royalties. The fact that we opened 500 studios last year, those are relatively lower AUVs as they ramp to their first kind of 380-ish, $400,000 just kind of range for that first year as designed. So when those start really kind of generating higher levels of royalties as they get more mature, that margin is -- it's 100% margin, it flows right to the bottom line. So that's the biggest area of growth you'll see in our revenue line is on the royalty component equipment revenues, both carry closer to a 30% margin. Those will be a little bit of a drag to the P&L as we continue to open more and more studios that they don't generate north of 35% to 40% margins on equipment and merchandise, but royalties are the key driver there.

The B2B as well. your other service revenue line that's very high margin flow through. So you typically see our other service revenue at 90% plus margin. So as we continue to do B2B deals, system-wide sales grow, we get rebates on processing our system-wide sales. So that will be a key contributor to the business as well. When you talk about margin and the highest you think you can get to, again, we do take a conservative approach to our guidance. We want to make sure that we guide to a level that we know we can achieve. And as we continue to deliver upside, then we could let you guys know how we adjust our guidance from there. But at this point, that's -- we're providing that outlook based off of today given uncertainty of any macro that hasn't hit us. But if there is a yet moment, we don't overcommit on margin level.

And then just one more on the same-store sales you're embedding for the year, should we think roughly close to your long-term guidance? Or could you just give any more insight to the 30% increase in system system-wide sales relative to kind of a low 20% increase in units, what bridges the gap between those 2?

Yes. So we did what 25% same-store sales in 2022 when you think about 2023, what is the right way to look at with regards to AUVs. Based on what we're seeing right now, it's interesting because there's the pre-COVID, we averaged 8% per quarter on average for the 2 years prior to COVID. You look post-coat it seems like sitios are ramping at a very rapid pace still. We did an analysis on sitios that are 36-plus months in operation. and those comps at 25% last year. So when you look at it in Q4, those same 36-plus months in operations studios were, I think, 17% to 18%. So very strong comps still even in the aged studios. I think a good kind of assumption as regards to how you should look at AUVs and what the same-store sales comp for next year, probably looking somewhere in the maybe very low double digits. I think 12%, 11%, that kind of area seems to be aligned with what we're thinking. But if we continue to see strong performance as we have, then possibly a little bit higher than that. But right now, I think from an assumption, very low double digits is probably the way to think about it and like I said, that 10%, 11%, 12% range.

We take the next question from the line of Joe Altobello with Raymond James.

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I kind of want to talk about the studio growth. You mentioned the 540 to 560 you expect this year. And it sounds like that number will have a 5 in front of it for the next probably 3 or 4 years. And I think you alluded to this earlier, but at what point do you guys think you need to add an additional brand to hit that 500 studio target every year.

Yes. I mean when you look at it today, let's just say, for easy math, you were at 500 openings a year and we have about 2,000, as we said today, we have about 2,000 sold but not open in development domestically and almost 1,000 committed to internationally. So if you looked at it from a global perspective, you're talking about 5 to 6 years. If you looked at it domestically on a 75-25 split, talking about opening about 400 units domestically against 2,000. So about 4 to 5 years here domestically. So that was our consideration as we look to an 11th brand. We already have many years of runway given the macro, we wanted to be conservative and not potentially take some operational risk, some implementation infrastructure risk and/or potential leverage or cash off the balance sheet or whatever it might be to do the acquisitions. Our acquisitions are usually fairly relatively small from a dollars or cash perspective. But we thought, hey, we're selling more franchises anyone we know we're opening more stores anyone we know and we're executing very well. Let's just keep our head down and continue to do that into today's macro to make sure that we can deliver the guidance that we set out.

And then if it's a quarter 2, 3, 4, whatever it might be, and we've all kind of seen the pivot point of this macro or we feel like is it really going to get worse or whatever it might be as we get further into this, so we get more and more visibility. And we want to go buy an 11th brand, that's easy money for us, right? That's not a big deal. We can do acquisitions from hello, what is your name to we own you in 6 weeks. So given that we've got 4 or 5 or 6 current conversations going on, that window could be even shorter. So for us, it's just when does opportunity strike and when do we feel we need to go forward. But even if you look at the unit number run rate we've been talking about on franchise sales, we'll still open enough and still add 150-plus units to our backlog just this year alone without an 11th brand. So information, we're not in a hurry of 11th brand. We don't necessarily need an 11th brand for the next few years, but we'll most likely be opportunistic when need be.

And maybe on AUVs, obviously, continue to make a lot of progress there, north of $500,000 here in the fourth quarter. Could you remind us what your highest AUV studios are doing today? Is there anything unusual about those studios? Or is it just a matter of time before they sort of get to those levels?

I mean look, the AUVs vary across brands, but the ROIs and margins kind of end up being the same depending on what brands you're in. So something like a Stretch Lab will have higher AUVs that has higher labor costs because it's one-on-one, something like a Pure Barre, we'll have lower AUVs, but it's more of an owner-operator model. So you've got a lot of the owners that are teaching class are working in the front desk and so labor's a lot less. And then you have something like Club Pilates called in the middle, which will have higher AUVs, but the majority of those franchisees are semi-absentee owners. So they're hiring in the front desk and hiring for the classes as well. But I mean there's -- when you look at sort of high-end capacity of certain things. I mean, there are Club Pilates that are doing $1.2 million, $1.3 million out of their boxes. And so there is the ability to do that. We've talked about Club Pilates when we bought it, was the AUVs are about $250,000, and they're kind of triple above that now. And so what we like that we're seeing is the newer brands like Rumble and BFT, even so our YogaSix that are opening, they're kind of opening it twice where Club Pilates started, right? And so we would love to say that those are going to triple like Club Pilates. I don't know if that will necessarily be the case. But what's nice is that we're at an all-time company high AUV and our new stores that are opening in those new brands are opening at that AUV and higher while brands like Club Pilates, or Stretch Lab their individual AUVs continue to climb as well as we comp year-over-year at double digits.

Yes, that's the point I was trying to get at is that you're not approaching a ceiling at all when it looks like AUVs here.

We had 9 quarters quarter-over-quarter prior to COVID, we got back a year ago after 7 quarters of climbing back out of COVID. And then since then, we've continued to see it climb. So in a pre-COVID world, we never found the top end of AUV. And in a post-COVID world, we're still not finding that top end yet.

We take the next question from the line of George Kelly with ROTH MKM Capital Partners.

First one on your royalty rates, Curious, I guess, 2-part question. Were there any surprises after you took the rate higher with Club Pilates, anything kind of unexpected that you saw? And part 2 of the question is, do you have plans this year to raise royalty rates to additional brands?

So no, no change at 8%. And remember, when we do these royalty increases, it's on the openings going forward. And so it's not retroactive. And so the people that have already signed their franchise agreement at 7% are locked in at 7%. The franchise agreements to get signed in the area development agreements that are getting signed after that 8%. Really, it's mostly the stores that are opening after we increase it-- those go to 8%. And as far as considerations on brands going from 7% to 8%, we look at that much like we look at the consumer, it's supply and demand based. And so when you see brands that we're selling a lot of that we've opened a lot of, we run out of territories. People still are demanding the product. The product is performing very well. It allows us to take price, right, through a royalty increase. But as discussed before, there are other ways to increase price to the franchisee other than increasing royalty rate, right? And so if an AUV was 500 and you want a 1% increase, you could institute a tech fee or something that would be $400 or $450 a month, and you would virtually get that 1% increase across the system and something like that could be retroactive. But we always want to guard the health of our franchise units. And so we're very careful to make sure we're not instituting fees, whether it's royalty rate increases or any other fees are increasing in any pricing that is going to put a franchisee in harm's way because, first and foremost, we want to make sure that we have kind of healthy, happy franchisees out there that are working for us.

And then second question for me on your balance sheet. How comfortable -- like how much leverage are you comfortable with? And there's been a fair amount of discussion about M&A. Just curious, you also have a bit of that convert preferred. I mean more than a bit, there's still a pretty big chunk out there. So just curious how you kind of balance those 2 uses of capital.

Yes. So I mean the business right now is highly cash flow positive. So we generated cash last year, the expectation for the foreseeable future is that the business will be -- generate a lot of liquidity and stack up on the balance sheet. When you look at M&A opportunities, it really depends on the size. Most of the acquisitions we've done historically are very low. They don't carry $20 million, $30 million, $50 million, $100 million. They're a couple of million bucks. So we would be able to finance most of acquisitions off the balance sheet.

In regards to leverage ratio, we did complete the reacquisition of -- roughly 40% of the preferred convert in Q1 of 2023. Right now, we're carrying about 3.5x levered. We've always said to -- the Street, 3 to 4x leverage for us is not a problem at all given how much cash this business generates. So -- the answer to that question, could we easily carry 3.5x, which we're at right now Yes, it's not an issue at all to service any debt levels there. The -- in regards to the preferred, there's about $8 million -- excuse me, 8 million equivalent Class A shares of preferred left. We've -- that is a better focus for me as far as getting that cleaned up. We do not want to see those shares get converted in the future because they're dilutive to us. And obviously, a lot of us are shareholders internally within the company so we don't want the dilution nor do our shareholders want it. So we'll continue to look to leverage the cash that we have on the balance sheet and opportunities to retire those shares over time. So it is a focus for us. We have talked about other instruments like something like the securitization, which is familiar to plan it, and we like to model ourselves after them. So we could use that as an opportunity when a window presents itself as a way to retire the preferred. But at this point forward, comfortable with our debt levels, comfortable with the amount of cash that's being generated off the business, and we'll continue to look to ways to streamline our capital structure to make it as efficient as possible.

We'll take the next question from the line of Peter Keith with Piper Sandler.

This is Matt Egger on for Peter. Congrats on our First off, from just a question on advertising. We're curious the best advertising mediums for your banners? Or maybe what mediums are being utilized the most and working the best?

We currently use multiple different marketing initiatives and ways that we bring in different leads. Digital marketing is always going to be very strong. But of course, the B2B as it's continuing to ramp is giving us access to additional leads within the studios as well. I mentioned XPASS earlier that, that's really helping from the top of the funnel perspective and driving leads into the system. And lastly, we've done a good amount of work around SEO and making sure that we're there as customers are starting to look for fitness online, and that we're the first to pop up and really meet the customer where they are in their fitness journey, both online and in brick and mortar.

Great. And then I guess on M&A, you mentioned -- curious if you're interested in only like boutique fitness brands or would you reach out to other different type of health and wellness concepts or curious on what you all be looking at.

Yes. I mean if you look at the business today, we've done an amazing job with stretch lab, which is clearly not fitness and clearly a wellness product. And so if you look at the name H&W Invesco that was the original name of the company that was not super clever on health and wellness investment companies. So from day 1, we've kind of projected this company to be in the health and fitness space. There are still a handful of modalities in the fitness space in which we could acquire and even more so on the wellness side. And I think we've proven that we can do an amazing job with something like a Club Pilates in the fitness space, an amazing job with something like Stretch Lab in the wellness space. And so I don't think you'll find us at least not today doing anything in restaurants or services or something like that. But I think anything that's a 1,500 to 2,000 square foot franchise retail box in the health and wellness space is something that is right up our alley.

We'll take next question from the line of Max Rakhlenko with TD Colin.

Okay. Great. First, can you speak to the competitive environment out there? Your AUV suggest that your franchisees are in healthy shape. But how do you think the independents are doing out there and if the sector is starting to get more promotional and competitive. And then how are you thinking about potentially playing to offense if the backdrop were to soften later this year.

From a competitive environment, and we continue to take market share. I think when you look at the boutique space and you look at our white space, we see ourselves being able to grow to about roughly 8,000 cities in the U.S. alone. As we continue to distribute more and more of our brands into new markets, we're educating consumers on boutique fitness and expanding our total TAM and driving more member growth. So when it comes to the competitive landscape, boutique fitness is primarily or historically been very fragmented. The fact that we're bringing national brands across things like stress lab, which really didn't exist in a national scale. And then tying it all together with things like our XPASS and introducing members in Stretch Lab or Club Pilates to these new concepts. I think we're growing the boutique fitness market. If we were a one concept type brand, it's very difficult. If I remember, joins and leaves, they're not typically going to end back up in the brand that they were already in. So we are actually capturing people who are being introduced by members and other concepts and seeing us and moving over. So we've added more members per studio, and we have more members than per studio than we've ever had historically. We've seen a significant growth post COVID. I think people are more aware of health and wellness and living a healthier lifestyle given the pandemic and the learnings from that. So I think that answered the first part. I think it was the second part of your question, too, I might have missed. What was the second part?

Just how would you look to play offense? Leading... How do we little bit more or –

Yes, I think that part goes back to what I was talking about before with negative CAC. We didn't want to -- we started looking at this about 1.5 years or 2 years ago as customer acquisition costs were rising in boutique fitness and digital and everything kind of across the board, we started to figure out how can we be smart, right? How can in to be scrappy and do things that other people aren't doing as this brand access originally was just providing cash to the business during COVID. And then in the post-COVID world, we started looking at how do we implement getting more eyeballs in front of our product, right, and delivering what I've always referred to as negative CAC into our franchise stores, right? And so that's what you'll continue to see from us continue to see promotional items that are happening. I just received pictures from Princess Cruises, where they're debuting a new Porsche out at the Porsche Club of America tomorrow, and it's got a huge x on the hood for Xponential and all the brands around it XPAAS and XPLUS and everything plastered all over this car that will be at the Porsche car America debut with Princess Cruises on it. So true partners like Princess when we do these things together and I worked with JP, the CEO there on the time, it's kind of like, yes, we have our agreement, but we're partners. And so how do we do things back and forth to help each other. And so the idea is to continue to put Xponential and its brands in the forefront of people's minds -- and not just have it be a brick-and-mortar location that is sitting next to a Starbucks and some grocery-anchored center and the only way they're going to know that, that space is there is to go inside or to get a local digital ad or to get a flyer on their doorstep or see it on newspaper. I mean it's kind of -- I've been in this business for 20 years, and we used to put Wall Street Journal ads back in the day because people used to get their stock information from -- the Wall Street Journal because that was how life went now they get it on their iPhone or other iWatch every millisecond. So the world has changed, we change with it. And we think that this sort of negative CAC concept in this B2B partnership concept is kind of the new wave of customer acquisition.

And then you touched on Princess, but can you speak to how that partnership is going? And if we could see potentially an expansion into more ships over time?

Yes. I mean as far as Princess, we'll obviously be expanding into all of princesses ships as we bring them into port when it's time appropriate to do so and add our brick-and-mortar kind of capabilities of the ship, our digital capabilities. We're in the middle of training new instructors to put on board and all those kind of things. So it will continue to roll out. We're selling retail through the cruise ships. So both branded and co-branded retail is out and available. So people are able to get off the cruise ship and take an XPASS with them after using XPLUS or using our brick-and-mortar and walk off with retail from us as well. So like I said, we're trying to find ways to continue to execute on ways that that Xponential becomes a lifestyle health and wellness platform that we can use in kind of all parts of people's lives.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back over to Anthony Geisler, CEO, for closing remarks. Over to you, sir.

Thank you, and thank you again for joining today's earnings call and for your continued support. I'd also like to acknowledge our entire Xponential fitness team and franchisees for their strong operational execution in the fourth quarter, and we look forward to seeing many of you at the upcoming Raymond James, ROTH, BofA, Citi conferences this month, and we'll speak to you again in May on our first quarter call.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.