Fitness financials: Bally results restatement to delay earnings reports until July 2005, plus increased holiday spending forecast, results of Sears consumer survey

Bally’s results restatement to delay financial statements until July 2005
Bally Total Fitness Holding Corp. (NYSE: BFT) reported Nov. 15 it will restate more than four years — 2000 through first quarter 2004 — of financial results to change the way it accounted for membership fees. As a result, Bally announced it will delay all financial statements until the restatement is completed — which is projected to be July 2005.

In the meantime, the health club operator will provide quarterly updates by issuing unaudited operating and cash flow data.

Bally said about the statements in question: “Accordingly, such financial statements and other communications related to such periods should no longer be relied upon.” Bally’s Audit Committee plans to use KPMG LLP, its new auditor, to re-audit its financial statements for the years ended Dec. 31, 2002, and 2003, which were previously audited by Ernst & Young LLP.

Problems arose when Bally used as its revenue recognition policy membership initiation fees over an average membership life, which it approximated to be 22 months. Instead, the company should have recognized revenue for all membership fees over the life of the contract or the period over which service was provided, whichever was longer. Bally also said it incorrectly recognized revenue associated with recoveries of unpaid dues on inactive member contracts.

The restatement will not affect reported cash flows, but will result in an undetermined cumulative, non-cash charge to earnings as of Jan. 1, 2000. It will include the amount previously reported as a cumulative effect adjustment when the company converted to a modified cash basis of accounting effective Jan. 1, 2003.

Bally expects to restate prior periods to record a liability related to repayment obligations of $22 million due in 2015 or later on membership contracts sold by a subsidiary before Bally acquired it in the late 1980s. This liability, which had a present value of $6 million as of Sept. 30, 2004, has not been reflected in its financial statements since 1995. The effect on prior income statements is the addition of non-cash annual interest charges of between $325,000 and $700,000 in each of the years 1996 through 2003. Bally said it intends to change the balance sheet presentation of its installment contract receivables, which would also change an equal amount of deferred revenue, so as not to report these amounts on its balance sheet.

Bally, which is facing a U.S. Securities and Exchange Commission probe into its accounting, said in August it would restate some results due to an examination of certain accounting issues. In addition, the company is also facing a class-action lawsuit based on stockholders claiming they made investments based on incorrect financial statements (See SNEWS stories: 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”).

Following Bally’s announcement, Moody’s Investors Service placed the ratings of Bally on review for possible downgrade. It also informed the company that it will send default notices to the company unless Bally commences consent solicitations by Nov. 15, 2004, and has either cured the defaults or obtained the necessary waivers from the holders of a majority of each series of notes by Dec. 15, 2004. The trustee has advised the company that it would begin notifying noteholders of default in accordance with the indentures. Moody’s said it is concerned that a default under the indentures may be triggered if Bally doesn’t obtain the necessary waivers or cure the default.

On the New York Stock Exchange, shares of Bally traded 9 cents lower to $3.30 in Monday’s evening session after closing down 13 cents at $3.39, nearing its 52-week low from Sept. 20 of $3.35.

Post-election stats indicate strong holiday sales season
Since the reelection of President Bush, companies analyzing retail numbers are reporting that retail sales are continuing to gain momentum and anticipate stronger selling seasons for November and December.

A survey by retail consulting firm Unity Marketing found U.S. consumers’ spending plans have changed since President Bush’s reelection on Nov. 2. Before the election, consumers expected they would spend 4.5 percent more during the holidays, but a post-election survey found that had increased to 5.6 percent. They now plan to spend $678 on gifts this season, up from $648 last year.

A cold snap in November has also spurred sales — especially of winter coats and footwear. “It has been colder this November than last year, creating a better retail environment, which will boost November sales, particularly apparel sales,” said Jim Gagne, senior vice president of Planalytics, which provides weather forecasts to retailers to help them with planning.

CIT Group Inc.’s CEO Jeff Peek is forecasting a slightly stronger holiday season this year based on his company’s role in financing inventory build-ups, with concerns over the election and rising interest rates calming. “All those uncertainties have gone away so people are now back and focusing on their business,” Peek said at a recent conference.

However, the tide may have been turning a little earlier than the election, according to the National Retail Federation (NRF). The NRF reported that October retail sales in the GAFS category (general merchandise stores, clothing and clothing accessories stores, furniture and home furnishings stores, electronics and appliances stores, and sporting goods, hobby, book and music stores) increased 6.2 percent from the same period last year and rose 1.1 percent month-to-month.

October retail sales released 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 0.2 percent seasonally adjusted for the month. Retail sales rose 5.6 percent unadjusted year-over-year.

Since Sept. 22, NRF has forecast a 4.5 percent increase in holiday sales (defined as GAFS sales in the months of November and December). Consumers are expected to spend $220 billion this holiday season.

Good value, friendly staff help consumers decide where to shop, Sears survey finds
Sears is living the good life as a national online survey conducted for the retailer found a few stats that will help it — and other retailers — during the holiday selling season. Insight Express, which polled consumers on their shopping preferences, found that more than three-fourths of all consumers surveyed cited good value and friendly, helpful staffs as the two most important factors in determining where they will shop this holiday season. The survey, which was conducted for Sears, also found that mom usually plays Santa with about two-thirds of moms most likely to be the main gift buyer in their families. More than half of all respondents plan to do their holiday shopping alone, with two-thirds of all respondents planning ahead and intending to complete their shopping between now and Dec. 15. Not many last-minute shoppers here: Another 10 percent already have completed their shopping. No really.

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