Jordan Terry
January 28, 2016
Jordan Terry @ Stone Street Advisors LLC
Founder & Managing Director, Stone Street Advisors LLC, investment research & consulting

Town Sports & The Sound of Inevitability

"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 Firm’s 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 firm’s 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.

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