Pinnacle Family Office Investments is a Dallas-based multi-family office founded by Barry Kitt. After closing his hedge fund Pinnacle Fund in 2010, Barry Kitt focused Pinnacle on managing his family’s wealth. As a family office, Pinnacle Family Office Investments primarily invests in small-cap stocks. One of its notable investments in 2021 was fitness franchisor Xponential Fitness, into which Pinnacle invested at $12 per share in July. Pinnacle Family Office sees strong upside potential for Xponential amid economic reopening and consumers returning to gyms. Pinnacle managing partner Gregory Kitt believes Xponential could potentially double its store count to about 1,900 locations in the next five years. He also thinks Xponential’s faster growth in both revenue and profitability gives it an edge over peers like Planet Fitness. Pinnacle Family Office’s bullish view on Xponential highlights its preference for fast-growing small-cap stocks as a family office.
Xponential Fitness – a key holding with bullish growth outlook
According to Pinnacle Family Office managing partner Gregory Kitt, the reopening of the economy and return of social gatherings will benefit companies tied to business, public venues and indoor gatherings, especially fitness franchisors like Xponential Fitness. Kitt believes the return of consumers to gyms will provide a boost to Xponential’s stock price and allow the company to double its size. Compared to peers like Planet Fitness, Kitt prefers Xponential due to its faster growth. Xponential currently operates 1,907 fitness studios globally and Kitt thinks it could potentially double its location count to around 1,900 in the next five years. During the pandemic, Xponential bought back some of its franchised businesses. It has committed to refranchising all unprofitable or break-even businesses by year-end 2021. If executed, Kitt says Xponential’s 2022 operating expenses should decline as it refranchises gyms at higher costs.
Xponential’s faster path to profitability compared to peers
Relative to other fitness peers, Kitt likes Xponential not just for its faster growth but also its quicker path to profitability. He notes Xponential’s studios can reach breakeven faster than many other franchisors in the space. Its fitness studios are expected to achieve a 40% cash-on-cash return by the second year after being franchised. Xponential also collects royalty fees as a percentage of revenue, unlike other companies that charge a fixed annual fee. Kitt says Xponential’s percentage-based fee structure is more franchiser-friendly in the early stages of studio operations. As studios scale up, Xponential’s profit margins on royalty fee income will continue rising.
Significant cash generation expected in coming years
Xponential is currently unprofitable but Kitt believes it will turn profitable next year. The biggest risk he sees is potential pandemic resurgences leading to further gym closures. Xponential has $25.5 million in cash and $100 million in debt, with most of its capital deployed towards acquiring brands. Kitt expects the company will have “substantial cash” going forward, allowing it to return capital to shareholders via buybacks or dividends. By 2024, he thinks Xponential could generate $250 million in revenue with EBITDA potentially surging to $100 million. “We believe Xponential’s stock could reach $40 by 2024,” Kitt stated.
As a family office focused on small-cap stocks, Pinnacle Family Office sees strong upside potential in fitness franchisor Xponential Fitness. Pinnacle managing partner Gregory Kitt believes Xponential can double its location count and size over the next five years amid economic reopening. He also likes Xponential’s faster growth and profitability metrics compared to peers. Kitt expects Xponential to turn profitable in 2022 and generate significant cash in coming years, potentially allowing returns of capital to shareholders.