Xponential Fitness (XPOF 0.30%) is a growth stock that has flown somewhat under the radar this year, but if it keeps up its current growth rate, investors are going to increasingly take notice. The company just reported third-quarter earnings, highlighted by searing year-over-year revenue growth of 56%.

Let's take a look at what Xponential Fitness is doing well, and why it continues to look like a top growth stock going forward.

A woman practices boxing at the gym.

Image source: Getty Images.

What is Xponential Fitness? 

Xponential Fitness is the largest franchisor of boutique fitness brands globally, with over 2,400 studios worldwide. The company operates a portfolio of 10 brands across various fitness disciplines, including boxing, yoga, cycling, and barre. Some of its most prominent brands include Club Pilates, Cycle Bar, and Rumble.

The company was founded in 2017 by CEO Anthony Geisler, who previously acquired LA Boxing and built it into the largest boxing, kickboxing, and mixed martial arts fitness franchise in the U.S. Geisler also bought Club Pilates, which is now part of Xponential Fitness, in 2015 and quadrupled its number of locations, so he knows a thing or two about scaling a fitness concept. Xponential Fitness went public in 2021.

In the studio

Xponential Fitness is growing revenue by opening new studios at a rapid rate. During the third quarter, it opened 128 net new studios, bringing the total to 355 new locations for the year, and the company is on track to hit its goal of 500 new studios for the full year.

It currently has a store count of 2,485 studios worldwide, and a backlog that gives it visibility toward opening 500 or more studios a year for the next three or four years. This means that the company will be growing its total footprint by 20% or more next year, with a multi-year runway of similar growth ahead.

For comparison, Planet Fitness (PLNT 0.05%), often thought of as the 800-pound gorilla among publicly traded fitness companies has 2,353 locations in the United States. Life Time Group Holdings (LTH) has 160 "athletic country clubs" across the United States, as well as a handful of co-working locations and residences. Life Time has opened 12 new locations in 2023 with 11 more to come.

The industry as a whole looks like it is growing at an enviable rate, as Life Time Holdings grew revenue 28.9% year over year in the third quarter while Planet Fitness posted revenue growth of 58.4% year over year, just edging out Xponential's 56% sales growth. However, Xponential Fitness trades at just under 20 times forward earnings versus 36 times forward earnings for Planet Fitness and 53 times forward earnings for Life Time Group Holdings.

With Xponential, investors are getting the same type of supercharged growth as Planet Fitness but at a much lower valuation.   

Members only

While growing its footprint, the company is also simultaneously increasing membership at an impressive rate.

In North America, membership increased by 33% year over year, and Xponential Fitness now has 577,000 members across its various brands. This growing membership base has led to higher annual unit volumes (AUVs) for its locations. These AUVs jumped from $417,000 last year to a run rate of $489,000 this year.

Resilient royalties

The new studios and new members mean that Xponential Fitness, as a franchisor, will be collecting more royalty fees from these new franchisees. These royalties make Xponential Fitness attractive because they are steady, recurring revenue.

In fact, Xponential Fitness reports that as of this quarter, 71% of its revenue is now recurring, primarily thanks to royalties. Note that these royalties are based on franchise revenue, not earnings, which limits the downside of rising costs due to inflation.

At a time of rampant inflation and uncertain economic growth, it's only natural that investors would question the resilience of a business like Xponential Fitness. But the business is more resilient than it might seem on the surface.

As aforementioned, the majority of Xponential's revenue is recurring. Furthermore, while health and fitness may be thought of as more of a discretionary expense than an essential one, Geisler notes that "The consistent growth in our run rate AUVs is a strong reminder that despite inflationary pressures and other macroeconomic challenges, the workouts our franchisees provide across our diverse portfolio of brands remain an integral part of our members' lives."

Geisler also points out that Xponential's average customer has a household income of $130,000, meaning that they have more spending power and may be less hurt by inflation than the average U.S. consumer.

For comparison, Planet Fitness breaks this number out differently but says that 26% of its members have incomes of below $50,000, while 21% of members have income of over $100,000. This isn't to say that it is better to serve one demographic or the other, and serving the mass market has advantages of its own right, but it just highlights the high income of Xponential's typical customer.

The company's concepts are well positioned as high-end, aspirational brands, giving it access to affluent customers, which contributes to the resiliency of its business model.

Looking ahead  

Xponential's strong, consistent revenue growth illustrates that it is a great long-term growth stock. The company is opening new locations at a rapid rate and is likely to open 500 or more franchises a year for the next several years. Xponential Fitness is attractive due the durable, recurring revenue that it brings in.

It's an under-the-radar growth stock for now, but with this type of performance, it won't stay that way for long.