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Town Sports International Holdings, Inc. Announces Second Quarter 2013 Financial Results

Stocks in this article: CLUB

Town Sports International Holdings, Inc. (“TSI” or the “Company”) (NASDAQ: CLUB), a leading owner and operator of health clubs located primarily in major cities from Washington, DC north through New England, operating under the brand names “New York Sports Clubs,” “Boston Sports Clubs,” “Washington Sports Clubs” and “Philadelphia Sports Clubs,” announced its results for the second quarter ended June 30, 2013.

Second Quarter Overview:

  • Total member count remained at the same level with approximately 512,000 members at the end of Q2 2013 and Q1 2013.
  • Membership attrition averaged 3.3% per month in Q2 2013 compared to 3.2% per month in Q2 2012.
  • Revenue decreased 1.7% in Q2 2013 compared to Q2 2012.
  • Comparable club revenue decreased 1.7% in Q2 2013 compared to an increase of 2.1% in Q2 2012.
  • Ancillary club revenue decreased 4.3% in Q2 2013 compared to Q2 2012.
  • Net income increased 14.4% in Q2 2013 to $6.2 million compared to $5.4 million in Q2 2012. Diluted earnings per share were $0.25 in Q2 2013 compared to diluted earnings per share of $0.23 in Q2 2012. Q2 2013 results were favorably impacted by a $0.06 per diluted share net gain comprised of a $2.5 million insurance recovery related to our property damage claims in connection with Hurricane Sandy partially offset by a fixed asset impairment charge of $128,000 related to one underperforming club.
  • Adjusted EBITDA was $25.7 million in Q2 2013, a decrease of $1.2 million, or 4.3%, when compared to Adjusted EBITDA of $26.8 million in Q2 2012 (Refer to the reconciliation below).

Robert Giardina, Chief Executive Officer of TSI, commented: “Our overall results were broadly in line with our expectations with a sequential improvement in personal training revenues as we continue to make nice strides with our personal training membership product. We are particularly pleased to have exceeded our EBITDA expectations for the quarter and generated $15 million in free cash flow to end the quarter with a cash balance of $69.5 million. After a soft start to the year, which we believe was impacted by macro factors, our overall business is back on plan as we head into the third quarter. We are excited about the direction of our business, including an outlook for improved comparable club revenue, driven by personal training and pricing, in the back half of the year.”

Second Quarter Ended June 30, 2013 Financial Results:

                   
Revenue (in thousands):
 
Quarter Ended June 30,
2013 2012
Revenue % Revenue Revenue % Revenue % Variance
Membership dues $ 90,882 75.7 % $ 92,944 76.0 % (2.2 ) %
Joining fees   3,823 3.1 %   2,686 2.2 % 42.3 %
Membership revenue   94,705 78.8 %   95,630 78.2 % (1.0 ) %
Personal training revenue 17,615 14.7 % 17,625 14.4 % (0.1 ) %
Other ancillary club revenue   6,474 5.4 %   7,549 6.2 % (14.2 ) %
Ancillary club revenue 24,089 20.1 % 25,174 20.6 % (4.3 ) %
Fees and other revenue   1,318 1.1 %   1,437 1.2 % (8.3 ) %
Total revenue $ 120,112 100.0 % $ 122,241 100.0 % (1.7 ) %
 

Total revenue for Q2 2013 decreased $2.1 million, or 1.7%, compared to Q2 2012. Revenue at clubs operated for over 12 months (“comparable club revenue”) decreased 1.7% in Q2 2013. Memberships at our comparable clubs were down 3.1% which was partially offset by a 1.4% increase in the price of our dues and fees.

The increase in joining fees revenue of 42.3% was, in part, due to the effect of the lower estimated average membership life of 24 months in effect for our unrestricted members during Q2 2013 compared to a higher estimated average membership life of 28 months in effect for Q2 2012. The lower amortizable life in the current period resulted in higher joining fees revenue recognition as joining fees were amortized over a shorter estimated average membership life.

       
Quarter Ended June 30,
2013     2012
Expense %
Expense % of Revenue Variance
Payroll and related 36.7 %     37.0 % (2.8 ) %
Club operating 36.7 % 36.5 % (1.1 ) %
General and administrative 5.8 % 5.0 % 13.3 %
Depreciation and amortization 10.3 % 10.2 % (0.1 ) %
Insurance recovery related to damaged property (2.1 ) % - % N/A %
Impairment of fixed assets 0.1   % - % N/A %
Operating expenses 87.5   % 88.7 % (3.1 ) %
 

Total operating expenses decreased $3.3 million, or 3.1%, in Q2 2013 compared to Q2 2012. Operating margin was 12.5% for Q2 2013 compared to 11.3% in Q2 2012. The total months of club operation increased 0.2% from 480 in Q2 2012 to 481 in Q2 2013. The decrease in operating expense was impacted, in part, by the receipt of $2.5 million of insurance proceeds received in connection with property damaged by Hurricane Sandy as well as the following factors:

Payroll and related . Payroll and related expenses decreased $1.3 million, or 2.8%, to $44.0 million in Q2 2013 compared to $45.3 million in Q2 2012. The decrease was due to decreases in bonuses and commissions as well as decreases in management incentive bonuses.

Club operating . Club operating expenses decreased $495,000, or 1.1%, to $44.1 million in Q2 2013 compared to $44.6 million in Q2 2012, primarily due to declines in rent and occupancy expenses and utilities, partially offset by increased repairs and maintenance expense.

General and administrative. The increase in general and administrative expenses in Q2 2013 was impacted by increases in insurance expense and increases in computer maintenance expense related to the implementation of a new club operating system.

Depreciation and amortization . Depreciation and amortization expense for Q2 2013 was relatively flat to the same period in the prior year. Modest decreases in depreciation were offset by an acceleration of depreciation of $331,000 at a single club where we have a planned near-term reduction of rental space at the location.

Net income for Q2 2013 was $6.2 million compared to net income of $5.4 million for Q2 2012.

Cash flow from operating activities for the six months ended June 30, 2013 totaled $44.5 million, an increase of $9.5 million from the corresponding period in 2012. This increase was primarily driven by increases in overall earnings, a decrease in cash paid for interest of $1.2 million and cash flows resulting from the timing of certain payments and collections made associated with our accounts receivable.

Third Quarter 2013 Financial Outlook:

Based on the current business environment, recent performance and current trends in the marketplace and subject to the risks and uncertainties inherent in forward-looking statements, our outlook for the third quarter of 2013 includes the following:

  • Revenue for Q3 2013 is expected to be between $118.5 million and $119.5 million versus $119.6 million for Q3 2012. As percentages of revenue, we expect Q3 2013 payroll and related expenses to be approximately 37.4% and club operating expenses to approximate 39.2%. We expect general and administrative expenses to approximate $6.8 million, depreciation and amortization to approximate $12.5 million and net interest expense to approximate $5.5 million.
  • We expect net income for Q3 2013 to be between $2.0 million and $2.5 million, and diluted earnings per share to be in the range of $0.08 per share to $0.10 per share, assuming a 39% effective tax rate and approximately 24.5 million weighted average fully diluted shares outstanding.
  • We estimate that EBITDA will approximate $21.75 million in Q3 2013.

Investing Activities Outlook:

For the year ending December 31, 2013, we are lowering our capital expenditures guidance and now plan to invest $34.0 million to $37.0 million in capital expenditures. This is a reduction from our previous expectation of $37.0 million to $42.0 million. The amount includes approximately $10.0 million to $12.0 million related to potential 2013 and 2014 club openings, inclusive of amounts for our recently acquired Fitcorp chain in Boston and planned renovations at these clubs as well as the separate single club acquired in Manhattan. The total capital expenditures also includes approximately $17.0 million to $18.0 million to continue enhancing or upgrading existing clubs and approximately $4.5 million to $5.0 million principally related to major renovations at clubs with recent lease renewals and to upgrade our in-club entertainment system network. We also expect to invest approximately $2.5 million to $3.0 million to enhance our management information and communication systems. We expect these capital expenditures to be funded by cash flow provided by operations and available cash on hand.

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