Town Sports International Holdings, Inc. Q2 2009 Earnings Call Transcript

Jul.29.09 | About: Town Sports (CLUB)

Town Sports International Holdings, Inc. (NASDAQ:CLUB)

Q2 2009 Earnings Call Transcript

July 29, 2009 at 4:30 pm ET

Executives

Alexander Alimanestianu - President and Chief Executive Officer

Dan Gallagher - Chief Financial Officer

Analysts

Paul Lejuez - Credit Suisse

Cassandra Stevenson - KeyBanc Capital Markets

David Cohen - Midwood Capital

[Jerry Rogers] - Deutsche Bank

Dan Gallagher

Thank you for joining us today. This is the Town Sports International Holdings earnings conference call discussing 2009 second quarter results. I am Dan Gallagher, Chief Financial Officer of the Company.

We caution listeners that to the extent we make any forward-looking statements in this conference call, they are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside of our control, which may cause actual results to be materially different from any forecast we have made. These risks and uncertainties are described in our reports filed with the SEC.

We have issued a press release discussing our results for the quarter, which will also be filed with the SEC under Form 8-K. In addition, to those of you who do not have access to this release and filing, we have also made them available at our website, www.mysportsclubs.com. This conference call is also being webcast and may be accessed via the Company's Investor Relations section of our website. Also, a replay and transcript of the call will be available via the Company's website following this call.

I now turn this call over to Alex Alimanestianu, the President and Chief Executive Officer of Town Sports International, for discussion on operations of the Company. And then I will give further detailed financial discussion later on in the call. Alex?

Alex Alimanestianu

Thank you, Dan, and good afternoon, everyone. We are pleased to be with you again to provide our second quarter 2009 results. We are now at the halfway point of 2009 and hopefully beyond the halfway point of the current recession and our business continue to generate significant positive cash flows and have been relatively stable, especially in the areas that we can directly impact and control like number retention.

For the six months ended June 30, 2009, we produced $51 million of cash flow from operation as compared with $57.3 million in the same period last year. Also, our ability to retain members is reflected in our attrition rate which we have been able to maintain in the range below 4% per month and far below the levels we saw in 2002 and 2003 as the result of the last recession.

As we have discussed on previous calls, over the past 18 months, we have been very focused on improving the member experience in our club as we believe this is the best way to both retain and attract new members over the long run and also the best way to grow our earning. Based on our member feedback in our Mystery Shopper scores, we know that these programs are having a strong impact on member satisfaction and the quality of club operation and we are also confident that this will benefit our bottom line in the future. The challenges we face today are primarily getting new members to join our club and the numbers that we have grown accustomed to and getting current members to purchase personal training session at the historical level.

We view these as primarily economic issues and we will write out this long recession by reducing expenses and keeping capital expenditures to a minimum while at the same time continuing to invest in initiatives that improve the member experience and strengthen our brand.

I would like to highlight some information and statistics that we are getting from our clubs to give you a better understanding of our stride in improving our member experience. While our longer term goal is to bring our attrition rate below 3% per month, in this environment, we were pleased with the average monthly attrition of 3.7% from the second quarter and if not for the initiatives in club operation that we have put in place over the past year, we believe our attrition would be materially higher today.

One metric which we believe reflects our success in enhancing the member experience that we have talked about before is overall club usage. Total usage was up 10% in the quarter and up 8% at our comparable club despite our ending the quarter with fewer members.

Another example of our progress is demonstrated by our Mystery Shopper scores which continue to increase to new high level and for the first time in June, exceeded our initial target set when we started the program over a year ago. We have seen increased at every quarter and we expect ongoing improvements as we continue to improve the way we manage the club. For instance, the general manager and fitness service manager bonuses are now tied to these Mystery Shopper scores.

We have another key performance metric called our net related score. For this, we compare customer feedback that is negative versus positive. The net feedback turned positive in the first quarter of this year and increased considerably in the second quarter so we now have a meaningfully higher percentage of feedback that is positive versus negative and are nearing our initial target for this metric.

One last thing I want to say about our attrition rate is that while the rate has increased for inactive members which is to be expected as they become more cautious with personal expenditures during a recession, it has remained very flat or even improved for regular and frequent club users, something we are very proud of and which gives us confidence in ultimately lowering our attrition rate when economic conditions improve.

Looking at other metrics in the quarter, our total membership at the end of the second quarter was 503,000, down 2.7% from a year ago. Membership decline primarily reflects the economic environments impact on our ability to recruit new members which again is something that is hard to control in keeping existing members happy. The year-over-year decline is in line with our internal expectations and will likely continue through the end of the year.

Corporate and group memberships continue to be a bright spot. We ended the quarter with approximately 61,000 corporate members, an increase of 25% over Q2 2008. We also sold approximately 5% of our new memberships in the quarter online through a program we launched in December. We continue to focus on group and online sales channels to reach new members as these channels enhance the experience of joining our club but also reducing our new member acquisition cost.

The noticeable area in which we saw a drop off for the quarter was same club revenue which was down 6.3%. One of the key issues within this decline was ancillary revenue, another area that is being directly impacted by economic conditions and therefore, it is more difficult for us to control. Similar to what we saw last quarter despite usage in our clubs increasing, our members are spending less money on our ancillary services just as they are in other areas of discretionary spending.

We are also seeing in-club advertising weakened which is another part of ancillary revenue that we have little control of. Price also contributed to the same club revenue decline. To respond to the consumers' extreme price sensitivity, we are discounting new memberships such as our first month free or current summer free program which lowered our overall monthly dues rate. We are also seeing some member trade down to lower price plan while at the same time; we are losing some older members who paid higher monthly fees.

And finally, the reduction in membership is also impacting the same club revenue. Unfortunately, we believe each of these issues will remain in place for the rest of the year, we believe the same club revenue decline could get a little worse in the second half of the year.

On the expense front, we have continued to revenue our cost structure in search of operating efficiencies. Our new central laundry facility announced for New York has now been successfully in operation for more than 2 months. We continue to expect to see $1.5 million of laundry related cost savings in 2010. Through the reduction of club operating hours and the cross training of club personnel, we have made reductions to overall corporate and club payroll by nearly $5 million on an annual basis while at the same time upgrading the quality of our club management teams and the corporate team that supports the club.

We are also making progress on our rent renegotiations and expect that we will achieve cash savings and occupancy cost of roughly $1 million this year and at least that amount next year. Some of these reductions are longer term while some just provide short term relief but we are doing everything we can to align our current expenses with revenue trend. We are taking advantage of the real estates market weakness to extend club leases where it make sense to do so and are also closing clubs that are not performing up to our financial expectations or strategically do not benefit our portfolio.

There were no club openings in the second quarter and there is no additional Greenfield club openings expected this year. As a reminder, we opened four clubs in the first quarter. Now, we closed our club in Parsippany, New Jersey on June 30th and as you know, this was our fourth closing of the year. We have two other clubs fated to close this year and we are assessing one or two others for possible closure.

Looking ahead, while we have had to lower our internal earnings budget for the second half of the year, our key goals for 2009 remain the same, to maintain the solid balance sheet, stay safely above our debt covenants against this year while continuing our initiatives to improve the member experience. With respect to the balance sheet, we started the third quarter with $16.1 million less net debt outstanding than we carried at the end of last year and the recent amendment to our senior credit agreement which Dan will discuss later provides us further room on our primary financial covenant.

Also, now that we have made good progress on our member experience and other operational initiatives which has been a critical priority since I took over the CEO in November 2007, we have heightened our focus on the sales and marketing front. To further that agenda, we are in the final stages of interviewing candidate for Vice President for Sales and Marketing position. While this will be a new position for the Company, of course we will replace that of our former head of Corporate Sales who left the Company during the second quarter.

The initial goals for this new Vice President in addition to driving membership sales and ancillary revenues will be to review our go-to-market strategy and brand positioning as well as certain aspects of our sales model. We expect to fill this key position shortly with the highly talented executive who will bring new leadership skills and vision for the sales and marketing area and help drive the effectiveness and productivity in this critical area in the business.

In the near term, we are stepping up our promotions to attract new members. In July, we have been pleased with the success of our summer free promotion which waives the monthly dues through August when paying an initiation fee of $49 to $69. We are running several other promotions this quarter which target very specific groups and we are also offering to all new members our fitness journey program which offered a complementary, structured exercise program including meeting with the member of our fitness team once per week for six weeks.

The primary objective of this program is to engage and inspire our members to make exercise an important part of their weekly routine. This will be the foundation of our future fitness platform. July is the inaugural month for the fitness journey program and we expect to offer it more broadly in the coming months to existing members and particularly to inactive members where we see an opportunity to reengage and motivate them to return to the club.

To drive revenue in the personal training area, we are increasing promotions on less costly 30 minute personal training session, regular session for 60 minute long. We have recently completed the review of our membership pricing and we will be adding our two-year commit membership option to 27 clubs. This membership type is generally at a $10 per month discount from our one-year commit membership option. After these additional clubs are added, approximately one third of our clubs were also the two-year commit membership option. We will also be reducing dues on our one-year commit membership option by $5 to $10 per month at 24 clubs.

We have taken these steps at our most price sensitive clubs in order to make sure that our price points are properly aligned with the marketplace and to make sure that we are maximizing new member sales with these locations. Also, each year in September, we increased dues of existing members. Given this year's consumer environment and the impact of dues increase might have on attrition, our dues increase is planned to impact less than 10% of our members and result in a very modest overall increase in due.

And finally, we do not know when or what type of federal health care plan will be passed in Washington but we expect there will be clear recognition in the legislation that fitness and exercise are basic integral components of wellness and prevention and we are hopeful that the reform legislation will provide meaningful financial and tax incentive to promote and support fitness club membership.

So, in summary, we feel good about how we performed to the first half of 2009 whether it is positive longer term trends in fitness or the initiatives we are pursuing right now to improve our clubs, we are confident that we will be well positioned when the economy begins to improve. As we stand now, we feel like our business is stable. We continue to be focused on completing the rollout next month of our operational excellence program making sure we continue to upgrade our member experience as we believe it is most effective membership potential that we can deploy and also that it will build strong word of mouth support for our brand over the long term.

We also are now bringing a greater focus to strengthening the sales and marketing functions within our Company and look forward to speaking more about this in the future. But, I am most excited about the feedback we are getting from our members about how our club teams and our fitness programs have improved their life and also that we are now getting more positive customer feedbacks and negatives from the first time we have started tracking this metric. We know that our brand now has positive momentum and while the economy may keep this momentum from showing up in our bottom line over the short term, we are confident that it will benefit our Company and our shareholders for the years to come.

Now, I would like to turn the call back over to Dan Gallagher to provide more details regarding our financial performance. Dan?

Dan Gallagher

Thank you, Alex. I will run through the details of the quarter and then discuss our outlook for the third quarter. For the second quarter, our consolidated revenue was $123.9 million, a decrease of 4.2% over the second quarter of 2008. Membership revenue was $101.7 million as compared to $105 million in the same period last year and as of June 30th, 2009, we had 503,000 members which is 2.7% fewer members when compared to June 30th, 2008.

Total ancillary club revenue totaled $20.9 million, a decrease of 8.1%. Within ancillary revenue, personal training revenue declined 9.2% to $15.2 million, while other ancillary revenue declined 5% to $5.8 million.

Revenue at comparable clubs –those clubs opened over 12 months –decreased by 6.3% for the quarter. Within same club revenue, the components were as follows: Price declined 1.9%, membership declined 1.9% and ancillary club revenue and fees declined 2.5%, with the drop in personal training having the biggest impact on ancillary revenue. Price was impacted by an increase in members that have their membership on freeze, promotions to attract new members to our clubs and cancellations by members that paid higher rates than our member base average.

The decline in membership is the reflection of challenges in recruiting members in this consumer environment. Because we ended the quarter with 4.2% less members at our comparable clubs and we expect continued pressure on ancillary revenue, the decrease in comparable club revenue is expected in the third quarter.

Total operating expenses increased 2% for the second quarter of 2009 when compared to 2008. We ended the quarter with a 2.5% increase in total club months under operation and 483 at the end of the second quarter of 2008 to 495 in the coming quarter. Also, total member usage was up 10%. These increases put pressure on payroll and related expenses as well as club operating expenses.

Overall, payroll and related expenses decreased by $407,000 whereby 0.8% to $48.2 million in the second quarter due to several factors. The decrease was due to lower management incentive bonus expense as well as a reduction in personal training payroll. This was partially offset by higher payroll cost associated with discounted membership fees. The payroll cost we can defer are limited to the amount of initiation fees collected thus lower fees resulted in an increase of approximately $1.3 million in payroll expense.

Club operating expenses increased $3.5 million, or by 8.5%, to $45.1 million. This increase is principally due to expenses at the 11 clubs we opened subsequent to April 1st, 2008. Also in the quarter we recorded $700,000 of rent expense in connection within anticipated judgment in favor of one of our former landlord and the advertising and marketing cost for the quarter increased $669,000 to $1.5 million. This puts our year-to-date advertising and marketing spend in line with the first six months of 2008.

General and administrative costs totaled $7.5 million for the quarter, a decrease of 15.8% versus the second quarter of 2008. The decline was principally due to $866,000 decrease in liability insurance expense. We experienced the decline in claims activity as well as the reduction in claims exposure associated with our decrease in membership and this had a positive impact on our claims reserves.

Depreciation and amortization expense totaled $14.3 million for the quarter, an increase of 12.8% versus second quarter of 2008. The increase in depreciation and amortization was primarily driven by the 11 new clubs added after April 1, 2008. As a result of these items, operating margin for the second quarter of 2009 was 7.1% as compared to an operating margin of 12.7% in the second quarter of 2008.

Interest expense was $5.3 million for the quarter, compared to $5.6 million in the prior year's second quarter. We continue to benefit from a decrease in short-term interest rates charged on our outstanding term loans. Interest charged on our term loan averaged 2.2% this second quarter compared to 4.4% in the second quarter of last year.

Fully diluted earnings per share for the second quarter were $0.11, compared to earnings per share of $0.26 last year. Our weighted average diluted share count for the second quarter of 2009 was 22.6 million shares, down from 26.5 million shares in the second quarter of 2008.

As you know, we previously announced a stock repurchase program to repurchase an aggregate of up to $25 million of the Company's common stock, which continues through December 2009. We repurchased 2.1 million shares at a total cost of $5.4 million in the first quarter of 2009 resulting in a decrease of total common shares outstanding from approximately 24.6 million shares as of December 31st, 2008 to approximately 22.6 million as of June 30th, 2009. We did not have any stock repurchases during the second quarter of 2009.

Cash flow from operations for the first six months of 2009 totaled $51 million compared to $57.3 million for the comparable period in 2008. The decrease in cash flow from operations is primarily due to the decrease in earnings. Cash paid for taxes decreased almost $10 million over the period. Actually we will be making the first cash interest payment on our senior discount notes totaling $7.6 million. This will reduce our third quarter cash flows from operations when compared to the third quarter of 2008.

Capital expenditures totaled $20.5 million year-to-date and we expect capital expenditures for the full year of 2009 to approximately $50 million to $53 million. This amount includes approximately $23.5 million to continue to upgrade existing clubs $8.6 million to support and enhance our management information systems and $4.5 million for the completion of the new regional laundry facility in corporate office. The remainder of our capital expenditures principally relates to 2008 and 2009 new club opening. We opened four clubs and closed four clubs in the first half of 2009 and we plan to close two additional clubs in 2009.

Turning to our balance sheet, total debt as of June 30, 2009, was $324.3 million, and our cash position was $12.8 million, net debt figure with $311.5 million. On the first six months of 2009, our net debt outstanding decreased $16.1 million. On July 15, 2009, we amended our 2007 credit agreement to evaluate the language to EBITDA such that we are now permitted to add back one month cash charges related to the impairment or write down of fixed asset and tangible assets or goodwill when performing a leverage ratio test.

Related to the amendment, we also agreed to reduce our revolver commitment from $75 million to $63.8 million. As of June 30th, we had $5 million outstanding on our revolver and $13.3 million of what is of credit outstanding. We continue to have adequate room in the primary financial covenant with our new senior credit facility that expires February 27, 2012. As of June 30, 2009, our gross leverage ratio taking into account the revised definition of EBITDA was 2.05 to 1.0 while our covenant requires a ratio of 4.25 to 1.0 or below.

Turning to our outlook, we are limiting our guidance to the third quarter of 2009. Based on the current business environment, our recent performance, and the current trends in our marketplace; and subject to the risk and uncertainties in our forward-looking statements, our outlook for the third quarter includes the following.

Revenue for the third quarter is expected to be between $117 million and $119 million versus $128.1 million for third quarter of 2008. We expect payroll, club operating and depreciation and amortization expenses in dollars to be similar to the second quarter of 2009, although increase as a percentage of sales. We expect third quarter general and administrative expenses to approximately first quarter levels. We expect the net loss for the third quarter of between $1.5 million and $2.5 million and a loss per share to be in the range of $0.07 per share to $0.11 per share assuming the 34% effective tax rate and $22.6 million of our weighted average full shares outstanding.

We would now like to turn the call over to any questions anyone may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Paul Lejuez - Credit Suisse.

Paul Lejuez - Credit Suisse

What percent of your members are inactive right now? I was just wondering what that looked like and relative to the same time last year and how that may have trended over the last couple of quarters.

Alex Alimanestianu

Paul, it is trending down. There are so many different definitions…

Paul Lejuez - Credit Suisse

Yes, what is yours?

Alex Alimanestianu

…that we looked at and that I just do not want to be too granular about any particular definition. In the industry standard it is around 23% but the definitions are all over the place in terms of what period of time the member has been inactive and whether it is 30, 60, 90 and how active is active. So, I could tell you the trending down and we are very focused on keeping that trend going in that direction.

Paul Lejuez - Credit Suisse

Did you say that about 20% you would say or..?

Alex Alimanestianu

I mean, I think that the industry norm.

Paul Lejuez - Credit Suisse

Yes, any figure around that level?

Alex Alimanestianu

It depends on the period of time we are looking at and we do not want to get into granularity on that definition.

Paul Lejuez - Credit Suisse

Got you and can you remind us, you have got a couple of clubs pool where you have members come in to the summer. Are those members already the most part included in that second quarter membership count?

Alex Alimanestianu

When we give out our membership count numbers, we actually exclude the summer members. So, those are full time members that we disclosed.

Paul Lejuez - Credit Suisse

Okay. So, how many approximately would you typically get during the summer month that are excluded?

Alex Alimanestianu

That is excluded? We will put it in our 10-Q. We are basically; we have two types of summer members. Some are the pool members and some are, which join our outdoor pool complexes and others are student memberships which are just the kids are back from school and here for the summer. So, there are two different types of them but I do not want to give out an exact number. All I can tell you is that together the group we are trending very similar to last year.

Paul Lejuez - Credit Suisse

Both of those, the pool and the students are excluded?

Alex Alimanestianu

Yes.

Paul Lejuez - Credit Suisse

Yes, got you and I guess just wondering if you have seen any higher percentage of, I do not know, maybe you collect early cancellations once members are released from a committed membership. Are you feeling like people are paying more attention for when that membership classes so that they can cancel on those commit memberships?

Alex Alimanestianu

We have not seen anything significant in that respect. I think people are paying more attention to all expenses and the thing we are focused on is especially the inactive group and how to make sure that we are doing everything we can to get them back into the club. That is where the biggest drop out attrition risk is, as we see it.

Paul Lejuez - Credit Suisse

Can you give percentages in terms of what percent of your memberships are month to month or one year versus two years?

Alex Alimanestianu

Yes, give me a second on that Paul. I know something you usually you ask for is, how many are in the commit membership and right now that number is 37.3% of our members are in a commit membership contract.

Paul Lejuez - Credit Suisse

And that is probably skewed much more towards the one year, correct?

Alex Alimanestianu

Yes, very much so.

Paul Lejuez - Credit Suisse

Alright, that is good enough for me.

Alex Alimanestianu

Alright, I could follow up on the percent in commit versus non-commit. I got it. The month to month would be obviously 62.7% and as far as the commit contracts, over 70% of them are one-year commits.

Operator

Your next question comes from the line of Cassandra Stevenson - KeyBanc Capital Markets.

Cassandra Stevenson - KeyBanc Capital Markets

I am just calling in for Scott Hamann. Well, I was wondering first of all if you could talk about the competitive landscape in some of your end markets. Are you perhaps benefiting at all from smaller clubs going out of business in just general trends?

Alex Alimanestianu

Yes, the number of clubs closing is certainly accelerating and it is not just smaller operators, it is also valley clubs and crunch clubs and some other regional players that are closing clubs and we are benefiting from that across the four regions. Expect that will accelerate. It is hard to quantify the impact of it at this point but certainly in this difficult time, the smaller, less well capitalized clubs with thinner margins are the ones that are most vulnerable.

Cassandra Stevenson - KeyBanc Capital Markets

Okay, and then you talked a lot about attrition already but I was wondering if you could give us an idea to a timeline for improvement in terms of…

Alex Alimanestianu

Well, the third quarter is a seasonally high quarter for attrition and then in the fourth quarter, we expect to see some improvement. In terms of narrowing the gap versus prior periods, we expect to see that in the fourth quarter so we are going to see less of, we will see a return closer to the prior period attrition rates. We have been averaging around 50 basis points higher but we expect that to come down in the fourth quarter.

Cassandra Stevenson - KeyBanc Capital Markets

Okay great, and then lastly, I was just wondering if you could speak about maybe any adjustments you made to sales commissions or net structure just to realize that our marketing efficiencies in terms of member acquisition cost.

Alex Alimanestianu

We have not revised our commission structures on the membership consultant compensation plans.

Operator

Your next question comes from the line of David Cohen - Midwood Capital.

David Cohen - Midwood Capital

It is nice to see the cost become more in line in the quarter. I am wondering, is there more room to reduce cost on payroll related and club operating as we trended? I understand you said for some of the third quarter but are there additional reductions that can happen over the second half in those areas?

Alex Alimanestianu

It is a constant effort but it is a balancing act between maintaining the level of service that we need to maintain especially in an environment where usage is up 8% in comparable clubs and so the demand is very strong for us and the clubs are very busy so you cannot, you have to be extremely careful about cutting housekeeping or group exercise or operating hours for that matter.

So, it is a constant effort. We are focused on that as well as corporate expenses and I do not think, Dan, we have anything specific to talk about.

Dan Gallagher

No, other than the…

Alex Alimanestianu

Than we what talked about.

Dan Gallagher

Yes, we are always looking for efficiencies, payroll or otherwise but you are specifically asking about payroll and while we are continuing looking at it, and there is nothing to report as far as a major change in structure. Alex did report in that. Usage is up pretty significantly so we have that to fight off while we continue to look for efficiencies.

David Cohen - Midwood Capital

And your comment just clearly suggested that G&A for the third quarter will look more like the first quarter. Why are we seeing the up tick since you had a nice decline from Q1 to Q2? Why the reversal back up to Q1 level?

Dan Gallagher

One of the areas we saw some savings in this second quarter was our liability insurance reserves and that is not something that is necessarily going to perpetuate but having said that, we have been looking at G&A and the levels we are at this year overall, I expect to be a little better than last year.

David Cohen - Midwood Capital

Okay, and then, you guys are not planning on opening additional club in 2009, is that correct?

Alex Alimanestianu

That is correct.

Dan Gallagher

Correct.

David Cohen - Midwood Capital

And are you spending money, investing capital now planning for 2010 openings?

Alex Alimanestianu

No.

David Cohen - Midwood Capital

So, I am just, looking at your, and you have basically kept your outlook the same for CapEx, you spent about 28. You said you had the laundry facility opening and you are not opening any new club, so I am trying to understand where in the second half of the year are you going to spend as much as capital as you suggested you might spend, up to $25 million in the second half of the year when there are no club openings.

Alex Alimanestianu

Sure, we have a decent amount of our equipment replacements and upgrades that happened in the second half of the year. We continue to have our IT initiatives underway but it is safe to say we spent more of our CapEx in the first half of this year than we expect to spend in the second half of this year.

David Cohen - Midwood Capital

Okay, and my last question is, you have opened about 15% of your club since June 30, 2007, right, and 24 clubs? Can you give about maybe, well definitely you are sitting over the order magnitude of the EBITDA drain or drag that accompanies those clubs. I mean it is something, is it a couple of million or is it high single digit note?

Dan Gallagher

That is not something I give out on the call like this, David. I do not have that readily available.

Operator

Thank you. (Operator's instruction) Your next question comes from the line of [Jerry Rogers] - Deutsche Bank.

[Jerry Rogers] - Deutsche Bank

Firstly on that bank amendment that was well done, my two questions is, I wanted to follow on from an earlier question. In terms of new competition, at least one part in New York, you have a David Barton’s Gym and a 24-Hour Fitness opening sort of surrounding a couple of your gyms. Are you seeing a lot of that type of new competition coming in to some of your markets and how do you think that will impact your business?

Now, let me ask my second one as well at the same time. I was wondering if you might be able to share with us what the correlation is between unemployment and your various sort of revenue drivers, new members sign ups, attrition, ancillary revenues?

Alex Alimanestianu

Okay, I will take the competition part first. The number of new clubs opening in 2009 and 2010 is expected to be lower for obvious reasons, lower than it has been historically. So, while there has been an increasing competition in the past few years that is subsiding to some degree. Our position in Manhattan is we have 39 clubs and we have the leading market share and the leading network and we have just a tremendous presence and market position and brand recognition. So, we have competed against David Barton and 24-Hour already against the 25th Street club and David Barton over the years and it is really not a material issue. We do take our competition seriously obviously but if we do everything we need to do, focus on the key operational initiatives and improving the things we are focused on improving, then we are not concerned about getting our share of the market.

In terms of correlation between unemployment and ancillary revenue, we have not done any request and analysis efficiently but…

Dan Gallagher

We also looked at consumer confidence as well as unemployment but it is safe to say as consumer confidence and unemployment trend against us, our ancillary revenue goes down because that is what we have been seeing.

[Jerry Rogers] - Deutsche Bank

I also meant all revenue like, not just ancillary revenue but new member sign ups and also attrition. I mean clearly the more people out of work have to impact your business, correct?

Dan Gallagher

Correct.

[Jerry Rogers] - Deutsche Bank

And then you never looked at the correlation of that?

Dan Gallagher

We looked at the correlation in the sense that when unemployment goes from 5% to close to 10% right now, we know that that is one of the reasons why we are having a more difficult time signing up new members and keeping members absolutely.

Alex Alimanestianu

Yes, I mean we are pleased to see that the banks have started making a lot of money again and Wall Street is turning the corners. So, that helps our New York Sports Club network tremendously. So, I think there is maybe we have bottomed out here in this market although that is very hard to predict but yes, we are looking for an increase in hiring obviously and that will help us and we are hopeful it is coming sooner rather than later.

Operator

It appears we have no further questions. I would like to turn it back to Mr. Gallagher for closing remarks or comments.

Dan Gallagher

Okay, thank you. That completes our call today. We look forward to updating everyone when we release our third quarter results. Thank you.

Operator

That does conclude today's call. We do thank you for your participation.

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