Moves look to be working out

  • Article by: SUZANNE ZIEGLER , Star Tribune
  • Updated: September 23, 2009 - 7:23 AM

Life Time Fitness has adapted, changing with the economy, and appears to be keeping pace.

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Life Time Fitness has banks of TVs in workout rooms, featuring their own LTF TV with original programming. Life Time also features a cafe and spa. A key figure is the success of the company is Life Time CEO Bahram Akradi, seen in Life Time's atrium.

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Life Time Fitness Inc. is a company that shouldn't be doing well in this recession.

And, for a while, it wasn't.

After a disastrous fourth quarter that saw its stock tumble, the Chanhassen-based chain of upscale fitness centers has been intent on proving to Wall Street -- and to its customers -- that it's not a luxury good. As consumers pared back on "wants" and focused on "needs," Life Time was determined to be needed.

Like rock-climbing or yoga? Life Time added more than two dozen clubs to help members find a niche. It went social, cranking up a members-only website to allow them to connect with one another online, as well as learn about events at their clubs. And, it added a program that lets members get discounts at other businesses, such as Costco and T-Mobile.

It also implemented moves more typical of companies in this recession: It cut staff -- its first layoffs in corporate history -- and scaled back expansion from about 12 new clubs a year to three. It has cut marketing costs and tried to keep costs down for luring new members.

So far, the strategies appear to be working. The clubs had double-digit membership growth in the most recent quarter. Average revenue per membership, after falling each quarter last year, is on the rise again. And the stock, which bottomed out to an all-time low $7.07 in March, has quadrupled since then.

"We have changed our strategies to do two things: always be cash-flow positive so we are in charge of our own destination," explained Bahram Akradi, the company's chairman and CEO. The second: "Deliver even a greater value to our customers -- so good that they really can't afford to give it up."

Of course, the company's race against this recession isn't yet over. The stock still hasn't recovered to where it was even a year ago. The company's existing clubs continue to post revenue that is down from the year before. And Life Time Fitness loses nearly 42 percent of its members every 12 months, a figure it hopes to get down to the mid-30s.

Akradi, who once worked as a health club janitor before he founded Life Time in 1992, said that he has weathered other recessions, but he called them "little squirrels compared to this one being a gorilla."

Resort-like feel

Walk into a Life Time Fitness Center and it doesn't smell, well, like a gym.

Fresh air is continually pumped in through vents. The check-in counter is granite, the "spa" offers pedicures and manicures, and personal trainers abound. Upstairs in the "spinning" room at the 110,000-square-foot Chanhassen club, blowers rush air over the cyclists so they feel as though they're actually moving, even though they're sitting atop bikes that are bolted to the floor. A drop-down screen lets them imagine themselves racing in the Tour de France.

The clubs have four price levels with amenities to match: Onyx is the priciest, followed by platinum, gold and bronze. (Chanhassen rates as a platinum.) Some clubs are remodels and don't have all the bells and whistles of the newer clubs. Individual memberships range from $49 to $119 per month.

Scot Motzny, 39, of Eden Prairie, is in a weekly volleyball league at his Eden Prairie club, where he'll often stay late after games and have drinks with other members of the league. The project manager for Medallion Cabinetry in Waconia has a job, so he can afford the monthly dues at the Onyx-level club.

"But if my financial situation changed, I'd find a way to work out for free. But I'd be missing out."

Indeed, the bar at the Eden Prairie center is a popular spot for tennis leagues to gather after they play. The Chanhassen club has a lounge with a leather couch, chairs and a flat-screen TV. Outdoor pools are activities for families all summer.

"Not only are you going to the club and doing your own thing, now you can communicate with people for Pilates or a spin club or a squash club," said Thomas Shaw, an analyst who follows Life Time for Stifel Nicolaus & Co. in Baltimore.

"If you become ingrained into the club-within-a-club, it makes it a much stickier proposition and it almost reinforces your membership, and I believe it also makes it harder for you to ultimately pull back and leave." Shaw rates Life Time stock a "buy."

With social networking still in its infancy, he said, the benefits of it will accrue over the longer term.

Of the 16 analysts who follow Life Time, 10 recommend that investors buy and six recommend holding the stock. Piper Jaffray & Co. last week downgraded Life Time from "buy" to "hold," a sign that it believes the stock's recent rally makes it less of a bargain for new buyers. Piper's report said the fundamentals of the company remain solid and that membership is expected to continue to grow, but noted that it believes that the majority of its cost-savings have been achieved.

Changing direction

Many of Life Time's problems last fall were of the company's own doing. It was slow to scale back its expansion program and still is spending as if the credit markets had not crumbled around them. And Akradi, who had bought stock with borrowed money, using the stock as collateral, was forced to sell more than half of his 4.2 million shares, further depressing the price.

At that same time, Green Equity Investors, a Los Angeles investment partnership with a national reputation, assembled a 9 percent stake in the struggling company. Akradi said that Life Time got Wall Street's message loud and clear, and was able to quickly slow expansion -- new clubs typically cost $30 million apiece -- because it owns its own management and construction companies. "The fix to that was to just literally build three large clubs a year and not 12," he said. "We immediately started spending less money than we're making."

The expectation, Akradi said, is that the road ahead will be bumpy. "The consumer will be exhausted from either lack of jobs, a slower economy or the shrinkage in the consumer credit. My expectation is it will be a headwind economy for a long time."

But he's trying to figure out ways around that. The Iranian-born entrepreneur, who still bikes 2,000 miles every summer, categorizes members into two groups. First, the "crazy, passionate people" who love their sports. For them, the company must give them the "Rolls-Royce" of their sport. "It's got to be the best yoga experience, the best running experience," he said. "You've got to be the Nordstrom's shoe department for each of those things."

The other group is the general fitness enthusiast, those who say, "I want to get as much as I can for $50 or $60 a month."

Life Time is targeting those members, with what it is calling "mind-blowing value." Starting next month, members will see more deals at the spas and cafes within clubs.

"I don't want my members to be able to buy swim lessons for their kids cheaper anywhere else than Life Time," Akradi said. "I don't want you to be able to buy a haircut for your kid cheaper elsewhere.

"We're trying to create more and more value to the member just because they're a member."

Suzanne Ziegler • 612-673-1707

  • BY THE NUMBERS

    1992: Year the company started in a Brooklyn Park strip mall

    84: Centers in 19 states

    25: Centers in Minnesota

    602,281: Members nationwide

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