New York — The economy weighed heavily on Town Sports International's (TSI) business in fourth quarter 2008, and the public company's management team expects the tough economy to be a negative factor in 2009 as well, causing it to slow growth this year, according to Alex Alimanestianu, CEO of TSI, New York.
TSI is focusing 2009 on maintaining its strong liquidity position and reducing capital expenditures until there is evidence of recovery in consumer sentiment and spending, Alimanestianu said last month during a conference call with analysts after the release of the company's fourth quarter 2008 and year 2008 financials.
Even though membership dropped in the fourth quarter, the company still grew membership by 4.9 percent for the year to 510,000 members, mostly because of new club openings. TSI's attrition rate of 3.5 percent per month in the fourth quarter was 10 basis points better than the third quarter but 50 basis points worse than the 3 percent it had in fourth quarter 2007.
During fourth quarter 2008, revenue increased 3.4 percent to $122.9 million, but for the year, revenues increased 7.1 percent to $506.7 million. When looking at the revenue more closely, TSI's financials show that revenue at clubs less than two years old grew as these clubs continued to ramp up membership, but revenue at clubs more than two years old fell.
For fourth quarter 2008, revenues increased $9.6 million at the 24 clubs opened or acquired after Dec. 31, 2006. This increase in revenue was offset by decreases in revenue of $4 million at TSI clubs opened or acquired prior to Dec. 31, 2006, and $1.6 million related to the seven clubs that were closed after Dec. 31, 2006.
TSI's operating margins declined as a result of increases in payroll and club operating expenses. Same club revenue declined by 1.4 percent for the quarter, which was TSI's first negative quarterly comparison since 2004. This decline negatively affected TSI's cash flows from operations for the quarter, which totaled $18.7 million versus $20.1 million a year ago.
In 2008, TSI opened nine new clubs instead of the 11 originally planned. Three of the nine new clubs opened in the fourth quarter. However, for 2009, the company plans to slow growth, opening just four clubs for the year. All of those were set to open by the end of the first quarter. TSI also will close four clubs in 2009.
Alimanestianu said the lower new club count and first-quarter openings would keep capital expenditures down and “avoid excessive risk in this challenging consumer spending environment.”
In the meantime, the company is lowering its capital expenditure plan for 2009 to about $50 million to $53 million. In 2008, TSI had capital expenditures of $96.2 million. The 2009 amount includes approximately $23 million for maintenance and upgrades of existing clubs, $8.4 million to support and enhance TSI's IT systems, and $4 million for the completion of a new laundry facility and a replacement corporate office in the New York region. The remainder of the approximately $16 million in capital expenditures relates to club openings.
In January 2009, TSI completed a round of layoffs that affected 47 non-club positions, or around 11 percent of TSI's non-club workforce, saving approximately $2.5 million excluding severance costs. TSI also froze non-club salaries for 2008 levels, including executive salaries.