Town Sports International's Transition Year Results in Revenue Decrease in Q4 2014

Town Sports International transitioned a majority of its clubs to a highvalue lowprice model resulting in a decrease in revenue for 2014 Photo by Stuart Goldman
<p>Town Sports International transitioned a majority of its clubs to a high-value, low-price model, resulting in a decrease in revenue for 2014. <em>Photo by Stuart Goldman.</em></p>

In 2014, Town Sports International (TSI), New York, embarked on two changes that it says can account in part to the decrease in its revenue for fourth quarter 2014 and full-year 2014. The company transitioned many of its clubs from mid-priced to what it is calling high-value, low-price (HVLP) clubs. It also opened its first BFX Studio in September. However, company officials noted in a conference call with financial analysts today that it expects improvements during 2015, even as it looks at strategic alternatives that could include a sale of the company.

Prior to the call with analysts, the company also announced that Bob Giardina, who had been CEO, is moving into the role of chairman of the board to work with Deutsche Bank Securities Inc. to review those strategic alternatives. Dan Gallagher, who had been president and COO, has moved into the CEO role for the publicly traded company that operates clubs under the brands of Boston Sports Clubs, Philadelphia Sports Clubs, New York Sports Clubs and Washington Sports Clubs.

Fourth quarter 2014 revenue for TSI was $109.7 million, a decrease of 3.7 percent compared to fourth quarter 2013.  For the full year, revenue decreased $16.4 million, or 3.5 percent, compared to full-year 2013.

Adjusted EBITDA was $10.4 million in fourth quarter 2014 compared to $18.4 million in fourth quarter 2013. Adjusted EBITDA for the year was $53.2 million compared to $90 million for 2013.

At the end of 2014, TSI had 71 clubs operating under its new HVLP pricing strategy. As of today, 98 clubs have been converted to HVLP and another 19 clubs are operating as passport-only membership clubs. TSI expects most of its clubs to be converted to the HVLP pricing strategy by May 31, and approximately 25 clubs to be operating under its higher priced passport-only membership model. It also plans to open two more BFX Studios this year.

A much decreased operating margin showed how much the move to HVLP affected the company. For 2014, operating margin was 0.2 percent compared to 8.6 percent for 2013. Net loss was $69 million in 2014, which included a non-cash tax charge of $60.4 million related to a tax valuation allowance, compared to net income of $12.3 million in 2013.

During 2014, TSI closed eight clubs and slowed development on others as it focused on growing its existing clubs and improving the productivity of its asset base, according to Giardina. The company had an increase of 5,000 in total member count in fourth quarter 2014 compared to a decrease of 10,000 in fourth quarter 2013. Its membership stood at 484,000 at the end of 2014, according to the company. Membership monthly attrition averaged 3.9 percent per month in fourth quarter 2014 compared to 3.4 percent per month in the same period in 2013.

Giardina commented: "The fourth quarter capped a year of significant transformation and highlighted positive momentum for our business. Compelled by industry change, we embarked on a new pricing strategy which we expect will first result in membership growth and increased market share followed by renewed positive EBITDA growth combined with improved cash flow."

Outlook for 2015

The company says it expects its first quarter 2015 revenue to be between $113 million and $114 million compared to $115.9 million for first quarter 2014. The company expects a net loss for first quarter 2015 to be between $4.8 million and $5.3 million, and estimates that adjusted EBITDA will approximate $7.3 million in the first quarter.

For full-year 2015, TSI plans to invest $30 million to $34 million in capital expenditures. This amount includes approximately $5.4 million to $6.5 million related to planned 2015 openings, including both clubs and BFX Studio units. Total capital expenditures also includes approximately $17 million to $19 million to continue enhancing or upgrading existing clubs and approximately $5 million to $6 million principally related to major renovations at certain clubs. TSI also plans to invest approximately $3 million to continue to enhance its management information and communication systems.

The company says it will fund these capital expenditures through cash flow from operations and available cash on hand. 

The financial call came at the end of the day of trading. The final stock price for the company today was $6.75 per share, an increase from the opening price of $6.67 but below its 52-week high of $9.61. Its 52-week low was $4.01.

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