When the Lifetime Group (NYSE:LTH) went public in October of last year, I concluded that it was time to relax, not invest in the distinctive wellness, health and fitness play. Since the public offering the company has seen a very modest recovery in the operating business, despite the reopening of the economy amidst the pandemic being on its backdrop.
This observation makes me cautious, despite some pressure on the share price, as I am not convinced by the operational performance as of late.
For those not familiar with the Life Time Group, the company was founded three decades ago with an aim to create happy and healthy communities. Its huge resorts offer yoga, swimming, fitness, spa, classes, food, relaxation etc., focusing on families which would like to enjoy time with each other.
The company runs more than 150 centers across 29 US states as its 30,000 team members are active in these facilities and a Canadian location, providing a wide range of these services to more than 1.4 million members which on average generate some $2,000 in average revenues. Just a $100 million business in 2000, the company has seen continued growth with exception to the economic crisis and the pandemic.
The company aimed to go public between $18 and $21 per share, with pricing set at the lower end of the range. With 198 million shares outstanding, the company commanded a $3.5 billion equity valuation, or $5.0 billion if we factored in pro forma net debt.
This valuation was applied to a business which generated $1.9 billion in 2019, on which operating profits of $168 million were reported, with operating margins falling from low double-digit percentages to high single digit percentages. 2020 sales were cut to just $948 million on which a huge $359 million operating loss was reported.
Revenues rose 17% to $572 million in the first half of 2021 with operating losses narrowing to $139 million, although trends were already improving in the second quarter. Amidst the fact that the company was still recovering, and the pandemic was far from over, investors were hesitant as shares fell to $17 on the first day of trading.
Believing sales could come in at $2 billion per annum in a normal year, with operating margins pegged around 10%, I pegged net earnings potential at $112 million after accounting for interest expenses and taxes, equal to just over half a dollar per share. This made it hard to see appeal at around 30 times normalized earnings, albeit that the company appears to be a long-term secular growth play.
Since the IPO shares initially rose to $22 per share in a delayed response to the IPO. Since that point in time, shares have come down, actually hit a low at $10 and change in March before now recovering to levels around the $15 mark.
In October the company posted third quarter results with revenues up 67% to $385 million as the company turned a modest EBITDA loss into a profit of $47 million based on that metric. Note that the D&A component of the business is quite high given the asset intensive nature of the business, with operating losses reported at $17 million. Moreover, a quick further recovery was not seen with fourth quarter revenues seen at $350-$360 million, marking a small sequential decline, and EBITDA set to increase slightly on a sequential basis to $50 million.
In March, it was apparent that the fourth quarter results came in at the high end of the guidance with fourth quarter sales coming in at $360 million, although that EBITDA of $48 million came in a touch light, indicating a continuation of the economic losses. Net debt still came in at $1.77 billion amidst the losses and continued investments into the business, including a new facility in Chicago.
With 186 million shares trading at $15, the equity valuation has fallen to $2.8 billion, awarding the entire company an enterprise valuation of $4.6 billion. This valuation is still hard to rhyme with the real economic performance, despite a reopening of the economy. Worrisome is that first quarter revenues are seen at a midpoint of $390 million, and while this reveals a further increase in sales, adjusted EBITDA is actually set to fall to a midpoint of $40 million at the midpoint of the guidance.
Truth be told is that the recent performance, that is the fourth quarter of 2021 and first quarter outlook for 2022 is quite underwhelming. Furthermore, the services are quite pricey and comes at a real premium, which is a bit tricky in this inflationary environment, with likely lower spending on discretionary and luxury items like a membership card of the company.
I am also not convinced about a 2022 revenue guidance which is seen at $1.8-$1.9 billion. With the company guiding for 18-20% EBITDA margins by year-end, a run rate close to $400 million in EBITDA might be in reach. While that looks good, note that D&A already runs at $230 million per annum, for a $170 million operating profit number. With net debt at 3% on $1.8 billion in net debt and taxes due, realistic net earnings might trend near a hundred million, but that sounds quite upbeat and there are real risks to the outlook given this macroeconomic environment.
Given these underwhelming developments on the operational front, I fail to get upbeat here despite an underperforming share price from the get go, which is fully explainable by a high valuation from the get go and underwhelming operational performance in the most recent quarters.