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Awaiting earnings restatement, Bally gives 3Q highlights
Days after announcing it would do a complete results restatement of more than four years of earnings, which would not be ready until at least July 2005, Bally Total Fitness Holding Corp. (NYSE: BFT) held an earnings call to report on operating highlights for the third quarter of 2004 ended Sept. 30.
“It goes without saying, this has been a challenging year — more challenging than anyone thought,” said CEO Paul Toback, who stressed that the turnaround plan has been implemented. “The good news is, our plan is working.”
The company said it expected to show a net loss for the three and nine months ended Sept. 30, despite membership sales trends improving — gross committed membership fees grew 11 percent during the third quarter and 16 percent for the previous nine months over the previous year’s comparable periods. In the third quarter last year, Bally reported its net income sunk to $4.7 million, or 14 cents a share.
But the stockpiling woes, from results restatements and SEC investigations to pending class-action lawsuits, has left the Chicago-based health club chain open to plenty of criticism. A Nov. 17 story by the Dow Jones Newswires read:
But there’s no question the company has some accounting issues to resolve. At around the same time the SEC began to investigate Bally, the company brought in accounting firm KPMG to replace Ernst & Young LLP. It also changed the way it accounts for membership contracts, booking revenues when the contracts are paid, rather than when they are signed.
It was part of an effort toward clearer, more straightforward accounting, said Bally management.
That’s why so many of the company’s shareholders, bondholders and analysts are baffled about management’s obstinacy in refusing to file the company’s quarterly returns. “That’s been the curious question,” said Phelps Hoyt, an analyst at KDP Investment Advisors. “Why is it taking so long to figure out what’s going on?”
On Nov. 18, its stock price continued its downward trend, closing at 3.18 on a volume of 509,400 and about bumping into its 52-week low of 3.10.
“It’s as frustrating to me as it is to you,” Toback told analysts and stockholders on the call Nov. 18. “We may not file until July. I’d rather get it right than see further eroding errors.”
He said the company was going to re-audit from scratch all of 2002 and 2003 to take a hard look at the way it accounted for membership fees. As a part of the restatement, it would go back to take another look at 2000 and 2001 also.
The Dow Jones article quoted one analyst as saying, “it looks like it’s just incompetence,” not fraud, which is of course what investors are hoping. Still, many were outraged when CEO Toback a few months ago was granted a $100,000 raise on a $575,000 salary, just as the investigation picked up steam and investor ire hit full boil although solutions didn’t surface.
One large shareholder told Dow Jones: “I am not happy,” adding that he thought what the company needed was “some adult supervision.”
With the restatement, analyst Gary Cooper of Banc of America Securities is still maintaining his “sell” rating on Bally. The target price has been reduced from $3 to $2.
In addition, on Nov. 15, Bally said it started soliciting consents to waivers of defaults from holders of its Senior Notes due 2011 and Senior Subordinated Notes due 2007 under the indentures governing the notes. These defaults relate to its failure to timely file its financial statements with the SEC and deliver the financial statements to the trustee under the indentures. Bally has retained Deutsche Bank Securities Inc. to serve as its solicitation agent and MacKenzie Partners Inc. to serve as the information agent and tabulation agent for the consent solicitation.
For detail and background on the ongoing problems see SNEWSÂ® stories: Nov. 15, 2004,”Fitness financials: Bally results restatement to delay earnings reports until July 2005;” Sept. 20, 2004, “Bally shareholder class-action lawsuit still pending, hearings set;” and June 4, 2004, “Bally faces shareholder class-action suit after revenue restatement.”
Dick’s reports 3Q net loss, total sales up 60 percent
With the merger costs related to the Galyan’s acquisition in July, Dick’s Sporting Goods (NYSE: DKS) reported a net loss for the third quarter of $1.8 million, or $(0.04) per diluted share, as compared to 2003’s net income of $4.7 million, and earnings per share of $0.09 per diluted share. The retailer reported net income for the third quarter ended Oct. 30, 2004, excluding merger integration and store closing costs, of $2.9 million, or $0.05 per diluted share as compared to earnings guidance provided in August of $0.03 to $0.04 per diluted share before merger costs.
Total sales for the quarter increased 60 percent over last year to $541.0 million due to a comparable store sales increase of 1.5 percent, the opening of new stores and the inclusion of Galyan’s operations in this year’s quarterly results. Galyan’s stores will not be included in the comparable store base until 13 months after the completion of the re-branding and re-merchandising effort expected to occur by the end of the first half of 2005.
Dick’s said it expects total merger integration and store closing costs of approximately $70 million pre-tax to be incurred of which $7.7 million was incurred in the third quarter. It estimates future merger costs of $35 million in the fourth quarter of 2004, $17 million in 2005 with the balance in 2006 and beyond.
During the third quarter, Dick’s opened 14 new stores and closed two stores, one replaced by a new store which opened last year and the second due to performance. Its year-to-date new store openings are 22. It intends to close nine stores — six Dick’s stores (one of which closes in 2005) and three Galyan’s stores.
For FY2004, Dick’s anticipates reporting EPS for the full year of $1.37 to 1.39 per diluted share excluding merger integration and store closing costs. The most recent guidance had been $1.35 to 1.37. With merger integration and store closing costs, it anticipates reporting $0.89 to 0.91 per diluted share. This compares to full year 2003 EPS of $1.05. Comparable store sales are expected to be approximately 2 percent to 3 percent.
Foot Locker reports 3Q, offers cash dividend
Foot Locker’s (NYSE: FL) net income increased 15 percent to $0.47 per share, or $74 million, from $0.41 per share, or $62 million last year. Sales increased 14.4 percent to $1.37 billion this year compared with sales of $1.19 billion last year. Comparable-store sales increased 1.2 percent. It opened 21 new stores and closed 24 stores during the latest quarter, ending with 3,955 stores. Foot Locker’s board of directors also announced a quarterly cash dividend on its common stock of $0.075 per share, which will be payable on Jan. 28, 2005, to shareholders of record on Jan. 14, 2004. This dividend represents a 25 percent increase and is equivalent to an annualized rate of $0.30 per share. In other news, Alan D. Feldman, president and CEO of Midas Inc., was elected to the Foot Locker’s board of directors, effective Feb. 1, 2005.
Hibbett same-store sales rose 5.4 percent
Revenue for retailer Hibbett Sporting Goods (NasdaqNM: HIBB) rose 17.5 percent to $92.1 million in the third quarter based on high sales in footwear and team equipment. Last year’s revenue was $78.4 million. Its earnings rose to $6.3 million, or 26 cents per share, in the three months ended Oct. 30, 2004, from $5.4 million, or 23 cents per share, a year ago. Same-store sales rose 5.4 percent from a year ago. During the quarter Hibbett opened 21 stores and closed two, to end the period with 468 stores. In August, the board authorized the repurchase of up to $30 million of its common stock. On Nov. 18, the board increased this maximum authorization to $40 million. During the third quarter, it repurchased 365,400 shares for a total expenditure of approximately $7.2 million.
Nike’s Knight to step down as CEO
Nike (NYSE: NKE) co-founder Phil Knight announced he is stepping down as the company’s president and CEO on Dec. 28, but will remain chairman. He did not give a reason for relinquishing the titles. He will be succeeded by William D. Perez, who has been president and CEO of $6.5 billion S.C. Johnson & Son Inc. since 1996. He has worked for the privately-held consumer products company for 34 years. Perez will have a base salary of $1.35 million annually, with bonuses of up to 125 percent of his salary. He said he would stay true to Knight’s vision. Knight still owns 72 million — about 28 percent — of the voting shares of Nike Class B stock, worth about $6.12 billion. He also holds 92 percent of the nonvoting Class A stock, according to SEC filings. A former University of Oregon track star, Knight founded Blue Ribbon Sports, Inc., with Bill Bowerman in 1968. Knight’s first shoes, which he sold out of the trunk of his car, had soles made on Bowerman’s waffle iron. The company was renamed Nike in 1972. Although shares of Nike dropped $2.50 to close at $82.50 Friday on the New York Stock Exchange, analysts said the move did not come as a complete surprise. In other company news, Nike’s board declared a quarterly cash dividend of $0.25 per share on the its outstanding Class A and Class B Common Stock, citing confidence in its cash flow and growth prospects. Payable Jan. 3, 2005, to shareholders of record Dec. 13, 2004, it is a 25 percent increase over the previous quarterly rate of $0.20 per share.
Sears and Kmart merge in $11.5 billion deal
In a surprising move last week, struggling retailers Sears Roebuck & Co. (NYSE: S) and Kmart Holding Corp. (NasdaqNM: KMRT) agreed to merge in an $11.5 billion deal to create the nation’s third largest retailer. The combined company will be anointed Sears Holding Corp., and will have $55 billion in annual revenues, 2,350 full-line and off-mall stores, and 1,100 specialty retail stores. Kmart shareholders will own 55 percent of the new company after it exchanges each of its shares for one share of Sears Holding. Sears Roebuck shareholders will own the remaining 45 percent and will have the right to elect $50 per share in cash or 0.5 shares of Sears Holding. Edward Lampert has been named the new chairman of Sears Holding. Lampert was the fund manager at ESL Investments which took Kmart out of bankruptcy last year. Alan J. Lacy, current chairman and CEO of Sears, and Aylwin B. Lewis, current president and CEO of Kmart, will be part of the chairman’s office. Lacy will be vice chairman and CEO of Sears Holdings. The merger, which is expected to close by the end of March 2005, is subject to approval by shareholders of Kmart and Sears.
G.I. Joe’s completes $11.5 million investment agreement
With 22 stores in Oregon and Washington, G.I. Joe’s has completed an $11.5 million investment agreement with Nogales Investors, a private equity firm in Los Angeles. The retailer said the majority of the financing will cover expansion in the Northwest, and the rest of the funds will be used to redeem preferred stock from a group of original investors. Nogales Investors seeks investments ranging from $5 million to $20 million in small- to medium-sized businesses across the United States, typically in growing low-tech industries. To diversify its marketing and distribution, the retailer recently partnered with The Nautilus Group to develop a fitness department in all of its stores. As of early November, G.I. Joe’s has been carrying five SKUs of strength and cardio equipment — Schwinn and Bowflex-branded stationary bikes, treadmills and home gyms.
Wal-Mart sales increase 9.7 percent
For the quarter ended Oct. 31, 2004, Wal-Mart Stores (NYSE: WMT) net sales were $68.5 billion, an increase of 9.7 percent over the third quarter of fiscal 2004.Â Income from continuing operations for the quarter was $2.3 billion, an increase of 12.7 percent from $2.0 billion in the third quarter of fiscal 2004.Â Diluted earnings per share from continuing operations were $0.54, up from $0.46 per share in the same prior year quarter. Net sales for the Wal-Mart division were $45.888 billion up 8.3 percent from last year’s $42.386 billion. Total U.S. comparable sales for the quarter increased 1.7 percent, with the Wal-Mart division representing a 1.3 percent comp increase.
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