Life Time Slows Down Growth as COO Leaves Company

Chanhassen, MN — Life Time Fitness will open the last of its three new clubs for 2009 next month when the Chanhassen, MN-based company opens the long-delayed club in the Memphis, TN-suburb of Collierville, TN. It will be the first club to open without President and Chief Operating Officer Michael J. Gerend, who left the company on May 1.

Originally, Life Time planned to open 11 clubs in 2009 before paring that estimate down, first to six, then to three. Two clubs opened in February — Berkeley Heights, NJ, and Lake Houston, TX.

Life Time CEO Bahram Akradi hinted during an earnings call with investor analysts last month that the company plans to open three more clubs in 2010, depending on the credit markets.

“I think there has been this underlying thought that Life Time Fitness is going to just blow itself out with growth and get in trouble,” Akradi said. “We have such a strong cash flow, we just want to demonstrate that — reduce our debt balance and be firmly in control of opportunities ahead. We feel great about opening three large-format clubs this year, another three next year. When the market gives us the complete green light, we can focus on increasing the growth very quickly.”

Gerend's departure was announced one day after Life Time released its first quarter 2009 financials and held its annual shareholders' meeting. Gerend joined Life Time Fitness in March 2003 after having served as president and chief executive officer of Champion Air. Prior to that, he held numerous senior management positions at Northwest Airlines.

In December 2007, Gerend took over as Life Time's president, a role formerly held by Akradi.

“During his tenure, Mike played an instrumental role in building and expanding the strong leadership team we now have in place and, in turn, the growth and performance we have achieved,” Akradi said in a statement. “As he makes his transition from the company, I want to thank Mike for his six years of dedicated service and many contributions. Moving forward, the current executive team will assume the responsibilities he formerly held.”

According to a profile by Forbes magazine, Gerend had a base salary of $335,000 in 2008, with total compensation coming to $908,857.

Akradi's confidence about his company's future came despite a 13.2 percent decrease in net income in first quarter 2009, which ended March 31. Life Time's net income was $15.1 million, down from $17.4 million in the first quarter of 2008. The $15.1 million, or 38 cents per share, was better than the 35 cents per share that analysts had predicted.

Revenue for the first quarter of 2009 grew 11.9 percent to $206.4 million from $184.5 million during the same period last year.

Akradi said several factors related to economic conditions affected Life Time during the quarter: lower enrollment fees, higher marketing costs, higher attrition, higher membership acquisition cost and pressure on average dues.

“We have challenged ourselves to create and execute an action plan that would address each of these areas,” Akradi said. “We are energized to face the challenges in front of us. We will hit it head on. We will win.”

Memberships grew 15.1 percent to 599,919 on March 31, compared with 521,177 on March 31, 2008. Membership dues rose 14.8 percent, although Akradi cautioned that that percentage will decrease as Life Time slows its new club openings. In-center revenue increased 7.3 percent but was down 7 percent per member. Same-center revenue was down 2.7 percent.

Life Time adjusted its 2009 business outlook slightly. Revenue is still expected to be $830 million to $860 million. Net income, however, is expected to be $62 million to $68 million, updated from $60 million to $68 million.

Attrition was higher than what Akradi and Life Time expected (42.7 percent in the first quarter) but the quarterly attrition rate decreased for the second straight quarter — 11.5 percent in third quarter 2008, 10.8 percent in fourth quarter 2008 and 9.8 percent in first quarter 2009. Akradi said he'd like overall attrition to come down to 36 percent.

“What we are doing is increasing the value proposition by providing more services, more value, more programming, more connectivity but not reducing our fees or our dues, which we really don't believe is necessary,” Akradi said.

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