‘Tis the season of fitness IPOs.

Beachbody, F45, and Xponential Fitness have all recently filed for public offerings in an effort to bulk up their overall capital.

Xponential, the latest entrant into the public market, opened at $11.20, lower than the $12 IPO price. However, both F45 and Beachbody raised more than initially anticipated. 

While this rush of funding is a positive sign for the gym industry, it could be too little too late in the big picture battle against digital fitness. 

The F45 Story

On July 15, Marky Mark (Wahlberg) dipped his toes into the IPO game as the gym company he backs, F45, officially listed on the New York Stock Exchange.

The decision to go public through a traditional IPO as opposed to a SPAC or direct listing has been, in a word, lucrative. 

Rewind to June 2020 — F45 had agreed to go public via reverse merger with Crescent Acquisition Corp. The total invested equity would’ve been roughly $845 million and the company would’ve gone public at the height of the pandemic, but the merger fell through and was fully scrapped in October. 

It turns out that a failed SPAC merger isn’t all that bad.

Instead of settling for $845 million, the company was able to navigate a significantly friendlier capital markets environment and raise at a valuation 100% higher than expected. 

F45’s new $1.5 billion valuation comes despite an 11% decline in revenues:

• 2019 Revenues: $92,690,000
• 2020 Revenues: $82,313,000

In 2019, Wahlberg and FOD Capital invested $110 million in F45 through Walhberg’s firm MWIG. After the IPO, they reportedly saw a return of more than $200 million.

The Nitty Gritty

The presentation included with the company’s S-1 filing reveals that F45’s business model is beautifully simple. Its revenues are derived almost entirely from their franchise model.

Why the franchise model is so attractive:

• Strong profitability with EBITDA margins in the 30% to 33% range
  • For context, publicly traded software-as-a-service companies typically hover around a 37% EBITDA margin
• Robust cash flow: the company generated over $20 million in cash flow in 2020
• Asset-light growth: equipment is sold to franchises so capital expenditure is limited

Now, one might wonder why F45 has yet to reach profitability.

Although the company generated $82 million in revenue in 2020, it spent nearly $60 million on SG&A — selling, general, and administrative expenses. 

The company currently has 518 studios operating within the United States, but plans to open more than 7,000 “long-term.”

With a massive U.S. market that F45 has yet to fully tap into and a business model that allows them deploy capital quickly and strategically, the $1.5 billion valuation might just be the beginning for the company.

But what does that mean for the brick and mortar gym industry?

Put Into Perspective

The F45 numbers are quite compelling, and I don’t think IRL gyms will go the way of the DVD rental store, but there’s no denying that digital fitness is set up to rule the world. 

Just take a look at a few of the top public gym companies by market cap:

• Planet Fitness: $6.3 billion
• Beachbody: $2.8 billion
• F45: $1.3 billion

Equinox is private but was looking at a $7.5 billion valuation during SPAC merger talks with the SPAC king himself, Chamath Palihapitiya, until talks ceased over valuation issues in July.

All of those figures combined pale in comparison to the connected fitness leader’s market cap:

• Peloton: $36.9 billion (SHEESH)

F45 and Planet Fitness utilize what’s essentially the same franchising model, just at different price points with slightly different workout offerings. While their models are indeed “asset light,” they suffer from ancillary issues related to franchising businesses, namely lease obligations. 

Franchisees are burdened with signing long-term leases and operating capital intensive businesses, which diminishes the franchiser’s ability to achieve exponential growth. 

F45 and Planet Fitness have made their respective forays into the digital space too, but they have yet to build strong monetization strategies around those properties.

Equinox and Beachbody, on the other hand, have been much more intentional about their digital product offerings.

• During the pandemic, Equinox was forced to shutter several of its locations and successfully prioritized its digital business, giving its app a fresh upgrade.
• But Equinox still lags behind Peloton from a market size and growth perspective.

Peloton is working on an in-app video game for its workouts, a move that could further expand their total addressable market, improve user experience, and is just plain cool. And when you harness the “cool factor,” you see growth. Peloton revenue grew by 140% in Q3 2021 and by roughly 100% in FY 2020.

We are yet to see the equivalent of Peloton introducing gaming to their product in the brick and mortar gym industry. The current model is too entrenched. 

Although F45 and Planet FItness were severely impacted by the COVID-19 pandemic, each was able to navigate through and reach their own measure of profitability: EBITDA positive for F45, with Planet Fitness returning to net income profitability in Q1 2021.

They both present incredibly low single-digit churn on their customers, as well.

Yet digital fitness companies and brick and mortar establishments — no matter how digitally savvy they are — play different sports.

When looking at Peloton and F45, we are really looking at two entirely separate asset classes. Can they co-exist? Yes. Can they both thrive at the same time? Maybe.

Brick and mortar fitness will survive post-pandemic, but its slice of the pie is unquestionably shrinking by the day.