Sports Club/LA has long been the hangout for celebrities looking to rip their physiques and drop a few pounds. It was even rumored a few years ago that Brad Pitt and Angelina Jolie had requested the Beverly Hills location shut down a few hours while they worked out.
But for all its high profile, the Los Angeles-based fitness chain has not been immune from the struggles plaguing the highly competitive industry, which has margins as thin as some members' waistlines.
Burdened by a costly growth strategy, the publicly traded company was forced to drastically pull back two years ago and sell more than half of its clubs. Even worse for investors, it dropped off the American Stock Exchange, landed on the Pink Sheets and deregistered its common stock.
But in a remarkably short period of time, Sports Club Co. Inc. has started to turn its fortunes around. The company has plans to open two clubs and expects this quarter to register its first profit in years.
The question remains whether the company can sustain its turnaround as the nation heads into a recession with health club members notoriously fickle about maintaining memberships when times get tough.
"We're holding our breath, as is everyone else, as we go through the turmoil in the market," said Chief Executive Rex Licklider. "We're not recession-proof, but we certainly are recession-resistant."
There are reports that gym memberships nationwide are off 10 percent this year, but Sports Club Co. has carved itself a niche in the health club industry by catering to a predominantly wealthy clientele.
With dues running as high as $260 a month, members can do more than simply run on a treadmill or lift weights; they can get their hair styled, grab dinner in an upscale restaurant, have their car washed or relax with a hot stone massage. And they can do it all without leaving the property.
High-end health clubs are nothing new, but Sports Club/LA, founded more than three decades ago, has been a pioneer in the industry. In 2006, however, the outlook was not so bright.
The company had an ambitious but costly growth strategy in which it took on the development costs of new clubs in addition to the burden of operating them. That put a strain on the company's balance sheet and limited its ability to grow.
"We paid for developing the clubs ourselves. We put up all of the development money and took the risk on the leases," said Licklider.
The result? The company ran out of money for additional expansion.
That year, management was forced to sell its interest in five clubs in New York; Washington, D.C.; Boston; and San Francisco for $80 million. The capital-raising effort helped it pay down $100 million in outstanding credit obligations. But with losses increasing, management deregistered its stock amid waning investor interest. In 1997, shares were trading as high as $9.25 on the American Stock Exchange. Shares today still trade for just a fraction of that, at little more than $1 per share.
At the same time, the company decided to change direction and pursue a growth initiative modeled on the Four Seasons hotel chain, in which the company does not pay to develop the facility. Instead, Licklider said, his company will partner with developers to operate clubs in new building projects.
"We decided we would only expand again with developers that viewed us as an enhancement to their projects," he said.
By modifying its business model, the company has been able to focus more acutely on its core business: operating high-end gyms.
President and founder Nanette Pattee Francini doesn't even like to call the company's facilities which can cost more than $30 million to build gyms. "It's a completely different thing," she said, noting the luxury amenities.
Indeed, health club industry consultant Glenn Colarossi said Sports Club/LA is attractive in how it sets itself apart from standard fitness centers, allowing members to feel like they are getting more for their money than they might at other clubs.
"There's a social aspect to it," he said. "It's like a country club. The people that belong there are fairly affluent (and) they want to be among the right people."
Indeed, the chain has been called the "gym to the stars," with members including movie stars Tobey Maguire, Katie Holmes, Mark Wahlberg and singer Jessica Simpson.
Still, it's unclear how the recent economic chaos will impact the health club industry, which has seen membership lag as of 2007, the most recent year for which statistics are available.
"Membership numbers for 2007 did go down a little bit from the previous year," said Rosemary Lavery, public relations manager for the International Health, Racquet and Sportsclub Association. "The health club industry is certainly not immune to other factors that affect the economy."
The least expensive clubs could see a trickle-down of business, leaving midpriced clubs such as 24 Hour Fitness squeezed in the middle. "The midlevel clubs face the deepest challenge," Colarossi said.
But there is at least some evidence to suggest that the economy could hurt premiums outfits such as Sports Club/LA. Both Francini and Licklider said there seems to be less interest in some ancillary services such as facials, and the company is waiting to see if that trend will grow.
Francini said they are hopeful that the impact will be minimal because, as she pointed out, membership prices are relatively low for many of its members. "The people at our clubs aren't spending their last dollar to be a member."
In the meantime, the company is happy to be bucking the industry trends.
In addition to four company-owned clubs, including its flagship on Sepulveda Boulevard, the company has branding agreements with the operators of its former Sports Club/LA locations. It also plans to open two more company-owned clubs soon, including one in Dallas in an emerging 2.8 million-square-foot development being touted as one of the largest mixed-use projects in the country.
The company is also working to repair its finances. It recorded a net loss of nearly $1 million for the quarter as a result of a one-time impairment charge of $1.1 million related to real estate holdings. However, revenue stood at $16.4 million, up more than 4 percent from the same period last year. Membership revenue, meanwhile, jumped nearly 7 percent.
Though the company has not released third quarter earnings, Licklider indicated that the numbers will likely be strong.
"New membership sales for the first nine months are at record levels," he said.
The Sports Club Co. Inc.
Headquarters: West Los Angeles
Market: Pink Sheets (SCYL)
CEO: Rex Licklider
Core Business: Operating luxury health clubs
Market Cap: $22.6 million
Revenue: $16.4 million*
Net Loss: $969,000*
*Quarter ended June 30
Source: Yahoo Finance
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