Is Town Sports Ready to Get Back in Shape?

Before you go, we thought you'd like these...
Before you go close icon

Is Town Sports International making any headway in its challenged business? The company has faced industry tailwinds, such as increased interest in fitness and an overall desire to be healthier throughout much of the United States, yet it has seemed unable to channel these trends into bottom-line improvements. Competition is greater than ever, with new players coming out of the tech world and improved offerings from at-home fitness entertainment services, but these brick-and-mortar gyms can provide attractive returns if run properly. With Town Sports' neighborhood focus, it has the potential to be a winner in the cutthroat industry. Let's take a look at the company as it approaches the latest earnings release.

Model competition
Ubergyms like Equinox and Life Time Fitness are providing premium experiences in lush, gigantic facilities that are as much about socializing as they are fitness. Town Sports plays a different game. The company has smaller facilities that operate under variations of the "Sports Club" moniker, depending on the town. While some of the facilities are higher market, many are standard issue -- weight rooms, running machines, and perhaps a yoga studio or spinning room.

The appeal of going to Town Sports is its convenience and relatively low cost, yet it's questionable whether that offer is holding up, as it's sandwiched between the premium gyms and new, lower-cost fitness alternatives, such as the Fitbit or a la carte outdoor fitness classes run by enterprising healthy people. For the last couple of years, Town Sports' membership growth has been negative, with the high-margin personal-training segment supporting an otherwise struggling business.

It's not that the brick-and-mortar overhead makes it too expensive; just look at Life Time Fitness for comparison. This company is moving toward even bigger facilities, like a 128,000-square-foot location it recently opened in Laguna Beach, Calif., while its sales and net income have grown steadily over the last few years. The stock has still lagged the broad market gains in recent years, though it is infinitely better than Town Sports' two-year loss of more than 30%.

Looking ahead
As mentioned above, Town Sports has a bright spot in its personal-training business. Management remains focused on enhancing and growing these offerings, which should keep things steady while the company homes in on customer retention.

In the coming earnings report, investors can expect some better numbers as the first quarter is always a great one for gyms (thanks to New Year's resolutions), though keep an eye on year-over-year membership trends. At the tail end of last year, the company saw some stabilization in its customer attrition, but we need more evidence before giving the all-clear.

All in all, Town Sports isn't too appealing a buy, even near its annual lows. There are better-performing gyms in the space trading at higher yet ultimately more attractive multiples. Life Time Fitness has an EV/EBITDA of 8.34 times. Town Sports trades at just five times trailing EBITDA, but it doesn't own the majority of its gyms (Life Time owns 70%-plus of its locations). The company certainly has the potential to get things moving the other way, but wait for further proof.

The biggest tech innovation in years
If you thought wearable tech like the Fitbit was amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

The article Is Town Sports Ready to Get Back in Shape? originally appeared on

Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading