Town Sports International Chairman and CEO Patrick Walsh called 2016 "an incredible inflection point in Town Sports International's history" and has "laid a foundation to improve sales both organically and externally through acquisitions."
The comments were part of a chairman's letter that Walsh released this week, 11 days after Town Sports International (TSI) shared that its 2016 revenue was $396.9 million, a decline of $27.4 million from 2015 revenue and the fifth straight year of revenue decreases. Despite the revenue decline, Walsh pointed out in the letter that adjusted EBITDA had improved from $28.8 million in 2015 to $40.9 million in 2016, an increase of 42 percent.
Walsh said that EBITDA increased for various reasons, including the company executing a plan that he laid out in 2015, letting the wrong people go while hiring the right people, making customer service and operational excellence the top priority, making people accountable to do their jobs, and rewarding people based on performance rather than factors such as seniority or likability.
These changes led to an improvement in operational efficiency, the letter stated.
"This has resulted in material margin expansion despite severe pressure from declining revenues," Walsh wrote. "When I first engaged in our cost savings initiatives in June of 2015, several current and former experienced senior managers were interviewed. The feedback from these meetings identified potential cost savings in the range from $750,000 to $2 million for the entire Company. Subsequently, the team then put their heads down and went to work. Cumulative cost savings since current management took over now surpass $60 million."
Based on results from 2016, Walsh said the company is ready to look at acquisitions.
"Our goal is to grow our fitness footprint through acquisitions," he wrote. "We have no set target for acquisitions. Our strategy is to be prepared to act quickly when opportunities present themselves. If you have a portfolio of gyms for sale please call us."
TSI operates club companies New York Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs and Washington, DC, Sports Clubs. In November, TSI underwent a branding initiative that included a makeover of some clubs, a new website and a digital app.
In the letter, Walsh wrote that 2016 "was a year when the pundits were expecting the Company’s demise and were proved wrong."
He wrote: "Over the last year and a half, the management team was confronted by what many industry observers described as an impossible mission. The Company was faced with declining revenues, negative cash flow, severe competitive pressure and an overleveraged balance sheet. The team kept its focus and accomplished what many said could not be done. During 2016, management led the remarkable turnaround of TSI and transformed a money-losing gym business on the brink of insolvency into a successful fitness enterprise that is now positioned to generate strong cash flow."
Walsh said that TSI is generating free cash flow and will focus on continuing to do so over the long term but that the company will spend "if the expected payoff is sufficient over time."
This is the second year that Walsh has posted a letter about the company's performance. The company continues to be publicly traded and to release its quarterly and year-end financials, but since Walsh became chairman of the board and CEO in 2016 after being an active investor in the company and getting a seat on the board, the company has not held a call with analysts after releasing its financials like many publicly traded companies do.
Despite the comments about increased EBITDA and improved cash flow, Walsh admitted that TSI "is still recovering from its prior strategy of converting to a low-cost budget gym. This strategy resulted in extreme revenue pressure over the past two years with revenue declining from $454 million in 2014 to $397 million in 2016."
However, he stated that from 2011 to 2015, the average U.S. health club membership increased by 25 percent while TSI moved to a lower membership dues price point during that same period, causing the company's lower revenue.
"We believe that our current prices offer tremendous value relative to the industry, especially given the Company’s geographic concentration in high barrier to entry markets where the cost of living is much higher than the national average," he wrote.
To read the full letter, go here.