Aching Backs Equal Big Bucks, but an Adjustment Looms

When the boss of a public company tells his investors that “pain isn’t going away,” it is usually a bad sign. Not in this case.

The Joint Corp

JYNT 7.19%

seems to have cracked the formula for chiropractic treatment. Using convenient storefronts and upfront prices that bypass insurance, the rapidly expanding chain has drawn flocks of customers with sore backs. Systemwide gross sales have grown at a blistering compound annual pace of 70% a year since 2012 compared with barely 5% for the overall U.S. market for the controversial treatments, which is worth about $18 billion a year.

While he isn’t a practitioner of the technique himself, Chief Executive Officer

Peter D. Holt

has used lessons learned at companies such as Mail Boxes Etc. and Tasti D-Lite to supercharge growth. The chain’s shares have surged by nearly 2,500% since the franchising veteran took over the reins in April 2016. Today’s share price actually represents a more attractive entry-point—the total return had been more than 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 purported insider dealing, repurchases of troubled franchises and customer billing disputes point to more smoke than fire. The bigger problem is that the stock remains overheated. On paper the potential seems enormous. The company points out that only 3% of what Americans spend annually on chiropractic treatment is now captured by chains compared with 12% for dentistry, though those typically aren’t franchises. The Joint is by far the largest chiropractic chain.

But by not accepting insurance and limiting itself to “adjustments” rather than tests or more elaborate treatments, The Joint’s revenue opportunity is smaller. Meanwhile, fast-growing chains like 20 Dollar Chiropractic, NuSpine, SnapCrack and Chiro Now have almost identical prices and sometimes more attractive franchising terms. Most franchisees aren’t one of America’s 70,000 licensed chiropractors, but each store must employ at least one full-time to see patients.

Like with a traditional chiropractic practice, the key is convincing people to keep returning. Back pain being chronic, and chiropractic adjustment not being a cure, a little bit of salesmanship does the trick. The chains simplify the process by selling subscriptions. The average customer sticks around for six months, according to the company, though some return later. That high churn could be a problem as the chain matures. More than 10% of franchise licenses sold are no longer active.

The chain sold a record 63 franchise licenses in the second quarter and it has 282 stores in development compared with 633 open today, including company-owned stores. One has to extrapolate that blinding growth rate for many years to justify the chain’s market value of almost $1.2 billion.

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Even on projected 2023 numbers, by which time the company expects to have about 1,000 stores, it is a stretch. The stock fetches more than 100 times projected earnings and 10 times revenue for that year based on the consensus of analysts polled by FactSet.

Franchises can sustain momentum for a while as money pours in from new licenses. Former Joint Corp CEO

John Leonesio

founded Massage Envy, which had an almost identical trajectory in its first six years through 2008, at which point the company was sold. Its growth has been stalled for the past decade or so at around 1,100 locations. The Joint has slightly better unit economics, but they might not be as rosy as they appear. They compete, after all, with clinics that accept insurance.

They also compete for the services of chiropractors, whose salaries average around $90,000 a year. Some stores’ impressive profits represent in part an owner-operator’s sweat equity. For both the occasionally underemployed practitioners and their patients, a storefront’s simplicity has been appealing compared with high-pressure clinics. If one views the chain as being at the very early stages of disrupting its sector and assumes that its head start will make it the

McDonald’s

of back pain then its valuation could be a bargain. But if it is more like another Massage Envy then the stock’s price and its future cash flows are seriously misaligned.

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Write to Spencer Jakab at [email protected]

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Appeared in the October 18, 2021, print edition as ‘Aching Backs Equal Big Bucks.’

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