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22 Feb 2024
Xponential Fitness tells HCM it will vigorously defend itself as class action lawsuit is filed in California
By Kath Hudson
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BFT is one of Xponential's most recently-acquired brands
Photo: Xponential Fitness
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Xponential Fitness has told HCM it will vigorously defend itself against claims made in a class action lawsuit being brought against the company for financial damages.
The lawsuit – City of Taylor General Employees Retirement System v Xponential Fitness Inc – was filed on 9 February in the state of California by the lead plaintiff.
Fifteen American law firms, including Robbins Geller Rudman & Dowd and Levi & Korsinsky, are now speculatively seeking engagement with complainants in a bid to gather a substantial enough cohort to represent Xponential Fitness shareholders in the case in a bid to recover funds. The deadline for them to come forward to participate in the legal action is 9 April.
It’s understood some of the law firms have up to 70 participants.
The court action states that certain executive officers of the company violated the Securities Exchange Act between 26 July 2021 and 7 December 2023.
The allegations are that:
False and/or misleading statements were made relating to the closure of 30 Xponential Fitness franchise locations.
Xponential’s reported same-store sales and average unit volume metrics had been exaggerated by the company excluding details about underperforming stores.
Eight out of 10 of Xponential’s brands at that point in time were losing money each month and more than 50 per cent did not make a positive financial return overall.
More than 60 per cent of the company’s revenue was one-time and non-recurring.
More than 100 franchises were for sale at a price that was at least 75 per cent less than their initial cost.
The court action will also contend that Xponential misled some franchisees into taking on franchises by misrepresenting the financial profile and profitability of existing studios, as well as the expected rate of return for new openings.
As a result, court papers contend that some franchisees are substantially in debt, suffering high attrition rates and running non-viable studios that have no realistic path to profitability.
An Xponential spokesperson told HCM: “We believe these claims are without merit, and we will vigorously defend ourselves against them. Beyond that, we don’t comment on litigation.”
FOOTNOTE
On 26 June 2023, short-only fund, Fuzzy Panda Research, published a report which raised a number of the same issues as the court action and alleged Xponential CEO, Anthony Geisler, has a history of misleading investors. This led to Xponential’s common stock falling by more than 37 per cent, however, the company and Geisler fought back strongly with the support of its investors and board and the shares recovered.
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