An Xponential Flip Flopper – Insider Weekends

A few months ago we built a custom screen for premium members called Flip Floppers and described it as follows:

The Flip Flopper is a premium screen that identifies insiders who purchased and sold shares within a period of time. For example they purchased shares on January 3, 2023 and sold those shares by April 28, 2023. The screen also identifies insiders that were selling and then suddenly flip to buying instead.

Why is this important? The SEC does not want insiders to engage in short-term trading and requires them to give back any profits from trades that happened within a six month period.

The  company we are briefly discussing this week is a flip flopper situation and we had to go beyond the top 5 insider purchases to identify it.

Xponential Fitness, Inc. (XPOF): $21.81

Business:

Xponential Fitness is a boutique fitness company that franchises brands focused on specialty fitness interests such as pilates, cycling, rowing and yoga.

When I graphed the company’s income statement using the new InsideArbitrage financial statements graphing feature, I was surprised to see that the company’s gross margin was well above the gross margin of competitor Planet Fitness (PLNT) and more than double of Lift Time Group Holdings (LTH), which is having a second go as a public company after TPG and Leonard Green  took it private in 2015.

The high gross margin can be explained by the fact that Xponential Fitness is an asset-light franchising business with 2,850 fitness studios open across its 10 brands. Franchisees invest around $350,000 to get a fitness center up and running and can expect revenue of about $500,000 by their second year of operations at 25% to 30% operating margins.

I looked at the monthly membership costs at one of their YogaSix studios ($159/month), calculated the average number of members at their studios (242) and the top line revenue number of $462,000 comes close the expectations Xponential is setting for their franchisees. These are average numbers and it would mean that some franchisees are likely to earn less or potentially even generate losses. More on that later.

Growth and Outlook:

Xponential is positioning itself as a high growth company and hence net income is scant and the balance sheet is leveraged. Last quarter, the company grew revenue by 29.8% to $77.3 million and increased its full year revenue forecast to a range of $295 million to $305 million, indicating a 22% increase year-over-year if revenue comes in at $300 million. The company also edged up its adjusted EBITDA guidance to a range of $102.5 million to $106.5 million, or an increase of 41% at the midpoint compared to 2022.

Net income of $27.5 million on sales of $77.3 million seemed respectable but the majority of that was related to a non-cash mark-to-market adjustment related to an acquisition. Adjusted net income was $4.2 million or 5 cents per share.

Inside Buying: 

Last week we saw a cluster of insiders including the CEO, the Chief Legal Officers and two directors purchase shares of Xponential Fitness.

One of these insiders, the CEO, was a flip flopper and agreed to disgorge $225,845 of profits back to the company because some of his prior sales were within six months of this purchase. You can check out the footnote in this form 4 filing. The las time insiders were so bullish about the company was in July and September 2021 when the stock was trading in the $10 to $12 range, below the company’s July 2021 IPO price of $12.

Conclusion:

Xponential checked a large number of boxes in my mental checklist including a founder at the helm, a rapidly growing company that appeared profitable, free cash flow above reported net income numbers, raised guidance, insider buying and a buyback announcement to the tune of $50 million.

The big question was why did the insiders suddenly stop selling stock and started buying as a group, especially when it meant the CEO had to give nearly a quarter million dollars back to the company. The other odd thing was the company’s decision to buy back stock through additional borrowing despite already having $228.4 million in net debt on its balance sheet even after excluding capital leases.

The third thing I kept thinking about was my back of the envelope math on franchisee earnings. If on average revenue was $462,000 for franchisees, then a 25% operating margin works out to $115,500 in operating earnings before taxes and interest. This might be considered a well paying job by some folks in certain low cost areas but is hardly a business franchisees could get excited about.

A short seller report by Fuzzy Panda Research discusses the franchisee economics, calls the company a house of cards and raises questions about the credibility of the CEO. While I don’t know enough about Fuzzy Panda Research or their track record, the report is well worth reading to understand the other side of the trade if you consider going long the company.

In light of the short seller report that came out in June and the subsequent drop in the stock price, both the cluster insider buying and the stock buyback announcement start to make more sense.

Welcome to edition 695 of Insider Weekends. Insider buying increased last week with insiders purchasing $64.71 million of stock compared to $62.22 million in the week prior. Selling decreased to $1.09 billion compared to $1.43 billion in the week prior.

Sell/Buy Ratio: The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by the total insider purchases that week. The adjusted ratio for last week dropped to 16.78. In other words, insiders sold almost 17 times as much stock as they purchased. This week, the Sell/Buy ratio was unfavorable, compared to the prior week when the ratio stood at 22.94.

Notable Insider Buys:

1. Sarepta Therapeutics, Inc. (SRPT): $111.89

Director Michael Andrew Chambers acquired 33,665 shares of this commercial-stage biopharmaceutical company, paying $108.47 per share for a total amount of $3.65 million. These shares were purchased indirectly through a trust.

You can view the list of recent insider transactions for Sarepta Therapeutics, Inc. here.

2. Precigen, Inc. (PGEN): $1.61

Shares of this gene and cellular therapies developer were acquired by 3 insiders:

• Director Fred Hassan acquired 570,345 shares, paying $1.75 per share for a total amount of $998,104. Mr. Hassan increased his stake by 184.82% to 878,942 shares with this purchase.
• Director Randal J. Kirk acquired 500,000 shares, paying $1.52 per share for a total amount of $757,612. These shares were purchased indirectly through a trust.
• Director Steven Frank acquired 400,000 shares, paying $1.72 per share for a total amount of $688,000. Mr. Frank increased his stake by 82.93% to 882,358 shares with this purchase.

You can view the list of recent insider transactions for Precigen, Inc. here.

3. Forward Air Corporation (FWRD): $64.58

Shares of this asset-light freight and logistics company were acquired by 10 insiders:

• President & CEO Thomas Schmitt acquired 16,050 shares, paying $62.70 per share for a total amount of $1 million. Mr. Schmitt increased his stake by 27.75% to 73,879 shares with this purchase.
• Director Robert C. Campbell acquired 5,000 shares, paying $64.33 per share for a total amount of $321,650. Mr. Campbell increased his stake by 20.84% to 28,994 shares with this purchase.
• Director Laurie Anne Tucker acquired 4,000 shares, paying $61.23 per share for a total amount of $244,920. Ms. Tucker increased her stake by 34.56% to 15,573 shares with this purchase.
• Director Ronald W. Allen acquired 2,000 shares, paying $64.06 per share for a total amount of $128,120. Mr. Allen increased his stake by 8.90% to 24,463 shares with this purchase.
• Director Chitra Nayak acquired 1,600 shares, paying $63.76 per share for a total amount of $102,016. Ms. Nayak increased her stake by 37.59% to 5,856 shares with this purchase.
• Director Craig Carlock acquired 1,600 shares, paying $64.84 per share for a total amount of $103,744. Mr. Carlock increased his stake by 10.70% to 16,550 shares with this purchase.
• Director George S. Mayes acquired 500 shares, paying $64.00 per share for a total amount of $32,000. Mr. Mayes increased his stake by 10.51% to 5,256 shares with this purchase.
• Director George M. Lynch acquired 500 shares, paying $63.28 per share for a total amount of $31,640. Mr. Lynch increased his stake by 4.72% to 11,083 shares with this purchase.
• CLO and Secretary Michael L. Hance acquired 411 shares, paying $60.65 per share for a total amount of $24,929. Mr. Hance increased his stake by 0.91% to 45,372 shares with this purchase.
• Chief People Officer Kyle R. Mitchin acquired 398 shares, paying $64.12 per share for a total amount of $25,520. Mr. Mitchin increased his stake by 2.29% to 17,803 shares with this purchase.

You can view the list of recent insider transactions for Forward Air Corporation here.

4. Option Care Health, Inc. (OPCH): $34.75

Shares of this home and alternate site infusion services provider were acquired by 2 insiders:

• Director Harry M. Kraemer acquired 55,000 shares, paying $34.63 per share for a total amount of $1.9 million. Mr. Kraemer increased his stake by 30.64% to 234,528 shares with this purchase.
• GC & Corporate Secretary Collin Smyser acquired 2,500 shares, paying $34.69 per share for a total amount of $86,725. These shares were purchased indirectly through a trust.

You can view the list of recent insider transactions for Option Care Health, Inc. here.

5. AerSale Corporation (ASLE): $12.61

Shares of this aftermarket commercial aircraft company were acquired by 6 insiders:

• Chairman, Chief Executive Officer, Division President, TechOps Nicolas Finazzo acquired 116,316 shares, paying $11.60 per share for a total amount of $1.35 million. These shares were purchased indirectly by Enarey, LP.
• Director Andrew C. Levy acquired 14,000 shares, paying $10.94 per share for a total amount of $153,120. Mr. Levy increased his stake by 163.21% to 22,578 shares with this purchase.
• Division President, Aircraft & Engine Management Frederick Craig Wright acquired 2,500 shares, paying $11.82 per share for a total amount of $29,550. Mr. Wright increased his stake by 1.14% to 221,585 shares with this purchase.
• Division President, MRO Services Basil Barimo acquired 2,500 shares, paying $11.51 per share for a total amount of $28,775. Mr. Barimo increased his stake by 1.09% to 232,885 shares with this purchase.
• Chief Financial Officer and Treasurer Martin Garmendia acquired 2,000 shares, paying $11.51 per share for a total amount of $23,010. Mr. Garmendia increased his stake by 1.09% to 185,102 shares with this purchase.
• Director Judith Ann Fedder acquired 1,800 shares, paying $10.83 per share for a total amount of $19,494. Ms. Fedder increased her stake by 15.32% to 13,548 shares with this purchase.

You can view the list of recent insider transactions for AerSale Corporation here.

6. Marqeta, Inc. (MQ): $5.72

Shares of this cloud-based open application programming interface platform were acquired by 2 insiders:

• Director Godfrey Sullivan acquired 200,000 shares, paying $5.88 per share for a total amount of $1.18 million.
• Director Judson C. Linville acquired 34,000 shares, paying $5.86 per share for a total amount of $199,393. Mr. Linville increased his stake by 76.15% to 78,650 shares with this purchase.

You can view the list of recent insider transactions for Marqeta, Inc. here.

7. Xponential Fitness, Inc. (XPOF): $21.81

Shares of this boutique fitness franchisor were acquired by 4 insiders:

• Chief Executive Officer Anthony Geisler acquired 44,900 shares, paying $22.18 per share for a total amount of $995,700. Mr. Geisler increased his stake by 14.18% to 361,565 shares with this purchase.
• Chief Legal Officer Andrew Hagopian acquired 8,800 shares, paying $22.18 per share for a total amount of $195,184.
• Director Mark Grabowski acquired 4,640 shares, paying $21.39 per share for a total amount of $99,238. Mr. Grabowski increased his stake by 44.31% to 15,112 shares with this purchase.
• Director Jair Clarke acquired 1,000 shares, paying $23.10 per share for a total amount of $23,099. Mr. Clarke increased his stake by 17.49% to 6,718 shares with this purchase.

You can view the list of recent insider transactions for Xponential Fitness, Inc. here.

You can view the full list of purchases from this Insider Buying page.

Notable Insider Sales:

1. Salesforce, Inc. (CRM): $204.83

Shares of this software application company were sold by 3 insiders:

• Chair and CEO Marc Benioff sold 75,000 shares for $208.36, generating $15.63 million from the sale.
• President and CFO Amy E. Weaver sold 16,275 shares for $208.03, generating $3.39 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.
• Co-Founder and CTO Parker Harris sold 1,250 shares for $210.33, generating $262,913 from the sale.

You can view the list of recent insider transactions for Salesforce, Inc. here.

2. The Kraft Heinz Company (KHC): $33.66

Shares of Kraft Heinz were sold by 3 insiders:

• CEO & Chair Miguel Patricio sold 259,958 shares for $44.28, generating $11.51 million from the sale. These shares were sold indirectly by a trust.
• VP, Global Controller (PAO) Vince Garlati sold 22,969 shares for $33.56, generating $770,948 from the sale. 4,892 of these shares were sold as a result of exercising options immediately prior to the sale.
• EVP, Global GC & CSCAO Rashida La Lande sold 10,994 shares for $33.55, generating $368,854 from the sale. These shares were sold as a result of exercising options immediately prior to the sale.

You can view the list of recent insider transactions for The Kraft Heinz Company here.

3. The St. Joe Company (JOE): $58.63

Director Bruce R. Berkowitz sold 201,000 shares of this real estate development operator for $62.06, generating $12.47 million from the sale.

You can view the list of recent insider transactions for The St. Joe Company here.

4. Booz Allen Hamilton Holding Corporation (BAH): $113.77

Director Ralph W. Shrader sold 100,000 shares of this management and technology consulting provider for $120.56, generating $12.06 million from the sale. These shares were sold indirectly by a trust.

You can view the list of recent insider transactions for Booz Allen Hamilton Holding Corporation here.

5. Atlassian Corporation (TEAM): $186.3

Shares of this software application company were sold by 5 insiders:

• Co-CEO, Co-Founder Michael Cannon-Brookes sold 41,205 shares for $193.57, generating $7.98 million from the sale. These shares were sold indirectly by a trust.
• President Anutthara Bharadwaj sold 4,739 shares for $199.99, generating $947,752 from the sale.
• Chief Revenue Officer Cameron Deatsch sold 1,276 shares for $199.99, generating $255,188 from the sale.
• Principal Accounting Officer Gene Liu sold 149 shares for $199.99, generating $29,798 from the sale.

You can view the list of recent insider transactions for Atlassian Corporation here.

6. The Liberty SiriusXM Group (LSXMA): $23.23

Shares of this entertainment company were sold by 2 insiders:

• Chairman of the Board John C. Malone sold 140,608 shares for $69.52, generating $9.78 million from the sale.
• President, CEO Gregory B. Maffei sold 5,182 shares for $32.82, generating $170,068 from the sale. These shares were sold indirectly by a trust.

You can view the list of recent insider transactions for The Liberty SiriusXM Group here.

7. The Boston Beer Company, Inc. (SAM): $362.74

Founder & Brewer, Dogfish Head Samuel A. Calagione III sold 27,000 shares of this beverages company for $359.13, generating $9.69 million from the sale. These share were sold indirectly by Limited Partnership managed by the reporting person.

You can view the list of recent insider transactions for The Boston Beer Company, Inc. here.

You can view the full list of sales from this Insider Sales page.

The list of all insider purchases and sales by management people is only available to InsideArbitrage Premium and Plus members.

Disclaimer:  Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.