Town Sports Looks Better Slimmer

Town Sports Looks Better Slimmer

Owner of Northeast and Mid-Atlantic gym chains such as New York Sports Club and Washington Sports Club, Town Sports is flirting with its 52-week highs even though the company delivered lackluster earnings for the third quarter. Some elements of the gym business are compelling -- recurring revenue and high ROIC -- while also being very susceptible to shifts in the economic environment. When economies head south, many gym-goers decide that running around the block will get the job done and save the monthly membership dues. The question for Town Sports is whether the company can leverage those bright spots of the business and put a plug in the membership drain.

Earnings recap
Though memberships still dropped year over year, it appears that Town Sports is slowing the bleed. The company lost 5,000 members in the quarter as opposed to 7,000 the year before.

Almost all of the financial figures drifted down slightly. Revenue shrank 2.1% while same-club sales dipped 1.7%. In the year-ago quarter, the gyms saw a 1% rise in comparable sales. As has been the trend for some time, personal training provides the brightest spot in the company's earnings -- up 5% for the year and now taking up 14% of the company's total sales.

Even with the high margin and growing personal training business, net income sank 17% for the quarter to just $2.6 million. EPS went from $0.13 in 2012 to $0.10 in this year's third quarter.

Thus far this year, the company has generated a healthy $50.5 million in cash flow.

Looking ahead to the fourth quarter, management expects a small revenue gain (around $1 million more than last year) and net income as much as $2.5 million. EBITDA is guided at $21.5 million.

What it all means
One thing investors should note is that Town Sports recently refinanced at a superior rate, which should lower interest expense materially and help generate better cash flows. The third and fourth quarter of this year are not particularly exciting, but it's good to see the company focusing on membership retention via competitive pricing. In the meantime, the personal training business is getting better and better -- costing the company very little. Town Sports is also considering the sale of a very valuable property in Manhattan -- worth in excess of $80 million, according to management. This would give the company a tremendous cash boost and likely send the stock higher.

In the short term, we can expect some more appealing numbers from the first quarter of next year. The new year is always the best for gyms as people reliably want to get their lives back on track starting Jan. 1, every single year. It's a delayed Christmas present for health clubs like Town Sports.

All in all, the current operating business for Town Sports is so-so, but the long-term holds considerable potential given the focus on high-value sales (personal training), better debt positioning, and real-estate value.

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