Xponential Fitness, Inc. (XPOF) Earnings Call Transcript & Summary

I think We'll get started here. So hello, everyone. I'm Alex Perry from BofA Global Research. I'm very pleased to have Xponential Fitness with us today, including Anthony Geisler, Chief Executive Officer; Sarah Luna, President; and John Meloun, Chief Financial Officer. I'm going to hand it over to Anthony for a quick overview of the business, and then I will lead off with some questions and then open it up to Q&A. So thanks again for coming, guys, and I'll turn it over to you, Anthony.

Great. Thank you. Xponential Fitness is the leader of franchise boutique fitness in the world. We have 2,100 open locations across the country, another 2,000 domestically to open that are already contractually obligated to open, another 1,000 contractually obligated to open internationally. So the company has, say, 9 quarters of AUV growth prior to COVID and then 6 quarters of AUV growth after COVID. And so happy to say that '21 was a great year. And in 2022, we'll sell more and open more and have higher AUVs, projected to do about $1 billion in system-wide sales coming up this year. So wouldn't wish a pandemic on somebody ever again, but we're really happy that it's in the rearview mirror, and we're staring down the barrel of the best year the company has ever had. So...

Great. That was really helpful. And so since coming to the public markets in July, you've announced some pretty transformative acquisitions and partnerships while managing through various headwinds, COVID lockdowns. So been a very busy and exciting time for you guys. Maybe just, first, can you maybe walk through how you're thinking about the business differently versus the IPO? And give us a little color on how you're thinking of the current brand portfolio now that you have 10 brands across a pretty diverse group of workout modules. And then in terms of acquisition strategy going forward, just maybe give us a little color there on whether you think about -- how you think about sort of growing the current portfolio versus acquiring additional brands.

Look, I think it's a good thought, and we spend a lot of time thinking about it all the time. And so it's how do we grow TAM, right? Because for us -- now the mission of the company is to sell more franchises so we can open more franchises and drive more revenue to the franchises that we have, right, and then effectively and efficiently use that capital to make sure that we're producing high margins and high EBITDA, right? And so that's what we're looking at. And so long as the demand is there to keep selling 1,000 units a year, we're going to have to continue to acquire brands to meet that demand, right? On top of that, in our mature brands like at Club Pilates, for instance, where we have 1,000 units, we're able to do some, what I'll call, nontraditional deals like our deal with LA Fitness, which allows us to then put a Club Pilates in 500-plus LA Fitnesses across the country, increasing our TAM in that one brand by 50%, right? So the answer is in order to do anything truly great, you've got to do it all. And so it's not just increasing TAM inside of one business or increasing AUV inside of one business. It's creating opportunities to grow the portfolios' brands while we're growing the TAM inside our mature brands that are starting to tap out on the TAM side.

Yes. And just focusing on TAM, if we look at that a bit more, I think you sort of took up your addressable market opportunity in North America from 6,900 studios to 7,900 studios now inclusive of BFT. Maybe just talk about how you see the total studio opportunity both within the U.S. and internationally.

Yes. I think we -- the way we go about addressing the TAM is different than other people do. So we use Buxton so that it becomes very scientifically-driven. So we actually run a core customer of that brand, right? So this is a lot more valuable than they're female, they make more than $75,000 a year, they're college educated. Like that's the easy stuff we can find online, right? The stuff we're able to get from a core customer is what car do they drive? How many credit cards do they have, right? What's the LTV on their home mortgage? Things like that, that you're not going to find a demographics dot-com, right? And so with that, we create a core customer for a brand, then we go out to the map and we say, hey, if we want 2-mile protective radiuses for our franchisees, and we want to do a $500,000 AUV, how many core customers exist in the density circles in the U.S. that allow us to go do that? And we did that with Club Pilates, our very first brand. It returned 938 dots on a map with longitude and latitude. That's the 938 franchises then that we go sell. So the same is true with the acquisition of BFT. We take that core customer. And by using that core customer and by using an AUV target number that we want to hit, right, we're able to go out and say, here's the 1,000 BFTs that we're going to sell in the U.S. Now if you lowered that number to 4 75 or 4 50, the TAM goes up, right, because it's easier to get lower AUVs to get a higher market. But we want to start where the franchisees. An average breakeven for a franchisee is somewhere in the $325,000 to $350,000 range, right? So if they're grossing $500,000 on average, my average franchisee is making 30% margins. They have a 2.5-year payback. They get 40% cash-on-cash returns unlevered, right? And so those are the kind of economics we want to deliver to a franchisee, which is why we sit there at $500,000 AUV. A lot of people say stuff like, hey, we're going to go open 5,000 units of something. Well, that's true. You can go open 5,000 of something, but at what AUV? And if the AUV is at $200,000, then the 5,000 are going to close because it's not sustainable, right? So we want to make sure that our TAM is actually tied to an AUV target that creates a healthy franchisee and a healthy system, which we've been able to achieve that because pre-COVID, we've never closed a store; and post COVID, we've never closed a store. We actually grew our store count by 25% during COVID because we select great franchisees, and we operate a model that allows a franchisee to have healthy economics.

Yes. And if we look at the current brand portfolio right now, what brand has the most studio growth potential in the U.S.? Another way of asking it would be if you look at that sort of 1,800 number, what -- within that, what has the most studios sold but not open? And how do you sort of expect that to play out within the next couple of years?

Yes. YogaSix is probably what has the most sold and not open because in 2019, prepandemic, we sold a ton of YogaSix because that was the new brand, right? So it had the most white space, so it sells the most, just a kind of logical path, right? And so in 2020 and 2021, we didn't open as many units of that as we normally would have. So there's a bit of a backlog in that brand. Going forward, if you ask what's going to be opening in 2023, it's going to be what we sold in '21 and '22, right, which will be Rumble and BFT, right? Because with BFT, where that sits today, we just began selling it about 3 weeks ago. It has a TAM of 1,000 units. And so given that, we've got 1,000 stores to go sell. And what happens in the franchise world is much like what happens in a car. It's a lot faster to go 0 to 60 than it is 60 to 120, right? And so same is true when you have a TAM of 1,000, you can sell the first 600 in the first couple of years, but then it starts to slow down because you've already sold the Dallases and the Miamis and the Atlantas and that kind of thing. And so starting to sell into some secondary and tertiary markets, right, as you kind of tap that 1,000. So a brand like Club Pilates, 5 years, they get to 1,000 locations, but they'll sell 50% of that base within the first 24 months.

Yes. So if you look at the portfolio just in terms of workout types, it seems like you're pretty broad-based at this point. You have rowing. You have cycling. You have a HIIT work out now with BFT. What would be sort of complementary to the current portfolio that you think would further build it out?

Yes. So BFT is functional training and not HIIT. And there is -- a lot of people don't -- maybe not understand that, but it's a massive difference, right? BFT is closer to a cross fit. And an Orangetheory is really a HIIT product, right? So you won't find racks and Olympic weights or things like that inside an Orangetheory where it's a true HIIT product. So there is an opportunity for us to go into a true HIIT product, right? There's high-intensity training and functional training in everything you do. It's like saying cardio. You're going to get cardio in everything you do, right? But a straight HIIT brand, we do not have. So something like an Orangetheory-type work out, we do not have. And something like a Planet Fitness-type situation, we don't have. And all of that is on the fitness side. The original name of the company when we went public, the holdco, was health and wellness, right? And so that's why we have brands like StretchLab, which is not a fitness brand. It's part of a wellness brand. So if you kind of look for us on the wellness side of the business, if we wanted to go into something that would be like a massage [indiscernible] or something that would be like a joint, right, something that is retail, franchised wellness, we have the ability to do that. StretchLab, for us, has been wildly successful. We've sold almost 600 of those, almost 200 open. It's the highest AUV in our portfolio. And it's a wellness product. So for us, we've been able to prove that what we're really good at is we're really good sales, marketing and operations engine. Now whether that be disguised as Pilates or stretching or massage, if it's something that is a 2,000-square-foot box, it's franchised and a retail center that's on a subscription model, it's something we've proven we're really good at. So I think the world is kind of our oyster because we've been able to prove we can buy existing brands of scale and provide a lot of value. We've proven we can scale things, and we've proven we can do that both in fitness, health product, but also a wellness or recovery type product as well.

Yes. So I thought it was really interesting, you mentioned Planet Fitness, which seems like a much different operating model. Now we're talking value-oriented end of the fitness market. We're talking big-box gym versus boutique fitness. Is that an area where Xponential could go over time?

It's an area we could go over time. Chris is amazing. Planet is an amazing product. And so they've done a really good job. I want to be clear, it's not that we're looking in that market today, and we're -- I've said this before on earnings calls, then we get Q&A where like I'm buying Orangetheory and Planet Fitness tomorrow or something, that is not what it is. I just -- saying a product like a Planet, a product like an Orangetheory. I can't afford Chris. He's really knocked the ball off the park. But yes, I mean a product like that, when you asked the question of what could we go into, right? If you would ask me last year, I would say we could go into boxing. We could go into functional training, right? So if you ask me modalities we could go into, we could go into something like Orangetheory or Planet or The Joint or Massage Envy. But for us, really, it's about building a box, filling it with equipment and selling a subscription model. People -- Chris always says, like we're trying to get people to get off the couch and come in, right? But we also know that his most successful program is his Black Card program, right? And you don't know what a black card is unless you know what an AMEX black card is. And you don't know what that is, unless you have disposable income, right? And so what he figured out there is there's people that do work out of Planet Fitness for $10 a month. They could afford much more, right? But it's a great place to workout. They can come in. They can lift a dumbbell. They can work on a treadmill. They can do any of those kind of things, and they can do it whenever they like to. A little bit different in boutique fitness where you have to schedule your class in advance. So I view those things as really complementary because we -- with our XPASS -- we have 10 brands. So you sign up at one, you can go to all of them. But a piece that could be missing from the XPASS is the ability to go get a work out whenever you want to. Saturday morning at 6:00 a.m., you get up, you want to run on a treadmill. You can't do that at Stride, right? Even though we've got 30 treadmills. You have to book a class and do a treadmill class. So I think stuff like that is in our wheel house and is also complementary to the XPASS.

Perfect. Perfect transition, actually. I wanted to ask a little bit about XPASS. I think you launched that nationwide last week. Can you just maybe talk us through the opportunity there? Give us more color on sort of the revenue share model from XPASS and sort of any contribution we should be thinking about the model for 2022 and maybe further down the line?

Yes. The XPASS actually rolled out at the end of last year. We added in Rumble just recently. So that's what you saw got added, I think, it was last week. So right now, the economics are that we take 20% off the top. We charge the member. It sits in an escrow account, the remaining 80%. And then as they go and book different classes, depending on if they're going to a peak class or an off-peak time class, how many points they end up using, they either burn through all their credits or there's a little bit of breakage kind of like a gift card. That breakage then goes back to Xpo. So that percentage becomes a little bit more like 30% to Xpo, 70% to franchisees. Franchisees service the booking. They get paid the next day. So within 24 hours, they see the payment. No royalties. No marketing fund fee. So that feels good to them to be able to fill underutilized inventory that would have otherwise collected $0. Now they're collecting $15, $20, $23. They can kind of choose the guardrails for their bookings and make sure that those last 3 seats actually go utilized, and that's where a lot of the profitability is within the boutique model.

And then, I guess, just in terms of adoption, are you expecting higher adoption in markets with more Xponential studios? And sort of how will XPASS members be prioritized versus regular studio members? And then I think maybe you answered this, but are all brands on XPASS now?

All brands except for BFT. So we'll get BFT on pretty quickly now. We've got 2 domestically. So we'll get those 2 on and then start to scale. But the benefits are different between the 2 passes. So if you wanted to go unlimitedly to a CycleBar or a Pure Barre, you wouldn't be able to do that very easily on the XPASS. You also get prime booking times if you're a direct brick-and-mortar membership versus XPASS. On the XPASS side, you get the flexibility of being able to go to 3 or 4 different modalities on one pass and one billing cycle and kind of choose your own adventure, if you will. So we're seeing that there's different types of members that are going between brick-and-mortar and also XPASS. What we are also seeing is that any of those that were inactive customers at our brick-and-mortars, we're now tapping into those through an e-mail campaign, and 50% of account holders for XPASS are now coming back to life again and then booking into the studios. And some of them are then becoming brick-and-mortar memberships as well, and they have both the XPASS and a direct membership at a studio. So we're seeing that it's talking to people in a new way. It's bringing 15% of brand-new lead flow into the system as well. So there are people that just don't know where to get started. So they'll start with a $19 pass, try a couple of things, and then jump into a studio. So it's both lead flow for the franchise partner as well as revenue for each booking.

Yes. In terms of the adoption, sort of what are you expecting on sort of adoption by market? Is it more attractive in a market like New York City where you have multiple modalities across?

Yes.

Or do you expect it to work where maybe you only have 2 or 3 concepts?

I mean, so far, adoption has been very strong. We're close to 80% fully onboarded with XPASS. As we open new studios, it just becomes part of the program. So as of -- today, we're launching 20 new studios that we've just opened, and they're all putting their inventory on XPASS. So really, we'll see very high adoption. And we see it in places like Anchorage where we've got a Club Pilates -- excuse me, with a Pure Barre and a Rumble. They'll go on so that their members can go between the 2. Now it's the same owner, so she doesn't have to now come with a membership and offering between the 2. She just puts them on XPASS, and she services 100% of the XPASS customers within that market. So you will see from a consumer standpoint, if there's more brands and more studios, it's more attractive, but it's attractive to the franchisees.

Yes. And then one more on XPASS. So how do you see that sort of its market share position versus like maybe a class pass, for instance? And then is there the option with XPASS to sort of go beyond the Xponential portfolio and start adding modalities that maybe fall beyond Xponential?

Yes. I think there's huge opportunity, both on the direct-to-consumer as well as business to business. Dan Ali, who we just hired, has a background in a lot of different aggregators and fixing the revenue model for those aggregators. It came from gym pass and Groupon, and the airline industry, pharmaceutical, real estate. So he's looked at a lot of different opportunities and industries in the past and how to maximize revenue and also make sure that we're meeting the consumer at their demand price essentially based on supply and demand within the studio. He has a huge background in business to business. So he's now focused on bringing in the Amazons and the PepsiCos and getting XPASS for all of their employees. We have Tivity Health launching in a couple of months as well. So we have a partnership with XPASS that will be coming soon. So that's a huge opportunity there. And we know that the gym pass model is successful and profitable, and class pass was less so, so we've started to model it more like a gym pass and less like a class pass.

Yes. Perfect. And then just shifting gears a bit, I wanted to sort of talk about the franchisee base and how that's evolved over time. Maybe just give us some color on how many studios the average franchisee owns, if you've seen that change. And do you expect larger investors -- Planet Fitness has a lot of sort of private equity firms involved. Is that something you think you'd start to see over time?

Yes. I think we'll see it. We see it a bit today. Our largest franchise holder is a private equity firm today, about 85 units. So not a massive amount of the few thousand, but -- and that's -- that 85 both opened and development territory going forward. But one thing we're key on with private equity and family offices, what I call professional franchisees, McDonald's and Papa John's and Liberty Tax or things like that, that are looking to evolve their franchise portfolio, is if they do come in and they do a roll-up type strategy, we make sure that, that roll-up strategy is matched with development. So if you want to come in and buy up 30 Club Pilates, that's great, but you also need to go develop 30 new ones, right? And because we have multiple brands, we can service that demand as well. But just because you're a private equity firm and you come in and you do a roll-up strategy of 30 clubs, that's great. But what does that do for the franchisor, right? Unless they're going to quadruple revenue overnight in order to see our royalty go up a little bit, we don't get anything out of that, right? And so what we want to make sure is that these people are coming in and they're doing roll-up strategies that we're also having development strategies so that we get something out of the deal as well, and we can expand the brand and the business.

Yes. And just moving to sort of customers and customer life span specifically. What is your sort of average customer life span? Have you seen that change at all? And sort of what strategies are in place to sort of increase member retention?

There's a lot. I mean right now, we service primarily women, ages 20 to 60. That really hasn't changed, and we still attract good population with Gen Z. That said, our average customer after the 12-month mark stays on for 3 years. So we know that their lifetime value is over $4,800. So it's a pretty sticky customer, and they love the product. They have the community. Their friends are there. They're moms, daughters, husbands, wives. They come and they work out together, which allows us to keep them for a very long time. And then for the retention strategies, it's just -- it's the small things that really matter. So we're recognizing birthdays, their first class completed, their 100th, their 200th, their 1,000th class and helping them with that one-on-one experience with the boutique experience, and the instructor being able to give hands-on correction, a little less during COVID, but really making it a personalized experience.

Yes. And then maybe could we talk a little about -- a bit about sort of customers that use multiple brands? Do you have any statistics around what percent of members have used more than one brand within the Xponential platform? And then do you find that within boutique fitness, members are sort of rotating through your different modalities?

Yes. So there's about 30% that go to 2 or more, and then it's about 10% that go to 3 or more. With XPASS, we're starting to be able to keep them within our ecosystem. But we know that boutique fitness customers have multiple memberships and that they like to -- and have one mainstay and then snack occasionally with stretching and cardio and rowing, dance. So we definitely see that and some overlap between the brands.

And then maybe if we could just talk -- switch gears and talk about AUVs for a bit. So run rate AUVs are sort of 94% above -- or 94% of prepandemic levels. When do you sort of expect them to reach prepandemic levels? And then maybe where is member utilization tracking versus prior to the pandemic?

Yes. So as far as AUVs are concerned, we hit our peak AUV and not the top of the peak right before COVID, so at the end of 2019. So right now, they're about 94% of that level. We told the Street that we expect to get back to pre-COVID levels this year, the first half of this year. Utilization from a total company and all brand perspective is above pre-COVID levels as a system-wide sales. So the AUV is really the only one KPI that is still the last hurdle from COVID that we need to get over. But from that perspective, the company has fully recovered from the pandemic.

Yes. And then there's a lot of concerns in the market right now in terms of people sort of forecasting a potential recessionary environment, a lot of geopolitical conflict. Can you just maybe talk about how a concept like Xponential would perform in a recessionary environment or maybe an inflationary environment? And do you view this as a discretionary purchase for the consumer that's relatively sticky? Or maybe, Anthony, any history with that would be great.

To say I think I'm probably the only one in boutique fitness that can talk about that because I was operating franchise boutique fitness in '08, right? And I've been doing it for 6 years at that point. So after 20 years in this exact niche, I remember '08 well. And the biggest shocker to us in '08 is that these boutique fitness memberships, this is entertainment dollars for people, not just fitness dollars, right? And I said back then, we will see bread lines before we see people giving up their memberships, right? And I said that 14 years ago now, as crazy as that sounds, when that started. And it was true, and we saw that. I ended up selling that business in 2012. And I sold that business in 2012 because it was massively bigger after '08. And so what you find in the franchise business that's interesting is you find -- in a recession type situation, you find franchisees that are out of jobs and are now looking for a new lease on life. You find massively cheap real estate, right? So where there were headwinds before, they become tailwinds. And from a member perspective, members wanted to show up, right? That was their outlet. That was the one thing -- that's the -- you say they work out 3x a week. That is the 3 hours they gave to themselves. The rest of their world might have been imploding, right? The rest of their world, they didn't control, but they controlled when they went and they worked out. And so that was the stress reliever for people. I believe we would have seen that same thing if fitness would have been allowed to stay during open the pandemic. I think that you would have seen people going to boutique fitness during the pandemic for that relief. And so we -- I don't want to ever call anything recession-proof, but it is definitely -- did well in '08, grew by 17x over a 4-year period of time because there were franchisees out there that wanted to get open and be doing something. And there's a ton of real estate to do it. So the geopolitical thing world were 2.5 or 3 or whatever this is. Obviously, we can't control that. I can't speak on how the world looks like that. But inflation so far is where it is. It hasn't been an issue for us. We haven't had supply chain issues. We're not having these material labor issues or things of that nature. Our employees -- our instructors work 10, 12 hours a week. This isn't where they make their money. This is something that they're passionate about. So we're not dealing with kind of labor issues on that side. We're trying to get somebody that works 60 hours a week, and they quit. So it's a little bit different of a niche for us. And thank God, we haven't had these effects from Omicron and inflation and supply and labor and even so far from the geopolitical stuff, right? So people are still continuing to work out.

Yes. And then I just wanted to ask a little bit about sort of corporate stores and how you think about that. I know 2021, you owned a larger percent of studios than you have in the past. There's been other fitness players who have expanded their corporate studio base, very attractive unit economics here. Is -- are you looking to primarily be a franchise business over time? Or do you find the corporate-owned studio model attractive?

Yes. Look, it is attractive. It is a lever we could pull in the future. Where we sit today, when you're selling 1,000 units and you're opening 500 a year and you're acquiring brands, there's a lot of low-lying fruit, a lot of really attractive economics for the franchisor where we are today. We always have about 1% of I'll call transition stores. So at today's couple of thousand units, we have about 20 stores that franchisees may be getting divorced. They may have passed away. They may have relocated. Whatever it might be that we bring a store in for a quarter or 2, we refranchise it back out, that's what you're referring to during COVID. We went from having about 20 stores, having about 60. So we had 40 additional stores that we brought on through COVID because, obviously, life became more difficult for people during COVID. And so those transitionary stores that we kind of foster increased. And we told the Street we would have those out by the end of the year, and we resold those out by the end of the year. So those are in hands of good, loving franchisees who are nurturing their business, and it's perfect. And so we continue back now with the 20 that we had before and just kind of rotating those through. But we could do a roll-up strategy in the future. We could buy out large franchisees much like Chris did in the Sunshine deal. So the arb on those things makes sense. Getting some leadership, like Planet was able to, on that deal makes sense. But where we are today, we're 100% franchise, 100% franchise-focused, but it's definitely always a lever we can pull at any time in the future.

Yes. So I just wanted to ask a little bit more about sort of how you view the overall boutique landscape now. So I think ERSA, the trade organization put out a statistic that 30% of boutique studios have closed over the past 2 years. Seems like a pretty significant base of the overall environment has come out due to COVID. Maybe talk about how you sort of view the opportunity there, if you're seeing any of the new joins come from competitive closures and if you're doing anything to sort of market to those people.

Yes. Look, I don't celebrate anyone's business closing, especially entrepreneurs are out there trying to make it. But the reality is those 30% closures created absolute tailwinds for us, right? And so that's 30% of the labor market tailwind. That's 30% of displaced members is a tailwind. That's 30% of real estate. It's an opportunity for us. It's not always on a one-for-one basis. We took over a regional chain of yoga studios that were 4,000 square feet. So we're able to open 2 boxes in every one of their yoga studios, right? We took over Flywheel when they went bankrupt, and we took over some of those locations and turned them into CycleBars. When YogaWorks went bankrupt, we took over some of those and turned them into YogaSixes. But the reality is our boxes, the way that they're designed, we could take over a Flywheel and turn it to a Rumble. So we don't need to do it modality for modality, but it does create tailwinds for us. And so we are seeing sign-ups from those displaced people. We're doing -- definitely doing real estate deals and definitely taking over some competitive space on a one-for-one modality basis.

Yes. And then just more broadly on the competitive environment, there's other competitors that are targeting very large studio counts in the U.S. If you think about the market in maturity, however long that may be, how do you see this sort of playing out? Do you see the market hitting a saturation point just given the really, really strong growth that we're seeing in boutique fitness market right now?

Yes. I think the question people don't ask when people give these massive amounts of units they say they're going to open is at what AUV, right? If everyone remembers Curves from back in the day, they had a massive amount of open locations, and then they had none, right? And that's because if you're not doing it scientifically like we are where we're saying, I'm going to do 938 $500,000-AUV stores that my system is healthy, the more locations you open, the AUV is going to shrink. And if it shrinks to a point that your franchisees aren't making money, then they're going to close, right? And so I think it'll be natural selection. I don't think those people that are talking crazy numbers of one brand in the U.S. will ever see that unit count. And if they get to that unit count and their average franchisee is going to be making $0.50, they're going to have a hard time staying open. So then I think you'll see closures that will then right side the ship from the cannibalization, right? And so what I like with our portfolio is that everything is truly complementary. We have a lot of brands that share walls with each other, 3 or 4 locations side by side by side, and they all do really well, right? The tide rises all ships there. But if you want to open, I don't know, 7,000 of one brand, then you're going to have cannibalization because you can't put them side by side, right? There's less than 7,000 franchise Starbucks, right? So -- and you think how many Starbucks are out there, right? And so if you have a product that has some cannibalization, you put them close together, you're going to shrink AUV to a point that the store can't stay open.

Yes. And then just wanted to ask a little bit about margins here. So I guess within sort of the equipment merchandise margins, are you seeing any cost increases there? How should we think about sort of the normalized equipment merchandise gross margins? Are you passing through any sort of cost inflation that you're seeing to the franchisees?

Yes. I mean from an equipment perspective, we see a little bit of inflation every year. So this year is no different than prior. We do, do a cost-plus model with our franchisees. Equipment margin is usually around 25%. Merchandise, not much inflation there. About 35% margins is what we see on our merchandise. Everything we do from an equipment perspective, though, is manufactured in the U.S. We freightship everything via train. So it's really the last mile from a gas perspective that we've seen on freight charges. That has gone up obviously with fuel, but it's the last mile. So it's not really material. So not much impact to the business at all from an inflation perspective.

Yes. And then if we just move one line down, talk about SG&A dollars a bit for 2022. Given that you're operating corporate-owned studios for a lot of last year, what should sort of the normalized run rate in terms of SG&A dollars be in? Anything to call out in terms of the phasing of the spend this year?

Yes. So last year, we had much higher spend in SG&A because of the COVID studios. If you take that away, this year, our SG&A will run about 33% of total revenue. There's a slight uptick in the first quarter as we kind of ramp down some of those COVID studios now having been fully transferred off. So Q1 will be higher than Q2 and Q3. Q4 is naturally higher because we have our annual convention every year and it's a couple of million dollars spend. We actually get a couple of million dollars of additional revenue in the fourth quarter to cover the costs from our vendors. That's a higher quarter, but you'll see kind of the bookends will be higher, the middle will be lower. But it will be about 68 million in range is kind of what I said, excluding stock-based comp this year. So much lower than previous years.

Perfect. Well, I think we're about out of time. So I really want to thank the Xponential team for joining us today, and thank you, everyone, for joining.