ClubCorp (MYCC) reported 3Q16 results and 4Q16 guidance largely in line with expectations, with a slight miss on sales and a slight beat on earnings. The solid results reflect a resilient subscription business model despite continuous headwinds from unfavorable weather and some weakness in oil-dependent markets. Importantly, MYCC outlined their goal to reduce debt partly by reducing club reinvention spending. The company also refinanced a portion of outstanding debt in order to reduce their interest expenses. The stock dropped sharply on the results in what we see as an overreaction.

The shift in capital allocation to focus on debt reduction signals a significant change in near-term strategy with several potential implications. First, the required capital for planned club reinventions has largely been invested, and should hopefully lead to an increase in membership growth rates at the improved clubs. Second, showing discipline on club reinventions supports management’s rationale for separating that category from ongoing maintenance expenses. Third, MYCC may see a lack of meaningful acquisition targets, which could limit inorganic growth opportunities and make it difficult to achieve the stated EBITDA goal of $300 million by 2018. Furthermore, without evidence that the roll-up consolidation story is playing out as expected, investors may see a lack of upcoming catalysts and begin to doubt MYCC’s long-term growth potential.

After the recent sell-off, we believe downside is limited. However, the stock may only have upside to $15-$18 until MYCC is able to demonstrate tangible progress on membership growth, improved profitability, the roll-up consolidation story, and the 2018 EBITDA target of $300 million. If the company is able to execute on these goals, we see potential for upside into the low-$20’s driven by improving investor sentiment and multiple expansion.

MYCC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  MYCC is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.