steiner leisure ltd. (nasdaqgs: stnr) april 17, 2014 guanrong (rachel) fu marnie georges jing feng...
TRANSCRIPT
Steiner Leisure Ltd. (NasdaqGS: STNR)April 17, 2014Guanrong (Rachel) FuMarnie GeorgesJing Feng (Jeffrey) Li
2
Agenda
Introduction
Company overview
Macroeconomic outlook and industry overview
Relevant stock market prospects
Financial analysis and projections
Valuation
Recommendation
3
Company Overview
Spa Opera-tions48%
Products31%
Schools8%
Laser Hair Re-
moval13%
Business Segments• Founded in 1934• Worldwide provider and innovator in the
fields of beauty, wellness, and education• Employees: 7,318• Market Cap: $632 MM• Industry Classification: Specialized Consumer
Services• Closing Price: $44.11
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Revenue by Segment
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
4
Business Overview: Spa Services
• Business Overview: • Relaxing therapeutic spas featuring quality beauty and body treatments • Practices through cruise-based and land-based hotel and standalone spas
• Cruise Ship Spa Performance: • Provide services including almost all major cruise lines in North America• By 2014, serve 156 cruise ships representing 18 cruise lines• Exclusive rights to offer services and sell products
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Carnival24%
Royal Car-
ibbean
14%
Others62%
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
5
Business Overview: Spa Services
• Land-based Spas:• Hotel-based Spas:• Offer services at 56 urban
hotels in 16 countries • Sizes from 625 ft.2 to 32,000
ft.2 • Exclusive rights with Starwood
• Day Spa:• Operates 5 day spas worldwide• Similar services to hotel spas
• Licensed Spas• Licensed one brand to
Thailand-based hotel operator
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
6
Risk Overview: Spa Services
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Land-Based Spas
Hospitality industry ties
Responsible for own capital costs
Increased competition from day spas
Hotel contracts may expire
Cruise Ship Spas
Cruise ship industry ties
Agreement for 7.2% revenue (33 ships) expires in 2014 — may renew
Carnival & Royal Caribbean account for 128 of 156 ships
Celebrity agreement terminated
New agreements may increase payments to cruise lines
20092010201120122013201420152016$0
$200
$400
$600
$800
$1,000
$1,200
Spa Revenues (MM)
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
Business Overview: Laser Hair Removal
• Business Overview: • Acquired Ideal Image Development Inc. in
2011• Provides non-invasive procedures for the
removal of unwanted facial and body hair
• Current Performance:• 58 new locations as of 2014• Operates 109 laser hair removal centers in 31
states and one center in Canada• Franchises brand to 17 additional centers
• Potential Risks• Capital costs for new centers• May not find ideal locations for new centers• Need specific medical personnel in high
demand
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
28%
24%14%
34%
Market Share
Aderans Co. Ltd.Ideal Image Development Inc.American Laser SkincareOther
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
Business Overview: Production
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
• Provides high-quality personal care products through cruise ship spas, land-based spas, Ideal Image centers, department stores, and e-commerce
• Generates 30% of STNR revenues
• Highly competitive market reliant on brand image
• Ingredients sourced from elite European manufacturers with high bargaining power
Key BrandsBliss
ElemisJou
La ThérapieRemèdeSteiner
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
Business Overview: Education
• Full-time and part-time programs in massage therapy , beauty and skin care
• Accredited by several industry boards
• Began in 1999 with expansion through acquisitions
• 4,663 students
• Potential Risks:• Title IV Compliance issues• Most students receive
financial aid• Accreditation and licensing
requirements changing
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
10
Market Power AnalysisSteiner’s recent acquisition and industry trends provide new opportunities moving forward.
Strengths Weaknesses
Ideal Image acquisition places strong foothold in new market Serious substitutes available for products and services
Contracts with major hotels and cruises builds brand image Depends on a few large cruise and hotel clients
Education segment provides competent employees for spa and hair removal businesses
Necessary R&D expenditures to develop new products and services may prove unprofitable
Ability to sell products at spas and additional outlets to build brand awareness
Subject to consumer sentiment, disposable income
Opportunities Threats
Opening new Ideal Image hair removal centers can capture new clients in growing market
Increased competition from day spas and other alternatives
Aging population demands new treatments and services Products may become irrelevant with consumer taste changes
Further global and domestic expansion with new partners Hotels and cruises may terminate contracts at any time
Increased international and domestic tourism raises exposure to spa services
Title IV legislation may hurt school enrollment and accreditation
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.
11
Spa Industry Drivers
• Increased affluence• More baby boomers (39.0%
of spa users) demanding anti-aging services• Mature industry offering
additional services and products• Consumer tastes and
preferences
20042006
20082010
20122014
20162018
2020$30,000
$32,000
$34,000
$36,000
$38,000
$40,000
$42,000
$44,000
Per capita disposable income
2.2%
CA
GR
201
4-20
19
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Sources: 1. “Health and Wellness Spas” Report. IBISWorld. March 2013.2. Bureau of Labor Statistics’ Consumer Expenditure Survey.3. “Cosmetology and Beauty Schools.” IBISWorld. May 2012
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Steiner Segment Industries
Cruise Ships
2014 2015 2016 2017 2018 20190.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Revenue Growth
Beauty Product Sales• Industry revenue CAGR of
7.5% to $7.2 billion by 2018• Marketing drives sales• High R&D expenditures• Low revenue volatility due to
increasing global demand and aging consumers
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
• 34.4% of all cruise destinations are in the Caribbean
• Safety concerns remain prominent
Sources: 1. “Ocean Transportation.” IBISWorld.2. “Cosmetic Manufacturing.” IBISWorld.
13
Steiner Segment Industries
Hair Removal Services• Growth among males and
females• Diversification of services
and technology
Health and Beauty Schools• 4.0% CAGR through 2017• Accredited schools qualify
for Title IV funding• Licensing requirements
ensure attractive career• Growth from spas, medi-
spas, and salons supporting increased enrollment
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
28%
24%14%
34%
Market Share
Aderans Co. Ltd.
Ideal Image De-velopment Inc.
American Laser Skincare
Other Sources: 1. “Cosmetology and Beauty Schools.” IBISWorld.2. “Hair Removal Services.” IBISWorld.
14
Industry Attractiveness
Sources: 1. IBISWorld Industry Reports. 2. Global Spa and Wellness Summit.
STNR operates in a competitive industry with high threats of substitutes and large opportunities for growth.
Bargaining Power of Buyers
• Numerous options to secure similar services and products
• Specific hotel and cruise contracts can limit competition
Bargaining Power of Suppliers
• Hotels and cruise ships could choose to terminate agreements
• Uses own products in spas
• Risks involving government and schools
Entry of New Competitors
• High capital requirements
• Stringent regulations
• Brand loyalty and reputation
• Contractual agreements for years
Rivalry Among Existing
Competitors
• Numerous competitors in spa space
• Differentiation through new technologies, medical focus
Threat of Substitutes
• Numerous product brands can replace products
• Many choices for personal care outside spas
• Limited choice on cruises
HIGH MEDIUM LOW HIGH HIGH
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
15
Historical Prices
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Though the stock price has increased for the past few years, recent concerns have surfaced in a lower stock price.
16
Financial Analysis
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
2009 2010 2011 2012 20130%
50%
100%
150%
200%
250%
DuPont Analysis
Tax Burden Interest BurdenOperating Profit Margin Asset TurnoverLeverage ROE
STNR, Financial AnalysisProfitability Ratios 2009 2010 2011 2012 2013Operating Profit Margin 8.79% 8.84% 8.51% 8.11% 6.97%
Solvency Ratios 2009 2010 2011 2012 2013Interest Coverage 123.61 16.19 21.99 10.69 14.10
Greenblatt Ratios 2009 2010 2011 2012 2013TEV 389,220$ 727,090$ 633,390$ 832,090$ 655,430$ Tangible Assets/EBIT 28.7% 33.3% 33.2% 32.9% 27.0%EBIT/TEV 11.1% 7.5% 9.4% 7.9% 9.1%
Activity Ratios 2009 2010 2011 2012 2013A/R Turnover 17.69 18.26 15.99 15.07 14.60 A/R Student Turnover 4.71 6.97 7.52 4.51 5.11 Days Sales of Inventory 122.22 134.41 119.54 111.46 126.89 Days Sales for general A/R Outstanding 20.64 19.99 22.82 24.22 25.00 Days Sales for general A/R student Outstanding 77.44 52.40 48.56 80.88 71.45
17
Comparable Company Analysis
Comparable Companies Enterprise Value
Comparable Companies Ticker Exchange Share PriceShares
OutstandingEquity Value
Debt/ Equity
Enterprise Value
Steiner Leisure Ltd. STNR NASDAQ 44.11$ 14.7 648.4$ 23.22% 665.0$ Regis Corp. RGS NYSE 13.11$ 56.3 738.1$ 20.38% 693.0$ Aderans Company Limited 8170 TSE 11.91$ 36.8 438.3$ 1.86% 452.5$ FANCL Corp. 4921 TSE 11.06$ 63.5 702.3$ N/A 418.9$ Koshidaka Holdings Co., Ltd. 2157 JASDAQ 28.93$ 9.6 277.7$ 23.97% 287.2$
Multiple Statistics Implied STNR Share PriceMultiple STNR Statistics Low Median High Mean Low Median High MeanPrice/Book Value 29.41$ 1.1x 2.5x 3.6x 2.28x 32.35$ 73.52$ 105.86$ 67.05$ Forward TEV/EBITDA 80.60$ 4.89x 7.35x 14.69x 8.38x 20.49$ 33.96$ 74.22$ 39.61$ Forward TEV/Revenue 855.50$ 0.36x 0.75x 0.82x 0.65x 14.41$ 37.17$ 41.60$ 31.38$ Forward P/E 3.16$ 10.18x 13.96x 262.2x 67.63x 32.17$ 44.11$ 828.55$ 213.70$
Multiples Weight PricePrice/Book Value 20% 73.52$ Forward TEV/EBITDA 25% 33.96$ Forward TEV/Revenue 30% 37.17$ Forward P/E 25% 44.11$ STNR Implied Share Price 45.37$
Multiples Weight PricePrice/Book Value 20% 73.52$ Forward TEV/EBITDA 25% 33.96$ Forward TEV/Revenue 30% 37.17$ Forward P/E 25% 44.11$ STNR Implied Share Price 45.37$
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
18
Discount Rate Calculations and Forecasting
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Beta Debt 93,139 12.6%5 Year 1.11 Equity 646,167 87.4%2 Year 0.88 Total 739,306 100.0%1 Year 0.98Half Year 0.83One Month 0.80 Risk Free 2.73%
Market Risk Premium 7.0%Adj. Beta 1.00 STNR Return 3.0% 40%
CAPM 9.7% 60%Cost of Equity 7.04%
5Year (annualized) 8.3%2 Year (annualized) -3.4% Cost of Debt 3.0%1 Year -1.4% Tax Rate 12%Half Year -26.9% After tax Cost of Debt 2.6%One Month -6.5%
WACC 6.484%Risk Premium 5.0%
Discount Rate 11.5%
Capital Structure
Discount Rate
Beta Debt 93,139 12.6%5 Year 1.11 Equity 646,167 87.4%2 Year 0.88 Total 739,306 100.0%1 Year 0.98Half Year 0.83One Month 0.80 Risk Free 2.73%
Market Risk Premium 7.0%Adj. Beta 1.00 STNR Return 3.0% 40%
CAPM 9.7% 60%Cost of Equity 7.04%
5Year (annualized) 8.3%2 Year (annualized) -3.4% Cost of Debt 3.0%1 Year -1.4% Tax Rate 12%Half Year -26.9% After tax Cost of Debt 2.6%One Month -6.5%
WACC 6.484%Risk Premium 5.0%
Discount Rate 11.5%
STNR Return
Beta Regression
2014P 2015P 2016P 2017P 2018P Spa Operations -8.00% 2% 5% 5% 5% Schools 9% 9% 9% 7% 7% Laser Hair Removal 20% 20% 10% 5% 5% Other (% of sales) -5% -5% -5% -5% -5% Products 10% 10% 10% 5% 5%
Forecast Figures
19
DCF Analysis2014 2015 2016 2017 2018 Terminal
Net Income 55,588 63,554 76,612 80,504 89,292 Depreciation 21,000 22,050 23,153 24,310 25,526 CapEx (31,000) (32,550) (34,178) (35,886) (37,681) Change NWC 8,770 8,867 9,419 6,909 7,274 FCF 54,358$ 61,921$ 75,007$ 75,837$ 84,410$ 753,406$ PV FCF 48,758$ 49,821$ 54,133$ 49,094$ 49,016$ 437,490$
Discount rate 11.48%Terminal Value Growth Rate 2.5%
Implied Equity Value 688,312 Less: Debt 93,139 166,656 <---- Add in 2 year obligationImplied Market Cap 595,173$ 521,656$
Share outstanding 14,649$ 14,649$ Implied share price 40.63$ 35.61$
Weight Stock Price $40.63 10.00% 11.00% 12.00% 13.00% 14.00%DCF 70% 40.63$ 1.50% 47.78$ 42.54$ 38.18$ 34.51$ 31.36$ Comparable Analysis 30% 45.37$ 2.00% 47.96$ 42.70$ 38.32$ 34.63$ 31.47$ Weighted Value 42.05$ 2.50% 48.14$ 42.85$ 38.46$ 34.75$ 31.57$
3.00% 48.32$ 43.01$ 38.59$ 34.87$ 31.68$ 3.50% 48.50$ 43.16$ 38.73$ 34.99$ 31.79$
Discounted Cash Flow Sensitivity AnalysisG
row
th ra
te
Discount RateValuation Summary
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
20
Current Valuation
Current Stock Price: $44.11
Our Valuation: $42.05
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation
Weight Stock PriceDCF 70% 40.63$ Comparable Analysis 30% 45.37$ Weighted Value 42.05$
Valuation Summary
21
Recommendation
Future Outlook and Concerns• Stabilized growth in these segments: education, spas, and laser
hair removal• New and continuing contracts with major hotel and cruise operators• Increase cost efficiencies in the products segment
WATCH LIST
Company Overview Macro Overview
Market Prospects
Financial Analysis Valuation