Earnings Call Transcript - XPOF Q2 2025

Operator, Operator

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

Patricia Nir, Investor Relations

Thank you, operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness' second quarter 2025 financial results. I am joined by Mike Nuzzo, Chief Executive Officer; Mark King, former Chief Executive Officer; John Kawaja, President, North America; 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 our operating performance that should be considered by investors in conjunction with 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. 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 June 30, 2025, this includes BFT, Club Pilates, CycleBar, Lindora, Pure Barre, Rumble, StretchLab and YogaSix. I will now turn the call over to Mark King, former CEO of Xponential Fitness.

Mark James King, Former CEO

Thanks, Patricia, and good afternoon to everyone. Before we discuss the quarter, I want to take a moment to share my enthusiasm for today's announcement that our Board of Directors has unanimously appointed Mike Nuzzo as our Chief Executive Officer. I've had a chance to spend some time with Mike, and I couldn't be more confident in his ability to lead Xponential through its next chapter. Mike brings over 25 years' experience, leading consumer, retail and services businesses with a proven track record of driving scalable growth and expanding into both domestic and international markets. His disciplined, data-driven approach and deep commitment to franchisee success were also particularly compelling to the Board. Previous leadership roles at Eyemart Express, Petco and GNC clearly demonstrate his ability to build strong brands and execute at scale. Mike has joined the call today to share a few thoughts. Mike?

Michael M. Nuzzo, CEO

Thanks for the kind words, Mark, and congratulations on all your accomplishments at Xponential. I also very much appreciate your help and support in getting me launched today. I am thrilled to be here and honored to be leading this great company. Today is day one, and I have a lot to learn. But as a 25-year consumer industry veteran, there is so much to love about Xponential. First, we are in a great space. Boutique fitness has substantial momentum and long-term growth potential as consumers continue to invest more in their health routines. Second, we have amazing studio brands, led by passionate and committed franchisees with so much upside potential. And third, Mark and the team have made great progress in building a team, supporting foundation, and company culture to drive strong growth and financial returns. You will hear more from me over the coming months, but I know Xponential can elevate and lead the fitness space around innovation, best-in-class franchisee support, and smart and healthy unit growth and expansion. Meaningful progress has been made, but I look forward to helping the team accelerate along the journey to providing the most impactful member experience and to becoming one of the most coveted franchisee partners in the industry. Thanks, and I look forward to spending time with all of you. Now, I will turn things back to Mark and the team to discuss Q2 in more detail.

Mark James King, Former CEO

Thanks, Mike, and welcome to the team. With our leadership transition in place, let's now turn to the progress we've made across the business this quarter. We remain focused on execution and continue to make progress against our strategic priorities. We advanced several initiatives we outlined at our Investor and Analyst Day, both during and after the quarter, including further expansion of our field operations team, a new retail partnership agreement and the divestitures of CycleBar and Rumble. Together, these actions reflect the company's ongoing focus on strengthening the business and creating long-term value for our shareholders. Let's now turn to second quarter results. North American system-wide sales of $474 million were up 12% year-over-year. North American quarterly run rate average unit volumes of $659,000 were up 3% year-over-year. Total members stood at 863,000 at quarter-end, up 8% year-over-year. And same-store sales were up 1%. Although year-over-year growth moderated compared to the first quarter, we believe the recent strategic actions will continue to improve performance in future periods. Alongside our new retail agreement, which John Kawaja will speak to in more detail shortly, the recent divestiture of CycleBar and Rumble brands represent another important step in sharpening our strategic focus. These actions enable us to focus our company resources on the brands that generate the highest ROI, including our core brands, Club Pilates, Pure Barre, YogaSix and StretchLab. With a leaner, more focused portfolio, we expect to see improvements in overall portfolio health, a reduction in closure rates and an increase in average unit volumes. While there will be a period of transition as we right-size back-office operations, this evolution will ultimately position us to operate more efficiently and focus on our highest-return brands. Before turning it over to John Kawaja, I want to take a moment to express how proud I am of what we've accomplished at Xponential Fitness during my time here. I'm confident in both the company's long-term potential and Mike's capabilities to deliver on the operational optimization required for Xponential to become the franchisor of choice in health and wellness. Thank you for your time today. John?

John Kawaja, President, North America

Thanks. I want to take a moment to thank Mark. It's been an honor working alongside him. His leadership has set a strong foundation that we're excited to continue building on. And of course, a warm welcome to Mike. With that, I'll provide a brief update on our new retail agreement with Fit Commerce, which has been a key focus area of mine since joining Xponential, and was executed post quarter-end. As many of you know, our wholesale retail business, historically managed in-house, has posed challenges over recent quarters. While our retail operations have contributed to revenue in the past, it has always been a low-margin portion of our business that carries significantly more risk and required a significant amount of management's attention. As part of our new agreement, we will outsource this noncore underperforming segment to Fit Commerce, which will be able to deliver elevated design, development and merchandising, ultimately enhancing service to our business, our franchisees, and our customers. This transition allows us to reallocate resources towards higher-margin scalable areas with long-term upside that better align with our strategic priorities. As Mark alluded to, this will allow us to focus on building strong brands and experiences while supporting studio-level franchisee operations. Importantly, this partnership will reduce our selling, general and administrative expenses while introducing annual minimum guaranteed commissions that will scale over time, totaling over $50 million in the initial five-year contract period, resulting in higher operating margins than our prior retail strategy. In addition, Fit Commerce will purchase the remaining inventory we have on hand, freeing up working capital. This is a win for our franchisees and certainly a win for Xponential, as we expect to see consistent growth in revenue and margin while significantly lowering our retail business' sensitivity to market cycles. Fit Commerce is required to satisfy certain capital requirements by the end of October for the retail agreement to be effective. I'll now turn to some recent updates across a few of our brands. As Club Pilates matures, we are actively focused on strengthening the brand by enhancing monetization strategies, better utilizing existing capacity, bringing larger operators into the franchisee system and improving our marketing to deliver same-store sales growth. With Club Pilates at record high utilization, we have the potential to drive revenue growth through enhanced pricing strategies that reflect demand for classes. We continue to invest in Club Pilates' long-term growth through product innovation, technology integration, targeted marketing, including experimenting with new pricing tiers and membership types to determine the right mix of driving additional revenue. The brand's attractive unit-level economics have also resulted in several private equity groups acquiring studios. These franchisees have access to growth capital and employ professional operators that understand how to operate efficiently and effectively market within their footprints. Lastly, we are using Club Pilates' significant scale and access to a deep marketing fund to launch a major Club Pilates brand marketing campaign to build brand awareness and expand interest in Club Pilates. It's worth noting that in its entire operating history, Club Pilates has never had a national brand campaign.

John Meloun, CFO

Thanks, John, and I'd like to also thank Mark for his leadership and partnership. It's been a pleasure working alongside him during this important chapter for the company. Mike, I'm thrilled to partner with you as we embark on the company's next chapter. We ended the quarter with 3,327 global open studios, with 86 gross new studio openings during Q2, with 66 in North America and 20 internationally. There were 57 global studio closures in the second quarter, or about 1.7%, representing an annualized closure rate of 6.9%. 27 or nearly half of the closures in the quarter were in CycleBar and Rumble brands. We sold 58 licenses during the second quarter, which were largely concentrated in Club Pilates, both in North America and internationally. The pace of license sales increased from last quarter, as we started selling licenses again in the United States after a temporary pause, during which time the 2025 franchise disclosure documents, or FDDs, were issued. At present, we have paused franchise sales in the United States, except for sales by exemption, as we work to issue FDD amendments to address the hiring of our new CEO, among other updates. The FDD amendments will be ready for use immediately upon issuance in non-registration states, while the FDD registration process with the franchise registration states typically involves more time to process. Our base of licenses sold and contractually obligated to open is over 1,400 studios in North America, and we also have over 1,000 international master franchise obligations. As John mentioned, approximately 40% of our global licenses are over 12 months behind their applicable development schedule, and we have started to actively terminate a certain number of these licenses. We believe the actions we are taking related to the management of our licenses will be elevated in the third quarter but normalize in the fourth quarter, but noting that terminations can take time, given requirements around notification timelines. Second quarter North America system-wide sales of $474 million were up 12% year-over-year, with growth driven primarily by the 1% same-store sales increase within our existing base of open studios, coupled with growth from net new studio openings. Approximately 80% of system-wide sales growth was driven by a higher number of actively paying members and approximately 20% by higher pricing and/or mix shifts. North American run rate average unit volumes of $659,000 in the second quarter increased 3% from $638,000 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 high levels of demand for many of our brands and Club Pilates, in particular, we believe there is a significant opportunity to increase revenues through more dynamic pricing methodologies, including new price tiers, more stringent cancellation policies, and new package offerings. On a consolidated basis, revenue for the quarter was $76.2 million, down 1% from $76.9 million in the prior year period. 82% 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 our studio opens. Turning to the components that make up revenue. Franchise revenue for the quarter was $45.4 million, up 5% year-over-year. This growth was primarily driven by an increase in royalty revenue, as system-wide sales were supported by an 8% increase in year-over-year actively paying memberships and an 11% increase in total visits, offset by lower revenues from license terminations in the period. Equipment revenue was $9.5 million, declining by 26% year-over-year. This decrease was primarily the result of a 39% year-over-year lower volume of global installations in the period compared to the same period last year. Merchandise revenue of $5.6 million was down 8% year-over-year. The decrease year-over-year was due to lower sales volumes. As John mentioned earlier, we recently entered into an agreement with Fit Commerce that will have a transformative effect on our retail margins with benefits to our financials expected in 2026. Fit Commerce will be handling all fulfillment. As a result, we will no longer have to bear the cost of operating our retail warehouse and the associated overhead. Fit Commerce is also committed to purchasing our remaining inventory, which will free up working capital. Franchise marketing fund revenue of $9.5 million was up 13% year-over-year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America, in addition to increased sales on a per studio basis. 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, among other items, was $6.3 million, down 3% from the prior year period. The decrease was primarily due to lower brand access fees. Turning to our operating expenses for the quarter. Cost of product revenue was $10.5 million, down 25% year-over-year. The decrease was primarily driven by a lower volume of equipment installations and merchandise sales during the period. Cost of franchise and service revenue was $4 million, down 32% year-over-year. The decrease in franchise sales commissions was largely due to lower international franchise license sales and lower commission expense from North American franchise license terminations. Selling, general and administrative expenses of $24.1 million were 35% lower year-over-year. The decrease in SG&A was primarily due to a decrease in legal expenses, driven by nonrecurring insurance recovery receivables and lower restructuring charges. As indicated in our 8-K filing on July 2, 2025, the SEC informed the company that it had concluded its investigation without action. We still expect to receive $15 million in cash reimbursement from our professional insurance policies in the second half of this year. This reimbursement was accrued for as of the end of the quarter and will have no impact on GAAP earnings or EBITDA once received. At present, we have entered into and paid for lease settlement agreements of approximately $31.1 million through the second quarter. As of June 30, 2025, we have approximately $14 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 expense was $3 million, down 34% compared to the prior year period. Marketing fund expenses were $8.9 million, up 13% year-over-year, afforded by higher system-wide sales and associated marketing fund revenue contributions. Acquisition and transaction credit was $1.9 million compared to a credit of $1.2 million in the prior year period. As I've 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 earn-out each quarter and adjust our accruals accordingly. Note that this earn-out will persist despite the recent divestiture of the brand. We recorded a net income of $1.3 million in the second quarter or a loss of $0.01 per basic share compared to a net loss of $14.3 million or a net loss of $0.30 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 second quarter was $14.5 million or adjusted net income of $0.26 per basic share on a share count of 35 million shares of Class A common stock. Adjusted EBITDA was $28.1 million in the second quarter, up 14% compared to $24.7 million in the prior year period, primarily driven by an increase in high-margin royalties in our franchise revenues. Adjusted EBITDA margin was 36.9% in the second quarter, up from 32.1% in the prior year period. Turning to the balance sheet. As of June 30, 2025, cash, cash equivalents and restricted cash were $38.7 million, up from $26 million as of June 30, 2024. For the six months ended June 30, 2025, net cash provided by operating activities was $8.3 million, which includes $1.9 million in lease settlements. Net cash used in investing activities was $2.9 million with $2.8 million used on the purchase of property and equipment and intangible assets. Net cash provided by financing activities was $0.5 million, which included $10 million on borrowing of long-term debt, $2.7 million in payments on long-term debt, $3.8 million in payments on preferred stock dividends, and $2.1 million in payments for taxes related to net share settlement of restricted stock units. Total long-term debt was $377.8 million as of June 30, 2025, compared to $330.1 million as of June 30, 2024. The increase in long-term debt is primarily due to the company drawing $10 million in additional debt in the first quarter of 2025 for general working capital purposes and $25 million in additional debt in the third quarter of 2024 to address the lease termination payments on previously owned studios and for general working capital purposes. Let's now turn to our outlook for 2025. Our updated guidance reflects the following considerations, which, taken together, have prompted us to be more conservative. First, the impact of recent brand divestitures and the timing of transitioning back-office functions; second, a more conservative revenue outlook in light of current headwinds from the FDD renewal process and a more unpredictable macro environment for the second half of the year; third, a commitment to increase levels of marketing spend, particularly in Club Pilates and StretchLab; and fourth, room for some organizational realignment with the new incoming CEO. For the full year, we are increasing guidance for our global net new studio openings and reducing guidance for system-wide sales, revenue and adjusted EBITDA. We now project North America system-wide sales to range from $1.78 billion to $1.8 billion, representing a 13% increase at the midpoint from the prior year when removing Rumble and CycleBar from the comparison for comparability, and down $155 million from the previous guidance of $1.935 billion to $1.955 billion, which included approximately $120 million from Rumble and CycleBar. For avoidance of doubt, note that in this updated system-wide sales estimate for fiscal year 2025, we have removed any impact from Rumble and CycleBar, including system-wide sales generated by the brands in the first six months of 2025. We 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, again, removing Rumble and CycleBar for comparability. We now expect the number of closures to be approximately 5% of the global system this year as a percentage of total open studios with any impact from Rumble and CycleBar brands removed. Total 2025 revenue is now expected to be between $300 million to $310 million, representing a 5% year-over-year decrease at the midpoint of our guided range and down from previous guidance of $315 million to $325 million. Adjusted EBITDA is now expected to range from $106 million to $111 million, representing a 7% year-over-year decrease at the midpoint of our guided range and down from previous guidance of $120 million to $125 million. This range translates into roughly 35.6% adjusted EBITDA margin at the midpoint. We expect total SG&A to range from $130 million to $140 million when further excluding the onetime lease restructuring charges and regulatory and 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. In terms of capital expenditure, we anticipate approximately $10 million to $12 million for the year, or approximately 4% of revenue at the midpoint. For the full year, our tax rate is expected 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 earnings per share and adjusted earnings per share 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 unlevered free cash flow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditures to grow the business. We continue to expect our anticipated interest expense in 2025 will be approximately $49 million, tax expenses to be approximately $10 million, including the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members, and approximately $8 million in cash dividends related to our convertible preferred stock, resulting in levered adjusted EBITDA cash flow conversion of 28%. This concludes today's prepared remarks. Thank you all for your time today. We'll now open the call for any questions.

Operator, Operator

Our first question comes from Randy Konik with Jefferies.

Randal J. Konik, Analyst

I have a couple of quick questions. Regarding the same-store sales for the quarter compared to the previous quarter, can you provide some insight on what influenced the change in trend? Also, concerning Club Pilates, are you considering increasing prices due to reaching some capacity, which would allow for greater revenue per day or per unit? I'm curious about what you're aiming for with Club Pilates. Lastly, regarding the 40% of the backlog that is behind schedule, are there specific banners that are primarily responsible for most of those units being delayed? Any additional information would be appreciated.

John Meloun, CFO

Thanks for the question, John. In terms of same-store sales, we reported 4% for Q1 and 1% for Q2. One of the reasons for the decline is that while Club Pilates is still performing well in the mid-single digits, it did see a decrease from Q1. Additionally, StretchLab experienced a more significant decline in same-store sales in Q2. These two brands had a notable impact on the change in performance from Q1 to Q2. Now, addressing your second question first, the 40% backlog includes brands like Rumble and CycleBar. In Q3, we will adjust any licenses that transition to the new owner, which will lead to a significant reduction in our backlog. The remaining brands in the backlog include Club Pilates, StretchLab, and some portion of YogaSix. It's important to note that much of the backlog issues originated from COVID, which pushed many original licenses sold before the pandemic further out by two years, thus causing a natural delinquency in our backlog. We have been focusing on mobilizing franchisees this year. CycleBar and Rumble will contribute significantly to the delinquency we expect to clear in Q2, with the remaining balance involving StretchLab, YogaSix, and Club Pilates.

John Kawaja, President, North America

Randy, it's John. Regarding pricing at Club Pilates, the studios reach a high level of productivity very quickly. We plan to focus on pricing and monetization strategies to increase same-store sales. We are examining membership pricing structures, cancellation and late fees, and also considering dynamic pricing.

Randal J. Konik, Analyst

Got it. And then, I guess lastly, John, if you think about the closure rate, I think you said 57 in the quarter. Half of those were CycleBar and Rumble. Any kind of feel for, just high level, when we should kind of see the closure rate kind of bottom out and we kind of move away from that? Is that like a mid-to-late 2026 item in your opinion, based on the numbers you're looking at?

John Kawaja, President, North America

Yes, I believe that by the second half of 2025, you will start to see the closure rate approach the 5% range. Currently, most closures, excluding the impact of CycleBar and Rumble, are occurring internationally, where BFT has a significant presence. They account for some closures. In the U.S., StretchLab and YogaSix are the main brands at scale that continue to see some closures among the bottom 10%. For the year, I expect about a 5% closure rate, which will likely trend down in the second half. By 2026, we should see a decline into the mid-to-low single digits as the brands opening, especially Club Pilates, both domestically and internationally, have healthier average unit volumes, leading to stronger overall performance and a reduced closure rate.

Operator, Operator

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

John Edward Heinbockel, Analyst

John, can you walk through the four items you mentioned that are affecting profitability in 2025? Could you provide a bit more detail on those four? Also, how many of those will extend into 2026? I'm trying to understand what the EBITDA base for 2025 looks like as we head into 2026.

John Meloun, CFO

Yes, John, it was crucial for us to maintain operations supporting Rumble and CycleBar during their divestiture to ensure a seamless transition to the new owner. Now that this has been completed, we are reorganizing the corporate support functions and services allocated to the brands, which will be assessed further. I believe this will primarily be addressed in 2025, so it shouldn’t have lasting impacts into 2026. Regarding system-wide sales, the adjustments we made to the guidance and the royalty impact are more immediate issues. We previously discussed same-store sales in Q2, which were robust for Club Pilates, but we are noticing some softness as we enter the third quarter. This cumulative effect will persist unless there's a significant shift that allows the trend to return to our forecasts. Consequently, we are experiencing a compounded effect in the latter half of the year related to declining system-wide sales and the resulting royalty impact. In response, we are increasing our marketing spending by approximately 25% in the second half compared to the first half to help counter these effects, although we have not anticipated any potential upsides from this marketing investment in our guidance. Nevertheless, we are taking a cautious approach by slightly lowering our guidance regarding system-wide sales. Additionally, with the new CEO coming on board, we have discussed our strategy, and while we are mostly aligned, we want to give Mike time to fully understand the business. Therefore, we are being conservative with our SG&A spending, especially regarding costs we have projected for the full year. In terms of how much of this extends into 2026, the primary concern is around system-wide sales and whether our marketing efforts can influence a positive trend as we transition into 2026. However, the divestiture of Rumble and CycleBar, as well as the marketing expenditures and additional guidance for the CEO, should mainly impact this year.

John Edward Heinbockel, Analyst

As a follow-up to that, what is the marketing spend primarily focused on? Is it not mainly for brand awareness? Is it about local social promotions? How is that broken down?

John Kawaja, President, North America

Yes. This is John. It's traditionally performance marketing, generating leads and generating conversion of those leads. For our Club Pilates business, we're going to be launching a brand campaign at the beginning of October. As we mentioned on the call, it's the first time the company has made an investment of that nature. And that is for brand awareness. It's a competitive environment of Pilates, and we believe it's the right time to make that investment.

Operator, Operator

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

Joseph Nicholas Altobello, Analyst

I guess, first question, can you kind of walk us through where we are on the FDD renewal process? It seems like we start to make progress and then, unfortunately, that progress seems to stall. So kind of what's taking so long and what needs to happen in the back half?

John Meloun, CFO

Yes. Joe, I mean, with the changing of the CEO, it is required that you would have to amend your FDDs. So from that perspective, this is a process that we have to follow to be compliant with that. So there are registration states and non-registration states. The non-registration states should be what I believe a fairly quick filing and amendment that will get approved. The registration states have to go through their review, based off of the state's requirements. As far as license sales, we did have an impact in the first half as we got the 2025 ones sold. We got momentum into Q2. I do believe we'll be able to maintain that momentum in the second half, that this amendment for the CEO should not have a material impact, and I don't think the FDDs will materially stay dark as we saw in the beginning of this year.

Joseph Nicholas Altobello, Analyst

Okay. So it sounds like you expect to be able to sell licenses in all states pretty quickly?

John Meloun, CFO

We expect to be able to sell licenses in the second half and get back on trend fairly quickly, yes.

Joseph Nicholas Altobello, Analyst

Okay. And maybe secondly, in terms of the portfolio, obviously, CycleBar and Rumble being divested, what's the outlook for some of your sort of noncore core, if you will, Lindora and BFT in particular?

John Meloun, CFO

BFT has been a great international brand. It has a good presence for us. It actually kind of helped us create more of an international structure. So we'll continue to full speed ahead with BFT on the international front. Club Pilates as well is getting a lot of traction there. Then secondarily, on Lindora, Lindora is a brand that we bought a couple of years ago. We've been evaluating that brand. Like all brands in our portfolio, we'll continually evaluate the performance and make sure that they have a contributing ROI. So at this point, we have the brands we have. We divested Rumble and CycleBar, and we're focused on growing the business. So at this point, you can consider those are the brands that we own in the portfolio and we'll continue to operate.

Operator, Operator

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

Jonathan Robert Komp, Analyst

John, I just want to follow up. Could you provide an update on the same-store sales? I believe you were previously expecting them to be in the mid-single-digit range. Any insights on what you're factoring into the guidance? Also, regarding the moderate slowdown you've observed, have you identified any trends or notable drivers related to this trend?

John Meloun, CFO

Yes. Regarding same-store sales, historically, we’ve considered a mid-single digit. Due to the lower same-store sales comparison in Q2, our guidance now reflects a low-single digit as we move into the second half. With the increased marketing expenditure, we haven't really factored in any upside for the second half. Typically, Q2 and Q3 are our slower quarters, as summer vacations lead to more members freezing their accounts or visiting less frequently. However, we’re still experiencing solid system-wide sales growth, even if the comparison is a bit low. Brands like Club Pilates, YogaSix, and Pure Barre are performing well, although StretchLab has a negative comparison that drags down the overall numbers. Therefore, you should expect approximately a low-single-digit same-store sales comparison for the second half.

John Komp, Analyst

Yes. If I could, just wanted to change subjects and ask about just the focus of the Investor Day building out better capabilities. Is that best-in-class franchisor? Just any feedback from the system and franchisees post some of those updates and the early rollout of some of the field initiatives? Just any feedback there? And then, Mark or Mike, if you're there, welcome. Just curious, as we think about transition here, sort of key steps and near-term road map there.

John Kawaja, President, North America

Sure. This is John. Yes, we've been rolling out our field operations team over the last three months. We've got the first wave hired and trained, and they are ready to hit the road next week. So we'll be deploying over a double-digit number of field operations people in the field. It's been really well received by the system. They're looking forward to the help. They're looking forward to having people in their studios, sharing best practices, and we're excited to get that launched.

Michael M. Nuzzo, CEO

This is Mike, Jonathan. Yes, it's day one, but I have been well prepared. I'm eager to get started, and I believe I'm entering the business at an opportune moment. The team has made some smart decisions to position the company for effective portfolio management, the new retail merchandise agreement, and an increased emphasis on operations, marketing, healthy franchise sales, and unit growth. While there are still some areas to improve and enhance, I think this provides a solid foundation for a strategy to build upon, which will enable me to start quickly.

Operator, Operator

Our next question comes from the line of Chris O'Cull with Stifel.

Christopher Thomas O'Cull, Analyst

Welcome to the call, Mike. My first question is on Club Pilates. Given the high utilization rates and class demand, why not be more aggressive in terms of infilling markets, which could arguably capture incremental demand while making it harder for competitors to enter the market, and especially given the returns on the Club Pilates studios are already extremely high? So I'm just curious, why not be more aggressive with unit openings?

John Kawaja, President, North America

Yes, thanks. This is John. We plan to do just that. We believe there's a significant opportunity for Club Pilates. We are collaborating with larger, more experienced franchisee investors. Recently, we sold a 60-pack of Club Pilates. We agree, there is plenty of potential. Each group of studios consistently outperforms those from previous years, and they reach a high level of productivity very quickly. It’s a strong business, and we are optimistic about growth.

Christopher Thomas O'Cull, Analyst

Okay. And then, you mentioned rolling out some marketing campaigns for Club Pilates for the first time ever. Can you just elaborate on the channels you plan to utilize, maybe what the level of initial spend could look like?

John Kawaja, President, North America

Sure. We're really looking at all different mediums. The spend is significant in the third and fourth quarter, over $20 million. And so, we think that it's the right time to introduce a brand campaign to strengthen brand awareness and to really position Club Pilates as the leader in the space that it is.

John Meloun, CFO

Yes. I mean, $120 million of the drop in the guide is carving out CycleBar and Rumble. The balance is what you can consider the softness in how we see the back end of the year.

Operator, Operator

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

Ryan Robert Meyers, Analyst

First one for me, John, how should we be thinking about the Fit Commerce partnership? It sounded like that won't be making an impact until 2026, but just so we get a good understanding of kind of the cost savings that drives for you guys, I think that would be helpful.

John Kawaja, President, North America

Sure. This is John Kawaja. We are very excited about the deal, which starts on December 1. Most of the impact will be felt next year, although we will be selling nearly all of our retail inventory to Fit Commerce before the deal begins. For modeling purposes, there is a minimum guaranteed royalty of $50 million over five years. The first year is expected to generate around $7 million, with amounts increasing from there. Payments will be made monthly, so this will positively affect cash flow in 2026 and beyond.

Ryan Robert Meyers, Analyst

Okay. Got it. And then, now that you guys were able to get the SEC investigation resolved, does that help speed up the debt refinance at all?

John Meloun, CFO

Yes, with the SEC investigation behind us, our focus has shifted to starting the refinancing process. We are actively working on it and looking to complete it as soon as possible.

Operator, Operator

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

Richard Frederick Magnusen, Analyst

I just have one question. In the past, you've tested different types of variations in studios such as smaller units. So I was wondering, are there any particular variations in these different studios or different brands, whether it's a smaller unit or specific arrangements or layouts within the studio that have been providing significantly greater efficiencies or other performance that you can talk about?

John Kawaja, President, North America

Yes, there are a couple of things we're considering. We are preparing to introduce what we refer to as double vibes, double Club Pilates, due to the strong performance in the studio with that brand, and we're eager to see the results. Additionally, we've started using smaller footprints in StretchLab, moving to 8-bench studios instead of 10, which reduces construction costs, lowers ongoing rent, and creates a more attractive offering for our franchisees with the smaller size.

Operator, Operator

Our next question comes from the line of JP Wollam with ROTH Capital Partners.

JP Wollam, Analyst

Could you start by discussing the pricing opportunity? I'm interested in understanding how significant the potential is for Club Pilates compared to other brands when considering different factors like price, cancellation fees, and tiers. Can you break that down for us?

John Kawaja, President, North America

Yes. We're focused on Club Pilates because of the high utilization in that brand. As we said, the studios get to a high level of productivity very quickly, which presents a challenge on same-store sales. The lever to push is pricing and monetization. And we're really curious about dynamic pricing. We think there's an opportunity to value the times of the day where the classes are most popular to create a model that will increase revenues. As far as that thinking across other brands, of course, we look at pricing and we look at membership tiers across all of our brands. And we're always looking at those things. I think dynamic pricing is the area across really all of our business that has upside opportunity.

John Meloun, CFO

I'll give my perspective on that. From what I’ve seen, we usually acquire brands that have a small presence. When it comes to expanding and promoting these brands, building awareness can be difficult. Body Fit Training is a good example; it was a successful international brand but not well-known in the U.S. We launched BFT in Santa Monica, but instead of starting in Southern California to build momentum before expanding, we went for a nationwide launch. As a result, consumer awareness was lacking. The initial franchisees faced challenges, making it tough to attract new franchisees who look for validation. This was likely one of the major obstacles for some of the smaller brands. Regarding cycling, that area was affected by COVID. Before the pandemic, it was performing as well as Club Pilates, but it didn't rebound as expected. There are various factors influencing how we grow these brands, along with changing consumer trends that can affect them. That's my take on some of the smaller acquisitions.

Operator, Operator

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

Unidentified Analyst, Analyst

This is Ben on for Owen. Are you seeing any change in churn or retention patterns post Q1 promotions, especially as those trial members transition into full memberships?

John Meloun, CFO

No. As far as memberships and trends around cancellations or freezes, no real shift in trend that's out of cycle for seasonality. You do typically see Q2 and Q3 being slower just because of the summer months, as I mentioned, with a lot of people on vacation or holiday, and that typically picks up late Q3. And again, Q4 and Q1 are usually your busiest quarters. So no off-trend shifts in membership at this moment.

Operator, Operator

There are no further questions at this time. I'd like to pass the call back over to John for any closing remarks.

John Meloun, CFO

Great. Thank you. Thank you all for your time today. We look forward to meeting with many of you at the upcoming marketing events in September and again in November when we report our third-quarter results.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.