When the boss of a public company tells his investors that “the pain won’t go away,” that’s usually a bad sign. Not in this case.
seems to have deciphered the formula for chiropractic treatment. Using convenient storefronts and upfront prices that bypass insurance, the rapidly expanding chain has attracted herds of customers with back pain. System-wide gross sales have grown at a blistering compound annual rate of 70% per year since 2012, compared to just 5% for the entire U.S. market for controversial treatments, which is roughly $ 18 billion per year. .
Although not a practitioner of the technique himself, CEO Peter D. Holt has used lessons learned at companies such as Mail Boxes Etc. and Tasti D-Lite to stimulate growth. The chain’s shares have jumped nearly 2,500% since the franchise veteran took the reins in April 2016. Today’s share price actually represents a more attractive entry point – the total return had been over 3,000% shortly before a negative report released earlier this month by short researcher Edwin Dorsey of The Bear Cave.
The report’s allegations, such as suspected insider trading, distressed franchise buyouts and customer billing disputes, point to more smoke than fire. The biggest problem is that the stock remains overheated. On paper, the potential seems huge. The company points out that only 3% of what Americans spend each year on chiropractic treatment is now captured by chains, compared to 12% for dentistry, although these are usually not deductibles. The Joint is by far the largest chiropractic chain.
But by not taking insurance and limiting yourself to “tweaks” rather than more elaborate testing or treatment, The Joint’s earning opportunities are reduced. Meanwhile, fast growing chains like 20 Dollar Chiropractic, NuSpine, SnapCrack, and Chiro Now have nearly identical prices and sometimes more attractive franchise terms. Most franchisees are not among the 70,000 licensed chiropractors in the United States, but each store must employ at least one full-time to see patients.
As with a traditional chiropractic practice, the key is to convince people to keep coming back. Since back pain is chronic and chiropractic adjustment is not a cure, a little know-how does the trick. Channels simplify the process by selling subscriptions. According to the company, the average customer sticks around for six months, although some return later. This high churn rate could be a problem as the channel matures. More than 10% of the franchise licenses sold are no longer active.
The chain sold a record 63 franchise licenses in the second quarter and has 282 stores in development compared to 633 open today, including company-owned stores. This blinding growth rate for many years has to be extrapolated to justify the chain’s market value of nearly $ 1.2 billion.
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Even on numbers forecast for 2023, when the company expects to have around 1,000 stores, it’s a stretch. The stock is reporting more than 100 times projected earnings and 10 times revenue for that year based on the consensus of analysts polled by FactSet.
Franchises can maintain their momentum for a while as money flows in from new licenses. Former Joint Corp CEO John Leonesio founded Massage Envy, which had an almost identical trajectory in its first six years until 2008 when the company was sold. Its growth has stalled for the past ten years at around 1,100 sites. The Joint has a slightly better unit economy, but it might not be as rosy as it looks. They compete, after all, with clinics that accept insurance.
They also compete for the services of chiropractors, whose salaries average around $ 90,000 per year. The impressive profits of some stores are in part the equity of an owner-operator. For both the sometimes underemployed practitioners and their patients, the simplicity of a storefront has been appealing compared to high pressure clinics. If you consider the chain to be in the very early stages of disrupting its industry and assume that its head start will make it the McDonald’s for back pain, then its valuation could be a bargain. But if it’s more like another Massage Envy, the share price and its future cash flow is seriously misaligned.
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Write to Spencer Jakab at [email protected]
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