Steiner Leisure Ltd. (NasdaqGS: STNR) April 17, 2014 Guanrong (Rachel) Fu Marnie Georges Jing Feng (Jeffrey) Li Agenda Introduction Company overview Macroeconomic outlook and industry overview Relevant stock market prospects Financial analysis and projections Valuation Recommendation 2 Company Overview • 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 Business Segments Schools 8% Laser Hair Removal 13% Spa Operations 48% Revenue by Segment Products 31% Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. Company Overview Macro Overview Market Prospects Financial Analysis Valuation 3 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 Carnival 24% Royal Caribbean 14% Others 62% Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. Company Overview Macro Overview Market Prospects Financial Analysis Valuation 4 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 Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. Company Overview Macro Overview Market Prospects Financial Analysis Valuation 5 Risk Overview: Spa Services Cruise Ship Spas Spa Revenues (MM) Cruise ship industry ties $1,200 Agreement for 7.2% revenue (33 ships) expires in 2014 — may renew $1,000 Carnival & Royal Caribbean account for 128 of 156 ships $800 Celebrity agreement terminated New agreements may increase payments to cruise lines $600 $400 Land-Based Spas $200 Hospitality industry ties Responsible for own capital costs $0 2009 Increased competition from day spas Hotel contracts may expire Company Overview Macro Overview 2011 2013 2015 Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. Market Prospects Financial Analysis Valuation 6 Business Overview: Laser Hair Removal • Business Overview: Market Share • Acquired Ideal Image Development Inc. in 2011 • Provides non-invasive procedures for the removal of unwanted facial and body hair Aderans Co. Ltd. Ideal Image Development Inc. American Laser Skincare • 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 Other 28% 34% • Potential Risks • Capital costs for new centers 24% • May not find ideal locations for new centers 14% • Need specific medical personnel in high Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. demand Company Overview Macro Overview Market Prospects Financial Analysis Valuation Business Overview: Production • 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 Brands Bliss Elemis Jou La Thérapie Remède Steiner Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. Company Overview Macro Overview Market Prospects Financial Analysis Valuation 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 Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. Market Prospects Financial Analysis Valuation Market Power Analysis Steiner’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 Sources: Company 10-K filings, Capital IQ, Yahoo! Finance. Company Overview Macro Overview Market Prospects Financial Analysis Valuation 10 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 Per capita disposable income $44,000 $42,000 $40,000 $38,000 $36,000 $34,000 $32,000 $30,000 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 Company Overview Macro Overview Market Prospects 2004 2008 2012 2016 2020 Financial Analysis Valuation 11 Steiner Segment Industries Cruise Ships • 34.4% of all cruise destinations are in the Caribbean • Safety concerns remain prominent Revenue Growth 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2014 2015 2016 2017 2018 2019 Company Overview Macro Overview Market Prospects 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 Sources: Financial Analysis 1. “Ocean Transportation.” IBISWorld. 2. “Cosmetic Manufacturing.” IBISWorld. Valuation 12 Steiner Segment Industries Hair Removal Services • Growth among males and females • Diversification of services and technology Market Share Aderans Co. Ltd. 34% 14% 28% 24% Company Overview Ideal Image Development Inc. American Laser Skincare Other Macro Overview Market Prospects Health and Beauty Schools • 4.0% CAGR through 2017 • Accredited schools qualify for Title IV funding • Licensing requirements ensure attractive career • Growth from spas, medispas, and salons supporting increased enrollment Sources: Financial Analysis 1. “Cosmetology and Beauty Schools.” IBISWorld. 2. “Hair Removal Services.” IBISWorld. Valuation 13 Industry Attractiveness 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 HIGH Bargaining Power of Suppliers Entry of New Competitors Rivalry Among Existing Competitors Threat of Substitutes • Hotels and cruise ships could choose to terminate agreements • Uses own products in spas • Risks involving government and schools • High capital requirements • Stringent regulations • Brand loyalty and reputation • Contractual agreements for years • Numerous competitors in spa space • Differentiation through new technologies, medical focus • Numerous product brands can replace products • Many choices for personal care outside spas • Limited choice on cruises MEDIUM LOW HIGH HIGH Sources: 1. IBISWorld Industry Reports. 2. Global Spa and Wellness Summit. Company Overview Macro Overview Market Prospects Financial Analysis Valuation 14 Historical Prices Though the stock price has increased for the past few years, recent concerns have surfaced in a lower stock price. Company Overview Macro Overview Market Prospects Financial Analysis Valuation 15 Financial Analysis DuPont Analysis 250% STNR, Financial Analysis Profitability Ratios Operating Profit Margin Solvency Ratios Interest Coverage Greenblatt Ratios TEV Tangible Assets/EBIT EBIT/TEV 200% 2009 8.79% 2010 8.84% 2011 8.51% 2012 8.11% 2013 6.97% 2009 123.61 2010 16.19 2011 21.99 2012 10.69 2013 14.10 100% 50% 2009 2010 2011 2012 2013 $ 389,220 $ 727,090 $ 633,390 $ 832,090 $ 655,430 28.7% 33.3% 33.2% 32.9% 27.0% 11.1% 7.5% 9.4% 7.9% 9.1% Activity Ratios A/R Turnover A/R Student Turnover Days Sales of Inventory Days Sales for general A/R Outstanding Days Sales for general A/R student Outstanding Company Overview 150% Macro Overview 2009 17.69 4.71 122.22 20.64 77.44 2010 18.26 6.97 134.41 19.99 52.40 Market Prospects 2011 15.99 7.52 119.54 22.82 48.56 0% 2009 2012 15.07 4.51 111.46 24.22 80.88 2010 2011 2012 Tax Burden Interest Burden Operating Profit Margin Asset Turnover Leverage ROE 2013 2013 14.60 5.11 126.89 25.00 71.45 Financial Analysis Valuation 16 Comparable Company Analysis Comparable Companies Shares Ticker Exchange Share Price Outstanding STNR NASDAQ $ 44.11 14.7 RGS NYSE $ 13.11 56.3 8170 TSE $ 11.91 36.8 4921 TSE $ 11.06 63.5 2157 JASDAQ $ 28.93 9.6 Comparable Companies Steiner Leisure Ltd. Regis Corp. Aderans Company Limited FANCL Corp. Koshidaka Holdings Co., Ltd. Multiple STNR Statistics Price/Book Value $ 29.41 Forward TEV/EBITDA $ 80.60 Forward TEV/Revenue $ 855.50 Forward P/E $ 3.16 Company Overview Multiple Statistics Low Median High 1.1x 2.5x 3.6x 4.89x 7.35x 14.69x 0.36x 0.75x 0.82x 10.18x 13.96x 262.2x Macro Overview Equity Value $ 648.4 $ 738.1 $ 438.3 $ 702.3 $ 277.7 Debt/ Equity 23.22% 20.38% 1.86% N/A 23.97% Enterprise Value $ 665.0 $ 693.0 $ 452.5 $ 418.9 $ 287.2 Multiples Multiples Weight Price Implied STNR Share Price Weight Price/Book Value Price/Book Value 20% $Mean 73.52 20% Mean Low Median High Forward Forward TEV/EBITDA 25% $$ 33.96 25% 2.28x TEV/EBITDA $ 32.35 $ 73.52 $ 105.86 67.05 Forward Forward TEV/Revenue 30% 8.38x TEV/Revenue $ 20.49 $ 33.96 $ 30% 74.22 $$ 37.17 39.61 0.65x P/E Forward P/E $ 14.41 $ 37.17 $ 25% 41.60 $$ 44.11 31.38 Forward 25% 67.63xImpliedSTNR 32.17 STNR Share Implied Price$ Share Price$ 44.11 $ 828.55 $$ 213.70 45.37 Market Prospects Financial Analysis Valuation 17 $ $ $ $ $ Price 73 33 37 44 45 Discount Rate Calculations and Forecasting Beta Regression Beta Capital Structure Beta Regression Capital Structure Debt 93,139 12.6% Beta Debt 93,139 5 Year 1.11 Equity 646,167 87.4% 5 Year 1.11 Equity 646,167 2 Year 0.88 Total 739,306 100.0% 2 Year 0.88 Total 739,306 1 Year 0.98 1 Year 0.98 Half Year 0.83 Discount Rate Half Year 0.83 Discount Rate One Month 0.80 Risk Free 2.73% One Month 0.80 Risk Free 2.73% Market Risk Premium 7.0% Market Risk Premium 7.0% Adj. Beta 1.00 STNR Return 3.0% 40% Adj. Beta 1.00 STNR Return 3.0% CAPM 9.7% 60% CAPM 9.7% Cost of Equity 7.04% Cost of Equity 7.04% STNR Return STNR Return 5Year (annualized) 8.3% 5Year (annualized) 8.3% 2 Year (annualized) -3.4% Cost of Debt 3.0% 2 Year (annualized) -3.4% Cost of Debt 3.0% 1 Year -1.4% Tax Rate 12% 1 Year -1.4% Tax Rate 12% Half Year -26.9% After tax Cost of Debt 2.6% Half Year -26.9% After tax Cost of Debt 2.6% One Month -6.5% One Month -6.5% WACC 6.484% WACC 6.484% Forecast Figures Risk Premium 5.0% Risk Premium 5.0% Spa Operations Schools Laser Hair Removal Other (% of sales) Products Company Overview 2014P -8.00% 9% 20% -5% 10% 2015P 2% 9% 20% -5% 10% Macro Overview 2016P 5% 9% 10% -5% 10% 2017P 2018P 5% Discount 5% Rate 7% 7% 5% 5% -5% -5% 5% 5% Market Prospects Discount Rate Financial Analysis 11.5% 12.6% 87.4% 100.0% 40% 60% 11.5% Valuation 18 DCF Analysis 2014 2015 2016 2017 2018 55,588 63,554 76,612 80,504 89,292 21,000 22,050 23,153 24,310 25,526 (31,000) (32,550) (34,178) (35,886) (37,681) 8,770 8,867 9,419 6,909 7,274 $ 54,358 $ 61,921 $ 75,007 $ 75,837 $ 84,410 $ $ 48,758 $ 49,821 $ 54,133 $ 49,094 $ 49,016 $ Net Income Depreciation CapEx Change NWC FCF PV FCF Discount rate Terminal Value Growth Rate 166,656 <---$ 521,656 Share outstanding Implied share price $ 14,649 $ 40.63 $ 14,649 $ 35.61 Stock Price $ 40.63 $ 45.37 $ 42.05 Macro Overview Growth rate 688,312 93,139 $ 595,173 Company Overview 753,406 437,490 11.48% 2.5% Implied Equity Value Less: Debt Implied Market Cap Valuation Summary Weight DCF 70% Comparable Analysis 30% Weighted Value Terminal Market Prospects Add in 2 year obligation Discounted Cash Flow Sensitivity Analysis Discount Rate $40.63 10.00% 11.00% 12.00% 1.50% $ 47.78 $ 42.54 $ 38.18 2.00% $ 47.96 $ 42.70 $ 38.32 2.50% $ 48.14 $ 42.85 $ 38.46 3.00% $ 48.32 $ 43.01 $ 38.59 3.50% $ 48.50 $ 43.16 $ 38.73 Financial Analysis Valuation 13.00% $ 34.51 $ 34.63 $ 34.75 $ 34.87 $ 34.99 14.00% $ 31.36 $ 31.47 $ 31.57 $ 31.68 $ 31.79 19 Current Valuation Current Stock Price: $44.11 Our Valuation: $42.05 Valuation Summary Weight DCF 70% Comparable Analysis 30% Weighted Value Company Overview Macro Overview Market Prospects Financial Analysis Stock Price $ 40.63 $ 45.37 $ 42.05 Valuation 20 Recommendation WATCH LIST 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 Company Overview Macro Overview Market Prospects Financial Analysis Valuation 21