24 Hour Fitness, Town Sports Reportedly Seeking Financial Remedies

Even before the COVID-19 pandemic caused the closure of almost all health clubs around the country, 24 Hour Fitness and Town Sports International, two of the largest mid-priced club chains in the United States were facing financial difficulties with large loans due soon for both. Now with temporary club closures mandated to control the COVID-19 pandemic, both chains are reportedly seeking options to remedy their situations, according to media reports. Those options could include bankruptcy.

“Both Town Sports and 24 Hour have too much publicly traded debt,” one long-time industry observer told Club Industry. The debt for both had been trading around 20 to 30 cents on the dollar recently while other club companies have been trading closer to 70  to 80 cents on the dollar.

24 Hour Fitness

24 Hour Fitness, San Ramon, California, is working with investment bank Lazard and the law firm Weil, Gotschal & Manges to create a plan for the company moving forward, according to a story by CNBC, quoting unnamed sources. One option noted was a possible bankruptcy filing.

24 Hour sent Club Industry this statement: “We are considering a broad range of options to ensure the long-term sustainability and success of 24 Hour Fitness, and we are not going to comment publicly on our strategic plans. We look forward to reopening our clubs when local and state governments and public health agencies indicate it is safe to do so.  We are fortunate to have a strong brand with millions of loyal members—over one million of whom are actively using our 24GO personalized fitness app and 24GO Live, our interactive YouTube channel, to stay fit during this difficult time.”

24 Hour Fitness ranked No. 3 on Club Industry’s 2019 Top 100 Clubs list, reporting $1.51 billion in 2018 revenue, representing an increase of 4.8 percent. Club Industry has not solicited 2019 revenue figures from club companies yet for the 2020 Top 100 Clubs list, and debt is never requested by Club Industry for the ranking. However, at the end of 2019, 24 Hour had total debt of $1.4 billion, according to a Wall Street Journal article. That same article shared that in late March after the mandated closures of about 450 of 24 Hour’s locations, the company fully drew the funds available to it as part of its $120 million revolving credit facility. The company also has an $837 million term loan that matures in March 2022 and $500 million in unsecured bonds due in June 2022, according to CNBC.

Much of the debt is blamed on increases to minimum wage in various states in which 24 Hour operates, according to the Wall Street Journal. But 24 Hour also is saddled with high rent at many of its properties. Some of its older clubs are not performing well. A limited number of its newer clubs are off to a strong start, the industry observer said. 

In 2019, 24 Hour not only eliminated its towel service and child care as well as began closing most of its clubs at 11 p.m. as cost-savings measures, but it also eliminated salespeople. Savings from these eliminated expenses may not be able to offset the decline in memberships and revenues that 24 Hour experienced—memberships decreased from 3.5 million to 3.4 million at the end of the third quarter, according to Moody’s.

After the COVID-19 shutdowns, 24 Hour Fitness sent a letter to at least one landlord noting it would not pay its April rent. 24 Hour Fitness did not respond to a Club Industry question about whether it paid any rent in April.

To remedy its financial situation, the company is considering its optioins, which could include a Chapter 11 filing.

“Chapter 11 will allow them to sever leases and redo the rents in particular,” the industry observer said. “This is the perfect time with closures to have that opportunity. You don’t need Chapter 11 to do that. If the equity people are looking to walk away and hand it off to the debt people, then one could do that without having to file, etc. They can negotiate that directly. Given that their debt is not due right away, it seems to me that they are not under as much pressure as Town Sports unless they have decided that they can’t make it long term and the best thing to do is to do a pre-packaged Chapter 11.”

In a pre-packaged Chapter 11, a company works with its debt people and jointly files the Chapter 11 on a planned basis rather than a confrontational basis, he said.

The company also is facing at least one class action lawsuit filed in late March after the COVID-19 mandated closures. The complaint claims that 24 Hour continued to charge dues after closure and did not refund dues for the half of the month the clubs were closed. After closing clubs on March 16, 24 Hour told members that their dues would be extended for the same period the clubs are closed. The company also notified members they could use the company’s 24GO app to access workouts online for free during the shutdown.

On April 1, 24 Hour notified members that because its clubs would likely be mandated to remain closed for an extended time, the company would suspend membership billing effective April 16 if clubs were not reopened at that time. Members who were charged dues between March 17 and April 15 would receive additional days of access equal to the number of days paid for while the clubs were closed, applicable at the end of the membership.

24 Hour Fitness responded to these dues allegations in this Club Industry story.

Town Sports International

Jupiter, Florida-based Town Sports International reportedly is talking with law firm Olshan Frome Solosky LLP and is seeking an investment banker to be its financial advisor to assist it in determining a path forward, according to reporting in an April 14 story by Bloomberg Law. Options include a possible Chapter 11 filing.

The company reported 2019 revenue of $466.76 million, a 5.3 percent increase from 2018. However, its 2019 gains were accompanied by $6.45 million in operating losses and an adjusted EBITDA decrease of 23.3 percent.

Town Sports (operator of New York Sports Clubs, Philadelphia Sports Clubs, Boston Sports Clubs, Washington Sports Clubs, Palm Beach Sports Clubs, Lucille Roberts, Christi’s Fitness, Around the Clock Fitness, LIV Fitness, Total Woman Gym + Spa) had been on a purchasing tear for the past three years as CEO Patrick Walsh looked to increase revenue for stockholders of the publicly traded company by added new brands to the mix.

From January 2017 to December 2019, Town Sports opened or acquired 53 clubs while closing or relocating 17 clubs and transitioning one club to a licensed location, according to its 2019 annual report. Seven of those new clubs opened in 2019 (six of which were acquisitions) while 25 of those new clubs were acquired in 2018 and one new club was built that year. Six of the closures were in 2019 and six of the closures happened in 2018.

Earlier this year, Town Sports worked on a deal to purchase Flywheel, but it was contingent on the approval of its debt holders, and the deal fell through earlier this month. That deal was originally set up to help pay down part of Town Sports’ $177.78 million loan that has a November 2020 maturity date and could have delayed the loan’s maturity for another four years.

That loan, along with COVID-19-related closures of all of its clubs, is the most pressing matter for Town Sports. In its most recent annual report, released in March soon after Town Sports had to close its clubs on March 16 due to the COVID-19 pandemic, the company stated: “Our debt under the 2013 Term Loan Facility, of which $177.8 million was outstanding as of December 31, 2019, is due on November 15, 2020. Our cash balance as of December 31, 2019 was $18.8 million and thus we do not have adequate sources of cash to repay our debt. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will depend upon our ability to refinance our debt prior to its maturity. There can be no assurance that we will be able to refinance our debt, or if we are able to refinance our debt, that such financing will be on terms favorable to us.”

The company also noted in the report that its “substantial amount of debt” could increase its vulnerability to adverse economic conditions, cause difficulty in securing additional financing, and reduce its ability use its cash flow for capital expenditures and acquisitions among other consequences.

“These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors,” the report stated.

The report noted that on March 13, Town Sports had borrowed $12.5 million from its 2013 revolving credit facility. Then, on March 16 when club closures were mandated, the company laid off all of its non-executive employees. Town Sports had 9,200 employees, according to its report.

Town Sports also was called on the carpet by the attorneys general of four states, who claimed that after Town Sports closed its clubs and laid off employees, the company continued to charge members and did not allow members to cancel online. It is also facing at least two class action lawsuits from members claiming they were charged despite the clubs being closed.

Despite these conditions, Town Sports noted in its annual report: “We believe that we have, or will be able to generate, sufficient funds to finance our current operating plans through the next 12 months.”

Town Sports trades on Nasdaq as CLUB. It has been trading under $1 since March 23. It closed on April 20 at 37 cents.