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Town Sports International Holdings, Inc. Announces First Quarter 2014 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 first quarter ended March 31, 2014.

First Quarter Overview:

  • Total member count decreased 1,000 members, to 496,000 members at the end of Q1 2014 versus an increase of 2,000 in Q1 2013.
  • Membership attrition averaged 3.5% per month in both Q1 2014 and Q1 2013.
  • Revenue decreased 2.7% in Q1 2014 compared to Q1 2013.
  • Comparable club revenue decreased 4.7% in Q1 2014 compared to a decrease of 2.4% in Q1 2013.
  • Ancillary club revenue decreased 4.0% in Q1 2014 compared to Q1 2013.
  • Personal training revenue increased 2.9% in Q1 2014 compared to Q1 2013 and represented 14.6% of total revenue in Q1 2014 as compared to 13.8% in Q1 2013.
  • Net loss was $3.5 million in Q1 2014 compared to net income of $4.2 million in Q1 2013. Loss per share was $0.15 in Q1 2014 compared to earnings per share of $0.18 in Q1 2013. Q1 2014 results included the following items:
    • Q1 2014 results were impacted by a $2.1 million, or $0.09 net loss per share, related to fixed asset impairment charges in connection with three underperforming clubs and goodwill impairment charges related to one outlier club.
  • Adjusted EBITDA was $14.1 million in Q1 2014, a decrease of $10.2 million, or 42.0%, when compared to Adjusted EBITDA of $24.2 million in Q1 2013 (Refer to the reconciliation below).
  • Following the end of the quarter, the Company declared a cash dividend of $0.16 per share payable on June 5, 2014 to shareholders of record at the close of business on May 22, 2014. The aggregate amount to be paid will be approximately $3.9 million, based on shares outstanding as of April 24, 2014.
  • In December 2013, 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. Subject to various closing conditions, the Company expects the transaction to be completed on or before July 14, 2014.

Robert Giardina, Chief Executive Officer of TSI, commented: “Our first quarter results reflect some of the near-term challenges we are facing on the membership front combined with higher than planned operating expenses driven in large part by unusually cold winter weather in the Northeast. However, the longer-term combination of an increased consumer focus on fitness and health and our initiatives to capture share of this expanding market keeps us excited, motivated, and optimistic about our medium to long-term growth plans. We will continue to aggressively pursue our strategic initiates in order to be well-positioned for the opportunities we see ahead.”

 

First Quarter Ended March 31, 2014 Financial Results:

                   
Revenue (in thousands):
 
Quarter Ended March 31,
2014 2013
Revenue % Revenue Revenue % Revenue % Variance
Membership dues $ 88,636 76.5 % $ 90,742 76.1 % (2.3) %
Joining fees   3,209 2.8 %   3,825 3.2 % (16.1) %
Membership revenue   91,845 79.3 %   94,567 79.3 % (2.9) %
Personal training revenue 16,910 14.6 % 16,430 13.8 % 2.9 %
Other ancillary club revenue   5,725 4.9 %   7,138 6.0 % (19.8) %
Ancillary club revenue 22,635 19.5 % 23,568 19.8 % (4.0) %
Fees and other revenue   1,423 1.2 %   1,029 0.9 % 38.3 %
Total revenue $ 115,903 100.0 % $ 119,164 100.0 % (2.7) %
 

Total revenue for Q1 2014 decreased $3.3 million, or 2.7% compared to Q1 2013. Revenue at clubs operated for over 12 months (“comparable club revenue”) decreased 4.7% in Q1 2014, reflecting a 2.7% decrease in membership, a 1.7% decrease in the combined effect of ancillary club revenue, joining fees and other revenue as well as a 0.3% decrease in the price of our dues and other fees.

 
Operating expenses:
    Quarter Ended March 31,    
2014     2013 Expense %
Expense % of Revenue Variance
Payroll and related 38.5 % 37.4 % 0.1 %
Club operating 42.8 % 37.1 % 12.2 %
General and administrative 7.1 % 5.7 % 22.0 %
Depreciation and amortization 10.2 % 10.2 % (2.9) %
Impairment of fixed assets 3.1 % - % N/A
Impairment of goodwill 0.1 % - % N/A
Operating expenses 101.8 % 90.4 % 9.6 %
 

Total operating expenses increased $10.3 million, or 9.6%, in Q1 2014 compared to Q1 2013. Operating margin was (1.8)% for Q1 2014 compared to 9.6% in Q1 2013. The total months of club operation increased 2.8% in Q1 2014 at 480 months compared to 467 months in the prior year. The increase in total operating expenses can also be attributed to the following factors:

Payroll and related . Payroll and related expenses in Q1 2014 was relatively flat to Q1 2013.

Club operating . Club operating expenses increased $5.4 million, or 12.2% in Q1 2014 compared to Q1 2013, primarily due to increases in rent and occupancy expenses related to the acquisition of new clubs as well as four additional clubs scheduled to open in 2014, and increases in utilities expense.

General and administrative. The increase of $1.5 million, or 22.0%, in Q1 2014 compared to Q1 2013 was primarily due to increases in computer maintenance expenses related to the implementation of our new club operating system and general liability insurance expense and increases in audit and tax fees. These increases were offset by a decrease in legal fees and club acquisition related fees incurred during Q1 2013.

Depreciation and amortization . In Q1 2014 compared to Q1 2013, depreciation and amortization expense decreased by $350,000, or 2.9%.

Impairment of fixed assets. For Q1 2014, we recorded impairment losses of $3.6 million on fixed assets at three underperforming clubs. We did not have fixed asset impairments in the three months ended March 31, 2013.

Impairment of goodwill. For Q1 2014, we recorded an impairment loss of $137,000 on goodwill at one of our outlier clubs as a result of our annual goodwill impairment test as of February 28, 2014. We did not have goodwill impairment in Q1 2013.

Net loss for Q1 2014 was $3.5 million compared to net income of $4.2 million for Q1 2013.

Cash flow from operating activities for Q1 2014 totaled $14.4 million, a decrease of $7.4 million from Q1 2013, primarily driven by the decrease in overall earnings.

Second 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, our outlook for the second quarter of 2014 includes the following:

  • Revenue for Q2 2014 is expected to be between $116.0 million and $117.0 million versus $120.1 million for Q2 2013. As percentages of revenue, we expect Q2 2014 payroll and related expenses to be approximately 38.3% and club operating expenses to approximate 41.3%. We expect general and administrative expenses to approximate $7.3 million, depreciation and amortization to approximate $12.1 million and net interest expense to approximate $4.8 million.
  • We expect net results to be breakeven, and diluted earnings per share to be approximately $0.00 per share, assuming a 43% effective tax rate and approximately 24.7 million weighted average fully diluted shares outstanding.
  • We estimate that Adjusted EBITDA will approximate $17.0 million in Q2 2014.

In addition, over the course of the next quarter, we plan to review our club portfolio and will likely target approximately 5% of our lower performing clubs for closure. This will enable us to absorb a portion of these members into other existing clubs while saving on certain club operating expenses such as payroll and utilities. We may incur certain charges in connection with these closings.

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