"Gyms need their members not to come, but they can't just lock the doors," noted Caitlin Kenney in Planet Money, NPR's economics podcast. "So they have to rely on consumer psychology to get you excited enough that you'll sign up for a gym membership, but not so excited that you'll get up an hour early to do some crunches before work."
Indeed, ask any physical trainers and Yogis: owning a fitness center is a straight forward business model. You lease 2,000 to 20,000 SF space, buy or lease some fitness equipment and get as many customers signed up. The fitness industry's rule of thumb is that if you can sign up 20 times the capacity of the studio, you will be in good shape .
But it's a tough business. First, not unlike the hotel business, customers’ expectations and standards increase with time. Hotel guests now demand flat screen TVs and at least a queen bed; gym members expect Peloton machines and shiny, new barbells. In short, you constantly must reinvest cash in the business
Another drawback is that the two largest operating costs - lease payments and labor wages - increase over time. And while these expenses rise, customers are not paying more than roughly $40 a month.
This is because there are plenty of options. People can exercise outside at no cost; they can subscribe to an app  for a fraction of the cost or they may simply go on a diet and give up on physical exercise.
Webflow is the way to design, build, and launch powerful websites visually — without coding. While working full-time, at nights I developed Pen & Paper using Webflow.Webflow empowers you to create for the web.
In their words: "In today's web, the means of production lie in the hands of the few. We want to change that, and help create a more beautiful, diverse web. We want to democratize access to the tools and knowledge required to build beautiful, well-coded websites, web apps, and - eventually - digital products of all kinds."
While the fitness business is competitive with little barriers to entry , I bought a few shares in Town Sports International Holdings (CLUB on Nasdaq), a fitness company with a pygmy market capitalization of $54 million or about $2 per share.
I calculated the 2018 free cash flow to be $15.1 million or $0.57 per share and the 2017 free cash flow to be $18.9 million or $0.73 per share. In other words, if the last two years serve as proxy, Town Sports' cash flow will pay back investors their original investment in less than four years.
There are few publicly-traded fitness companies. A quick glance at Planet Fitness shows that buying Town Sports is for the bargain hunter. In 2018, Planet Fitness traded as low as $29 and as high as $57. The company generated pre-tax earnings of $131.8 million, or $1.51 per share, which translates to price to pre-tax earnings ratio range of 19 times to 38 times.
Compare that to Town Sports, which earned $38.6 million in pre-tax earnings, or $1.45 per share. CLUB's stock traded as low as $5 and as high as $15 - a range of 10 times to 3 times the price to pre-tax earnings. Today, at about $2 per share, CLUB is trading at 1.4 times the 2018 earnings.
CLUB's bargain stock price comes alongside serious red flags. The list of concerns includes:
(1) the company's CFO, Carolyn Spatafora, has been selling the stock. She sold about 96 thousand shares this year , over 60% of her vested interest in the company.
(2) The company's debt matures in August 2020. Read: if the U.S. economy is in recession in a year, it is questionable whether lenders will finance the operations.
(3) Two thirds of CLUB's gym members are on a month-to-month basis. To me, this shows that there is hardly any brand loyalty and that customers are unwilling to commit.
(4) Management decided this year to hide its financial statements key information from readers. For many investors, that act alone would deter investment. Yours truly hopes that management action is simply because it would like to hide information from competitors.
But that is probably wishful thinking. Michael Shearn, who wrote The Investment Checklist: The Art of In-Depth Research would be appalled by my action. In his words:
I have learned that if the strategy of the business is based more on hiding information from competitors rather than outperforming competitors, it is far less likely that the business will have a long term success.
Careful readers of CLUB's prior annual reports would detect a deterioration in key metrics. So, it is little surprise why management would want to hide them.
A few illustrations: in 2013, the average revenue per member was $78 per month. As of 2017, the metric dropped by 24%, to $59. In 2013, the annual attrition  was 41.9% while in 2017 it was 47%.
Finally, in 2013, revenue per weighted average club was $2.97 million. The revenue dropped to 11% in 2017 to $2.64 million.
Founded in 2004, by Charlie Tian PHD, GuruFocus provides institutional-quality financial stock research for the individual investor.
GuruFocus hosts many value screeners and research tools and regularly publishes articles about value investing strategies and ideas. One of the features I use most is the 30-year financial information on businesses. Visit the 30-year analysis on Town Sports International to see more.
Patrick Walsh, who Forbes Magazine describes as a "Warren Buffett enthusiast" wrote to CLUB's shareholders that "patience is a minor form of despair, disguised as virtue."
I take a less cynical approach and estimate that there are few things good happening now and a few things worthwhile to be patient for.
First, Walsh is fiercely buying the stock. He bought 643 thousand shares this year at a weighted cost of $2.5. This amount was added to his already 3.1 million shares, which represent about 14% of the common stock outstanding.
Second, managing gym clubs does not require sophistication or expertise. I believe it is a matter of time before financial results return to a net profit margin of 10%, with Walsh in leadership or without him.
A year ago, the Jewish Community Center across the street increased by almost two-fold the monthly membership rate, from $32 to $57. Infuriated by the price increase, I said to Jillian, the members' relationship manager at the time, that I would take my business elsewhere.
I never did. The convenience of having the JCC across the street from my office, and the community of people I became friends with, far outweighed the price hike. It is my hope members of CLUB fitness centers have the same experience.