Documente Academic
Documente Profesional
Documente Cultură
Market Cap
LT Debt
Less: Cash
30,000 Action
295,394 Rating
95,478 Rationale
Enterprise Value
229,916
(NASDAQ: CLUB)
0.00
-100%
Reiterate
N/A
Restructuring watch,
hires advisors
Clarification/correction 2/4/2016:
Below and in the original version of this document, we cite an S&P LCD report that
Town Sports has hired Rothschild as financial advisors. We have confirmed that this is
NOT a reference to Rothschild Investment Corporation, rather to an unaffiliated
entity/firm. Please note this very important correction/clarification.
Gym & fitness center operator Town Sports International (NASDAQ: CLUB) revenue will
collapse almost 30% from 2015e-2018e in our base case due to intense membership fee
pressure, membership attrition, and membership type downgrades.
High, inflexible costs from Company-operated, leased facilities subject to high northeast U.S.
metro rent. Marginal improvement possible from headcount related cost cutting.
Less money in the door and the same or more money out means cash flow will be severely
negative for 2016-onlward. CLUB will run out of cash by 2017q3.
The Firms largely untapped and 75% unavailable $45m revolver matures in 2018q4, while its
$325m term loan ($295m out) matures 2020q4. The runway is not as long as it seems from the
air.
With the stock at all-time lows, down ~90% in two years, we do not expect the company will
be able to raise cash through the equity markets. The firms existing senior debt is trading at
distressed levels around 37; there is too much debt to service let alone repay, leaving further
debt issuance or a simple refinancing transaction out of the question.
We expect some sort of restructuring to be announced and underway by year-end 2016. Best
case scenario for equity holders is severe dilution related to equity options/warrants granted as
part of a distressed exchange.
Due to the above, we reiterate our $0 price target for the stock with no rating.
Town Sports and its creditors have reportedly already hired investment banks to advise on
potential restructuring (Rothschild and PJT Partners, respectively).
Neither the company nor the activist hedge funds controlling the company have disclosed the
engagement of financial advisors or refuted reports. This may not be a direct violation of
securities regulations but it is an intentional failure to report material (non-public) information
to investors in the spirit of securities laws. Hell hath no fury like an investor in a money-losing
company scorned.
Town Sports, owner of gyms including New York Sports Club, is now facing that same sound, the sound
of inevitability. As I explained in my previous post on the company, management has been living in an
alternate reality for the past decade-plus, blissfully unaware of whats actually happened around them,
indifferent to the ever-changing landscape. In that article I explained how the industry changed and how
CLUB got into the unenviable situation in which it finds itself. Here, Im going to talk more about the
future and how I expect it to play out.
In keeping with the theme, absent remarkable strategic and financial transformation, the following
happenings are inevitable:
Declining Membership Fees
In 2014, Town Sports brought in about $78 per member per month in revenue, or $59/month in
membership fees. Planet Fitness (PLNT) charges $10/month, with their Black Card membership
TOWN SPORTS INTERNATIONAL & THE SOUND OF INEVITABILITY
Source: Stone Street Advisors LLC analysis of 90 NYSC, BSC, WSC, and PSC membership options per
mysportsclubs.com, 2015q4.
2
We are NOT suggesting or even discussing whether to invest in PLNT. We reference it as CLUBs only public &
most important competitor.
3
The campaign calls for selfie stations/mirror clings in gyms so people can snap pics while theyre still pumped. We
can only hope this idea never takes off, for everyones sake. http://www.prnewswire.com/news-releases/newyork-sports-clubs-builds-a-new-ad-campaign-i-built-this-marks-new-era-in-speaking-to-consumers300196366.html
For most, sticking with the status quo is easier than switching. The question is how long will it take
people to switch once PLNT penetrates CLUBs territory and offers the same or better for to 1/3rd the
price?
Ive been a CLUB member (New York Sports Club) for most of the past 6 years. Im pretty close to the
epitome of their target market; an early 30s, white-collar, metropolitan-area fitness buff. As such, Im
TOWN SPORTS INTERNATIONAL & THE SOUND OF INEVITABILITY
Case
P&L
4
Base
9mos
Historical
Case: Base
Membership Dues
Revenue Growth
Initiation & Processing Fees
Ancillary Non-Training Club Revenue
Other Revenue
Fee Revenue
Personal Training Revenue
Total Revenue
Revengue Growth y/y
Total Members
Membership % change
Change in members/avg # of locations
Revenue/member/month
Fee Revenue/member/month
Operating Expenses
Payroll & Related
Per location
% Sales
Club Operating
Per location
% Sales
G&A
% Sales
Impairment
% Sales
D&A
% Sales
Total OpEx
OpEx % Sales
Operating Income
EBITDA
Interest expense
EBT
Tax Rate
Tax provision
Net Income
EPS
2013
358,761
14,392
24,720
5,985
403,858
66,367
470,225
-1.8%
497,000
-2.5%
78.8
174,894
1,080
37.2%
179,683
1,109
38.2%
28,431
6.0%
714
0.2%
49,099
10.4%
431,817
91.8%
38,408
87,507
22,617
19,691
37.4%
7,367
12,324
Passport
30.0%
Premier
70.0%
Estimated
9 months
2014
2015
343,185
230,964
-4.3%
12,044
15,000
22,304
17,468
5,971
4,736
383,504
318,748
70,338
55,316
453,842
323,484
-3.5%
484,000
534,000
-2.6%
-83
78.1
59.1
177,009
1,172
39.0%
192,716
1,276
42.5%
31,352
6.9%
4,706
1.0%
47,307
10.4%
453,090
99.8%
752
48,059
19,039
(16,378)
135,866
52,611
(68,989)
(2.84)
(17,066)
(65,838)
(2.67)
42.0%
151,386
46.8%
23,144
7.2%
46,129
14.3%
36,042
11.1%
392,587
121.4%
(69,103)
(33,061)
15,562
(82,904)
2015
333,280
-2.9%
20,000
22,400
5,917
381,597
78,300
459,897
1.3%
540,000
12%
368
71.0
51.4
2016
273,300
-18.0%
10,000
20,000
5,000
308,300
76,125
384,425
-16.4%
525,000
-2.8%
-97
61.0
43.4
2017
243,438
-10.9%
20,000
5,000
268,438
73,950
342,388
-10.9%
510,000
-2.9%
-97
55.9
39.8
2018
230,910
-5.1%
20,000
5,000
255,910
71,775
327,685
-4.3%
495,000
-2.9%
-97
55.2
38.9
181,127
1,184
39.4%
199,206
1,302
43.3%
30,859
6.7%
46,129
10.0%
46,000
10.0%
505,807
110.0%
(45,910)
90
19,000
(64,910)
35.0%
(64,910)
(2.60)
165,175
1,066
43.0%
201,810
1,302
52.5%
28,000
7.3%
0.0%
46,000
12.0%
440,985
114.7%
(56,560)
(10,560)
19,000
(75,560)
35.0%
(75,560)
(3.02)
165,175
1,066
48.2%
201,810
1,302
58.9%
27,500
8.0%
0.0%
46,000
13.4%
440,485
128.7%
(98,097)
(52,097)
19,000
(117,097)
35.0%
(117,097)
(4.68)
165,175
1,066
50.4%
201,810
1,302
61.6%
27,000
8.2%
0.0%
46,000
14.0%
439,985
134.3%
(112,300)
(66,300)
19,000
(131,300)
35.0%
(131,300)
(5.25)
-7.8%
-27.8%
-10.7%
-28.7%
0.6%
2.3%
-2.9%
-8.3%
-8.3%
-9.9%
-29.4%
-34.2%
-8.1%
-8.9%
-22.3%
-24.4%
-1.7%
-6.7%
-3.0%
-8.8%
1.2%
4.7%
0.4%
1.3%
-3.7%
-13.9%
-4.4%
-12.5%
-0.7%
-2.9%
-4.5%
-13.0%
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
We assume that headcount reduction to minimal levels is accomplished in 2016. We have kept club
operating costs level due to our lack of visibility on rent prices in each of CLUBs metro areas, but absent
recession, we expect our projections to underestimate actual lease expense and thereby club operating
expenses going forward.
To get an idea for what I mean by not highly staffed, try getting a staff member, trainers included, to give you a
spot lifting, even when theyre just hanging around in a mostly empty gym.
2013
Estimated
9 months
2014
2015
(68,989)
47,307
42,054
9.3%
279
(65,838)
36,042
24,073
7.4%
157
19,854
73,598
93,452
(5,166)
93,452
88,286
Impairment
Working Capital
Debt Issuance
Preferred Dividend
Common Dividend
Debt Repayment
Asset Sale
Change in Cash
Beginning Cash
Ending Cash
2015
2016
2017
2018
(64,910)
46,000
32,193
7.0%
210
46,129
(10,000)
3,000
2,026
93,452
95,478
(75,560)
46,000
26,910
7.0%
174
(5,000)
2,970
(54,439)
95,478
41,039
(117,097)
46,000
23,967
7.0%
155
(5,000)
2,940
(93,004)
41,039
(51,965)
(131,300)
46,000
22,938
7.0%
148
(5,000)
2,911
(106,148)
(51,965)
(158,113)
CLUB doesnt have a lot of big moving parts on the balance sheet or in financing so weve simplified the
cash flow statement similarly to calculating FCF. We havent added back stock-based comp or similar
since we dont believe it makes a material difference and doesnt alter the conclusion. We see CLUB
turning in a slight cash increase of $2m for 2015, but 2016 will be a long year of pain & suffering absent
some unexpected good fortune, as we project the company will go through $54.4m of cash in 2016.
2017 is going to be so unspeakably terrible itll make management and investors (if theres any left by
then) beg for the only horrible days of 2016. Unless weve made a major judgement error about the
stickiness of members in the face of increasing competition, it seems unlikely that CLUB gets through
2017 without reorganization, either in or out of court. Allowing for a few miracles, CLUB makes it into
2018, but by then the goose is cooked.
We believe the equity is worth zero, though weve been bearish for years5. Anyone considering
shorting this stock into the ground would be well-served to remember the adage, markets can stay
irrational longer than you can stay solvent. Low-priced micro-caps can see huge price swings on little
or no new information, so while were confident of the outcome, we are not so confident of the path.
E.g. 2/20/2014: For those still long $CLUB think it through. There is zero chance this co can turn it around without
an unpleasant restructuring/makeover. https://twitter.com/The_Analyst/status/436551614418014208?lang=en
A favorite example: Ryerson hires UBS, buried at the end of a press release attached to one of two 8-ks filed on
the same day: https://www.sec.gov/Archives/edgar/data/790528/000119312507030493/dex991.htm
7
To be clear, issuers are not required to report hiring an investment bank on form 8-k, but section 8.01 is explicitly
reserved for (emphasis ours) events that are not specifically called for by Form 8-K, that the registrant considers
to be of importance to security holders. See: https://www.sec.gov/answers/form8k.htm
Given the choice of taking the red pill or the blue, CLUB management long-ago reached for the blue pill
and went about living their days under blue skies and rainbows, or so they thought. The end result of
their inability and indifference to adapt to a rapidly changing industry and consumer preferences has the
firm running on borrowed time. The smart-money activist investors took the red pill and have been
Disclosure: The opinions presented herein are solely those of Stone Street Advisors LLC. Neither Stone
Street Advisors LLC nor any of its members has a position in CLUB or CLUB derivatives, nor any plans to
initiate a position. Nothing contained herein shall constitute a solicitation, recommendation or
endorsement to buy or sell any security or other financial instrument. Stone Street Advisors LLC makes
no representation or warranty as to the accuracy, completeness or timeliness of the information
contained herein, and disclaims all liability arising from errors or omissions contained in this
presentation. This document is presented for informational purposes only and does not constitute
investment advice. Stone Street Advisors LLC is not an Investment Advisor.
10