KC Underweight Deals: A Yoga Studio With Limited Upside

Key Stats:

Summary

This week we are doing a deep-dive into YogaBody Studios, a boutique yoga studio based in Southern California. It’s no secret that yoga is a booming industry. In fact, as we’ll elaborate on in a moment, yoga studios are by-and-large extremely profitable businesses.

What makes us nervous is not so much YogaBody’s business but it’s valuation. As Warren Buffett says “Of course, a business with terrific economics can be a bad investment if it is bought at too high a price.”

YogaBody has an incredible reputation. Google Reviews has them at five out of five stars. Yelp five out of five. Facebook five out of five. Even Referrizer, a service that enables customers to easily refer friends and family, gives the company a perfect score.

A sterling reputation with customers is just about as good as it gets these days. Especially in a service industry where you are asking customers to hand over their hard earned dollars for an experience — not a physical product.

Merits aside, crowdfunding investors are risking their hard earned dollars for a reason: high returns. Of course, believing in a product or a company’s missions are important. Ideally they go hand in hand with profit. Yoga itself is beneficial, we’re just not too sure this company can live up to it’s valuation.

YogaBody Studios: Raising on Wefunder

1. On trend: To say that Yoga is “hot” right now is an understatement. It’s estimated that 27 million Americans (8.4% of the U.S. population) classified themselves as “practitioners” in 2017. This figure may understate the matter. Other estimates are as high as 35 million. Companies like Lululemon, catering to “yogis” with premium apparel are generating sizable profits. The question is — what is a yoga studio worth?
2. High Valuation: We tried to answer that question by looking at perhaps the most successful yoga-studio chain: CorePower. Corepower was bought by a private equity firm in 2013 for “well north of $100 million.” Details are scarce, but near as we can tell the average studio of what is arguably the “Starbucks of Yoga” is worth $1 million.
3. We don’t say this lightly. But at the time of its sale CorePower had approximately 150 locations. Even if “well north of $100 million” meant $200 million that equates to just $1.33 million per studio.
4. One could argue that YogaBody is a startup with its growth-days still ahead of it. True enough, and management has said as much. As part of the offering they note that “It is our intention to build a five-studio yoga corporation in the area around the Inland Empire in Southern California with this round of funding and either secure another round of funding to continue growing regionally or offer the chain of studios to a larger corporation.”
5. No one could have said it better.
6. Even if YogaBody makes good on its goal of having five yoga studios and then sells, current investors are asking a potential buyer to pay more than $1.74 million per studio just so they themselves can make a profit. This is not a formula for big returns.
7. Comps: At an $8.7 million valuation and $450,000 in 2017 revenue management is valuing the company at 19.33x trailing revenues. This alone should raise some eyebrows.
8. We wondered whether or not YogaBody might not be a “better studio”, i.e. more customers and capable of charging higher prices for classes. Alas, that too doesn’t appear to be the case.
9. As detailed in its StartEngine pitch deck, the company serves approximately 3,000 students a month. That’s roughly 100 students per day. We called around to some local yoga studios (found in the Washington DC-area) and this is right in line with their experience — we even called a local Core Power location.
10. Pricing is more or less in-line with the industry average as well. An unlimited monthly membership (AKA the “Thrive Membership”) with YogaBody will run you $155. Our local CorePower, of which there are now over 160 locations across the country, offers a “Black Tag” membership for those wanting unlimited monthly access for $165.

The Bottom Line

In our experience paying up for a fast-growing, quality business is often a good idea. But at its current valuation we find it hard to see how crowdfunding investors will come out ahead with YogaBody. It seems as though management is pricing in all future growth right out of the gate.

If you’re investing in search of 10x+ returns, which is what we look for you will likely find better spots for investment elsewhere.

The opening of just the second studio in the chain won’t occur until Q4 2018 and a third is slated for Q1 2019. This growth, as well as a great deal of future growth, is more than priced into the current offering. Things could change if the company changed its tactics and went with a franchise-growth model but alas it appears as though this is not the long term strategy for the business. It seems that, for now, the company is going the “slow growth” corporate-owned store route.

Though we think this is a lower risk investment than some of the other startups we recommend, the growth profile just isn’t there. As is common with businesses that end up in this cohort of underweight deals, we see this more as a lifestyle business, rather than a high growth startup.

As always, if you have any questions regarding this underweight rating you can reach us at hello@kingscrowd.com