What do you do when your airport spa business gets hit by a pandemic and you can no longer take in clients? Turning the business into a COVID-19 testing facility might not be the first idea that comes to mind, but it is what XpresSpa Group (XSPA) has done to survive the pandemic.
Yet, a cursory glance at the company’s latest earnings would make you wonder if such a move was worth it.
In 4Q20, the company delivered revenue of $0.3 million, a 97% year-over-year drop and missing the estimates by $1.5 million.
However, as H.C. Wainwright’s Scott Buck points out, there are mitigating circumstances to the alarming drop. In fact, the analyst thinks the new business’ economics compare favorably to its legacy business.
So, what’s the story, then? Well, the big miss, says Buck, “reflects the inability to recognize revenue associated with medical service agreements.”
However, the company should be able to recognize the revenue sometime in 1H21. On a pro forma basis, for the three months ending January 2021, patient service revenue came in at $3.3 million with pro forma gross profit hitting $1.2 million.
“At a 36.5% gross margin,” Buck said, “This is meaningfully higher than 2019 XpresSpa gross margins of 22.0%.”
What’s more, the company has said there has been a rise to both the number of patients visiting XpresCheck centers and the average revenue per patient, and Buck thinks the “favorable underlying economics of the testing business” will yield results in the coming quarters.
“We expect these trends to continue as more and more passengers return to airports and more countries require negative COVID-19 test results for entrance,” the 5-star analyst further said.
While the legacy spa business remains closed for now, XpresSpa is adding another arrow to the quiver.
The company is launching a new travel health and wellness store, and will open the first two locations in late summer or early fall.
In addition to pre-travel health and wellness planning services, guided meditation, yoga and retail goods, the new stores will also provide medical testing. Moreover, there will also be a digital component to the new concept, which could drive retail sales, and bring in potential subscription revenue for health and wellness services while traveling.
“With this new concept, we believe the company is well positioned to take advantage of the return in air passenger travel, utilizing these first two locations to test various goods and services,” the analyst opined.
All in all, Buck reiterated a Buy rating on XSPA shares, backed by a $3.5 price target. Investors stand to pocket a 112% gain, should the figure be met over the next 12 months. (To watch Buck’s track record, click here)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.