Life Time Fitness (NYSE: LTM ) operates 71 fitness centers in 16 states. Its large-format centers distinguish themselves from competitors by offering a range of activities for families. As described in the recent 10-K, in addition to typical health club fare, Life Time's centers have amenities such as:
- Indoor and outdoor aquatics center with waterslides
- Play area featuring a maze
- Computer center
- LifeSpa for hair, nail, and skin care services
- LifeCafe with food and beverages.
Life Time has grown rapidly in the past few years. Both sales and earnings per share more than doubled since 2004. Membership growth has slowed substantially, and in part Life Time has been a victim of its own success. Some of its clubs had become so crowded, the company raised prices and reduced marketing expenditures to cull its membership.
Water slides and cash flow
However, this growth has come at a price. Although the company has generated $376 million in cash flow from operating activities over the past three years, it has spent $868 million on capital projects. The difference has been made up primarily from borrowing against a revolving credit facility, but Life Time also raised $92.5 million last year by issuing new shares at $55.40.
It would be one thing if the investments were reaping a huge payoff. But the opposite appears to be happening. On a trailing 12-month basis, the return on invested capital was 8.7% in December 2005. It has been falling ever since, and in the December 2007 quarter was down to 7.2%.
Returns like that make it difficult to justify the company's use of debt, as the interest rate on a recent financing was 8.25%. It is also puzzling that returns continue to decline when the price increases and reduced marketing ought to be having a positive impact.
Judging from the current capital spending plan, I expect further declines whether the economic slowdown affects it or not. For 2008, Life Time expects to spend another $440 million to $460 million on capital expenditures, which will far outstrip the $160 million to $170 million I expect it can generate from operations.
Credit's tight squeeze
Life Time's primary financing comes from a $400 million credit facility, supplemented by a $200 million "accordion" feature; $313 million of that was being used as of Dec. 31, 2007. The remaining amounts look like they will be consumed this year based on the current plans.
Will Life Time be able to raise more debt to cover its liquidity needs? In this environment, it wouldn't come cheaply. Instead, it may have to issue new shares, no matter how cheap they may appear to be. At any rate, they'd likely cost far less than the $55.40-per-share price generated in last year's offering and cause even more dilution as a result.
At least Life Time has held up better than its nearest publicly held peer. Town Sports International (Nasdaq: CLUB ) , which operates the New York Sports Club chain, has lost more than 70% of its value over the past year, compared to "just" 43% for Life Time. Yet Town Sports appears much more conservative about its expansion strategy, keeping its capital expenditures roughly in line with the cash flow generated from operations.
Long story short, Life Time just doesn't appear fiscally fit.
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