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And welcome to the Xponential Fitness Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Patricia Nir at Addo IR. You may begin.

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' third quarter 2026 financial results. I'm joined by Mike Nuzzo, Chief Executive Officer, Jennifer Ryu, Chief Financial Officer, and Robert Julian, Interim Chief Financial Officer.

A recording of this call will be posted on the Investor section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations.

For a more detailed description of these risks and uncertainties, please refer to the earnings release issued today, our most recent Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC, and our subsequent filings with the SEC. We assume no obligation to update the information provided on today's call, except as required by law.

In addition, we will be discussing non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that could be considered by investors in conjunction with GAAP measures that we provide. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in the earnings release issued earlier today and in the investor presentation, both of which are available on our website at investor.xponential.com.

We are not able to provide quantitative reconciliation of forward-looking non-GAAP measures without unreasonable efforts to the most directly comparable GAAP measure due to the high variability, complexity, and low visibility with respect to certain items. Please also note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted.

As a reminder, in order to ensure period-over-period comparability and consistency with our reporting methods since IPO, we present all KPIs on a pro forma basis, meaning for full KPI history presented, we only include brands that are under our ownership as of the current reporting period for the period ended September 30, 2026. This includes BFT, Club Pilates, Pure Barre, StretchLab, and Yoga6.

I will now turn the call over to Mike Nuzzo, CEO of Xponential Fitness.

Thanks, Patricia. Good afternoon, and thank you all for joining today. First, I'd like to take a moment to officially welcome Jen Ryu as our new Chief Financial Officer. Jen brings extensive experience and a strong track record across finance, capital allocation, and investor relations, as well as a disciplined, data-driven approach. I'm excited to have her on our leadership team and look forward to partnering with her as we continue to strengthen our business and drive shareholder value. Welcome to the team, Jen.

Thanks, Mike. I'm thrilled to join Xponential as CFO. What attracted me to the company was a differentiated portfolio of brands, scaled platform, and exceptionally talented team. Over the past few weeks, I've had the opportunity to spend time with Mike, Robert, and the broader leadership team, learning more about the business, our franchise system, the franchisee community, and our financial priorities. I'm excited to be here and look forward to connecting with many of you.

Thanks, Jen. I would also like to take this time to thank Robert Julian for his tenure as interim CFO. Robert's leadership and steady hand on all things finance and accounting have been invaluable for our company. Congratulations, Robert, on an outstanding career. And on behalf of the entire team, I wish you and your family all the best.

Turning to the quarter, I am confident that we are focused on the right initiatives to build a stronger Xponential Fitness for our franchisees and members. We are seeing early progress in several key areas as we improve capabilities across the business, and the entire executive team is aligned and focused on translating initiatives into measurable results.

Our priorities are clear across the organization: improve franchisee and studio-level economics; support healthy and disciplined unit expansion, both domestically and internationally; strengthen Xponential's financial performance; and elevate our member experience across our portfolio. To do this, we are concentrating our efforts on four areas where we can have the greatest impact: marketing, brand operations, technology, and financial performance.

Importantly, several key initiatives we discussed earlier this year are now being implemented and starting to positively impact our business. Our objective is to demonstrate continued progress across these areas and build a stronger foundation for improved performance.

Let me now turn to a more detailed discussion of the quarter. We ended Q3 with 3,185 open studios globally. Domestically, we delivered net unit growth of 1 in Q3 and 40 year-to-date. We have streamlined our new studio development process and expect to increase new studio openings and equipment installs in Q4. We also began implementing our Club Pilates Refresh program, which is intended to modernize the member experience at our older studios.

Internationally, we delivered net unit growth of 19 in the quarter and 48 year-to-date. We continue to view international expansion, led by Club Pilates, as an important long-term unit growth opportunity, with Australia, Spain, France, and Portugal reaching new unit opening milestones in Q3.

Turning to studio performance, same-studio sales were down 7.5% overall and down 5.6% for Club Pilates. Our comp was also pressured by lower merchandise sales, which remain challenged due to the outsourced logistics partner transition issues we discussed last quarter. Work is underway to meaningfully improve our merchandise offering and fulfillment. While performance is below our expectations, sustained retention and early website conversion progress that I will discuss shortly are encouraging signs.

For Club Pilates, our AUVs continue to be industry-leading and support new unit growth. Across boutique fitness, credit card data also showed a Q3 slowdown compared with the first half of 2026, suggesting a more challenging market backdrop. Nevertheless, we are concentrating on what we can control: generating higher-quality leads, converting more prospects, keeping members in the studio longer and keeping them engaged longer, and supporting stronger execution at the studio level.

As we enter Q4, we have strengthened our capabilities across marketing, technology, and brand operations. We will continue to evaluate these initiatives based on measurable operating and financial outcomes.

In marketing, we enhanced digital, social, and creative outreach to prospective members, lowering cost per lead. We introduced a new innovative AI SEO capability that combines technology to target the best platform placement with a dedicated content production team. Since its launch late in Q3, Club Pilates articles such as "Pilates for Beginners" and "How a Pilates Membership Works" have driven an increase in organic engagement. We began rolling out a restructured local marketing platform that better leverages Meta to improve prospect targeting and is more cost-effective for franchisees. And we started a new influencer platform that optimizes social media content, a critical element of our brand positioning.

In technology, we launched the new Club Pilates website at the end of September. Its design reflects the strength and relevance of the brand as it approaches its 20th anniversary. We believe the new platform will elevate the member journey, streamline studio discovery, and drive new member acquisition. Beyond branding and visual aesthetics, the site offers significantly improved navigation. Since its launch, we have seen a double-digit percent increase in lead form submission and first-class appointment conversion and expect these results to continue to improve as we refine the online journey.

We began implementing the same website transformation across our other brands, with Pure Barre next, and expect similar conversion improvements. We invested in all studios' Google listings, which we believe will help each studio rank higher in local Google searches and improve the accuracy of information so nearby prospects can easily find and choose our locations. And lastly, we introduced new digital outreach that uses video messaging, including member and instructor testimonials, to highlight the value of our brand experiences to potential new members across their journey.

Within brand operations, we refined and focused our field team efforts, including performance dashboards and training targeting the studio cohorts with the greatest opportunity to improve lead conversion and membership performance. Our highest-performing studios continue to demonstrate the potential of our brands, and our focus is on narrowing the performance gap between those studios and our lower-performing cohorts. We also introduced new equipment, classes, promotions, and member engagement programs across our brand portfolio. At Yoga6, recently introduced programs have contributed to a recent increase in average member tenure and improved new member trends.

Beyond these initiatives, we are focused on 4 key elements that we expect will also contribute to financial performance. First, we have a strong long-term domestic and international growth opportunity in Club Pilates with our industry-leading AUVs. Domestically, we have an established network of franchisees eager to expand, and our long-term objective is to grow Club Pilates to more than 2,000 locations in the next 5 years. Internationally, we continue to build a healthy pipeline of master and sub-franchisee partners with robust development plans for Club Pilates. The brand resonates with members across countries and cultures, and our international studios continue to see strong average unit volumes. As we pursue this opportunity, we will prioritize responsible development, partner quality, and sustainable unit economics.

Second, we will continue to assess opportunities across the rest of our brand portfolio to support each brand's potential and strengthen its contribution to our overall business.

Third, one of Jen's initial focus areas will be to assess our cost structure to identify new ways to improve operating efficiency. This review will include evaluating our use of technology and AI, in close partnership with Eric, our CIO, as well as opportunities with some of our longtime vendors.

Fourth, we have made significant progress putting key legal matters behind us, an important step in improving our cash flow profile.

Our goal is to be a high-performing franchisor that supports the entrepreneurial spirit of our franchisees and delivers a differentiated experience for our members. We have certainly made progress in 2026 and will continue building on that foundation as we look ahead. I want to thank our franchisees for their resilience, their passion for our brands, and continued commitment to providing the best member experience. Every time we walk into our studios, we are reminded of the meaningful role our brands and teams contribute to the ongoing health and wellness of our members. We will continue to set the standard, evolve the experience, and drive value and positive change.

Before I hand the call over to Robert, I want to comment on our strategic alternatives review. As we shared in April, our Board initiated this review to explore alternatives to maximize shareholder value, led by our independent directors and supported by Jefferies as financial advisor. The Board remains actively engaged in a review of strategic alternatives designed to maximize long-term shareholder value, including strategic, financial, and operational alternatives. The process may include a sale of the company, a merger, or another strategic or financial transaction. Because the process is ongoing, we do not intend to comment further until it has concluded. We ask that you keep your questions during Q&A focused on the quarter.

With that, I will turn the call over to Robert for one last time for a financial review of the quarter. Robert?

Thank you, Mike. I appreciate the kind words and have really enjoyed working with the entire Xponential team over these past 8 months. I also have great confidence in Jen and know the finance organization is in very capable hands under her leadership going forward.

I'll now begin with an overview of our third quarter results before turning to our 2026 guidance. I'd also like to mention that unless otherwise stated, all financial remarks refer to the third quarter of 2026, and all comparisons will be year-over-year comparisons versus the third quarter of 2025.

With that, let's turn to the results. We ended the quarter with 3,185 global open studios, opening 54 gross new studios, 28 in North America and 26 internationally. There were 34 global studio closures in line with historical trends and concentrated primarily within StretchLab, BFT, and Pure Barre. We sold 58 licenses globally during Q3, including 43 internationally and 15 in North America. As of September 30, 2026, we had 618 licenses contractually obligated to open in North America and 741 international master franchise obligations. We also expect to continue pursuing terminations of inactive licenses.

Third quarter North America system-wide sales of $424 million were down 2% year-over-year, and same-store sales were negative 7.5%, both on a pro forma basis, adjusting for divestitures. As Mike discussed, improving performance across the existing studio base remains a key focus, and we have a number of initiatives underway to drive performance.

On a consolidated basis, revenue for the quarter was $62.3 million, down $16.6 million, or 21%, compared to $78.8 million in Q3 2025. Franchise revenue was down $8.5 million, or 16%, primarily due to a $7.1 million decline in franchise territory revenue, driven by lower revenue recognized from franchise agreement terminations. Royalty fees were also lower, reflecting the decrease in same-store sales and the brand divestitures in 2025, and technology and training fees declined as well. Equipment revenue declined $3.2 million, primarily due to a decrease in global equipment installations driven by a decrease in studio openings compared to the prior-year period. Merchandise revenue declined $4.4 million compared to the prior year. The decline reflects the change in how merchandise revenue is recorded following the transition to our new business model, as well as previously mentioned operational, structural, and execution challenges associated with that transition. Adjusted EBITDA was $24.3 million in the third quarter, down $9.2 million, or 27%, compared to Q3 2025.

Turning to the balance sheet, as of September 30, 2026, cash, cash equivalents, and restricted cash were $27.2 million compared to $41.5 million as of September 30, 2025. And as we've discussed, we've made significant progress addressing the vast majority of our regulatory matters, allowing us to focus our attention and resources on driving long-term growth. During the third quarter, we paid $4.0 million related to our agreed settlements in the FTC case. For Q4 2026, we anticipate approximately $3.4 million in total payments related to the settlement of the franchisee case. As a reminder, our franchise disclosure documents have also now been substantially refreshed with registration pending only in Maryland.

Total long-term debt was $521.1 million as of September 30, 2026, compared to $376.4 million as of September 30, 2025. The increase in total long-term debt primarily reflects borrowings incurred in connection with the retirement of the convertible preferred stock during the fourth quarter of 2025. We also had $10.0 million outstanding under our $25.0 million revolving credit facility as of September 30, 2026, with $15.0 million of undrawn capacity. We remain comfortable with the company's liquidity position.

Turning to our full-year 2026 guidance, we now expect full-year global net new studio openings to range from 124 to 130. We expect North America system-wide sales to range from $1.70 billion to $1.75 billion, unchanged from prior guidance. We expect total 2026 revenue to range from $250 million to $260 million, also unchanged from prior guidance. Full-year adjusted EBITDA is now expected to range from $91 million to $94 million.

Before we open the call for questions, I would like to say a few parting words, as this will be my last earnings call with Xponential. I want to thank Mark, our board, and the entire Xponential team for their support, as well as our franchisees who are at the heart of this system. I'd also like to thank our analysts and investors for their engagement over the past 8 months. I especially want to thank and recognize the Xponential finance and accounting teams. You are a talented and dedicated group, and it's been a pleasure and an honor to be your leader these last 8 months. I'm confident Jen and this team are well positioned for future success. I look forward to following Xponential's progress going forward.

Thank you all for your time today. We will now open the call for any questions. Operator?

[Operator Instructions] Our first question comes from the line of John Heinbockel with Guggenheim Partners.

Hey, Mike, can you talk through the Club Pilates comp? I'm curious, you know, is that largely the product of lower members, players? It may be some per-member spend, you know, changing membership and packages. But maybe talk through that, you know, the – I know you're working on some marketing things, but sort of the path back to – maybe flat results. And I think you've said in the past, you can, given the AUVs, you can live with a low single-digit, a very modest increase in Club Pilates. Is that still true for you and the franchisees?

Yes, thanks for the question, John. Yes, that's correct. I think the biggest focus is on the new members. So I think we've talked about that in previous calls. Obviously, in a more competitive environment, the battle for new members is front and center for everybody. So that's the big focus relative to the comp. But you make a really good point, and I want to emphasize the point you're calling out, which is Club Pilates reached over $1 million in AUV, which again, I've said this, looking at the economics and the performance of that, you seldom see performance like that that drives profitability at a studio level in franchising in consumer. And so we expected a level of moderation off of that what I would call sort of a record-breaking level of AUV. So that also contributes to some negative comps.

But from a development standpoint and from a profitability standpoint, we're still talking about an incredibly healthy model with a lot of room to grow.

Maybe the follow-up to that, right, so what's the level, obviously if you've got existing franchisees opening Club Pilates, probably okay cannibalizing some of their units. You know, what's the level of growth there or, you know, of flatness they're okay with? And as a franchisor, if Club Pilates was sort of flat comps or even maybe slight declines, does that work economically for you given your role?

Yes. I mean, I guess what I would say is when we model with our franchisees new locations, the expectation around the AUV to start is relatively modest compared to where they are performing today, and the economics that that produces for the franchisee is very, very healthy. I think we've talked about our pre-sale process being one of the best in the industry. We come out of the gates really fast with a big build in membership. And so that sets the foundation for really healthy AUVs going forward. So that's how our franchisees think about expansion and the AUV dynamics. And even from a comp standpoint, they're not getting caught up in a particular comp result in any given quarter because they look at it as a total AUV dynamic, total studio profitability, and the ability to continue to add units that are incredibly healthy.

Okay, thank you.

And I would say that to answer your question directly, John, does it work for Xponential with a lower AUV and same studio sales? Absolutely, it works. As long as we're continuing to grow total studios, total system-wide sales will increase and total royalty revenue will increase.

Okay, thank you.

Your next question comes from the line of Arpine Kocharyan with UBS. Please go ahead.

Hi, good afternoon. This is Darren on for Arpine. Could you talk about the same-store sales dynamics at Club Pilates specifically, including what you're seeing so far in the fourth quarter?

Yes, thanks for the question. We don't talk about the current quarter information. But I think as I was talking to John about the big dynamic, and this is not just for Club Pilates, but this is the focus across our brands, is really on driving that new member conversion. We have talked about our retention being incredibly strong and sustained. Loyalty to our brands is very strong, and so we have focused our programs and our initiatives on driving new member leads and new member conversion. And when we were talking about the website, that's an important additional tool that we'll have now for better lead conversion and first-time appointment conversion. So, again, I think we're focused on the right things from a comp standpoint and obviously really happy and continue to be happy with the AUVs that we're seeing out of that brand.

Thank you. And more broadly, what do you think is driving the same-store sales decline across the portfolio?

Yes, I think we've talked about in the past some of the drivers of that. We have identified organic traffic and organic leads as a major focus for us. There have been changes in dynamics with digital marketing. And so that is the area that we are most focused on and have really targeted from a comp improvement standpoint.

[Operator Instructions] Your next question comes from the line of Owen Richter with Northland Capital Markets. Please go ahead.

Hey guys, this is Keon Phelps on for Owen Richter. Just a quick one from us. North American sales and guidance were unchanged. Revenue was unchanged. I guess, can you kind of just help us understand, you know, adjusted EBITDA guide being lowered?

Yes, I would characterize it, Owen, as we have narrowed the guide range. And I think we took a pretty thoughtful approach to Q4. So we modeled in sales similar to Q3, and taking into account October, we got some natural cost savings in the quarter. We shifted the convention. We spent more in marketing last year around an awareness campaign. And then we got really good insight into the expectations around openings, refreshes, and merchandise. So it gave us the ability to get more focused on our EBITDA range.

Perfect. That's helpful. Yes. And then just one, if I can sneak an extra one in here looking at the net new studio openings that was lowered as well. I guess looking at that, is there a difference between, you know, new franchisees delaying openings, or are these some existing franchisees delaying openings?

Yes, most of our new openings are in Club Pilates, and I would call out two factors. And the first one, I think, has been reported by a few other players out there. Mid-year we were seeing that the real estate environment was getting a little bit more difficult, especially for the 2,000-square-foot spaces that we look for in good strip centers. So, you know, slower to find spaces, slower to get to LOI, leases, all of that. So, no reflection of the intent of franchisees to open new locations.

And then the other piece of which I think is a really healthy thing, is we've improved our analytics around assessing locations. And we think that this is going to be a net positive and allow us to select locations that ensure consistent opening success. So we're being more selective. We've turned down sites that we may have gone with in the past. I think that's a good thing. So I think both of these factors don't really impact the long-term growth trajectory of Club Pilates. And as I said, the intent is still there and motivation around getting more openings for the brand. So that's how I would characterize it.

Okay, perfect. Thanks.

This now concludes our question and answer session. I would like to turn the floor back over to Mike Nuzzo, the CEO, for closing comments.

I just want to thank everybody for participating on the call today, and we look forward to updating you in the future. Thanks.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

This live transcript is auto-generated without human intervention or review.

Good afternoon. Welcome to Xponential Fitness' Second Quarter 2026 Earnings Call.

[Operator Instructions]

Please note that this event is being recorded.

I will now hand over to Patricia Nir of ADDO Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' second quarter 2026 financial results. I am joined by Mike Nuzzo, Chief Executive Officer; and Robert Julian, Interim Chief Financial Officer.

A recording of this call will be posted on the investors section of our website at investor.xponential.com. We remind you that during this conference call, we'll make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our most recent annual report on Form 10-K for the year ended December 31, 2025, filed with the SEC and subsequent filings with the SEC.

We assume no obligations to update the information provided on today's call, except as required by applicable law. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call and in the investor presentation available on our website. We are not able to provide a quantitative reconciliation of forward-looking non-GAAP measures without unreasonable efforts to the most directly comparable GAAP financial measures due to the high variability, complexity, and low visibility with respect to certain items.

Please note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted. As a reminder, in order to ensure period-over-period comparability and consistent with our reporting method since IPO, we report all KPIs on a fully pro forma basis. Meaning for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended June 30, 2026, this includes BFT, Club Pilates, Pure Barre, StretchLab, and Yoga Six.

I will now turn the call over to Mike Nuzzo, CEO of Xponential Fitness.

Thanks, Patricia. Good afternoon, and thank you all for joining us today. Over the past decade, Xponential built the largest global boutique fitness platform through an exceptional franchise model with strong brand appeal. That growth was achieved largely through unit expansion and brand development. As we reach greater scale and the consumer environment shifts, our priorities have naturally evolved. Today, our focus is on optimizing the business, driving stronger organic growth, improving franchisee economics, and creating a more consistent member experience across our brands. To support this phase, we've assembled a leadership team with deep operating experience. As I introduced Robert, Eric, and Steph on our last call, I want to officially welcome Danielle Parra as President. Danielle brings extensive experience across all major franchise disciplines, including marketing, operations, and brand strategy, with previous leadership roles at GoTo Foods, Icon Automotive, and Caesars Entertainment.

She has hit the ground running, and her early work is helping advance several important initiatives. She's leading efforts to strengthen franchisee relationships, accelerate studio expansion, improve brand positioning, and drive collaboration across our field operations team to deliver more coordinated support. Overall, the team that we've assembled over the past year asks the hard questions, challenges assumptions, and is relentlessly focused on collaboration, franchise support, and execution. Ultimately, our objective is straightforward. Build a healthier, more productive franchise system that delivers sustainable membership growth and long-term value creation. While we are focused on improving system-level execution, we continue to see strong evidence of the brand affinity and community engagement that underpin our long-term opportunity. The senior team and I witnessed this firsthand in June at the Pure Barre 25th anniversary event in Manhattan, where we hosted 211 franchise owners, members, teachers, media influencers, and partners.

The event featured curated Pure Barre workouts, brand activations, and live stream experiences. Social media from the event drew over 1.8 million views. Moments like this reinforce the strength of our brands, the loyalty of our communities, and the meaningful impact they have on health and wellness routines. We are also finding new ways to expand our reach. In July, Club Pilates collaborated on the launch of Starbucks protein coffee drinks, giving us access to approximately 120,000 Starbucks and Pepsi employees through an exclusive introductory Club Pilates offer. Starbucks will also bring influencers into Club Pilates studios to experience the workout and highlight the lifestyle connection between Pilates, wellness, and Starbucks protein coffee. We view this as a strong example of the kind of consumer brand collaboration that can introduce more people to our brands.

At the same time, we recognize there is more work ahead to enhance our execution and drive growth. We are focused on the areas that can most directly improve our business, strengthening top-of-funnel, enhancing the digital journey, improving our franchise support across key operating functions, and evaluating each brand's growth and positioning for long-term health. This is an important time at the company as we set the course to maximize value for our shareholders, franchisees, and employees. I'll now turn to a more detailed discussion of the quarter. Domestically, we delivered net unit growth of 16, and internationally, net unit growth of 12. Year-to-date, we have grown net units by 39 domestically and 29 internationally and have a total of 3,165 open studios globally.

We are also excited to announce a partnership with our largest Club Pilates franchisee, Spartan Fitness Holdings, through which we expect to open 117 total studios across Texas, Florida, Massachusetts, Connecticut, Missouri, Illinois, Indiana, Ohio, New Jersey, and Pennsylvania over the next six years. Partnerships like this, driven by the continued demand of Pilates, are a key element of our long-term growth and emphasize the strength of the Club Pilates brand. We continue to show momentum internationally as well. We now have over 500 international studios open, with Club Pilates opening its 200th studio in June, and we see great white space opportunity in both current and new markets across the globe. We again saw year-over-year increases in leads from paid media through the continued progress with our national marketing agency that helped partially offset year-over-year declines in organic leads.

As in Q1, Q2 total company member retention improved, increasing 28 basis points year-over-year, continuing to reflect our strong member loyalty and affinity for our brands. Our Q2 same-store studio sales were down 6.8% overall and down 5% for Club Pilates, remaining below our expectations and modestly weaker than Q1 trends, with the primary impact coming from top-of-funnel pressure. The quarter also reflected a more challenging environment, consistent with the broader fitness and consumer discretionary sectors, where companies have pointed to more selective spending, higher promotional activity, and pressure on new customer acquisition heading into the summer months. Against this backdrop, we remained focused on our initiatives within our control. This includes several initiatives intended to support franchisee performance.

On the digital front, we implemented our new StretchLab digital experience in July and completed our Club Pilates website redesign, which is now being programmed by our tech team for a Q3 launch. These exciting changes are expected to have a positive impact on same-store sales by improving member navigation, reducing friction in the member journey, and supporting higher lead submission. We also expanded our remodel program in Club Pilates, which we believe will elevate existing studios and have a positive impact on our member experience. All new Club Pilates studio openings will also feature our new design experience. Finally, we continue to expand our engagement with studio operators and our field support teams with a specific focus on improving lead-to-membership conversion.

As an example, the Pure Barre and Yoga Six teams are using data tools to coach studios on adding more class types that drive the highest new member conversion. Overall, our focus remains on driving strong, durable, long-term unit growth while improving studio-level performance. We continue to see healthy development activity supported by a strong pipeline of new Club Pilates studios in various stages of development. Our teams are supporting franchisees in site identification, lease negotiation, and build-out planning. Importantly, our new studio growth runway is charted for the next five-plus years with a great mix of both smaller and larger scale franchise partners. Organic lead trends remain a key top-of-funnel opportunity. We are actively responding with dedicated AI SEO resources, technology tools designed to optimize organic lead flow, and updated website experiences across our brands.

On a weekly basis, we are now producing compelling, unique content for each of our brands, targeting the most popular fitness AI search subjects. While these initiatives are still early, we believe improving the digital experience for customers will be an important way to support franchisees, since virtually all new members start their journey on our web and mobile digital properties. New member conversion from lead to subscription is another meaningful top-of-funnel opportunity to utilize technology and RDO field support in partnership with our franchisees. As I mentioned, our field teams are using new reporting and dashboards to coach franchisees on ways to optimize membership conversion. We are also supporting partnering franchisees who are piloting AI-enabled tools that interface with studio member management systems and provide more automated advanced CRM capabilities for both new member and retention efforts.

We intend to provide technical leadership, guidance, and recommended solution options while allowing our franchisees to use the tool that matches their local needs best. Merchandise is a smaller part of our business, it remains a contributor to profitability and to the franchisee experience. That said, the recent transition to our outsourced logistics partner has created initial challenges in vendor operations, sourcing, and execution that have negatively impacted our results. Our supply chain team is working closely with this vendor on process fixes while also evaluating additional ways to improve reliability and performance over time. All these initiatives are progressing, they will take time to translate into financial results.

As Robert will discuss in more detail, we are lowering our full year guidance primarily due to our second quarter performance, as well as our current expectations around same-store sales and merchandise revenue in the second half of the year. We will also continue with a level of elevated paid media and digital spend that will help bridge us to the expected improvement in organic lead performance later in the year. We also remain focused on identifying additional savings and efficiency opportunities, including ways to better leverage technology to support our efforts. We have effective leadership in place to drive action, we are committed to strengthening the business and creating long-term value. Before I hand the call over to Robert, I want to comment on our strategic alternatives review.

As we shared in April, our board initiated this review to explore alternatives to maximize shareholder value, led by our independent directors and supported by Jefferies as financial advisor. The board remains actively engaged in a review of strategic alternatives designed to maximize long-term shareholder value, including strategic, financial, and operational alternatives. The process may include a sale of the company, a merger, or another strategic or financial transaction. The process is ongoing, we do not intend to comment further until it has concluded. We ask that you keep your questions during Q&A focused on the quarter.

With that, I will turn the call over to Robert.

Thank you, Mike, and good afternoon, everyone. Let's begin with an overview of our second quarter performance and then discuss our 2026 guidance. I'd also like to mention that unless otherwise stated, all financial remarks refer to the second quarter of 2026, and all comparisons will be year-over-year comparisons versus the second quarter of 2025.

With that, let's turn to the results. We ended the quarter with 3,165 global open studios. We opened 67 gross new studios during Q2, 47 in North America and 20 internationally. There were 39 global studio closures in the second quarter, in line with historic trends and concentrated primarily within StretchLab, Pure Barre, and BFT. We sold 53 licenses globally during Q2, including 43 internationally and 10 in North America. As of June 30, 2026, we had more than 690 licenses contractually obligated to open in North America and 730 international master franchise obligations.

We generated slightly higher termination revenue and net income this quarter as we pursued terminations of inactive licenses and expect to continue to do so over the next couple of quarters. Second quarter North America system-wide sales of $437 million were flat year-over-year, and same-store sales were negative 6.8%, both on a pro forma basis, adjusting for divestitures. Growth in system-wide sales from net new studio openings was offset by the same-store sales decline. As Mike mentioned earlier, we have several initiatives underway to improve our same-store sales performance moving forward. On a consolidated basis, revenue for the quarter was $66.0 million, down $10.2 million or 13% compared to Q2 2025. Approximately $2.5 million of the year-over-year decline was related to equipment revenue, which correlates to new studio openings and is largely related to the timing of studio openings and installation schedules rather than changes in long-term development demand.

Merchandise revenue declined $5.1 million compared to prior year. $3.9 million of the year-over-year decline is related to how revenue is recorded in our new outsourced merchandise model. You will recall that we no longer record the full sales value of merchandise sold as revenue, but rather only record the commission we earn on those merchandise sales now. We also continue to work through challenges related to our transition to this new business model. We are actively implementing initiatives to improve execution and enhance performance, although the pace of the improvement has been slower than originally anticipated. Franchise revenue was down $1.4 million versus the prior year, primarily due to the decrease in same-store sales, coupled with the brand divestitures in 2025. The remaining $1.4 million revenue shortfall was split evenly between marketing fund revenue and other services revenue.

Adjusted EBITDA was $21.9 million in the second quarter, down $6.2 million, or 22%, compared to Q2 2025. Adjusted EBITDA margin was 33%, down from 37% in the prior year. Relative to our internal forecast, Q2 adjusted EBITDA came in below expectations, primarily due to lower merchandise contribution and higher marketing investment. Turning to the balance sheet. As of June 30, 2026, cash equivalents, and restricted cash were $25.0 million, down from $38.7 million as of June 30, 2025. As we've discussed over the past several quarters, we've made significant progress in resolving the vast majority of our regulatory matters. Importantly, this allows us to return our full focus and resources toward executing our strategic priorities and supporting long-term growth.

During the second quarter, we made payments of $6.8 million related to our agreed settlements in the franchisee lawsuit, the FTC case, and the New York Attorney General case. For the remainder of the year, we anticipate approximately $11.4 million of additional payments related to the settlement of both the franchisee and FTC cases. Also, our franchise disclosure documents have now been substantially refreshed, reflecting the work we've done to strengthen our operations and providing prospective franchisees with a clearer, more current representation of our system. Total long-term debt was $522.4 million as of June 30, 2026, compared to $377.8 million as of June 30, 2025. The increase in total long-term debt is primarily due to retiring the convertible preferred security during the fourth quarter of 2025.

Before discussing our outlook in greater detail, I want to address the primary drivers of our revised guidance. First, second quarter performance was below our internal expectations. Second, we anticipate continued pressure on merchandise revenue going forward. Finally, we have made more cautious assumptions for same-store sales growth in the second half of the year, reflecting Q2 trends and what we have seen so far in Q3. Although this lowers our full-year outlook, we believe it is appropriate to remain disciplined in our assumptions until we see sustained trend improvement. Our current guidance is as follows. We expect full-year global net new studio openings to be approximately 150. We expect North America system-wide sales to range from $1.70 billion to $1.75 billion.

We expect total 2026 revenue to range from $250 million to $260 million. Full-year 2026 adjusted EBITDA is now expected to range from $91 million to $97 million. This translates to 36.9% adjusted EBITDA margin at the midpoint. In closing, we are taking decisive actions to improve same-store sales, strengthen merchandise execution, support our franchisees, maintain cost discipline, and allocate capital prudently. While there is still work ahead, we believe these actions can strengthen profitability and position the business to create long-term value.

Thank you all for your time today. We will now open the call for any questions. Operator?

[Operator Instructions] Our first question comes from John Heinbockel of Guggenheim Partners. Please go ahead.

Mike, couple of things. When you think about reversing the comp trend at Club Pilates, how do you address that? I know you've said in the past that that's less important when you think about the AUV, it's less important to franchisees than kind of maintaining that AUV number. Is that still fair? I guess, what does it take or what comp number would exert less pressure, much less pressure on your P&L? I don't know where that has to be. I guess it could be negative.

John, thanks for your question. Let me start with what I'm pleased with relative to the Club Pilates brand in particular. First, we continue to open studios, have a really good process for it, and the new studio openings have been very strong and continue to be strong. I attribute a lot of that to the presale process. The team here does a great job of building a membership base at opening that drives some really strong AUVs. As far as the comp trend goes, I'm pleased with the continued member retention trend and, from a lead standpoint, I think we're starting to hit our groove with paid media leads. We are laser-focused on improving organic leads and the experience on our website.

In particular, the work that we've done over the last couple of months on the Club Pilates website that is going into production, I think will have a very meaningful impact on our top of funnel. All that said, to your point, this is a brand that continues to generate great AUVs, and incredible economics for our franchisee base. As we continue to grow this brand, this idea of having perhaps double the number of studios we have today in the U.S., North America, and having those even be at a slightly lower AUV still represents an amazing business. From a comp standpoint, I think you're also right in your thinking. This is a business that has historically done double-digit comps. Going forward, we don't need double-digit comps. Anything from a modest positive to even flat would be really good.

Again, that's with the inherent pressure that we'll have on AUVs as we continue to open new studios in fill-in markets. That's really the focus for us. How do we get that comp to get obviously closer to flat, modestly positive, but also continue to open strong studios and build a great brand.

Yes. I'll add to that, Mike, if that's okay. As Mike said, with the strategy to grow studios and to fill in studios, the AUV and the comp becomes less of a factor. It's not unimportant, but I would say that what is putting pressure on our P&L right now is actually more on the equipment sales and the merchandise revenue. That's transitory. We will continue to open studios, the equipment installations will increase, and we will fix the merchandise issue. I think there's sometimes a misconception and maybe a little too much focus on same-store sales comp, for example because it doesn't fully account for the total studio expansion and the total increase in system-wide sales that could still exist even with pressure on AUV and same-store sales going forward.

My follow-up, maybe, Robert, can you talk about the path to normalization in SG&A as legal costs moderate? I think the number with including SBC is probably, I don't know, 110 or so. The path there and then also the path to cash flow generation. When you - maybe you get out to '27, you've also got the lease. You're still negotiating lease settlements. What is that path and when do we get there? It's sort of been pushed out a little bit.

Yes. I'll address that and the folks internally here know that I look at the P&L a little bit different, I bifurcated our SG&A expenses into two categories, the recurring SG&A, the impacts adjusted EBITDA, and the non-recurring or adjusted SG&A, which has been elevated. I bifurcate the two, if you look at our recurring SG&A, we're actually making good progress and continue to make progress. Even in the second half of the year this year versus first half, we're really doing a good job of managing recurring SG&A. We've had elevated non-recurring and adjusted SG&A legal expenses and so on. I actually think it's a little bit hidden in the total SG&A number.

If you can look at it on a basis of what is normal, ongoing, recurring SG&A, we're doing pretty well and we're still working on that and becoming more efficient, but it's actually in better shape than what the total SG&A looks like when you don't exclude the unusual and adjust it out SG&A. On the second part of your question relative to cash flow. This year was under a tremendous amount of pressure. Cash flow is under a lot of pressure this year for both legal expenses and legal settlements to the tune of $40 million-ish. It's been that much in previous years as well. I mean, over the course of several years, the legal expenses and settlements approaches $100 million. It's put tremendous pressure on free cash flow. Our view is that, again, that is mostly behind us.

We have a schedule for those expenses going forward. I project cash flow to be positive in the future. In 2027, that number will be positive and continue to improve. Frankly, I'm not concerned about the balance sheet or cash flow or liquidity. I just think that those. We had some unusual non-recurring items in the last couple of years that's really put a lot of pressure on cash.

The next question comes from Arpine Kocharyan of UBS. Please go ahead.

On same-store growth, can you maybe give a little bit more detail on the declines you're assuming for Q3 versus Q4, and specifically, what kind of declines you're looking at for the back half for Club Pilates and what's implied for that brand for H2?

Sure. I'll start, and I'll let Mike fill in. We've seen fairly consistent same-store sales comp in the Q1, Q2, first half of the year has been roughly minus 6.5%, give or take 100 basis points or so. In our projections for the second half in our guidance, we are assuming more or less the same trend, not really much of a difference between Q3 and Q4. That may just be, I'm not going to say it's conservative because we're trying to be prudent in the financial assumptions that we're making in the inputs to our forecast and the guidance that we're giving. To answer your question, what's built into the forecast and the guidance is more or less the same trend through the end of the year, pretty consistent with what we've seen in the first half.

Yes. That's right. I think we're holding ourselves to the discipline of, we've got a number of good initiatives going right now. We feel like they're targeted on bending the curve around same-store sales. Until you see it, we aren't going to build the financial structure around it. I appreciate Robert's thoughtfulness around the guidance there.

Yes, I have to admit, it's a bit of a philosophical forecasting philosophy that I've had throughout my career, it's more or less, I don't like to forecast a change in trend until I've seen a change in trend. We are doing everything we can and a lot of actions to see a change in trend, the forecast reflects what we've seen up until this point in the first half of the year.

Okay. That's helpful. Another question, maybe a two-part question. One is in terms of net unit growth, which has obviously changed today, adjusted down a little bit. Is there a change in your assumption for deletions versus sort of growth additions that you are looking at? Maybe can you remind us how different this year will be in terms of deletions as a percentage of footprint? I just wanted to go back to the idea of system growth existing even with declining same-store sales. Over a short period of time, that can very much be true, but how do you attract franchisee investment if the mature store is declining? How do you attract new money?

Yes. Let me answer the real estate question first. In terms of, I think you were referring to closures. Our closure trend in the first half of 2026 actually mirrors the closure trend in the first half of 2025. Before we had a larger number of closures in Q4 of 2025, and again, around some brand work we were doing and divestitures and a lot of that. I think we're on a pretty decent run rate around closures. That is what we would have expected. The real focus is on the new studio openings. We feel really good about the pipeline. The real estate environment, and I'm in these meetings every week, and so is Robert. It feels like everybody is looking for strip centers in the 2,000 square foot range. Naturally, landlord negotiations and lease work, I think is a little tougher than it was just a few years ago.

On the flip side of that, we're providing more support to the franchisees in the process I feel good that we're going to maximize the opportunities we have for 2026. We did dial in that number, as best as we could. I think we have a good chance to get out of the gate faster in 2027. I feel good about that. To your question about the messaging to the franchisees, I think there, it kind of gets back to the question we were talking about, or the issue we were talking about around AUV and studio-level economics. I think that as a franchisee, you're always looking for this as a long-term proposition. You're even more hyper-focused on what is a reliable revenue forecast for the studio itself.

What are the expense structure items that I can count on, and what kind of four-wall profitability can I produce? From that perspective, the Club Pilates model has shown incredible durability and strength, and I feel good about continuing to have those discussions with our franchisee base. Having said all of that, one of the big advantages I think we have is that, especially in Club Pilates, we have an existing franchise base that can open most of our new studios as we go forward. Much of our territories are spoken for at this point, again, that gives us a very reliable growth engine into the future.

The next question comes from Owen Rickert of Northland Capital Markets. Please go ahead.

This is [ Keyan ] on for Owen Rickert. Just one from us here. I think this is announcement with Spartan is kind of the second or third big, large deal you've done for Club Pilates partnerships. I guess, is there any benefit to them signing these larger partnerships, any deals they're getting on the equipment front? Then how do you think about the balance of the pipeline with these larger partners in? Is it leaning towards these larger partners or more independent franchisees?

Good question. I think just to be specific, the nature of these deals is more around, the focus is more around the planning for the future expansion expectations that both we as the franchisor and the franchisee partner can hold us to. It's really great work, and it's not something that takes a couple of weeks. It usually takes quite a bit of time to put into place because our real estate team gets involved. We map out the geographies. We get very specific. That's why the number is very specific because it is linked to very laser-focused geographies. There aren't really elements of the deal that are vastly different than our core franchise arrangement. These are really advantageous to us. These are really great partners. They operate really good businesses. They often bring incremental resources to their management of studios.

They serve as a really good group to test and pilot new initiatives that we develop here at corporate. Some of it comes from our ideas, some of it comes from their ideas. That tends to be really helpful. And we'll see. There are some geographies where some additional larger arrangements could work pretty well, but we'll have to kind of see how that plays out over time.

[Operator Instructions] Our next question comes from Noah Zatzkin of KeyBanc Capital Markets. Please go ahead.

I guess first, just on merchandise revenue, how are you thinking about the kind of timeframe for that to ramp back up after the changeover? On the marketing fund expense increase in the second quarter versus last year, any kind of results to point to or expectations for, I guess, when those investments could gain traction? Thanks.

I'll take the second part first. The marketing investment in Q2 really helped produce higher paid leads, which was definitely a benefit to us because it helped offset the pressure that we were experiencing around organic leads. That did make that worthwhile. Our return on investment is actually pretty similar on the paid side. We're happy with where that sits. We just have to make up more ground on the organic side. As far as the merchandise arrangement goes, I can't get into much detail, but as we alluded to in the script, we're clearly having some challenges with our outsource partner, and we're working through it. We're exploring a host of improvement options. You called it out. This is not large, but it is a contributor to profitability for both us and our franchisees. And our goal is to get that back to a normal run rate in the second half of the year.

Yes. Noah, I guess I would add similar philosophy that I described around the same-store sales comp. We are being either conservative, realistic, however you look at it, in terms of what we're projecting in the second half of the year, which is similar to what we experienced in the first half of the year. Frankly, the largest elements to our change in guidance are a continuation of the same-store sales trend and a continuation of the merchandise through the end of the year.

But we hope to, just like same-store sales comp, we're working very hard to fix that. We hope to do better than a continuation of those trends. That is effectively what's built into the forecast. Those two items, plus the shortfall in Q2 versus our internal expectations, entirely make up the change in our guidance.

Ladies and gentlemen, with no further questions in the queue, we have reached the end of the Q&A. I will now hand back for closing remarks.

Judith, thanks. Thank you all for your questions and your participation. We appreciate your time and look forward to updating you on our progress next quarter. Have a good day.

Thank you. Ladies and gentlemen, that concludes this event. Thank you for attending. You may now disconnect your lines.

Greetings, and welcome to the Xponential Fitness's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Patricia Nir, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you all for joining our conference call to discuss Xponential Fitness's first quarter 2026 financial results. I am joined by Mike Nuzzo, Chief Executive Officer; and Robert Julian, Interim Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.xponential.com.

We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our most recent annual report on Form 10-K for the year ended December 31, 2025, filed with the SEC and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call, except as required by applicable law.

In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call and in the investor presentation available on our website. We are not able to provide a quantitative reconciliation of forward-looking non-GAAP measures without unreasonable efforts to the most directly comparable GAAP measures due to the high variability, complexity and low visibility with respect to certain items.

Please also note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted. As a reminder, in order to ensure period-over-period comparability and consistent with our reporting method since IPO, we present all KPIs on a pro forma basis, meaning for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended March 31, 2026, this includes BFT, Club Pilates, Pure Barre, StretchLab and YogaSix.

I will now turn the call over to Mike Nuzzo, CEO of Xponential Fitness.

Thanks, Patricia. Good afternoon, and thank you all for joining us today. Before I discuss the quarter, I'd like to highlight 3 important leadership additions. During the first quarter, we welcomed Robert Julian as Interim CFO; and Erik Quade as Chief Information Officer.

Robert brings over 30 years of proven financial leadership with experience guiding high-growth consumer brands, including the RealReal, Sportsman's Warehouse and Callaway Golf. Erik brings extensive hands-on experience across the full spectrum of multisite technology disciplines, scaling enterprise capabilities for consumer brands such as Tilly's, Hot Topic and Billabong.

Finally, in mid-May, we will be welcoming Steph So as our new Chief Marketing Officer. Steph was most recently Chief Growth Officer at Shake Shack and has led brand building and performance marketing efforts in senior roles at Ralph Lauren, Estee Lauder, Shopbop and Cover FX. Collectively, these highly accomplished leaders will strengthen execution across the organization, and we are very happy to welcome them to the Xponential team.

Now I'll turn to a more detailed discussion of the quarter. In Q1, we continued focusing on operating in a more integrated way, aligning marketing, operations, technology and brand building to drive stronger performance and set the foundation for continued operational improvement. These organic growth priorities, coupled with our sustained unit expansion, established brands and industry tailwinds, highlight the potential beyond our existing platform today and position Xponential strongly for future success.

With that backdrop, an overview of Q1 is as follows. Domestically, we opened 23 net new units and internationally, we opened 17 net new units, consistent with our midpoint expectation of 160 net new openings globally for 2026. We finalized Club Pilates unit expansion deals with 2 major domestic franchisee partners, securing commitments for approximately 160 future studio openings.

Internationally, Club Pilates opened its first studios in 3 new countries: Mexico, Belgium and Thailand. We also recently finalized the development agreement in the Philippines. Overall, our Club Pilates growth pipeline remains robust, and we have an expectation to expand to over 2,100 studios domestically. Internationally, we currently have 189 open studios across 14 countries with committed licenses for more than 499 additional studios in major markets in Europe and Asia, capitalizing on the growing Pilates wave across the world.

We also see studio growth potential across our other brands, and we will provide more updates as we move through 2026. Our Q1 same-store studio sales were down 6% overall and down 4% for Club Pilates, which was a modest change from the fourth quarter decrease of 3% in Club Pilates. These sales results, while below our standard, were expected given several factors I'll discuss shortly, in addition to the challenging year-over-year comparison with Q1 2025, which included 6% total company and 9% Club Pilates same-studio sales.

Importantly, we have seen signs of stabilization as we reaffirm our 2026 guidance. Specifically, with front-loaded marketing spend in Q1, we saw paid lead growth with a combination of enhanced national and local paid marketing match efforts. While still early, we expect ongoing improved performance and continued momentum as we further enhance organic top-of-funnel member acquisition capabilities and meaningfully improve our digital experience.

Operationally, we also made progress in Q1, including the following initiatives: completed the transition to a new national marketing and digital agency with extensive expertise in the rapidly changing performance, social and AI marketing landscape. We are seeing quick improved performance in our paid performance marketing efforts, launched an automated e-mail CRM program, which is now being used across all our brands and major new member cohorts with a second phase that includes the development of member retention outreach, accelerated critical work on all our brand digital properties that I am convinced is a key element to organic growth.

Our websites, in particular, are long overdue for upgrades to design, navigation, user experience and AI SEO. Initial improvements recently completed for a pilot group of StretchLab studio microsites are yielding a high single-digit initial booking lift. Once we expand this new navigation experience to our national site and full studio chain, we anticipate it will have a real impact on StretchLab trends.

I also recently saw the new proposed Club Pilates site redesign, and it is a significant change that will position us with best-in-class fitness digital experiences. I can't wait to leverage this work for all of our brands, web, mobile and app properties. We expect it to transform our top-of-funnel experience.

Nationally, we saw the recently launched Club Pilates Circuit class gain quick adoption across our chain and popularity with members, while we will also be launching a new Y6 core class for our YogaSix brand, which incorporates elements of hot mat Pilates.

We kicked off our remodel program in Club Pilates with Pure Barre planned as a fast follow. All new Club Pilates studio openings will feature our new design experience. We meaningfully enhanced our YogaSix, Pure Barre and BFT brand assets and introductory offers across all marketing channels. Leverage the pricing work we completed in Q4 to plan actions in upcoming quarters, including targeting an inflationary price adjustment in early Q3. And we continue to expand our engagement with studio operators with our field support teams with a focus on improving lead to new member conversion. These teams are providing more hands-on support through targeted sales coaching, enhanced marketing tools and newly developed KPI dashboards.

Most importantly, this represents our scaled effort to deliver consistent in-market support, particularly for new studio openings, staff transitions and underperforming locations, which we believe will be a key driver of improved studio level performance over time. This is all positive progress, but let me talk more about our same studio sales, where we have spent considerable time focusing on the drivers of our trends.

First, importantly, our existing members are showing even more affinity and loyalty to our modalities and brand proposition. In fact, in Q1, year-over-year company-wide member retention improved 36 basis points, and March marked our best member retention month since Q1 2024. In particular, this strong member retention in Club Pilates continues to produce one of the strongest 3-year member LTV at over $2,300. And recent surveys continue to indicate that approximately 80% of members expect to continue taking classes over the next 6 to 12 months.

Clearly, our strong member retention provides a foundation for driving organic growth. So with stronger existing member retention, we are laser-focused on accelerating top of funnel and new member conversion as the major opportunity. Here, we see the following factors at play.

First, across all our brands, we have seen lower digital traffic driven by industry-wide platform changes at Meta and Google. Meta represents a major share of our local marketing, specifically direct franchisee spend with company-approved local agency partners.

Starting in mid-2025, Meta began transitioning to Edramada. This AI-driven ad approach replaced focused audience targeting, which shifted the platform toward a more broad-based consolidated spend model. This challenged the efficacy of our structure of many distinct agency arrangements supporting individual studio markets. Essentially, we were not realizing the scale advantage with our Meta spend, and we believe this started to affect lead flow in late 2025 into 2026.

Also in the second half of 2025, organic search for us primarily Google, underwent significant AI-driven changes that have been widely reported to reduce traditional organic click-through rates across every sector by nearly 30%. Increasingly, search results now yield AI-generated content instead of clickable links or ads, a shift many of you have experienced firsthand.

Because virtually all prospective members begin their journey on our web and mobile platforms, these changes had a major impact on our organic website traffic and in turn, our new member lead generation. Second, our ability to convert new leads to members was impacted as changes to member privacy systems created confusion at the studio level and complicated lead outreach.

In addition, we had the anticipated transition period from our brand-based sales structure to our new field-based support team. The good news is that all these factors are within our control, and we are actively taking steps to address and capitalize on them.

On Meta, we are working to enhance our local account structure to better realize scale benefits from individual franchisee spend. On Google, short term, we are addressing organic traffic pressure with a more front-loaded increase in paid media spend, which you will see in our financial results, while our major planned website improvement projects across all brands will include a focus on all the ways to drive better AI SEO results. As the industry leader in the space, we expect to be at the forefront of making meaningful progress quickly.

On lead to member conversion, we have already addressed our studio system-related deficiencies created by privacy-related changes, and we are continuing to integrate our field ops team who are rolling out tools in support of driving our franchisee success. In addition, we expect that our recently launched automated e-mail program will support these efforts, and we will also evaluate other technology tools to improve introductory class booking and membership close rates.

My goal in all of this is to become best-in-class in partnering with our franchisees to generate new member lead flow, create the most seamless digital engagement and offer the best supported membership purchase process. With strong member retention as a foundation by bringing more advanced resources to lead generation with paid performance marketing, new member digital experience improvement and incremental in-studio membership conversion support, we plan to help our franchisee partners provide a best-in-class member experience.

As we look ahead, our focus is on restoring sustainable organic growth through a more disciplined and repeatable execution framework. We also remain focused on retention through ongoing class innovation, our studio remodel programs and enhanced brand positioning. And I want to thank our franchisees and studio teams for their partnership and continued focus on delivering a great member experience every day.

Finally, I would like to thank Chelsea, Jair and Bruce for their service to our Board and welcome our newest Board member, Nicole.

With that, I'll turn the call over to Robert for a review of the financials.

Thank you, Mike, and good afternoon, everyone. I'd like to begin by expressing my excitement to be stepping into the interim CFO role here at Xponential Fitness, and supporting the process for selecting and onboarding a new permanent CFO. It's been a pleasure for me to work with Mike again and to meet and work with the executive leadership team here at Xponential. Over the past couple of months, I've had the opportunity to work closely with Mike and the team here to gain a deeper understanding of the business and our financial priorities.

I look forward to leveraging my 30-plus years of financial leadership experience to support the company with disciplined financial oversight and focused execution moving forward. It's really great to be here.

I'll now turn to an overview of our first quarter performance and then discuss our 2026 guidance, which we are reaffirming. While my remarks today will be more streamlined, we encourage you to review the earnings press release and the financial overview section of the investor presentation available on our website.

I'd also like to mention that unless otherwise stated, all financial remarks refer to the first quarter of 2026, and all comparisons will be year-over-year comparisons versus the first quarter of 2025. With that, let's turn to the results.

We ended the quarter with 3,137 global open studios, opening 66 gross new studios during Q1 with 43 in North America and 23 internationally. There were 26 global studio closures in the first quarter, in line with historic trends and concentrated primarily within StretchLab, BFT and Pure Barre. Moving forward, we expect unit closure rates to decline to the low to mid-single-digit range.

We sold 28 licenses globally during Q1, including 16 internationally and 12 in North America. In April, we completed the FDD update for the 2026 cycle as part of the normal renewal process. As of March 31, 2026, we had more than 780 licenses contractually obligated to open in North America and 750 international master franchise obligations.

While we continue to pursue terminations of inactive licenses, Q1 terminations was impacted by the annual FDD renewal process, and we expect slightly higher termination revenue and EBITDA over the next couple of quarters. First quarter North America system-wide sales of $437 million were up approximately 2% year-over-year, and same-store sales were negative 6.2%, both on a pro forma basis, adjusting for divestitures. The increase in system-wide sales was driven primarily by growth from net new studio openings.

Mike addressed in his earlier comments, the challenges around the negative same-store sales performance in Q1 and the strategic actions that we are taking to address and improve these trends moving forward.

On a consolidated basis, revenue for the quarter was $60.7 million, down $16.2 million or 21% compared to Q1 2025. Approximately $6.8 million of the year-over-year decline was in equipment revenue, which is related to new studio openings and largely a timing issue. $5.6 million of the decline is from our transition from an in-house merchandising model where we previously recorded the full value of items sold as merchandise revenue to an outsourced model under which we now record only the royalty or net profit from retail items sold on the merchandise revenue line.

Franchise revenue was down $2.7 million versus the prior year, primarily due to a decrease in same-store sales, coupled with the brand divestitures in 2025. The remaining $1.1 million revenue shortfall was split evenly between marketing fund revenue and other services revenue.

Adjusted EBITDA was $20.4 million in Q1, down $6.9 million or 25% compared to prior year. Adjusted EBITDA margin was 34% in Q1 2026, down from 36% in the prior year period. Approximately $2.9 million of the year-over-year decline in adjusted EBITDA is related to the timing of incremental marketing spend, net of marketing fund revenue as we front-loaded more in Q1 2026. And approximately $2.1 million of the decline is associated with the timing of new studio openings and equipment revenue that I mentioned earlier.

Turning to the balance sheet. As of March 31, 2026, cash, cash equivalents and restricted cash were $21.5 million, down from $42.6 million as of March 31, 2025. During the quarter, we entered into and paid lease settlement agreements of approximately $0.3 million. As of March 31, 2026, we had approximately $8 million of lease liabilities remaining to be settled. We anticipate most of the remaining liabilities will be settled during the remainder of this year.

During Q1, we also paid out $12.5 million related to our agreed settlement in the franchisee lawsuit. For the remainder of the year, we anticipate approximately $16.4 million in additional payments related to the settlement of both the franchisee and FTC cases. Although we expect to fund these payments from normal operating cash flow, out of an abundance of caution, in April, we drew $10 million on our $25 million revolving credit facility to ensure maximum operating flexibility. This is a short-term timing issue, and we do not anticipate making further draws on the revolving line of credit this year.

We expect to pay down the line through our normal healthy cash flow generation by year-end or shortly thereafter. In the meantime, we have substantially reduced regulatory and legal uncertainty in the business.

Total long-term debt was $523.7 million as of March 31, 2026, compared to $379.1 million as of March 31, 2025. The increase in total long-term debt is primarily due to retiring the convertible preferred security during the fourth quarter of 2025.

Let's now discuss our outlook for 2026. Based on current business conditions and our expectations as of the date of this call, we are reiterating guidance for 2026 as follows: we expect global studios open net of closures to be in the range of 150 to 170. We expect the number of closures to be 3% to 5% of the global system this year as a percentage of total open studios.

We project North America system-wide sales to range from $1.72 billion to $1.80 billion. Total 2026 revenue is expected to range from $260 million to $270 million. Adjusted EBITDA is expected to range from $100 million to $110 million. This translates into 39.6% adjusted EBITDA margin at the midpoint.

In closing, we are encouraged by the early traction on the organic growth initiatives Mike outlined, and we remain focused on disciplined execution to drive more consistent performance. Our priorities are straightforward: stabilize lead generation, improve lead to member conversion, and support our franchisees and field teams with tools and operating rigor that translate into stronger studio level results.

Before opening the call to questions, I would like to note that we are actively engaged in the company's recently announced review of strategic alternatives. We will not be addressing questions regarding that initiative at this time, but we'll provide additional information on the process when appropriate.

Thank you all for your time today. We will now open the call for questions. Operator?

[Operator Instructions] The first question we have is from John Heinbockel of Guggenheim Partners.

Mike, can you talk to kind of the health of the Club Pilates member base and their behavior, right, in terms of number or growth in members, packages that they're buying, visitation, speak to that. And then I guess, when do you think -- I know the comps are not going to grow very much. But when do you think you at least return to sort of a flattish trend line?

Yes. John, thanks for your question. Yes, I would start by saying one of the things we feel really good about around the Club Pilates business specifically is the member retention that we called out in our prepared remarks. So we've always had really strong member retention and to even have it increase in the quarter was a really good sign. We -- and that, to me, shows continued affinity and loyalty to the brand.

When we dig into our member statistics, again, we see broad-based participation in the brand. We see some really, what I would say is very good concentration in what I would call the middle age customer. And these are members that tend to be very loyal, as I said before, very high frequency. So when we were doing the pricing work, we were identifying that these members tend to come to us between 8x and 13x. And I think just under half of them are on our unlimited plan. Those are all great signs, clearly signs of a very healthy member base.

We also see it in our new studio openings. Our new studio openings continue to be really, really strong. Each cohort just seems to be getting a little bit better than the previous one. So that's what we have continued to see.

I'm also feeling better that we talked a lot about this sort of top of funnel. And I feel better that we've been able to identify it as the major opportunity in the business. We have seen better results in our paid media investment with our new agency partner, which is a really good thing. And then we've seen with very modest changes in one of our digital properties for StretchLab, we've seen better results. So this tells me that we're clearly on the right track and focusing on the top of funnel, specifically the organic traffic that comes to our digital properties is really what we need to continue to do good work around. I think we do that. We'll obviously see that return to better comp results than we had in the quarter.

All right. Maybe my follow-up is other than the timing issues around marketing and equipment, right? So that was, I guess, $5 million in the quarter. Aside from that, what do you need to do to get to your EBITDA target for the year? Any changes? And you referenced this third quarter inflationary adjustment or something to that effect. What does that entail?

Yes. I'll take it in 2 parts. You're right. On the question about the expectation for full year EBITDA, we anticipated that there would be 4 -- roughly 4 things that would impact our Q1 EBITDA. One was, you called it out, front-loaded marketing spend. The second was lower terminations. That's related to the FTD renewal process that we did. Lower equipment sales. And then you know this and we knew it, obviously. We would have the toughest comparison from a comp standpoint. So we shaped the full year expectation assuming improvement in each of these line items. And most importantly, that the sales trend would improve to that negative low single-digit comp level that we use to base the guidance on. So that's obviously the focus for us.

Around the pricing question, I'll go back and talk a little bit about the work that was done there. We did a comprehensive pricing analysis in Q4. It was really helpful on a lot of levels. We're now in what I would call the planning and implementation stage related to that. I would emphasize, we are not getting aggressive around price increases. That's probably the worst thing anybody can do in the current pricing environment. The way I would think about it is this is pricing hygiene that probably should have been part of our structure and process before.

So we're looking at the pricing tiers. We have probably too many pricing tiers, and so we're going to try to narrow those down a little bit. We're going to provide some additional coaching around tier opportunities within markets. We are setting up a structure that would allow our franchise partners to do inflationary price increases. Again, we're talking modest, consistent with the market. And then we're also looking at the discounts that we provide across our business, especially when it comes to new studio openings. We were giving some pretty generous discounts, legacy founder, forever discounts, and we realized we don't have to do as much of that. So I think it's good work. I think it will benefit us, obviously, on the top line for our studios and for us. But again, I want to put it in context.

The next question we have is from Richard Magnusen of B. Riley Securities.

I just was wondering if you could provide an update and maybe more specifics on how you're using tools like maybe CRM to target specific audiences such as older adults. I think you talked a bit about that last time, but have there been any more metrics that could show a displayed improvement around conversion? Or can you provide any other results?

Yes, Richard, thanks for the question. I guess I would say that in our switch to a new national agency, that was all part of the work that we did, which was working very closely with them to understand a lot better our target markets, our target member base and to really create assets and outbound material that would appeal to them through all of our channels.

The other piece that we've done specifically around the CRM front is we've done this national coordinated e-mail campaigns that would automate e-mails to a number of our key lead cohorts. So for example, if you fill out a lead form but don't show up for that introductory class, we're now outbounding to you to get you to come in for that class. So we're starting to see -- we're actually starting to see the conversion from some of that e-mail work, and it's going to be a huge focus for us as we go over the next couple of months.

We started to see better performance from our paid media spend. And I think we're just doing as much as we can and I think a better job of just making sure that our messaging is much more targeted to the appropriate member for our different brands because obviously a StretchLab customer is going to be a little bit different than Club Pilates and Pure Barre and YogaSix, et cetera.

The next question we have is from Chris O'Cull of Stifel.

Mike, thanks for the details regarding the Meta and Google advertising issues. And I apologize if I missed it, but do you have a time line for those issues being addressed? And I guess also, what gives you confidence that the company won't need to make additional marketing investments in the back half of the year to support lead generation?

Yes. Good question, Chris. You're right. I'll take the second question first. We planned heavier spend in Q1, part of Q2. We're going to have to judge based on the ROI. If we're getting some good ROI from that, that will sort of help judge how much more we spend over the back part of the year. But I would expect that middle to back part of the year, we'll start to make some meaningful progress around both the Meta and the Google issues, which will meaningfully help our organic top of funnel because we really need that to work for us.

You can't do what we do around member acquisition with just paid. There's always a big part that's organic. So fixing that is a major focus. I think we can make some really good progress over the next couple of quarters.

Okay. And then I had a question about just franchisee consolidation that seems to be occurring across the Club Pilates system. Has the number of franchisees in that system fallen materially during the past year? And is there a goal in terms of the number of franchisees you'd like to see in that system? And then lastly, just curious how you see that impacting your ability to kind of manage and grow the brand, I would assume and make it easier.

Yes. Yes, we haven't -- I wouldn't characterize that we've lost a lot of franchisees from that -- from the brand at all. But what we are doing is we're fortifying our relationships with some of our larger franchisee partners. So we mentioned we completed 2 deals after the quarter. We've got another couple in the works. So those relationships with larger franchisees continue to pay dividends. They are great operating partners. They partner with us very closely around the real estate side of the business, identifying new studios, white space opportunities, fill-in opportunities. So it benefits us a lot when it comes to the growth of the brand.

However, again, I think that for that brand and the success of that brand, there will always be a mix, a mix of smaller scale franchisees and some larger franchisees. And I think the dynamics there create a really healthy overall franchise base.

The next question we have is from Arpine Kocharyan of UBS.

This is Darren [ Pelvican ] on behalf of Arpine. You had previously guided to approximately a 4% decline in same-store sales continuing into the first quarter, but the actual performance appears to have come in somewhat softer than that expectation. Could you walk us through the key drivers behind this variance, particularly how much of the change was driven by pricing versus volume?

Yes. So we guided for 2026 to a low single-digit negative comp. We -- if you take a look at the comparison to the 2025 comp performance, we knew that Q1 was going to be the biggest anniversary or anniversarying the strongest quarter from last year. So the comp performance there didn't necessarily surprise us. But I think I called out the factors. Most of it is around sort of the top of funnel. So the new member acquisition side as being the bigger contributor to it. So that will give you some insight there.

[Operator Instructions] The next question we have is from Owen Rickert of Northland Capital Markets.

This is [ Ketan ] on for Owen. On the innovation side, which newer formats or studio refresh initiatives are generating the strongest early engagement from members and franchisees?

That's a good question. I'll talk a little bit about the work that we're doing there. We just launched the Club Pilates refresh effort. So we are now engaging with franchisees around that refresh format. We're also going to utilize that for all of our new studio openings. So we're excited about it. Anytime you have a chance to go out and refresh studios, especially we've got some studios that are up in age. So I think that's going to be a really big opportunity for us.

In my past, when you do that, obviously, you don't expect there to be a big uplift, but I'm usually surprised that oftentimes, that's exactly what you see. Obviously, better member acquisition, better member retention just from having a new studio environment. So that's something we're excited about.

We're also making progress on a similar refresh program for Pure Barre. And I've seen some of the initial designs for that, and it looks great. So studio refresh is a really big focus for us.

The other thing that we're working on is in the innovation front is some new classes. So we've launched the circuit class in Club Pilates. That, at this point, is about 75% of the chain is incorporating that, which is great. And then we have new classes in both YogaSix and Pure Barre, and they will be launching and rolling out in the next couple of months.

So again, I think the more we can do to keep our brands fresh and new and changing for the members, I think the better. And it's an area that I have a lot of passion around. And I know the teams get pretty excited and the franchisees get excited to see these new elements roll out.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mike Nuzzo for closing remarks.

Yes. I wanted to thank you all for your questions and for joining us today. We appreciate the continued interest in Xponential, and we look forward to updating you on our progress as we move through the year. Thank you.

That concludes today's conference. Thank you for joining us. You may now disconnect your lines.

Greetings, and welcome to the Xponential Fitness Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Patricia Nir, Investor Relations, to begin. Thank you.

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' fourth quarter and full year 2025 financial results. I am joined by Mike Nuzzo, Chief Executive Officer; and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.xponential.com.

We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our annual report on Form 10-K for the year ended December 31, 2025, to be filed with the SEC and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call.

In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call and in the investor presentation available on our website.

Please also note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted. As a reminder, in order to ensure period-over-period comparability and consistent with our reporting method since IPO, we present all KPIs on a pro forma basis, meaning for full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended December 31, 2025, this includes BFT, Club Pilates, Pure Barre, StretchLab and YogaSix.

I will now turn the call over to Mike Nuzzo, CEO of Xponential Fitness.

Thanks, Patricia, and good afternoon, everyone. The fourth quarter played an important role in my continued integration into the business, highlighted by our very productive and inspiring November franchise convention. The more time I spend with our teams, franchise partners and members, the more conviction I gain in both our strengths and opportunities to drive long-term consistent growth.

In 2025, we made important progress on several fronts. 201 net new studios opened, including our 1,414th Club Pilates Studio. The power of this brand, the compelling 4-wall economics driven by an outstanding first year sales ramp and ongoing unit growth prospects, both domestically and internationally, continue to set the standard in the industry, achieved $1.75 billion in system-wide sales, driven by our growing franchise base and strong brands, graduated over 2,100 Pilates and over 3,000 barre instructors from our Xponential training programs, which represent a key asset for the business, completed the transition to an outsourced studio retail and merchandise partner, closed our debt refinancing, providing a solid financial framework going forward and accomplished key strategic brand divestitures and completed our important corporate reorganization.

Despite this progress, we recognize there is meaningful work and opportunity ahead. These efforts, along with our strategic outlook and financial plan for 2026 and beyond, continue to be shaped by my commentary on 3 core themes: the strength of the Boutique Fitness segment, our global franchising platform of strong premium brands and the opportunity to chart a clear path towards sustained long-term growth.

Roughly a decade ago, Xponential was founded with a mission to bring Boutique Fitness to consumers across the U.S. and the world. Since then, we've grown into the leading global franchisor of Boutique Fitness, rapidly expanding through new license sales, studio openings and brand acquisitions to achieve the dominant scale, reach and market position we have today. As a result, now we are an undisputed market leader by number of studios. We are 7x the size of the next largest Pilates competitor, over 3x the size of our next largest barre competitor and one of the top brands in yoga and stretch, while BFT's unique HIIT format has a major international presence.

Our rapid scaling and success helped to foster a more competitive landscape with regional and national concepts and even traditional gyms expanding into group fitness. We maintain a very favorable positioning in this more competitive environment. First, consumers have a strong affinity for our brands, and our scale enables broad convenient access to our studios across the country and around the world.

Second, our approach to barre, yoga, Pilates, HIIT and stretch is time-tested with broad appeal and real results and engagement for members as illustrated by our consistently strong member growth.

And third, our best-in-class brand-specific training and onboarding programs, driving differentiation in experience and securing key roles to support our new studio expansion. And our experienced franchisees and studio managers bring deep local market insight, while our scale as a franchisor delivers brand recognition, visibility and innovation advantages.

At the same time, we acknowledge that over the past few years, legal and regulatory hurdles, underperforming brand acquisitions and divestitures and organizational challenges limited our ability to consistently execute best-in-class support capabilities. So inevitably and not surprisingly, sales growth started to moderate beginning in late 2024 and into 2025.

In 2025, we also had marketing and lead management missteps that contributed to member top-of-funnel challenges that over time resulted in same-store sales pressure, most visible in Club Pilates. While the brand remains the category leader, operates successfully across virtually every market profile nationwide and has average studio AUVs far surpassing our original franchise profitability model, addressing ongoing growth for Club Pilates and across our entire brand portfolio remains a top priority.

As we start 2026, we are developing and implementing improvements focused on organic growth in partnership with our franchisees. They certainly understand the impact they have in driving this effort and are aligned around a renewed focus on member acquisition at the local studio level. So I want to make it clear that as we plan for 2026, we intend to prioritize investments that support new member acquisition and healthy top line growth for our franchisees.

First, our most critical growth engine will continue to be our new unit opening pipeline and process anchored by the Club Pilates brand, and we are already seeing the benefits of enhanced support and tools. We recently enhanced our new franchisee recruiting process across all brands and implemented an effort to address the global licenses that are lagging more than 12 months behind their development schedules. Our Club Pilates franchisee base is eager to open more units in both new and existing geographies, and we continue to see the potential to double our domestic network. Internationally, the Club Pilates brand is also in high demand, and we anticipate meaningful expansion opportunity, specifically in Asia and Europe. Driving overall revenue growth through continued new studio expansion is a key 2026 initiative.

Our second critical element of growth is driving organic studio revenue performance across all brands, measured by continued healthy average unit volumes and modest comp sales growth. We view this as a major improvement opportunity and a key investment focus in 2026. We know that today's fitness landscape is characterized by higher member acquisition costs and longer conversion time lines as consumers weigh more options before committing to a particular studio membership. While we have seen our top-of-funnel lead trends improve since August, we are not where we need to be and require further progress in the focus areas I'll discuss shortly.

We generate strong adjusted EBITDA with attractive and expanding margins, reflecting the scalability and capital-light nature of our franchisor business model. We implemented SG&A cost reductions and margin improvements in 2025 and see additional savings and efficiency opportunities in 2026. However, based on my experience across other consumer businesses, pulling back on member acquisition focused resources to meet an adjusted EBITDA growth target typically proves to be misguided and shortsighted. With a more efficient overhead structure, we believe that over time, growing our top line will generate meaningful adjusted EBITDA leverage.

John will walk through our guidance in more detail, but it reflects deliberate marketing, operations and franchisee support decisions we are making today intended to support durable long-term growth even if it means near-term adjusted EBITDA growth will be more modest than previously expected.

As I alluded to on our last call, we are focused on the following best-in-class studio performance support areas for 2026. First, marketing at both the national and local studio level. After some missed opportunities in 2025, we are making improvements to both, particularly in performance marketing. In Q1, we'll have a second-year version of our local franchise match program that last year was a successful XPO franchisee partnership to put more dollars to work at the local level. Our Club Pilates marketing program in Q4 provided us with valuable insights on additional performance channels we can activate during the year.

In 2026, we will amplify more brand content and awareness through social media and performance marketing, such as the 25th anniversary of Pure Barre, the Club Pilates Circuit class, our unique YogaSix Sculpt and Flow classes and BFT's Signature 8-week Challenge. For StretchLab, we are also using social media in a major way to build awareness around the benefits of assisted stretch, particularly for active older adults.

We also tested and saw solid results from some new member trial offers that we plan to drive through performance marketing channels. Finally, we will be testing and piloting new pricing and member package changes informed by our Q4 pricing study that over time are expected to contribute to organic growth.

Second, our digital and studio platforms across our brands can be enhanced to improve member conversion. In Q4, we started work on our Club Pilates and StretchLab websites, focusing both on updated imagery and improved navigation and member experience. We expect to leverage these enhancements across all our brands to maintain a consistent, high-quality member experience. In 2026, we also plan to conduct an upgrade to our studio member management systems to incorporate more automation, lead management tools and enhanced membership offerings and packages based on our learnings from our Q4 pricing analysis.

Third, our roughly 35-person field operations team is now in place, having spent valuable time extensively training to strengthen on-the-ground studio support. For 2026, they intend to focus their coaching and leadership on increasing studio lead to membership conversion performance. We have a high degree of confidence we can improve every brand's effectiveness by turning leads into trial appointments and first-time classes into memberships.

The team will also be a valuable resource to help new studios maximize presale efforts to drive first year membership growth. And with specifically designed management tools and studio visit protocols, we expect they will also support improved studio profitability. Our senior team and field leaders meet weekly to gather feedback, review KPIs and pivot accordingly.

Fourth, and above all, both acquiring new members and retaining existing members comes down to continuing to evolve and innovate with our brands, including the look and feel of studios, class content and member engagement. We are working through a broad studio refresh initiative at Club Pilates with a new format beginning to pilot in coming months. Our Circuit class in Club Pilates is off to a strong start, and we are planning additional class styles as part of our innovation road maps for each of our brands. You will see these innovations reflected in our marketing, as I mentioned previously.

Finally, with strong support from our operations team, we believe we will be positioned to execute new member engagement campaigns and initiatives at a local studio level. While we are still in the early innings and while I expect to make progress through 2026, it always takes time for new programs, initiatives and teams to maximize their operational effectiveness.

John will discuss our 2026 guidance, but as we gauge resources for driving improved organic growth and until we understand the timing and extent of our initiative results, we are being very thoughtful not to overreach on our full year guidance. I am confident in our priorities and our plan to evolve the business, and I look forward to providing updates over the coming quarters.

Now I'll turn the call over to John.

Thank you, Mike, and good afternoon, everyone. I'll begin with an overview of our fourth quarter and full year performance and then discuss our outlook for 2026.

We ended the quarter with 3,097 global open studios, opening 78 gross new studios during Q4 with 51 in North America and 27 internationally. For the full year, our gross new studio openings were 341 with 252 in North America and 89 internationally. There were 47 global studio closures in the fourth quarter and 140 during 2025, representing approximately 4.5% of our global open studios for the year.

Closure activity in the quarter included decommissioning of 16 nontraditional studios that were operating on Princess cruise ships. The remaining 31 traditional studio closures were in line with historical quarters and concentrated primarily within StretchLab, BFT and YogaSix. Moving forward, we expect closure rates to decline and be in the low to mid-single digits.

We sold 53 licenses globally during Q4 and 179 licenses in 2025. 112 of the 179 licenses sold in the year were international and 67 were for North America. The North America license sales were lower during portions of the year as we temporarily paused sales activity to complete a comprehensive review and update of each brand's franchise disclosure documents. We expect updated FTDs for the 2026 cycle to be filed in the coming weeks as part of our normal renewal process.

As of December 31, 2025, we had more than 830 licenses contractually obligated to open in North America and more than 760 international master franchise obligations. Of these, approximately 30% are currently more than 12 months behind their contractual development schedules and are considered inactive.

Fourth quarter North America system-wide sales of $447 million were up approximately 5% year-over-year and same-store sales were negative 4.3%. The increase in system-wide sales was driven primarily by growth from net new studio openings. In 2025, system-wide sales increased approximately 13% to $1.7 billion from $1.6 billion in 2024 and full year same-store sales were 0.5%.

North America run rate average unit volumes of $683,000 in the fourth quarter decreased 2% from $695,000 in the prior year period. The decrease was largely driven by lower average pricing for paying members, partially offset by a higher number of actively paying members.

On a consolidated basis, revenue for the quarter was $83 million, flat from the prior year period. 76% of the revenue for the quarter was reoccurring, which we define as including all revenue streams, except for franchise territory revenues and equipment revenues given these materially occur upfront before a studio opens. In 2025, Xponential generated $314.9 million in revenue, a 2% decrease from the prior year.

Turning to the components that make up revenue. Franchise revenue for the quarter was $51.5 million, up 14% year-over-year. This growth was primarily driven by higher franchise territory revenue, reflecting accelerated license revenue as we continue to resolve delinquent franchise licenses.

Equipment revenue was $7 million, declining by 45% year-over-year. This decrease was primarily the result of a lower volume of installations in the period compared to the same period prior year.

Merchandise revenue of $7.2 million was up 18% year-over-year. The increase year-over-year was due to favorable retail sales and the benefits of the outsourced retail operation that occurred in the fourth quarter.

Franchise marketing fund revenue of $8.9 million was down 3% year-over-year, primarily due to lower system-wide sales stemming from divested brands.

Lastly, other service revenue, which includes sales generated from rebates from processing studio system-wide sales, brand access partnerships, company-owned studios, XPASS and XPLUS amongst other items, was $8.3 million, down 16% from the prior year period. The decline in the period was primarily due to lower sponsorship revenues from our preferred suppliers, which offsets the cost of holding our annual franchise conference.

Turning to our operating expenses for the quarter. Cost of product revenue were $9.7 million, down 29% year-over-year. The decrease was primarily driven by the lower volume of equipment installations. Cost of franchise and service revenue were $7.2 million, up 19% year-over-year. The increase in franchise sales commission was driven primarily by the termination of franchise licenses, which results in the immediate acceleration in commission expense recognition.

Selling, general and administrative expenses were $57.7 million for the quarter, up 1% year-over-year. In 2025, we have entered into and paid lease settlement agreements of approximately $33.5 million. As of December 31, 2025, we have approximately $9.1 million of lease liabilities yet to be settled. We expect most of the remaining liabilities will be settled during the remainder of this year.

Importantly, we have an update in connection with the pending FTC investigation. Earlier this week, FTC staff indicated they will recommend that the FTC commissioners approve a proposed stipulated consent order to fully resolve all of the FTC's alleged claims against the company. As part of that proposed consent order and without the admission of liability, the company has agreed to pay $17 million over the next 12 months. The settlement remains subject to the approval of the FTC commissioners and the court. We believe resolution of this matter will resolve a meaningful amount of uncertainty for all our stakeholders.

Depreciation and amortization expense was $2.4 million, down 47% compared to the prior year period. Marketing fund expenses were $13.3 million, up 126% year-over-year. This increase was expected and primarily driven by a higher spend afforded by the increase in system-wide sales and as part of the increased planned spend for Club Pilates. As Mike mentioned, top-of-funnel lead generation is critically important for the company. The increased spend this quarter was purposely deployed to gain insights on the effectiveness of various marketing strategies.

Acquisition and transaction expenses were $0.5 million, down from $1.9 million in the prior year period. As I have noted on prior earnings calls, this includes the contingent consideration activity, which is related to the Rumble acquisition earn-out and is driven by the share price at quarter end. We mark-to-market the earnout each quarter and accrue for the earn-out. Note that this earn-out will persist despite the recent divestiture of the brand.

We recorded a net loss of $45.6 million in the fourth quarter or a loss of $1.17 per basic share compared to a net loss of $62.5 million or a loss of $1.36 per basic share in the prior year period. For 2025, we recorded a net loss of $53.7 million or a loss of $1.47 per basic share compared to a net loss of $98.7 million or a loss of $2.27 per basic share in the prior year period.

We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income and loss to adjusted net income and loss is provided in our earnings press release. Adjusted net loss for the fourth quarter was $44.6 million or adjusted net loss of $0.91 per basic share on a share count of 35.2 million shares of Class A common stock. For 2025, adjusted net loss was $18.4 million or adjusted net loss of $0.49 per basic share on a share count of 34.8 million shares of Class A common stock.

Adjusted EBITDA was $22.9 million in the fourth quarter, down 26% compared to $30.8 million in the prior year period. The adjusted EBITDA margin was 28% in the fourth quarter, down from 37% in the prior year period. The primary items in the period that contributed to the lower EBITDA margin include higher marketing fund expenses that exceeded marketing fund income and lower sponsorship revenues from our annual franchise conference. For 2025, our adjusted EBITDA was $111.8 million, down 4% compared to $116.2 million in 2024.

I'd now like to provide a comprehensive summary of our annual results that include more granular brand level metrics and the data for our 5 brands: Club Pilates, Pure Barre, StretchLab, YogaSix and BFT. As stated in previous years, this additional information is only provided on our fourth quarter conference call.

In 2025, the strongest license sales occurred at Club Pilates with 140 and BFT with 24. Club Pilates alone represented 78% of the 179 licenses sold this year. Most license sales, 63% occurred internationally with the remaining 37% sold in North America.

For gross openings, Club Pilates led with 220, followed by StretchLab with 48 and BFT with 36, together representing 89% of the 341 gross new studio openings this year. Gross new studio openings mostly occurred in North America at 74% with the balance of 26% occurring internationally. Over time, international operations are anticipated to become a greater percentage of the total gross new studio openings.

System-wide sales are driven directionally by the number of North American studios operating and the maturity of those studios. It is expected that the brands with a growing number of studios will continue to generate higher proportions of our system-wide sales as AUVs increase. Club Pilates with 1,241 studios operating at year-end in North America contributed 65% of our total system-wide sales for the year. Pure Barre with 624 and StretchLab with 503 studios operating, both contributed approximately 14%, respectively.

Overall run rate average unit volumes decreased 2% to $683,000 at year-end. StretchLab AUV decreased 12% year-over-year to $483,000 and Club Pilates AUV decreased 6% year-over-year to $966,000. Meanwhile, Pure Barre AUV increased 3% year-over-year to $400,000 and YogaSix AUV increased 12% year-over-year to $525,000.

Same-store sales across the portfolio were up 0.5% for the full year, with Club Pilates at 3%, continuing to overinfluence performance due to its scale. Within the other brands, YogaSix and Pure Barre had same-store sales of 2% and 4%, respectively, for the full year, while StretchLab was negative 12%.

Turning to the balance sheet. As of December 31, 2025, cash, cash equivalents and restricted cash were $45.9 million, up from $32.7 million as of December 31, 2024. In 2025, the company's cash position increased by $13.1 million. For the year, net cash provided by operating activities was $28.3 million. Net cash provided by investing activities was $1.5 million and net cash used in financing activities was $16.7 million.

In December 2025, we took a significant step to strengthen our capital structure and support long-term shareholder value by entering into a new 5-year $525 million term loan and putting in place a $25 million revolving credit facility. A key aspect of this refinancing was the full repurchase of all outstanding convertible preferred stock, eliminating approximately 8.1 million potential common shares and simplifying our equity base.

By refinancing the existing debt and retiring the convertible preferred security, we have reduced refinancing risk, improved financial flexibility and removed a source of dilution for existing shareholders. This action reinforces our commitment to disciplined capital management and positions the company to better support strategic priorities going forward.

Total long-term debt was $525 million as of December 31, 2025, compared to $352.4 million as of December 31, 2024. The increase in total long-term debt is primarily due to retiring the convertible preferred security previously mentioned. As the company continues to generate cash, we expect for deleveraging to occur over the coming years.

Let's now discuss our outlook for 2026. Based on current business conditions and our expectations as of the date of this call, we are issuing the following guidance for global net new studio openings, system-wide sales, total revenue and adjusted EBITDA for the current year as follows.

We expect 2026 global net new studio openings, which is net of closures to be in the range of 150 to 170, representing a 20% decrease at the midpoint from the prior year pro forma for brand dispositions. We expect the number of closures to be 3% to 5% of the global system this year as a percentage of total open studios with a longer focus to reduce global closures to low single digits as a percentage of the total global system.

We project North America system-wide sales to range from $1.72 billion to $1.8 billion, representing a 1% increase at the midpoint from the prior year pro forma for brand dispositions.

Total 2026 revenue is expected to be between $260 million to $270 million, representing a 16% decrease year-over-year at the midpoint of our guided range. The year-over-year change is roughly driven by an approximately $23.1 million revenue impact from 2025 divested brands and approximately $18 million revenue impact from the shift to an outsourced merchandise sales model.

Adjusted EBITDA is expected to range from $100 million to $110 million, representing a 6% decrease year-over-year at the midpoint of our guided range. This range translates into an approximately 40% adjusted EBITDA margin at the midpoint.

The relatively flat year-over-year forecast is driven by an approximately $5.6 million net benefit from divested brands, which is gross margin upside offset by cost savings and overall lower SG&A, primarily from our prior year cost reductions and the net benefit from our new outsourced retail arrangement, offset by lower studio same-store sales, which we expect to trend in the negative low single-digit range for 2026.

We expect total SG&A to range from $108 million to $113 million. When further excluding the onetime lease restructuring charges and regulatory legal defense expenses, we are expecting SG&A of $97 million to $102 million and a range of $85 million to $90 million when further excluding stock-based costs.

In terms of capital expenditure, we anticipate approximately $6 million to $10 million for the year or approximately 3% of revenue at the midpoint. Going forward, capital expenditure will primarily focus on our data transformation initiative, website and mobile applications, learning management system and general technology investments.

For the full year 2026, our tax rate is expected to be mid- to high single digit and share count for purposes of earnings per share calculation to be 37.3 million. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculation can be found in the tables at the end of our earnings press release as well as our corporate structure and capitalization FAQ on our investor website.

We anticipate our non-GAAP unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditure to grow the business. We expect that our anticipated interest expense in 2026 will be approximately $55 million, tax expenses to be approximately $4 million, including the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members, resulting in levered adjusted EBITDA cash flow conversion at the midpoint of approximately 35%.

As Mike mentioned at the beginning of the call, we are happy with the progress we have made on several fronts in the past year. We have invested and will continue to invest in all the necessary initiatives expected to drive sustainable financial performance and long-term growth of our brands.

This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for questions. Operator?

[Operator Instructions] And your first question comes from Joe Altobello with Raymond James.

I guess my first question is on the revenue and same-store sales in the quarter. I think, John, you mentioned lower average pricing as a part of that. Can you elaborate a little bit on that?

Yes. I mean as we've seen new studios come online and as far as the ramping is concerned, when you just simply do a calculation on the total system-wide sales divided by the number of members, you get a lower pricing.

One thing to be kind of attentive to in the fourth quarter, we run a lot of promotions in regards to like Black Friday sales, and those are usually quite successful as they're meant to bring in new members or eventually convert to new members as we sell more package type offerings. So you typically get a little bit of dilution around pricing in the fourth quarter, but it normalizes after -- in Q1 and Q2 as those members burn off their packages and have the ability to convert into more traditional memberships versus package type offerings.

Are you seeing any shift between pricing tiers?

No. I mean we've typically seen a lot of stability in regards to the distribution of what members are buying. I mean in brands like Club Pilates, you typically see a lot of unlimited membership as those studios come online and people initially kind of join. So there hasn't been material shifts from historical trends.

Okay. And my last question on -- in terms of the EBITDA guidance for the year, how much of an improvement are you assuming from exiting or shifting to an outsourced retail model?

Yes. So quite a bit actually. And when you actually look at the gross profit improvement that you're seeing in the business, we typically have been in the low to mid-80% range, and now we're getting closer to a 90% gross profit. And that's really because of the fact that we're not running the retail sales into the business along with its -- the cost of goods sold. It's just going to be the rebate that we now get from the vendor.

So what was traditionally, I would say, a retail business that operated breakeven or slightly at a loss is now going to be virtually 100% margin. So the improvement in EBITDA on the retail business is going to be a high single-digit, low double-digit EBITDA enhancement.

Yes. Joe, I would just add that I thought the team did a really good job getting the conversion done by the end of the year, minimizing any issues in the transition -- and yes, I would just add that we've outsourced -- it's a noncore function for us. So it will be a big help. And also, we're starting to partner closely with our outsourced partner around new product introductions. And so that whole process seems to be getting going in a really good way.

And Joe, for clarity, when I said high single digit, I mean millions of dollars, so it will be in that $9 million to $10 million EBITDA improvement in the year by moving to the retail.

Your next question comes from Randy Konik with Jefferies.

I guess some of the commentary you mentioned, I think, nearly 80% of the licenses during the year were Club Pilates. When you look at the numbers kind of put up at StretchLab and you made some portfolio changes already, what is your view on where the -- I guess for Mike, where the portfolio needs to go from here? Do we keep cutting things away? Do we just get to just Club Pilates? Like how should we be thinking about this over the next 12 to 18 months?

Randy, good question. I guess I would start by saying we've not been reluctant about parting ways with brands that we don't see having a good long-term growth match with us. And so -- so we've done that, and I give the team a ton of credit for making some key divestitures last year in particular.

Having said that, we're focused on improvement across all the brands. And so you take a brand like StretchLab, we've got a very urgent improvement focus, and we're partnering very closely with our franchisee base there. They've been a great partner to us around this effort.

I brought in a new leader who helped me to turn around the grooming business at Petco, and he's been diving in with the team, understanding the data and the trends, marketing strategy, brand positioning and other improvements that we're starting to get out into the market for StretchLab.

And as you know, this is a brand where we're the leader in the space, one of the leaders in the space. We have great overall satisfaction scores. We've got some very productive studios. And then we've got some cohorts who have been impacted by, among other things, the Medicare Advantage changes that happened.

So right now, the team is focused on all the right things, targeting performance marketing on what we consider our spot, so active older adults with spending power, building awareness, local activation and retargeting with these folks, using CRM and app to drive higher retention of members in the first 3 months, which we see as a key opportunity. As I referenced in the script, we're going to be launching a new website experience that will make it easier for folks to buy and schedule a stretch, trial the experience and then convert to membership.

And then we're also coaching and working with our franchise partners on how we can shift hours of operation to more weekends and week nights. And that's been a major thing that's come about from our look into the data and our survey work.

So we feel good about these being the things that will help us to drive momentum in a business like StretchLab. And regardless of what the long-term situation is, having that momentum is going to be really, really important.

Got it. And then on Club Pilates, I think we've kind of talked about this in the past. The productivity is very strong, 4-wall very, very strong as well. When you look at the comp number or the AUV, do you look at that and say, all right, we have to kind of get out more of these units as quickly as possible to further densify that brand, at least in the United States? If so, what is the plan there? And how quickly can you kind of get this done? And are you looking to kind of -- really kind of double down on license sales in that concept?

Yes. We gave you some initial unit growth numbers. And again, a large part of that is going to be Club Pilates focused. We feel really good about the opening process, the goals, the way the team is working, especially with our outsourced real estate partner and our licensed sales team.

And so when it comes to the Club Pilates business, we feel like there's a lot of potential for upside. And I would also say that with the other brands, we are also focused on generating some unlocks when it comes to unit growth as well, Pure Barre, YogaSix, BFT, which we've worked on a new go-to-market approach there that we really like.

The other piece of it is on the international front. We haven't talked a lot about international, and I certainly hope to talk more about it as we go because we feel like for Club Pilates, especially, there is a lot of opportunity. We are just getting started in a number of key international markets and feel like there's a lot of growth potential. We have a dedicated team. We are engaging with really good master franchise potentials and existing partners. And so I think that's a growth avenue as well.

Within the domestic part of the business for Club Pilates, we believe working with both smaller and larger franchisees, there's still a lot of white space. There's also fill-in space where we have very productive studios and an opportunity to set up another studio within a short distance. And so that will have different impacts on the ramp and the sales, but everybody is very enthusiastic about the 4-wall economics, and we continue to see really, really good results there.

Your next question comes from Arpine Kocharyan with UBS.

It seems like my first question is on unit growth. It seems like you were looking at something like mid-single-digit attrition of units and then around 10% or so of gross additions for 2026 about a quarter ago. Could you maybe help me bridge that outlook with the 20% decline in net units today? I'm sure some of the divestitures shaved off some units, but what else moved that outlook versus a quarter ago?

Yes. Arpine, nice to talk to you. When you look at the gross openings for 2025, we opened over 340 -- I think it was 341 new studios in the year. So we did on a gross basis, open up about 10% more locations. The majority of the, as you called it, attrition or closures in 2025, they were concentrated in a few brands. So they were concentrated in Pure Barre, StretchLab and YogaSix. So that was about another 140 locations that went away.

When looking at that kind of distribution, I think it's really important to understand that only 3.5% of -- or 92% of the closures happened domestically, which is a very low amount. The majority of the closures -- or 48 or a larger percentage, which is about 10% of the international locations closed. So when you think about guiding forward on a net basis, it's really hard to understand where the closures are going to come from because you don't usually typically know very much information outside of a couple of months of where some of the studios are struggling.

So we believe that putting in front of 2026 guidance pretty similar to how we performed in 2025 right now is kind of the right conservative approach. We may be taking probably too aggressive of a closure number, meaning probably too high, but we want to err on the side of being conservative.

So I think what you'll see from a performance standpoint is '26 will largely mimic or look a lot like '25. The distribution of closures will probably still be concentrated in those same 3 brands of StretchLab, Pure Barre and YogaSix. I think the distribution of closures between domestic and international will look very much the same, where I think you'll have a low single digit in the domestic and probably a little bit higher of a percent high single-digit percent internationally. But the growth algorithm remains the same. It should be about 10% new studio openings per year, offset by how many closures we have.

Got it. That's super helpful. And then just a quick follow-up on your same-store growth outlook. I was wondering if you could walk us through what same-store growth is embedded in your current guidance for this year. And I'm not sure if you mentioned this, I'm sorry if you didn't, I missed it. For Club Pilates, did you give out same-store growth for Q4 and where you expect that to end up for 2026?

Yes. Let me comment on that and then give some more context that I think might be helpful, at least from my perspective. So the guide reflects more of the way we ended 2025 in terms of organic growth. And I'd be the first one to say that I have very little patience for negative sales trends. And at least in Q4, we definitely should have performed better in this environment with the assets we have. But to me, that's all about competing in a healthy environment.

Stepping back from it, I'd say that we've got the brands and we've got the modalities that are very strong. We still have meaningful first-mover advantage. Our retention remains strong. So after years of growth after growth, we have a top of funnel issue to fix. And so we had some marketing missteps that we talked about, but we're also nascent when it comes to our field support at this point. We've got some clunky apps and website to address. We're not getting the pricing upside that we think we have the potential to get, and we're still pushing for improved performance marketing.

So the good news is all of these things are addressable. And this is what really lays the foundation for the plan for 2026. But again, to John's point about guidance, we wanted to really not overstep. And so if that's helpful perspective.

Yes. And to answer your question specifically on the performance, for the full year, Club Pilates had a positive 3% same-store sales. The fourth quarter was down 3%. But again, we're competing against our performance year-over-year when it comes to running these promotions.

I think the one thing to kind of just kind of repoint out is when you look at Club Pilates and how fast these units ramp and get to full capacity, when you have an installed base that virtually has ramped to this roughly $1 million-ish AUV, it's much harder to always constantly be comping positive without always just taking price because there is only so many available reformers in the units and they're largely -- these classes are spoken for and taken up.

So for us, we do believe Club Pilates, it's a volume game here where we want to consistently continue to open up more units and create more supply because we do see the ramp is very healthy. But it should not be expected that you're going to return back to the days where you're seeing 20% to 10% -- or 10% to 20% same-store sales like what happened when we came out of COVID because there's just not that much supply left without opening more units.

And your next question comes from Ryan Meyers with Lake Street Capital.

John, I just wanted to follow up kind of on the answer you gave to the last question and make sure I understand it correctly. So that 3% same-store sales decline in Club Pilates, you're just kind of attributing that to the tougher year-over-year comparisons. And there's nothing within that concept itself that you guys are seeing kind of demand soften at all. It's more so just that tougher year-over-year comp.

Yes. I think the way to think about it is like we keep pushing Club Pilates to like record levels as far as like AUV. And it's like can you constantly break world records every quarter, and it becomes harder and harder to repeat that. So I think you may come up a second or so short if you put it in Olympic terms in racing, like it's not easy to always repeat what you did last year. And we continue to add more units. And I think that's the important part of this equation here is the growth and profitability for the franchisor is about more units. And if we can consistently keep AUVs at these elevated levels, they'll generate really strong royalties.

So when you see a negative 3% in Q4, that's not a terrible thing when you consider for the full year, it was a positive 3% comp. So the business is performing well. The franchisees are doing really well from the 4-wall, and the business is producing really strong royalties, which is showing up as strong margin flow-through in the business.

Yes. And I would also add to what John is saying and maybe emphasize what John is saying, too, and it gets to the point about future unit growth. If you just break it into you'll have unit growth that is more white space, then your expectation there could be for a higher first year AUV, but perhaps not as much growth in comp.

There's also the scenario where we're adding into existing markets where there, you might have a slightly lower AUV, still far better than what you would have put into any model. And then you've got more opportunity for comp. And so I could see as we continue to go along the path of doubling the network, which we feel really good about and our franchisees feel really good about, I think we're going to have that dynamic as we go. And so that will impact overall comp. It's just a fact of life.

And we're working hard to make sure that we do all the right things that organically grow the business. But we're not going to be terribly disappointed with the AUVs we're producing under either scenario.

Okay. Fair enough. That makes sense. And then a couple of times in the call, you guys mentioned the pricing survey that you put out there. I'm just kind of wondering if you can talk about what you guys learned from that and how you think you potentially can apply that.

Yes. First of all, I was really happy with the work that the team did. We used an outside consultant, as I think I mentioned before. They produced some real foundational work. They looked into our data in a way that we had not viewed it in the past. And so that was really good. And then we took that work and we pressure tested it directly with a group of key franchisees. And so it was a very collaborative effort. And the result of that are several initiatives that we will be testing starting around Q2. And as we see results from those tests, we'll look to expand it to the rest of the network.

Some of the initiatives are, I would say, relatively straightforward, for instance, like pricing adjustments for inflation, enhanced trial offers, some updated cancellation fees, looking at where we're pricing regionally and helping to coach the franchisees on making that more consistent where applicable. And then some are a little more strategic, like potentially a new unlimited offering, which we're excited about.

So I would say that this work is going to have a lot of applicability not just for Club Pilates, but across our other brands. And some of the brands like YogaSix have already started along the path of a similar approach on pricing. So it's been really good to see.

We'll give you a sense of the impact probably over the next couple of calls. Sometimes it takes a while for pricing to really work its way through the membership base, but it's a really good start.

Your next question comes from Jeffrey Van Sinderen with B. Riley Securities.

Just to clarify, did you spend more on marketing in Q4?

Yes. There was about a $4 million investment that we made, and we talked about this to really look at a number of marketing strategies and see which ones were the most effective, so we could use that as we rolled into 2026. So there was about a $4 million higher marketing fund spend in Q4 than the income we received.

Okay. But if we sort of look at it organic -- is there a way to look at it organically and parse it out and say, okay, you didn't really spend -- you did this, what I would call maybe a special project with that $4 million, if you want to call it that? But the core marketing didn't go up, correct?

Well, all the marketing that we spend on a quarterly basis is related to marketing funds. So in the fourth quarter, we brought in about $8.9 million in marketing fund revenue, and we spent around $13.3 million. So the excess -- or I guess you can call roughly that $4 million excess, that was marketing fund surplus dollars that -- the majority of it came from Club Pilates when post-COVID, the business ramped faster than we could actually deploy the dollars. So there was a surplus balance in the marketing fund for Club Pilates that we now have the benefit of investing into the brand to start driving more leads. And we expect to do that again in the first half of 2026 as we burn off more of that surplus to really drive more brand awareness, but also more lead generation into that brand.

Okay. Good to hear. And then I know Club Pilates was down slightly on comp in Q4 and obviously, a tough comparison there. But how are you thinking about the Club Pilates comp progression as you think about this year? When do the comparisons get easier? When do you anticipate turning positive?

I won't give you specifics, and we don't forecast quarterly. I'll just give you a couple of data points. I think that last year, around the middle of the year is when we started to see more weakness around top of funnel. And then the other piece I would tell you is that, obviously, the things we've been talking about take a little time to start getting traction. So again, as we go through the year, I think you'll see more progress.

Your next question comes from Owen Rickert with Northland Capital Markets.

You did mention in the prepared remarks, I think you said you have 35 field team members now. That's kind of been an initiative we've been talking about the last couple of quarters. I guess, can you just dive a bit deeper into how that initiative is performing? And maybe what tactics have been working and where are some areas of improvement that these team members are assisting franchisees with?

Yes. Really good question. Yes, we have 35, and that feels like the right number at this point as we look at the network and what they will be responsible for helping with. They have really just been deployed and trained, and we're starting to have them engaging with franchisees on a regular basis.

What we're directing them to do and help with is driving sales. So helping with our franchise partners around information around how to help drive sales, how to help drive conversion, how to help drive initial appointments, how to follow up on leads.

When it comes to new studios, they will be involved in helping with the presale process, which is really, really important for getting our initial membership base established. And then they also have a designated group of target studios. And so these are studios that either the franchisee has reached out to us or we've seen in data where there's a potential for a studio to perform better. And they are making visits and doing a sort of a comprehensive assessment of how they can help coach the studio team, the studio manager to help drive better results.

And so that's the focus. They've really just gotten started. But I'm excited. We've gotten some really good feedback from the franchisees about these visits and their engagement. And I think as we get through the year, the other advantage that they will give us is, as we have initiatives, like pricing, for example, they can help with ensuring that it's implemented really, really well.

And there are no further questions at this time. So I hand the floor back to Mike Nuzzo for closing remarks.

I'd like to thank you all for joining us today. And for a number of you, we look forward to seeing you at the Raymond James Conference. Thank you.

And with that, we conclude today's call. All parties may disconnect. Have a good day.

Greetings, and welcome to the Xponential Fitness, Inc. Third Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patricia Nir. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' Third Quarter 2025 Financial results. I am joined by Mike Nuzzo, Chief Executive Officer; and John Meloun, Chief Financial Officer.

A recording of this call will be posted on the Investors section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations.

For a more detailed description of these risks and uncertainties, please refer to our annual report on Form 10-K for the year ended December 31, 2024, filed with the SEC and subsequent filings with the SEC. We assume no obligations to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about their operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call and in the investor presentation available on our website. Please note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted.

As a reminder, in order to ensure period-over-period comparability and consistent with our reporting method since IPO, we present all KPIs on a pro forma basis, meaning, for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended September 30, 2025, this includes BFT, Club Pilates, Pure Barre, StretchLab, and Yoga6.

I will now turn the call over to Mike Nuzzo, CEO of Xponential Fitness.

Thanks, Patricia, and good afternoon, everyone. First, I'd like to thank the entire Xponential family for welcoming me on board. As I said when I started, Xponential is uniquely positioned to thrive as a successful consumer business. Having completed my first 90 days, I've had the opportunity to deep dive into our business, connect with many of you and gain a clear understanding of both our strengths and the areas where we can improve.

This period has reinforced my belief in the power of our brands and the dedication of our franchisees. I want to again highlight 3 foundational elements: First, Xponential is in a great space. Boutique fitness has substantial momentum and long-term growth potential as consumers continue to invest more in their health and wellness routines.

Second, Xponential has strong studio brands, which are loved by members and led by passionate and committed franchisees. Third, Xponential has made progress in building a team and a supporting foundation to start driving stronger growth and financial returns. Importantly, given the 3 recent divestitures, we have a more optimized brand portfolio. With this, I am convinced we can provide better franchisee support with a more appropriate level of infrastructure consistent with our smaller brand portfolio. I'll discuss recent actions we have been taking to address this.

Let me walk through these elements in more detail. First, the industry. It is estimated that a record 247 million Americans engage in an exercise routine in 2024, up by over 25 million from just 2019 and representing the 11th consecutive year of growth. Within the space, the global boutique fitness market is expected to reach $60 billion by 2030, fueled by a growing demand among all age groups for specialized community-focused experiences. The sector's emphasis on holistic health and strong engagement will likely continue to fuel growth that outpaces the overall fitness industry. These trends bode well for Xponential.

Secondly, we have strong brands and an excellent network of franchisees. I have spent time with many of our franchisees over these past few months and their commitment to driving their local businesses, ultimately fueling our success is clear. Each of our brands has unique attributes that contribute to their performance.

Club Pilates with over 1,200 locations across North America and over 150 locations internationally is our flagship brand and the scaled leader in the category. Club Pilates studios generate the strongest new unit economics I have ever seen. For example, our recent 2 vintages of Club Pilates openings, the 2023 and 2024 cohorts have shown record year 1 revenue ramps, exceeding the previous 3 vintages at month 12 by an average of 27%. This demonstrates the brand's continued popularity and significant growth opportunity ahead.

Yoga6 and Pure Barre are complementary studio concepts that have a healthy owner-operator franchisee structure and continue to generate impressive sustained organic growth. They both also exhibit strong retention driven by an almost obsessive member base, which we love, of course.

StretchLab and BFT have all the attributes to return to and exceed their historical levels of performance. BFT, born in Australia, has a compelling offering in the high-intensity interval training space. Currently, we have a cross-functional team focused on refining our go-to-market approach in the U.S. to drive better individual studio economics, member awareness and market density.

StretchLab's assisted stretch model is a great complementary addition to a weekly workout routine. I've experienced the benefit firsthand. After exhibiting solid AUVs a few years ago, recent StretchLab revenue trends have been pressured as Medicare Advantage plans, a strong source of member flow, have scaled back on stretch as a covered benefit. Based on what I've learned, there are meaningful opportunities to improve every element that impacts member acquisition and retention. I expect us to make steady progress across both brands as we position for 2026.

Importantly, following the recent divestitures of CycleBar, Rumble and Lindora, we now have a more streamlined brand portfolio, which brings me to my third key area of focus and probably the most significant opportunity for the company. While Xponential has a foundation in place to support franchisees and members, there is substantial opportunity to improve without adding additional cost.

The 5 major areas of focus are: marketing, operations support, unit growth and licensing, innovation and efficiencies and cost savings. I have been dedicating significant time to strengthening each of these core functions within a more streamlined portfolio. This is not about adding additional cost. Rather, it's reallocating and refining how we operate to drive greater focus and efficiency.

Let me walk you through each aspect of our tactical approach. First, in the area of marketing. Our new leadership team in marketing is enhancing our corporate capabilities in digital media, CRM, search and social to augment franchisee local marketing efforts. We have launched a pricing study focused first on Club Pilates, which will serve as a framework for our other concepts. All our corporate brand websites are being refreshed to improve our member journey from initial contact to conversion and retention.

We are also addressing lead management system and process deficiencies to help strengthen our top-of-funnel KPIs across our portfolio. In the fourth quarter, we are making additional marketing fund investments to launch a national brand campaign for Club Pilates, expanding our reach through new performance channels like podcasts, YouTube TV and CTV. Overall, we are improving our corporate marketing engine with a clear focus to drive organic growth. These improvements are designed to help support our brands optimize performance and strengthen our connection with both prospective and existing members.

Second, operations support. We launched our initial field support teams with a laser-focused mission to provide best practices to studios and franchisees on all the ways to enhance local studio financial performance. We are working closely with franchisees to gather feedback, improve processes, refine our approach and ensure these teams are effectively supporting our studios.

On the retail front, the transition to the outsourced model is well underway. We expect the implementation to be largely complete by year-end, and we are looking forward to delivering a much more efficient retail experience for both our corporate teams and franchisees. In the area of unit growth and licensing, we've made swift progress in ramping up our improved real estate and license sales support capabilities. We are working closely with a leading outsourced partner in franchise real estate to implement best-in-class site selection practices, including leveraging the latest AI-powered market assessment tools.

These improvements are designed to ensure we're making smart, data-driven decisions that support long-term success. In addition, we are taking steps to attract more established operators, along with private equity into the existing franchisee base, particularly for Club Pilates.

I'm also excited to share that during Q3, we successfully completed the franchise disclosure documents registration process across brands and states. In international markets, we continue to add locations focused on Club Pilates and BFT, and I look forward to working with the team on ways to accelerate our growth within key strategic geographies in both Europe and Asia.

On the innovation front, we are focused on generating new class content and member engagement within our current portfolio and see substantial upside within each of the brands. For example, in Club Pilates, we recently launched our first new class in several years, Circuit, which incorporates more intense athletic movements while still being accessible to even beginners.

In Yoga6, we are refining our class offering menu for 2026. Both Circuit and new planned classes in Yoga6 will have appeal across age groups and feature strong social media attributes. This month, we also defined a new Club Pilates studio design, a big request from our franchisees.

At a corporate level, we are making sure that our innovation and marketing teams are closely aligned, such that new content continuously fuels the marketing engine, driving engagement and retention. I believe we are just scratching the surface with our abilities to bring innovative leadership to the space.

Finally, efficiencies and cost savings. One of my key learnings these past 90 days was that we needed to move quickly to rightsize our corporate organization, both as a result of the divestitures and in an effort to more broadly streamline the organization. As a result, in October, we executed a reduction in force across most of our corporate departments, which was a difficult but necessary task.

This is expected to result in annualized SG&A savings of about $6 million. We will continue to identify ways to optimize our operations while upholding our commitment to providing the best service to our franchisees and members. I want to be clear that the initiatives here are clearly multifaceted. While we are acting with the requisite immediacy, the full impacts will unfold over the ensuing quarters. We intend to measure progress and adjust as needed, ensuring that the changes we implement are both effective and sustainable.

With that, I'll turn the call over to John. John?

Thank you, Mike. Good afternoon, everyone. We ended the quarter with 3,066 global open studios. This quarter, we opened 78 gross new studios, 57 in North America and 21 internationally. There were 32 global studio closures in the third quarter or about 1%, representing an annualized closure rate of 4%.

In the third quarter, the company sold 49 licenses, of which 16 were in North America and 33 were international. Our base of licenses sold and contractually obligated to open is over 1,000 studios in North America, and we also have over 700 international master franchise obligations. Approximately 40% of our global licenses are over 12 months behind their applicable development schedules.

Third quarter North America system-wide sales were $432.2 million, up 10% year-over-year. This was driven primarily by growth from net new studio openings. Notably, about 90% of system-wide sales growth came from a higher mix of actively paying members with the remainder driven by higher pricing and mix shifts. Same-store sales were down 0.8% for the quarter and up 5.4% on a 2-year stack basis. Same-store sales trends in Q3 were driven by a confluence of factors, and we are in the process of examining them in detail.

At a high level, we've identified lead flow and member conversion issues across the portfolio that we are working to address, some of which were likely accentuated by our implementation of additional member privacy safeguards earlier this year. At a more granular level, StretchLab continues to be impacted in part by brand positioning challenges and the Medicare Advantage coverage reductions. Meanwhile, at Club Pilates, as you all know, we are benefiting from a stronger sales ramp in newer cohorts. While this is great for studio economics, it means that recent cohorts are already near capacity when they enter the same-store sales calculation, translating to lower same-store sales contributions.

As Mike alluded to, we are reviewing all elements of corporate and studio-level operations to compete better and more profitably. Our North America run rate average unit volumes climbed to 668,000 in the third quarter, up 2% from $654,000 in the prior year period. The increase in AUVs was largely driven by a higher number of actively paying members and higher pricing for new members.

Given the consistent level of demand for our brands and Club Pilates in particular, we believe there is an incremental opportunity to increase revenues through enhanced pricing methodologies, including new price tiers, disciplined cancellation policies and new package offerings.

On a consolidated basis, revenue for the quarter was $78.8 million, down 2% or $1.7 million from $80.5 million in the prior year period. 73% of revenue for the quarter was recurring, which we define as including all revenue streams, except for franchise territory revenues and equipment revenues, given these materially occur upfront before the studio opens.

Franchise revenue for the quarter rose 17% year-over-year or $7.4 million to $51.9 million, driven primarily by the catching up of franchise territory license terminations and by royalty revenues given a higher effective royalty rate driven by new studio openings. The company will continue to terminate licenses at elevated levels in the fourth quarter, noting terminations can take time given requirements around notification time lines.

Equipment revenue was $7.5 million, down 49% year-over-year or $7.2 million, reflecting a 41% decline in global installation volume compared to the prior year period. Merchandise revenue of $4.8 million was down 27% year-over-year or $1.8 million, reflecting lower sales volumes. As a reminder, in Q4, we will begin the implementation of our outsourced retail strategy with FitCo, which is expected to contribute improved margin expansion in 2026 and further optimize non-core operations and reduce working capital commitments.

Franchise marketing fund revenue was $8.8 million, an increase of 3% year-over-year or $0.3 million, primarily due to continued growth in system-wide sales in North America and increased average unit volumes from our installed base of studios. Lastly, other service revenue, which includes sales generated from rebates from processing studio system-wide sales, brand access partnerships, company-owned studios, XPASS and XPLUS amongst other items, was $5.9 million, down 6% or $0.4 million. The decrease was primarily due to lower brand access fees.

Turning to our operating expenses for the quarter. Cost of product revenue were $10.2 million, down 41% or $7 million year-over-year. The decrease was primarily driven by the lower volume of equipment installations and merchandise sales during the period. Cost of franchise and service revenue were $7 million, up 45% or $2.2 million year-over-year. The increase was largely driven by the increased recognition of associated commission expenses from the catching up of franchise territory license terminations.

Selling, general and administrative expenses were $24.7 million, down 47% or $21.5 million year-over-year. The decrease in SG&A was primarily lower due to a decrease in legal expenses driven by non-recurring insurance reimbursement and lower restructuring charges from lease liability settlements.

During the quarter, we received $10 million in cash reimbursement from our professional insurance policies related to the SEC investigation that was concluded without action in July as well as other defense costs from other active inquiries. There was an additional $10 million insurance receivable recorded for SEC investigation and franchise matters as of the end of the quarter, noting that the receipt of these recovery payments in future periods will have no impact to GAAP earnings or EBITDA.

At present, through the third quarter, we have entered into and paid lease settlement agreements of approximately $32.7 million. As of September 30, 2025, we have approximately $8.8 million of lease liabilities yet to be settled. We expect most of the remaining liabilities will be settled during the remainder of 2025.

Depreciation and amortization expenses were $3.7 million, down 13% or $0.5 million compared to the prior year period. Marketing fund expenses were $9 million, up 40% or $2.6 million year-over-year, afforded by higher system-wide sales and associated marketing fund revenue contributions.

Acquisition and transaction expenses were $3.1 million, down 16% or $0.6 million from the prior year period. This includes the contingent consideration activity, which is related to the Rumble acquisition earn-out and is driven by the share price at quarter end. We mark-to-market the earnout each quarter and adjust our accruals accordingly. Note that this earn-out will persist despite the recent divestiture of the brand.

We recorded net loss of $6.7 million in the third quarter or a loss of $0.18 per basic share compared to a net loss of $18.1 million or a net loss of $0.29 per basic share in the prior year period. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income and loss to adjusted net income and loss is provided in our earnings press release.

Adjusted net income for the third quarter was $19.3 million or adjusted net income of $0.36 per basic share on a share count of 35.1 million shares of Class A common stock. Adjusted EBITDA was $33.5 million in the third quarter, up 9% or $2.7 million compared to $30.8 million in the prior year period, primarily driven by increased margin from license terminations and increased royalties in our franchise revenues. Adjusted EBITDA margin was 42% in the quarter, up from 38% in the prior year period.

Turning to the balance sheet. As of September 30, 2025, cash, cash equivalents and restricted cash were $41.5 million, up from $32.7 million as of December 31, 2024. For the 9 months ended September 30, 2025, net cash provided by operating activities was $17.6 million, which includes $2.8 million in lease settlements. Net cash used in investing activities was $2.3 million with $4.3 million used to purchase property and equipment and intangible assets, offset by $2 million in proceeds from disposition of brands.

Net cash used in financing activities was $6.6 million, which primarily includes $5.9 million in net borrowings on long-term debt, $5.7 million in payments on preferred stock dividends, $3.4 million payments on promissory note liability and $2.3 million in payments for taxes related to net share settlement of restricted stock units.

Total long-term debt was $376.4 million as of September 30, 2025, compared to $352.4 million as of December 31, 2024. The net increase in total long-term debt is largely due to the company drawing additional debt in the first quarter of 2025 for general working capital purposes and associated fees, offset by quarterly principal payments. As previously communicated, the company is actively exploring multiple work streams to refinance our term loan in advance of its coming current in May of 2026.

Let's now turn to our outlook for 2025. We are reiterating guidance for net new studio openings, revenue and adjusted EBITDA. We are taking a more conservative approach to North American system-wide sales given current business conditions and to account for the divestiture of Lindora. Note that guidance and year-over-year comparisons for system-wide sales and net new studio openings exclude CycleBar, Lindora and Rumble in both periods for comparability.

We now project North America system-wide sales to range from $1.73 billion to $1.75 billion, representing a 12% increase at the midpoint. We continue to expect 2025 global net new studio openings, which is net of closures, to be in the range of 170 to 190, representing a 37% decrease at the midpoint from the prior year. We expect the number of closures to be approximately 5% of the global system this year as a percentage of total open studios.

Total 2025 revenue is expected to be between $300 million and $310 million, unchanged from previous guidance and representing a 5% year-over-year decrease at the midpoint of our guided range. Adjusted EBITDA is expected to range from $106 million to $111 million, unchanged from the previous guidance and representing a 7% year-over-year decrease at the midpoint of our guided range. This range translates into a 35.6% adjusted EBITDA margin at the midpoint.

We continue to expect total SG&A to range from $130 million to $140 million. When further excluding the one-time lease restructuring charges, brand divestitures and regulatory legal defense expenses, we are expecting SG&A of $110 million to $115 million and a range of $95 million to $100 million when further excluding stock-based costs. As a reminder, in the fourth quarter, the company hosts its annual franchise conference, which has a net $3.7 million expense in the period.

Regarding marketing fund, in the fourth quarter, we expect to see marketing fund spend exceed marketing fund revenue by approximately $5 million, largely driven by the nationwide branding campaign for Club Pilates. In terms of capital expenditure, we now anticipate approximately $6 million to $8 million for the year or approximately 2% of revenue at the midpoint. This compares to previous guidance of $10 million to $12 million or approximately 4% of revenue at the midpoint.

For the full year, we continue to expect our tax rate to be mid- to high single digits, share count for purposes of earnings per share calculation to be 34.8 million and $1.9 million in quarterly cash dividends related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the end of our earnings press release as well as our corporate structure and capitalization FAQ on our investor website.

We continue to anticipate our unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditure to grow the business. We continue to expect that our anticipated interest expense in 2025 will be approximately $49 million, tax expenses to now be approximately $5 million, including the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members and approximately $8 million in cash dividend related to our convertible preferred stock, resulting in levered adjusted EBITDA cash flow conversion of approximately 35%.

This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Chris O'Cull with Stifel.

John, I know Club Pilates comps had moderated last quarter, I think, to the mid-single-digit range. Can you provide an update on how that played out in the third quarter and then maybe current trends you're seeing in Club Pilates specifically?

Thanks, Chris. Yes. In Q2 of 2025, it moderated closer to the mid-single digit, which we said was around 5%. In Q3, we did see it come into the low single digit or about 1% in the third quarter. As we explained on the call, what we're really seeing is your installed base of studios now getting to what we believe is a full maturity given the current operating structure and number of members and pricing that they have, which is around about $1 million AUV.

As we add new units, what we're seeing is these new units are coming on pretty efficiently and getting up to that kind of, let's call it, $900,000 to $1 million AUV very early in the first 12 months of operation, which means as they move into the 13-plus month, they're not really comping like they used to because now the whole system is almost at that $1 million AUV. That's one of the phenomenons that we're talking about is just the efficiencies of the ramp in Club Pilates. Because they're at full capacity, they're not really comping beyond the $1 million.

Yes, Chris, and I'll add a couple of points as well. Yes, it's a great brand. Obviously, strong AUVs and a great ramp, high productivity. We should still expect to grow organically. Obviously, we're happy with where we were in the first half of the year. I would say that in an increasingly competitive space, we have to do better at helping our franchisees compete better. In the script, we talked about a lot of the areas that we're focused on.

John and I also called out some of the deficiencies in our lead generation and member conversion capabilities, and we're focused on addressing those. Beyond that, we've got to up our game in marketing and studio ops support. I think the team is galvanized around that, and we're excited to support what is a really great brand.

That leads to my follow-up question though is given that Club Pilates is at record high utilization, I guess, and that you're looking into this enhanced, I think you call it enhanced pricing strategies to drive revenue. I guess my question is 2 parts.

First, how do you balance the push for higher prices with the risk of alienating members in a more unpredictable, let's say, macro environment? Then secondly, instead of focusing on pricing, how much opportunity is there to drive growth to fill the significant off-peak capacity hours that exist, I guess, outside of the morning and evening rush?

Yes. I think you're hitting on a couple of really important topics. I think the quick answer is the best way to do it is to bring in an expert who has done pricing analyses and work and support for brands across the country. That's exactly what we kicked off in the quarter. I've worked with this group in the past. I think what they do a really good job of is really digging into the data in a way where we're getting into deep analysis around the members and the usage and the packages and the pricing structure. It's a very multifaceted approach. It's just not saying, take our tiers and increase them by a specific fixed amount.

We're really getting into the science of this. We're also getting some great feedback from our franchisees, and taking their observations and their learnings at the local studio level. I expect we'll come out with a really thoughtful approach to pricing and packages and intro promotions to maximizing the use of our studios. I'm excited about this work, and I think it's definitely something that will help us in 2026.

Our next question comes from the line of Randy Konik with Jefferies.

Mike, can you expand upon -- I think you said some sort of comment about private equity entering more into the franchisee base. Can you just give us some perspective on what that would entail, what brands, what geographies? What are you trying to -- what do you kind of envision for that?

Then I know this -- you talked a little bit about in response to another question around this pricing kind of looking into it. What work is being done around density and thinking through what is the appropriate distance to have Club Pilates from another Club Pilates, specific to Club Pilates, I should say, because it just seems like there's just a lot more ground that can be covered with more units per se, maybe not just or instead of kind of tweaking some of the pricing because it sounds like, obviously, these boxes are very productive. Maybe they are reaching maturity, but that would just argue for more units to be put in closer proximity to other units. Just give us your thoughts on how you're thinking about those 2 areas, the private equity and the density question.

Yes. Thanks, Randy. You're hitting on the 2 topics that occupy the unit growth part of our strategy and the team. As far as PE, I would say that specifically in Club Pilates, we've had some really great experiences with larger scale operators and I think in general, we are looking to grow with the operators we have and potentially look at opportunities to bring in larger scale operators to other geographies in the U.S.

Private equity has done very well in this space, and so we're having really good productive conversations with them. I'm happy with what the team is doing on that front. There may still also be opportunities with the other brands around larger scale operators, and we certainly are looking into that as well.

On the real estate side, this is what I was specifically referencing when it comes to partnering with an experienced third-party real estate partner and the use of pretty sophisticated location selection technologies so that we can feel good about being able to place studios in proximity to other studios, but still not having the negative impact of meaningful cannibalization. You're probably familiar, there are a lot of great systems out there. We feel like we've got one that will work really well for us and be able to allow us to maximize our network of studios within specific geographies.

Then last question, just give us your philosophy on portfolio construction. I think, look, investors that I speak to generally welcome the paring back of the portfolio, skinning down the number of concepts and modalities that the company has. Do you feel like this is the right set of concepts? Do you think about potential more pardowns in the future? Just kind of what -- give us your kind of sense on where we are with the portfolio and any changes that need to be made or not made.

Yes. I won't speak to any future considerations. I'm obviously still learning about each of the brands. I do agree that having a smaller portfolio like we have today and the divestitures that we've done have helped us and will help us. It will allow us to be more focused as we ramp up a lot of the business capabilities that I was talking about.

I also see a lot of complementary aspects to the portfolio that we have. I see a lot of opportunities around leveraging best-in-class things that are happening in one brand and applying them to another brand. I think pricing is a good example of that. I'm happy with the portfolio we have. I think we've done some really good work around the divestiture side, and I'm excited to dive in with each of the brands to drive growth into 2026.

Our next question comes from the line of John Heinbockel with Guggenheim Partners.

Mike, when you guys talk with franchisees about the Club Pilates economic model, is the assumption still sort of the old ramp as opposed to this ramp quickly to $1 million AUV? Because obviously, if that's true, in theory, I guess, you could go into -- you could pay more rent, you could absorb more cost, but there'd be no guarantee that you stay at $1 million AUV. How has the sort of the model changed or it's not, if this ramp holds, it's upside to ROI?

Well, I think that the ramping that we've seen is a function of the brand and the strength of the brand. It's a function of having really, really strong franchisee presale activity that we have developed and refined and improved over years, right? As a scaled business, we're just -- we're getting a lot of things right on the execution around new studio build. I think that's great. I think that it's all relative, right, based upon the studio where you open it. I feel like we can show improvement with each new class of studio openings.

From a modeling standpoint, the work that the real estate team is doing, especially around the new systems that we're putting in place, are adjusting accordingly and making changes to the ramp that help us make more intelligent decisions on site locations. We'll continue to refine it, and we'll continue to just get better-and-better. I still think there's opportunity around how we do our launch marketing, for example. I think -- but it's a good problem to have, right, when you have to modify your model for obviously a better start-up.

Maybe as a follow-up on the retail ops field consultants. Where are you with that ramp? Then now that you've whittled down to 5 brands, obviously, they can concentrate on fewer brands, fewer issues, but where do you see -- and I guess it wouldn't be Club Pilates, but where do you see the biggest opportunity to fix execution gaps probably across brands?

Yes. The field team right now is about 20, and we'll be doing a few more over the next couple of months. They are going to be working directly with our franchisees and our studios around a system called ProfitKeeper. The focus of that is how to improve studio level economics. I know when you start out with something, it always morphs into something that's a little different and a little better and a little evolved. I anticipate this doing the same thing.

I also think there's an opportunity, and I've seen this in other retail settings and studio settings, and you've probably seen it, too, where you can identify opportunity, in this case, opportunity studios and you can focus their attention, of course, supporting all of the brands and all of the units, but around a very defined group of studios that you know has the potential to perform better and create some analysis, some feedback, even some friendly competition that makes a system like that work pretty well.

Our next question comes from the line of Joe Altobello with Raymond James.

I guess first question on Club Pilates. What's the purpose of the national ad campaign? I ask that because normally, you're looking to build brand awareness, right? You've already got pretty high brand awareness, I would think, and you already have record high utilization. Do you guys see more upside to that utilization rate?

This was talked about when I first started, and I dug in with the team, and we've modified the approach a little bit. Most of what will be hitting on the brand campaign will take place over Q4. The way I would think about it is it is us putting incremental dollars to certainly a creative part of it, but around new channels that we typically do not use in performance marketing.

We identified some of those channels. Some of them are traditional media, some of them are new media, CTV, YouTube, podcasts, so what I really like about it, and I think this is going to help us as we get into 2026, is we'll be able to understand the efficacy of each of these investments in these new channels, and then what it provides for us is new ways as we get into the year, if we want to put more dollars behind a particular brand, we know the channels that have the best chance to perform. I think that's what we're really getting as a huge benefit from this work.

Just to clarify, so there are benefits to other brands. This is testing around marketing concepts behind Club Pilates, but it could have benefits for StretchLab, etc.?

Well, this particular campaign is solely for Club Pilates. I think what I was trying to communicate was it will be testing out channels and the efficiency and the effectiveness of new channels that we currently haven't done much work in. That learning will help us if we want to apply this investment or apply these channels to other brands as we get into 2026.

Just to follow-up on that. John, earlier, you mentioned 40% or so of your backlog is still 12 months behind on a development schedule. How does the accounting work for that in the fourth quarter? Because if I look at your EBITDA guide, obviously, you're calling for a pretty sharp decline year-over-year in the fourth quarter. How should we think about that accounting impact?

Yes. When you do a termination -- well, first, when you sell a license, the full balance of the license sale, the price goes on to the balance sheet as deferred revenue. If you pay any commissions, the commissions get deferred as a cost as well. When you terminate the license, what that does is it immediately accelerates the full amount of the license that has been deferred from a revenue perspective and commission to the P&L.

In the third quarter, there was a large margin impact or margin benefit, I should say, related to the accelerated termination of licenses. As you move into the fourth quarter, the steep decline based off of the guide is really being contributed by a couple of factors. One is, there will not be a repeat level of terminations in the fourth quarter that there was in the third quarter, and that will be -- that's around about a $4 million, I guess, you can call it headwind into the fourth quarter.

In addition to that, as a reminder, we have about a $4 million expense impact in the fourth quarter related to our franchise conference as spend that we do to hold that event. Then as Mike mentioned, the marketing fund dollars, which is about $5 million for the Club Pilates brand awareness, that is also a headwind into the fourth quarter. The convention in the marketing fund, you can probably consider one-time within the sequential quarters. That's about an $8 million number.

As you kind of think of a $33 million adjusted EBITDA number in the third quarter, and you can kind of get to where the guide is by adding an additional $8 million of convention costs and marketing fund spend in the fourth quarter. There will be heightened elevations again -- or terminations again in the fourth quarter, but not to the magnitude that we saw in Q3.

Our next question comes from the line of Jonathan Komp with Baird.

John, if I could just follow-up on the last point. I think I heard it, was it $4 million of benefit from terminations in Q3? Then if 40% are still non-current, that seems like a pretty high number, maybe like $900 million or so. Could you share any insight on sort of the outlook for those? Can you get any of those back to current? Any view of why the 40% hasn't come down? I think that's been a consistent number as you have been terminating some.

Yes. Thanks, Jon, for that. Yes. I mean when you look at the delinquency of the backlog, one of the things that occurred during COVID was pretty much everything went delinquent, right? Because there was any licenses that was sold prior to COVID, there was about a 2-year period where franchisees were kind of waiting on the sidelines with signing new leases and such because of the fact that there was a shutdown of studios. There was a natural kind of delinquency in our backlog.

Earlier this year, we stopped terminating licenses while our new COO came in and did a full assessment of franchisees by brand, where they stand. The terminations we have done are an output of that work where we have gone through with franchisees and identified which ones are not moving forward and made those terminations.

When you compare the sold but not open backlog from Q2 to the ending Q3, we have significantly reduced the number of licenses that were delinquent, but the percentage that is still delinquent within the brands we still own is still around 40%. When you think about the brands where -- or the composition of the delinquent, let's call it -- the total remaining backlog is about 1,800. About 44% of that backlog is Club Pilates. We feel very strongly that those franchisees are going to move forward.

The other 20% is in StretchLab. Yoga6 is about 12%, Pure Barre is about 5 and then your BFT is about 20%. We have seen a lot of growth in Club Pilates. We do believe those units will be online. They're just delinquent from the development schedule when they originally bought the license. The StretchLab is a function of AUV performance as well. As we can continue to get the AUV up in StretchLab, we should start seeing those franchisees move forward.

One thing you have to remember, too, John, is we did pro forma the licenses. It is comparable with the brands that we own to the prior year, but -- or the prior period. I do believe that the backlog in addition, when we look at it at Q4, that the backlog, you'll see that there will be some more licenses terminated and that percentage over time will start to come down through terminations, but also with franchisees moving forward.

Long answer, but by kind of just organic default around COVID, the backlog naturally just kind of got put into a delinquent state, but it doesn't mean that the licenses won't get open at some point. It's just that they're moving forward on a delinquent schedule.

Then maybe to follow-up, John, for the fourth quarter, any help you can give in terms of just bridging comps, system sales and revenue that you're expecting? There's still a fairly wide range on those?

Then just, Mike, bigger picture, could you maybe talk about some of the key metrics that you're targeting to watch the progress initially here? Any further detail on when you would expect to start to see some progress around the key initiatives you're watching?

Yes. As far as system-wide sales is concerned, I mean, we still guided to the $1.73 billion to $1.75 billion for system-wide sales. You can assume that the system-wide sales sequentially will be up from Q3. One of the benefits with system-wide sales in the fourth quarter is we do run promotional Black Friday marketing programs to drive package sales to drive new memberships in the fourth quarter. You will sequentially see system-wide sales up.

As far as comp is concerned, with Q3 being a negative 1% comp, we are expecting to see 0 to low single digit from a comp perspective. It all depends on the successfulness of the marketing programs in the fourth quarter and how they play themselves out.

As far as revenue is concerned from Q3 to Q4, there's a couple of things at play. One is, you will sequentially see overall revenue down from Q3 to Q4. The reason why, again, is the fact that you won't have the benefit of the heightened terminations in the third quarter or fourth quarter that you had in the third quarter. That's going to be the main driving force for overall revenue being down. We do expect to see royalty production up in the fourth quarter, but it's just the one-time terminations that are going to drive down revenue in Q4, but year-over-year, we do expect revenue to be up. We did about $44.5 million -- excuse me, $80 million in Q3 of '24. We're relatively in line with that for Q4 of this year.

Yes. On the KPI question, the good news about a business like this is it's got some pretty straightforward KPIs. Weekly, we're looking at leads, new members, classes, retail sales, cancellations, average studio sales on a year-over-year basis each week, and we look at it compared to the previous 4 weeks and 8 weeks. We're getting a sense for momentum and where we stand. We're in a pretty good rhythm when it comes to measuring the business and addressing it.

John, let me correct what I just said too. The revenue in Q3 of 2024 is around $80 million. Adjusted for the terminations, you're probably going to be down sequentially from Q3 of '24 to Q4 of '25.

Our next question comes from the line of Ryan Mayers with Lake Street Capital.

First one for me, just kind of on the topic of innovation that you guys are looking to drive at some of the concepts. Is this a concept-wide nationwide thing? Is it more so just specific franchisees at certain locations maybe need help driving member growth? Just kind of walk us through some of the innovation there and how we should be thinking about that?

Yes, Ryan, good question. When it comes to class content, we approach it from a nationwide rollout standpoint. Again, we'll test and we'll perfect and we'll get it to the point where we're ready to launch it, but we will launch it on a nationwide basis, understanding that some franchisees may not be able to implement it right at the time that we launch it.

The other thing that we'll increasingly do is have that innovation work feed our marketing and driving awareness around new class content is a great way to do it. This is something that I think all the brands will benefit from, and we'll put together a schedule for each of them to dive into it next year.

Then just on the topic of pricing, I mean, how should we think about what the membership churn currently is and maybe more specifically at Club Pilates, where you guys are looking to drive price and then maybe just kind of the concept as a whole, just so we can think about sort of the membership base that potentially is turning out there? Is it elevated? Or what's kind of that historical level there?

Ryan, I'll take that one. As far as Club Pilates is concerned, we haven't seen a shift in cancellations or churn within the brand. It's a trend that's remained fairly stable. I think what you're starting to see is just the actual total member per studio. It is up when you look at it compared to prior -- the same quarter prior year, but it's just kind of getting to that capacity where we're not adding at the same rate that we did historically. Churn overall has remained stable.

Even when you look at memberships where they've been temporarily frozen, haven't seen any real shift in that either. It's more of a top of the funnel kind of just, I guess, signal that is the rate of growth has kind of slowed down a little bit. Overall members per studio has remained fairly constant.

Our next question comes from the line of Richard Magnusen with B. Riley Securities.

This is regarding StretchLab. Could you provide maybe more details on your efforts to replace the loss of Medicare visitors, the money that they brought in? What has worked so far to replace that lost revenue? Then you earlier call -- earlier in the year, you mentioned looking at ways to reduce the ratio of stretch instructors to visitors because it tends to be very heavy in that particular metric. I wonder what you've done there and what success you've had?

Then finally, have you looked at maybe other ways of including that modality with other modalities to maybe reduce overhead or get more people interested in it?

Yes, Richard, good question. Yes, you're right. We touched on the Medicare Advantage issue. I would just say that we have to drive an expanded membership mix. As we looked at the current membership base, I think there's a lot of opportunity to drive younger member across more athletic pursuits, new partnerships. All these are areas where the offering as it stands today should really resonate.

Also, there's a chance to -- or there's an opportunity to drive business from folks who just want to purchase individual stretches but not a full membership. I think there's an opportunity there. Then also from just overall supporting the brand better, we're looking at pricing intro packages, performance marketing, the online journey, which I think needs some work and local activation. There are a lot of things we're doing around membership expansion in that concept.

From an operation standpoint, we're also testing a few operational adjustments that will lighten the demand on the labor side within the box. Not in a position to give any specific results of that work, but we are diving in for sure.

Our next question comes from the line of Owen Rickert with Northland Capital Markets.

Quickly, what are you hearing from franchisees about potential pressures in areas like labor, occupancy or instructor availability? If you are hearing anything from them, how are you helping them mitigate these challenges?

I don't think we're hearing a lot more necessarily. I think that it's a constant challenge just to doing business. Most of our franchisees, I think, do a really great job of addressing it and balancing it. The availability of instructors is something that I think we've heard on an ongoing basis. One of the things that I think we do really well, especially within the Club Pilates system is we've got a pretty extensive instructor training program that helps to obviously feed our studios, which is great. We're looking for ways to potentially expand that in the future, which is really good.

I also think that having the field people engage with the studios around this ProfitKeeper system, I think, can help, especially on the cost side and the profitability side. I mean, I think we'll be helping them to address it, but nothing of note that's been raised more so recently.

We have reached the end of the question-and-answer session. I would like to turn the floor back over to Mike Nuzzo for closing remarks.

Well, thanks, everybody, for joining today's call. We look forward to connecting with many of our franchisees. We have our annual convention in Las Vegas in the next couple of weeks, and we look for more opportunities to give you insight on the business. Thanks a lot.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.