The world’s fastest growing fitness studio – F45 Training | Summer Series

Bryce: [00:00:15] Welcome to another episode of the Equity Mates summer series over 12 episodes where deep diving into some of the most exciting, interesting and well known companies from both here in Australia and over in the US. In some instances, we'll be hearing directly from the CEOs to give you firsthand insight into their companies. My name is Bryce and as always, I'm joined by my Equity Mate Ren. How's it going? 

Alec: [00:00:37] I'm very good. Bryce bit of a delay there. What's going on?

Bryce: [00:00:39] you were about to say something about our recording equipment.

Alec: [00:00:42] Not right over that side of the desk. Yes. No. I'm good. I'm excited. This is a company that is an Aussie success story. Come good and say you love Australian companies listing in the US. I mean, you love them. Love lifts them. Listing in Australia because preferably here they're local and traditionally that's all we could invest in. But you love to say Aussies taking it on the world stage and with platforms like Superhero, we can now invest in the 45's and the Atlassian's of the world if they live in the US or in Australia. So love to say it. The company we're going to talk about today is one of those. It's F45. 

Bryce: [00:01:22] Yes, F45 ticker FXLV recently listed over in the US, but you did mention superhero there Ren and the summer series is brought to you by Super Hero, who allow you to buy Aussie and US shares and ETFs with no monthly account fees. And you can now own Qantas points with Sydney, right? So visit Super Hero Dot Com slash Qantas to learn more eligibility criteria, terms and conditions and fees and charges apply. So today we're going to be covering F. Forty five are going to be talking about what they do. If you've never heard about them before, we're going to look at the industry financials, future prospects and also keep your ears tuned for some fun facts because as with all episodes in the summer series, you have the chance to win a thousand dollars in your super hero wallets. To do so, all you need to do is listen to this episode. Remember a couple of key facts that really interested you and then head across to the Equity Mates Instagram at Equity Mates. Find the corresponding posts for this episode and you can make a comment. And we're going to choose that one of the best fun facts from this episode, and you can earn the chance to win a thousand bucks. 

Alec: [00:02:26] Yeah, straightforward. Pretty easy. Remember, one interesting thing from this episode commented on the post and will choose someone to get a thousand bucks. It's that easy. Yeah, and if you want to invest it in their forty five, you can. If you want to invest in anything else, you can if you want it to withdraw it. I don't actually know what the rules are around that, but I would say that's not in the spirit of what we're trying to do.

Bryce: [00:02:49] There are some investor. There are rules around it. I think there's at least a 90 day period in which you can't withdraw the money. So check out the chase and say, But anyway, Ren, let's get stuck into our forty five. As you said, an incredible success story for a company that started here in Sydney in 2013 in our backyard with a store in Paddington. 

Alec: [00:03:08] There you go. Founded by Rob Deutsch, Hobart got his name right and Adam Gilchrist, not the cricketer, and it's all about high intensity group workouts. It's the gym of the moment. You'd probably have to say yes. My theory of gyms late 2000s, early 2010s CrossFit was the real like cold gym, and then F forty five usurped them and became like the gym of the moment. 

Bryce: [00:03:37] It's not as in the moment as it was. Well, that makes sense.

Alec: [00:03:40] I was going to let you respond to that because now then I was going to say, like, Barry's is probably like the the gym. 

Bryce: [00:03:46] Yeah, but I think also what it did was really re-engaged. A lot of the gyms that also offer gym equipment, re-engage them on providing better class structures. And I thought, Yeah, 

Alec: [00:03:58] yeah, I say that my dad, so my dad's a member of fitness first, and he used to go to this fitness first. And I remember him just being rope a because the fitness first he went through, they took all the equipment, all the free weights, like all the cardio equipment, and it was all classes all the time. Yeah, it was like, what's this? But now he's a big, he's a big class guy.

Bryce: [00:04:19] Yeah, well, they did start it. I clearly remember when I was at uni and going into the workforce at forty five was the thing, you know, people like. It's great you're in the corporate world, you ducky, and you pump out forty five minutes in, you're out. So that is a really good job and it's been a great growth story. 

Alec: [00:04:32] So let's yeah, a little bit. I know that wasn't an innovation for me. I could always do a short workout at the gym you just laid, so I was fucking around what it is. But just to establish the facts, clearly, what is like, what happens when I walk into an f forty five? How is it different? What was the innovation? 

Bryce: [00:04:51] So as you said, there is no ability to do individual workouts. You're in a group forty five minutes and you do group workouts for forty five minutes and then you're out and no workout. And this is what I really like about it. No workout is ever the same. 

Alec: [00:05:09] Yeah, it's a high intensity circuit. Yeah, you're in and you're out. You're doing it with other people. One. For a class, that's the kind of ratio Jim's love to say, yeah, yeah, so that was it. And from humble beginnings in Sydney in 2013, they took on the world. 

Bryce: [00:05:26] They did. It was. It's been an incredible expansion story. Ren. They started in Paddington and then within the first 30 months of that store, they launched 200 studios, which is pretty phenomenal. If you think about it at just over two year period 

Alec: [00:05:40] and we will get to how they grew so quickly in a second. But tell us the full story because that 200 didn't stay too long. 

Bryce: [00:05:47] No, in the in less than eight years, their global footprint has now gone to two thousand two hundred and forty seven franchises and in 63 countries and one thousand four hundred and eighty seven studios. So from zero to 1400 studios in eight years,

Alec: [00:06:05] incredible growth, incredible growth. There's a few things to unpack. Let's start with our term, you said, and then let's reconcile those numbers because they don't make sense. Franchises. So this is a franchise business, and for people who are unfamiliar, think of like a McDonald's or a KFC subway. Fast food is generally the easiest example to play in. There's a brand as a company, the franchisor that owns the brand, I guess that is the parent company. And then individual investors buy franchises and become franchisees, and they operate each individual store. So your local markers, it's very unlikely, is owned by the McDonald's Corporation. It's much more likely it's a everyday investor that spent the hundred and fifty k up front in the million a year or whatever. I don't know what the numbers are for McDonald's to to get the licence to operate a McDonald's in that area. That's the franchise model and forty five have done it with gyms and not the first gym to become a franchise. They won't be the last, but they have basically created the concept. Then they went to other gym operators, other investors, and said, Do you want a licence? This concept will give you, you know, workouts, IP branding, marketing support, all this stuff, training stuff. All that and you can be an F45 gym in your local area. All you gotta do is pass a heap of cash.

Bryce: [00:07:32] Speaking of a heap of cash at forty five franchises sell for a minimum of 50 grand. Buyer is required to spend another hundred thousand or so on equipment and then there's monthly costs on going. However, looking at the S1 or the prospective over in the states, the average setup cost is about $350000, so it's not insignificant. They do hop on about the return on that and the free cash flow that you get from it. It's not a small amount of change, but the set up costs are lower than your traditional gym. As as we know F45, you're not having to buy all the equipment and multiple racks and all those sorts of things. A lot of it is focussed on body work and that stuff. 

Alec: [00:08:11] Someone's going to slide into your arms and say, it's a perspective, it's not as perspective. So I just want to establish here that he knows and you don't have to do. 

Bryce: [00:08:20] Thanks. 

Alec: [00:08:21] Right through this episode, we'll talk about like the merits of a franchise business and stuff like that. Because when you're analysing it, thinking about the gym and the success of the gym is only half the story. But let's reconcile the two numbers that you told us there because you said in the first 30 months, they expanded to 200. Then you said, now they've got two thousand two hundred forty seven total franchises sold. Yeah, but they only have one thousand four hundred and eighty seven studios. Yeah. So what? They've sold 800 studios and just never built 

Bryce: [00:08:51] them, essentially. Yeah, they've gone out to market, sold franchises and sold to franchisees. So I've gone to Ren and said, You're interested in a in setting up a studio. 

Alec: [00:09:02] It's like a really fit guy. You should probably run a jag. 

Bryce: [00:09:04] You interested here? All the facts and figures about what it what it's like to own an f forty five. You sign up all well and good, but you still then need to go out and find the actual location for the studio. You need to probably quit your full time job. Tell your wife that you're going to do that. Break that news. Covid hit. So there it's not like you just walk into a fully formed studio that at forty five have set up for you. You buy the franchise and then you actually have to set up the studio. So that's why there's the differences here. It's a it's a bit misleading, I think from f forty five, it's kind of saying this is our pipeline of coming. 

Alec: [00:09:39] It's not misleading. Like they gave you both numbers in the prospectus. 

Bryce: [00:09:42] Well, true, but I think it's interesting to look at what you need to determine which one is the right number to consider. 

Alec: [00:09:48] Yeah, I mean, I do, but I also think that's a bit harsh. Both numbers are important and both of them. So basically one thousand four hundred eighty seven teams in operation, they will be paying annual or monthly licencing fees, and they probably have to give a percentage of profits or percentage of revenues back to the company. And so that one thousand four hundred ninety seven, if you're thinking of investing, you can model out what those numbers look like and then you say. Two thousand two hundred and forty seven gyms have been sold, so the difference there is about 800. They've probably paid the upfront component already. You probably model how long it will take for them to come online. I'm sure the companies given some guidance on that. And then you add that to your model in terms of what that means. So you have a view of what the pipeline is going to be. The big thing for me that stood out in that number is that having 4500 gyms in operation and having 800 sold in your pipeline feels like a pretty heavy pipeline. Like if you if you find that some of your assumptions about how many gyms you could sell in a certain area and city were wrong, if you find that different countries didn't take to the concept, I don't know where those 800 are, but it's a pretty heavy pipeline to operating store ratio. I would think 

Bryce: [00:11:03] what you're trying to say is of those 800, how many are going to be, what percentage is going to be a success versus 

Alec: [00:11:10] all the today, cannibalise existing ones and make existing ones like it feels like there's some risk inherent in that pipeline. You wouldn't assume that all eight hundred are just going to be profitable, profitable from day costs. 

Bryce: [00:11:22] Yeah, yeah. Well, I like that word risk because you know, you think about the longevity of these businesses, and there's no doubt in the health and fitness space in gyms, it's a reasonably low barrier to entry industry. So the question is how to forty five think that they differentiate themselves from the rest? Speaking of low barrier to entry, that just reminds me a couple of years ago, down in Potts Point forty five set up Kings Cross. Forty five set up and it was pumping booming set up across the road from a fitness first and from a let's see other 24 gym. Twenty four, anytime, anytime fitness. Yeah, so pretty competitive as it is two years later. Barry's Bootcamp bang right next to it and forty five not going so well. Really? Yeah, well, I just visually and I'm only basing this from walking past and having a look at it. But Barry's has certainly taken what I would imagine a lot of those customers. Yeah, just given the area and that sort of, yes, but but yeah, yeah. 

Alec: [00:12:18] So low barriers to entry. This is probably a good point to talk about. The benefits and risks of a franchise model is that Kings Cross at forty five might not be doing so well, but as f forty five, the parent company, they care. They obviously care. But at the same time, how much do they care? Because that Kings Cross franchise franchisee still has obligations to pay X amount of fees a year. There's probably also a percentage of revenues so that how well it goes will affect what it pays back to. The parent company, like franchise laws like the parent companies can do very well from underperforming franchisees because those just obligations that you have to pay a certain amount. So f forty five as a gym could be losing popularity, but F45 as a business could still see strong revenue for years to come, at least until those contracts end. Yeah, or franchise fees shut down. Find a way to break those contracts. 

Bryce: [00:13:16] Yeah. So just quickly, how do they claim to differentiate? Well, it's all about for them delivering these fitness programmes through technology. So if you've ever been to an f forty five, you know that there's huge screens everywhere that almost act as your fitness instructor. They use algorithms to ensure no two workouts are ever the same. They have about 6000 workouts in their library. At the moment, they're aiming to get to 10000. And of course, this is a scalable model around the world now. Is that truly differentiated on A.. But that's what they claim is they're differentiating factor.

Alec: [00:13:50] I feel like it's also a brand thing, and that's why I like Barry's has really hurt them. It's like F45 was a brand and people liked being associated with that brand. And now Barry's is like the the brand in fitness. Yeah, well, listen, that's who I don't know. I don't know if we're way too Sydney centric. I think so. 

Bryce: [00:14:08] Barry's well, I don't know. It's definitely not in Wagga 

Alec: [00:14:13] of market opportunity. Then knock it off a lot of a lot of pretty fit soldiers coming out of Kapooka. And well, 

Bryce: [00:14:20] yeah, well, fun fact about a fun fact about F45. Unlike Barry's, F45 have a policy of no mirrors, no microphones and no egos. They've deliberately excluded the use of mirrors and microphones in their workout rooms, which they believe mitigates the appearance, related pressures and trainer intimidation that are associated with many fitness alternatives. And I know for a fact that Barry's is the complete opposite of that. 

Alec: [00:14:50] Yeah, isn't the whole thing like the like red light lights everywhere and mirrors 

Bryce: [00:14:54] everywhere hate art. So you're sweating shirts off like mirrors microphones and egos? 

Alec: [00:15:00] Yeah, right. Okay, there you go. So I think the other important company fact is that Mark Wahlberg, the actor former rapper, was a very early investor in f forty five, and that was really important for them. Especially as they expanded into the US, 

Bryce: [00:15:16] so before we move to industry and financials Ren, I just wanted to quickly touch on Covid because I found this quite interesting. You would think that Covid would have a pretty devastating effect on the business. You know, how many businesses were in existence, how many studios have come back since then? Did they have enough cash to survive? So going into it into Covid, they had roughly fourteen hundred studios in operation, of which 1200 are now back online. So pretty interesting. But not only that, they still managed during Covid to sell an additional three hundred and fifty five or to open additional three hundred fifty five new stores. So I would say that's pretty resilient. Only 200 not back online. Hopefully not 200 of the best, but I would have expected that percentage to be far greater. 

Alec: [00:16:04] I feel like pretty resilient business. I feel like gyms. And again, this is just local buyers. But like in Sydney, it feels like they navigated it pretty well. We saw basically everyone just take equipment and go outside and keep training, and then they all seem to have come back pretty strongly. So I'm sure there will be some hands. But Covid and like a total shutdown of gyms, was the worst possible outcome. You couldn't have thought of something worse and they navigated pretty well. They IPO during that period, the market wasn't too worried about their long term prospects. So, yeah, full credit to the team to get through. But let's take a break and then talk about the industry and where F45 fits the financials and their future prospects. Because I think, you know, there's no doubt that it's been an incredible business story to date. The question for us as investors is what is the future holds? So let's take a break and then get into that conversation. I Bryce before the break, we really did a pretty comprehensive breakdown of F45, the business, what it offers to gym goers and then the basics of the franchise model and how F45, the parent company, is actually making money. Let's now talk about how F45 fits in the broader global fitness industry. 

Bryce: [00:17:18] Well, there's plenty of competitors. We know that they've really brought interest in a lot of excitement around that, a class only approach. And so competitors such as Orange Theory, which had first hand experience with great workout Peloton, which I haven't. But it's that class workout. There are many others, but that class only high intensity short period of time. That space in the industry is is pretty hotly contested. With more and more competitors, it seems coming on to the space. So Peloton have an advantage in that they are not at home exercise. But arguably F45 feels a bit like a stronger business in the group class since 

Alec: [00:18:02] there's so many competitors. Yeah. So it's like globally, the global gym industry is worth about $100 billion. If you can narrow that down slightly to like fitness clubs, eighty billion, I don't know what you really exclude there. I guess, like the Peloton's of the world, if we go to Australia, it's estimated annual revenue of about $1.4 billion in Australia from the gym industry, about three and a half thousand gym businesses. What would you guess is the biggest market share in Australia in terms of gyms? Who has it? Who has it? 

Bryce: [00:18:37] Um, fitness first.

Alec: [00:18:40] Second. There I visit a second year. Any time, any time. Nineteen point three percent market share, then fitness. First Virgin, then good life gyms, which is owned by ardent leisure. Oh yeah. My big takeaway from that is that the old school operators are the big players in terms of market share and they they offer cheaper subscriptions and you get the basics. But at forty five Barry's, all these other names that we've been speaking about, they really just try and target a nation of people that are willing to pay more and get a different experience. And so total market share doesn't really matter to them what matters to them. The unit economics of each franchise, how many people do we need to sign up to make each club profitable? And then let's move on to the next one, and they're doing that. So if we're going to make an investment case for our forty five, you wouldn't say my thesis is they'll take 20 percent of Australian market share. It's that they will be able to do. You would want to go bottom up and you'd say they'll be able to open this many franchises and they can make them profitable. With this many members and the likelihood of getting this many members for this many franchises and I obviously haven't done that work. But but for me, it's like, that's what really matters. Yeah. And then as a franchise business, market share again doesn't matter. It's how many franchises can be feeding you cash back to the like as a parent company. Yeah, quantity matters over quality in the franchise game. 

Bryce: [00:20:14] Yeah, well, they are changing their fee structure, so we'll talk about that in a second. But let's have a look at the financials for F45. So at the time of recording on the 4th of November, current share price, according to superhero app, is fourteen point seventy four since market cap of 1.3 billion and Ren revenue of ninety two point six million in 2019, up from twenty five million in 2017. And they're looking at revenue, which has been Covid impacted in 2020 of eighty two point three million. 

Alec: [00:20:49] I mean, not like pretty impressive from twenty five million to 90 million in two years pre-COVID. Like you love to say that so somewhat unsurprising for a company that's still growing incredibly quickly and investing the growth, it's not profitable. It's in the Covid affected year of 2020. It lost about $25 million. In 2019, it lost about 12. The year before that, it was profitable. So obviously it's really started to invest for growth the last few years. But I mean, that's not surprising franchise businesses, you would expect probably to turn profitable faster than like a tech business or something, but they're investing a lot in in growing the business, opening in new markets and finding new franchisees. So that's probably the long in the short of the financials. Share price is basically flat from when it listed. Yeah, yeah. Anything else you want to add? 

Bryce: [00:21:43] No, I mean, one to watch for me. From a listing point of view, it hasn't. It didn't pop out as as some of the Big Tech companies have over there. But yeah, I'd love to see a listing anyway. 

Alec: [00:21:56] Yeah, it's got about 20, $30 million in cash on its balance sheet, or at least it did at the end of last year, which should give it some runway to invest and grow. You can say the model, but you can also say that gyms are an incredibly fatty business. Absolutely. I get in two minds about this company, but let's talk about future prospects because we're sort of there. What do you say? 

Bryce: [00:22:21] So in terms of expansion, so they've gone out and raised and they're looking to really expand studio footprint in the United States. And then once they add that down, looking at really expanding around the rest of the world, they are in 63 countries, but obviously want to make that more. What is interesting Ren, we've spoken about their revenue model and up until recently, a lot of a franchise model has been just to take a flat fee. But now they're moving towards a flat fee. And then, as you've pointed out, a model where there's a sort of percentage of earnings and that sort of stuff. So changing the way that they take revenue from their franchisees, interestingly, they're expanding into new channels. So they currently operate 29 franchises in universities and on school campuses. They see this as a real area for growth, and they're also targeting a few new fitness concepts which one that I really like is targeting people of the older demographic aged over 50 years old. So it can be, I guess, a bit intimidating for those later in life to go into a pretty high intensity fitness class of, you know, 30 year olds. And so they're trying to come up with some concepts that will appeal to an older demographic. I think to some that up its geographic expansion, review their revenue model and look at new ways to access new demographics in new markets. 

Alec: [00:23:55] It's fascinating for me. Gyms feel like these businesses that can be great businesses for owner operators, but maybe not investable at scale and everything you've just said that it's like it's had this success. It's listed and now it's looking to change all these things, like change its concept, expand into like different channels and to target older people and all that stuff. And I get it like grow your total addressable market, find different concepts for different natures, all that stuff. I get it. But it's like if the business, if if it had really nailed product market fit and it was like 10x better than any other gym that was there, it would be saying we're just going to double down. We know what works and we get to double down on it. And for me, that is not bad, but it's 

Bryce: [00:24:42] worth noting, yeah, for me, it's just like, what is the future of exercise? I know that that's a great question, but like, I don't know, like in 10, 15 years is going to a physical location with 40 people in a class still going to be the preferred method of doing group exercise is group exercise is still going to be the preferred method over doing it. Well, you're always going to be some sort of crazy technology where are pumping it out in the metaverse. Well, you 

Alec: [00:25:12] know, we're leading maybe every episode we're going to lead to this question, which is what is fitness? What does X look like in the metaphor? Maybe Facebook will disrupt them? Yeah, metal will disrupt matter. 

Bryce: [00:25:25] Yeah. So I don't know because, you know, name a gym that was around 30 years ago. That's still around today, that strolls gym. I don't think, you 

Alec: [00:25:36] know, it was like where Arnold Schwarzenegger and stuff. Okay, cool. Cool. 

Bryce: [00:25:41] You know what I'm saying? Maybe they weren't chains like, they're OK. There was 

Alec: [00:25:44] the first 

Bryce: [00:25:44] round. Yeah. Well, that's one I don't know. I don't think so. 

Alec: [00:25:46] Well, good question. If you don't know the answer to, yeah, great question.

Bryce: [00:25:50] But what I'm getting at is how sustainable? Yes. This is a great question. Is this is this just a fad where they've hit a great expansion phase? They've hit, they've hit a peak? And will they be able to keep up with the changing the health industry? I feel like changes quite rapidly. And are they positioned and they're going to be good enough to recognise the changing consumer demands for health and and keep up with that. I don't know. 

Alec: [00:26:17] The other thing that is worth watching, you mentioned Peloton before that at home fitness trend, there's some people that are incredibly bullish on it. Peloton is obviously paving the way. I saw recently that someone has just knocked off the Peloton concept, but for rowers, so exactly the same as Peloton, but just with like rowing machines rather than exercise bikes and like that at home fitness trend is going to. It's always been around, but there's obviously going to be more and more money pouring into that space because people are going to say, Peloton, maybe we should do a treadmill version of Peloton running all like a really obscure fitness contraption like, you know, the stair staircase. 

Bryce: [00:26:58] Why don't why not just pellets on bit with blacks at a half or half as expensive? I don't know, undercut them. 

Alec: [00:27:06] There's a number of trends that are playing against each other. There's the the changing fashion in the group fitness space. There's obviously always the competitive threat from that individual fitness, anytime fitness, fitness, first base, there's the at home fitness trend, which is sort of having a moment. Well, had a moment during Covid and we'll see what happens there. But on the other side, I think the fact of the matter is that fitness is just always a structural growth industry. The fact that as society, as Western societies, we're getting more overweight and we have no self-control when it comes to what we ate means the fitness and those sort of industries will always say money flowing into it. So I don't know, I'm torn about this company. But for me, the biggest takeaway is whether or not I choose to invest in it. I love to say an Australian company take on the world. 

Bryce: [00:27:58] It's a great story. Congrats to the co-founders, who managed to in eight years go from a gym in Paddington to two thousand four hundred franchises around the world and listing on the Nasdaq Epic experience epic story. 

Alec: [00:28:12] I think it listed on the New York 

Bryce: [00:28:13] Stock Exchange New York Stock Exchange. So, yeah, I'm on the same Ren. I'll keep an eye on it. Not one that I have money in and I don't really intend to at this stage, but great story. 

Alec: [00:28:23] And if you say Bryce hanging out at Kings Cross, watching the gyms know that it's mark of that because it was a bit weird how he has so much information, anecdotal information earlier, but it's all in the investment case writing process. 

Bryce: [00:28:39] Yes, it is. It is now. I managed to take all of that in as I was walking to the fried chicken shop just passed on. Not so Ren really enjoying these summer series. We're going to be back next week with an interview with the CEO to hear it directly from them. And that is Hipages. 

Alec: [00:28:56] Yeah, we'll break down the company first, then we'll get the CEO on to ask the hard questions. 

Bryce: [00:29:00] That's it. And a reminder that the summer series is brought to you by Super Hero, who now allows you to buy Aussie and US shares and ETFs with no monthly account fees. And you can now earn Qantas points with superhero visit super hero dot com.au/Qantas to learn more eligibility criteria, terms and conditions and fees and charges apply. Remember take your favourite facts from this episode. Head across to the Equity Mates Instagram page at Equity Mates. Jump onto the corresponding posts for this episode and leave a comment with your favourite fact and go in the draw to win $1000 for a Super Hero Wallets, which we will announce at the end of this week. 

Alec: [00:29:36] And no one can take their favourite fact as Bryce creeps outside gyms in Kings Cross because that's my favourite fact and I will be commenting. 

Bryce: [00:29:44] And it's not all. It's also not a fact. It's fiction, but Ren always a pleasure chatting stocks, having a great time. We'll pick it up next week. Sounds good. [1721.9]