Survival of the Fittest: Initiating on
the Fitness & Wellness Sector
Effective March 21, we initiated coverage on the fitness and wellness sector,
under the umbrella of our consumer lifestyle theme. We believe that lifestyledriven
spending will be a key theme within the consumer space. Lifestyle choice
spending includes areas such as fitness, health and wellness as well as leisure
and recreational spending. For example, for a fitness lifestyle, a consumer may
join a gym or participate in outdoor sports. To be healthier, one may choose to
lose some weight. Many consumers are choosing organic foods and using
nutraceuticals as part of their healthy lifestyle. Lifestyle choices also affect
where and how consumers spend on entertainment (performing arts for
example) and recreation (e.g., gourmet cooking classes have become popular).
According to various independent market research firms and CIBC estimates,
the market size for the fitness and wellness segment has been estimated to be
about $50 billion-plus.
Revenues in the fitness center segment of the market are growing at about midsingle
digits. The industry is extremely fragmented, and even larger chains have
small shares. Large-format, full-line amenities and facilities clubs as well as
small, no-frills formats are outperforming the rest in general. Life Time Fitness is
growing revenues at 20%+. We see consolidation occurring in the next 5 to 10
years as major chains gain size and financial sophistication. We believe
successful fitness companies are conservative in their financial and growth
plans, disciplined in re-investing and focused on differentiating through providing
better experience and value to their members.
The weight-loss segment is growing at low to mid-single digits, but there is
wide variation among different sub-groups. Online weight-loss counseling is
taking share from center-based businesses, while prepared meals are gaining
consumer interest. NuriSystem is growing revenues at 20%+ this year.
Competition is cut-throat, and all weight-loss solutions are essentially vying for
the same wallet share. Those operators that have stood the test of time and
side-stepped reputation crisis tend to have the strongest brand equity and
perform best over the longer term.
We initiated coverage of three companies:
• Life Time Fitness, Inc. (LTM) with a Sector Outperformer rating and
target price of $60. LTM is growing to be a heavyweight in its industry. We
would be buyers, especially on weakness. LTM is well positioned for aboveaverage
rates of top- and bottom-line growth organically. We see LTM as a
potential consolidator of the sector as well.
• NutriSystem, Inc. (NTRI) with a Sector Performer rating. NTRI is
growing its own market. We would be opportunistic buyers in the short term
based on attractive valuation and the possibility that the company will beat
expectations. We caution that sector risks are high, and the stock has
historically been very volatile.
• Weight Watchers International (WTW) with a Sector Performer
rating. WTW is the leader with a golden brand. We’d be more bullish if
attendance trends and WTW’s business weathers competition better than
expected. We might be opportunistic buyers at based on valuation, all else
equal.

Table of Contents
Survival of the Fittest: Initiating on the Fitness & Wellness Sector ................ 3
Fitness Center Industry: Not All Are Created Equal...................................... 5
A Fragmented $16-17B Market .............................................................. 5
Not All Companies Are Successful .......................................................... 5
Opportunity for Younger, Larger Clubs.................................................... 6
Sector Risk Considerations .................................................................... 7
Weight Loss Industry: It’s All Fair Game .................................................... 9
Competitive Market with Multiple Segments ............................................ 9
Rising Interest in Prepared Meals ........................................................... 9
Online Programs Gaining Share ........................................................... 10
American Dieters: Going to Be More of Us............................................. 10
Sector Risk Considerations .................................................................. 12
Investment Summaries ............................................................................ 15
Life Time Fitness, Inc. (LTM) - Sector Outperformer ............................ 15
Nutrisystem, Inc. (NTRI) - Sector Performer....................................... 15
Weight Watchers International, Inc. (NTRI) - Sector Performer ............. 15
Life Time Fitness, Inc.: Sector Heavyweight ............................................. 16
A History of Solid Earnings Performance............................................. 17
Key Investment Merits .......................................................................... 18
Key Investment Risks............................................................................ 19
Company Overview: Life Time Fitness, Inc. ........................................ 20
Upside to Valuation Possible................................................................... 22
LTM Price Target Calculation................................................................ 22
LTM Key Risks to Price Target.............................................................. 23
Management and Board Profile ............................................................... 23
Models ................................................................................................ 25
NutriSystem, Inc.: Growing its Own Market.............................................. 29
Key Investment Merits .......................................................................... 31
Key Investment Risks............................................................................ 31
Company Overview: NutriSystem, Inc. .............................................. 32
Current Valuation Suggests Short-Term Opportunity ................................. 33
Management and Board Profile ............................................................... 34
Models ................................................................................................ 35
Weight Watchers International: Leader With a Golden Brand...................... 38
Key Investment Merits .......................................................................... 40
Key Investment Risks............................................................................ 40
Company Overview: Weight Watchers International, Inc. ..................... 41
Management and Board Profile ............................................................... 42
Models ................................................................................................ 44
Appendix................................................................................................ 48