Editor's Note:
Rick Caro is an icon in the club industry, he started in the club industry around 30 years ago when he and his partners owned and operated 8 clubs in the Northeast U.S. Being a financial wizard, he specialized in buying failing tennis buildings and turning them into successful multi-purpose clubs. Most notably, 20 years ago, he is the visionary that thought of joining the National Indoor Tennis Association with the National Court Club Association into what is now IHRSA. Today he is a financial and marketing consultant to the fitness industry, we asked him, from a financial perspective, to reflect on 2003 and what's in store for 2004. |
 HE FINANCIAL COMMUNITY WOULD SEE THE YEAR 2003 as one of "quiet" news, as there were no major breakthroughs for the club industry. In many ways the year mirrored 2002. The big picture saw the economy improve slightly but unemployment remained steady. Based on an IHRSA Index, the club industry was recession resilient (not recession resistant) as key indicators were positive but not very impressive. Comparing each quarter's results to the same quarter for the year previously, some club revenues were only up slightly. Net memberships were also up slightly but new membership levels were flat or even slightly negative. The combination of non-dues revenues categories were increasing, sometimes at impressive levels.
"The diet center industry, which continues to grow and represents three times the size of the health club industry, still does not present a workable solution for most of its clients without the inclusion of a dedicated exercise component."
The Bottom Line Increased in 2003
The bottom lines as stated by EBITD (Earnings Before Interest, corporate income Taxes, Depreciation and amortization) increased. Often, this might be explained by much greater attention to cost cutting than major revenue gains. Some club companies benefited from new, attractive leases as real estate landlords began embracing the club industry and with more favorable terms. 
"For smaller club companies, the low interest rates led to re-financings."
The debt markets softened so a number of the larger companies either completed high-yield debt offerings (Town Sports International-TSI-Bally Total Fitness and Equinox Fitness) or did a re-capitalization (24 Hour Fitness). For smaller club companies, the low interest rates led to re-financings. This culminated in either new fresh capital to expand a present club, build a new club, acquire a club or provide a significant dividend to the owners.
"Top 10 club companies did almost all of their growth via new builds"
Key Financial Trends
Private equity firms have been very successful raising dollars for their funds but not necessarily investing all of it. Many of these firms have been studying the health club industry, but in 2003 no new firms entered it.  And no real consolidation took place. Occasionally, a 2- or 3-club group bought a club, but the Top 10 club companies did almost all of their growth via new builds. 2003 was a year of lesser overall new builds, except for the tiny express clubs.
Wall Street Struggles To Understand The Fundamentals Of This Industry When They Focus Solely On The Two Major Public Companies
Bally Total Fitness: A Health Club Company and a Consumer Finance Company
Wall Street analysts claim that they still struggle to understand the fundamentals of this industry when they focus solely on the two major public companies. Bally Total Fitness had to dramatically cut back their capital expenditures (cap ex) in 2003 to stay cash-flow positive. Also, they are not providing adequate maintenance cap ex for all of their existing clubs. They once again changed accounting treatment, which has challenged analysts in the short run. They had to revise their debt covenants for compliance and now are changing auditors. Their new membership sales were off dramatically in 2003. They delayed their year-end results, which caused great anxiety. And, most importantly, they continue to be viewed as a combination of a health club company as well as a consumer finance company (financing their 3-year memberships internally). 
"LifeTime Fitness has filed to go public. And there are rumors of one of the largest club companies going to be sold …"
The Sports Club Company
The Sports Club Company has challenged analysts because it has specialized in very high-end boxes with their landlord as a major investor. There is little outside trading in the stock. Although it recently opened 2 new facilities (1 in Los Angeles and the other in Miami), these are mainly management contracts. For a variety of reasons, few analysts follow the stock and do not see the company as typical of the club industry.
"The UK market was known for all of the public club companies. Now, almost all have gone back private"
In 2003 no major club companies were sold or exited the industry, and there were no IPOs (initial public offerings). This year, LifeTime Fitness has filed to go public. And there are rumors of one of the largest club companies going to be sold-in all likelihood, to another financial company rather than a club company. The UK market was known for all of the public club companies. Now, almost all have gone back private
Other 2003 News The UK market was known for all of the public club companies. Now, almost all have gone back private, so their high multiples of earnings are no longer a ready yardstick for the UK or U.S. markets. A few transactions occurred amongst the manufacturers as Icarian and Club Com were bought by Precor. More such sales are likely to occur in 2004. There were fewer new builds of wellness centers by hospitals. YMCAs and non-profits still post fair competition challenges. The diet center industry, which continues to grow and represents three times the size of the health club industry, still does not present a workable solution for most of its clients without the inclusion of a dedicated exercise component. Unfortunately, no major changes occurred in the role of government relative to exercise or among HMOs or insurance companies.
In 2004 Club Industry Will Improve Along With the Economy
However, 2004 could be a much more positive and active year for the club industry. In all likelihood, the economy will improve. More new builds and a few acquisitions will take place. Bottom lines will continue to remain impressive. Debt still will be attractive. Some new equity players will enter the industry. Financial analysts will study LifeTime Fitness and characterize it as more of a pure club company. Others may go public toward the 4th quarter. Fair competition issues will still be at the fore. A few HMOs or insurance companies may actually provide financial benefits for those who prove to be regular exercisers with real tracking of their data. 2004 may be significantly a better year for the club industry than the previous two years.
About the Author
Rick Caro is President of Management Vision, Inc., a consulting company focused on the club industry. He is an expert in the areas of finance, market feasibility studies, valuations, member research, expert witness testimony, club sales/purchases and operational analyses to improve existing club businesses. Management Vision can be reached at (800) 778-4411.
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 05/01/04
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