So what exactly went wrong?
big ambitions
When F45 listed on the New York Stock Exchange in 2021, it had plans for world domination.
F45 was now on US military bases and developing a “military to millionaire” franchise offering for retired US veterans. It was the first fitness franchise to be accepted on US college campuses, and high schools were another target for expansion.
Australian fund managers jumped on the fitness craze. L1 Capital had acquired a 7.1 percent stake in a Gilchrist and Wahlberg share sale in December 2020. L1’s stake would have been worth $113.6 million at the time of the float.
Caledonia reportedly acquired $100 million worth of shares in the initial public offering. The fund manager declined to comment.
Gilchrist was flanked by Wahlberg as told the finance chain Bloomberg of its grand expansion plans on the New York Stock Exchange, prior to its market debut in July last year.
He was undeterred by the fact that the business was losing money, with losses ballooning to $182.7 million at the end of 2021, and its franchises barely reopening since the initial onslaught of COVID-19.
“We want to be the largest franchisor in the world,” Gilchrist said. “We want to surpass Planet (Fitness) and be bigger than McDonald’s.”
In sheer numbers, the F45 certainly looked like a contender. The total number of franchises sold more than tripled, from 907 in 2017 to more than 2,800 in 63 countries at the time of the float.
By May of this year, when F45 announced its first quarter results for fiscal 2022, Gilchrist was sweeping expansion plans in the stands in a way his cricket namesake would have been proud of.
He reported that the group had sold a record 706 franchises for the March quarter and raised its target for the year from 1,000 to 1,500. Even this was conservative, he hinted.
“We have never seen this amount of franchise demand. We continue to grow our business by tapping into incredible influencers, like David Beckham,” he told analysts and investors at the first quarter investor call in May.
“We’ve raised the guidance from 1,000 sales to 1,500. However, if you were looking ahead… that could go back up, closer to 2,000, before the end of the year.”
But these growth plans did not impress the financial market. F45 shares were trading at less than half what investors had paid in the initial public offering just 10 months earlier.
The float was sold on the basis that the gym world was opening up again post-COVID, but new strains of the virus were already making their presence felt.
Gilchrist revealed a secret weapon that would solve a huge problem for the franchisor.
F45’s soaring franchise sales figures reflected new franchisees signing on the dotted line and putting down their deposit. But actually getting the financing, approvals, and installation to the point where the franchise was operating and making fee payments was a different story.
The record 706 franchise sales announced for the March quarter would not actually open until the end of 2023, he said.
In fact, in its May first quarter results, Gilchrist admitted to a backlog of more than 2,200 franchises where deposits had been paid but studios had not opened. This represented more than half of its total franchise sales for 4007 as of March 31.
F45 planned to help remove the significant financial hurdle by engaging outside financiers, such as Fortress Investment Group, to provide financing to franchisees.
Fortress was providing $150 million to help fund the F45 franchises, and Gilchrist said this had the potential to expand to $300 million and possibly $500 million by 2023. Another $100 million was available for its military program.
“Regarding franchise financing, we think it will help speed up backorder openings,” he said.
“We think that can be reduced to six months with respect to lag periods from signing a contract to openings.”
As he explained to analysts and investors, this funding was off-balance sheet, meaning F45 had no direct debt exposure other than what he described as “limited collateral”, and this buildup represented a huge tailwind for the business.
Just two months later, the story was very different. Amid rising global interest rates, franchise financing had disappeared. It would be catastrophic for business.
Last week, F45’s share price fell as low as $1.35, more than 90 percent below the $16 paid by investors in July last year. The latest drop came when staffing levels, revenue and profit targets were slashed. And the precarious state of his finances was revealed.
Any idea of selling 2,000 franchises this year evaporated. As of last week, F45 was targeting as few as 350 franchises.
Expectations of up to $275 million for the year have also crumbled. Revenues could be as low as $120 million.
F45’s preferred measure of earnings – adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) – fell from a high of $100 million to just $25 million.
Forecasts that it would generate free cash flow of $50 million to $60 million were withdrawn. F45 has also received a waiver from its banks for potential loan defaults in the coming months.
The company’s dwindling cash reserves would also be affected by significant cash payments to Gilchrist and the 110 employees being cut to ensure F45 lives within its means.
The company said redundancy costs, including a cash payment of more than $7 million to Gilchrist, would cost it up to $12 million.
Gilchrist’s payment includes an agreement that he does not seek an offer to take the weakened F45 private for at least 12 months.
F45 had less than $14 million in cash at the end of March this year and has yet to say how these payments will affect it. The company’s CFO is also due to receive a retainer payment of $2.4 million of F45 by October 15 this year, or sooner if the company fires him.
The full extent of the damage will be revealed in the group’s second-quarter earnings release in the middle of this month, and it could come as a shock to investors who were sold on the F45 capital-lite model, which relied on a steady stream of royalties from franchisees.
The massive growth of the franchise means that the company is generating most of its revenue from the sale of its $150,000 equipment packages to franchisees. The fees it earns from operating franchise businesses were less than 40 percent of its revenue for the March quarter.
What we don’t know yet is whether he’s on the hook for tens of millions of dollars worth of equipment that he hoped to sell to franchisees this year.
The buildup of this equipment inventory resulted in a $15 million increase in F45 accounts receivable for the March quarter.
Full steam ahead in Australia
The good news is that the Australian company remains very little affected. Up to this point.
It makes sense, given that Australia is a mature market for the F45. Their market presentations show that little change is expected for the more than 800 franchisees here.
And it is reflected in the attitude of the franchisees that the Herald Y Years spoke to this week who described it as “business as usual.”
They had almost no worries about what was happening abroad, though some wondered what impact the loss of almost half the head office staff would have. Communication from the front office has been frequent, including a conference call Thursday that included interim CEO Ben Coates.
“I think whatever has happened with this CEO and the stock price [issue] it has had very little effect on the operations of the business…and we have not seen any effect of the staff being laid off,” said one franchisee. He did not want to be named as the agreement does not allow them to speak to the press without F45’s permission.
But the business still faces its challenges here.
“I think the struggle in our industry has been post closures and post support,” the veteran franchise owner said.
“When everyone was allowed to go out, I think the first place everyone went was for a drink, a meal and to visit friends and family. Bringing people to gyms is [already] tough business. I think people who haven’t been training for two years, convincing them to come back has been slower than most other industries.”
A Sydney gym spoke of losing 20 members last month when the latest work-from-home measures came in.
Things are no better for the mastermind behind F45’s fitness regimen, co-founder Luke Istomin, who left F45 in 2016 over creative differences and has since established his own fitness business franchise, Reunion Training.
Last year’s plans to target 150 franchises of the Réunion business had to be reworked as the latest variant of COVID-19 emerged.
F45 co-founder Luke Istomin left the business in 2016 due to creative differences.
“We were about to realize our potential. Then COVID came along and it really decimated the business,” he said as he wraps up part of the operation and works on other business ideas.
“The actual training model that I have built has been phenomenal. But unfortunately, that’s the harsh reality of trying to get through two years of COVID; It hasn’t been kind to a start-up business.”
If it’s any consolation to F45 investors and franchisees, Wahlberg remains a shareholder and has continued a steady posting regimen for his 19 million Instagram followers. Last week’s disaster means the F45 is valued at less than half of what Wahlberg paid for its initial investment in 2019.
But his enthusiasm for the product has clearly not diminished.
“The best training in the world. The reason is anyone can do it at any fitness level,” he says in one of the latest posts from him this week outside of an F45 studio.
“It’s the best, it’s the best.”
