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Tickers in this Article: STNR, KDE, CCL, RCL, MAR, HOT, JWN
We're coming up to the seventh anniversary of the Sept. 11 terrorist attacks. Everyone remembers where he or she was when the first news reports came over the television that a plane had hit the World Trade Center. I happened to be at my computer that fateful morning researching a stock I owned at the time, 4Kids Entertainment (NYSE:KDE). I was on an investor message board reading what people were saying about the company when all sorts of comments started appearing about a plane and the World Trade Center. 4Kids offices are in New York so at first I thought it was some sort of prank. The messages kept coming so I flipped on the television to see something I hope I never see again in my lifetime. It was truly a sad day.

After the shock subsided later that afternoon, I began to wonder what would happen to my stocks once the markets resumed trading. I knew it wouldn't be good, especially for one in particular. Steiner Leisure (Nasdaq:STNR), which I bought in May 2001, generated most of its revenue operating spas on cruise ships.

After what had just happened, who in there right mind would want to take a cruise? I didn't know what to do so I emailed the company looking for their response to the crisis. A day later, I received a phone call from CEO Leonard Fluxman. He simply stated that it would do everything in its power to maintain the stock price but in the end, it could do little if there was a mass exodus. There was. (To learn more, read Terrorism's Effects On Wall Street.)

Its stock price dropped by more than half in the week following the attack. I held my stock until early in 2002 when it recovered enough for me to sell at a profit. I should have held longer as it went to highs in the $50s as recently as last year. That was the first and probably only time I'll receive a phone call from the CEO of a major corporation.

One Beautiful Business
Steiner currently operates spas on 133 ships for 19 cruise lines. In addition, it serves resort hotels throughout the world. Partners include Royal Caribbean (NYSE:RCL), Carnival (NYSE:CCL), Marriott International (NYSE:MAR) and Starwood Hotels & Resorts (NYSE:HOT). It even has its own spa brands, Mandara and Elemis, as well as its own skin care products marketed under the Elemis and La Therapie brands; selling to third party retail shops including Bergdorf Goodman and 24 Nordstrom (NYSE:JWN) locations across the country. Lastly, it runs four post-secondary schools in the U.S. for skin care and massage therapy.

In 2007, services represented 66% of sales and products the remaining 34%. Talk about vertical integration. Steiner trains potential employees at its schools, hires them to work in its spas, and then sell the spa guests skin care products to use when not at the spas. A little recurring revenue don't you think?

Steady If Not Spectacular Growth
Sales have grown to $529.2 million in 2007 from $280.6 million in 2003 and operating income to $47.7 million in 2007 from $28.2 million. Revenue in 2007 increased 12.6% to $529.2 million from 2006's $470.1 million. Broken down into segments:

  • Spa operations in 2007 increased 9% to $416.4 million from $382.1 million in 2006;
  • Product revenue increased 32% to $96.7 million from $73.3 million in 2006
  • Schools were up 17.1% to $46 million from $39.3 million in 2006.
As I said, this growth is steady but not spectacular. Unfortunately, the increased sales in the products and schools segments didn't translate into greater profits. (Use these key attributes to uncover top-level investment, find out how in Find Investment Quality In The Income Statement.)

Thankfully, its biggest revenue generator, the spa operations, saw operating income rise 8.7% in 2007, almost identical to a 9% increase in sales. Profits started to erode in the second half of 2007 and that's evident in the latest quarterly report. Second quarter revenue rose 4.5% to $135.7 million from $129.8 million while operating income decreased $784,000 or 6.3% to $11.6 million from $12.4 million. Obviously, the current slowdown has hurt its customer's ability to pay for spa visits even when they've been able to cover the cost of the cruise. That likely won't change for some time. (For a more in depth look at analyzing understanding a company's financial statements and reports, check out Advanced Financial Statement Analysis.)

Bottom Line
In 2007, Steiner got a five-year contract from British Airways to open eight Elemis Travel Spas in their U.K. and U.S. departure lounges. Steiner is now on land, sea and in the air. I believe the opportunities are limitless for the Miami-based company and should you doubt management's ability to act, you need only look to beginning of the article for reassurance. Once a healthy economy returns, so too will Steiner's stock price.

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