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Town Sports International brought in less revenue than estimated in first quarter 2015 because of its transition to a lowpriced model a transition that company executives said they expect to pay off in the longterm Photo by Stuart Goldman
<p>Town Sports International brought in less revenue than estimated in first quarter 2015 because of its transition to a low-priced model, a transition that company executives said they expect to pay off in the long-term. (Photo by Stuart Goldman.)</p>

Town Sports Misses Q1 2015 Revenue as Transition to New Membership Model Continues

TSI reports&nbsp;first quarter&nbsp;revenue loss can be attributed to member loss in 2014 and lower average dues associated with the transition&nbsp;to the high-value, low-price (HVLP) club model.

Town Sports International (TSI), New York, reported revenue of $111.4 million in announcing first quarter 2015 financial results today, missing by $4.5 million (3.9 percent) the $113 million to $114 million first quarter estimate that company executives said in February that they expected.  

TSI also reported a net loss of $12.8 million in the first quarter and an adjusted EBITDA of $6.8 million. 

The revenue loss was due to a loss of members in 2014 and lower average dues associated with the company's transition from mid-priced clubs to high-value, low-price (HVLP) clubs, TSI Chief Financial Officer Carolyn Spatafora told analysts in a conference call today. The company has converted 124 of its 158 clubs into the HVLP model and expects those clubs to continue experiencing near-term revenue pressure, according to a release announcing the results.

Despite the revenue loss, the company added 21,000 memberships in the first quarter, increasing its total memberships to 505,000. That compares to a first quarter 2014 decrease of 1,000 members. The increase in membership sales volume did not offset members opting for lower dues and new members enrolling at lower rates. â€‹In the media release, TSI said the HVLP strategy will attract new, long-term members at each of its clubs, and volume will in turn increase market share for the brand long-term. 

“While this was our largest membership increase in at least five years, we continue to learn and make tactical adjustments to maximize the membership potential of this strategy,” TSI CEO Dan Gallagher told analysts. “We believe our HVLP was the driving force behind our member additions.”

Membership dues compromised 74 percent of TSI’s revenue in the first quarter ($82.4 million) and initiation/processing fees accounted for 3.1 percent (3.3 million).

Gallagher said TSI continues to monitor the cost of member initiation fees “closely.” He described the $249 initiation fee to get members in at the $19.95 HVLP monthly rate as “probably too high to hit sales multiples.”  When the fees were reduced, the membership sales increased, he said.

Gallagher said the remaining non-HVLP clubs are not planned for conversion and will principally be comprised of the higher priced Passport Membership.

“Our focus is on improving our member experience while we increase memberships and drive efficiencies," Gallagher said.

In February, TSI announced its board of directors was evaluating strategic alternatives that included a possible sale of the company, though today's call offered no further details about a potential sale.

TSI approved five new members to its board of directors in March at the same time four resigned and former CEO Robert Giardina’s left the company's employment, remaining on the board as a nonemployee.

“Our new board members have been reviewing our business and current strategies as part of our on-going strategic review process, which is currently focused on strategies for improving our clubs, leveraging the HVLP model and seeking efficiencies to maximize profitability," Gallagher said.

TSI’s operating expenses in the first quarter increased $1.4 million compared to first quarter 2014, marking an increase of 1.2 percent. The increase included costs of $2.2 million related to newly opened clubs and BFX Studio locations, and $1.3 million of separation accrual related to Giardina. Those costs were offset by a decrease in fixed asset and goodwill impairment charges of $2.6 million and a decrease in $2.5 million related to closed clubs.

Gallagher said four to six clubs are targeted for closure as it continues its HVLP turnaround phase.

TSI’s club operating expenses increased $1.7 million (3.4 percent) in the first quarter compared to first quarter 2014, primarily due to increased advertising spending related to the introduction of the HVLP strategy.

The HVLP strategy affected TSI’s payroll and operating expenses for a total of $2.3 million (5.1 percent) in the first quarter compared to first quarter 2014. Separate from the $1.3 million paid to Giardina, TSI reported increased payroll expenses of $506,000 from personal training directly related to higher personal training revenue.

Gallagher told analysts that personal training revenue was at the highest quarterly level in company history (up eight percent) and said the HVLP model is supporting the personal training product.

The HVLP conversion cost $1.4 million in payroll expenses due to higher wages and hours paid to membership consultants and front desk staffing, though it was offset by lower commissions of $900,000.

TSI is planning to invest $30 million to $34 million in capital expenditures in 2014, which includes $7 million to $8 million related to planned openings. Those openings include one club, the Manhattan BFX Studio that opened in March and two future BFX Studio locations.

Approximately $16 million to $18 million is planned to upgrade existing clubs and $4 million to $5 million is related to major renovations at certain clubs. The expenditures are expected to be funded by cash flow from operations and available cash.

TSI operates clubs under the brands of Boston Sports Clubs, Philadelphia Sports Clubs, New York Sports Clubs and Washington Sports Clubs.

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