Is Town Sports International (NASDAQ:CLUB) making any headway in its challenged business? The company has faced industry tailwinds, such as increased interest in fitness and an overall desire to be healthier throughout much of the United States, yet it has seemed unable to channel these trends into bottom-line improvements. Competition is greater than ever, with new players coming out of the tech world and improved offerings from at-home fitness entertainment services, but these brick-and-mortar gyms can provide attractive returns if run properly. With Town Sports' neighborhood focus, it has the potential to be a winner in the cutthroat industry. Let's take a look at the company as it approaches the latest earnings release.

Model competition
Ubergyms like Equinox and Life Time Fitness (NYSE: LTM) are providing premium experiences in lush, gigantic facilities that are as much about socializing as they are fitness. Town Sports plays a different game. The company has smaller facilities that operate under variations of the "Sports Club" moniker, depending on the town. While some of the facilities are higher market, many are standard issue -- weight rooms, running machines, and perhaps a yoga studio or spinning room.

The appeal of going to Town Sports is its convenience and relatively low cost, yet it's questionable whether that offer is holding up, as it's sandwiched between the premium gyms and new, lower-cost fitness alternatives, such as the Fitbit or a la carte outdoor fitness classes run by enterprising healthy people. For the last couple of years, Town Sports' membership growth has been negative, with the high-margin personal-training segment supporting an otherwise struggling business.

It's not that the brick-and-mortar overhead makes it too expensive; just look at Life Time Fitness for comparison. This company is moving toward even bigger facilities, like a 128,000-square-foot location it recently opened in Laguna Beach, Calif., while its sales and net income have grown steadily over the last few years. The stock has still lagged the broad market gains in recent years, though it is infinitely better than Town Sports' two-year loss of more than 30%.

Looking ahead
As mentioned above, Town Sports has a bright spot in its personal-training business. Management remains focused on enhancing and growing these offerings, which should keep things steady while the company homes in on customer retention.

In the coming earnings report, investors can expect some better numbers as the first quarter is always a great one for gyms (thanks to New Year's resolutions), though keep an eye on year-over-year membership trends. At the tail end of last year, the company saw some stabilization in its customer attrition, but we need more evidence before giving the all-clear.

All in all, Town Sports isn't too appealing a buy, even near its annual lows. There are better-performing gyms in the space trading at higher yet ultimately more attractive multiples. Life Time Fitness has an EV/EBITDA of 8.34 times. Town Sports trades at just five times trailing EBITDA, but it doesn't own the majority of its gyms (Life Time owns 70%-plus of its locations). The company certainly has the potential to get things moving the other way, but wait for further proof.

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