Life Time Group Holdings, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Life Time Group Holdings, Inc. is a leading luxury health, fitness, and wellness company that offers an integrated experience for its members through physical facilities, digital platform, and personalized services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Life Time operates large, high-end fitness centers designed to foster a community of health, wellness, and social interaction. It also generates revenue from its digital platform, personalized training, spa services, and nutritional sales. This company aims to provide a holistic approach to health, fitness, and wellbeing.

  • Revenue Streams:
    • Membership Dues: The majority of Life Time’s revenue comes from membership fees. These are typically recurring payments from members that allow access to their facilities and services. The level of membership and the tier determines the amount the member pays per month.
    • Center Revenues: In addition to membership fees, they generate a good portion of revenue from in-center sales, including those of personal training services, food, beverages, and spa treatments at a high margin.
    • Other Revenue: Digital membership, health assessments, other fees, partnerships with corporations, and so on.

  • Target Audience: Life Time primarily targets affluent and health-conscious individuals who are willing to pay a premium for high-quality facilities and services. Its customers are generally affluent, middle-aged men and women living in affluent suburbs and interested in health, fitness, wellness, and nutrition.

  • Industry Trends: The fitness and wellness industry is experiencing a significant shift from generic gym memberships to more personalized wellness experiences. Consumers are increasingly looking for a holistic, integrated approach to health that goes beyond just physical fitness. Digital platforms and personalized services like training are becoming increasingly popular, and so are specialized amenities like spa treatments and premium services.

  • Competitive Landscape:
    • High-End Fitness Centers: Life Time competes with other high-end fitness centers, including Equinox and some upscale boutique gyms. These competitors have high-end facilities, quality staff, and premium locations.
    • Mainstream Gyms: Life Time competes with mainstream gyms like Planet Fitness and Gold’s Gym on price and convenience of locations.
    • Digital Fitness: Companies like Peloton, Tonal, and other interactive fitness apps compete in the digital space.
    • Specialty Studios: Yoga studios, spin studios, crossfit boxes, and other small niche fitness concepts.
    • Health and Wellness providers: There is a huge push for more integrative health and wellness, and the healthcare sector is growing.
  • Differentiation: Life Time differentiates itself through several key elements:
    • Luxury Facilities: Their centers often offer large facilities with a wide array of equipment, amenities like large pools and saunas, childcare facilities, and multiple studios, which cater to the affluent demographic.
    • Integrated Services: They try to integrate fitness, nutrition, spa, and health services. The intent is to create a holistic wellness experience that captures more revenue per customer.
    • Community Building: Life Time fosters a strong sense of community among members through social events, challenges, and group classes and are positioned to be a social space rather than a gym.
    • Digital Platform: Their digital application supplements the physical experience and gives added value, allowing for seamless integration between center activities and at-home workouts and monitoring.
    • High Investment in the Member Experience: From the financial statements, it is clear that they continue to upgrade their facilities and focus heavily on improving the experience for the members.
  • Financial Discussion:
    • Revenue: The company has been increasing revenue substantially in the last couple of years, although the effects of COVID pandemic are still affecting certain parts of the business. Their revenue is primarily driven by membership, which is very recurring. Membership and related revenue account for around 80% of revenue; the rest comes from other revenue.
    • Profitability: Life Time has an okay margin, around 20%, but is looking to improve that, by increasing prices, optimizing operating costs, and also through an increase in membership in new and existing centers. The company has struggled to increase profitability significantly over the past years and continues to have fluctuations in its gross profit margins. The main reason is attributed to high operating expenses.
    • Debt: They have a high debt load of almost 2 billion, as they had been expanding rather aggressively. However, they are looking to reduce that by using their free cash flow and also through their sale-leaseback program. In general, they have been facing problems covering their debt in recent years.
    • Capex: Life Time has a high capital expenditure to acquire land, expand facilities, and maintain all of them. Capex usually ranges between 10 and 20% of their total revenue. This is a high expense that most fitness centers do not have.
    • Cash Flow: Their free cash flow is mainly impacted by higher capital expenditures, but operating cash flow is usually higher because of the high membership model.
    • Recent Performance: They have posted great revenue numbers for the last quarters, which implies a strong demand for high-quality fitness centers. However, as stated above, their operational profitability has not changed much, mainly due to a high expense burden. Also, rising interest rates will lead to higher interest expenses.

Moat Analysis

Moat Rating: 2/5

  • Intangible Assets: Life Time possesses a strong brand in the minds of its customers for its high-end experience and service. This helps create customer lock-in. However, this brand isn’t unbreachable, so it is still easy to replace or switch to a similar premium brand.
  • Switching Costs: There are some moderate switching costs associated with the time and effort required to change from Life Time to a different fitness center. Members might have built communities or friendships with people there, making it somewhat harder to switch locations. However, this effect is not as high as it is with, for instance, a software program or bank. For those who only exercise at the gym, and do not use the spa, food, or training services, this is really low.
  • Network Effect: The company has a decent network effect, given the community aspect of its centers. There is a positive feedback mechanism where the more people who join and use the facilities, the more valuable they become to all. However, the network effects aren’t as strong as those in more digitally connected environments.
  • Cost Advantages: Life Time has some level of cost advantages. First, scale helps them reduce the operating costs of the facilities. Also, because of the integrated experience, their other revenue streams (training, food, spas) become more valuable, because customers only need one membership. However, these advantages are not insurmountable, and competitors may be able to implement similar strategies in their own businesses.
  • Overall: The company does have some moats in place, but the lack of switching costs and strong network effects makes the moat weaker, as compared to other great businesses. I would classify this as a narrow moat, with a 2/5 rating.

Risks and Resilience

  • Economic Downturns: Given that the target demographic for LTH is high-income individuals, the company could suffer during recession times, as people would be less inclined to spend money on premium products like that of LTH. Also, job losses can impact their membership base. In recent years, there have been a lot of layoffs in tech, which could lead to some members being unable to afford such a service.
  • Competition: The fitness and wellness industry is growing, but that also attracts competition. More companies are offering better services. It is possible for newer companies to capture market share from LTH. For example, the home fitness industry gained a huge following during the COVID pandemic.
  • High Debt Levels: Life Time has high debt, which could hurt the company if interest rates rise further. Also, a high debt level means that they have less flexibility for other investments.
  • Dependence on Facilities: The model of Life Time is very facility-dependent. As compared to other companies, they need to make huge investments in infrastructure, which may not pan out.
  • Reputational Risks: A very high-end luxury brand like Life Time may be negatively affected if a controversy or bad press occurs, leading to a drop in membership.
  • Business Resilience: The model of Life Time is very recurring revenue, as they are mostly tied into membership payments. So, it is unlikely for people to cancel their membership in large numbers. This is evident from their results as the effects of COVID have subsided. Also, they have a high-quality service offering, giving them an edge over other players. The company has a reasonably strong balance sheet that helps them mitigate problems in the company. However, as stated above, high debt levels may hurt them.

Understandability

Understandability Rating: 3/5

Life Time’s business model is fairly easy to understand, with the company operating physical facilities and providing services and a digital offering. It is also easy to understand the business from the lens of revenue generation. However, the complexities of the financial statements, along with the intricacies of membership, and other operational details, make it a little complicated. Overall, a 3/5 is a good rating for the understandability of the business.

Balance Sheet Health

Balance Sheet Health: 3/5

  • Debt levels: LTH has high debt, which impacts its financial flexibility, and makes it susceptible to rising interest rates. They are trying to reduce the debt, however, it is still a cause of concern.

  • Cash Balance: LTH’s cash balance is adequate, but not very strong, and is susceptible to changing industry dynamics.

  • Asset quality: They have high levels of property, plants, and equipment, but these facilities are a crucial part of the business model, as their business model is primarily about in-person experiences.

  • Equity: Although they have a large and steadily growing equity on the books, the main concern lies with their debt load. They also have negative retained earnings and accumulated losses, and they have needed to issue shares in order to raise capital.

Overall, the company has a satisfactory balance sheet for the long term, however, their high levels of debt may make them less resilient as compared to other players in the industry. Therefore, the balance sheet health rating is 3/5.

This output should give you a full understanding of the business.