Fitness Resource tells SNEWS what led to bankruptcy reorganization; explains future

Even when the economic downturn struck, Fitness Resource remained bullish. But the upswing never came, forcing the business into bankruptcy reorganization Sept. 9 to try and get out of its leases. President David Nees talks to SNEWS about what happened and what the future holds.
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Even when the economic downturn struck, Fitness Resource President David Nees remained bullish. Other companies downsized or went bankrupt, but he kept his longtime Southeastern specialty fitness retail business plugging along.

He hit his high in store numbers in 2008 (26) and only in 2010 began to significantly downsize, dropping to 19. But it apparently wasn’t enough and wasn’t soon enough: 26-year-old Fitness Resource filed for Chapter 11 bankruptcy reorganization Sept. 9 in the U.S. District Court, Eastern District of Virginia, just prior to the Health & Fitness Business show Sept. 14-16.

“I’d been betting the economy would recover,” Nees told SNEWS at the show, "and it never did.”

Fitness Resource was locked into a number of five- to 10-year leases that were set at pre-downturn rates, he said. Per court documents obtained by SNEWS, that left him with 13 unprofitable stores with unexpired leases and two warehouses. Part of the plan is to have the court allow him to reject those leases to get back on his feet.

On Sept. 12, after an all-staff meeting, he started the process by closing three stores – Alpharetta, Ga.; and Sterling, and Oakton, Va. The Fredricksburg store followed. More closings are expected.

“This action alone will result in a substantial reduction in operating expenses by eliminating rent, inventory, staffing costs, and general overhead expenses for those locations,” he said in a court declaration, “and is a significant step in return to profitability.”

In other words, Nees told SNEWS: “The way to go forward is to squeeze it till it hurts.”

A future exists

Nees said he believes there is a business remaining.

“As things tightened down further (economically), I sat down and said, ‘I have a business here that’s viable' and I asked myself, ‘Where is it?’” he explained. So one day in August he said he completely analyzed the business to find out what was working and what wasn’t.

“Then the question was, how do we get to the (working) model?”

The model was to remain in the markets where he was already established, but to pare back on the number of doors and make the stores smaller – approximately 2,000 to 2,500 square feet – so Fitness Resource is not cannibalizing itself, he said. “You can’t afford that in this down economy,” he added.

In addition, he is looking for potential investors. He also said he hopes to continue his 2009 entry into the recreational cycling retail market, as reported by SNEWS.

Nees told SNEWS he expected in the end to have about 10-12 stores that will cover his current markets; the court papers noted he expected to relocate and reopen eight stores and one warehouse “under more favorable leases.” Nees said he would begin to renegotiate leases and relocate stores upon returning from the HFB show.

“Yeah, it’s tough,” he said, "but it’s not too late.”

Emerging from Chapter 11

Despite skepticism about the possibility of emerging from Chapter 11, American Home Fitness in July 2009 filed for bankruptcy reorganization and indeed emerged and still exists (www.americanhomefitness.com), today operating eight stores after rejecting leases during the court process for others.

Tom Staub, president of PaceMaster, which is No. 2 on the creditor list among fitness vendors and owed $330,980, said the situation was indicative of the continuing bad economy.

“I feel bad for David (Nees) from a personal standpoint. He’s truly one of the best individuals in the industry. Plus, this is bad for the entire industry,” Staub said. “The retailers that have survived (the downturn) have been very proactive in response to the economy. I hope this reorganization provides him the ability to continue on in a profitable manner.”

At Octane Fitness, which as No. 3 creditor among fitness vendors is owed $279,927, President Dennis Lee also said nobody wants to see Fitness Resource go down. Lee, who said he has known Nees for two decades, said his company will support him to emerge from Chapter 11.

“This,” Nees said, “is a hiccup. The new, trimmed-down Fitness Resource is a much safer company to do business with…. I’m still the best bet in every market.”

A hearing to consider the request to reject additional leases has been rescheduled twice and was set for Sept. 21. Additional court-required filings, including financial summaries, are due Sept. 23.

A creditors’ meeting was set for Oct. 17 at 3 p.m. at the Office of the U.S. Trustee, 115 South Union Street, Suite 206, Alexandria, Va. Proof of Claims are due by Jan. 17, 2012. Information is available by calling 1−800−326−5879.

--Therese Iknoian

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