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Is This Fitness Operator a Good Buy Now? – Town Sports International Holdings, Inc. (CLUB)

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Recently, Fool contributor Michael Lewis wrote about a fitness club owner and operator, Town Sports International Holdings, Inc (NASDAQ:CLUB). Town Sports has advanced significantly since 2009, from around $1.5 per share in March 2009 to around $13 per share in September 2012. However, the stock has retreated to around $9 levels of late, within striking range of its 52-week low. Lewis is of the opinion that it could be “an attractive buy” at its current trading price. Is it true? Let’s find out.

Town Sports International Holdings, Inc. (NASDAQ:CLUB)Business snapshot

Town Sports International Holdings, Inc. (NASDAQ:CLUB) is considered to be the third biggest owner and operator of fitness clubs in the U.S., with 510,000 members and 160 fitness clubs under four brand names, including New York Sports Clubs, Boston Sports Clubs, Washington Sports Clubs, and Philadelphia Sports Clubs. The majority of its top line, $376.5 million or 78.8% of the total, was generated from membership revenue. Personal training revenue ranked second, with $65.64 million in 2012, accounting for 13.7% of overall revenue, while other ancillary club revenues were nearly $30 million, or 6.3% of the total. As Town Sports derived the majority of its revenue from membership dues, its performance is quite dependent on its ability to attract and retain members. Its annual attrition rate was 41% in 2012.

A declining quarter with Hurricane Sandy impact

Town Sports International Holdings, Inc. (NASDAQ:CLUB) has experienced a decline in its comparable club revenue in two out of the last five years. In 2009 and 2010, comparable club revenue decreased 5.6% and 4.3%, respectively, due to the recession and its impact on consumer spending. In the fourth quarter of 2012, due to the negative impact of Hurricane Sandy, its comparable club revenue also decreased 1.1%. Total member count also dropped by 12,000 to 510,000 in Q4 2012.

Its fourth-quarter net loss came in at $453 million, due to nearly $3.2 million charges of fix asset impairment from four clubs that suffered from damages caused by Hurricane Sandy. A bad fourth quarter might be the reason behind Town Sports’ share price plunge. I expect that Town Sports could improve earnings in the first quarter of 2013, as the company probably will not incur impairment charges caused by Hurricane Sandy’s impact anymore.

What makes me worried about Town Sports is its weak balance sheet. As of December 2012, it had a negative stockholders’ equity of $55.5 million, while the cash on hand was $37.76 million. In addition, the company employs significant leverage in its operation. The debt was a whopping $310 million.

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