Fitness financials: 24 Hour Fitness sold for $1.6 billion, plus Saucony, Gaiam, TSI, Nautilus, Brunswick, adidas, Big 5, Everlast, Wal-Mart, LA Gym

24 Hour Fitness sold for $1.6 billion
Ranked No. 1 in the world by revenues, 24 Hour Fitness Worldwide Inc. has signed an agreement with Forstmann Little & Co., a New York private investment firm, to acquire the company for approximately $1.6 billion — the largest-ever transaction in the health-club industry. Reportedly, the new owners will continue with the 24 Hour Fitness name and the affordable, made-for-the-masses style, promoted now by a lighter debt load that could profit from the country’s collective battle against obesity.

24 Hour Fitness generates revenues of more than $1.1 billion, has over 3 million members and 330 clubs in 16 U.S. states, as well as 15 clubs in Asia in four countries. Founded in 1983 by Mark S. Mastrov with a single club in San Leandro, Calif., in the San Francisco area, 24 Hour Fitness has leading market positions in California and other Central and Western states. Mastrov who is the chairman and CEO will continue to lead the company with his existing management team.

“24 Hour Fitness has a very strong market position, a superb management team and significant potential for growth, all characteristics we look for in an acquisition,” said Theodore Forstmann, 65, Forstmann Little senior partner. “We believe our unique capital structure can accelerate the growth of 24 Hour Fitness’ very impressive business model. In an industry that has rapidly expanded from $6 billion in the mid-1990s to over $14 billion today, Mark has created a global brand and achieved tremendous growth.”

The sale is expected to close in June.

Mastrov, 47, will retain a significant stake in the business. Forstmann Little will finance the transaction with more than $900 million from its equity and subordinated debt funds with the balance through a senior loan facility. This conservative capital structure will provide 24 Hour Fitness the capital to fund internal growth and expansion in domestic and Asian markets.

Since 1978, Forstmann Little has made 30 acquisitions and significant equity investments, which include Gulfstream Aerospace, General Instrument, Ziff-Davis Publishing, Dr Pepper, Community Health Systems, Citadel Broadcasting and IMG Worldwide. Prior to the 24 Hour Fitness acquisition, the firm had approximately $1.3 billion in committed capital for future investments. It plans to use more than $900 million from its equity and subordinated debt funds for the purchase and plans to finance the remainder with a senior loan facility.

“I’m a growth guy,” Forstmann said in an interview with the SF Chronicle of his interest in 24 Hour Fitness. “I like to be involved in really legitimate, solid growth. There’s a need for what these guys do.”

The San Francisco Chronicle noted in an article about the sale that economic hard times have hurt some luxury fitness clubs in recent years, but less-expensive competitors have frequently gained members on tight budgets. At 24 Hour, monthly fees range from the low $20 range into the $30-dollar range, plus an initiation fee, depending on contract terms and promotional offers. That compares with $70 or more per month at higher-end competitors, it said.

At the end of this year, the company will have opened one new club almost every week. That expansion rate is expected to continue after the sale is final, Mastrov told the SF Chronicle.

The transaction will reduce 24 Hour’s interest payments on its debt by about $12 million a year, Mastrov also told the newspaper. It’s not clear whether the savings will go into the pockets of its owners or help finance club improvements and expansion, it noted.

The transaction is subject to regulatory approval, but is not subject to financing. Merrill Lynch acted as financial advisor to 24 Hour Fitness. JP Morgan acted as financial advisor to Forstmann Little. JPMorgan and Merrill Lynch are also providing senior loan financing. Wilson Sonsini Goodrich & Rosati acted as legal counsel for 24 Hour Fitness and Kirkland and Ellis LLP acted as legal counsel for Forstmann Little.

As a result of the acquisition, Menlo Park equity firm McCown DeLeeuw & Co., which took a position in 24 Hour in 1994, will sell its majority stake, the SF Chronicle reported.

Saucony net sales and income down in Q1
Saucony’s (Nasdaq: SCNYA and SCNYB) first quarter took a couple hits in net income and net sales after some bumps in the mall-based retail channel.

Net income was down to $3.2 million in the first quarter of 2005, compared to $4.2 million in 2004. Diluted earnings per share decreased to $0.41 per Class A share and $0.46 per Class B share in the first quarter of 2005, compared to diluted earnings per share of $0.58 per Class A share and $0.64 per Class B share for the comparable period in 2004. Net sales for the first quarter decreased 11 percent, to $41.9 million, compared to $47.0 million in the first quarter of 2004.

Net sales for the first quarter of 2005 decreased 11 percent to $41.9 million, compared to $47.0 million in the first quarter of 2004. Domestic net sales decreased 14 percent to $31.1 million in the first quarter of 2005, compared to $36.0 million in the first quarter of 2004. The company’s domestic sales decrease in the first quarter of 2005 was due primarily to a 17 percent decrease in footwear unit volumes, partially offset by a 21 percent increase in Hind apparel sales, it said.

Saucony said it expects second-quarter net sales to range from $41 million to $42 million, and net sales for the year to range from $163 million to $165 million.

Gaiam finances back on track after consolidation settling
Gaiam (Nasdaq: GAIA) saw an 11 percent increase in revenue — $26.3 million in Q1 2005 compared to $23.8 million in 2004 — generated by internal growth. Revenue from Gaiam’s business segment, which distributes media and other proprietary products to retailers, was $13.0 million or 12 percent higher in the first quarter of 2005 than last year. Revenue from Gaiam’s direct-to-consumer segment was $13.3 million or 10 percent higher for the first quarter of 2005 than in the comparable period in 2004. The improvement of the internal growth rate to 11 percent from 2 percent in the preceding quarter represents the third consecutive quarter of improvements.

The gross margin of 52.2 percent for the first quarter of 2005 exceeded its guidance of 51 percent, Gaiam said in a statement. Although the gross margin was lower than the 53.3 percent generated during the first quarter of 2004, it was a significant improvement over the 48.7 percent gross margin generated during the fourth quarter of 2004.

After several quarters of consolidation reset, Gaiam returned to profitability, posting an operating profit of $287,000 in the quarter compared to an operating loss of $329,000 for the same period in 2004. Net income for the 2005 quarter was $116,000, or $0.01 per share, as compared to a net loss of $329,000, or $0.02 per share, for the first quarter of 2004.

Town Sports International revenue up 9 percent
First-quarter revenues for Town Sports International Holdings (TSI) were $93.8 million, an increase of $7.7 million, or 9.0 percent, over the same quarter of 2004. During the quarter, TSI’s mature clubs (those in operation for 24 months or longer) saw a $4.0 million, or 4.8 percent, increase in revenues over the prior year’s quarter. This increase in mature club revenues is due to a 4.1 percent increase in membership and a 1.8 percent increase in ancillary revenue offset by a 1.1 percent decrease in average dues charged, the company said. The 14 clubs opened or acquired within the last 24 months contributed $3.7 million of the increase in revenues in the quarter ended March 31, 2005 over the prior year. Revenues at all clubs open a year or more increased 6.0 percent, using the “same store” method used by many retailers.

Operating income for the first quarter was $9.6 million compared to $4.6 million in the first quarter of 2004, a 107.2 percent increase. The company recorded a $2.0 million goodwill impairment charge in the first quarter of 2004, with no comparable in first quarter of 2005. 2005 net interest expense increased $1.2 million to $9.8 million in the quarter from $8.6 million in the same period last year. The increase in interest expense is directly related to the February 2004 issuance of $124.8 million of 11 percent Senior Discount Notes. TSI recorded net income of $179,000 during the quarter compared to net loss of $2.1 million last year. It opened three new clubs in the first quarter of 2005, increasing its club count to 138 owned and two part-owned and operated clubs. Find more about TSI at www.mysportsclubs.com/company_info/company.asp.

Nautilus, Brunswick boards OK stock repurchase
The board of directors for both Nautilus (NYSE: NLS) and Brunswick Corp. (NYSE: BC) have authorized the repurchase of its company’s common stock, commonly done to signal to the market that the company believes its stock is undervalued and people should buy it. A stock repurchase can also be an alternative to issuing a one-time dividend.

Nautilus’ board has authorized management to repurchase up to $100 million of the company’s common stock in open-market transactions. The authorization will expire on March 31, 2008, unless extended by the board. It also declared a regular quarterly dividend of $0.10 per common share, payable June 10, 2005, to stockholders of record as of May 20, 2005.

Brunswick’s board also OK’d the discretionary repurchase of up to $200 million of its outstanding common stock. Based on market conditions, share repurchases will be made from time-to-time in the open market or through privately negotiated transactions, it said. Also, Brunswick has entered into a new five-year $650 million revolving credit facility agreement, which replaces a $350 million facility that was due to expire in November. The $650 million credit facility agreement is with a group of financial institutions led by J.P. Morgan Securities Inc. and RBS Securities Corp.

adidas sales up 10 percent
First-quarter net sales for adidas-Salomon increased 11 percent on a currency-neutral basis with improvements coming from all regions, it reported. This represents growth of 10 percent in euro terms to euro 1.778 billion (USD $2.279 billion) in 2005 from euro 1.623 billion (USD $2.080 billion) in the first quarter of 2004. Gross margin improved 1.0 percentage points to 46.9 percent of sales from 45.9 percent in the prior year. First-quarter operating profit grew 27 percent to euro 179 million (USD $229 million) in 2005 from euro 142 million (USD $182 million) in the prior year. Net income attributable to shareholders grew 46 percent reaching euro 105 million (USD $134 million) versus euro 72 million (USD $92 million) in 2004. This equates to basic earnings per share of euro 2.29 and represents an increase of 45 percent versus the prior year (2004: euro 1.58 (USD $2.02) per share). Diluted earnings per share grew 36 percent to euro 2.15 (USD $2.75) in the first quarter from euro 1.58 (USD $2.02) last year.

The company said that sales growth in the adidas segment set the pace for the group’s performance during the first quarter of 2005. Currency-neutral adidas revenues increased 11 percent. Drivers of this growth were significant increases in nearly all sport performance categories as well as strong double-digit growth in the sport heritage division. adidas sales in euro terms were up 10 percent to Euro 1.512 billion (USD $1.938 billion) in the first quarter of 2005 from Euro1.378 billion (USD $1.766 billion) in 2004.

(Conversion of euros into U.S. dollars is for information only, is not necessarily relative to earnings, and is based on the currency rate as of May 3.)

Big 5 reports 1Q same store sales growth for 37th consecutive quarter
Big 5 Sporting Goods Corp. (Nasdaq: BGFVE) has reported that 1Q net sales increased by $8.1 million, or 4.5 percent, to $189.9 million from net sales of $181.8 million in the first quarter of 2004. Same-store sales increased 1.7 percent during the first fiscal quarter versus the comparable 13-week period last year, representing the company’s 37th consecutive quarterly increase in same store sales over comparable prior periods. Net income increased to $7.2 million, or $0.32 per diluted share, for the fiscal 2005 first quarter, compared with net income, as preliminarily restated, of $6.6 million, or $0.29 per diluted share, in the fiscal 2004 first quarter.

The company reported that despite being open for business one less day than in 2004 due to the timing of the Easter holiday, store sales were up in each of the retailer’s three major merchandise categories for the quarter, with footwear being the strongest performing category, followed by apparel and hardgoods.

As Big 5 previously announced, the company will be restating its prior reported financial statements for fiscal years 2002 and 2003, and the quarterly periods of fiscal years 2002, 2003 and 2004, in order to correct an accounting error and to make adjustments relating to the previously disclosed establishment of a sales return allowance as well as the company’s accounting treatment for leases. The company’s accounting firm hasn’t been able to finish the restatements, resulting in the change of Big 5’s Nasdaq symbol from BGFV to BGFVE — a probation period by the stock exchange until Big 5 completes the paperwork. Big 5 management said it does not believe that the ongoing review of its prior reported financial statements will identify any other material errors or adjustments than those the company has already reported or result in any material change to the company’s financial information contained in the 1Q report.

Big 5 currently operates 310 stores and anticipates opening between 16 and 20 new stores in fiscal 2005.

Everlast net revenues jump 23 percent
Everlast Worldwide (Nasdaq: EVST) reported record first-quarter net revenues of $12.2 million, an increase of 23 percent compared with net revenues of $9.9 million in the prior year period. Net sales from continuing apparel operations and sporting goods increased 16 percent to $9.1 million compared with $7.9 million in the first quarter of fiscal 2004. Net licensing revenues advanced 49 percent to $3.1 million compared with $2.1 million in the prior period.

For the first quarter, its gross margin was 38.3 percent, compared with 41.7 percent in the first quarter a year ago — the lower gross profit margin was primarily due to a change in product mix, Everlast said. Everlast achieved income from operations of $700,000, which is $0.1 million higher than the prior period. EBITDA for the first quarter of this year was $1.1 million as compared to $1.0 million in the prior period. Adjusted basic earnings per share from continuing operations (excluding the net affect from the non-cash warrant issuance) was $0.02 in the first quarter of fiscal 2005.

Wal-Mart reports April sales
For April, total sales for Wal-Mart Stores (NYSE: WMT) was $22.302 billion, up 7.4 percent from last year’s $20.765 billion. The Wal-Mart Stores division generated $14.829 billion, up 6.1 percent. The division’s same-store sales for April was 0.1 percent. Wal-Mart’s total U.S. same-store sales for the month was 0.9 percent. It’s estimating that same-store in the United States for the May four-week period to be in the 2 percent to 4 percent range.

UK’s LA Fitness sells for USD $267 million, plus debt
An article on “The Deal” website confirmed that MidOcean Partners will buy British gym operator LA Fitness for 220 pence per share, or GBP 140 million (USD $267 million), including GBP 48.3 million (USD $91.3 million) in debt. SNEWS® reported on April 12 that talks were in the works between the two entities. The company is the U.K.’s last publicly traded health club chain since several competitors, including Holmes Place and Fitness First, have been taken private by other private equity firms.

Shareholders of record May 6 will receive a 0.6 pence per share dividend on June 3. CEO Fred Turok will reinvest approximately GBP 7.1 million (USD $13.4 million) in the buyout, and finance director Richard Taylor will reinvest GBP 165,000 (USD $311,966), the company said. Stock of the London-based chain closed up 2.35 percent at 196 pence Friday, before the announcement.

The company is the U.K.’s last publicly traded health club chain. Several competitors have been taken private by other private equity firms, reflecting institutional investors’ disenchantment with the sector, The Deal said.

LA Fitness operates 69 clubs and boasts a membership of 195,550, down from 200,470 members in January 2004. Its outstanding equity is valued at GBP 90 million (USD $170 million).

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