The Joint Corporation (JYNT)
A falling knife with a flawed strategy?
The Joint Corporation (NASDAQ: JYNT) reported underwhelming Q3 earnings on November 3rd. Revenue increased 27% to $26.6 million for the quarter, total system-wide sales increased 18%, comp sales (mature clinics - open 13 months or longer) grew 6%. Total clinics ended the quarter at 805 up from 666 in Q3 21 and 769 in the prior quarter. Although the top line growth looked healthy, general and administrative expenses continued their year-long creep upwards, increasing 38.9% versus the comparable period. Management has been forthcoming sharing that most of this is due to large salary increases for both the wellness coordinator position and the Doctor of Chiropractic (DC) position. Inflation, salary creep, and slow implementation of price increases has not been kind to JYNT with the first 9 months of EPS coming in at $0.04 per share.
Before I continue, a brief confession. I’ve owned JYNT twice in the past. The first time, I sold out in March 2020 before a monstrous run in the stock price that in hindsight was a bubble waiting to happen. The second time I owned this stock was earlier this year. As the stock sold off, I bought a small position, believing there was still time to ride the franchise execution story. I sold several months ago after thinking rationally about what the chiropractic market looks like and what my on the ground due diligence told me. In short, I do not believe the Joint Corp. and its franchisees can find enough DCs to fully achieve their end goal of clinic openings.
JYNT’s Goal - 1950 clinics
The management team at the Joint has been remarkably consistent in stating their goal of achieving approximately 1950 clinics. On their Q1 2022 earnings call:
“We have our near-term goal set to open 1,000 clinics by the end of 2023, and this is just a tipping point. Already, our analysis comparing our actual patient demographics to MSAs across the U.S. indicates that we have a potential for almost 2,000 clinics, and this does not include the opportunities that we can create by expanding our business model to rural, urban, micro, military and even international locations. I'm confident in our ability to drive long-term growth and stakeholder value.” (emphasis added)
On several of their investor decks, they reiterate the same potential for nearly 2000 clinics.
Source: Stifel 2022 Cross Sector Insight Conference
The Joint plans to do this through catching DCs early in their career as they graduate. The idea is to show them they can earn a nice salary working at a Joint, not deal with the stress of managing their own clinic, and earn a slightly higher salary than they would earn elsewhere. Management has been clear about their intention to recruit out of schools.
“Regarding forging a chiropractic dream, we've revamped our recruitment of marketing materials and enhanced our messaging to better connect with candidates to become DCs. With the easing of COVID restrictions, we were able to participate in 5 live chiropractic industry and university DC recruitment events, and we remain focused on the developing new programs aimed at chiropractic students who are the future of the profession, along with the continuing education opportunities that appeal to established working DCs.” Q1 2022 Earnings Call (emphasis added)
The Disconnect
I have been to Joints in multiple states and every time have had insightful conversations with the DCs who are running the day to day patient care over the past three years. This ongoing due diligence led me to two key discoveries: 1. Despite management’s plans, this is not a model that works with new DCs. 2. At full penetration, the Joint needs an unreasonably high total percentage of market share of available DCs in a market with shrinking supply.
In my experience going to Joint clinics and visiting with DCs, I’ve noticed a turnover pattern. The DCs who tend to stick around are usually a little older, more experienced, and this is not their first job. Meanwhile, the new grads tend to fizzle out quickly. From conversations with a Joint DC who has succeeded in the model, they shared it is not well suited for a new graduate because it is high volume, fast paced, they don’t have access to X-rays, they are asked to work long hours and weekends, and they are unsupervised almost immediately upon taking the job. This contrasts dramatically to a more traditional DC career path where a new grad works an associateship for several years before establishing their own clinic.
The second reason requires some crude math and a couple assumptions. First, I hold the view that for a Joint clinic to operate well, they need two full time doctors. The clinics are open 6-7 days a week with nights and weekend hours, too much work for one DC to handle themselves. There are some DCs who float between a group of franchisee-owned clinics, but that bear with me. That would leave the Joint Corp and franchisees responsible for finding 3900 DCs to have the concept fully staffed.
According to Grand View Research, there are ~80,000 DCs in the United States, with the number growing by approximately 2500 new graduates per year. Chiropractic Economics details the industry’s impending growth problem, sharing that in a report titled Chiropractic 2025: Divergent Futures, “graduates will decrease to anywhere from 800 to more than 1,000, while DCs retiring or leaving practices will eclipse that mark.”
Assumptions
80,000 DCs in the United States, net addition of 1700 DCs per year (2500 new graduates per year, 800 retire). Over the next three years, recent grads will not be a sustainable long-term fit for the Joint model for reasons already detailed. Over the next three years, that shrinks the pool of JYNT’s available DCs to 77,600. However, this is before taking into account the reality of the largely single DC operated independently operated chiropractic offices.
Source: Oppenheimer’s 22nd Annual Consumer Conference
Most of the 40,150 independent clinics are operated by a single DC. I’m going to make another large assumption and guess that individuals who work for themselves and own their own business are unlikely to want to give up autonomy and their nights and weekends to work in a franchise model. Backing that number out leaves the Joint Corp. and franchisees with a pool of ~37,500 DCs for nearly 4,000 DC jobs.
This leads to the inherent disconnect I discovered with JYNT. 10% market share if everything goes right is doable. But the franchise model is starting to show weakness with slowing unit economics, a recruiting strategy aimed at the wrong cohort of DCs, and a shrinking pool of DCs available to scale the franchise model.