Tuesday, March 11, 2008

“Talk Is Not Cheap” At Life Time Fitness

According to a proxy statement filed last week with the Securities and Exchange Commission, Life Time Fitness (LTM-$27.36) reimbursed its founder and chief executive, Bahram Akradi, $31,777 for his cell phone plan and home Internet connectivity.

Hey! You over there, I know about your kind
You're like the Independent Network News on Channel 9
Everywhere that you go, no matter where you at
I said you talk about this, and you talk about that
When the cat took your tongue, I say you took it right back
Your mouth is so big, one bite would kill a Big Mac

U.S. Cell Phone Plan analysis finds several carrier plans offering up to 6,000 minutes per months ($149 - $199 a month)—much cheaper than the $2,648 a month being spent by Akradi.

You talk too much
You never shut up
I said, “You talk too much”
Homeboy you never shut up…

Shares in the health club operator are selling at a multi-year low, two-weeks after the gym operator reduced its FY 2008 EPS outlook below consensus on its
fourth-quarter earnings call. The Company expects to bring in earnings of $2.05 to $2.08 per share in 2008 on sales of $780 million to $800 million. Analysts polled by Thomson Financial had expected share-net of $2.18 on sales of $806.8 million, on average.

Life Time’s profitability depends on attracting—and retaining—a large membership base within the first three years after a new center is opened. In FY 2007 ended December 31, 2007, the Company opened ten new centers, bringing the number of open centers to 70, with memberships growing to 499,092, up Y/Y 12.5 percent.

In FY 2007, revenue per membership grew 6.2% to $1,360.

In our view, stiffer headwinds from a slowing U.S. economic climate will give prospective members reason to pause, making them question the value proposition of spending more than $1,000 a year on individual membership dues and in-center costs (including fees for personal training, dieticians, and the purchase of LifeCafe and LifeSpa product offerings).

In-center revenue increased 80 basis points to 27.8% of total revenue, driven primarily by members’ increased use of personal trainers, LifeCafe sales, and heart rate monitor sales.

Average in-center revenue per membership (ACpM) increased $36 Y/Y for the year ended December 31, 2007.

Management remains optimistic that the ACpM metric can offset some of the expected slowdown in new member additions in coming months. "We continue to see very strong performance on our personal training business," said Mike Robinson on the
Q&A part of the earnings call. "We continue to grow the heart rate monitor sales. We got a lot of connectivity points that have held up very, very strongly in this time. So, that’s the main driver of it. We have seen good cafe growth as we have entered into the first part of this year. Again, it’s a really a combination of many, many of those things. We continue to add new products. We have added new menus in the café. We continue to add new products and expand our line of retail products in this cause."

The Company does not discount membership fees. However, the one-time origination cost is negotiable. According to management, the average enrollment fee has come down approximately $20 per acquired member, offset by incremental increases of $120 to $240 more per year in dues ('member advisers' receive incentive bonuses by directing customers to higher
membership tiers).

You talk too much
And you never shut up
I said, “You talk too much”
Homeboy you never shut up!

Life Time is highly dependent on less-mature centers for growth. For the year, the Company generated growth of 6.1% for 13 month same store sales and 0.8% for the 37-month metric.

A big blabbermouth, that's what you are
If you were a talk show host, you'd be a star
I said your mouth is big, size extra large
And when you open it, it's like my garage

During 2008, Life Time plans to open 11 centers. Market cannibalization (only three centers will be in new markets) and/or delays in new health club openings, anticipated lower operating margins (driven by increases in advertising/marketing costs for brand awareness and higher construction costs), and slowdowns in projected membership growth (targeted capacity is 90% within three years)—the 10Q Detective believes Life Time Fitness will likely revisit revenue growth and FY 2008 profit metrics in coming months—giving Akradi more reasons for filibusterism on his cell phone.

You talk too much
And then you never shut up
I said, “You talk too much”
Homeboy you never shut up
~ Run DMC (“You Talk Too Much”)

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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