NEW YORK -- Bob Giardina is looking to the future for good news. The past year and a half haven’t offered much of that for Town Sports International (TSI), New York. The company hasn’t posted a revenue increase since first quarter 2009, and that increase was just 0.3 percent.
Giardina and company have been trying to turn around falling revenue and membership numbers since Giardina’s return as CEO in March. TSI reinstated a $20 processing fee for new members on June 1. It increased dues by 1.5 percent for most members on Sept. 1. It raised initiation fees throughout the year from an average of $11 in the first quarter to an average of $52 in the third quarter. It expanded its student memberships beyond the summer, allowing students to work out at its clubs during non-peak hours throughout the year for $20 a month. It offered a 30-days-for-$30 trial membership. And it implemented a low-price (with a high initiation fee) à la carte membership at four clubs.
Giardina says the efforts are about to pay off.
“Overall, I’m very happy about many aspects of the business, including increased traffic and how our elevated member experience is having a positive impact on attrition,” Giardina said on a call with analysts in October. “Third quarter revenue was still not quite up to the expectations we had set for ourselves. But as you know, the first component of the business that has to move in the right direction is membership, and we are encouraged by the success we are seeing on this front.”
Giardina may have reason for some optimism. TSI’s earnings were better than the company had initially indicated for the third quarter, and the fourth quarter outlook is roughly in line with what Wall Street was looking for, says Sharon Zackfia, an equity analyst who follows TSI for William Blair & Co., Chicago.
Zackfia says a turnaround for the club industry may be slower than for retail and restaurants since the downturn affected the industry later.
“Town Sports is finding a stabilizing environment, but it’s not mimicking the other industries that started turning positive earlier,” she says. “It might be a last-out-and-last-in sort of thing.”
Zackfia speculated that it took people a while to cancel their memberships, so it may take a while to resume them.
TSI’s memberships were down over the same period last year, but attrition rates improved to 3.8 percent per month compared to 4.2 percent per month in the third quarter last year. In the fourth quarter, Giardina expects to have the first year-over-year membership growth since first quarter 2009, he said on the call.
NEXT PAGE: MORE FROM GIARDINA ON MEMBERSHIPS
“Thanks primarily to continued improvements in attrition, as well as our new student membership plan ... our sequential second to third quarter membership count improved significantly from the trend over the past couple of years,” Giardina said.
Membership numbers were affected by the closure of five clubs since third quarter 2009. Plus, exiting members typically have been those paying higher dues, which has caused the average dues per member to continue to decline in 2010. Monthly electronic dues dropped from $64 at the beginning of 2010 to $61 in the third quarter.
Giardina said the company had received only minimal resistance to the September dues increase, and he plans to increase dues again in 2011.
These efforts aren’t expected to increase revenue significantly in the fourth quarter. The company anticipates fourth quarter revenue of between $110 million and $111 million compared to $114.3 million in fourth quarter 2009. TSI’s third quarter 2010 revenue was $113.1 million, a decrease of 6.1 percent from the same period last year. However, total ancillary revenue was $21.7 million in the third quarter, up from $20.8 million a year ago. Within ancillary revenue, personal training revenue increased 2.3 percent to $13.8 million while other ancillary revenue rose 8 percent to $7.8 million.
“If you are already a member, you might be inclined to spend more,” Zackfia says about the growth. “It’s the initial sign-up that seems to be harder.”
TSI continues to hold back on spending. Capital expenditures totaled $10 million year to date, down $29.8 million from the same period in 2009. Capital expenditures in the fourth quarter are expected to be $13 million to $15 million, Giardina says, putting 2010 capital expenditures at $23 million to $25 million, considerably lower than the $49 million the company had in 2009.
For 2011, Giardina anticipates $32 million to $35 million in capital expenditures, about $7 million to $8 million of that for two clubs that TSI plans to open in the second half of 2011.
The plan to open two new clubs isn’t necessarily a sign that Giardina and TSI are hopeful of an improved year in 2011, Zackfia says.
“I’d take it as a mildly positive sign,” she says. “I wouldn’t do any cartwheels over it. It’s better than not opening any clubs like this year. If they thought there was a market improvement, they would increase club openings even further than two, though.”