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24 Hour Fitness weighs bankruptcy as coronavirus pushes fitness industry to brink
A customer works out at a 24 Hour Fitness center on July 31, 2012 in San Francisco, California.
Justin Sullivan
Gym chain 24 Hour Fitness is working with advisors at investment bank Lazard and law firm Weil, Gotshal & Manges to weigh options including a bankruptcy that could come as soon as the next few months, people familiar with the matter tell CNBC.
The chain is grappling with a heavy debt load, deteriorating performance and a coronavirus pandemic that forced it to shut its more than 400 clubs. The mid-priced fitness studio is already struggling to compete against premium rivals like Equinox and cheaper competitors like Planet Fitness.
Credit ratings agency Moody's recently downgraded the chain over worries around its "negative membership trends, very high-interest burden and negative free cash flow prior to the coronavirus outbreak, as well as approaching maturities to provide limited flexibility to manage through the crisis."
It has an $837 million term loan with a so-called springing maturity in March 2022 and $500 million in unsecured notes maturing in June 2022, if more than a fifth of those notes remain outstanding.
San Ramon, California-based 24 Hour Fitness had roughly $1.5 billion in sales in 2019, and less than $1 million in cash, according to Moody's. It is controlled by AEA Investors, which acquired it through a $1.8 billion deal with Fitness Capital Partners and Ontario Teachers' Pension Plan in 2014.
The people, who requested anonymity because the information is confidential, cautioned that bankruptcy is not definite, and may still be avoided. Spokespeople for Lazard and Weil, Gotshal & Manges as well as 24 Hour Fitness did not respond to requests for comment. AEA declined to comment.
The gym chain is one of many fitness companies that has been under pressure after states ordered they close their doors to help prevent further spread of the virus. 24 Hour Fitness announced on March 16 it was closing all its clubs, later acknowledging the closures may last for "an extended period of time" due to coronavirus.
It has said it would suspend all membership billings effective this week if it was unable to reopen its clubs.
The gym chain's struggles are emblematic of broader challenges and questions the fitness industry must face. Even after gyms reopen, mounting unemployment may mute appetite for excess costs like gym membership. There remain questions as to how many people will be comfortable working out in a crowded environment.
"We need to limit indoor activities that are purely recreational, especially those where there are a lot of shared surfaces that can be contaminated," said former FDA Commissioner Dr. Scott Gottlieb. "Bars and gyms fall squarely in that category."
Many fitness chains have sought to offer at-home options during the pandemic, but it is unclear how many will be able to generate revenue from those options at a scale large enough to compensate for what may be permanently lost gym memberships.
In hopes of securing financial relief, the industry has stepped up its lobbying efforts in recent months, hiring multiple D.C. firms. Trade group International Health, Racquet & Sportsclub Association is pushing for expanded eligibility under the small business program, business interruption insurance and rent relief.
The industry scored a victory this past week when the administration said gyms would be among the first to reopen business in a 3-phase plan, provided gyms "adhere to strict physical distancing and sanitation protocols." The decision to open gyms before school as part of the plan raised some eyebrows. Trump has invited a number of high-ranking executives to advise him on plans to reopen U.S. businesses, including The Related Companies' Stephen Ross, which owns Equinox.
A hit to the gym industry comes as private equity investors have poured money into the space, looking to take advantage of recent trends in health. They've also sought to find a new industry to invest in, as retail has been roiled. TPG Growth acquired Crunch Fitness last year; L Catterton has a stake in Soul Cycle-owner Equinox; North Capital Partners owns SLT, Barry's Bootcamp and other brands.
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The chief executive of gym chain Planet Fitness said in a recent interview that social distancing inside gyms is possible, even as the pandemic has accelerated consumers' adoption of digital fitness and at-home workouts.
Practicing social distancing could include unplugging some equipment to create space between treadmills, for instance, Chris Rondeau told news network Cheddar Friday.
But health experts have likened gyms, which the Trump administration said could reopen during the first phase of reopening US businesses, to a "petri dish" of germs.
Visit Business Insider's homepage for more stories.
Planet Fitness CEO suggests unplugging 'every other piece of cardio' equipment at gyms as one way to enforce social distancing when lockdowns end
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Planet Fitness CEO Chris Rondeau said social distancing inside gyms is possible as the Trump administration intends to include gyms during the first phase of a plan to reopen American businesses.
"We're going to be really reiterating our cleaning policies and procedures with our staff," Rondeau said Friday in a remote interview on the news network Cheddar.
Earlier this week, the Trump administration released a three-phase plan to reopen businesses temporarily shuttered during the coronavirus outbreak. Gyms can open "if they adhere to strict physical distancing and sanitation protocols," along with restaurants, places of worship, and movie theaters, according to the plan.
Planet Fitness, for its part, said in mid-March that it temporarily closed most of its locations, and that it was closing the remainder of its corporate stores through March 31. It was "strongly urging" its franchisees to do the same.
The Hampton, New Hampshire-based company then issued an update on March 30 that it was extending its temporary store closures until further notice. Planet Fitness reported 2,001 locations and 14.4 million members through the end of 2019.
Health experts have warned on the risks gyms pose during an outbreak.
"Gyms are like a petri dish," Laurence Gostin, the director of the O'Neill Institute for National and Global Health Law at Georgetown University, told the Daily Beast. "People are close to one another, they're sweating, they're coughing and sneezing, they're touching multiple surfaces, they're sharing equipment, they're indoors. Literally all of the heightened risk factors for COVID transmission are all entwined together in a gym."
AP/Richard Drew
In the Cheddar interview on Friday, Rondeau said he took note after speaking with an Asia-based executive about necessary steps once a gym there initially opened. During the first three weeks, "they unplugged every other piece of cardio, so that forced some space between treadmills, for example," he said.
"That might be one thing we have to do at the beginning," he said.
Rondeau, who was named CEO in 2013 and joined the company in 1993, said the company has long had "sanitation stations" scattered throughout locations, and said the company encourages members to wipe down equipment with cleaning solution before and after usage.
The pandemic has hit the wider fitness industry as consumers demand gyms place memberships on hold and companies lose out on recurring revenue.
Gold's Gym, for instance, has moved to permanently close about 30 locations, Business Insider previously reported. The move impacted only company-owned — not franchisee-owned — gyms mainly in their St. Louis, Alabama, and Colorado Springs markets, the company said.
Social distancing has also accelerated consumers' adoption of digital fitness trends, Rondeau said, pointing to more consumers turning to in-home workouts streamed remotely.
"We realized that the trend is going this way, and I don't really see it as a way that people replace a gym membership, but it enhances their ability to work out when they can't get to the gym that day," he said.
Planet Fitness and other gym chains have come under pressure for charging members' accounts for regular fees even as their facilities closed.
"Unfortunately the timing of mandates and closures lead to some of our members being billed shortly before we closed," the company said on Twitter to one user. "Rest assured that you will not be charged for any days when the club was closed. We will make an adjustment on your next billing cycle when we reopen."
Planet Fitness reported $689 million in revenue at the end of 2019, a 20% increase from a year earlier, and a rise in same-store sales of nearly 9%.
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East Northport Business Intelligent Fitness Needs Your Support
The new coronavirus has changed life for all of us. Local businesses have taken a huge economic hit, but communities are finding creative ways to support the establishments they know and love.
In an effort to help local businesses in our communities stay connected and succeed, Patch will shine a light on some of them through a series of Q&A articles during this time.
Intelligent Fitness is one of the businesses in town facing struggles during the coronavirus. You can lend your support by reading more about the company, below, and by contacting them here.
Tell us about your business and its history in your town.
Phil Sottile formed Intelligent Fitness in 2001 and began servicing the townships of Hauppauge to Cold Spring Harbor. His wife joined the company in 2007 and was the driving force behind the company's redesign into Long Island's first fitness boutique. In 2009, the company relocated to East Northport and quickly became the benchmark for Long Islanders' fitness and wellness solutions. The husband and wife owners and operators have garnered 10 Best of Long Island titles over the last four years, being twice named Best Gym, four times named Best Personal Trainers, and naming Phil Sottile as the Best LifeCoach on Long Island for four straight years.
How has the new coronavirus impacted your business and its employees?
The gym business was mandated to shut down around March 17, preventing groups of people from congregating in their favorite small group classes of 6 to 10 people. Foreseeing this government mandated shutdown coming, we were the first to roll out virtual training classes and private one-on-one services. We also rolled out an equipment rental program to get fitness equipment into the hands of people who desired to work out at home and has upgraded and expanded our virtual class schedule to roll out a national platform of various online options.
How can local customers support you now and in the future?
Become a virtual client and we will deliver the necessary fitness equipment to your home. No need to buy anything. If someone decides to opt out, we will simply pick up the rented equipment. A virtual membership always comes with an in-club component membership. Come join us when you can in the club when we return to our normal lives.
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Do you have any words of encouragement for your community?
Stay the course. Continue to get outside and walk. Call your parents or children. Keep looking toward the future because the one thing Long Islanders do better than anyone anywhere is adapt, evolve and get stronger the tougher things get.
Are you offering any special services, promotions or hours during this time?
We still work seven days. We service all of Long Island through a robust virtual portal that will continue to support our in-club menu of services. Our initial virtual consult is complimentary. We use this time as a discovery session to frame goals, objectives, personal profiling and rely upon this meeting to frame a forward-looking, solutions-oriented path.
Are there any other outstanding businesses in town you think deserve some community support?
We support all our local favorites and attempt to visit each to demonstrate local support. They include La Piazza, Larkfield Pasta, NY Fitness and Boxing and Uncle Giuseppe's.
Do you own a local business in need of a feature on Patch? Fill out the questions in this form for consideration. Or, check out Patch's full list of resources for small businesses during the coronavirus crisis.
Thank you, and stay safe!
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