Xponential Fitness today indefinitely suspended founder and CEO, Anthony Geisler, saying it had been notified on 7 May that the company is facing a legal challenge by the United States Attorney’s Office for the Central District of California.

The challenge comes as a result of a filing that was first made in February this year.

Brenda Morris, who has been on the Xponential board since 2019, will act as interim CEO, while a replacement is found.

Xponential had also recently disclosed that it's under investigation by the US Securities and Exchange Commission.

Members of the company’s board say they will ‘cooperate with both the US Attorney’s Office and the Securities and Exchange Commission,’ establishing a committee to investigate all allegations. This group will include independent directors Chelsea Grayson, Jair Clarke and Jeffrey Lawrence.

The challenge filed on 9 February was a class action lawsuit brought against the company for financial damages.

The suit – City of Taylor General Employees Retirement System v Xponential Fitness Inc – was filed in the state of California.

Fifteen American law firms, including Robbins Geller Rudman & Dowd and Levi & Korsinsky, also speculatively sought 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 was 9 April. It’s understood some of the law firms had up to 70 participants.

At the time, Xponential told HCM the company would vigorously defend itself against the claims that certain executive officers violated the Securities Exchange Act between 26 July 2021 and 7 December 2023.

The company has been fighting to stave off rumours of problems since June 2023 when Fuzzy Panda Research published a damning report on its prospects.

Fuzzy Panda made a series of allegations about Geisler and the general trading position of the business, including that in spite of claims by the company it had “never closed” a location, 30 had been permanently closed.

It also said it had evidence that eight out of ten Xponential brands were losing money, calling the business “an abusive franchisor that is a house of cards.” 

Shares in the company – the largest global franchisor of boutique fitness brands – fell 37 per cent on the day Fuzzy Panda published, but a fast response from Xponential directors, who called the report ‘misleading’ and ‘inaccurate’ and positive statements from other analysts, such as Raymond James – who said the response of the market was ‘overdone’ – saw them rebound.

Further signs that all was not well came on the day of the deadline for legal action (9 April), when two widely respected Xponential execs – John Kersh and Garrett Marshall – both exited the business on the same day to take up other senior positions in the sector.

Now, a month later, Anthony Geisler has departed.

At the time of the Fuzzy Panda report, Mark Grabowski, chair of the board and founder of Snapdragon Capital Partners – the company’s largest investor – said: “I’ve known and worked closely with Anthony Geisler… since investing in Club Pilates at my prior firm. I couldn’t speak more highly of his passion, commitment to excellence and professionalism.”

However, in announcing Geisler’s ousting today, Grabowski said: “The Board has determined that appointing Brenda Morris to serve as Interim CEO is in the best interest of Xponential, its employees, customers, franchisees and shareholders.”

In a bid to steady the ship, Xpontential also re-affirmed it stands behind its full-year 2024 guidance which was originally announced on 2 May 2024.

Background notes

Details of the lawsuit brought on 9 February 2024

City of Taylor General Employees Retirement System v Xponential Fitness Inc.

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.