San Ramon, Calif. — Fitness center retail chain 24 Hour Fitness has filed for Chapter 11 bankruptcy protection stemming from revenue losses during the COVID-19 pandemic. The San Ramon, Calif.-based company expects to secure $250 million in debtor-in-possession financing, which is subject to court approval.
The fitness chain also intends to permanently close 132 of its 300-plus gyms. In California alone, 24 Hour Fitness will shutter 41 locations, and in Texas another 26 will permanently close as the company will focus on reopening its other gyms across the country.
“If it were not for COVID-19 and its devastating effects, we would not be filing for Chapter 11,” says Tony Ueber, CEO of 24 Hour Fitness. “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.”
Although Ueber says the COVID-19 pandemic is the main culprit in the company’s struggles, the retailer’s debt load is also a contributing factor. Brad Umansky, president of Progressive Real Estate Partners, says that the retailer’s ownership group, including private equity firm AEA Investors, hampered 24 Hour Fitness from operating to the best of its ability by saddling the retailer with “substantial debt.”
“And as a result, it has not been able to reinvest in its facilities,” says Umansky. “This has caused the company to not be able to provide its members with the best value compared to the competition.”
24 Hour Fitness joins Gold’s Gym as fitness retailers that are restructuring and closing locations amid the pandemic. Umansky says that with the disruption caused by the COVID-19 outbreak, consumers are reconsidering their fitness needs as most gyms require paid subscriptions.
“The current interruption in the economy is going to cause many [consumers] to reevaluate their memberships and be more strategic with which fitness facilities they are going to support,” says Umansky. “This is going to make it more challenging for those that are not offering the absolute best facilities at the best price to their members.”
Rick Scardino, principal of Lee & Associates in Chicago, says 24 Hour Fitness was facing intense competition even before the COVID-19 outbreak as fitness users had been actively leasing retail space since the Great Recession.
“There has been an explosion of gym offerings in recent years, with many boutique gyms opening in micro spaces compared to the big box formats,” says Scardino. “They can feature cycling, rowing, Pilates, Zumba, boxing and yoga, and they all take a bite out of the overall industry.”
Scardino is confident that fitness users will remain an integral part of the retail recovery from the COVID-19 pandemic. More specifically, he believes fitness centers will be an attractive backfill candidate for the plethora of stores that have permanently shuttered locations in recent months.
Umansky argues that the fitness category overall will face an “uphill climb” when it comes to the psyche of the American consumer until there is a viable vaccine for COVID-19. He says gyms are among the most difficult real estate category to keep contagion-free.
“I am very sympathetic to those in the fitness industry as I believe they have significant operating challenges in trying to keep their facilities clean and complying with social distancing, while also trying to maintain and grow their membership,” says Umansky.
24 Hour Fitness is allowing all members access to any open and operating gyms at no additional charge through the end of the year. The company hopes to open the bulk of its locations in phases by the end of June.
The company has reimagined its club experience to help stop the spread of germs, including a new workout reservation system and touch-free club check-in, as well as stringent cleaning and social distancing protocols.
Scardino is advising his clients that cleanliness is going to be a strong differentiator for any retailer looking to reopen.
“Make sure your stores had a deep clean, are spruced up and have great offers to get the consumer back in,” advises Scardino.
As a routine matter, 24 Hour Fitness has asked the bankruptcy court for authorization to continue paying team members’ wages, salaries and benefits and to continue its various member programs. The company expects its salaried and hourly team members to continue to be paid on the normal schedule.
Lazard is acting as financial advisor to 24 Hour Fitness, and FTI Consulting is acting as its restructuring advisor. Weil, Gotshal & Manges LLP is acting as legal counsel in connection with the company’s Chapter 11 cases.
— John Nelson