April 17, 2014

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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
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