Town Sports International Holdings, Inc. Announces Third Quarter 2015 Financial Results
Posted: November 2, 2015 in Chains
Town Sports International
NEW YORK, N.Y. – Town Sports International Holdings, Inc. (“TSI” or the “Company”) (NASDAQ:CLUB), one of the leading owners and operators 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”, “Philadelphia Sports Clubs” and “BFX Studio” announced its results for the third quarter ended September 30, 2015.
Third Quarter Overview:
- Total member count increased 14,000 to 534,000 during Q3 2015 compared to a decrease of 9,000 in Q3 2014.
- Management executed cost savings and overhead reduction initiatives which resulted in labor savings of $2.4 million, primarily in September, which we expect to result in approximately $25.0 million of savings on an annualized basis.
- Adjusted EBITDA was $6.6 million in Q3 2015 (refer to the reconciliation below), an increase of 19.6% compared to Q2 2015.
- As of September 30, 2015, our cash position was $88.3 million (approximately $41.2 million of which was held at the holding company) for a net debt level of $217.7 million compared to a net debt level of $214.8 million as of December 31, 2014.
- Membership monthly attrition averaged 4.4% per month in Q3 2015 compared to 4.0% per month in Q3 2014.
- Net loss was $22.0 million in Q3 2015, which included a non-cash fixed asset impairment charge of $12.4 million. This charge did not have any tax effect due to the impact of the Company’s tax valuation allowance in Q3 2015. Net loss was $867,000 in Q3 2014, which included a $1.6 million ($928,000, net of taxes) occupancy gain related to club closures.
Patrick Walsh, Executive Chairman of TSI, commented: “We are excited to welcome three new members to our management team, including a Chief Operating Officer, a Chief Marketing Officer and a General Counsel. The Company remains focused on generating profitable membership growth and during the quarter, our membership increased to 534,000, a net member gain of 14,000. In addition, the Company has realized labor savings that should result in more than $25 million of annualized cost savings. Further cost saving initiatives are being analyzed that will potentially result in additional savings.”
Third Quarter Ended September 30, 2015 Financial Results:
Total revenue for Q3 2015 decreased $8.8 million, or 7.8%, compared to Q3 2014, primarily due to existing members downgrading their memberships to those with lower monthly dues and new members enrolling at lower rates, both as a result of the new pricing strategy. The effect of existing members opting for lower dues and new members enrolling at lower rates was only partially offset by an increase in membership sales volume. We continue to consider pricing adjustments in order to increase revenue while also driving membership growth.
Payroll and related. Payroll and related expenses decreased $1.1 million, or 2.5%, in Q3 2015 compared to Q3 2014. Overhead and club expenses decreased $2.4 million primarily associated with the initial results of our cost savings initiatives, including a headcount reduction. These reductions primarily occurred in September 2015. These decreases were partially offset by severance charges of $954,000 in the 2015 period, including $446,000 in separation obligations related to our former Chief Information Officer. In addition, personal training payroll increased $307,000, which was related to an increase in personal training revenue.
Club Operating. Club operating expenses increased $2.6 million, or 5.6%, in Q3 2015 compared to Q3 2014. This increase was principally attributable to the following:
Rent and occupancy expenses increased $1.8 million in Q3 2015 compared to Q3 2014 principally due to the following:
- Mature clubs expenses increased $860,000 resulting from rent escalations.
- Expenses associated with newly opened and future clubs and BFX Studio locations increased $221,000.
- In Q3 2014, we recognized $2.9 million of gains related to the reversal of deferred rent in connection with leases terminated early which decreased rent and occupancy expenses in that period.
- Offsetting the above increases were savings of $1.5 million for closed clubs.
- Lease termination penalties decreased $641,000.
Electric utilities expense increased $694,000 in Q3 2015 compared to Q3 2014 primarily as a result of rate increases, as well as the warmer weather and therefore higher electricity consumption.
General and administrative. General and administrative expenses decreased $1.1 million, or 14.3%, in Q3 2015 compared to Q3 2014, primarily reflecting the initial results of our cost savings initiatives of $1.7 million. The decrease was partially offset by increased general liability insurance expenses of $581,000 associated with an increase in reserves for claims related to prior periods.
As of September 30, 2015, our cash position was $88.3 million, which was a $10.1 million decrease compared to June 30, 2015. In addition to changes in cash flow from operations, the decrease in our cash position primarily reflected capital expenditures of $7.3 million related to club maintenance, club remodeling and the planned opening of a future BFX Studio location, as well as $4.4 million in interest payments.
Investing Activities Outlook:
We invested $24.1 million in capital expenditures for the nine months ended September 30, 2015, and plan to invest an additional $5.0 million to $9.0 million for the remainder of the year. This additional amount includes approximately $1.0 million to $3.0 million related to one future BFX Studio location opening in 2016. It also includes approximately $4.0 million to $6.0 million to continue enhancing or upgrading existing clubs. We expect these capital expenditures to be funded by cash flow from operations and available cash on hand.
Cost Savings Initiatives:
During Q3 2015, we began to realize the results of our cost savings initiatives. We realized overhead and club level savings of $2.4 million, primarily in September, from headcount reductions, which we expect to result in approximately $25.0 million of savings on an annualized basis. We also realized approximately $1.7 million of savings in General and administrative expenses during the quarter as a result of these initiatives.
Member Count Adjustment:
We completed the conversion from our internally developed Club Management legacy system to a third-party developed software system. This conversion resulted in a one-time adjustment to our historical legacy member count of approximately 5,000 members. We believe this adjustment was non-revenue generated and therefore no impact on our consolidated financial statements.
This release contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements under the captions “Cost Savings Initiatives” and “Investing Activities Outlook”, statements regarding future financial results and performance, potential sales revenue, potential club closures, results of cost savings initiatives, and other statements that are predictive in nature or depend upon or refer to events or conditions, or that include words such as “outlook”, “believes”, “expects”, “potential”, “continues”, “may”, “will”, “should”, “seeks”, “approximately”, “predicts”, “intends”, “plans”, “estimates”, “anticipates”, “target”, “could” or the negative version of these words or other comparable words. These statements are subject to various risks and uncertainties, many of which are outside the Company’s control, including, among others, the level of market demand for the Company’s services, economic conditions affecting the Company’s business, the success of our pricing strategy, the geographic concentration of the Company’s clubs, competitive pressure, the ability to achieve reductions in operating costs and to continue to integrate acquisitions, outsourcing of certain aspects of our business, environmental matters, the application of Federal and state tax laws and regulations, any security and privacy breaches involving customer data, the levels and terms of the Company’s indebtedness, and other specific factors discussed herein and in other releases and public filings made by the Company (including the Company’s reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission). The Company believes that all forward-looking statements are based on reasonable assumptions when made; however, the Company cautions that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made, and the Company undertakes no obligation to update these statements in light of subsequent events or developments. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.