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TSI Surges to First-Quarter Profit

NEW YORK -- Apparently, analysts liked what they heard from Town Sports International (TSI) during the company’s conference call last Thursday to announce its first-quarter results. TSI boasted a first-quarter profit and increased revenue, causing at least two of the analysts who participated in the call to raise their profit estimates for the company.

TSI earned a net income of $4.8 million, or 18 cents per share, and revenue increased 9.5 percent to $126.3 million in first quarter 2008. Revenue was $115.4 million in first quarter 2007, when TSI lost $3.8 million, or 15 cents a share, as it took charge of $12.5 million to pay off debt. The net income and revenue in first quarter 2008 was greater than analysts had expected.

The increase in revenue is attributed to growth in membership and personal training revenue, which shot up 15.9 percent to $16.1 million. Membership is up 7.6 percent from a year ago to a total of 512,000 members. Comparable club revenue increased 4.5 percent, 1.7 percent of which was due to an increase in membership. Revenues from TSI’s corporate and group sales program grew nearly 50 percent in first quarter 2008.

“Even in a challenging consumer environment, our overall trends remained consistent and positive,” TSI CEO Alex Alimanestianu said during the conference call. “We continue to offer our core metropolitan customers an affordable and convenient way to stay committed to their exercise fitness and lifestyle goals and using our clustering strategy to guide our expansion. We continue to build clubs that solidify our strong market position in our core regions.”

Total operating expenses increased 9 percent to $112.2 million for first quarter 2008 compared to $103 million for first quarter 2007. Operating margin improved to 11.1 percent for first quarter 2008 from 10.8 percent in first quarter 2007. EBITDA (earnings before interest, taxes, depreciation and amortization and loss on extinguishment of debt) increased 13.6 percent to $27.2 million.

TSI opened two clubs and closed one club in first quarter 2008, Alimanestianu said. Dan Gallagher, TSI’s chief financial officer, said that the company plans to open 11 clubs and close four clubs, bringing the total number of clubs to 168 by the end of 2008.

TSI expects revenue for the year to be in the range of $510 million to $520 million, or about 8-10 percent growth over 2007, and projects net income will be between $21.3 million and $22.3 million for 2008 compared to $13.6 million in 2007. The company expects to spend $90 million in 2008 compared to a previous estimate of $95 million.

TSI also announced that it plans to buy back up to $25 million in shares of its stock by the end of 2009. The company approved the plan on April 29.

Ed Aaron of RBC Capital Markets raised his profit estimates to bring them in line with the company’s guidance, and Anthony Gikas of Piper Jaffray raised his price target on TSI’s stock from $10 to $12 after the conference call.

A third analyst, Tom Shaw of Stifel Nicolaus, expects TSI to earn 84 cents per share this year and maintained a “Buy” rating. However, Shaw says TSI’s guidance could be too low.

TSI’s stock was at $9.51 today. The stock has traded in between $6.10 and $23.36 over the past 52 weeks.

Sharon Zackfia, an analyst with William Blair, asked Alimanestianu during the call about how TSI is faring in the New York City market. Alimanestianu said the company does not break out regional performance but that the company is satisfied with the New York/Manhattan portfolio in the first quarter.

“In a difficult economic environment, we think that we benefit in Manhattan from being, I’d say, the most affordable, value-oriented, quality option in the market,” Alimanestianu told Zackfia. “As we look out our windows from our [New York] offices, the sky is not falling.”

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