Steiner Limited Sell-Off Is An Overreaction And Buying Opportunity

Dec.27.13 | About: Steiner Leisure (STNR)

Losing a major customer is never good in any business. When it comes to the spas on cruise ship business, losing one entire cruise line would have a large impact on revenue and earnings. However, what investors did to Steiner Limited (NASDAQ:STNR) after losing Celebrity Cruises, seems like an overreaction.

Sales of Steiner Limited were down 15% in early trading on Monday after the company announced it will not have its contract with Celebrity Cruises renewed going into 2014. Steiner appeared to be disappointed, but assured investors that the loss of Celebrity Cruises will cut out $0.24 or less in annual earnings per share.

Steiner Limited is a worldwide provider and innovator in beauty, wellness and education. The company has distribution channels on ships and in land based spas. Other smaller sources of revenue include health clubs, department stores, and third party retail outlets. Steiner Limited products can also be found at airports and on QVC.

The loss of Celebrity Cruises will not go unnoticed. The company's products are on over 150 ships, including those from Carnival (NYSE:CCL), Royal Caribbean (NYSE:RCL), Princess, and Norwegian (NASDAQ:NCLH). With strong partnerships with the other cruise lines and expanding sales of key products in stores, the loss should be minimal to Steiner in 2014 and going forward.

In fact, land based brands like Elemis, Mandara, Bliss, and Remede continue to see strength in sales and are approaching 100 locations. Land-based customers include Caesar's Entertainment (NASDAQ:CZR), Hilton Hotels (NYSE:HLT), Marriott Hotels (NYSE:MAR), and Planet Hollywood locations. Sales of product brands were up 16.3% in the third quarter and continues to be the key source of growth and diversification away from just cruise ship revenue.

Ideal Image, Steiner's laser hair removal product line, is used in 124 treatment centers that bear its name. Seventeen of those locations license the brand from Steiner and pay franchise fees. Ideal Image is in 31 states and Canada. Ideal Image revenue increased 35% to $31.6 million. This represented 15% of total third quarter revenue. The company will also open 10 additional Ideal Image locations in the fourth quarter of the current fiscal year.

Third quarter earnings in October came in ahead of analysts' expectations. Revenue of $214.8 million, was a 5% increase from the prior year and came in $0.5 million ahead of estimates. Over the first nine months of the year, revenue grew 5.7% to $634.5 million. The company saw strength across key segments in the third quarter (prior year's third quarter):

· Services: $148.3 million ($144.7 mil)

· Products: $66.5 million ($59.7 mil)

· School Revenue: $20.2 million ($18.9 mil)

· Wholesale & Retail Products: $35.9 million ($30.9 mil)

School and wholesale overlap into the services and product categories, but you can see the picture of improvement. When looking at the results, you can also see how the loss of Celebrity Cruises isn't going to damage the growth at this company and should have a minimal impact. Earnings per share in the first nine month were $2.46. The company expects to post earnings per share in the range of $3.30 to $3.35 for the full fiscal year. Analysts see the number hitting $3.38, which would be above the new guidance. In fiscal 2014, analysts see earnings per share hitting $3.64, a number that still included the Celebrity Cruises revenue figures.

One potential catalyst that could make up for the loss of Celebrity Cruise revenue and more is international sales. During the third quarter earnings call, Steiner CEO Leonard I. Fluxman offered this when asked about international expansion:

"With regard to China, we're hoping still to ship in the fourth quarter, else early in the first quarter of 2014. We've definitely manufactured and assembled. Our product's ready to go. So as soon as we get the green light, we will ship."

Obviously this is a big deal for Steiner Limited, as sales of its beauty products continue to sell well. Entry into the lucrative Chinese market could provide a big boost to first quarter earnings and shares could see a nice lift. A positive impact from China could have shareholders and analysts forgetting all about the loss of Celebrity Cruises.

In 2013, shares of Steiner Limited are now down only 2%. This seems crazy, after watching shares drop more than 20% in the last 30 days. The selloff is now offering investors a great opportunity to invest in Steiner. The company is diversifying itself away from just a cruise ship revenue generator. Several years ago, the loss of a major cruise line could have hurt revenue and earnings by over 20%, however that is not the case anymore. Let this drop in price provide you with a good entry point below $50.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.