Life Time Fitness (NYSE:LTM) announced February 28 that it is coming to Canada in March, opening its first Canadian club in a Toronto suburb. It's about time. When Target (NYSE:TGT) announced its huge plans for Canada this past year, it sent a signal to American companies unsure about the Canadian market that we are eager for good retail and other service oriented businesses. Life Time is ready to gain a foothold in Canada, and I'm sure Canadians will respond positively to its brand of wellness.
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Real Estate
I live about a five-minute walk from a street filled with independent retailers. Many are fading away due to expensive rent. It seems the only ones able to survive are those owning the building itself, usually bought many years ago when business was brisker. Life Time did this as a matter of course many years ago and now owns 71 of its 102 centers, 54 of them mortgage free. This pride of ownership (just like owning your own home) translates into a nicer experience for its members. And it's easier to make alterations and changes if need be. Furthermore, if it ever got large enough, not that it isn't already, it could transfer the real estate into its own real estate investment trust (REIT), giving it financial flexibility as well. For more information, see How To Analyze Real Estate Investment Trusts.
Fitness Industry a Racket
In early December, LA Fitness announced it was paying $153 million to purchase 171 locations from Bally Total Fitness. Bally has had years of financial problems and a third bankruptcy isn't out of the question. After the sale of 171 clubs, it now operates approximately 100, while LA Fitness is somewhere around 538 locations. When the deal was announced, LA Fitness initially wasn't honoring the lifetime memberships of Bally customers, but the uproar was so great it reversed its decision. It's these kinds of news stories that constantly occur in the fitness industry. Underfunded, improperly managed and ruthlessly marketed Life Time is a breath of fresh air. Since 2008, its annual attrition rate, which tracks the total terminations in the previous 12 months versus the average total membership in that 12-month period, has dropped three consecutive years from 42.3% to 35% in 2011. That is right about its historical average prior to the recession. In 2007, its attrition rate was 34.3% and then it ballooned 800 basis points the very next year. In 2007, its revenue per membership was $1,360. In 2011, it was $1,543, despite an unemployment rate 350 basis points higher. Management is clearly delivering value to its customers and shareholders.
Financial Success
Life Time's business is very solid. Its 13-month same-store sales have been positive for nine consecutive quarters and on a 37-month basis for seven. Its membership base continues to grow at an 8.8% clip per year. It finished 2011 with 676,054 members, an increase of 10.4% and above its latest five-year average. In those five years, revenues grew by 14.6% annually and EBITDA by 12.9%. On the bottom line, net income averaged 12.8% growth between 2006 and 2011. These are all very consistent. Its in-center revenue per membership grew 9.3% in 2011 to $481. Most impressive is the fact its in-center revenue represents 31.2% of total revenue per member, the highest rate in at least a decade. Not only does higher in-center revenue generate higher profits, it further engages its members, creating more opportunities to grow revenues profitably. It's a business model that works.
Life Time Fitness and Peers
Life Time Fitness (NYSE:LTM)
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Future Growth
In 2012 and beyond, Life Time is focusing on profitable growth. One of the four key areas where it will concentrate its efforts is improving its return on invested capital (ROIC). Harvard professor Michael Porter stresses that true success in business means generating sustainable operating profits from invested capital. In the past decade, Life Time's ROIC has varied between 5 and 8%, hitting a high of 7.92% in 2005 and 5.98% last year. Given how it's growing in-center revenues, I see it hitting double digits within five years. However, it won't happen without margins increasing.
The Bottom Line
Life Time's entrance to Canada is long overdue. LA Fitness has eight locations in the Toronto area, and although they have a five-year head start, I think Life Time has plenty of opportunity north of the border. While Life Time's stock isn't cheap long-term, it's grown book value per share by 40% annually. If you're patient, it will pay you a healthy return.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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