Fitness financials: Bally hit by $14.3 million arbitration award, eyes Crunch sale, and largest stockholder buys more; plus April retail sales up, Russell, Health Fitness Corp., Wal-Mart, Nike

Bally hit by huge arbitration award, eyes Crunch sale, while largest stockholder ups holdings
Amid reorganization struggles, Bally has been slammed by a $14.3 million arbitration award after it announced it was considering a sale of its Crunch Fitness brand. In addition, its largest single stockholder, Liberation Investment Group, has upped its holdings by about 50 percent while remaining the most vocal critic of Bally’s goings-on.

In an 8K filing with the SEC on May 16, Bally Total Fitness Holding Corp. (NYSE: BFT) announced it had received notification of the entry of an arbitration award in the proceeding stemming from contractual dispute related to a program of transferring membership receivables balances into a credit card program. That program, begun in 1995 and funded and managed by an independent financial institution, was terminated in 2003 to stop excessive losses that Bally said were caused by the institution’s poor program management. The arbitration related to allocating program losses resulting from accounts transferred to the program prior to February 2003. In the ruling on May 12, the arbitration tribunal awarded damages to each party, resulting in a net award to the financial institution of approximately $14.3 million. Bally said in the 8K filing it believes the award is unreasonable and “is exploring all of its options.”

That followed a recent announcement that Bally was putting out feelers on the sale of its high-end Crunch Fitness business, which has 21 locations in New York, Los Angeles and other large cities with 85,000 members and was acquired by Bally in October 2001. That move was based on advice by newly hired turnaround experts at The Blackstone Group to strengthen Bally’s core assets and is part of an ongoing analysis of the business.

And, despite being one of the most outspoken critics of Bally activities, Emanual R. Pearlman’s Liberation Investments has announced it now holds 10 percent ownership stake in Bally, up from nearly 7 percent. Despite the joint SEC filing by Pearlman and three Liberation-named companies, the ownership of the 4,099,450 shares of common stock are entirely in the name of Pearlman, according to the SEC paperwork. The jump in ownership from 6.68 percent comes despite the many problems Liberation Funds, managed by Pearlman, has had over the past couple of years with Bally management. As reported previously in SNEWS® on Aug. 26, 2004, Bally Total Fitness Holding Corp.’s CEO and board of directors received a letter from Liberation Investment Group reprimanding it for missing its 10-Q filing deadline. Additionally, Liberation Investment Group has suggested that Bally sell assets, separate the titles of COB and CEO, and provide clearer financial information at times over the past year. And it has been a leader in pressing forward on the pending class-action lawsuit.

Bally operates 440 gyms worldwide under the names Bally Total Fitness, Gorilla Sports, Pinnacle Fitness and others.

SNEWS® View: One could view the Crunch sale as a fire sale — we bet more sales and closures will come. But a shutdown of the club would be devastating to the fitness industry and the consumers’ trust in it. As for Pearlman, we’re not sure why he’s opted in for just about 50 percent more stocks. Perhaps it signals the company is getting back on track by taking Liberation’s past advice. Or he’s just trying extend its influence over the company and force Bally to enact more of the recommendations he and his group has made over the past year.

Retail sales for April on the upside
Retail industry sales for April (which exclude automobiles, gas stations, and restaurants) rose 4.4 percent over last year and rose 1.0 percent seasonally adjusted from March, according to the National Retail Federation (NRF). The gains were stronger than NRF had been anticipating.

April retail sales by the U.S. Commerce Department show that total retail sales (which include non-general merchandise categories such as autos, gasoline stations and restaurants) rose 1.4 percent seasonally adjusted from March and increased 7.2 percent unadjusted year-over-year. Sales at gasoline stations rose 20.1 percent over a year ago as gasoline prices increased, which inflated total retail sales.

NRF said it expects sales to increase 5.0 percent in the second quarter and 4.8 percent this year over 2004.

Russell outlines long-term goals in investor call
Russell Corp. (NYSE: RML) held an investor conference call outlining its long-term goals, saying it was targeting annual sales growth of between 5 percent and 7 percent and annual earnings per share growth of 12 percent. It’s also anticipating double-digit operating income as a percent of sales by 2009. Key strategies the company said it is focusing on are building Spalding into a global sporting goods brand, expanding Russell Athletic’s position in athletic performance goods, doubling Brooks’ sales over the next four to five years and pursuing acquisitions where they can accelerate the company’s vision
  
Health Fitness reports first-quarter earnings
For the first quarter of 2005, Health Fitness Corp. (HFIT.OB) reported a 6.3 percent increase in revenue to $13.5 million compared to $12.7 million in 2004. Gross profit was also up — 11.5 percent to $3.4 million from $3.1 million in 2004. Earnings before income taxes were $1.1 million up 93.1 percent from last year’s $561,207. Net earnings applicable to common shareholders were $627,934, an increase of 86.5 percent, compared to $336,707 for the same quarter last year. Gross profit as a percent of revenue increased to 25.6 percent, compared to 24.4 percent in 2004.

Revenue from staffing services provided at managed sites was $12.6 million versus $12.2 million last year. The company said the increase was due primarily to new management contracts. Also, revenue from its Health Improvement Program Services increased 88.3 percent to $840,445 from $446,312 for the first quarter of 2004. This increase is due primarily to increased service penetration at managed sites, it said.

The company said its primary strategy is focused on growing its customer base and improving revenue from existing sites in its two business areas: fitness management services and health management services. To accomplish this, it intends to begin investing additional resources to improve its sales and marketing capabilities.

Wal-Mart struggles in Q1
Despite record first-quarter sales and earnings, Wal-Mart Stores (NYSE: WMT) missed analyst expectations, reported lower-than-expected earnings and predicts its second quarter won’t be much better. It too has struggled with higher gas prices and fickle weather affecting buyers. The news caused its stock to drop as much as 4 percent, and the stock is off some 18 percent from a November 52-week high and near a more than four-year low set in late April.

Net sales for the company’s first quarter were $70.9 billion, an increase of 9.5 percent over the first quarter of fiscal 2005. Net income for the quarter was $2.5 billion, an increase of 13.6 percent from $2.2 billion in the first quarter of fiscal 2005. Earnings per share were $0.58, compared with $0.50 for the prior year first quarter. The company said its earnings in fiscal 2006 were favorably impacted by two items totaling $145 million after tax or $0.03 per share: an increase due to favorable tax resolutions of $77 million and positive legal developments of $68 million after-tax. Excluding these items, earnings per share were $0.55.

First-quarter net sales for its Wal-Mart division were $47.6 billion up 9.3 percent from 2004’s $43.6 billion. Its same-store sales were up 2.8 percent.

For May sales, the company said it stands behind its forecast of a 2 percent to 4 percent increase in sales at U.S. stores open at least a year.

Nike declares cash dividend
Nike’s board of directors (NYSE: NKE) declared a cash dividend of $0.25 per share on its outstanding Class A Common Stock and Class B Common Stock payable July 5, 2005, to shareholders of record at the close of business on June 13, 2005.

For more information about these companies or their financial reports, as well as to view stock prices updated every 15 minutes, visit the SNEWS® Stock Market Updates. Click on:www.outsidebusinessjournal.com/cgi-bin/snews/stock_report.htmlÂ
Â