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Steiner Leisure Ltd. (NasdaqGS: STNR) April 17, 2014 Guanrong (Rachel) Fu Marnie Georges Jing Feng (Jeffrey) Li

Steiner Leisure Ltd. ( NasdaqGS : STNR)

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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 - PowerPoint PPT Presentation

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Page 1: Steiner Leisure Ltd. ( NasdaqGS : STNR)

Steiner Leisure Ltd. (NasdaqGS: STNR)April 17, 2014Guanrong (Rachel) FuMarnie GeorgesJing Feng (Jeffrey) Li

Page 2: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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Agenda

Introduction Company overview Macroeconomic outlook and industry overview Relevant stock market prospects Financial analysis and projections Valuation Recommendation

Page 3: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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Company Overview

Spa Opera-tions48%

Products31%

Schools8%

Laser Hair Re-

moval13%

Business Segments• 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

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Revenue by Segment

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 4: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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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

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Carnival24%

Royal Car-

ibbean

14%

Others62%

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 5: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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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

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 6: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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Risk Overview: Spa Services

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Land-Based Spas

Hospitality industry ties

Responsible for own capital costs

Increased competition from day spas

Hotel contracts may expire

Cruise Ship Spas

Cruise ship industry ties

Agreement for 7.2% revenue (33 ships) expires in 2014 — may renew

Carnival & Royal Caribbean account for 128 of 156 ships

Celebrity agreement terminated

New agreements may increase payments to cruise lines

20092010201120122013201420152016$0

$200

$400

$600

$800

$1,000

$1,200

Spa Revenues (MM)

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 7: Steiner Leisure Ltd. ( NasdaqGS : STNR)

Business Overview: Laser Hair Removal• Business Overview: • Acquired Ideal Image Development Inc. in

2011• Provides non-invasive procedures for the

removal of unwanted facial and body hair

• 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

• Potential Risks• Capital costs for new centers• May not find ideal locations for new centers• Need specific medical personnel in high

demand

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

28%

24%14%

34%

Market ShareAderans Co. Ltd.Ideal Image Development Inc.American Laser SkincareOther

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 8: Steiner Leisure Ltd. ( NasdaqGS : STNR)

Business Overview: Production

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

• 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 BrandsBliss

ElemisJou

La ThérapieRemèdeSteiner

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 9: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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

Market Prospects

Financial Analysis Valuation

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 10: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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Market Power AnalysisSteiner’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

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Sources: Company 10-K filings, Capital IQ, Yahoo! Finance.

Page 11: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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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

20042006

20082010

20122014

20162018

2020$30,000

$32,000

$34,000

$36,000

$38,000

$40,000

$42,000

$44,000

Per capita disposable income

2.2%

CAGR 20

14-2

019

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

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

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Steiner Segment Industries

Cruise Ships

2014 2015 2016 2017 2018 20190.00%1.00%2.00%3.00%4.00%5.00%

Revenue Growth

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

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

• 34.4% of all cruise destinations are in the Caribbean

• Safety concerns remain prominent

Sources: 1. “Ocean Transportation.” IBISWorld.2. “Cosmetic Manufacturing.” IBISWorld.

Page 13: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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Steiner Segment Industries

Hair Removal Services• Growth among males and

females• Diversification of services

and technology

Health and Beauty Schools• 4.0% CAGR through 2017• Accredited schools qualify

for Title IV funding• Licensing requirements

ensure attractive career• Growth from spas, medi-

spas, and salons supporting increased enrollment

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

28%

24%14%

34%

Market Share

Aderans Co. Ltd.

Ideal Image De-velopment Inc.

American Laser Skincare

Other Sources: 1. “Cosmetology and Beauty Schools.” IBISWorld.2. “Hair Removal Services.” IBISWorld.

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Industry Attractiveness

Sources: 1. IBISWorld Industry Reports. 2. Global Spa and Wellness Summit.

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

Bargaining Power of Suppliers

• Hotels and cruise ships could choose to terminate agreements

• Uses own products in spas

• Risks involving government and schools

Entry of New Competitors

• High capital requirements

• Stringent regulations

• Brand loyalty and reputation

• Contractual agreements for years

Rivalry Among Existing

Competitors

• Numerous competitors in spa space

• Differentiation through new technologies, medical focus

Threat of Substitutes

• Numerous product brands can replace products

• Many choices for personal care outside spas

• Limited choice on cruises

HIGH MEDIUM LOW HIGH HIGH

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Page 15: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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Historical Prices

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Though the stock price has increased for the past few years, recent concerns have surfaced in a lower stock price.

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Financial Analysis

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

2009 2010 2011 2012 20130%

50%

100%

150%

200%

250%

DuPont Analysis

Tax Burden Interest BurdenOperating Profit Margin Asset TurnoverLeverage ROE

STNR, Financial AnalysisProfitability Ratios 2009 2010 2011 2012 2013Operating Profit Margin 8.79% 8.84% 8.51% 8.11% 6.97%

Solvency Ratios 2009 2010 2011 2012 2013Interest Coverage 123.61 16.19 21.99 10.69 14.10

Greenblatt Ratios 2009 2010 2011 2012 2013TEV 389,220$ 727,090$ 633,390$ 832,090$ 655,430$ Tangible Assets/EBIT 28.7% 33.3% 33.2% 32.9% 27.0%EBIT/TEV 11.1% 7.5% 9.4% 7.9% 9.1%

Activity Ratios 2009 2010 2011 2012 2013A/R Turnover 17.69 18.26 15.99 15.07 14.60 A/R Student Turnover 4.71 6.97 7.52 4.51 5.11 Days Sales of Inventory 122.22 134.41 119.54 111.46 126.89 Days Sales for general A/R Outstanding 20.64 19.99 22.82 24.22 25.00 Days Sales for general A/R student Outstanding 77.44 52.40 48.56 80.88 71.45

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Comparable Company AnalysisComparable Companies Enterprise Value

Comparable Companies Ticker Exchange Share PriceShares

OutstandingEquity Value

Debt/ Equity

Enterprise Value

Steiner Leisure Ltd. STNR NASDAQ 44.11$ 14.7 648.4$ 23.22% 665.0$ Regis Corp. RGS NYSE 13.11$ 56.3 738.1$ 20.38% 693.0$ Aderans Company Limited 8170 TSE 11.91$ 36.8 438.3$ 1.86% 452.5$ FANCL Corp. 4921 TSE 11.06$ 63.5 702.3$ N/A 418.9$ Koshidaka Holdings Co., Ltd. 2157 JASDAQ 28.93$ 9.6 277.7$ 23.97% 287.2$

Multiple Statistics Implied STNR Share PriceMultiple STNR Statistics Low Median High Mean Low Median High MeanPrice/Book Value 29.41$ 1.1x 2.5x 3.6x 2.28x 32.35$ 73.52$ 105.86$ 67.05$ Forward TEV/EBITDA 80.60$ 4.89x 7.35x 14.69x 8.38x 20.49$ 33.96$ 74.22$ 39.61$ Forward TEV/Revenue 855.50$ 0.36x 0.75x 0.82x 0.65x 14.41$ 37.17$ 41.60$ 31.38$ Forward P/E 3.16$ 10.18x 13.96x 262.2x 67.63x 32.17$ 44.11$ 828.55$ 213.70$

Multiples Weight PricePrice/Book Value 20% 73.52$ Forward TEV/EBITDA 25% 33.96$ Forward TEV/Revenue 30% 37.17$ Forward P/E 25% 44.11$ STNR Implied Share Price 45.37$

Multiples Weight PricePrice/Book Value 20% 73.52$ Forward TEV/EBITDA 25% 33.96$ Forward TEV/Revenue 30% 37.17$ Forward P/E 25% 44.11$ STNR Implied Share Price 45.37$

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Page 18: Steiner Leisure Ltd. ( NasdaqGS : STNR)

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Discount Rate Calculations and Forecasting

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Beta Debt 93,139 12.6%5 Year 1.11 Equity 646,167 87.4%2 Year 0.88 Total 739,306 100.0%1 Year 0.98Half Year 0.83One Month 0.80 Risk Free 2.73%

Market Risk Premium 7.0%Adj. Beta 1.00 STNR Return 3.0% 40%

CAPM 9.7% 60%Cost of Equity 7.04%

5Year (annualized) 8.3%2 Year (annualized) -3.4% Cost of Debt 3.0%1 Year -1.4% Tax Rate 12%Half Year -26.9% After tax Cost of Debt 2.6%One Month -6.5%

WACC 6.484%Risk Premium 5.0%

Discount Rate 11.5%

Capital Structure

Discount Rate

Beta Debt 93,139 12.6%5 Year 1.11 Equity 646,167 87.4%2 Year 0.88 Total 739,306 100.0%1 Year 0.98Half Year 0.83One Month 0.80 Risk Free 2.73%

Market Risk Premium 7.0%Adj. Beta 1.00 STNR Return 3.0% 40%

CAPM 9.7% 60%Cost of Equity 7.04%

5Year (annualized) 8.3%2 Year (annualized) -3.4% Cost of Debt 3.0%1 Year -1.4% Tax Rate 12%Half Year -26.9% After tax Cost of Debt 2.6%One Month -6.5%

WACC 6.484%Risk Premium 5.0%

Discount Rate 11.5%

STNR Return

Beta Regression

2014P 2015P 2016P 2017P 2018P Spa Operations -8.00% 2% 5% 5% 5% Schools 9% 9% 9% 7% 7% Laser Hair Removal 20% 20% 10% 5% 5% Other (% of sales) -5% -5% -5% -5% -5% Products 10% 10% 10% 5% 5%

Forecast Figures

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DCF Analysis2014 2015 2016 2017 2018 Terminal

Net Income 55,588 63,554 76,612 80,504 89,292 Depreciation 21,000 22,050 23,153 24,310 25,526 CapEx (31,000) (32,550) (34,178) (35,886) (37,681) Change NWC 8,770 8,867 9,419 6,909 7,274 FCF 54,358$ 61,921$ 75,007$ 75,837$ 84,410$ 753,406$ PV FCF 48,758$ 49,821$ 54,133$ 49,094$ 49,016$ 437,490$

Discount rate 11.48%Terminal Value Growth Rate 2.5%

Implied Equity Value 688,312 Less: Debt 93,139 166,656 <---- Add in 2 year obligationImplied Market Cap 595,173$ 521,656$

Share outstanding 14,649$ 14,649$ Implied share price 40.63$ 35.61$

Weight Stock Price $40.63 10.00% 11.00% 12.00% 13.00% 14.00%DCF 70% 40.63$ 1.50% 47.78$ 42.54$ 38.18$ 34.51$ 31.36$ Comparable Analysis 30% 45.37$ 2.00% 47.96$ 42.70$ 38.32$ 34.63$ 31.47$ Weighted Value 42.05$ 2.50% 48.14$ 42.85$ 38.46$ 34.75$ 31.57$

3.00% 48.32$ 43.01$ 38.59$ 34.87$ 31.68$ 3.50% 48.50$ 43.16$ 38.73$ 34.99$ 31.79$

Discounted Cash Flow Sensitivity AnalysisG

row

th ra

te

Discount RateValuation Summary

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

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Current Valuation

Current Stock Price: $44.11

Our Valuation: $42.05

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation

Weight Stock PriceDCF 70% 40.63$ Comparable Analysis 30% 45.37$ Weighted Value 42.05$

Valuation Summary

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Recommendation

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

WATCH LIST

Company Overview Macro Overview

Market Prospects

Financial Analysis Valuation