Fitness financials: Bally reportedly being eyed by Virgin; seeks waivers from debt holders, plus Forzani Group, Nike, Finish Line

Bally reportedly being eyed by Virgin; seeks waivers from debt holders
Virgin group billionaire Sir Richard Branson is reportedly weighing a $1.2 billion bid to buy Bally Total Fitness (NYSE: BFT) and sees the health club operator as a way to grow the company’s U.K.-based Virgin fitness club business into the United States. According to an article in the New York Post on March 21, sources said Virgin has been examining Bally’s financial reports and received a pitch book on the company put together by J.P. Morgan and The Blackstone Group.
 
Shares in Bally jumped $1.15, or 15 percent, to close at $8.99 on the New York Stock Exchange following the news.

If the sale comes to fruition, the deal would bulk Virgin Active up to four times its current size. Virgin Active has 25 clubs in the U.K., 77 clubs in South Africa, 12 clubs in continental Europe, and over 700,000 members worldwide.Â

Last year, Virgin bought back Bridgepoint Capital’s 55 percent stake in Virgin Active for $236 million. The pair was apparently at odds over how soon Virgin Active should be floated: Bridgepoint — which acquired its stake in February 2002 when it agreed a $192 million partnership with the group to fund expansion of the chain — was in favor of a swift sale, while Virgin wanted first to bulk up the business with some hefty overseas acquisitions.

One U.K. newspaper’s sources said the sale process is still at an early stage, and added that Virgin is likely to face competition for control of Bally from private equity buyers, other health club chains and from property investors. The first round of bids is due early next month. Matthew Bucknall, Virgin Active’s managing director, had no comment on the speculation of a takeover.

In other news: After failing to file its 2005 financial statements on time, Bally said on March 24 it is seeking waivers of defaults from some debt holders. It’s also working on a waiver to extend the time for filing its reports for the quarters ended March 31 and June 30.

Bally said it would seek waivers of defaults from holders of its 10.5 percent senior notes due 2011 and 9.875 percent senior subordinated notes due 2007. Holders of approximately 53 percent of the senior subordinated notes have already entered into agreements with Bally to consent to the requested waivers, including Tennenbaum Capital Partners (the largest holder of senior subordinated notes), and entities affiliated with Pardus Capital Management and Everest Capital Limited.

Bally said that these noteholders have also agreed to vote unregistered Bally shares received in the consent solicitation in favor of a transaction that may result from Bally’s strategic process and approved by its board. For consenting, noteholders will either receive cash or stock shares. The senior subordinated noteholders that have already agreed to consent have elected to receive their consent fee in stock, Bally said.

The company added that it will seek to waive a requirement to deliver audited financial statements by March 31 under its $275 million senior secured credit facility.

Bally said that the senior secured credit facility default waivers will be completed by March 31, and the indenture default waivers will be completed by April 14.

Bally attributed the delay of its annual report to a delay in completing a 2004 audit and restatements of prior periods.

Bally shares closed at $9.10 on March 24, up $0.05 from the previous day.

Canadian retailer Forzani Group reports Q4 and FY results
Despite a 31 percent jump in fourth-quarter earnings, the Forzani Group (FGL.TO) said its full-year earnings were down due to weak results in its first two quarters.

Retail system sales for the fourth quarter were CDN $438.0 million (USD $375.3 million), compared to CDN $366.6 million (USD $314.1 million) last year. Excluding the impact of two new banners — National Sports and Nevada Bob’s Golf — retail system sales for the fourth quarter were CDN $407.1 million (USD $349 million), an 11.0 percent increase over sales in the same period last year. In February, Forzani announced its acquisition of Canada’s Fitness Source to further its expansion into fitness retail. (Click here for a Feb. 3, 2006, SNEWS® story, “Canada’s Fitness Source acquired by Forzani Group, expansion plotted.”)

Total revenues, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, were CDN $342.2 million (USD $293.2 million), an increase of 24.8 percent from the prior year. Exclusive of the impact of National Sports and Nevada Bob’s Golf acquisitions, revenues increased to CDN $316.1 million (USD $271 million), or 15.2 percent over last year’s fourth quarter.

Fourth-quarter corporate store revenues, at CDN $287.8 million (USD $247 million), were 25.4 percent above last year’s revenues of CDN $229.5 million (USD $197 million) — partially impacted by a stronger-than-expected same-store sales increase of 10.1 percent. Net earnings for the quarter were CDN $17.0 million (USD $14.5 million), or CDN $0.51 (USD $0.44) diluted earnings per share, versus CDN $12.7 million (USD $11 million), or CDN $0.39 (USD $0.33) diluted earnings per share.

Wholesale sales for the quarter were CDN $54.4 million (USD $47 million), up 21.4 percent from the prior year. Franchise comparable store sales were up 5.3 percent for the quarter on the strength of footwear, athletic and winter clothing.

For the full year, retail system sales were CDN $1.3 billion (USD $1.1 billion), up $202.2 million from last year. The company said the increase was a combination of same-store sales increases of 3.8 percent and 6.5 percent in corporate and franchise stores, respectively, and the sales resulting from the acquisition of National Sports in the first quarter of fiscal 2006 and the full-year impact of the addition of Nevada Bob’s Golf. Without the two acquisitions, retail system sales for fiscal 2006 were CDN $1.2 billion (USD $1.02 billion), a 7.4 percent increase over sales in the same period last year.

Revenue was CDN $1.1 billion (USD $942.5 million), a 14.6 percent increase over last year. Exclusive of the impact of National Sports and Nevada Bob’s Golf, revenue increased to CDN $1.04 billion (USD $891.1 million), or 5.6 percent over the prior year. Net earnings were CDN $13.8 million (USD $11.8 million), or CDN $0.42 (USD $0.36) diluted earnings per share, compared to CDN $21.5 million (USD $18.4 million), or CDN $0.66 (USD $0.57) diluted earnings per share, in the prior year.

Considered Canada’s largest sporting goods retailer, it operates under the National Sports, Coast Mountain Sports and Sport Chek banners.

(Conversion of Candian dollars into U.S. dollars is for information only, is not necessarily relative to earnings, and is based on the currency rate as of March 24.)

New IPOer Crocs gets mixed opinions from brokerages
Following a successful IPO, Crocs (Nasdaq: CROX) saw its shares fall as much as 6 percent, as cautious opinions from two brokerages about the footwear maker’s brief history and limited products outweighed bullish comments from other brokerages.

The company’s stock hit an intra-day low of $22.81 in morning trading, but closed down 5.5 percent at $23. The company went public on Feb. 8 at an initial public offering price of $21 per share and rose 36 percent in its first day of trading.

“While we view Crocs as well-positioned to realize near term market share gains, we believe the company’s current reliance on two footwear styles and limited operating history both reduce visibility into long-term earnings growth potential and create a higher risk profile,” SG Cowen & Co. analyst Elizabeth Montgomery wrote in a client note.

“The company’s limited operating history makes forecasting potential seasonality and earnings variations more challenging,” she added and started coverage with a “Neutral” rating.

Separately, BB&T Capital Markets analyst David E. Turner initiated coverage of Crocs’ stock with a “Hold” rating, saying its price was “fairly valued,” even as he projected strong sales and earnings growth over the next several years.

Turner said that Crocs’ stock is trading at 27 times estimated 2007 earnings and a 50 percent premium to its peer group average. “While we believe a premium is clearly warranted, it’s difficult to argue for a valuation significantly higher than current levels,” he added.

Brokerages PiperJaffray and Thomas Weisel Partners separately issued notes starting coverage of Crocs with an “Outperform” rating. Both were joint book runners of Crocs’ IPO in February.

Nike’s Q3 net income tops views
Nike (NYSE: NKE) beat analyst forecasts in its third quarter as net income jumped 19 percent in the first report under its new chief executive. It earned $325.8 million, or $1.24 per share on sales of $3.6 billion. That was up from $273.4 million, or $1.10 a share, in the same period a year ago.

Nike said it balanced growth in emerging markets such as Russia, China and Brazil with efforts to reinvigorate lagging markets in Western Europe and Japan — the largest markets for Nike after the United States.

Analysts said the strong performance was better than expected partly because U.S. sales were higher than estimated and Nike improved its cost-cutting measures. But the 6 percent growth in U.S. future orders for the third quarter was actually a slight decline from recent quarters, one analyst noted.

Nike faces increased competition from No. 2 adidas-Salomon AG after adidas completed its acquisition of Reebok International in January. The merger boosted the adidas share to 21 percent compared with 36 percent for Nike in a market that accounts for half of all the athletic shoe sales in the world.

Despite analyst concerns over a high level of unsold inventory, Nike said it did not expect inventory levels to have a significant effect on earnings growth.

Future orders for athletic footwear and apparel totaled $5.4 billion, up about 3 percent from the same period last year, after accounting for changes in currency exchange rates. Without the changes, future orders grew by 5.4 percent, the company said. But orders declined 2 percent in Europe, where the company said it has been battling for market share in recent years.

Banc of America Securities analyst Robert Ohmes raised estimates for Nike following the better-than-expected quarterly results. Ohmes maintained a “buy” rating and $110 price target on the stock, which he includes as a “top pick” in his coverage of apparel, footwear and textiles.

Shares of Nike rose $1.87, or 2.2 percent, to close at $86.82 March 22 on the New York Stock Exchange.

Finish Line posts Q4 profit decline
Finish Line (Nasdaq: FINL) reported that its fourth-quarter profit declined slightly despite increased revenue, partly due to an impairment charge and an increased tax rate.

Income for the quarter was $28.1 million or $0.58 per share, down from $28.2 million, or $0.57 per share in the year-ago period. The recent quarterly results included a $2.5 million impairment charge related to 12 underperforming stores, it said. Revenue for the quarter was $399.2 million, up 11 percent from $361.4 million last year.

For the 2006 fiscal year, income was $60.5 million, or $1.23 per share, down from $61.3 million, or $1.24 per share the previous year. Revenue was $1.31 billion, up from $1.17 billion the year before.

The company expects to open 100 new stores between its three concepts — Finish Line, Man alive and new women’s concept Paiva — during its 2007 fiscal year.

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