LTH - Life Time Group Pursues Asset-Light Opportunities

2023-07-28 15:46:33 ET

Summary

• Life Time Group Holdings, Inc. operates a network of fitness and health center locations in the United States.
• 2023's revenue growth expectations are materially lower than 2022's annual growth rate over 2021.
• Management is pursuing "asset-light" opportunities and expects to fund its capital requirements from cash flow in a few years.
• But higher interest rate prospects may dent the firm's profitability due to its high debt load.
• I remain Neutral [Hold] on Life Time Group Holdings, Inc. stock for the near term.

A Quick Take On Life Time Group Holdings

Life Time Group Holdings, Inc. ( LTH ) reported its Q2 2023 financial results on July 25, 2023, beating revenue but missing earnings consensus estimates.

The firm provides fitness services through its network of athletic resort destinations in the United States.

I previously wrote about Life Time Group with a Hold outlook.

Given the potential for further interest rate hikes as macroeconomic data shows recent strength, a potential rise in borrowing costs and downward pressure on pricing multiples, my near-term outlook for Life Time Group Holdings, Inc. remains Neutral [Hold].

Life Time Group Overview And Market

Chanhassen, Minnesota-based Life Time was founded to develop, acquire and operate premium athletic health and wellness locations via a recurring membership subscription business model.

Management is headed by founder, Chairman and CEO Bahram Akradi, who has been with the firm since its inception and was previously co-founder and EVP of U.S. Swim & Fitness Corporation.

The firm seeks customers via an omnichannel approach involving both online and offline media.

LTH says it also is focusing on delivering 'live streaming fitness classes, remote goal-based personal training, nutrition and weight loss support and curated award-winning health content and wellness data monitoring on the go.'

According to a 2021 market research report by Mordor Intelligence, the global health and fitness club market was an estimated $81 billion in 2020 and is forecast to grow at a CAGR (Compound Annual Growth Rate) of 7.21% from 2021 to 2026.

The main drivers for this expected growth are a continued rise in the benefit of health awareness and increasing incidence of obesity leading medical caregivers and governments to encourage exercise as a regular feature of individual habits.

Also, the North American region will continue to dominate the health and fitness center market in the coming years.

Major competitive or other industry participants include:

• Equinox

• The Bay Club Company and Club Corp

• LA Fitness International

• 24-Hour Fitness Worldwide

• YMCA

• Anytime Fitness

• Snap Fitness

• Planet Fitness

• Orange Theory

• Barre3

• Others & Independents.

Life Time Group’s Recent Financial Trends

• Total revenue by quarter has trended higher; Operating income by quarter has trended lower in recent quarters.

• Gross profit margin by quarter has trended higher recently; Selling, G&A expenses as a percentage of total revenue by quarter have dropped slightly in recent quarters.

• Earnings per share (Diluted) have remained positive in each of the last four quarters.

(All data in the above charts is GAAP.)

In the past 12 months, LTH’s stock price has risen 23.78%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with only $30.9 million in cash and equivalents and $1.86 billion in total debt, of which $64.8 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash used was a whopping $338.7 million, during which capital expenditures were $675.6 million. The company paid $32.1 million in stock-based compensation, or SBC, in the last four quarters.

Valuation And Other Metrics For Life Time Group

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings.

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $14.84 versus the current price of $18.06, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.

Commentary On Life Time Group

In its last earnings call ( Source - Seeking Alpha ), covering Q2 2023’s results , management highlighted the "rapid deleveraging" progress, reducing its net debt to adjusted EBITDA multiple from 9x down to 4.2x in one year.

Leadership also noted that its customer attrition rates dropped in June to below that of 2019, the first month since the pandemic began.

However, management is cautious about the environment going forward due to "some potential recessionary headwinds."

Total revenue for Q2 2023 grew by 21.8% year-over-year, and gross profit rose by 6.7%.

Selling, G&A expenses as a percentage of revenue decreased 2.8% YoY, indicating increasing efficiency and operating income rose sharply compared to the previous year’s period.

The company's financial position features a large debt load of $1.86 billion in total debt, little cash on hand, and significant free cash use in the past year.

Looking ahead, consensus revenue estimates for 2023 suggest $2.24 billion, or a 15.4% growth rate.

If achieved, this would represent a sharp reduction in revenue growth versus 2022’s growth rate of 32.87% over 2021, indicating a halving in its previous growth trajectory.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Recession" two times, "Macro" four times, and "Drop" five times.

Analysts questioned company leadership about the effect of weight loss drugs on client activity and management responded that its locations are focused on broad social aspects of health and wellness and believes they are not seeing any difference in signup activity.

Leadership also wants to get the company to a position where it can finance its growth plans from cash generation, which it sees occurring within the ‘next two to three years.’

The firm is looking at a potential 200 "asset-light opportunities," already finishing 20 of them with another 20 in discussions.

Regarding valuation, in the past twelve months, the firm's EV/Sales valuation multiple has dropped about 10%, as the chart from Seeking Alpha shows below.

A potential upside catalyst to the stock could include stronger-than-expected consumer resiliency in the U.S.

The primary business risk to the company’s outlook is a further rise in the cost of capital, which would impact the company's profitability due to its heavy debt load.

It’s a tricky time for the U.S. economy, with plenty of cross-currents as short-term interest rates are restrictive but consumers continue to spend and employment remains strong.

Given the potential for further interest rate hikes as macroeconomic data shows recent strength, and a rise in borrowing costs and downward pressure on pricing multiples, my near-term outlook for Life Time Group Holdings, Inc. remains Neutral [Hold].

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