How Australian fitness phenomenon F45 ran out of puffs

So what exactly went wrong?

big ambitions

When the F45 goes public on the New York Stock Exchange in 2021, the F45 was planning global dominance.

The F45 is now on a U.S. military base and was developing a “Army to Millionaire” franchise offer for veterans. It was the first fitness franchise to be accepted on US college campuses, and high schools were another expansion target.

Australian fund managers also joined the fitness boom. L1 Capital had acquired his 7.1% stake in a stock sale by Gilchrist and Wahlberg in December 2020.

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

Gilchrist was sandwiched between Wahlbergs. told the financial network Bloomberg About plans for a major expansion on the New York Stock Exchange ahead of its market debut last July.

With losses ballooning to $182.7 million by the end of 2021, he was unfazed by the fact that the franchise had just restarted from the initial COVID-19 onslaught.

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

The F45 had certainly established itself as a competitor. The total number of franchises sold has more than tripled from 907 in 2017 to over 2800 in 63 countries as of float.

By May of this year, when F45 announced its first quarter results for fiscal 2022, Gilchrist had his expansion plans hammered into the grandstand in a way his cricket namesake would have been proud. I was there.

He reported that the group sold a record 706 franchises in the March quarter, raising its annual target from 1,000 to 1,500.

“I have never seen this much demand from a franchise. He told analysts and investors on an investor call.

“We have increased our sales target from 1,000 to 1,500. But if I was looking forward, it could increase again as we approach 2,000 by the end of the year.”

However, these growth plans failed to impress the financial markets. F45’s stock was trading at less than half what investors paid for him in his IPO ten months earlier.

The float was marketed on the reopening of the gym world after COVID, but the new strain of the virus was already making its presence felt.

Gilchrist has unveiled a secret weapon that solves a big problem for franchisors.

F45’s burgeoning franchise sales reflected new franchisees signing up on the dotted line and paying security deposits. But getting the funding, approvals, and set-up to actually get the franchise up and running and paying its fees was another story.

The record 706 franchise sales announced in the March quarter aren’t actually all open until the end of 2023, he said.

In fact, in May’s first quarter results, Gilchrist acknowledged a backlog of more than 2,200 franchises. There, the deposit was paid, but the studio never opened. That’s more than half of his 4007’s total franchise sales as of March 31st.

F45 planned to help remove major financial hurdles by using third-party financial institutions such as Fortress Investment Group to fund its franchisees.

Fortress has provided $150 million to help fund the F45 franchise, which Gilchrist said could grow to $300 million, possibly $500 million, by 2023.

“In terms of franchise funding, we believe it will help speed up the backlog launch,” he said.

“In terms of the backlog period from contract signing to opening, we believe it could be close to six months.”

As he explained to analysts and investors, this funding was off-balance sheet. That meant the F45 was not directly exposed to debt, other than what he described as “limited guarantees.” This backlog was a huge tailwind for the business.

Only two months later, it was a completely different story. Franchise financing has disappeared as global interest rates rise. It would be devastating for business.

Last week, F45’s stock fell to $1.35, more than 90% below the $16 investor paid last July. The most recent drop was due to significant reductions in staffing, sales and revenue targets. And its financial precariousness became apparent.

The idea of ​​selling 2000 franchises this year has gone. As of last week, the F45 was targeting just 350 franchises.

Expectations of up to $275 million a year were also dashed. Earnings he could be as low as $120 million.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), the F45’s preferred earnings metric, fell from a high of $100 million to just $25 million.

Forecasts to generate $50 million to $60 million in free cash flow have been withdrawn. F45 also received a waiver from the bank as the loan could default in the coming months.

The reduction in the company’s cash reserves will also be magnified by a large cash payment to Gilchrist and the 110 staff that will be cut to allow the F45 to live within its means.

The company said the layoffs, including more than $7 million in cash payments to Gilchrist, could cost up to $12 million.

Gilchrist’s payment includes an agreement not to seek offers to keep the weakened F45 private for at least 12 months.

F45 had less than $14 million in cash at the end of March this year, but it’s not yet clear how those payments will affect it. The company’s chief financial officer said he expects to receive $2.4 million in retainage from the F45 on October 15 of this year.

The full extent of the damage is due to be revealed in the Group’s second-quarter earnings release in the middle of this month, a shock to investors sold under the F45 capital-light model, which was based on steady cash flows. may become. Royalties from franchisees.

The franchise’s significant growth means the company generates most of its revenue from selling $150,000 equipment packs to franchisees. Fees from operating franchised businesses were less than 40% of revenue in the March quarter.

What remains to be seen is whether or not it will be able to get hold of the tens of millions of dollars of equipment it was expected to sell to franchisees this year.

This equipment inventory buildup added $15 million to F45’s accounts receivable in the March quarter.

sprinting in australia

The good news is that our Australian business has not been significantly affected. recently.

Given that Australia is a mature market for the F45, it makes sense. That market presentation shows little change in her 800+ franchises here.

And that is reflected in the attitude of merchants. Herald When Year This week, he described it as “as usual.”

They were little worried about what was happening overseas, but some wondered what the loss of nearly half the headcount at headquarters would do. Communication from headquarters has been frequent, with interim CEO Ben Coates holding a conference call on Thursday.

“I wonder what happened to this CEO and the stock price [issue] There has been little impact on business operations and we have not seen any impact from employee layoffs,” said one franchisee. He didn’t want to be named because he wasn’t contractually allowed to speak to the press without F45’s permission.

But businesses face challenges here, too.

“I think the struggle in our industry is post-lockdown and post-support,” said the veteran franchise owner.

“I think when everyone was allowed to go out, the first place everyone went was to have a drink, eat, or visit friends and family. Bring people to the gym.” to go [already] tough business. People who haven’t had training in two years, I think, are persuading them to come back, but I’m told it’s slower than most other industries. ”

A gym in Sydney said it lost 20 members last month as the latest work-from-home measures hit.

Things aren’t looking good for the brains behind the F45 fitness scheme. Co-founder Luke His Istomin left his F45 in 2016, citing creative differences, and has since launched his own fitness business his franchise, his Reunion Training.

Last year’s plan to cover 150 franchises for the Reunion business had to be restructured as the latest COVID-19 variant surfaced.

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

“We were on the verge of realizing our potential. Then COVID came along and really devastated our business,” he said as he scaled back some operations and worked on other business ideas. he said to

“The actual model of training I built was amazing. But unfortunately that is the harsh reality of trying to survive two years of COVID.

If it’s a consolation to F45’s investors and franchisees, Wahlberg remains a shareholder and continues to steadily post to his 19 million Instagram followers. That’s less than half what we paid for our initial investment in 2019.

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

“The best workout in the world, because anyone can do it, regardless of fitness level,” he said in one of his latest posts outside the F45 studio this week.

“It’s the best, it’s the best.”

How Australian fitness phenomenon F45 ran out of puffs

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