How Aussie fitness phenom F45 ran out of steam – Internet Cloning

How Aussie fitness phenom F45 ran out of steam – Internet Cloning

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So what exactly went wrong?

Big ambitions

When F45 was listed on the New York Stock Exchange in 2021, it had plans for global dominance.

F45 was now on US military bases and developing a “Military to Millionaire” franchise offering to retired US veterans. It was the first fitness franchise to be accepted on US college campuses, and high schools were another target for expansion.

Australian fund managers joined the fitness craze. L1 Capital acquired a 7.1 percent stake in a Gilchrist and Wahlberg stock sale in December 2020. L1’s stake would have been worth $113.6 million at the time of the IPO.

Caledonia reportedly acquired $100 million worth of shares in the IPO. The fund manager declined to comment.

Gilchrist was flanked by Wahlberg as he told the Bloomberg financial network of its major expansion plans on the New York Stock Exchange – ahead of its market debut in July last year.

He wasn’t troubled by the fact that the company was losing money, with losses rising to $182.7 million by the end of 2021 and its franchises just reopening after the initial COVID-19 onslaught.

“We want to be the largest franchisor in the world,” Gilchrist said. “We want to sprint past Planet (Fitness) and be bigger than McDonald’s.”

Numerically F45 was certainly developing into a contender. At the time of the IPO, the total number of franchises sold had more than tripled from 907 in 2017 to more than 2,800 in 63 countries.

When F45 announced first-quarter results for fiscal 2022 in May this year, Gilchrist slammed the expansion plans into the stands in a way his cricket namesake would have been proud of.

He reported that the group sold a record 706 franchises in the March quarter and raised its goal for the year from 1,000 to 1,500. Even that is conservative, he indicated.

“We have never seen such high demand from franchise companies. We continue to grow our business by leveraging incredible influencers like David Beckham,” he told analysts and investors on the May Q1 investor conference call.

“We have increased the forecast from 1000 sales to 1500. However, looking ahead… that could climb closer to 2000 before the end of the year.”

But these growth plans did not impress the financial market. F45 shares traded at less than half what investors paid at the IPO just 10 months earlier.

The float was sold on the basis that the gym world was reopening after COVID, but the new strains of the virus were already making themselves felt.

Gilchrist revealed a secret weapon that would solve a major problem for the franchisor.

F45’s skyrocketing franchise sales reflect new franchisees signing on the dotted line and making their down payment. But getting the funding, permits, and set-up to the point where the franchise was up and running, and actually getting the fees paid, was another story.

The record sales of the 706 franchise announced for the March quarter would not actually all be open until the end of 2023, he said.

In fact, Gilchrist admitted in May’s first-quarter results that it had a backlog of more than 2,200 franchises that had received deposits but had not opened studios. This represented more than half of 4007’s total franchise sales as of March 31.

F45 planned to help remove the significant financial hurdle by bringing in third party financiers such as Fortress Investment Group to provide financing for the franchisees.

Fortress committed $150 million to fund F45 franchises, and Gilchrist said this has the potential to expand to $300 million and possibly $500 million by 2023. Another $100 million was available for his military program.

“In terms of franchise funding, we believe this will help accelerate the opening of the backlog,” he said.

“We think that in terms of backlog times from contract signing to opening, that could be up to six months.”

As he explained to analysts and investors, that funding was off-balance sheet — meaning F45 had no direct exposure to the debt other than what he described as a “limited guarantee” — and that backlog was a major tailwind for the deal.

Barely two months later, it was a very different story. Amid rising global interest rates, franchise financing was gone. That would be catastrophic for business.

Last week, F45’s share price fell as low as $1.35, more than 90 percent below the $16 that investors paid in July last year. The most recent decline came as headcount, revenue and earnings targets were cut. And the precarious state of his finances was exposed.

All thoughts of selling 2000 franchises that year vanished. Last week, F45 targeted just 350 franchises.

Expectations of up to $275 million for the year were also dashed. Sales could be as high as $120 million.

F45’s preferred earnings measure — adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) — fell to just $25 million from a peak of $100 million.

Forecasts that it would generate free cash flow of $50 million to $60 million have been withdrawn. F45 also received a waiver of possible loan defaults in the coming months from its banks.

The company’s dwindling cash reserves would also be weighed down by significant cash payouts to Gilchrist and the shedding of 110 employees to ensure F45 lives within its means.

The company said layoff costs — including a more than $7 million cash payment to Gilchrist — would cost up to $12 million.

Gilchrist’s payment includes an agreement that he will not seek an offer to take the weakened F45 privately for at least 12 months.

F45 had less than $14 million in cash at the end of March this year and has yet to say how those payouts will affect that. The company’s chief financial officer is also scheduled to receive a retention payment of $2.4 million from F45 on October 15 this year, or sooner if he is fired by the company.

The full extent of the damage will be revealed when the group’s second-quarter results are released later this month, and it could come as a shock to investors sold off the F45 Capital Lite model, which relied on a steady stream of royalties from franchisees.

Massive franchise growth means the company derives most of its revenue from selling its $150,000 equipment packages to franchisees. Fees it receives from operating franchises accounted for less than 40 percent of its revenue in the March quarter.

What we don’t know yet is whether it’s on the hook for tens of millions of dollars worth of devices it hoped to sell to franchisees this year.

A build-up of this inventory resulted in a $15 million increase in F45 accounts receivable in the March quarter.

Full speed ahead in Australia

The good news is that the Australian business remains remarkably unaffected. Until now.

That makes sense as Australia is a mature market for F45s. His market presentations show that hardly any changes to the more than 800 franchise companies are expected here.

And it’s reflected in the attitude of franchisees who… Herald and Age spoke to this week, which described it as “business as usual.”

They had little concern about what was happening overseas, although some questioned the impact of losing nearly half the head office’s workforce. Communications from headquarters have been frequent — including a conference call Thursday attended by interim CEO Ben Coates.

“I think whatever happened to this CEO and the stock price [issue] had very little impact on operations… and we saw no impact from the layoffs,” said one franchisee. He did not want to be named as the agreement does not allow them to speak to the press without F45’s permission.

But the business still faces its challenges here.

“I think the struggle in our industry has been post lockdown and post support,” said the veteran franchisee owner.

“When everyone was allowed out, the first place everyone went was to have a drink, eat and visit friends and family. Getting people into the gym is [already] a tough business. I think people who haven’t exercised in two years convinced them to come back – it was slower than most other industries.”

A Sydney gym spoke of losing 20 members over the past month as the latest work-from-home measures hit.

Things aren’t getting any better for the minds behind F45’s fitness program, co-founder Luke Istomin, who left F45 in 2016 over creative differences and has since launched his own fitness business franchise, Reunion Training.

Plans from last year to target 150 franchises of Reunion business had to be revised when the latest COVID-19 strain emerged.

F45 co-founder Luke Istomin left the company in 2016 due to creative differences.

F45 co-founder Luke Istomin left the company in 2016 due to creative differences.

“We were close to realizing our potential. Then COVID came along and really decimated the business,” he said while winding down part of the operation and working on other business ideas.

“The actual manikin I developed was phenomenal. But alas, that’s the harsh reality of trying to get through two years of COVID; was not good for a start-up company.”

If it’s any consolation to F45’s investors and franchisees, Wahlberg remains a shareholder and has continued to post to his 19 million Instagram followers. Last week’s disaster means F45 is valued at less than half of what Wahlberg paid for his initial investment in 2019.

But that obviously hasn’t dampened his enthusiasm for the product.

“The best workout in the world. The reason is that anyone at any fitness level can do it,” he says in one of his latest posts this week outside an F45 gym.

“It’s the best, it’s the best.”

https://www.smh.com.au/business/entrepreneurship/bigger-than-mcdonald-s-how-australian-fitness-phenomenon-f45-ran-out-of-puff-20220803-p5b6w9.html?ref= rss&utm_medium=rss&utm_source=rss_business How Aussie fitness phenom F45 ran out of steam

How Aussie fitness phenom F45 ran out of steam – Internet Cloning

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