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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (27894)	3/5/2005 5:53:47 PM
From: orkrious	Read Replies (1) \| Respond to of 110194

i'm not sure if it's "overabundant capital" which is the culprit in your example. after all, Franklin is offering to reduce your fee by almost 50%, and presumably they do not think they will be losing money on you at that price. this suggests that they had unsustainably high margins and were thus vulnerable to poaching. there is no question franklin's margins were high, but 15 years ago there were a lot of health clubs around that cost $59/month. costs have gone up substantially since then. lifetime has come in and is charging the same price as most other health clubs 15 years ago. it's fortunate the Lifetime went public last year so it lets us analyze your assertion a little more deeply. even a cursory review shows that I doubt they'd be charging what they are without "cheap" capital. first, looking at the cash flow statement, they issued $80 mil in stock and paid down debt with $65 mil of it. so their interest expense is lower this quarter than it was last year because of their ability to go public. looking at Q3 03 numbers (wasn't Q3 03 near the bottom in interest rates?) they had $4.85 mil in interest expense and $9.77 mil in profit before taxes. so if their interest expense doubled it would have cut their income before taxes in half. if their net margins were half, would they have been able to go public? also note that if their margins were cut in half, their net income would have been less then their enrollment fees, and their enrollment fees are going to go down as a percentage of their total revenue because, no matter what, their growth rate is going to slow down (even if they open more facilities each year than the year before, they aren't likely to be able to keep the same growth rate). my point is that this is a very high fixed cost business, and interest expense should be a fairly significant component of their total expenses. given that their margins aren't that high, more "normal" interest rates would hurt. also, lower interest rates allow them to show better profit, which facilitates access to the equity markets, which reduces interest expense... regarding my being profitable to franklin at $60, they obviously have high fixed costs, and their marginal cost of having me as a customer is low. since they are losing their customers to Lifetime, they are better off having me and everyone else at $60 when they can't have me at $115. that is, until interest rates are normalized and they are better off shutting their doors.