Barchart columnist Jim Van Meerten’s Feb. 6 Chart of the Day was Life Time Group Holdings (LTH), the Minneapolis-based premium fitness chain.  

Jim pointed out that the technicals were screaming that it was a green light to buy. On Tuesday, LTH stock entered Barchart’s Top 100 Stocks to Buy in the 94th spot. More importantly, from a technical standpoint, its weighted alpha is 138.54, higher than its 12-month performance, which was up 130.84%. 

The stock is hotter than a pistol, up over 40% year-to-date. As Jim suggests, LTH is trading above its 20-, 50-, and 100-day moving averages with 100% technical buy signals. 

There is no question it’s on a roll. The question is whether it can stay on a roll. In the long run, I don’t think it can. If you’re an aggressive momentum investor, have at ‘er, but if you’re more of a buy-and-hold investor, Life Time is not the stock to buy. 

Here’s why.  

You’ve Got to Spend a Buck to Make One

Running fitness clubs isn't cheap. That's especially true when you're building out the kind of clubs Life Time runs. 

According to its October 2024 lender presentation, the average club is 100,000 square feet. It leases approximately 67% of its 177 clubs in 31 states and one Canadian province. Since 2015, its new clubs have been 86% leased. There’s a reason for that, which I will get to in a bit.  

So, while it doesn't take on the capital outlay as much to build the facility, there’s still a massive rent commitment and substantial capital expenditures for equipment, etc. This is not some no-name franchise with a 2,000-square-foot box. 

The company’s 2024 Investor Day presentation says opening new locations requires between $25 million and $30 million in net invested capital. Based on the 100,000 average from earlier, this is about $250 to $300 per square foot. In addition, maintenance capex costs $6 per square foot annually, for a total of $600,000 in annual operating expenses. 

As I said, it mostly gets mall owners, and other real estate investors to own the properties, and LifeTime leases them back over an average period of 17.2 years. That’s a big commitment in rent. 

As of Sept. 30, its lease-related liabilities were nearly $2.5 million, and its long-term debt was $1.65 billion. These liabilities totaled $4.12 billion, or 64% of its market cap. Thus, its total debt was 4.3x its $600 million in EBITDA. 

Most importantly, according to S&P Global Market Intelligence, its Altman Z-Score is 0.81. The Altman Z-Score indicates how likely a company is to enter bankruptcy proceedings within the next 24 months. Anything under 1.81 is considered in the distress zone. In 2020, it was in negative territory.

It might have healthy revenue and adjusted EBITDA growth--projected to be 17.3% and 23.0%, respectively, in 2024--but it generates this by spending a lot of bucks.

The Recession Elephant in the Room

The company believes that its asset-light business model is relatively recession-resistant. 

In its investor day presentation, it points out that the median household income of its members is $157,000, about 1.6x the local area. Further, during the Great Recession of 2008 and 2009, the retention rate at its highest-priced centers was 30% higher than its lowest-priced centers, lending credence to its argument that high household incomes will matter when the you-know-what hits the fan with a trade war. 

Its lender presentation also points out that it grew revenue from $656 million in 2007 to $837 million in 2009, right through the recession. It grew revenue every year from 2001 through 2019, so there’s no question it can increase revenue. However, that has more to do with additional locations and higher fees than a resilient business model. 

Life Time is a public company for a second time. The first time was in June 2004, 12 years after current CEO Bahram Akradi founded it. It was taken private by private equity firms Leonard Green & Partners and TPG for over $4 billion, including the assumption of $1.2 billion in debt. At the time of the buyout, its total debt was 43% of its $2.82 billion market cap, less than what it is today with a so-called asset-light business model. 

The Bottom Line on LTH

The fitness industry is a terrible long-term investment. I’m not suggesting that you can’t make money in it but the capital required to stand out from the competition puts you on a path to destruction or lean times. The number of gyms that go bankrupt is the stuff of legends. 

Its business is rocking today, but tomorrow is another question altogether. 

Consider this: Life Time has a current return on capital of 3.2%. Nike (NKE), which is going through a terrible spell with slow or no growth and is in the middle of a turnaround, had an ROC of 14.1% as of Nov. 30. 

I don’t know about you, but my money’s on Nike.