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

To: orkrious who wrote (27897)	3/6/2005 12:39:11 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 110194

thanks for the clarification. i was not even aware that Lifetime was a publicly traded co. still, $59 does not strike me as cheap in any way. i just checked online, and a local 24hr Fitness membership only costs $36.99 a month. 24hourfitness.com ) 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 while i understand what you are saying, i don't think it's possible to relate margins to this interest expense without knowing more about operational costs, etc. speaking generically, high-fixed-cost businesses can see enormous gains on c/f when debt is paid off or prices expand just a little (this was a big attraction of FCX a couple years ago). and in the early stages of an expansion, there is a lot of capex and interest expense, so to understand the underlying business the analysts will look at EBITDA and ignore the interest. not knowing anything about Lifetime in particular, it could be that the interest is for debt on recently opened or newly opening facilities which have yet to generate mature revenue. and looking at their website, it looks like Lifetime is expanding rapidly (they are even opening in Austin, but i doubt they will get to charge $59 here since the market is saturated) as you mentioned, it is a high fixed-cost business, and it might take two years to build up a membership base for each club. so after just two months, there will be a lot of negative cash flow still. after 24 months, there could be significant positive cash flow--probably if you listen to their CC they discuss the particulars. i'm not saying that's the situation--i just think we'd have to know more about the particulars of the firm to relate the debt to c/f. 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. as mentioned above, $59 strikes me as quite high. but 15 years ago we didn't have all these national chains all over the place--maybe one or two, and it was more the strip mall variety as compared to today's yuppie-type clubs that can poach from country clubs. now it seems they are popping up all over the place. but that's not necessarily a bad thing--a fitness club is not exactly a gourmet restaurant. they can rationalize operations and provide more of what customers want (whatever those things may be--more floorspace, better lockers, yoga, childcare, etc.). after all, the people who started the video-store chains have to find a new niche, right? -g-