Bally spins tale of bright future despite troubled 2004, says it would consider selling some assets

Despite a rise in memberships, Bally Total Fitness (NYSE: BFT) expects a loss for Q4 and fiscal year 2004, Bally president and CEO, Paul Toback, told investors, analysts and media during a conference call on April 12. That’s the bad news.

The good news, also reported on the call, is that Bally saw memberships for the year grow at a 22 percent clip (20 percent for the quarter), and attained a company record gross committed membership fees of $1.2 billion in 2004, a 14 percent increase over the prior year. The company also said that it had made significant inroads on costs and has had success with its nutritional program, products and personal training.

With all that good news, what happened?

Well, the company said that some of the loss came from lower gross committed fees per member due to new membership plans that included month-to-month, family and friend add-on and a 30-day results guarantee. The company also tested a reduced contract of 24 months versus its typical 36-month contract and has begun testing a “build your own membership” program.

Additionally, Toback said that costs associated with its lingering accounting problems and the investigations into the company — both internally and by the SEC and Department of Justice — have cost it $16 million, cutting into available cash flow (See SNEWS® story, Feb. 17, 2005, “Fitness financials: Bally accounting error sparks criminal investigation”). And, still on the plate for Bally is a class action suit on behalf of stockholders that is still pending in the U.S. District Court for the Northern District of Illinois (See SNEWS® story, Sept. 20, 2004, “Bally shareholder class-action lawsuit still pending, hearings set”).

“The court appointed a lead plaintiff by order dated March 15, 2005. We expect the court to appoint lead counsel shortly,” Doug Risen of Berger & Montague, P.C., one of the law firms bringing suit, told SNEWS®. “Following that appointment a consolidated amended complaint will be filed and motion practice will begin.”

But, despite those troubles, Toback stressed during the call that the company is on the road not only to recovery but also to becoming a new, kinder and softer Bally.

“We are moving away from an old-fashioned and hard-selling gym,” he said. “We are showing laser focus on service and retention of our members and that, in the end, will help us as a company.”

In addition to the new membership packages, Toback said part of the shift from a sales-oriented to service-oriented company includes training of all staffers, having all staff come from a fitness background as opposed to a sales background, and using profits as opposed to sales to base incentives for GMs.

But the changes for Bally aren’t stopping there as Toback and the company’s new financial management staff looks to turn around the struggling company with some help from The Blackstone Group, which it retained in February. That may include sales of some assets by the end of the summer, according to an April 12 report in the Wall Street Journal.

“We are beginning, with the aid of the Blackstone Group, to look at brands, markets and locations that are under-performing or could perform better in other peoples’ hands,” Toback said without expanding on specific brands, although he did say that the company will concentrate on its already established, larger markets for expansion and capital investment. “Our hope is that we can turn around those underperformers but we will look at moving assets if we feel that provides the most value to our stockholders.”

SNEWS® View: Shifting gears to a “totally integrated health company” that focuses on service and retention sounds like a step in the right direction for Bally. With this rather steep hill to climb with lawsuits and SEC investigations, it’ll take some time for Bally to erase the “member mill” mentality as well as to simply get over hurdles to be able to move forward. Moreover, it’ll take some extremely honest and successful (at least in terms of earnings and profits) accounting from its new financial team to erase the perceptions some investors and, seemingly, the federal government have about the chain.