Covid-19 Aside, XpresSpa’s Got a Compelling Business

XSPA could end up rising off multiple revenue channels

There is no question that companies such as XpresSpa (NASDAQ:XSPA), whose livelihood is directly tied to the success of air travel, have taken a massive hit in 2020. Year-to-date, XSPA stock was getting crushed thanks to the novel coronavirus.

Covid-19 Aside, XpresSpa’s Got a Compelling Business
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That is until it announced a partnership with HyperPointe on June 5, which will see it convert its U.S. airport locations into Covid-19 screening and testing facilities. Talk about a pivot. In one swift move, it’s gone from providing a discretionary service to a mandatory one.

How awesome is that?

XpresSpa’s Pivot Should Be Good for XSPA Stock in the Long Run

CEO Doug Satzman is to be commended for realizing that XpresSpa’s actual business isn’t providing massages, nail care, facials, and waxing services, but rather controlling key real estate in America’s busiest airports. That’s where the value lies.

“XpresCheck [XpresSpa’s new division] has begun construction and intends to start a pilot program at New York’s John F. Kennedy International Airport Terminal 4 by the end of June, offering testing for airline employees, contractors and workers, airport concessionaires and their employees, TSA officers, and U.S. Customs and Border Protection agents,” stated the company’s June 5 press release.

“XpresCheck also plans to expand with locations in additional airports to serve travelers as well as industry personnel.”

I can remember having a Zoom call with friends a couple of months ago. One of the people on the call lived in Hong Kong. He was telling us about the new normal as we were just starting into the virus. My friend pointed out that temperature checks had been a regular part of air travel in Asia for several years.

Well, it’s pretty clear testing for Covid-19 and other infectious diseases will become a permanent part of air travel in the U.S. and worldwide. Already possessing the real estate puts XpresSpa way ahead of any other interested parties.

I think it’s a tremendous opportunity. My InvestorPlace colleague, Luke Lango, does a good job laying out the benefits of first-mover advantage on the Covid-19 front. You can read that here.

Luke calls its traditional spa business, “decent, but mostly nothing special.”

I understand his assessment. It’s not Virgin Galactic (NYSE:SPCE) and commercial space travel. But it’s a service that weary travelers enjoy and can relate to. My wife is itching to get back to the nail salon for a professional pedicure.

We have a friend returning from Scotland in a few days. She’ll be in four different airports by the time she gets home. A couple of those places she’ll be stuck waiting for flights. Covid-19 aside, I’m sure she’d love to get a facial while sitting around passing the time.

If my wife or husband had an opportunity to kill some time with a massage or pedicure while at the airport, I’d say why the heck not?

Where XpresSpa Will Be in Two Years

In 2019, XpresSpa had top-line sales of $48.5 million and an operating loss of $15.9 million. A year earlier, it had sales of $50.1 million and an operating loss of $35.9 million. Excluding a $19.6 million goodwill impairment and the operating loss was $16.3 million.

The bad news is that it’s losing money. The good news is that it can fix this situation by growing the top line. The 10-K says it had a store margin of 22% in 2019, 80 basis points higher than a year earlier.

Assuming doubled revenue in 2019, the stores would have generated $97 million in sales and a store profit of $21.3 million. Of course, to handle that much business, its non-store operating expenses would also move higher.

So, let’s assume its other operating expenses, including general and administrative, increased by 20%. That would increase the non-store operating expenses from an actual $26,533 to $31,840.

This would still leave it with an operating loss of $10.5 million ($97.0 million times 22% less $31,840 in non-store expenses). However, if the non-store operating costs remained at $31,849 annually and the store margin remained at 22%, it would have to generate approximately $145 million to breakeven.

Given Covid-19, any potential for its original business model to generate $145 million in annual revenue in the next 12 to 24 months has likely gone out the window.

The Bottom Line

However, should its pilot in New York go well, you could see revenues grow very quickly. Luke Lango estimates that it could generate as much as $1.5 million a day in revenue from testing. That’s $550 million in annual revenue, far more than it could hope to generate from its spa services.

That said, I believe the original business idea isn’t a bad one. Spa services will resume once the world figures out how to live with the virus, most likely through a vaccine solution sometime in 2021.

What that means for XpresCheck is anybody’s guess. I’d be shocked if airport testing in some form didn’t remain a permanent part of airport travel.

An intriguing possibility would be for XpresSpa to merge with OneSpaWorld Holdings (NASDAQ:OSW), an operator of spas on cruise ships and land. Together, they could operate both a medical testing division and a spa division.

Either way, XpresSpa stock has more merit than meets the eye.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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