Focus Article: Life Time Fitness Inc. (LTM)

Life Time Fitness Inc. (LTM) $46.98

The Company:

Headquartered in Chanhassen, Minnesota and founded in 1992 by current Chairman, CEO and President, Bahram Akradi, Life Time Fitness designs, builds, and operates health clubs in the United States and more recently in Canada. Prior to founding Life Time, Mr. Akradi was part owner of U.S. Swim and Fitness (formerly Nautilus Fitness Center, Inc.), which was sold to Bally Total Fitness in 1986. Ironically Bally Total Fitness is one of the main competitors of Life Time Fitness today.

The company’s business model revolves around building large up-scale family friendly health clubs and selling additional services at these clubs. Additional services and products range from spa services to Wi-Fi enabled cafes selling healthy products. The CEO described their cafes as mini-Whole Foods selling drinks without high fructose corn syrup and meats that are not treated with hormones. With 103 Fitness Centers in 27 markets including one in Canada (as of March 9, 2012), Life Time Fitness caters to both organizations and individuals  by offering programs in various areas, such as group fitness, yoga, swimming, running, racquetball, squash, tennis, pilates, mixed combat arts, kids activities and camps, adult activities and leagues, rock climbing, cycling, basketball, personal training, weight loss and nutrition initiatives, spa and chiropractic services.

109,000 Sq Feet Life Time Facility in Tempe, Arizona

109,000 Sq Feet Life Time Facility in Tempe, Arizona

The following two charts in essence summarize the bull case for Life Time. The company is experiencing double digit revenue growth, double digit earnings growth, sports double digit operating margins of 18% and still has the founder/CEO at its helm two decades after the company was founded. What is remarkable about this growth is that it occurred right through one of the worst recessions the country has experienced in decades.

Life Time Total Revenue

Life Time Total Revenue

Life Time Net Income

Life Time Net Income

Beyond selling corporate subscriptions, Life Time has also created a product called myHealthCheck. myHealthCheck is a division of Life Time that helps businesses deploy a health plan that ties employees’ premium contribution to a health score created by Life Time. Most of the company’s growth is organic but the company has also acquired other facilities and rebranded them as Life Time properties.

Business Statistics & Financials:

Life Time generates 65% of its total revenue from membership dues. On average, members spent $510 in the first quarter of 2012, with $382 of that spend coming from membership dues and $124 coming from in-center purchases. The median family income of its customers is $118,898. Attrition rates have been dropping over the last three years but still remain at 35% for the full year 2011. Attrition in Q1 2012 increased to 8.9% when compared to 8.4% in Q1 2011 primarily on account of a couple of acquisitions.

During the first quarter of 2012, total revenue was $268.4 million, up 11.6% from Q1 2011 and net income came  in at $25.7 million or 62 cents per share, a 21.6% increase year-over-year. Same-store sales (an important retail metric) increased 5% at mature stores open more than 37 months and increased 5.4% at store open more than 13 months. Operating margins of 18% increased 130 basis points from 16.7% in Q1 2011.

Life Time expects revenue to grow between 10 to 12% in 2012 to a range of $1.11 billion to $1.135 billion and net income to increase between 21% to 25% to a range of $112 to $115.5 million. The company expects to spend between $200 to $250 million on CapEx in 2012 to build three new facilities, maintain existing facilities as well as start work on facilities that would open in 2013 and 2014. The company has modeled maintenance CapEx at $3.5 to $4 per square foot in its business plan. With depreciation for 2011 running a little over $100 million, it appears that the company will not see much free cash flow in 2012, if any at all.

On account of their expansion into new markets, acquisitions and recent decisions to purchase properties they were formerly leasing, the company has managed to add on debt and had $679 million in net debt on its balance sheet by year end 2011. The company trades for 15 times forward earnings, 9 times EBITDA and at twice its book value.

Competitors:

Stock Symbol Mkt Cap EV/EBIDTA P/B Operating Margin
Life Time Fitness Inc. LTM 1.93B 9.04 1.89 17.58%
Town Sports International Holdings Inc. CLUB 300.77M 6.23 866.67 7.63%
Bally Total Fitness Holding Corp. BLLY.PK 12.37M N/A -0.01 12.50%

Insider Buying:

One insider purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Life Time Fitness here.

Owner Relationship Date Cost # Shares Value($) Total Shares
Bahram Akradi Chairman, President and CEO Apr-24 $44.07 16,905 745,008 2398,296

Risk Factors:

Some of the risks the company faces include competition and lower margins as it expands out of its core mid-west markets into the more competitive coastal markets. Capital Expenditure related to both growth and maintenance is high. If the company experiences an increase in attrition rates or slower growth, the debt they are taking on will come back to bite them.

Conclusion:

Life Time Fitness is an intriguing growth story with a management team that has a demonstrated track record. For a growth stock, the company trades at a reasonable valuation. Their high CapEx plans and the resultant lack of free cash flow give me pause.

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