Lean Times for Life Time Fitness

Related Quotes

Symbol	Price	Change
LTM	25.81	+0.05

{"s" : "ltm","k" : "c10,l10,p20,t10","o" : "","j" : ""}

I'm still net long this rally, but not all long. Insiders are keeping me cautious with their continued bearish signals, and I have acted on the caution with a high cash level and a couple short positions.

One of my shorts is Life Time Fitness . I researched betting against this firm's shares back in June after the chronic insider selling at the company placed it on my screen of stocks to research further for a downside bet. But the already-low valuation of LTM last summer didn't leave enough downside potential to justify a bearish move.

Good thing I passed. Despite insider apathy, the stock participated well in the summer portion of the market's fabulous rebound since March, rising nearly 70% in just over two months.

The quick rise in LTM has only mitigated the valuation argument against shorting it, however. The stock also looks at risk to fail a test of technical supports. Meanwhile, the negative bent of the company's insider profile is still evident.

Life Time Fitness operates health and fitness centers in the United States, eschewing cutthroat markets like New York and California in favor of states primarily in the Southeast and Midwest. Life Time's stock peaked (with the major indices) back in October 2007 at $65, and swooned all the way down to $7 in March of this year; investors were likely worried that cash-strapped consumers would cut down their spending for discretionary health memberships.

That's a logical fear, and one that played out again in the firm's financial results. While total revenue increased a respectable 7.8% year over year in Life Time's third quarter to $214.3 million, earnings of 51 cents per share were 7.3% below the year-ago period. That's the fourth straight quarter of year-over-year declines for Life Time's bottom line.

Life Time's income statement shows that its third-quarter revenue gains were largely eaten up by similarly increased expenses for operating the fitness centers. And the firm's EPS decline would have been much worse had Life Time not cut advertising and marketing expenses by a sharp 21% over last year. With same-center sales down 5.4%, cutting marketing doesn't seem like the healthiest long-term solution to shoring up earnings and cash flow. But desperate times call for you know what, and Life Time's management can't really be faulted for doing what they must.

I think the desperate measures are going to continue to be needed at Life Time until this recession is over. And I don't mean "over" in economic terms. Heck, the Bureau of Economic Analysis will release the advance GDP report for the third quarter on Thursday, and some economists expect that third-quarter gross domestic product for the U.S. will come in at around a 3.25% annual growth rate.

But Life Time does not charge membership fees to the economy -- the only metric that can bolster Life Time's prospects is an increase in the number of jobs. A decreasing rate of job losses or even no new job losses is not likely to reverse the bearish trajectories of Life Time's margins, membership growth and attrition rate. The firm needs more existing and potential members to get employed outright, or more fully employed. That is the primary way the pairs of financially stable, treadmill-seeking feet will increase.

As it is, management has dampened revenue growth expectations for the fourth quarter due to a lower-than-expected level of new members signing up last summer, even as they beefed up the firm's EPS guidance by several pennies. Management now expects the firm to earn between $1.78 and $1.81 a share this year.

But Life Time beat EPS expectations in its third quarter by several cents already, and its shares fell 15% during its earnings week. The bottom line is that the bottom line is less important for Life Time right now than the level of new memberships. Without a return to an increasing rate of new memberships, any earnings gains will rightfully be seen as being of "low quality," and likely unsustainable.