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Since my last update, the share price of The Joint Corp (NASDAQ:JYNT) has seen some growth. However, the stock is still down by 88% from its peak in 2021. Market sentiment towards the stock remains subdued. Following the recent Q4 earnings call, I believe JYNT still presents a buying opportunity due to its future earnings potential. The recent strategic shift to improve margins also adds to its appeal. I will outline my reasoning for this assessment below.
Business update
JYNT concluded 2023 with robust growth and operational expansion. System-wide sales rose by 11% to reach $488 million, while revenue climbed to $117.7 million. The company’s adjusted EBITDA also saw a positive movement, ending the year at $12.2 million. Operational metrics were equally impressive, with total patient visits increasing to 13.6 million from 12.2 million in the previous year, and new patient treatments growing to 932,000 from 845,000. Notably, 36% of these new patients were first-time visitors to any chiropractic service, highlighting JYNT’’s role in expanding the market reach of chiropractic care.
Despite a slowdown in comparable sales growth to 4% from 9% in 2022 and a decrease in the number of franchise licenses sold—from 75 to 55—the company aggressively expanded its clinic network. By year-end, The Joint Corp operated 935 clinics, up from 838, including 800 franchised and 135 company-owned or managed clinics, representing a substantial increase from the previous year’s totals of 712 and 126, respectively.
The business seems reaching a plateau as previous narrative has been weakened.
While JYNT displayed overall growth in 2023, there are indications that the expansion pace may be moderating. The 4% increase in comparable sales for clinics operational for more than 13 months demonstrates that the business model retains its growth potential and has not yet hit a saturation point. This consistent performance in comparable sales could enhance investor confidence, potentially boosting franchise license sales in the future. However, the sale of franchise licenses remains a challenge, with only 55 issued last year, 58% of which were to existing franchisees, pointing to a reduced influx of new entrepreneurial interest compared to prior years.
New patient counts have also dipped, falling 6% from the previous year, underscoring a slowdown. This shift suggests that JYNT’s expansion momentum has indeed paused, with broader economic factors such as rising interest rates and high employment levels impacting consumer behavior more than previously anticipated. This contrasts with earlier beliefs that chiropractic care, as a health service focused on managing pain and physical well-being, would be largely resilient to macroeconomic fluctuations. The management’s recent comments have highlighted these economic challenges as significant hurdles affecting the company’s growth trajectory.
The refranchise strategy gets a smaller share of earnings, but not bad news for shareholders
In November 2023, JYNT announced plans to refranchise the majority of its corporate-owned clinics, a move that diverges from its previous strategy of expanding corporate clinics as a key growth lever. Owning and operating profitable clinics directly allowed JYNT to capture a larger share of system-wide earnings, thus enhancing cash flow to shareholders. However, managing corporate clinics comes with its own set of uncertainties and operational risks, which could potentially lead to significant losses if not managed effectively.
Opting to refranchise these clinics appears to be a strategic pivot toward minimizing capital expenditures and maximizing margins. Nonetheless, this shift means relinquishing direct benefits such as gaining firsthand insights into business trends, experimenting with new clinic products, and maintaining strict control over brand quality. This strategy might be seen as a form of ‘intentional downsizing’ and could be interpreted as a lack of confidence in the sustainability of owning more clinics directly, especially in light of escalating doctor costs within the industry—a concern that seems increasingly challenging to manage.
On the positive side, this strategic shift allows JYNT to transition from an aggressive growth mode to a more conservative harvesting mode. By transferring the operational costs and complexities to franchisees, JYNT stands to stabilize its earnings.
RD acquisition can give immediate lift on earnings
The aforementioned increase in cash flow could also be allocated towards the reacquisition of Regional Developer (RD) territories. Currently, JYNT does not plan to expand its RD territories further. Although JYNT collects 7% of franchise gross sales in royalties, they are required to remit 3% of these gross sales to the RDs, which represents a substantial portion of their revenue. In an effort to retain a greater share of these royalties, JYNT reacquired one RD region in 2023, reducing the total number of RD territories to 17. It is anticipated that the share of royalties paid to RDs will continue to decrease, which should enhance JYNT’s profitability. This strategic shift is projected to potentially add another $15 million in pure profits for JYNT, marking a significant step towards optimizing its financial model.
Bottom Line
Overall, The Joint Corp (JYNT) remains a strong business. The management is keenly attuned to industry trends and has strategically opted to refranchise their corporate portfolio. While the business will continue to sell licenses and aim to fill geographic gaps, the expected number of new franchised clinics for 2024 is projected to be between 60 and 75—a noticeable decrease from the 104 opened in 2023. The company is still poised for continued growth, albeit at a slower pace. Its well-managed working capital and lack of long-term debt position it to potentially become a cash cow in the short term, which is undoubtedly a positive development.
However, from a long-term perspective, this strategy could be seen as less favorable. If the business’s ultimate goal is to build up to 1,800 clinics, with system-wide revenue potentially doubling to around $1.1 billion, the income from a 9% royalty plus a 2% marketing fee would yield JYNT approximately $130 million in revenue—only slightly more than its current levels. Because all of these are franchising revenue, around half of these revenue could be operating income which lead to around 65M earnings power. At 170M current market cap, I think the stock is still a buy.
