CLUB - Town Sports International Holdings

[Laxputs]

Debt is not an inherent evil. Some people think it is. I don't see debt as a negative or a positive thing. I see it as a tool. If interests payments are safely maintained and returns can be increased with its use, it seems pragmatic to do so. Most companies do. This company does. This company uses a lot of it. Is it excessive? The numbers say they are safe.

 

I like asking what the downside is, but even if there is a theoretical downside of a particular investment of 100%, if the yield is high enough and that risk of insolvency is low enough, one should make the investment and do well over the long term.

 

How long will it take to access the FCF? They are paying a dividend, they have bought back shares.

 

What it comes down to, for me, is whether or not I am understanding the yield correctly. Is maintenance cape ex (MCE) accurate at about 25m (4% of sales) as management describes? I trying to disprove that. Help me to do so.

 

If we take their average from the last 7 years CFFO as 72m. Subtract 25m for MCE, that's 1.93/share OE.

 

 

-------------------------------------------------------------

 

"Ed Aaron - RBC Capital Markets

 

Last question, maybe for you Dan, I’m trying to understand how to reconcile the difference between your overall depreciation which is roughly $50 million in a year and your maintenance cap ex which is closer to $20 million, why would there be such a big gap between those two numbers?

 

Daniel Gallagher - Chief Financial Officer & Senior Vice President

 

The overall depreciation of the company compared to our maintenance cap ex?

 

Ed Aaron - RBC Capital Markets

 

Yes.

 

Daniel Gallagher - Chief Financial Officer & Senior Vice President

 

We’ve always used 4% as our maintenance cap ex since I’ve been here which has been over nine years and we have never deviated from that and we’ve managed to run this business at the very similar operating margins that we are running them at, so I’m not seeing a need to spend more than the 4% of revenue that we’ve been doing very consistently probably for over seven years. Like I said, since I’ve been here. I guess that’s the best way I can answer that question.

 

Ed Aaron - RBC Capital Markets

 

I’m just trying to get my arms around why the accounting policy for how fast you’re assets are depreciating would be different from what you have to do to maintain essentially the level of the assets.

 

Daniel Gallagher - Chief Financial Officer & Senior Vice President

A lot of our depreciation that we incur for the company relates to our leasehold improvements which run over the life of the lease and I would say a smaller degree of our maintenance cap ex reflects a leasehold improvement component as opposed to equipment and other types of maintenance cap ex that we’re spending money on." - 2008 Q1 Earnings Call

 

[dwy000]

People have raised most of the main issues here but I wanted to throw out a couple more having worked on a number of financings for health clubs in a previous life.

 

- the key for success in most gyms is the ability to attract new members.  You have to replace your customer base every 3 years (using the 3.4% monthly churn) from people within the immediate neighborhood and in the face of increasing competition as new gyms open.  Given there are virtually no variable costs, every paying member contributes like 95% gross margin.  Therefore you will keep dropping the price to whatever level keeps the gym full and every other gym in the area has to follow suit.

 

- the big drop in initiation fees is a bit of a red flag (even though it's a small portion of revenues).  With membership levels largely unchanged and churn unchanged at 3.4% it means they had to start waiving a lot of initiation fees to keep the gym full.  That's a real warning sign that they're struggling to keep membership high.  It tends to precede a decline in average membership rates (which at 95% margin falls to the bottom line).

 

- rent is key.  It's the biggest uncontrollable, fixed cost. 

 

- there is some seasonality and you can see it in the deferred revenues jump in 1Q (people signing up for new year's resolutions).  If you adjust out that figure, cash flow for the quarter drops a fair amount.  It's also surprisingly recession resistant because when people lose their jobs (esp in NY, Boston and LA) the gym becomes bigger part of their life.  Personal training tends to drop off sharply though.

 

- I haven't looked up the debt agreements but they will probably have some leverage (debt/EBITDA) covenants and possibly fixed charge covenants.  If the EBITDA continues to decline they will probably have to cut off the dividend and start to sweep excess cash to repay debt.

 

- The high debt level is normal in this industry due to the historic stability of the cash flows (which is why they've all been owned by Private Equity through LBO's).  But they aren't immune - Bally Total Fitness filed for bankruptcy twice and a bunch of 24 Hr Fitness locations filed as well.  Renewing the debt at high levels isn't usually a problem unless rates have gone up and then it's a big problem.

 

- closing gyms is good for the industry but don't count on the membership switching to another NYSC gym.  Nobody wants to travel too far to go to the gym so most will just switch to another one in their immediate neighborhood.

 

If you can stabilize the membership and renewals these things can just churn off cash at a prodigious rate.  With debt costs as low as they are that's fantastic for shareholders.  But once they start to deteriorate, given the high fixed cost base it can collapse on itself very quickly.  Just some additional thoughts.

[Laxputs]

In theory, should D&A always equal maintenance cap ex (MCE) over the long term? Or can you have businesses where there is a persistent difference between the two without accounting gimmicks? Like Berner Dental Management or Town Sports or Life Time Fitness.

 

Taking CFFO and subtracting the amount it takes to run the business at the current level makes a lot of sense to me. And as long as that MCE takes into account the initial outlay or leasehold improvements that are necessary when a new lease at a new place is signed, what am I missing? But maybe it does not take that into account?  If that is the case MCE is a misnomer.

[yadayada]

yeah oddball and myth raise some good points. I do think some people here are a bit biased because they sold themselves on the stock already. Just sell and move on imo. Put it on the watch list, and it could v well go lower at some point to make this a buy.

[Guest deepValue]

yeah oddball and myth raise some good points. I do think some people here are a bit biased because they sold themselves on the stock already. Just sell and move on imo. Put it on the watch list, and it could v well go lower at some point to make this a buy.

 

I don't have a position in this stock, but I find it hard to reconcile why someone would be interested in this at a lower price but not the current price. If you think the company can clear its interest payments, maintain its membership base, and continue to generate owner earnings at what they seem to have been in the past, then this is a cheap stock today. If you don't believe it can maintain its earning power, you probably don't want to buy this even at a lower price. (And it will only trade at a lower price if it becomes even less certain that the company can sustain its earning power)

[yadayada]

Because then the risk/reward potential is better. Let's say capex goes up a bit (nobody in this thread really knows what that will be long term), and suddenly it trades at a 10x FCF multiple. Then maybe revenue goes down a bit more, and it trades at like 12-14x FCF. Then their leases become higher, and it it might trade at 20x FCF or more at today's price.. Which it obviously doesn't deserve.

 

And then the multiple will be much much lower, because debt/FCF multiple will be much higher and the risk is bigger.

 

Unless you know extremly well with a large probability how these things will play out, I wouldnt touch this.

 

BUT it seems you can easily get info on those leases, and it is probably possible to figure out future capex. 

[Myth465]

I think it could be a good investment. G Gannon who is a good investor put a large chunk of his portfolio in it, which is why I started looking. This issue for me and a good chunk of my losses are due to deteriorating companies which have a great cash flow yield vs market cap, but an ok cash flow yield vs. EV.

 

They havent worked out well for me, so I avoid them at least until the business stabilizes. Cash flow was down quite a bit in Q1.

[Laxputs]

I started another thread on just trying to understand depreciation and amortization as it relates to OE and LHI, etc. I'm pasting what I last wrote there:

 

...From the 10-Q: "Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining period of the lease." Are LHI amortized because they relate more to design layout, installing fixtures, etc., and their useful life is more inexact given the intangible nature of their value?

 

3.The answer the CFO and other analysts have said when the question comes up why there is such a difference between depreciation and maintenance cap ex is: Leasehold improvements are significant and depreciated over the life of the asset but maintenance cap ex is spent more on equipment and other costs. Or another similar answer is that they over depreciate their assets and the assets actually last a lot longer.

 

4.It seems to me the crux is LHI. When they open a new location they have to spend on LHI - the upfront costs that are not so much maintenance as they are building the place out to be a gym--more one time costs even though of course the place will have to be maintained. They obviously need to do maintenance on that over the years to keep it looking like a good gym. If they expand to a new location without closing an old location that would be under growth LHI and would not relate to OE (only the yearly maintenance on that location would relate to OE of a new location) . If they close an old location and open a new location, that LHI has to be under maintenance cap ex, and that has to affect OE.

 

5. Their location numbers have not expanded since 2008 but there will still be a big difference between depreciation and maintenance cap ex given the amortization of the LHI is over the life of the lease. In theory, if they did not open any new locations going forward, after the LHI are amortized off the books D&A and maintenance cap ex would converge.  They have plans to open new centres in areas they have a proven market and economies of scale working in their favour. And they have plans to open boutique studious. So this won't happen.

 

6.If they keep the same lease, same location, when the lease expires, they get a lot of value from the original LHI because they do not need to spend the investment in LHI at a new place, they can just spend on maintenance cap ex, about 20-25m a year, and reap all the cash flows. If they can keep the vast majority of their locations without having to open a new location to replace an expired lease, then maintenance cap ex is likely accurate. Given their history and the industry trends, I am betting and hoping they can do so.

 

I believe I understand this investment a lot more after writing this down. But please look to poke holes in it. The key to OE being roughly accurate is keeping the same number (or more) of gyms in the same lease locations, without having to spend money on LHI to replace expired leases/locations. If they can do this (and manage debt, membership numbers, lease renewals, etc.,--of which I am less concerned) OE should be fairly accurate. They don't need to be very accurate for a massive yield. LHI should really be seen as growth IF the gym count is kept constant (or increased) and the gym's locations are kept constant by lease renewal.

 

The company may face lease re-ratings. The company has a lot of debt. The company is facing competitive headwinds. So there is a company that has been around for 40 years in a business that is easily understood. Offering better than a 20% OE yield with a 10% dividend and half its share price in cash, that has bought back large amount of its stock during sell off times, and operates in a growing industry. Any contrarian investors out there? :)

 

Thanks.

[yadayada]

yeah so since 65% of this is already depreciated, you could look into it yourself (if you live in New york). Most of their gyms are in New york under one brand name. You can become a member and try out maybe 20 of them and see in what state these places are? If everything still looks new, then it is likely it can last another 10 years or so.

 

 

If that is confirmed, only thing that is left now is to find out is to see what will happen when leases have to be renewed and what risk of terminal revenue decline is.

[BG2008]

dwy000  Wow, some really awesome comments! 

 

Regarding rent.  In case, I didn't make it clear enough the first time.  In extreme cases, rent escalation in NYC is a matter of 5-10X above a 20 yr old lease.  It isn't a matter of a 50% increases.  Hence, if there is even a small % of gyms paying say $10/sqft/yr and the market is closer to $50-100/sqft/yr, that $67mm of Cash from operation can go out the window very quickly.  I am not saying this is the case.  I am saying you guys need to think of this in the right context and pick up the phone and make some calls to the company and to some brokers in NYC.

 

Yes, there will always be gyms in NYC just like there will always be restaurants in NYC.  The difference is that the landlord wins and your gym goes out of business and an Equinox takes over your space just like the mom and pop Italian eatery goes out of business and a 3 Michelin star restaurant takes over your spot.   

 

People have raised most of the main issues here but I wanted to throw out a couple more having worked on a number of financings for health clubs in a previous life.

 

- the key for success in most gyms is the ability to attract new members.  You have to replace your customer base every 3 years (using the 3.4% monthly churn) from people within the immediate neighborhood and in the face of increasing competition as new gyms open.  Given there are virtually no variable costs, every paying member contributes like 95% gross margin.  Therefore you will keep dropping the price to whatever level keeps the gym full and every other gym in the area has to follow suit.

 

- the big drop in initiation fees is a bit of a red flag (even though it's a small portion of revenues).  With membership levels largely unchanged and churn unchanged at 3.4% it means they had to start waiving a lot of initiation fees to keep the gym full.  That's a real warning sign that they're struggling to keep membership high.  It tends to precede a decline in average membership rates (which at 95% margin falls to the bottom line).

 

- rent is key.  It's the biggest uncontrollable, fixed cost. 

 

- there is some seasonality and you can see it in the deferred revenues jump in 1Q (people signing up for new year's resolutions).  If you adjust out that figure, cash flow for the quarter drops a fair amount.  It's also surprisingly recession resistant because when people lose their jobs (esp in NY, Boston and LA) the gym becomes bigger part of their life.  Personal training tends to drop off sharply though.

 

- I haven't looked up the debt agreements but they will probably have some leverage (debt/EBITDA) covenants and possibly fixed charge covenants.  If the EBITDA continues to decline they will probably have to cut off the dividend and start to sweep excess cash to repay debt.

 

- The high debt level is normal in this industry due to the historic stability of the cash flows (which is why they've all been owned by Private Equity through LBO's).  But they aren't immune - Bally Total Fitness filed for bankruptcy twice and a bunch of 24 Hr Fitness locations filed as well.  Renewing the debt at high levels isn't usually a problem unless rates have gone up and then it's a big problem.

 

- closing gyms is good for the industry but don't count on the membership switching to another NYSC gym.  Nobody wants to travel too far to go to the gym so most will just switch to another one in their immediate neighborhood.

 

If you can stabilize the membership and renewals these things can just churn off cash at a prodigious rate.  With debt costs as low as they are that's fantastic for shareholders.  But once they start to deteriorate, given the high fixed cost base it can collapse on itself very quickly.  Just some additional thoughts.

[dwy000]

Hi BG.  Agree with your points. The only part I might differ with you is that typically the rents will have escalator clauses in them so that it is rising at a fixed annual rate or relative to inflation.  So while current rents will be significantly higher than the rates 10 years ago, they may not be quite that far above what they are actually paying.  In addition, many include contingent payments based upon the tenant's revenue or cash flows.

 

The other thing on rents is that they usually get expensed on a straight line basis but paid on an accreting basis.  So if you sign a 10 yr lease at $100 increasing 3% per year you will expense $114 in each of those 10 years but actually pay the landlord $100 in the first year and $130.50 in the final year.  Therefore in the early part of the lease your cash flows are better than your op income and late in the leases cash flow is lower than op income.  Note for CLUB in th 10k that the cash flow statement shows a $5.7m use of cash for "non cash rent expense" - and that number is growing ($4.0m in 2012 and $3.6m in 2011).  If you really want to guess at rent expense you should probably add or subtract that figure each year.

 

Finally, (and I don't want to come across as some kind of know-it-all, just want to share ideas based upon experience), the points on capex and LHI are all very we'll stated.  The way I'd look at it is that  the company has had a very flat club count for about 5 years now (a couple opened or closed but nothing relative to the 160 base number) and capex has hovered around $30m.  So I'd be hard pressed to use anything else as a maintenance number without it impacting the ability to attract members.  Keep in mind that much like retail stores, while you don't have to upgrade, if everyone around you is doing it, your state of the art facility will look very dated after 5 years.  So you will probably do a "refresh" every 5-7 yrs and upgrade the locker room and lobby. 

 

Sorry to get long winded here - but the loan agreement seems to have both 4.5x leverage covenant as well as a free cash flow sweep that will kick in during 1q 2015.  If mgmt forecast for $63m ebitda is correct they will breach the covenant this year (unless it is off of net debt) but that only means they can't draw the revolver not that they are in default.

[Laxputs]

Great discussion, guys. Giving me lots to think about.

[BG2008]

dwy000,

 

Most escalators are fairly benign.  The issue is with lease renewal.  When the leases are at the end of their 5, 10, 15, 20 year term.  I will be willing to wager a large sum of money that rent in NYC has compounded at much higher rate than the escalators which is typically tied to CPI or 2-4%.  The tenant usually has an option to renew, but over 99% of the time at market rate.  It is the market rate that worries me, I can assure you that NYC rent has compounded in the mid single digits to teens rather than the 2-4% in most escalators.  RE in NYC is very different than elsewhere.  For example, you have Juicy Couture that failed as a retailer on 5th Ave.  But they are being bought out for $50mm for a lease with seven year duration left.  Granted this is not an apples to apples comparison, it is illustrative of the very unique dynamic of NYC real estate. 

 

http://commercialobserver.com/2013/11/juicy-couture-given-50-million-to-leave-embattled-650-fifth-avenue/

 

Next on my list of things to do, open a retail store on 5th Ave, if the store works, great!  If the store fails sell the lease to someone else for an insane amount of money. 

 

Hi BG.  Agree with your points. The only part I might differ with you is that typically the rents will have escalator clauses in them so that it is rising at a fixed annual rate or relative to inflation.  So while current rents will be significantly higher than the rates 10 years ago, they may not be quite that far above what they are actually paying.  In addition, many include contingent payments based upon the tenant's revenue or cash flows.

 

The other thing on rents is that they usually get expensed on a straight line basis but paid on an accreting basis.  So if you sign a 10 yr lease at $100 increasing 3% per year you will expense $114 in each of those 10 years but actually pay the landlord $100 in the first year and $130.50 in the final year.  Therefore in the early part of the lease your cash flows are better than your op income and late in the leases cash flow is lower than op income.  Note for CLUB in th 10k that the cash flow statement shows a $5.7m use of cash for "non cash rent expense" - and that number is growing ($4.0m in 2012 and $3.6m in 2011).  If you really want to guess at rent expense you should probably add or subtract that figure each year.

 

 

[APG12]

I looked at this when Gannon started his position but passed because of the debt.

 

I agree with others that management's estimate of maintenance cap-ex is understated. Over the past 11 years the company has spent an average of $50 million a year in cap-ex yet operating income is flat to down. What would have happened if they had only spent $25 million a year?

[SandU]

Great thread! Not much to add to it.

 

But i think they should get a little bit more cred for their competitive advantages and financial situation. The cluster offers more than marketing benefits, if i remeber correctly, closed to 40% of their customers used multiple club locations. That can´t a competitor offer and must be worth something. And also the company was in top historic shape regarding debt/ebitda® before their latest ebitda drop anoncements. But a decent part of that ebitda drop comes from the sale and lease back of their property and  their new studio development, not bye lower sales and in the end that should generate income again. With the property sold clubs covers over a year´s fixed costs in cash. That is multiple times what they normaly have on their balance sheet.

[Spekulatius]

They have economies of scale. They can spread advertising costs over multiple gyms whereas a new competitor, in theory, does not have multiple locations, and has to absorb the advertising into one location. This would allow CLUB to be the low cost provider. The difficulty in acquiring multiple locations at once due to expensive leases, restrictive zoning laws, limited real estate options, etc, helps to prevent competitors from encroaching. It's not a super strong moat, imo, but they have some competitive advantages.

 

1) Sounds like the real moat is in the landlord business. If an gym operator would own the real estate, this would result in an insurmountable cost advantage over time.

 

2) 25M$ in maintenance capital (to pick the higher number) spread over 162 gyms is about 150k$ in maintenance Capex/year. Probably enough to replace broken gym equipment or furniture, but is that enough to keep the interior refreshed? I feels too low to me, if you assume and refresh is necessary every 10 years or so.

[Guest roark33]

Any updated thoughts from the peanut gallery. 

 

My one comment is on the idea of people looking back at 2008/09.  Having lived in NYC at that time, I would note that no new gyms were opening.  In fact, some of the marginal gyms (one gym locations) were closing, so I think the comparison to that period in terms of competitive environment is misplaced.  I am in the camp that most companies have value at some price with an adequate MoS, but in the near term it is tough to predict that with this company.  Just like a WTW, CLUB gets a lot of its new enrollment from the early Jan-March season. That season was dramatically impacted by the weather and I think CLUB will continue to suffer the rest of the year as the base membership enrollment is much lower coming out of that early year season.  Not sure there will be a real inflection point until next "new-year resolution" season in January. 

 

Thoughts?

[Laxputs]

I was wrong on them losing more market share. They are losing more market share in both suburban and urban.

It's not a great business. It was extremely cheap when I bought it and don't believe I was incorrect there. It is still very cheap on an owner's earnings basis.

 

I think the main question is, is there an insolvency risk.

I do not believe the numbers suggest that.

 

If we believe 25mm is m-capex (that's the high end of mngmt's estimation), they were owner's earnings positive this quarter and every quarter.

EBITDA+R/R+Int Exp of 1.4. Acceptable. They have ebitda:interest coverage of over 2.2x. They had around 50mm of CFO, annualized. There is another 15mm coming from the non-refundable down-payment of the 83mm RE sale, pushed back, once again, to September.

 

They still are paying leases on clubs that are just starting up (not positively contributing) in their profitable urban locations. They are closing some weaker performers in the suburbs. There has been over 100 start-up competitors, mom'n'pop shops, in the past year. The market can't support them all. CLUB has competitive advantages in its core urban location. Not an epic moat but it should be very competitive in those markets. The industry will exist and grow going forward.

 

It's trading around 4-5x annualized OE. 6.5 EV/EBITDA.

 

All three years before this one, they had 90mm in EBITDA. If they hit 80% of that in 4 years it's a return of around 15%/year. If revenue loss stabilize in 4 years and the market gives them credit for 1$ in  FCF, it's around 15%/year. If they can regain 20% EBITDA margins on their core urban locations, and their BFX and HVLC models have reasonable results, this stock could triple in 4 years.

 

It's not a great company. There are risks in the stock. They are converting 13% of their locations to HVLC, that's an unproven model. But I think it's definitely worth considering. There is lots of potential upside.  I think the question I ask myself is are there 6 other ideas with greater returns or the same return with less downside (if 6 is the amount of stocks I want to hold)?

[Laxputs]

I did sell CLUB for a 50% loss. I sold for a few reasons:

 

-It was amazing to see that such a small decline in members, 3% yoy, 7% from 2011, can translate into a 30% EBITDA drop. That is astounding. It's interesting what happens when high fixed (and growing) costs meet a marginal decrease in revenue.

-There was some unknowns entering the picture: they are planning on changing a material amount of their business model to "high-value-low-cost" and "BFX" studios. So launching unproven business models in challenging times had me questioning the value thesis. Also, if they were launching part of that strategy in their core markets, it suggested that their strongest segment was coming under pressure and not just the suburban market.

-I don't believe insolvency is likely but the risk reward here would not make it into my top 8 ideas now.

-Finally, I'm fairly new to value investing and so I try to run ideas by people that are better at this than me (not hard to find). Nearly all thought being very cautious of this stock with high debt and declining revenues was prudent.

 

I think it's a really interesting situation and hope to learn from it.  I don't believe the original thesis has been proved wrong either. I don't think it was a poor decision to buy in when I did given the information at that time, but I will be more skeptical in the future of companies operating in competitive markets with few barriers to entry with declining revenues and high debt loads--even if the debt load looks sustainable and the fcf yield high.  I'm trying to be really selective when I'm choosing my companies now and this just isn't the 2 no-brainer ideas I'm looking for every year.

[GregS]

I did sell CLUB for a 50% loss. I sold for a few reasons:

 

-It was amazing to see that such a small decline in members, 3% yoy, 7% from 2011, can translate into a 30% EBITDA drop. That is astounding. It's interesting what happens when high fixed (and growing) costs meet a marginal decrease in revenue.

-There was some unknowns entering the picture: they are planning on changing a material amount of their business model to "high-value-low-cost" and "BFX" studios. So launching unproven business models in challenging times had me questioning the value thesis. Also, if they were launching part of that strategy in their core markets, it suggested that their strongest segment was coming under pressure and not just the suburban market.

-I don't believe insolvency is likely but the risk reward here would not make it into my top 8 ideas now.

-Finally, I'm fairly new to value investing and so I try to run ideas by people that are better at this than me (not hard to find). Nearly all thought being very cautious of this stock with high debt and declining revenues was prudent.

 

I think it's a really interesting situation and hope to learn from it.  I don't believe the original thesis has been proved wrong either. I don't think it was a poor decision to buy in when I did given the information at that time, but I will be more skeptical in the future of companies operating in competitive markets with few barriers to entry with declining revenues and high debt loads--even if the debt load looks sustainable and the fcf yield high.  I'm trying to be really selective when I'm choosing my companies now and this just isn't the 2 no-brainer ideas I'm looking for every year.

 

This is a good postmortem. You are right - I wouldn't say the original thesis is wrong, and it still might work out. But based on what we know now its hard to call this a good investment.

 

The changing business model is perhaps the biggest red flag. It shows management feels the old biz is a melting ice cube. It also renders their history of consistent FCF generation moot. Maybe it will work out, maybe it won't, but you can't let the past numbers guide you. I faced this same question on Weight Watchers, specifically whether the meeting business was still robust or nor not. Management's strong moves towards online - where their moat is seriously diminished and chances of success significantly reduced - was the tell.

 

In any event, admitting the mistake, taking the loss, and learning from it are major keys to being a great investor.

[jschembs]

I did sell CLUB for a 50% loss. I sold for a few reasons:

 

-It was amazing to see that such a small decline in members, 3% yoy, 7% from 2011, can translate into a 30% EBITDA drop. That is astounding. It's interesting what happens when high fixed (and growing) costs meet a marginal decrease in revenue.

-There was some unknowns entering the picture: they are planning on changing a material amount of their business model to "high-value-low-cost" and "BFX" studios. So launching unproven business models in challenging times had me questioning the value thesis. Also, if they were launching part of that strategy in their core markets, it suggested that their strongest segment was coming under pressure and not just the suburban market.

-I don't believe insolvency is likely but the risk reward here would not make it into my top 8 ideas now.

-Finally, I'm fairly new to value investing and so I try to run ideas by people that are better at this than me (not hard to find). Nearly all thought being very cautious of this stock with high debt and declining revenues was prudent.

 

I think it's a really interesting situation and hope to learn from it.  I don't believe the original thesis has been proved wrong either. I don't think it was a poor decision to buy in when I did given the information at that time, but I will be more skeptical in the future of companies operating in competitive markets with few barriers to entry with declining revenues and high debt loads--even if the debt load looks sustainable and the fcf yield high.  I'm trying to be really selective when I'm choosing my companies now and this just isn't the 2 no-brainer ideas I'm looking for every year.

 

thanks for the frank discussion. nothing is a better learning experience than losing money (i know many times over).

[BG2008]

Any update on this one?  An activist, Walsh got involved last year. 

[Sionnach]

The news flow on this one is virtually non-existent, but a recent Bloomberg headline was: "New York Sports Clubs Owner's Term Loan Price Said to Plunge". It plunged to about 35 cents on the dollar and this loan was basically first in line in the capital structure.

 

In other words, probably not doing well.

 

I actually go to NYSC and for about 5 days I could tell they were really struggling - no towels, only one employee working. Now its back to normal, so I guess things got cleared up

[Stuart D]

Since the last post it's been a 10-bagger, then it went all the way back down.

 

New VIC writeup from carbone959:

https://valueinvestorsclub.com/idea/TOWN_SPORTS_INTL_HOLDINGS/6010632002#description

 

Quick summary of the recovery and crash.

Recovery

- debt retired at 40c on the dollar

- positive SSS and credit rating upgrade

 

Crash

- inadequate spending causing declining SSS and poor online reviews

 

Too risky for me, but it's interesting to follow.

[Foreign Tuffett]

I looked at this earlier this year and concluded that it was an overleveraged gym rollup that was underspending on maintenance capex. Exercise machines being abused and breaking is a fact of life in the gym business.

 

Gyms are a brutally competitive business, and they fail all the time. Planet Fitness, with its franchising and anti-gym  mentality, is the only company I know of that has figured out how to makes things work in the segment.