Fitness financials: Bally accounting errors spark criminal investigation, plus Life Time Fitness, Brunswick, GSI, Saucony, Sears, Foot Locker

Bally accounting errors draw feds’ attention
Following the announcement of alleged accounting errors by four former finance executives, Bally Total Fitness Holding Corp. (NYSE: BFT) said the U.S. Attorney for the District of Columbia has opened a criminal investigation and ordered the company to save accounting records. Bally said it is fully cooperating.

The Securities and Exchange Commission opened an investigation into the company in April 2004 over the recording of prepaid dues. Bally in November said it would restate financial results from 2000 through first quarter 2004 as a result of errors it made in booking revenue. The company said it plans to file new financial statements by July 31. Bally said multiple accounting errors were found in its financial statements and concluded that Bally’s former Chairman and CEO Lee Hillman and former CFO John Dwyer were responsible for “multiple accounting errors and creating a culture within the accounting and finance groups that encouraged aggressive accounting.” Bally said the investigation also found improper conduct on the part of its Vice President and Controller Ted Noncek and Vice President and Treasurer Geoff Scheitlin and terminated their employment. (See SNEWS® story, Feb. 11, 2005, “Bally’s plight worsens, executives fired for misleading accounting.”)

An AP report said the letter from the U.S. attorney’s office did not indicate whether Bally or its former officers were the target of the criminal investigation. Randall Samborn, spokesman for the U.S. attorney’s office in Chicago, declined to comment on why the Washington office was handling the investigation, the AP added.

Another development, separate from the federal investigation, is a demand by a Bally shareholder to bring actions or seek other remedies against parties potentially responsible for the company’s accounting errors. Bally’s board is evaluating the request.

Bally shares fell 25 cents, or 6.7 percent, to close at $3.50 on Feb. 17 trading on the New York Stock Exchange. The company’s shares have traded in a 52-week range of $2.95 to $6.69.

Life Time Fitness fourth-quarter revenue up 22.4 percent
Life Time Fitness Inc. (NYSE: LTM) reported that its fourth-quarter 2004 revenue grew 22.4 percent to $82.1 million from $67.1 million during the same period last year. Net income during the quarter grew 54.1 percent to $8.1 million, or $0.23 per diluted share, compared to last year’s net income of $5.3 million, or $0.18 per diluted share.

Revenue for the year totaled $312.0 million, up 21.4 percent from $256.9 million in 2003. For the year, net income grew 40.3 percent to $28.9 million, or $0.87 per diluted share. This compares to net income of $20.6 million, or $0.72 per diluted share, for 2003.

“The company’s fourth-quarter and full-year results are indicative of the continued focus and execution on our fundamental growth strategies, including new center growth, membership ramp, and increasing in-center revenue,” said Bahram Akradi, Life Time Fitness chairman and chief executive officer.

Membership dues revenue for the fourth quarter grew 21.5 percent to $56.2 million from 2003’s $46.3 million. Membership dues revenue in FY2004 grew 21.7 percent to $208.9 million from $171.6 million in 2003. Enrollment fee revenue for the fourth quarter was $4.8 million, compared to $4.7 million in 4Q 2003. Full-year enrollment fee revenue totaled $19.6 million, compared to $19.2 million in 2003.

Total operating expenses during the 2004 fourth quarter totaled $64.3 million compared to $53.4 million for 2003, and full year operating expenses were $246.5 million, compared to $203.0 million in 2003, driven primarily by increased expenses to support new centers, membership growth and presales activities, according to Life Fitness. Total operating margins were 21.7 percent for the fourth quarter 2004, up from 20.4 percent in the prior-year period. Full-year operating margins remained consistent at 21.0 percent compared to 2003.

In 2004, Life Fitness opened six new centers and has acquired the land and commenced construction on the six additional new centers it plans to open in 2005. It ended the year with 39 open centers in eight states.

Life Time also announced that James F. Halpin has been elected to its board of directors, and he will serve as chair of the Compensation Committee and a member of the Audit Committee. Halpin started his own private investment firm after he retired as CEO of CompUSA Inc. Retiring from the Life Time board is W. John Driscoll, who served as a director since May 1994. He is the retired chairman and CEO of Rock Island Company, a private investment firm.

Brunswick stock down after it cuts boat production, CEO reconfirms ’04 expectations
Shares in Brunswick Corp. (NYSE: BC), parent of Life Fitness, dropped close to 4 percent last week — down $1.68 to $43.95 — after it announced it will cut production in its aluminum boat division to work down inventory and an analyst downgraded its stock. RBC Capital analyst Edward Aaron lowered his recommendation on its shares to “sector perform” from “outperform,” cut his price target to $50 from $60 and reduced his fiscal 2005 earnings estimate to $3.28 a share from $3.30. Despite the knocks, Chairman and CEO George W. Buckley reconfirmed the company’s earnings estimates for 2005 while speaking with analysts and investors at a company-sponsored event in Miami — the Miami International Boat Show. He said the company expects $3.15 to $3.30 per share for 2005, up from the $2.77 per share reported in 2004. He added that the company assumes the marine industry will be up 5 to 6 percent at retail, which will drive Brunswick’s organic sales growth to be up between 11 to 12 percent for 2005, with operating margin improvement of between 70 to 100 basis points.

GSI’s sporting goods category 4Q revenues up 30 percent
For the fourth quarter, GSI Commerce (Nasdaq: GSIC) increased its net revenues 43 percent to $135.8 million and reported net income of $10.6 million, or $0.25 per share, compared to net revenues of $95.2 million and net income of $2.7 million, or $0.07 per share in 2003.

For FY2004, the company increased its net revenues 39 percent to $335.3 million and reported net income of $340,000 or $0.01 per share, compared to a loss of $12.1 million, or $0.30 per share for the 2003 fiscal year.

Net revenues from product sales generated by the company’s sporting goods category were $67.6 million for the fourth quarter — a 30 percent increase from 2003’s $52.0 million. Merchandise sales from the sporting goods category increased 75 percent in the fourth quarter to $91.2 million compared to $52.1 million last year.

For FY2004, net revenues from product sales generated by the company’s sporting goods category were $165.4 million for fiscal year 2004, which was a 29 percent increase compared to $128.4 in FY2003. Merchandise sales from the sporting goods category increased 56 percent in fiscal year 2004 to $200.4 million compared to $128.5 million in fiscal year 2003.

GSI is working with various new companies, including adidas’ online store, as their new e-commerce solution provider.

Saucony’s board declares cash dividend
The board of directors of Saucony Inc. (Nasdaq: SCNYA and SCNYB) has declared regular quarterly cash dividends of $0.050 per share on the company’s Class A Common Stock and $0.055 per share on the company’s Class B Common Stock. The dividends will be paid on April 14, 2005, to all stockholders of record on March 17, 2005. The company’s corporate charter provides that cash dividends paid on the Class B Common Stock be in an amount equal to 110 percent of the amount paid on the company’s Class A Common Stock.

Sears to restate 4Q after accounting error
Sears, Roebuck & Co. (NYSE: S) said it will restate its fourth-quarter results by as much as 10 cents a share to correct an accounting error. It previously reported that fourth-quarter earnings of $1.76 a share will likely be reduced by 5 to 10 cents a share. The company said the restatement was to correct its accounting for the amortization of construction allowances. Sears has been spreading out the amortization of those allowances for a longer period of time than “historically had been the practice,” the company said. Sears added that prior years’ financial results will not be restated, as the accounting adjustments would be immaterial to results of operations, cash flows and the retailer’s financial position for the current year or any earlier fiscal period.

Foot Locker offers cash dividend
Foot Locker’s (NYSE: FL) board of directors declared a quarterly cash dividend on its common stock of $0.075 per share, which will be payable on April 29, 2005, to shareholders of record on April 15, 2005.

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