To Jim Cramer, the obesity epidemic has become one of the biggest secular trends today, so the “Mad Money” host recommends investors consider fitness-related stocks.
“In an era of expanding waist lines and rising health care costs, taking an hour to go to the gym every day seems more and more like a necessity, at least if you want to stay thin and healthy,” Cramer said, adding that “at least some Americans are finally getting off our collective butts and doing some darned exercise.”
Last week, a viewer asked Cramer whether he prefers fitness center operator Life Time Fitness or Town Sports. After doing some research, Cramer said it’s “no contest.”
“Life Time Fitness beats Town Sports any way you look at it with a superior business model and a cheaper stock, although it's not necessarily a buy right here,” Cramer said.
The Chanhassen, Minn.-based company operates 98 centers with more than 700,000 members in 22 states and one Canadian province. Town Sports operates 160 sports clubs in major cities along the East Coast under such brands as New York Spots Club or Boston Sports Club. It has more locations, but it has about 533,000 members — considerably less than Life Time, Cramer noted.
More importantly, Cramer said these companies have different business models. Life Time gets 65 percent of its revenues from membership fees while 30 percent of its revenues come from in-center services, like personal training. Town Sports, on the other hand, gets 78 percent of its revenues from membership fees. Also, Town Sports sells annual memberships while Life Time sells monthly memberships. While year-long memberships give Town Sports greater visibility, Cramer said it’s also facing increased competition from cheaper-priced gyms. Life Time is different, however.
“In stark contrast to the rest of the industry, Life Time does not compete for members based on price. The company is selling a premium experience targeted at a wealthier demographic — people for whom price matters a lot less than the quality of the overall experience,” Cramer explained. “By focusing on providing top-notch amenities, Life Time Fitness has been able to attract higher income customers and that gives them tremendous pricing power.”
After Life Time secures a member, Cramer said it tries to get them to spend more money on things like personal training or fitness-related products. In turn, Life Time has faster revenue growth than Town Sports. Life Time’s revenues were up 11.6 percent in the last quarter versus a 5.3 percent increase at Town Sports. It also posted faster same-store sales growth of 5.4 percent versus 4.5 percent at Town Sports.
Cramer also thinks Life Time has more room to grow and a cheaper stock, but he’s not necessarily a buyer at current levels.