patrick-walsh-g-770-2.jpg Photo by Scott Eisen / Getty Images for Boston Sports Clubs.
TSI CEO Patrick Walsh (center in the suit) attributes some of the company's revenue uptick to efforts such as the introduction in late 2016 of the Gronk Zone at its Wellington Circle Boston Sports Clubs location in Medford, Massachusetts. The space is dedicated to an NFL-inspired training regimen developed by New England Patriots player Rob Gronkowski (back row center, to left of Walsh) and his family as part of their Gronk & Co. brand.

CEO Patrick Walsh Says Town Sports International’s Turnaround Will Be ‘Historic’

Since being appointed CEO in 2016, Town Sports International’s Patrick Walsh has led the health club company through a reversal of a low-price strategy, cost-cutting, niche acquisitions and a recommitment to the 45-year-old brand’s legacy.

Patrick Walsh faced an uphill battle in the fall of 2016 when he became CEO of Town Sports International (TSI).

The company behind the New York Sports Clubs and Boston Sports Clubs brands, among others, was amid its fifth consecutive year of revenue decline, as well as several executive-level personnel changes that included the exit of long-time former CEO Bob Giardina.

Investors experienced declining stock values. Analysts wrote about a possible bankruptcy or a sale of the company.

Walsh, who initially was an active investor in the four-decade-old company before working his way onto the board and then into the role of the executive chairman, saw a once iconic New York brand in need of help to return to its former glory.

“If you look back at New York Sports Club in the 1980s, it was the dominant gym,” Walsh, 42, told Club Industry in March. “If you go back and watch ‘Sex and the City,’ it would highlight iconic places in New York. They went to New York Sports Club. I felt New York Sports Club fell off the pedestal [since then], and my goal was how do we bring this back to where it should be?”

The TSI of days gone by “wasn’t being reflected on the balance sheet,” Walsh said.

Walsh was a managing partner of investment firm PW Partners with investments in the restaurant industry. In early 2014, he purchased a 5 percent stake in BJ's Brewhouse, whose shares were trading below $30. After taking a seat on the company’s board, he emphasized smarter marketing and improved kitchen efficiencies. By mid-2015, the company’s shares were trading at $50, an increase of 55 percent. Despite several peaks and valleys in the ensuing years, BJ’s shares are still trading above $50 as of May 2018.

During the last decade, Walsh helped drive similar turnarounds at Red Robin Gourmet Burgers and Famous Dave’s of America, where he focused on strategic cost-savings.

However, by 2015, the fitness-industry outsider had set his sights on TSI and began making waves as an investor in the company to launch a resuscitation effort that he said will “go down in history as one of the great turnarounds in American business.”

Driven by niche acquisitions, cost-cutting strategies and a move away from a short-lived strategy to be a low-priced brand, TSI ended 2017 reporting financial growth for the first time in six years. In May 2018, the company also reported a $6 million increase in its 2018 first quarter revenue.  

Subsequently, TSI (NASDAQ: CLUB) went from trading at $1.02 per share in February 2016 to $11 per share in May 2018.

“Our stocks are up huge," Walsh told Club Industry in mid-May. "Everyone said, ‘Oh, nobody can turn the company around.’ It was very daunting. When I came in, we were on the verge of bankruptcy. [Our competitors] were telling everyone we were going under, trying to create a death spiral, looking at our assets, hoping to pick up something in the process.”

Ernst and Young may agree with Walsh's assessment of TSI's performance. The global accounting firm announced on May 31 that Walsh was a finalist for its Entrepreneur Of The Year 2018 Award in the New York region. The award winners will be decided June 12 during a gala in New York City.

“The recognition as Entrepreneur Of The Year finalist from EY is a testament to the culture, hard work and dedication of the entire TSI organization," Walsh said in a media release regarding his nomination for the award. "I am proud of the TSI Team and our recent accomplishments. More importantly, I am extremely excited about TSI's future as I believe the best is yet to come."

Moving from New York to Florida

In 2016, TSI was spending approximately $5 million in cash every month, Walsh said. He was troubled by the growing bankruptcy chatter among company insiders and outsiders, a possibility that could cause TSI’s 7,500 employees to lose their jobs. Walsh closed the company’s longtime Manhattan office and laid off 50 corporate and regional staff members, saving the company at least $1.7 million, he said.

“Maybe we lose 50 jobs instead of 7,000,” Walsh said about his decision. “And now, with the acquisitions, we’re hiring more people and creating more jobs. … People want to come and work for TSI now, and that wasn't always necessarily the case.”

TSI repurposed parts of an 82,000-square-foot TSI laundry facility in Elmsford, New York, located north of the Bronx, into the company’s new regional office, while Walsh moved the company’s headquarters to Jupiter, Florida, where Walsh, a Boston native, now lives.

Pod-style offices were established in a number of TSI’s New York City clubs for employees who would have been inconvenienced by a commute to Elmsford. The company’s presence in New York City wasn’t diminished by the relocation of the corporate headquarters, Walsh said.

“The laundry facility in Elmsford and going to Florida was a true no-brainer,” Walsh said. “I miss my old office. I had the corner CEO office with a TV. It was nice. But this was the right thing to do with the company.”

Changing the Culture

TSI’s improved financial performance has come from Walsh’s focus on running the company as efficiently and analytically as possible.

"It was not one thing,” Walsh said about improving operating efficiencies. "It was hundreds of different decisions. We changed a lot of different tactics and strategies for how the clubs were run. That's where my role as an outsider was very beneficial. I didn't know how things were run in the past. I came in with a fresh perspective and asked a lot of questions of why do we do it this way versus this way. You keep asking why enough times, and sometimes that can lead to big changes, and that's how it happened at Town Sports."

Walsh focused his team’s efforts on improving the quality of service at individual clubs and reinvesting capital in TSI's existing clubs, he said, as evidenced in a November 2016 branding initiative that included a makeover of select TSI clubs along with a refreshed website and digital app.

Walsh attributed some of the revenue uptick to celebrity partnerships, such as that with New England Patriots football player Rob Gronkowski. In late 2016, TSI introduced the Gronk Zone at its Wellington Circle Boston Sports Clubs location in Medford, Massachusetts. The space is dedicated to an NFL-inspired training regimen developed by Gronkowski and his family as part of their Gronk & Co. brand.

However, another part of the recent revenue increase stems from Walsh discarding the company’s efforts under former management to move from a mid-priced club model to a low-priced brand. In his chairman’s letter written in February 2017, Walsh noted that the company was still recovering from the 2014 conversion to a low-priced brand, which had caused the revenue to decline from $454 million in 2014 to $397 million in 2016. The move back to a mid-priced brand took more than a year to bear fruit.  

Piece by piece, Walsh has aimed to revitalize the TSI culture for members and for employees.

The most significant cultural shift within TSI was changing the incentive structure for all employees—trainers to facility managers, Walsh said. He implemented an "ownership culture" throughout the company, so that general managers see their respective club as their own small business. Bonuses are tailored and merit-based to motivate all employees throughout the year.

"We set up the incentive structure in a way so that [employees] could participate in the upside they would create," Walsh said. "And then everyone would win. ... Before, it didn't really matter how they performed. It could be subjective in how they got paid bonuses. So we actually went in and changed the incentive structure so that it would really align their compensation with the improvement in the business."

The biggest similarity between the restaurant industry and the health club industry, Walsh said, is how heavily a brand's success can hinge upon having the right or wrong person in a given role.

He stressed that point in the February 2017 chairman's letter to TSI shareholders in which he stated: "We focused on getting the right people on the team, placing people in the right roles and quickly getting the wrong people off the team. Customer service and operational excellence were made the absolute priority. In addition, management has been relentless in its focus on accountability. Everyone must do their job. Finally, we are forging an ownership mentality and creating a culture of meritocracy where rewards, whether they be financial, psychic or career advancement, be designated based on performance, not seniority, likability or some other factor."

Growing through Acquisition

A series of acquisitions has helped fuel TSI's turnaround. In July 2017, the company acquired women-only brand Lucille Roberts, adding 16 clubs to TSI's portfolio in New York. In February 2018, TSI acquired San Diego-based Total Woman Gym + Spa, another women-centric health club concept, as well as TSI's first business in California.

Also that month, TSI acquired TMPL, New York, which Walsh described as a "high-end luxury club brand with boutique elements." TMPL was the brainchild of David Barton, who had been the founder of DavidBartonGym.

These acquisitions are the first steps in turning TSI into a diversified holding company able to consider acquisitions in any market, domestic or abroad, Walsh said.

"We think it's going to be a very challenging environment," Walsh said of the current health club industry. "If [other club brands are] under the Town Sports umbrella, we can utilize our leverage, provide capital for growth, operational expertise, marketing expertise ... all these things we think are very attractive to a small business owner like David Barton or Lucille Roberts or Total Woman. Once they're under our umbrella, they have a much better chance of growing the business in the years ahead given the environment. And that's the real value we've created with Town Sports."

Each acquired company will continue to operate under its original branding, as has been the case for Lucille Roberts, Total Woman and TMPL.

"We're kind of agnostic in that each brand can have its own unit leader and each brand can stay true to what made them what they are," Walsh said. "If we've done our job right, [club members] shouldn't know anything different."

Walsh is particularly enthusiastic about TMPL. TSI is already constructing three new TMPL clubs, in addition to the original location in New York City's Hell's Kitchen neighborhood. The first new TMPL location will open sometime in 2018 or 2019 in Manhattan's West Village, Walsh said.

In 2016, Walsh and Barton struck up a friendship after TSI purchased a former DavidBartonGym location in New York City. Barton invited Walsh to tour his new concept, TMPL, and Walsh was so blown away by the club that he offered to purchase the facility on the spot, Walsh said.

Walsh called TMPL "the Chanel of fitness" and would eventually like to extend the brand to Washington, DC, Boston and around the globe, through an ongoing partnership with Barton. Barton has developed a cult following with his concepts since the early 1990s, but Barton left DavidBartonGym in 2013 after a 2011 Chapter 11 filing for the company. A few days before Christmas 2016, the new ownership shuttered DavidBartonGym clubs in Bellevue, Washington; Boston; Chicago; Miami and New York.

"David is one of the best designers, a creative genius, in terms of designing clubs, and obviously you saw the turnaround with Town Sports," Walsh said of TMPL's future under TSI. "We're very strong in operations, so I thought it was a match made in heaven. If we could have David focus on the design of the gyms and we operate them, we could take his company and turn it into a global brand."

Walsh does not anticipate any major market or price-point changes regarding TSI's staple facilities: New York Sports Clubs, Boston Sports Club, Philadelphia Sports Clubs and Washington Sports Clubs.

In January 2018, TSI acquired Christi’s Fitness, a single-location health club business in Vero Beach, Florida, as part of Walsh’s strategy to expand in the Sunshine State. TSI is also in negotiation with another multi-location club business in Florida, but Walsh would not disclose details or timelines.

Walsh’s opportunistic outlook on acquisitions may be perceived as contrarian, as many industry executives say developing new clubs is more cost-effective than acquiring existing ones, he said, but he is banking on TSI's brand name and legacy being the "best home" for almost any club business.

"We'll look at everything," he said. "We're very open-minded. We'll consider if it's a geographic fit. A culture fit. If not, can we improve it?"

Looking Forward

TSI stopped holding analyst calls in July 2017, and the company’s annual and quarterly financial statements include the minimum required information, according to one industry insider who asked not to be named. Few equity analysts following TSI have published research reports about the company, but one who has, George Kelly, senior vice president of Equity and Industry Research with Imperial Capital, did share with Club Industry his thoughts about TSI’s performance.

“Patrick has done a lot to improve the financial profile and internal management structure of the business, and it seems like his team has bought into the new system,” Kelly told Club Industry in May, noting he believes TSI’s financial turnaround will be long-lasting. “So far, I think the acquisitions have been accretive. [Walsh] is able to leverage corporate infrastructure with new locations. Over time it may be challenging to manage the different brands and geographies.”

The anonymous industry insider, however, said that even though Walsh seems to be a talented financial engineer, it is difficult say whether the underlying business is stronger and poised for growth. TSI appears to have bought back its debt at a low price, as it was trading at a fraction of the dollar, he said.

It may be time to focus on revenue growth, especially after the company has had a continuing story of losing same-store revenue for several years, according to the industry expert. He noted that a few minor club purchases may help overall levels of company revenue, but it may not address weakened revenue from the existing portfolio, which may mean that the core business has not fundamentally turned around.

Recent Security Exchange Commission filings show that clubs operated by TSI for more than 12 months reported sales increases during all four quarters of 2017, compared to losses for the previous three years. Those increases were primarily due to higher average dues per membership after the reversal of the low-priced model decision and an increase in member count in comparable clubs, according to the SEC filings. Those increases were partially offset by decreased initiation and processing fees and other ancillary club revenue.

In the meantime, TSI is a publicly traded company that both club industry insiders and outsiders watch to learn from and use as a role model for club companies and benchmarking, the industry insider said. More detailed information from TSI would help the industry and explain to the financial community the elements of their story, he said, adding that until then, it is somewhat frustrating for all.

Even though TSI is a public company with shareholders to please, Walsh runs the business no differently than if it were privately operated, he said.

"In this industry, my ignorance became an asset," Walsh said. "It doesn't matter how we did or didn't do things before. It's about always about making the right decision. About what's going to create the most value. I think in a very long-term view of the company. And we're running this company like it's the only asset we own."

Editor's note: On June 12, 2018, Patrick Walsh received Ernst and Young's Entrepreneur Of The Year 2018 Award for the New York region.

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