By JESSICA TOLEDANO
Sports Club Co. is probably best known for its Westside flagship on Sepulveda Boulevard, where a small army of valets hustle to open European-car doors for L.A.'s fit and wealthy.
But the company is expanding beyond its Westside roots, rolling out upscale clubs nationwide for the high-income 35- to 55-year-old crowd.
Some 2,200 workers are employed at the company's 14 high-end health clubs, which include celebrity hangouts like the Reebok Sports Club/New York. The chain counts among its 75,000-plus members Magic Johnson, Madonna, Bruce Springsteen, Princess Stephanie of Monaco and Arnold Schwarzenegger. The clubs are touted as "urban country clubs," featuring swimming pools, cafes, personal trainers, spa services and high-tech fitness equipment.
"Our concept has proven to be so successful that we decided to expand on it," said Michael Talla, co-founder and chief executive. "Plus, lower interest rates, a good real estate market and a good economy has made it a lot easier to expand. We are positioned well for the future."
This year alone, the company has acquired six clubs in Southern California, the Vertical Club in New York and a Las Vegas club that has been renamed Sports Club/Las Vegas. More than $8 million is being invested in capital improvements to those newly acquired centers.
In addition, construction is underway on sports clubs in Houston, Washington, D.C., San Francisco, Boston and at New York's Rockefeller Center. Those clubs are all slated to open over the next three years.
"They are the dominant player in the high-end market," said Paul Roukis, an analyst at Schroder & Co. Inc. "The growth is there, but it is really going to be marked by the new club developments."
In the next few years, membership is expected to grow by 40,000, which would represent more than a 50 percent jump from the current levels.
But growing profits will not come as easily, or quickly, according to David Rose, an analyst at Jefferies & Co. Inc. "New clubs tend not to be profitable right away. Typically you incur a lot of front-end costs, so it takes awhile to experience profitability," he said.
The company reported net income in 1997 of $1.5 million (12 cents a share), down from $1.7 million (15 cents a share) a year earlier. Sports Club President John Gibbons attributed the profit dip to a 1997 lawsuit that was settled for $2 million. The lawsuit was over a lease agreement on the Century City Spectrum Club, which the company shut down.
Second-quarter results, released last week, also were affected by a one-time extraordinary expense. To facilitate a secondary offering last April, company executives elected to pay down debt early and incurred $2.1 million in pre-payment penalties.
As a result, the company posted a second-quarter net loss of $462,000 (8 cents a share), compared with a net loss of $724,000 (6 cents a share) for the like period a year ago.
Still, operating income was $1.7 million for the second quarter, compared with an operating loss of $724,000 in the year-ago quarter.
Roukis projects earnings to trend upward once more clubs are opened in the next few years. His one-year target price for the stock is $11. It was trading last week just below $7, closing on July 28 at $6.75 a share.
"Things are moving up for them and for the fitness industry," Roukis said. "Potential investors will have to believe in the ability of their model. You have to believe in their focus of the market."
One challenge has been trying to get more recognition on Wall Street. "We get left in the dust like a lot of smaller companies," said Talla. "Until we are a $400 million to $500 million company, we are not going to get noticed. An investor is looking at a good solid two-year hold and will realize gains in the next couple of years."
Sports Club Co. was started by Talla and Nanette Pattee Francini in 1979. They used an initial investment to open a 40,000-square-foot upscale gym in Santa Monica and signed up members from a trailer. A second location was then purchased in Beverly Hills and the company began to grow. (Both those two original locations have since closed.)
YEAR (Dec. 31) 1997 1996
Revenue (millions) $61.1 $36.9
Operating Expenses (millions) 54 31.5
Operating Income (millions) 7.1 5.3
Net Income (millions) 1.5 1.7
Earnings Per Diluted Share $0.12 $0.15
Business: Health clubs
Headquarters: West Los Angeles
CEO: Michael Talla
Market Cap: $140 million Dividend Yield: N/A*
Total Liabilities: $73 million P/E Ratio: 47
Long-Term Debt: $50.7 million
* Sports Club Co. does not pay dividends.
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