Hammered by an unrelenting economic headwind, a withering attrition rate and difficulty in attracting new members during a recession, Chanhassen-based Life Time Fitness (NYSE:LTM) nevertheless continues to invest in expansion and plans to open new fitness centers in 2010 and beyond, albeit more slowly than in the past.
After going public in 2004, the company enjoyed torrid growth, driven by expansion. Over the past five years, its top line grew an average of 27 percent and net income more than 50 percent annually.
Through the first nine months of this year, revenue of $633 million is up only 10 percent and profits are down slightly to $54 million. Same-center revenue declined 4.2 percent so far this year.
Last month, the firm opened a newly renovated and expanded center in the Highland Park neighborhood of St. Paul after a million-dollar makeover. In addition, Life Time opened three new centers this year in New Jersey, Texas and Tennessee and plans another three in 2010. “We have not provided guidance for 2011 and beyond but do own land and have entered into leases for another four centers to open,” said Life Time spokesman Jason Thunstrom.
But that is a slower pace of expansion than the 49 clubs added over the previous five-year (including nine from acquisitions). Today the company operates 84 centers in 19 states.
“I have to tell you … business is as tough as I have ever seen it in 20 years,” said founder and CEO Bahram Akradi last month in commenting on Q3 results. In past recessions, “all we had to do was lower our initiation fee, and we were able to pull the people in by doing increased promotions and marketing. These things just are not working. We do advertising, we don’t see the impact that we would expect.”
While the situation is slightly improved from last year, Arkradi says he is “not pleased” with the 41.6 percent attrition rate, well above its historical experience in the mid-30s and similar to increased attrition the entire industry faces. The company has launched several initiatives to increase member loyalty, but it’s too soon to pass judgment on their success, he said. “We have to figure out how we can get a more sticky experience for our customer,” he told analysts.
Akradi is committed to the growth strategy, projecting as much as $100 million in capital spending next year split between maintenance and growth. He told investors the company is “not going to stop building. We are going to continue to build in the same pace we’re building right now. Even though the numbers are significantly below our expectations, we still are significantly profitable.”
When attrition rates get back to a more normal level, which he does not expect until the second half of 2010, the company “can ramp up the growth. We will be in a strong financial position, debt ratios significantly lower, to acquire attractive debt, then pivot and speed up again … That’s what we have to do.”
But the company recognizes it still faces a tough transition.
Last, June, the Life Time board awarded about 1 million restricted shares with “game-changing high-performance hurdles” for 2011-12, according to CFO Michael Robinson. “At this time, we do not believe the performance hurdles are achievable.” As a result, under accounting rules, the company has not accrued expenses for the stock awards, nor has it affected the company’s share count.
According to market researcher FirstResearch, the U.S. fitness center industry is highly fragmented across 22,000 companies and generates $1.5 billion annually. The 50 largest companies account for about 30 percent of revenue, and only a few dozen companies own more than 10 centers.