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Town Sports International Holdings, Inc. Announces Fourth Quarter And Full-Year 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 fourth quarter and full-year ended December 31, 2013.

Fourth Quarter Overview:

  • Total member count decreased 10,000 to 497,000 in Q4 2013 and decreased by 13,000 for the full-year 2013.
  • Membership monthly attrition averaged 3.4% per month in Q4 2013 compared to 3.5% per month in Q4 2012.
  • Revenue was $113.9 million in Q4 2013, a decrease of 0.3% compared to Q4 2012.
  • Comparable club revenue decreased 1.3% in Q4 2013.
  • Diluted loss per share was $0.03 in Q4 2013 compared to diluted loss per share of $0.02 in Q4 2012.
  • Q4 2013 results included a favorable out of period rental income adjustment, a loss related to debt extinguishment, severance related to the departure of an executive officer, legal and consulting expenses related to the pending sale of our 86 th Street building in Manhattan, a payroll bonus in connection with the quarterly dividend paid, and fixed asset impairment charges for one underperforming club. These items amounted to an aggregate net charge of approximately $1.2 million before taxes (approximately $738,000, net of taxes), or approximately $0.03 per diluted share.
  • Q4 2012 results included fixed asset write-offs related to four clubs that sustained damage as a result of Hurricane Sandy, administration and incremental compensation expenses related to the special dividend payment and related stock option modifications and discrete tax benefits. These items amounted to an aggregate net charge of approximately $6.3 million before taxes (approximately $3.4 million net of taxes) or approximately $0.14 per diluted share.
  • Adjusted EBITDA was $18.4 million in Q4 2013, a decrease of $4.8 million, or 20.6%, when compared to Adjusted EBITDA of $23.2 million in Q4 2012 (Refer to the reconciliation below).
  • Following the end of the quarter, the Company announced a quarterly cash dividend of $0.16 per share payable on March 5, 2014 to shareholders of record at the close of business on February 24, 2014. The aggregate amount to be paid will be approximately $3.9 million, based on shares outstanding as of February 18, 2014.
  • In Q4 2013, the Company refinanced its credit facility with a new $325.0 million Term Loan Facility and a $45.0 million revolving loan facility. The Company expects annual interest savings of approximately $3.0 million as a result of this refinancing.
  • The Company entered into an agreement to sell its property located at 151 East 86th Street, New York to an affiliate of Stillman Development International, LLC for a price of $82.0 million, subject to certain adjustments. The transaction is subject to various closing conditions, and the parties expect the transaction to be completed on or about March 31, 2014.

Robert Giardina, Chief Executive Officer of TSI, commented: “This is an exciting time for TSI. The fitness industry is growing and evolving faster than anytime I have seen in my 39 years in the business. In 2013 we made progress aligning our offering in order to benefit from these changes. While we are not satisfied with our 2013 financial results, we made advancements in a number of important areas like personal training, development of our exciting new BFX Studio brand, pricing improvements which were accompanied by stable attrition rates, systems investments, capital structure improvements and return of capital to shareholders with our establishment of a quarterly dividend. With our excellent real estate portfolio, strong financial position and experienced management team we are poised to capture our fair share of the growing health and fitness industry revenues.”

Fourth Quarter Ended December 31, 2013 Financial Results:

             
Revenue (in thousands):
 
Quarter Ended December 31,
2013 2012
Revenue % Revenue Revenue % Revenue % Variance
Membership dues $ 87,886

77.1

% $ 89,176 78.1 % (1.4 ) %
Joining fees   3,108 2.7 %   3,329 2.9 % (6.6 ) %
Membership revenue   90,994

79.8

%   92,505 81.0 % (1.6 ) %
Personal training revenue 15,920 14.0 % 14,772 12.9 % 7.8 %
Other ancillary club revenue   4,758 4.2 %   5,997 5.3 % (20.7 ) %
Ancillary club revenue 20,678 18.2 % 20,769 18.2 % (0.4 ) %
Fees and other revenue   2,235 2.0 %   942 0.8 % 137.3 %
Total revenue $ 113,907 100.0 % $ 114,216 100.0 % (0.3 ) %
 

Total revenue for Q4 2013 decreased $0.3 million, or 0.3%, compared to Q4 2012. The decrease in revenue for Q4 2013 is primarily comprised of a $1.7 million decrease at our clubs opened or acquired prior to December 31, 2011, including $300,000 at a club temporarily closed due to Hurricane Sandy and re-opened in December 2013, and approximately $800,000 decrease at clubs closed after December 31, 2011. These decreases were partially offset by an increase of approximately $1.9 million at clubs opened or acquired subsequent to December 31, 2011 and an increase of approximately $424,000 in fees and other revenue related to an adjustment to deferred lease receivable affecting subtenant rental income.

Q4 2012 revenues were negatively impacted as a result of lost operating days from Hurricane Sandy. At the height of the storm, 131 of our 160 clubs were closed with 16 clubs that remained closed for over a week and two clubs that remained closed through the end of 2012. In Q1 2013, one of these clubs was permanently closed.

Operating expenses:            
Quarter Ended
December 31,
2013 2012
Expense %
Expense % of Increase
Revenue (Decrease)
Payroll and related 37.7 % 39.7 % (5.4 ) %
Club operating

40.5

% 37.6 % 7.3 %
General and administrative 6.5 % 5.6 % 15.8 %
Depreciation and amortization 10.5 % 10.5 % 0.2 %
Impairment of fixed assets 0.1 % 2.8 % (95.4 ) %
Operating expenses 95.3 % 96.2 % (1.2 ) %
 

Total operating expenses decreased 1.2% for Q4 2013 compared to Q4 2012. Operating margin was 4.7% for Q4 2013 compared to 3.8% for Q4 2012.

Payroll and related. The decrease in payroll and related expenses in Q4 2013 was primarily related to a $2.5 million bonus payment made in connection with the special dividend paid during Q4 2012, lower management incentive bonuses in Q4 2013 resulting from not meeting certain performance targets, and reductions in club-related payroll, including lower bonuses and commissions.

Club Operating. The increase in club operating expenses in Q4 2013 included a 1.5% increase in number of club months of operation. Also, increases in occupancy expenses, utilities and repairs and maintenance contributed to the increase.

General and administrative . The increase in general and administrative expenses in Q4 2013 compared to Q4 2012 was primarily due to the increases in consulting and computer maintenance expenses related to the implementation of our new club operating system as well as costs related to the upgrade and enhancement of our phone and data network. The increases were partially offset by the reduction in dividend administration fees incurred in connection with the payment and administration of the special cash dividend payment paid during Q4 2012.

Depreciation and amortization. Depreciation and amortization expense for Q4 2013 remained flat to Q4 2012.

Impairment of fixed assets. In Q4 2013, we recorded $147,000 of fixed asset impairment charges related to an underperforming club. In Q4 2012, we recorded fixed asset impairment charges of $3.2 million related to the write-off of fixed assets at four of our clubs that sustained damages from Hurricane Sandy.

Net loss for Q4 2013 was $695,000 compared to net loss of $453,000 for Q4 2012.

Full-Year Ended December 31, 2013 Financial Results

For the full-year ended December 31, 2013, total revenue decreased $8.8 million, or 1.8%, compared to full-year 2012. Operating margin was 8.6% for 2013 compared to 8.7% for full-year 2012. Net income for 2013 was $12.3 million compared to $12.0 million in 2012.

Cash flow from operating activities for full-year 2013 totaled $67.4 million, an increase of $7.3 million from full-year 2012 driven primarily by the decrease in cash paid for interest of $4.0 million and the timing of certain payments and collections made associated with accounts receivable, accounts payable and accrued expenses.

First Quarter 2014 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, excluding any impact of the possible completion of the sale of our East 86 th Street property, our outlook for the first quarter of 2014 includes the following:

  • Revenue for Q1 2014 is expected to be between $116.5 million and $117.5 million versus $119.2 million for Q1 2013. As percentages of revenue, we expect Q1 2014 payroll and related expenses to approximate 38.3% and club operating expenses to approximate 41.4%. We expect general and administrative expenses to approximate $7.5 million, depreciation and amortization to approximate $12.0 million and net interest expense to approximate $4.7 million.
  • We expect net income for Q1 2014 to be between $0 and $250,000, and diluted earnings per share to be in the range of $0.0 per share to $0.01 per share, assuming a 39% effective tax rate and 24.5 million weighted average fully diluted shares outstanding.
  • We estimate that EBITDA will approximate $17.0 million in Q1 2014.

Investing Activities Outlook:

For the year ending December 31, 2014, we currently plan to invest $45.0 million to $50.0 million in capital expenditures compared to $33.8 million of capital expenditures in 2013 when including acquisition purchase prices. The 2014 amount includes approximately $20.0 million to $22.0 million related to potential 2014 and 2015 club openings, including those under our new BFX Studio concept. Total capital expenditures also includes approximately $18.0 million to $20.0 million to continue enhancing or upgrading existing clubs and approximately $4.0 million to $4.5 million principally related to major renovations at clubs with recent lease renewals. We also expect to invest approximately $3.0 million to $3.2 million to continue 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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