Patrick Walsh, TSI Photo by Scott Eisen / Getty Images for Boston Sports Clubs.
In a rare public letter, TSI CEO Patrick Walsh (center in the suit) spoke openly about the company's declining stock market value as well as its aggressive acquisition strategy that has grown revenue but not addressed declining EBITDA and operating expenses.

Town Sports International CEO Addresses Declining Stock Price, Acquisition 'Spree' in Annual Letter

In his annual letter, Town Sports International CEO Patrick Walsh addressed the company's steadily declining stock prices and its aggressive acquisition strategy, which includes recent expansions to South Florida and Puerto Rico.

The chairman and CEO of Town Sports International Holdings Inc. (TSI), Jupiter, Florida, dismissed concerns about the company's steadily declining stock prices in his annual chairman's letter.

The letter, issued on April 24 by TSI’s chief executive Patrick Walsh, offers a rare glimpse inside the publicly traded company which, in July 2017, stopped hosting conference calls to discuss its financial results.

Over the last year, TSI’s stock value (NYSE: CLUB) has steadily dropped by more than $10 per share since reaching a high mark of $14.75 on July 5, 2018. Its price closed at $4.02 per share on April 24, 2019.

In his letter, Walsh said all shareholders will benefit in time as long as TSI’s management remains focused on building a great company.

“Town’s stock has been volatile over the past year, and it is important to remember that good companies are not always good stocks and good stocks are not always good companies,” Walsh said in his letter. “Price and timing matter when purchasing securities.”

In February, TSI reported a 7.6 percent increase in its 2018 revenue, marking its second straight year of revenue growth as well as six consecutive quarters of growth. However, the company’s fourth quarter operating expenses increased by 8.7 percent and adjusted EBITDA dropped 12.7 percent.

Walsh addressed these inconsistencies in his letter, plainly stating that TSI must establish annual same store revenue growth of at least 2 percent in order to maintain its operating margins. 2018 was the first time in three years that TSI did not grow its same store member count, despite growing same store revenue by 1.6 percent.

“The company failed to leverage the growth in revenue due to cost pressures from labor and occupancy costs which resulted in negligible flow-through of 7 percent,” Walsh said. “The company continues to face challenges from labor costs due to mandated minimum wage and salary increases in our core markets. These cost pressures are expected to continue through 2021 at a minimum. It is important that our shareholders and investors understand the cost pressures [TSI] faces in the years ahead.”

For 2018, TSI reported a 12.2 percent adjusted EBITDA margin—a telling statistic, according to one anonymous industry insider. The average health club company should see EBITDA margins grow at least 15 percent to 20 percent per year, while highly successful companies will report as much as 25 percent, according to the insider. TSI's 2018 margin was also slightly lower than its 2017 margin of 12.8 percent.

In his letter, Walsh characterized TSI’s ongoing growth-via-acquisitions strategy as a “spree.” He said that TSI is not over-extending itself for new acquisitions and is only allocating internally generated cash to purchase assets.

Rapid acquisitions have indeed typified Walsh’s two-and-a-half-year-long tenure as CEO. These include Lucille Roberts, New York; Total Woman Gym + Spa, San Diego; and TMPL, New York.

Other acquisitions in late 2018 include three previously branded Gold's Gym clubs in South Florida that TSI is renovating and rebranding as Palm Beach Sports Clubs—a continuation of its signature New York Sports Clubs brand that has since expanded to Boston, Philadelphia and Washington, D.C.

TSI also acquired two LIV Fitness clubs in San Juan, Puerto Rico, as well as four Massachusetts-based Latitude Sports Clubs that are being rebranded as Boston Sports Clubs.

In total, TSI acquired 24 clubs for $35.3 million in 2018.

In March 2018, Walsh told Club Industry he envisions TSI becoming a diversified holding company able to consider acquisitions in any market, domestic or abroad.

In the letter, Walsh acknowledged that TSI’s recent acquisitions may not solve all of the company’s financial challenges.

“[T]he benefit of hindsight will be required to truly judge the performance and merits of these deals,” Walsh said. “We look forward to reporting our progress in the years ahead.”

TSI ranked No. 7 on Club Industry’s Top 100 Health Clubs of 2018 list, reporting $403 million in 2017 revenue.

In June 2018, Walsh received an EY Entrepreneur of The Year Award for his recent efforts with TSI.

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