I recommend selling the stock of Steiner Leisure (STNR). Below I point to a few key factors that could provide challenges to profit growth over the coming year.
Onboard Growth Weakening
Disclosure: No positions
STNR’s spas located onboard cruise ships still account for the majority of its overall income. However, Carnival Corp (CCL) and Royal Caribbean (RCL), which combined account for about two-thirds of global capacity, and an even greater proportion of STNR’s shipboard business, are slated to grow combined capacity by only about 5% through 2012, versus historical growth in the high single digits.
This slower anticipated capacity growth, combined with cruise line customers trading down once they’re onboard, should force the major cruise lines to take a harder look at onboard costs. At both the major cruise lines, onboard revenues fell faster than ticket revenues last year, yet have failed to rebound as quickly thus far in 2010. And while the cruise lines’ overall margins have rebounded smartly this year, onboard margin growth continues to act as a drag.
$100 million Acquisition Only Marginally Profitable
In late 2009 STNR bolstered the revenue generating ability of its land based spa business when it spent $100 million to buy the Bliss spa and skincare company from Starwood Hotels (HOT). Pro forma results for Bliss, which indicate a small operating loss for the two years prior to acquisition, suggest that under STNR’s umbrella, Bliss is viewed as a turn around.
But despite the benefit of more normalized overall luxury spending, the company’s land-based spa margins have yet to benefit from the addition of Bliss’ 11 hotel spas. For the time being, though, the relatively successful product side of Bliss, including Remède brands, probably makes any large write-downs on the goodwill associated with the transaction unlikely.
Schools Segment Strong But Regulations a Concern
The company has only 17 schools, but by virtue of their 20%-plus margins, this unit contributes a disproportionate share of overall profits. However, there is the possibility that the Department of Education’s gainful employment regulations rules will have damaging effects on its students’ ability to obtain government sponsored loans. Although some of the rules were announced in early November, release of the most contentious regulations have been delayed until early next year. Despite management’s belief that STNR will not be negatively impacted by the new rules, the uncertainty puts a cloud over its fastest growing, highest margin business.