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The Club Market Is Slower to Recover Than Others

I spoke with Sharon Zackfia, an equity analyst with William Blair & Co., Chicago, this morning about Town Sports International's (TSI) third quarter performance. Her comments about TSI will appear in the December issue, but she had some interesting comments about the health club industry in general that I thought I'd share here.

Zackfia covers the retail and restaurant business in addition to covering both Life Time Fitness, Chanhassen, MN, and TSI, New York.

She said that she began seeing weakness in most markets in the third quarter of 2008 with real paralysis occurring in fourth quarter 2008 and first quarter 2009, but the health club market was one of the last markets to be affected by this weakness. Now, she's seeing strength in her other two markets—some of the retail and restaurant businesses she covers will report record earnings for 2010—but she's still seeing the health club market being sluggish.

“This business slowly gets better just like it slowly gets bad,” she said, noting that it may take people a long time to decide to cancel their memberships and it may take them a long time to resume their memberships.

She said she's seen few signs on the consumer side that 2011 will be worse than 2010. I guess that should give some hope to our industry.

In comparing Life Time's more quickly improving performance to that of TSI's still sluggish performance, Zackfia said that Life Time had two advantages over TSI. Life Time has had the same management team in place for years and that management team implemented strategies early to make the business more resilient. TSI changed its CEO earlier this year, which caused its plans to change, and change takes time to bring about results.

In addition, Life Time's club base is more diversified geographically and more family oriented than TSI's base. TSI's clubs (which go by the names Boston Sports Clubs, New York Sports Clubs, Philadelphia Sports Clubs and Washington Sports Clubs) are located in the Northeast, which was hit harder by the recession than some other areas of the country. And TSI has more single members than family members, which may mean its membership is more transient than Life Time's, she said.

An interesting perspective from someone who follows our industry. For two other analysts' perspectives on Life Time and TSI, check out this video.

Do you think the health club industry is showing signs of recovery? Will 2011 be better for the industry?

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