24 Hour Fitness files for bankruptcy, closing 130 gyms

24 Hour Fitness Worldwide Inc. sought court protection from its creditors, unable to keep up with debt payments after the COVID-19 pandemic shut down gyms nationwide.

The company will permanently close about 130 gyms, including 18 locations around the Greater Los Angeles area and Orange County.

The fitness chain’s Chapter 11 petition was filed in Delaware, court papers show. Such a restructuring allows a company to keep operating while it works out a plan to pay its creditors and ease its debt load of $1.4 billion, plus lease obligations.

24 Hour lined up $250 million in so-called debtor-in-possession financing backed by its creditors to allow the company to continue operating as it starts reopening locations across the country, according to a statement Monday. The majority of its gyms remain closed to try to stop the spread of the virus. The company isn’t charging members amid the shutdowns, taking its revenue down close to zero.

While some gyms start to reopen, it’s no guarantee that members will come flocking back, and cancellations could be even more devastating. It costs twice as much to recruit a new member as it does to retain an existing one. Roughly 28 of 100 U.S. gym-goers are expected to bail this year, according to trade group International Health, Racquet & Sportsclub Assn.

Even before the onslaught of COVID-19, middle-tier operators like 24 Hour struggled with customer defections to higher-end or budget-friendly fitness options. The gym operator posted a 2% revenue decline in unaudited fourth-quarter earnings, Bloomberg reported in March.

Privately held 24 Hour, which had about 445 clubs in the U.S. in March, reported a slide in 2019 earnings partly due to the rocky debut of an automated system for checking in and signing up customers. Memberships fell to 3.4 million in the third quarter of last year from 3.5 million in the prior quarter, according to Moody’s Investors Service.

Like many other businesses across the U.S., 24 Hour had to close all its locations in mid-March to help stop the spread of the coronavirus. The company, based in San Ramon, Calif., fully drew its $120-million credit line to cope with the expected effects of the pandemic.

Management had been in talks with creditors to rework its debt load, but negotiations ended in a stalemate around the time of the closures, 24 Hour Fitness said in a March 23 earnings report.

“If it were not for COVID-19 and its devastating effects, we would not be filing for Chapter 11,” Chief Executive Tony Ueber said in prepared remarks. The company was unable to generate revenue by securing new members, and, after the closures, it started suspending monthly membership dues, court records show.

24 Hour Fitness plans to reopen a majority of its footprint by the end of June with new social distancing guidelines in place, allowing members access to any club through the end of the year regardless of membership level, the company said.

However, the company is also requesting court permission to end 135 club leases in addition to other leased sites to cut costs, filings show. With assistance from real estate advisory firm Hilco, 24 Hour identified clubs to close that were either out of date or in close proximity with other locations.