Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Forgive YogaWorks Inc. shareholders if they're not feeling very Zen right now.

Shares of the Culver City, California-based yoga chain have more than halved since its August IPO, in part due to lackluster quarterly earnings and a dim outlook. In hindsight, it's becoming clear that the company -- backed by private equity firm Great Hill Partners LLC -- entered the big leagues too soon.

YogaWorks went public to raise capital for its expansion plans, which entail purchasing studios across North America. Just last week, it snapped up a studio in Virginia, taking its total to 53 -- and it has another 14 in the pipeline, according to an earlier earnings call. But the company's increasingly weak financial position, which includes a dwindling cash balance and negative free cash flow, is going to make sticking with this strategy tough.

Downward Dog
The yoga chain's IPO demonstrates the risks of going public too early
Source: Bloomberg

At a mere $45 million, YogaWorks's market value is just a rounding error compared to other newly public companies like Snap Inc. and even rival publicly-traded fitness chains like Planet Fitness Inc. That means it'll find the legal, accounting and other costs of being a public company harder to bear. Ironically, $45 million is the same valuation that the company fetched in a sale to its majority owner Great Hill Partners some three years ago, so the IPO -- at least so far -- appears to have backfired.

Rather than seeking capital from public markets to fund YogaWorks's acquisition spree, Great Hill perhaps should have continued to back the company's growth in a private setting by chipping in more equity itself or tapping its co-investors (usually pension funds or family offices) for additional funding. Now, with YogaWorks projected to deliver just $300,000 in earnings before interest, taxes, depreciation and amortization next year, the company may need to ramp up its borrowings or issue new stock. 

Namaste
U.S. yoga practitioners spent ~$16 billion last year, and the industry is growing. YogaWorks's grab for share makes sense, but staying private for longer would've been prudent.
Source: 2016 Yoga in America Study via YogaWorks filing

YogaWorks' treatment by analysts marks another example of the seeming lack of partiality exercised by Wall Street's sell side. The four firms that cover YogaWorks all hail from firms that underwrote its IPO. Unsurprisingly, all of them are touting YogaWorks as a "buy" and reckon it'll more than double in the next 12 months, which seems to be a stretch. 

Newbies
Only 138 companies have pursued U.S. initial public offerings this year. Despite Yogaworks's poor performance, most of its peers are in the green.
Source: Bloomberg

YogaWorks's miserable start should be a warning to other small, fast-growing, private equity-backed companies to steer clear from the NYSE and Nasdaq until they've reached a certain scale and offer investors more that just a blue-sky promise. The market doesn't hesitate to punish those not ready for prime time. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net