TSI to Slow Down New Club Growth for the Year

New York — Town Sports International's plan for the remainder of 2009 is to slow new club growth, close underperforming clubs and cut costs where possible while installing a new enterprise management system and completing the rollout of its operational excellence program.

The New York-based company announced last month that its first quarter 2009 revenue increased 0.3 percent to $126.7 million, but net income for the quarter dropped to $639,000 compared to $4.8 million in the first quarter of 2008.

“Total revenue was essentially the same as in the prior-year quarter, but negative comparable club revenue led to an operating margin decline,” CEO Alex Alimanestianu said in a call with analysts after release of the financials. Although membership at TSI's comparable club was roughly equal to the same quarter a year ago, same-club revenue declined by 2.1 percent, driven primarily by a decline in ancillary revenue, and specifically by a decrease of 7.1 percent in personal training revenue from a year ago to $15 million.

“This represents our first quarterly decline in personal training revenue, and it demonstrates that even though members are using our clubs more often, they are spending less money on our ancillary services, just as they are in other retail venues,” Alimanestianu said. Member usage increased by 13.6 percent.

“While there aren't any magic bullets to address the weaker demand side of the equation, we are making every effort to hold the line until the economy improves,” he added.

TSI decreased its initiation fees in the first quarter to attract members, Alimanestianu said. Initiation fees in the first quarter were $3.16 million, down from $3.4 million in the same quarter last year.

However, the decreased initiation fees helped TSI increase its membership by 6,000 members, or 1.2 percent from first quarter 2008, to 518,000. Membership attrition averaged 3.6 percent per month in the first quarter, compared to 3 percent attrition in the same period last year.

“As expected, weak consumer confidence and spending continue to weigh on our business, making it difficult for us to grow our membership base at historical rates,” Alimanestianu said. “We continue to focus on our goal of maintaining a strong liquidity position so that we are well prepared to weather this recession. In that regard, at the end of the quarter, we had revolver availability of $42.5 million and cash of $7.6 million.”

However, corporate and group memberships continued to perform well and were a driver of member growth in the quarter. TSI ended the quarter with approximately 60,000 corporate members, an increase of 26 percent over first quarter 2008.

Alimanestianu said that because of the weakened economy, TSI would not open any more Greenfield clubs this year and would only pursue acquisitions if they offered unusually high returns on investment.

In the first quarter, the company opened four clubs and closed three older clubs. TSI, which operates clubs under the New York Sports Club, Boston Sports Club, Philadelphia Sports Club and Washington Sports Club brands, is still evaluating other underperforming clubs for possible closure, Alimanestianu said. In a weakened real estate market, the company is renegotiating leases and extending leases where it makes financial sense, he added.

TSI's enterprise management system is on track for completion this year and deployment by mid-2010. With the new IT system, TSI will have enhanced productivity in membership and personal training sales, the ability to deliver a better member experience and the delivery of timely information for decision-making, Alimanestianu said.

TSI reduced capital expenditures to between $50 million and $53 million, down from $96 million in 2008. The 2009 capital budget includes expenditures for TSI's enterprise management system and a new laundry facility and satellite corporate office.

In January 2009, TSI completed a round of layoffs, which eliminated 47 non-club positions, or 11 percent of TSI's non-club workforce. TSI also froze non-club salaries, including executive salaries, at 2008 levels. The company also lessened its club operating hours and group exercise schedules.

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