Something in the Air

Yesterday it rained here after a few weeks of very hot and humid summer weather. My evening drive home through the wet, tree-canopied streets made me think of fall, especially since the gray day brought with it cooler temperatures. I love that crisp, cool feeling in the air — even when I know another month of summer remains and the relief is only temporary. It's a tease that gives me hope of relief to come.

I'm feeling a little tease in the air in the fitness industry right now, too. Yes, Bally Total Fitness is facing a mess as of this writing, but exciting changes are happening for other large clubs and that hints of better times ahead for the industry.

For years our industry has been a mystery to Wall Street. That's not surprising considering the only two public companies in the industry until Life Time Fitness went public last year were not pure club companies. Bally Total Fitness was a finance company as much as a health club company (it finances memberships). The Sports Club Co. was as much a real estate company as a health club company (and it will soon return to its private status). So looking at these two companies never gave investors a true picture of the industry.

Then Life Time stepped up and went public last year. Since then, it has performed admirably. In fact, a recent Credit Suisse First Boston's July report rates Life Time Fitness as “outperform” and increases its target price from $32 to $40. The company said Life Time Fitness helped to “legitimize the fitness industry as a whole.” The report's three authors also called it “one of the most exciting growth concepts” in the universe that they cover.

However, private equity firms also hesitated to plunge into our industry because they felt uncertain of an exit strategy. Last year's sale of Gold's Gym combined with the recent sale of 24 Hour Fitness should help put those fears to rest since they showed that a profitable exit does exist in this industry.

Another aid in alleviating fears is the 8 percent compound annual growth rate of our industry — a growth rate that is much higher than a lot of other industries, according to an interview with an industry expert. And a recent report by Industry Insights (conducted for IHRSA) found that revenue at a dozen leading U.S. health club companies rose on average by 4.3 percent in the first quarter of 2005 compared to the same period in 2004. The mean total revenue for the clubs was $13.23 million. All of this combined makes buying into the fitness business all the more appealing.

With that knowledge in hand, several former potential bidders for 24 Hour Fitness walked away from that sale straight to a new prospect in Town Sports International, which announced last month that it was seeking a buyer. They may soon have plenty of clubs to choose from. Rumors have floated around for months about a sale of Sport & Health. Other rumors center on a sale of Spectrum Clubs and Wellbridge.

It is a fertile time in the health club industry. Investors who could have cared less about the industry in the past are taking a hard look at it now. If this holds up, fall could be an even more exciting time for the industry. Of course, October will bring with it Bally's restated financials (we hope), and that could remind us of the harsh realities of the winter to come. Still, the industry is showing maturation beyond Bally in businesses that are pure health club companies. So regardless of Bally's outcome, the industry is showing signs it can weather winter just fine.

Pamela Kufahl • Editor

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