24 Hour Fitness on Monday filed for bankruptcy protection as the gym chain deals with the fallout from closures due to coronavirus. In an affidavit, Daniel Hugo, chief restructuring officer, wrote, “Put simply, the COVID-19 pandemic upended the debtors’ operating model leaving the debtors without a source of revenue to fund their operations.”
The Company, based in San Ramon, CA, and owned by private-equity firm AEA Investors and the Ontario Teachers’ Pension Plan, filed for Chapter 11 in the U.S. Bankruptcy Court in Delaware. It expects to secure about $250 million in debtor-in-possession (DIP) financing.
The filing was expected with the Wall Street Journal earlier reporting that 24 Hour Fitness had been shopping for a potential bankruptcy loan of as much as $200 million. The Company had also been in discussion with landlords, and the filing comes days after the fitness chain said it would be permanently closing more than 130 locations across the U.S. locations.
As of March 31, 24 Hour Fitness served approximately 3-to-4 million members in 445 locations across the U.S., all of which are leased.
“If it were not for COVID-19 and its devastating effects, we would not be filing for Chapter 11. With that said, we intend to use the process to strengthen the future of 24 Hour Fitness for our team and club members as well as our stakeholders,” said CEO Tony Ueber, in a statement. “We expect to have substantial financing with a path to restructuring our balance sheet and operations to ensure a resilient future. The COVID-19 environment has proved that attention to health and fitness is more important now than ever before. As a result of this restructuring, we will gain financial strength and flexibility to accelerate our business transformation plan which includes reinvestment in our existing clubs, opening new clubs and introducing several new innovative products and services that will enhance the fitness experience for our club members and guests for many years to come.”
Ueber continued, “I want to thank our team members for their unwavering commitment and our club members for their continued loyalty during such an unprecedented period in our lifetime and company history.”
The filing comes as middle-tier gym chains have been facing newer competition from less-expensive fitness chains, such as Planet Fitness, as well as newer fitness options such as boutique studio classes, including OrangeTheory and Soulcycle, as well as at-home fitness alternatives such as Peloton.
Gold’s Gym, a similar chain to 24 Hour Fitness with 700 locations, filed for bankruptcy in May and permanently closed 30 locations in April but plans to emerge from bankruptcy in August. In April, YogaWorks, which currently operates more than 60 studios, said it would be permanently closing its New York City locations.
In his affidavit, Hugo, a senior managing director at FTI Consulting who began working with 24 Hour Fitness in March 2020, said a number of operational missteps in prior years, with respect to transitioning the fitness chain’s then-current selling and operating model, had been negatively impacting financial performance.
Hugo said 24 Hour Fitness responded by appointing a new management team commencing in January 2019 and began implementing a number of operational and strategic initiatives to drive new-member growth and streamline its product platform.
The new leadership team has already identified several key initiatives that will better position 24 Hour Fitness for success including reintroducing in June 2019 an in-club salesforce to drive memberships. The chain in 2017 shifted to an “EVO” model that provided member prospects with more self-service options and was seen as less aggressive than past recruitment tactics, but “ultimately impaired their ability to convert potential members into actual dues-paying members,” according to Hugo.
Other steps taken by the new management team include reducing the complexity of its membership types, pricing model and club classifications; efficiently replicating on-trend concepts in its fitness clubs; seeking partnerships with providers of on-trend concepts; and undertaking a lease rationalization process.
Wrote Lugo, “By implementing these initiatives, the debtors hope to both broaden the population of members and potential members and offer more products and services that their current members will purchase from them.”
Lugo said that new-prospect conversion rates have been improving, and management expected to see growth on a year-over-year basis again once the June 2019 implementation had been lapped. Lugo wrote, “COVID-19, unfortunately, stopped these developments in their tracks.”
On March 16, 24 Hour Fitness closed all its clubs in response to the recommendation of the Centers for Disease Control and Prevention (CDC) as well as various state and local laws, regulations and/or governmental orders. Monthly membership revenues were suspended on or about April 15. Wrote Hugo, “In short, the debtors have not generated any material operating revenues for nearly two months.”
With its clubs shuttered, steps were identified to improve 24 Hour Fitness’ balance sheet and club footprint to reposition the company.
With the assistance of Hilco Real Estate, negotiations began with landlords to improve lease terms and “facilitate the cost savings necessary to rightsize their go-forward club footprint.” The Company will be requesting court approval to reject approximately 135 club leases.
24 Hour Fitness has also begun the process of re-opening its club locations as various “shelter in place” and similar orders have been lifted with a focus on the safety of employees and members. As of June 15, 20 clubs have reopened in Texas. The majority are expected to reopen by the end of June.
Finally, 24 Hour Fitness will continue with the various operational initiatives developed by the new management team to enhance its operational profile.
On the financing side, 24 Hour Fitness’ liquidity is limited with the chain entering Chapter 11 with less than $9 million cash on hand and facing a re-opening process in its early stages. Hugo said 24 Hour Fitness is “determined to utilize the Chapter 11 processes to enhance liquidity through debtor-in-possession (DIP) financing, to obtain the ‘breathing spell’ provided by Chapter 11 and to use the bankruptcy toolkit to help rightsize its footprint and balance sheet.”
With respect to DIP financing, an ad hoc group of lenders has agreed to fully backstop a $250 million new-money senior secured note to support these Chapter 11 cases and the 24 Hour Fitness reorganization efforts. Members of the ad hoc group, hold approximately 63.3 percent of the aggregate principal amount outstanding under the prepetition credit facility and approximately 73.9 percent of the face amount of the senior unsecured notes. 24 Hour Fitness has engaged in “productive discussions” with the ad hoc group around a holistic reorganization, and those discussions are expected to continue “with the goal of building consensus around a deleveraging transaction and filing a plan of reorganization in the near term,” said Lugo.
24 Hour Fitness’ balance sheet includes approximately $1.4 billion of funded debt consisting of approximately $930.3 million in principal amounts outstanding under its prepetition credit facility and $500 million in principal amount of unsecured bond debt, as well as the substantial rental expense associated with its club fleet. In 2019, 24 Hour Fitness generated revenue and adjusted EBITDA of $1.5 billion and $191 million respectively.
The Top 30 unsecured creditors listed in the Chapter 11 petition are:
- Wells Fargo, $500,000,000
- Kellermeyer Bergensons Services, $8,829,781
- Veritas Media Group LLC, $6,291,723
- Axiom Construction Company LLC, $4,210,514
- Raymond Construction Inc., $2,756,804
- DGC Capital Contracting, $2,641,504
- Club Resource Group Inc., $2,559,035
- AT Kearney Inc., $2,523,777
- Muscle Foods USA, $2,431,967
- Epsilon Agency LLC, $2,222,781
- Cumming Construction Company Inc., $2,191,607
- Staples Contract & Commercial LLC,$1,850,411
- Cal Select Builders, Inc., $1,732,328
- SMA Architects PC, $1,496,711
- PCM Sales Inc., $1,289,431
- Keono, $1,176,143
- Precor Inc., $1,084,903
- Microsoft Corporation, $934,689
- 600 Broadway Partners LLC, $929,495,
- 225 5th Avenue NY LLC, $915,792
- Colorado Pool Systems, $861,768
- Radius Global Solutions LLC, $848,149
- Wiedenbach-Brown Co., Inc., $829,648
- Piranha Industries, $821,832
- Palomar Fitness Partner LP, $802,270
- 1680 Kapiolani LLC, $801,229
- Annapolis Towne Center at Parole, $789,742
- BP-CGCenter I LLC, $777,688;
- Hoist Fitness Systems, $749,820
- Costco Wholesale, TBD
Photo courtesy 24 Hour Fitness