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

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 third quarter ended September 30, 2013.

Third Quarter Overview:

  • Total member count decreased 5,000 members, to 507,000 members at the end of Q3 2013 versus a decrease of 7,000 members in Q3 2012.
  • Membership attrition averaged 3.7% per month in both Q3 2013 and Q3 2012.
  • Revenue decreased 2.1% in Q3 2013 compared to Q3 2012.
  • Comparable club revenue decreased 1.7% in Q3 2013 compared to an increase of 1.0% in Q3 2012.
  • Ancillary club revenue decreased 4.0% in Q3 2013 compared to Q3 2012.
  • Personal training revenue increased 5.0% in Q3 2013 compared to Q3 2012 and represented 14.0% of total revenue in Q3 2013 as compared to 13.1% in Q3 2012.
  • Net income decreased 17.8% in Q3 2013 to $2.6 million compared to $3.2 million in Q3 2012. Diluted earnings per share were $0.10 in Q3 2013 compared to diluted earnings per share of $0.13 in Q3 2012. Q3 2013 and Q3 2012 results included the following items:
    • Q3 2013 results were favorably impacted by a $0.01 per diluted share net gain comprised of a $694,000 insurance recovery related to our property damage claims primarily in connection with Hurricane Sandy partially offset by a fixed asset impairment charge of $439,000 related to one underperforming club.
    • Q3 2012 results included a net loss of $(0.02) per diluted share comprised of $(0.06) per share refinancing related charges, partially offset by a $0.03 per share benefit from additional fees and other revenue realized in connection with a termination of a long-term marketing arrangement with a third party advertiser and a $0.01 per share discrete tax benefit.
  • Adjusted EBITDA was $21.7 million in Q3 2013, a decrease of $3.0 million, or 12.2%, when compared to Adjusted EBITDA of $24.7 million in Q3 2012 (Refer to the reconciliation below).

Robert Giardina, Chief Executive Officer of TSI, commented: “Our third quarter bottom-line results were in line with our expectations. We were disappointed we did not meet our revenue expectations for the quarter and we believe the steps we are taking on the pricing and personal training membership fronts will begin to benefit us as we head into 2014. Strategically, we are focused on leveraging the investments we have made in our clubs into pricing power for the core business while adding offerings for current and new members to continue to improve the overall fitness experience. We are excited about the possibility of refinancing our debt at lower borrowing costs while extending our term and expanding on our ability to return value to shareholders.”

 

Third Quarter Ended September 30, 2013 Financial Results:

                     
Revenue (in thousands):
 

 

Quarter Ended September 30,

 

2013

2012

 

Revenue

% Revenue Revenue % Revenue % Variance
Membership dues $ 89,251 76.3 % $ 90,661 75.8 % (1.6) %
Joining fees     3,636 3.1 %   3,014 2.5 % 20.6 %
Membership revenue   92,887 79.4 % 93,675 78.3 % (0.8) %
Personal training revenue 16,402 14.0 % 15,623 13.1 % 5.0 %
Other ancillary club revenue     6,350 5.4 %   8,067 6.7 % (21.3) %
Ancillary club revenue 22,752 19.4 % 23,690 19.8 % (4.0) %
Fees and other revenue     1,403 1.2 %   2,247 1.9 % (37.6) %
Total revenue   $ 117,042 100.0 % $ 119,612 100.0 % (2.1) %
 

Total revenue for Q3 2013 decreased $2.6 million, or 2.1% compared to Q3 2012, which included a benefit from an acceleration of in-club advertising revenue which added approximately $1.2 million to Q3 2012 revenue. Revenue at clubs operated for over 12 months (“comparable club revenue”) decreased 1.7% in Q3 2013. Memberships at our comparable clubs were down 3.0% which was partially offset by a 1.1% increase in the price of our dues and fees and a 0.2% increase in the combined effect of ancillary club revenue, initiation fees and other revenue.

 
Operating expenses:
  Quarter Ended September 30,    
2013     2012
Expense %
Expense % of Revenue Variance
Payroll and related 37.1 %     36.5 % (0.5) %
Club operating 38.7 % 38.7 % (2.1) %
General and administrative 6.2 % 4.7 % 28.4 %
Depreciation and amortization 10.7 % 10.2 % 3.3 %
Insurance recovery related to damaged property (0.6) % - % N/A %
Impairment of fixed assets 0.4 % 0.2 % 83.7 %
Operating expenses 92.5 % 90.3 % 0.3 %
 

Total operating expenses increased $320,000, or 0.3%, in Q3 2013 compared to Q3 2012. Operating margin was 7.5% for Q3 2013 compared to 9.7% in Q3 2012, primarily as a result of the increase in general and administrative expenses and lower revenues. The total months of club operation was relatively flat in Q3 2013 at 479 months compared to 480 months in Q3 2012. The increase in operating expense was offset, in part, by the receipt of $694,000 of insurance proceeds in Q3 2013 received primarily in connection with property damaged by Hurricane Sandy and was impacted by the following factors:

Payroll and related . Payroll and related expenses in Q3 2013 was relatively flat to Q3 2012.

Club operating . Club operating expenses decreased $970,000, or 2.1%, to $45.3 million in Q3 2013 compared to $46.3 million in Q3 2012, primarily due to declines in electric utilities expense and repairs and maintenance expense.

General and administrative. The increase of $1.6 million in general and administrative expenses in Q3 2013 was primarily due to increases in insurance expense, due in part to favorable loss reserve adjustments in the prior year, as well as increases in consulting and computer maintenance expenses related to the implementation of a new club operating system.

Depreciation and amortization . The increase in depreciation and amortization expense in Q3 2013 was primarily due to the increase in the fixed and intangible asset base from club acquisitions completed earlier in the year.

Impairment of fixed assets. In Q3 2013, we recorded fixed asset impairment charges of $439,000, representing the write-off of fixed assets of one underperforming club. In Q3 2012, we recorded a fixed asset impairment charge of $239,000 related to one underperforming club.

Net income for Q3 2013 was $2.6 million compared to net income of $3.2 million for Q3 2012.

Cash flow from operating activities for the nine months ended September 30, 2013 totaled $50.5 million, an increase of $6.5 million from the corresponding period in 2012. This increase was primarily driven by a decrease in cash paid for interest of $2.9 million and cash flows resulting from the timing of certain payments and collections made associated with our accounts payable, accrued expenses, accounts receivable and deferred membership costs.

Fourth 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 fourth quarter of 2013 includes the following:

  • Revenue for Q4 2013 is expected to be between $115.0 million and $116.0 million versus $114.2 million for Q4 2012. As percentages of revenue, we expect Q4 2013 payroll and related expenses to be approximately 37.0% and club operating expenses to approximate 39.0%. We expect general and administrative expenses to approximate $7.0 million, depreciation and amortization to approximate $12.5 million and net interest expense to approximate $5.5 million.
  • We expect net income for Q4 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 24.7 million weighted average fully diluted shares outstanding.
  • We estimate that EBITDA will approximate $21.5 million in Q4 2013.

As previously announced, the Company is seeking to refinance its existing senior secured credit facility, and the outlook for the fourth quarter of 2013 above does not reflect any increases or decreases to fees and expenses associated with such refinancing.

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