Sector Watch: Getting physical
In a country where obesity rates are on the rise, fitness-related companies such as Town Sports International Holdings, Inc. (Nasdaq: CLUB) and Gaiam, Inc. (Nasdaq: GAIA) stand to benefit.
According to a report in August from the Trust for American Health, a non-profit wellness organization, obesity rates rose in 31 U.S. states last year, and two-thirds of American adults and 25 million children are obese or overweight.
This news loosely echoes a 1991 Surgeon General’s Report and a 2001 Call to Prevent Obesity, both of which resulted in millions of Americans increasing their workout habits. Between 1996 and 2005, total U.S. health club revenues increased 7.5% annually, to $15.9 billion in 2005 from $8.3 billion in 1996, while the total number of club memberships grew 5.2% annually, to 41.3 million from 26.2 million. Some 85% of Americans surveyed believe obesity has reached epidemic proportions.
Town Sports International Holdings, which closed at $15.24 on Tuesday, is a leading operator of fitness clubs and the nation’s fourth-largest fitness club operator overall. At year-end 2006, it operated 147 clubs serving 453,000 members across four metro markets: New York, Boston, Philadelphia and Washington, DC.
The company achieves operating efficiencies by clustering its clubs, initially opening locations in city centers and then branching out to neighborhoods and suburbs. Town Sports is the largest fitness club operator in Manhattan with 38 locations, twice as many as the next largest competitor, and a total of 99 clubs within a 75-mile radius of New York City.
Town Sports has identified a profitable niche serving affluent urban customers, targeting upper value customers aged between 21 and 50 who annually earn between $50,000 and $150,000. This chain’s rapid growth is attributable in part to America’s growing focus on fitness as aging baby boomers and their offspring, the so-called echo boomers, attempt to minimize the effects of aging by exercising.
During the first six months of 2007, Town Sport’s revenues grew 10.1% year-over-year to $235.2 million from $213.5 million and net income (excluding non-recurring items) increased three-fold to $10 million, or $0.37 per share, from $3.1 million, or $0.16 per share, for the same period one year ago.
In 2007, Town Sports anticipates opening 16 new clubs, boosting annual revenues at least 10% and increasing per-share earnings by at least 40%. Analysts target 53% growth for the company this year and 22% growth next year. Over the last 52 weeks, shares have ranged from $12.94 to $24. My $25 price target for Town Sports shares is nearly 70% above the current price.
While Town Sports targets a niche of affluency, Gaiam, Inc. targets a demographic concerned with both physical and spiritual health.
The Broomfield, Colo.-based company develops and markets media content focused on wellness, spirituality, personal development and healthy lifestyles. This marketer of yoga and Pilates exercise videos is positioned as a leader in the $227 billion worldwide Lifestyles of Health and Sustainability (LOHAS) market. With a line of yoga and Pilates videos ranking #1 in the U.S. market, the company has a 44% share of the fitness/wellness video segment.
Gaiam markets its products through multiple channels, including traditional media, catalogs, the Internet, direct response television and broadband, and subscription clubs and communities. The company has 7.5 million direct customers and distributes through 68,000 retail stores.
During the first six months of 2007, Gaiam’s revenues increased 16.8% year-over-year to $110.8 million from $94.9 million. Net income grew to $1.4 million, or $0.06 per share, from a net loss of $0.3 million, or $0.01 per share, in the same period a year earlier.
Acquisitions are supplementing organic growth. Gaiam recently acquired Zaadz, the leading social networking site in the LOHAS space with 850,000 visitors per month, multimedia lifestyle company LIME, and a company called Conscious Enlightenment, which operates a yoga DVD and streaming video subscription club. Analysts expect Gaiam to produce 72% growth next year and growth averaging 30% annually over the next five years. My $25 price target for Gaiam is 30% above the current share price. On Tuesday, the company’s stock closed at $21.49. Over the last 52 weeks, shares have ranged from $11.38 to $21.20.
Be it yoga, Pilates or old-fashioned pumping iron, it seems that Americans are increasingly becoming more physically and mentally health-conscious, especially as more reports are released confirming rising obesity rates. As an investor, it might work out in your favor to invest in working out.
