Fitness financials: adidas orders decline for first time in 10 quarters, plus Foot Locker, TSI, Cybex, Bally, Wal-Mart, Costco, Sears, Sport Chalet, Health Fitness Corp.

adidas-Salomon sales up, stock falls based on 2005 forecast
Despite strong sales for the third quarter partly boosted by adidas numbers, adidas-Salomon (ADSG.DE) saw its stock drop after forecasting its sales will be flat in the first half of 2005. Still, the wave adidas has been riding broke slightly as orders in Europe fell for the first time in 10 quarters.

Overall, third-quarter net sales for the entire company increased 9 percent on a currency-neutral basis with improvements coming from all brands and regions. This represents growth of 5 percent in Euro terms to Euro 1.953 billion (USD $2.532 billion) in 2004 from Euro 1.853 billion (USD $2.402 billion) in the third quarter of 2003. Gross margin improved 2.8 percentage points to 47.8 percent of sales from 45.0 percent in the prior year. Third-quarter operating profit grew 16 percent to Euro 313 million (USD $405.8 million) in 2004 from Euro 270 million (USD $350.1 million) in the prior year. Net income was up 19 percent reaching Euro 179 million (USD $232.1 million) versus Euro 150 million (USD $194.5 million) in 2003, driven by strong growth in Asia and a turnaround in the U.S. market. This equates to basic earnings per share of Euro 3.92 (USD $5.08) and represents an increase of 18 percent versus the prior year of Euro 3.31 per share (USD $4.29).

Currency-neutral sales for the company rose 6 percent in the first nine months of 2004. In Euro terms, revenues increased 3 percent to Euro 5.044 billion (USD $6.540 billion) in 2004 from Euro 4.913 billion (USD $6.370 billion) in the first nine months of 2003.

For the adidas division, sales increased 9 percent in currency-neutral terms in the third quarter. In Euros, adidas’ third-quarter sales grew 6 percent, reaching Euro 1.570 billion (USD $2.035 billion) from 2003’s Euro 1.475 billion (USD $1.912 billion). According to the company, adidas sales increased 7 percent on a currency-neutral basis for the first nine months of 2004 and was attributed to “solid growth in Europe and North America and double-digit sales increases in both other regions.” In Euro terms, sales for the nine month period increased by 3 percent to Euro 4.155 billion (USD $5.387 billion) in 2004 from 2003’s Euro 4.017 billion (USD $5.208 billion).

The company was tripped up by order predictions for the adidas brand. For the first time in 10 quarters, orders for the brand fell 4 percent in Europe. The company attributed the decline to struggling retailers KarstadtQuelle, Germany’s leading department store operator, and Giacomelli, once Italy’s leading sporting goods retailer which is now insolvent.

CEO Herbert Hainer said during an earnings call with analyst that overall orders were expected to be flat in the first half of 2005. Also, for 2005, the company predicted slower earnings growth, up only 10 percent to 15 percent, with sales forecast to be up at about 9 percent. As a result, shares in adidas-Salomon fell 2.21 percent to Euro 111.73, or USD $143.35, on Nov. 4 — the third biggest decliner in DAX, which is one of the index groups of the German stock exchange.

(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 Nov. 4.)

Foot Locker lowers 3Q outlook
The quarterly earnings outlook for Foot Locker Inc. (NYSE: FL) isn’t going to be as high as the company expected with September hurricanes and reduced promotions stifling sales gains. The retailer said it expects to report an earnings increase of 10 percent to 15 percent for the third quarter ended on Oct. 30. That translates to about 45 cents to 47 cents per share — but analysts were expecting 49 cents per share. Foot Locker also said same-store sales rose 1.2 percent in the quarter, while analysts had predicted 2.9 percent. The biggest culprit affecting it, according to Foot Locker, were the hurricanes disrupting operations in Florida and Puerto Rico, where nearly 300 of its 4,000 stores are located. “Comparable-store sales were also somewhat tempered as part of our planned effort to reduce our overall promotional posture during the third quarter versus the first six months of this year,” CEO Matthew Serra said in a statement. Foot Locker will report its full third-quarter 2004 and year-to-date results on Nov. 18.

TSI revenues up 3.8 percent for quarter
Town Sports International Holdings (TSI) reported that revenues for the three months ended Sept. 30, 2004 were $90.1 million, an increase of $3.3 million, or 3.8 percent over the same quarter of 2003. During the quarter, revenue for TSI’s clubs in operation for 24 months or longer increased 2.1 percent or $1.7 million when compared to 2003. Revenue at clubs open over 12 months increased 3.6 percent when compared to the prior year’s third quarter. Operating income for the third quarter of 2004 was $11.4 million compared to $10.9 million in the third quarter of 2003. Interest expense increased to $10.3 million from $6.8 million due to increased interest accruing on Senior Discount Notes issued in February 2004. The company recorded net income for the quarter of $690,000 compared to $2.3 million for the comparable period in the prior year.

Cybex issues common stock to two investors
According to a recently filed 8-K form, Cybex International had exceeded 1 percent of its outstanding common stock in connection with unregistered issues of that stock. In late October, The CIT Group/Business Credit, Inc. and Wachovia Bank, N.A. exercised their warrants to buy Cybex common stock. The CIT Group bought 176,619 shares, and Wachovia purchased 191,896. Pursuant to the net exercise provisions of the companies’ warrants, Cybex issued 119,302 shares of common stock to The CIT Group, and 133,217 shares to Wachovia. In issuing the shares of common stock, Cybex relied on the exemption from registration provided by the SEC in that the transaction did not involve a public offering.

Bally seeking waivers from noteholders
Bally Total Fitness Holding Corp. (NYSE: BFT) intends to seek waivers of default from holders of its senior notes due 2011 and senior subordinated notes due 2007 under indentures governing the notes. These defaults result from the company’s previously announced failure to timely file its financial statements for the quarter ended June 30, 2004, Bally said. The company, which has been under pressure from a major investor to refinance its debt, completed a new $175 million secured term loan in September which the company said meant it has no significant repayment obligations on any debt until 2007.

October same-store sales OK for Costco, Wal-Mart and Sears
Retailers fared better in October, with Costco picking up sales, while Wal-Mart and Sears, Roebuck & Co. were on the low end of projected sales expectations.

Costco (NasdaqNM: COST) reported that October same-store sales rose 8 percent, ahead of analyst predictions of 7.1 percent. Total sales for the four weeks ended Oct. 31, 2004, were up 11 percent to $3.79 billion from $3.42 billion a year ago. For the first nine weeks of its 2005 fiscal year, Costco said total sales rose 11 percent to $8.32 billion from $7.49 billion a year ago. Same-store sales were up 8 percent year-to-date.

Wal-Mart Stores (NYSE: WMT) reported net sales for the four-week period ending Oct. 29, 2004, of $21.042 billion, an increase of 10.4 percent over 2003’s $19.066 billion. Sales for the Wal-Mart division for the four-week period were $13.915 billion, up 9.4 percent over sales of $12.720 billion in the same four-week period in the prior year. It reported a 2.8 percent gain in sales at its U.S. stores which was toward the low end of its 2 percent to 4 percent forecast.

While analysts anticipated a 0.5 percent decline, Sears (NYSE: S) eked out a 1.9 percent increase in same-store sales in October. Year-to-date same-store sales fell 2.1 percent. Total October sales rose 0.1 percent to $1.9 billion, although year-to-date total sales dropped 3.4 percent to $18.66 billion.

October same-store sales were expected to rise 3.0 percent across the board, according to the International Council of Shopping Centers (ICSC). The market watches October sales closely to see how well retailers are setting up for the holiday season, which can account for up to 40 percent of some retailers’ annual sales. Forecasts for the holiday period vary but sales growth was expected to be lower than last year’s 4 percent rise. The ICSC expects an increase of 3 percent to 4 percent.

Sport Chalet to expand into Arizona market
Second-quarter sales were up 17. 2 percent at Sport Chalet (Nasdaq: SPCH) — $72.5 million compared to last year’s $61.8 million — as a result of opening three new stores in the late fall and two new stores in 2Q. Also, same-store sales increased 5.2 percent for the quarter ended Sept. 30, 2004. The retailer said gross profit margin increased from 2003’s 29.9 percent to 31.0 percent for the same quarter this year, due to reduced costs from more efficient inbound logistics as well as continued improvements in inventory procurement, which lowered markdowns as a percent of sales. Selling, general and administrative expenses, as a percentage of sales, increased slightly to 26.8 percent from 25.2 percent last year. Even with new store opening expenses, net income increased $76,000, from $1.7 million, or $0.25 per diluted share, in the second quarter last year to $1.8 million, or $0.25 per diluted share, for the same quarter this year. Sport Chalet is planning to expand into Arizona with an initial opening of four locations in the Phoenix area in fiscal 2005-2006.

Health Fitness Corp. experiences significant gains in 3Q
Third-quarter revenue for Health Fitness Corp. (HFIT.OB) was up 76.7 percent thanks in part to last year’s acquisition of Johnson & Johnson Health Care Systems. For the quarter ended Sept. 30, 2004, the company’s revenue was $13.154 million from $7.445 million last year. Gross profit increased 128.3 percent to $3.347 million from 2003’s $1.465 million. As a percent of revenue, gross profit increased to 25.4 percent compared to 19.7 percent for the third quarter last year. Net earnings applicable to common shareholders increased 429.9 percent to $465,164 from $87,786. Net earnings per diluted share of $0.03 increased 200 percent from $0.01 per diluted share for the same quarter last year. In addition to the acquisition of the Health & Fitness Services Business of Johnson & Johnson Health Care Systems Inc., Jerry Noyce, HFC CEO and president, said significant improvement in financial results this were also due to growth from HFC’s Health Enhancement Program services and new contract growth outpacing contract attrition.

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