It’s an early, pre-coffee hour of the morning, but the athletes around you outfitted head-to-toe in Lululemon exhibit an inexplicable cheer. You’re in a well-lit lobby renting shoes at an incremental charge for the forty minute exercise class that you already paid $34 to attend. The brightness of the lobby is an ironic prologue to the dimly lit – no, objectively dark – basement into which you’re about to descend. A similarly dressed instructor, or more aptly named high priest(ess), at the front of the room leads you through interval training on a stationary bike while Nicki Minaj and Calvin Harris ring out overhead at this ungodly hour.
For such an anthropologically odd phenomenon, SoulCycle has created a redoubtable customer base. According to their S-1, filed with the SEC on December 9th, 2015, the company had attracted more than 383,000 unique riders. Their financials reflect the loyalty of their clients who have driven a 76% revenue CAGR and 78% adjusted EBITDA CAGR from 2012 to 2014. Investors and the general public seem equally as thrilled with the firm, given the vast amount of unsolicited media attention that SoulCycle receives.
However, a closer look at the company’s operations suggests that the financial health of the firm may be short-lived. Fitness trends have certainly come and gone before. The S-1 reports that their studio count has grown at a 73% CAGR from 2012 to 2014. Comparing this figure to the firm’s adjusted EBITDA CAGR (78%, as noted above) suggests that the vast majority of the company’s cash flow growth has come from opening new studios, not from same-store sales growth. Same-store sales growth is one of the leading indicators of the ability of a retailer to grow organically and is crucial to long-term financial health. It therefore seems that while SoulCycle is capable of “buying” new cashflow from studio openings, this strategy will only keep the firm growing until SoulCycle and its competitors have saturated the market.
While studio fees are the leading contributor to SoulCycle’s top line, the firm also records “Other revenue,” which is attributable to apparel sales, beverage sales, and shoe rentals. Other revenue has constituted 14.8%-16.7% of SoulCycle’s total revenue from 2012 to 2014 according to the S-1 filing – a material portion of the firm’s top line. We ask ourselves, “How many $50+, SoulCycle-emblazoned tank tops does one need?” An ounce of skepticism suggests very few, but given that SoulCycle’s clientele don’t seem to blink at paying $34+ all-in for classes a few times each week, perhaps these clients would be similarly interested in collecting overpriced merchandise in perpetuity.
To depart from finance and operations, SoulCycle’s brand message may be powerful and may resonate widely, but it is ultimately untenable. According to the S-1, “For many of our riders, SoulCycle is not about how much weight they can lose, rather, it’s about letting go, turning inward and finding the strength to meet life’s daily challenges, overcome obstacles and break through. SoulCycle isn’t in the business of changing bodies: it’s in the business of changing lives.” While craftily written, this excerpt is as absurd as it is offensive. The notion that clients with the level of disposable income, time, and energy necessary to commit to regularly attending SoulCycle classes have serious life problems that necessitate “spiritual uplifting” in the form of group exercise is ridiculous.
The geographic dispersion of the studios enforces the claim that SoulCycle targets America’s most privileged, not the downtrodden. As of the S-1 filing in December, SoulCycle’s studios were located in only eight metropolitan areas, with 84% of revenues generated in New York, Los Angeles, and San Francisco. The studios are further located in ultra-high net worth communities in the Hamptons, Westchester, and Greenwich, CT. Heaven help us if we can’t go to spin class in East Hampton before settling down into lobster rolls and rosé.
However, there is some evidence to suggest that SoulCycle may be filling the power elite’s spiritual vacuum. A 2012 Pew Report noted that while lack of religious affiliation is growing across all income levels, it’s growing the fastest among those who earn $75,000 or more annually. As of the 2012 study, the highest earners accounted for a slightly disproportionate share of the religiously unaffiliated. If this trend continues, wealthy Americans will continue to seek a substitute to the traditional religious incumbents. SoulCycle seems to provide some sort of community and self-actualization to this demographic, but only at the most obtuse level.
This opinion may be unpopular, but it’s not wrong. We envision that SoulCycle will have a successful IPO, in spite of the market downturn. The unit economics are extraordinarily compelling. However, investors would do well to listen to some of the devil’s advocates when it comes to SoulCycle’s long-term growth and the soundness of the company’s marketing. We are not the first to poke holes in the company’s messaging, and we won’t be the last. To our chagrin, we know that financial performance is not tied entirely to rationality. SoulCycle will continue to succeed for as long as it can open stores with short payback periods and find clients who lap up its sauce.