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Life Time Revenue Up, Stock Down

EDEN PRAIRIE, MN — As the stock market struggled late last month and early this month, Life Time Fitness, Eden Prairie, MN, also experienced some ups and downs after releasing its fourth quarter 2006 and year 2006 financials last month. The week that Life Time announced growth for those periods and a new three-story urban model, the stock dropped from $52.57 at close on Feb. 13 to $49.90 at the close of that week and continued to drop through March 1 when it closed at $48.83.

The drop in stock price came for several reasons, says Ken Cooper, senior director of finance and investor relations officer at Life Time. A few weeks prior to the earnings report, Life Time stock hovered around the $49 level. Then, two analysts released projections for the company, driving the stock to $54.85 at the close of Jan. 24. That price slowly dropped until it reached $52.45 the day before earnings were released on Feb. 15 before dropping even further due to what Cooper says was a reaction by some investors to the three-story urban model that the company announced in its earnings call.

“To the educated investor who knows our story well, they applauded that decision [to do the three-story urban model],” says Cooper. “To someone who didn't know it as well, it raised questions. A three-story concept doesn't change anything with the fundamental business other than it extends our growth in the long term.”

The company, which already operates two-story models in the suburbs, plans to open the first three-story model in Houston in 2008.

“When we executed our IPO (in June 2004), one of the things we said was we see 200 facilities based on this two-story, large model,” says Jason Thunstrom, director of corporate communications at Life Time. “What this new [three-story] model represents is no change to the path to 200. It gives us more options beyond that. We can site a 140,000-square-foot, three-story concept on half as much land [as the two-story model] or a 90,000-square-foot one on as little as two to three acres. It simply takes the story we told back then and opens that up.”

Cooper agrees, saying that the demographics in the more densely populated areas that the three-story models will open in are “awesome.”

“Why bypass giving our concept to those folks just because we can't find enough land?” Cooper asks.

Jim Cramer, host of MSNBC's “Mad Money,” interviewed Bahram Akradi, CEO of Life Time, on his show in mid February after the stock price dropped. Akradi indicated that he was not worried about the drop.

“I think the results will show up in the near future,” Akradi said on the show.

Results have already shown up for the company. Life Time's fourth quarter 2006 revenue grew 34.5 percent and full-year revenue grew 31.2 percent. Fourth quarter 2006 revenue was $139.3 million compared to $103.6 million during the same period the year before. Revenue for 2006 totaled $511.9 million compared to $390.1 million in 2005.

Net income during the quarter grew 16.9 percent to $14.1 million, or $0.38 per diluted share, including the effect of share-based compensation expense. This compares to net income of $12.1 million, or $0.33 per diluted share, for the same period in 2005. For the full year, net income grew 22.7 percent to $50.6 million, or $1.37 per diluted share, from $41.2 million, or $1.13 per diluted share, for 2005.

In-center revenue grew 41.7 percent to $35.9 million during fourth quarter 2006, and 41.6 percent to $138.3 million for the full year.

Cooper attributes revenue growth to three drivers: the opening of more clubs, increasing memberships at clubs less than three years old and clubs not at capacity (memberships at all clubs grew 23.8 percent to 443,660 in 2006), and in-center revenue growth through the addition of services and products to be sold in its five businesses. Those businesses are personal training; Life Spa, which is the spa element; Life Café, which is a restaurant in each club; member activities, which are the fee-based programs that don't fall under personal training; and tennis.

During the fourth quarter, the company opened clubs in Overland Park, KS; Palm Valley, AZ; Alpharetta, GA; and Scottsdale, AZ. The company has started construction on eight current model centers that are scheduled to open this year.

Analysts expect the company's earnings to grow at an annualized 25 percent pace during the next five years, according to Kiplinger's, which ran a March story urging investors to consider adding health club companies — including Life Time — to their portfolios. A Feb. 19 Fortune magazine story called Life Time stock “hot.”

Thunstrom didn't give much credence to a story on that questioned Life Time's practice of taking on mortgages to purchase its land and to finance construction of clubs. The article said that the company couldn't finance the new clubs with its own revenue because Life Time's capital expenditures since it went public in June 2004 exceeded cash flow by $227 million. Thunstrom says the article does not echo the thoughts of the company's analysts.

Cooper adds, “We are in the red if you look at free cash flow, but that's because we are growing and expanding the company. The current plan that we have in place right now is to fund the company through long-term mortgages. If we stopped construction today or started leasing all the facilities, we would show cash flow tomorrow. We feel that the smart thing to do is to make sure we are using the best cost of capital for our shareholders.”

Cooper says that the 6.03 percent interest on the 90 percent of cost loan is a better answer for shareholders than to lease at a higher rate.

“And it gives us more flexibility,” Cooper says, adding that the company plans to continue to fund its growth through use of its operating cash flow of $126 million for the year, management of its $300 million revolver and use of long-term mortgages.

Although Life Time has been the focus of a lot of media attention lately, Akradi's personal life also has been in the spotlight. On Feb. 20, Akradi was sentenced to 90 days in jail and a $1,000 fine, but he will not have to serve jail time or pay the fine if he stays out of trouble during the next year. The sentence stemmed from a guilty plea to a misdemeanor charge of assault that allegedly occurred in February 2006. A felony charge of property damage was dropped as part of the agreement. Akradi was charged in June 2006 with a felony after police investigated the February incident in which Akradi allegedly cut off a 17-year-old in the parking lot of Minnetonka High School. The teenager honked at Akradi, which allegedly led to Akradi yelling at the student, hitting the teen's car and opening the door to try to pull the boy from the car.

Akradi has said that the teenager charged at his car in an attempt to scare his daughter and him. He denies grabbing the teen's shirt or pulling him from the car.

The judge ordered Akradi to attend anger management classes and donate $5,000 in sports equipment to Minneapolis public schools.

In response to the incident, Life Time released this statement: “The fact that Akradi chose to settle this matter is a declaration of his intent to maintain sole focus on leading our world-class company. To date, the media coverage of this matter offers an incomplete set of facts and lacks pertinent detail surrounding the specific actions and character of the complainant, coupled with alleged claims that remain unproven.”

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