Lifetime Fitness (NYSE: LTM)

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LIFETIME FITNESS (NYSE: LTM) April 17, 2014

Jason ChanMichael DeRenzoJason Mudrock

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AGENDA

• Introduction• Company Overview• Macroeconomic Outlook• Relevant Stock Market Prospects• Financial Analysis• Valuation• Recommendation

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COMPANY OVERVIEW

• Headquarters: Chanhassen, Minnesota• IPO in 2004• Market Cap: 2.03 Billion, Price: $50.55 as of April 16, 2014• “The Healthy Way of Life” Company• Built around achieving health objectives & fitness goals• Sports, professional fitness, family recreation, and spa

destinations• Operates 109 centers (as of Feb 28th 2014)– 29 major markets in the USA and Canada– 64 are current model design, 6.5-10.5k memberships

(114k sq feet)• Opening a Des Moines two-floor, 166k sq feet facility in

Summer 2014

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS

MACRO OUTLOOK VALUATION

Sources: LTM Form 10-K

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COMPANY OVERVIEW

• Wide variety of programs for adults and children– Individual/team sports, yoga, personal training,

spa, etc• Other sources of income include– Line of nutritional products and supplements– Magazine, Experience Life – Athletic events division (holds running, cycling, and

triathlon events)– Health programs/assessments– Corporate/Insurance partnerships

• Continue to expand nationally and internationally• Expand product line

Management Outlook


FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


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COMPANY OVERVIEW

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS



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MACROECONOMIC OUTLOOK– KEY EXTERNAL DRIVERS

• Disposable Income• Time spent on leisure and sports• Number of adults aged 20 to 64• Participation in sports• Fighting Obesity

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


Sources: http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=1655

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• Fighting Obesity– Fighting fat is a major factor– 35.7% of U.S. adults – 17% (or 12.5 million) of

children/adolescents aged 2—19 years

– 42% of adults are expected to be obese by 2030

Sources: http://www.cdc.gov/obesity/data/adult.html

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


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• Obesity Trends Among U.S. Adults

No Data <10% 10%–14% 15%–19% 20%–24% 25%–29% ≥30%

1990 2000 2010

Sources: http://www.cdc.gov/obesity/data/adult.html

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


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INDUSTRY OVERVIEW – HEALTH AND FITNESS CLUBS

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


Sources: http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=169#CP

Current Performance• Improved sales over the past 5 years• Smaller gyms have benefited from the recession – low cost• Consumers desire for 24/7 operating hours

Keys to Success• High consumer discretionary income• Capturing population growth and demographic changes• Fighting obesity, diabetes and other aliments

Industry Trends• Smaller gyms attempting to steal market share in niche markets• Moving from low-cost to higher quality fitness centers• Public health campaigns• Consumer target is 18 to 54 years old

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INDUSTRY ANALYSIS – HEALTH AND FITNESS CLUBS

Revenue Revenue Growth

• Stable positive projected growth rates• Revenue forecasted to grow at a CAGR of 2.9% from 2013 to 2017

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS



10 11 12 13 14 15 16 17 18 19 20 $20,000

$22,000

$24,000

$26,000

$28,000

$30,000

$32,000

Revenue ($ In Millions)

10 11 12 13 14 15 16 17 18 19 200%

1%

2%

3%

4%

Revenue Growth (%)

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UNDERSTANDING MARKET POWER

Strengths Weaknesses- Large variety of programs and

services- Member loyalty- Convenient locations- Proven, consistent member

growth

- Cyclicality of the industry- Month to month memberships

Opportunities Threats- Opening of new centers- Acquisitions of health clubs/fitness

centers

- Very intense competition- At home gyms/workout facilities- Sensitive to macroeconomic

conditions

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


Source: http://advantage.marketline.com/Product?pid=MLIP0251-0001&view=d0e393

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COMPANY ANALYSIS – LIFETIME FITNESS

Revenue Revenue Growth

• Revenue increased from 2010 to 2013 with a CAGR of 9.56%• Significantly outperformed the industry by >400% from 2010 to 2013

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS



2009A 2010A 2011A 2012A 2013A $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Total Revenue ($ In Thousands)

2010A 2011A 2012A 2013A5%

6%

7%

8%

9%

10%

11%

12%

9.06%

11.05%

11.17%

7.01%

Revenue Growth (%)

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PORTERS’ FIVE FORCES

Power of Suppliers: Medium Substitutes: Medium

• Switching costs are not high• Quality of training of employees provided by third parties is

vital

• Consumers can choose to find other means of fitness such as an in home gym, but standards are much worse

• Invest time in other activities – work, shopping, etc

Barriers to Entry: Medium Power of Buyers: Medium

• Capital intensive industry• Economies of scale• Reputation of products is pertinent (safety, quality, etc)• Large number of suppliers and buyers

• Switching costs are very low• Changes in disposable income could lead to cautious

spending on leisure activities

Competition: High

• Very segmented market, even at the top• Can differentiate through additional tailored services

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


Sources: http://advantage.marketline.com/Product?pid=MLIP0251-0001&view=d0e393

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RECENT STOCK PERFORMANCE

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


• Currently Lifetime’s stock price is above both the 20 and 200 day moving average• Sell-off in February 2013 attributed to missed estimates

Source: Yahoo Finance

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FINANCIAL RATIO ANALYSIS

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


2009 2010 2011 2012 2013Current Ratio 0.47 0.58 0.61 0.60 0.49 Quick Ratio 0.35 0.45 0.45 0.43 0.32 Cash Ratio 0.05 0.09 0.05 0.10 0.04

2009 2010 2011 2012 2013Operating Profit Margin 17.79% 17.61% 17.09% 18.48% 18.63%Net Margin 8.65% 8.84% 9.14% 9.90% 10.09%ROA 4.44% 4.70% 4.83% 5.38% 5.22%ROE (Book Value) 9.82% 9.60% 9.67% 10.40% 10.60%

2009 2010 2011 2012 2013Debt/Assets 0.40 0.36 0.36 0.34 0.36 Debt/Equity 0.90 0.73 0.72 0.66 0.74 Interest Coverage (4.91) (5.78) (8.60) (8.17) (8.76)

2009 2010 2011 2012 2013A/R Turnover 207.90 157.22 164.66 121.54 145.32 Fixed Asset Turnover 0.55 0.58 0.58 0.61 0.57 Total Asset Turnover 0.51 0.53 0.53 0.54 0.52

LTM Financial Analysis

Liquidity Ratios

Profitability Ratios

Solvency Ratios

Activity Ratios

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FINANCIAL RATIO ANALYSIS

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


2009 2010 2011 2012 2013Tax Burden 60.41% 60.16% 59.97% 60.54% 60.74%Interest Burden 80.49% 83.44% 89.13% 88.48% 89.20%Operating Profit Margin 17.79% 17.61% 17.09% 18.48% 18.63%Asset Turnover 0.51 0.53 0.53 0.54 0.52Leverage 2.21 2.04 2.00 1.93 2.03 ROE 9.82% 9.60% 9.67% 10.40% 10.60%

2009 2010 2011 2012 2013TEV 1,270,902 1,995,939 2,135,446 2,717,773 2,490,573 EBIT/Tangible Assets 9.74% 10.13% 9.83% 11.04% 10.51%EBIT/TEV 11.71% 8.05% 8.11% 7.66% 9.02%

Greenblatt Ratios

DuPont Analysis

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REVENUE PROJECTIONS

• Increasing the number of centers

Sources: Form 10-K

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


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REVENUE PROJECTIONS

Revenue Projection 2014 2015 2016 2017 2018

Total Members: 808,725.00 828,943.13 849,666.70 870,908.37 892,681.08 % Growth Rate: 2.5% 2.5% 2.5% 2.5% 2.5%Total Revenue 813,026,542.70 $856,876,902.78 $912,187,363.59 $968,883,730.44 $1,020,943,264.86

8.44% 12.61% 2.47% 0.25%

2014

Different tiers of Membership Number of Facilities % of Total Facilities Number of Members at given facilties Dues/Year Total RevenueBronze 14 12.61% 102,001.35 $600.00 $41,861,354.59Gold 55 49.55% 400,719.59 $900.00 $350,628,188.11Platinum 12 10.81% 87,429.73 $1,020.00 $89,178,324.32Onyx 16 14.41% 116,572.97 $1,320.00 $153,876,324.32Diamond 14 12.61% 102,001.35 $1,740.00 $177,482,351.35

111 $813,026,542.70

• Membership growth rates were 8.44%, 12.61%, 2.4%, and 0.24% from 2010 to 2013 respectively

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DISCOUNT RATE CALCULATION

80% weight applied to CAPM, 20% weight applied to ROE

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


WACC Calculation

Capital Structure

Debt-to-Total Capitalization 36.4%Equity-to-Total Capitalization 63.6%

Total 100.0%

Cost of DebtCost of Debt 2.4%

Tax Rate 39.6%

After-tax Cost of Debt 1.4%

Cost of EquityRisk-free Rate(1) 2.8%

Market Risk Premium 6.5%

Levered Beta 1.51

Cost of Equity 12.6%

ROE 26.9%

Weighted Cost of Equity 15.4%

WACC 10.3%Business Risk Premium 1.5%Discount Rate 11.8%

WACC Sensitivity Analysis

1.4% 1.9% 2.4% 2.9% 3.4%16.4% 14.5% 14.6% 14.6% 14.7% 14.7%26.4% 13.1% 13.2% 13.2% 13.3% 13.4%36.4% 11.6% 11.7% 11.8% 11.9% 12.1%46.4% 10.2% 10.3% 10.4% 10.6% 10.7%56.4% 8.7% 8.9% 9.0% 9.2% 9.4%

Debt

/ C

ap

Pre-tax Cost of Debt

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DCF VALUATION

FINANCIAL ANALYSIS

COMPANY OVERVIEW

STOCK MARKET

PROSPECTS


In thousands2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018P

EBIT 148,861.00$ 160,759.00$ 173,266.00$ 208,228.00$ 224,624.00$ 368,842.77$ 401,813.85$ 442,420.38$ 482,393.81$ 526,303.99$

Less: Income Taxes 47,441.00$ 53,448.00$ 61,810.00$ 72,697.00$ 78,655.00$ 146,191.96$ 159,260.16$ 175,354.68$ 191,198.27$ 208,602.20$ Plus: D&A 90,770.00$ 92,313.00$ 98,843.00$ 115,016.00$ 118,972.00$ 137,672.04$ 148,685.86$ 160,580.72$ 173,427.18$ 187,301.34$ Less: CapEx (146,632.00)$ (131,671.00)$ (165,335.00)$ (224,194.00)$ (348,948.00)$ (435,961.45)$ (470,838.36)$ (535,268.88)$ (578,090.39)$ (624,337.62)$ Less: Change in Working Capital: (4,513.00)$ 5,424.00$ (15,568.00)$ (16,433.00)$ (16,504.09)$ (7,384.00)$ (9,636.81)$ (10,984.68)$ (12,066.49)$

Unlevered FCF 233,249.41$ 246,305.50$ 252,723.71$ 279,913.55$ 309,936.42$

Terminal Value = 3,402,306.58$

Discounted Cash Flows - LTMHistorical figures Forecast Figures

Terminal Growth 2.5%Terminal Value 3,402,307

Discount Rate 11.8%Present Value of Cash Flows

EV = 2,886,873

Calculation of Implied Share PriceImplied Enterprise Value 2,886,873$ Less Debt 848,598$ Plus Cash -$ Implied Market Cap 2,038,275$

Implied Share Price 49.14$

Terminal Value Assumption Share Price Sensitivity

2.0% 2.3% 2.5% 2.8% 3.0%9.8% $64.32 $66.48 $68.78 $71.25 $73.90

10.8% $54.42 $56.05 $57.78 $59.61 $61.5611.8% $46.54 $47.80 $49.14 $50.54 $52.0312.8% $40.12 $41.13 $42.18 $43.28 $44.4413.8% $34.80 $35.61 $36.46 $37.34 $38.27

Terminal Growth Rate

Disc

ount

Rat

e

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COMPARABLE COMPANIES

• There is only one publicly traded company (Town Sports International) that is operated in the United States. – Negative equity

• Resorted to looking at international companies– Vastly different Market Cap, Leverage, TEV, Revenue

Comparables Enterprise Value / Price / Growth Rates Profitability

2012A 2013A 2014PShare Shares Equity Debt/ Enterprise EPS EPS EPS 1 Year Margins

Ticker Price Outstanding Value Equity Value Rev. EBITDA BV Actual Actual Est. Rev. EBITDA EBITDA NILife Time Fitness LTM 50.55 41.48 $2,097 73.9 $2,897 2.2x 7.8x 1.79x 19.5x 17.6x 16.3x 8% 7.7% 28.51% 10.1%Town Sports International Holdings Inc. CLUB 8.41 24.74 $208 NM $446 1.0x 6.1x NA 23.9x 19.8x 68.2x -1% -18.9% 18.62% 2.6%

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RECOMMENDATION

WATCH LIST

• Lifetime Fitness is currently trading at $50.55, as of April 16th• Lifetime Fitness’s DCF intrinsic value: $49.14• Membership growth is optimistic relative to projected industry growth• No comparable companies

Lifetime Fitness (NYSE: LTM)

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