Fitness financials: Icon shows net loss despite sales gains, plus Nautilus, Bally, Amer, adidas, Reebok, NRF, Life Time Fitness, Finish Line, Wal-Mart

Icon shows net loss despite quarterly sales gains
Despite showing slightly increased net sales for the quarter ended Sept. 3, 2005, Icon Health & Fitness’ bottom line still showed a net loss.

The Logan, Utah-based, company had a net loss of $24.8 million, up from the $20.8 million last year. Net loss before taxes and discontinued operations was $22.0 million, compared to a net loss before taxes and discontinued operations of $26.4 million in 2004. This year’s provision for taxes was $1.3 million compared to a benefit of $8.3 million last year. Icon said the increase can be attributed to a deferred tax valuation allowance.

The 7.1 percent increase in net sales wasn’t enough to offset the losses: Net sales were $144.2 million compared to $134.6 million for the same quarter in 2004. In addition, EBITDA (income before interest expense, income tax expense, depreciation and amortization and certain non-recurring items) for the quarter was negative $6.7 million compared to a negative $14.5 million for the three months ended the same quarter a year ago. The loss on discontinuing operations incurred in the period ended September 3, 2005 meets the definition of “non-recurring” in relevant SEC guidelines.

Icon’s total assets as of Sept. 3, 2005, were $404.7 million, compared to $460.7 million as of the previous quarter ended May 31, 2005. It said the decrease in assets was primarily attributable to the decreases in accounts receivable, fixed assets and discontinued assets. Accounts receivable decreased as a result of lower sales in the first quarter of fiscal 2006 versus the fourth quarter of fiscal 2005 and partially due to decreased direct response receivables, which are financed over a longer period of time. It also said the decrease in fixed assets can be attributed to the disposal of its interest in China. The increase in inventory can be attributed to the seasonal build-up that will carry it through the upcoming busy season, the company reported.

Net debt for the periods ended Sept. 3, 2005, and May 31, 2005, were $285.3 million and $282.1 million, respectively.

Icon’s three largest customers together accounted for approximately 51.7 percent and 48.9 percent of our revenues in fiscal years 2005 and the first three months of fiscal 2006, respectively. Its largest customer, Sears, accounted for 40.4 percent and 38.7 percent of the company’s revenues in fiscal years 2005 and the first three months of fiscal 2006, respectively. In categories, sales of cardiovascular and other equipment in the quarter increased $11.4 million, or 10.6 percent, to $119.2 million. Sales of strength training equipment decreased $1.8 million, or a negative 6.7 percent, to $25.0 million.

Nautilus downgraded by RBC, shares drop
Shares of Nautilus (NYSE: NLS) dropped to a new 52-week low after RBC Capital Markets downgraded the company to “sector perform” from “outperform.”

The company’s shares fell $1.85, or 9 percent, to $18.68 in afternoon trading on the New York Stock Exchange. Earlier, shares changed hands as low as $18.42, dropping below the previous year-low of $18.85, reached Nov. 2, 2004. Volume of 1.1 million was more than double the average of 401,000.

In mid-September, RBC had lowered its 2006 estimate for Nautilus, but maintained its outperform rating for the fitness company, anticipating that it would prove resilient to any softening in consumer spending. (See SNEWS® story, Sept. 16, 2005, “Fitness financials: RBC lowers ’06 estimates for Nautilus, maintains outperform rating….”)

However, RBC shifted gears on Oct. 20 and dropped its price target from $31 to $23, saying its caution is based on a weakening consumer and retail environment that likely signals a declining demand for fitness products this season. It also reduced its fourth-quarter earnings estimate to $0.53 per share, down from $0.57 per share.

On average, other analysts said they are expecting earnings of $0.57 per share on sales of $175.9 million. Additionally, Banc of America initiated coverage on the fitness company, giving it a “neutral” action on Oct. 19.

RBC also lowered its 2005 forecast to $1.14 from $1.19 (slightly below guidance), as well as its 2006 estimate to $1.40 from $1.52.

“The recent hurricanes and resulting drop in consumer confidence were poorly timed, as they occurred immediately prior to the peak retail selling season (November through February) for fitness equipment,” the company said in a research report.

RBC said it would maintain a “positive long-term view” for the company and is inclined to revisit the rating once it becomes apparent that the company’s earnings expectations are set at “an achievable level.”

Nautilus is scheduled to release its third-quarter earnings statement on Nov. 2.

Bally responds to stockholder letter, implements Rights Plan
In response to a recent letter from Pardus Capital Management, the board of Bally Total Fitness Holdings (NYSE: BFT) sent its own letter saying it is considering the shareholders’ nominations for independent directors. Pardus holds a 14.4 percent stake — about 5 million shares — in Bally.

Bally’s Oct. 18 letter said that one of Pardus’s nominees declined to be considered, and the two others have not provided meeting dates. Pardus has said that it intends to formally nominate candidates at the company’s annual shareholder meeting, scheduled for Jan. 26, 2006.

Bally’s letter in response to Pardus also said that it agrees that it opposes any substantial asset sales, sale of the business, or other significant actions until its restated financial statements are publicly available. Bally added that it has been working diligently to meet the Nov. 30 target date for filing its restated financials.

Separately, but coincidentally timed, Bally’s board has implemented a short-term Stockholder Rights Plan to prevent outside parties from acquiring Bally stock in excess of 15 percent of its equity for near-term gains.

Bally said it has been discussing the Rights Plan with its advisors for some time and approved its adoption subject to obtaining consent from the Company’s lenders, which has now been obtained. The Rights Plan is being adopted in light of the significant accumulations of shares in recent months, and is not a response to any proposed takeover or other transaction, it added. The adoption of the Rights Plan will not foreclose a fair acquisition bid for Bally or any other capital transaction, nor will it preclude any shareholder’s ability to nominate directors.

Under Bally’s Stockholder Rights Policy, the Rights Plan will expire if it is not approved by shareholders prior to July 15, 2006, although it can be redeemed or terminated sooner by the company. In the interim, the plan is intended to prevent an outside party from attempting to acquire Bally or its equity at prices that may not reflect Bally’s true long-term value.

The board said it declined Pardus’ request to acquire more than the 15-percent threshold.

Amer’s buyout of Salomon concludes, exercises its 2002 warrants
Amer Sports (AMEAS.HE) has completed its acquisition of Salomon and its brands from adidas-Salomon (ADS.DE). The transaction value for the Salomon business segment is expected to be approximately Euro 485 million (USD $583 million) based on year-end 2004 figures. According to the agreement, the final price will be set in accordance with net assets as at Sept. 30.

The consolidation of Salomon’s financial figures into Amer Sports began on Oct. 1. The company said the transaction will have a significant effect on its net sales in the final quarter of the present year. The acquisition is estimated to have no significant impact on Amer Sports’ earnings per share in the current fiscal year. Amer added that Salomon will comprise its own business area, the Salomon Group. Amer and adidas-Salomon will cooperate for a maximum period of three years to ensure support for the transferred business.

In other Amer news, the company said 16,950 of its shares have been subscribed for as a result of an exercise of its 2002 warrants. The corresponding increase in the company’s share capital amounting to Euro 67,800 (USD $81,109) was registered on Oct. 18. As a result of this increase, Amer’s share capital now totals Euro 285,747,240 (USD $341,839,423) and the total number of shares in issue is 71,436,810. Shareholder rights commenced from the registration date, and the new shares were listed on the Helsinki Exchanges on Oct. 19. The subscription period of Amer’s 2002 warrant scheme will end on Dec. 31, 2007.

(Conversion of Euros into U.S. dollars is for information only, is not necessarily relative to earnings, and is based on the currency rate as of Oct. 20.)

adidas-Salomon estimates $12 million book loss from sale of Salomon
adidas-Salomon AG (ADS.DE) said it expects to record a book loss of around Euro 10 million (USD $12 million) from the sale of its Salomon division to Amer Sports (AMEAS.HE).

CFO Robin Stalker said this during an analyst conference in May and his comments are still valid, adidas said. However, it added that it doesn’t yet exactly know the book loss resulting from the sale. The final evaluation is continuing and it is unclear when this process will be concluded, it said.

Despite the sale, the company’s name will remain adidas-Salomon until shareholders vote on a new company name. Legally its company name will remain adidas-Salomon until its next annual general meeting next May, it said.

adidas acquired Salomon, including its Golf division which adidas will keep, in 1997 for around Euro 1.2 billion (USD $1.44 billion).

(Conversion of Euros into U.S. dollars is for information only, is not necessarily relative to earnings, and is based on the currency rate as of Oct. 20.)

Reebok experiences profit jump and sales drop in Q3
Reebok International (NYSE: RBK) reported a 44 percent jump in third-quarter profit despite declining sales as it heads into a planned $3.8 billion sale to adidas-Salomon.

Reebok’s third-quarter net income was $117.7 million, or $1.87 per share compared with a profit of $81.8 million, or $1.34 per share, in last year’s third quarter. The results include an after-tax gain of $49 million on the sale of Reebok’s Ralph Lauren footwear business and $2.5 million in legal and other costs from the adidas deal.

Sales fell nearly 11 percent to $1.04 billion from $1.16 billion a year ago, missing the analysts’ average forecast of $1.14 billion. The company said news of the adidas deal created some short-term uncertainty among retailers, which hurt sales and order intake in the quarter.

For the fourth quarter, Reebok forecast earnings per share of $0.55 to $0.65, excluding any one-time items. Analysts on average expect $0.60.

NRF gauges consumer purchase intentions for holiday season
The National Retail Federation “2005 Holiday Consumer Intentions and Actions Survey,” conducted by BIGresearch, found that the average consumer plans to spend $738.11 this holiday season, up 5.1 percent from the previous year. Furthermore, consumers will spend an additional $86.62 on themselves. The survey is in line with NRF’s holiday sales forecast, announced last month, which expects total holiday retail sales to increase 5.0 percent over last year to $435.3 billion.

According to the survey, consumers will be dedicating the majority of their holiday spending to gifts for family ($421.30) and friends ($78.99). They’ll also spend $21.05 on co-workers and $44.16 on gifts for other people, including babysitters, teachers and clergy. Consumers will spend an additional $17.68 billion on non-gift purchases for themselves or their families this holiday season, the survey said. Men will be the most generous when it comes to treating themselves, with the average male spending $108.87.

More than a third of consumers (37.9 percent) said that sales or price discounts are the most important factor in their decision to purchase from a particular store. Selection is also important, with nearly a quarter (23.1 percent) of consumers polled ranking selection of merchandise as a top factor, while other consumers chose where to shop based on quality of merchandise (11.0 percent) or location (6.5 percent). Consumers also appreciate good, knowledgeable customer service, with 3.7 percent saying it was the most important factor when choosing where to shop.

The survey also found that consumers plan to shop at a variety of stores for their holiday shopping this year, with discounters (71.4 percent) and department stores (59.4 percent) once again remaining top shopping destinations. Other popular stores include specialty stores, such as clothing, toy or electronics (46.5 percent) and grocery stores (47.4 percent). The popularity of online shopping continues to grow, with almost half (42.6 percent) of consumers planning to purchase gifts online, up from 38.3 percent the previous year.

The NRF 2005 “Holiday Consumer Intentions and Actions Survey” was designed to gauge consumer behavior and shopping trends related to the winter holidays. The survey, which polled 7,726 consumers, was conducted for NRF by BIGresearch from Oct. 5-12, 2005. The consumer poll has a margin of error of plus or minus 1.0 percent.

Coverage initiated on Life Times Fitness
Banc of America initiated coverage on Life Time Fitness (NYSE: LTM) on Oct. 19. It gave the Eden Prairie, Minn.-based, health club operator a “buy” rating.

Finish Line declares dividend
The Finish Line’s (Nasdaq: FINL) board of directors has declared a quarterly cash dividend of $0.025 per share of Class A and Class B common stock. The quarterly cash dividend will be payable on Dec. 12, 2005, to stockholders of record on Nov. 25, 2005.

Wal-Mart sticks with October forecast
Wal-Mart Stores (NYSE:WMT) is maintaining its October sales forecast and said demand was strongest in the U.S. Southeast, where Florida residents were bracing for Hurricane Wilma. The retailer said it still expects a 2 percent to 4 percent increase in October sales at its U.S. stores open at least a year.

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