Fitness financials: Nautilus shares drop 25 percent after lowered earnings estimate, plus Bally/Crunch, adidas/Reebok, Puma, Finish Line

Nautilus shares drop 25 percent after earning estimates plummet
Nautilus (NYSE: NLS) warned that fourth-quarter earnings would fall well short of forecasts due to new product delays and manufacturing inefficiencies, causing its shares to tumble nearly 25 percent in trading — making it one of the New York Stock Exchange’s biggest losers on the day of the release of that information Jan. 18.

Based on preliminary information, Nautilus said it expects fourth-quarter net sales for 2005 to be in the range of $179 million to $183 million — or about 85 percent to 87 percent of its previous guidance from Nov. 2, 2005, of $210 million. Corresponding earnings per share were expected to be a mere 15 percent to 25 percent (now in the $0.07 to $0.12 range) of the previous guidance of $0.44 to $0.48 range.

“Clearly, Nautilus has process issues that need to be resolved,” wrote analyst Ed Aaron with RBC Capital Markets. “Supply problems and delays have been experienced across multiple product lines, indicating that there’s not just one specific glitch in the system. Our primary concern is that these issues will disrupt relationships with customers, particularly in the specialty retail and commercial channels.”

Analysts surveyed by Thomson Financial had been looking for Nautilus to post profit of $0.46 per share on sales of $210.7 million. RBC, for example, has lowered its fourth quarter EPS estimate to $0.10 from $0.47.

Nautilus said it was not able to launch new products as planned because of unspecified manufacturing issues. “We are continuing to make progress in improving our manufacturing and operational capacity as we adjust to a fast pace of product innovation. We are closing gaps and improving efficiencies in each stage of our go-to-market process,” Gregg Hammann, chairman and CEO, said in a statement.

Apparently particularly experiencing supply issues were the direct channel’s TreadClimber and Sport series treadmills.

Nautilus shares closed at $13.91 on the New York Stock Exchange on a volume of 3,618,200, down $4.62 or 24.9 percent, after hitting a low of $13.55, its lowest since January 2004.

Additionally, investment companies Wedbush Morgan Securities, BB&T Capital Markets and Stanford Research downgraded the stock from “buy” to “hold” in light of the company’s outlook. D.A. Davidson & Co. maintained its “buy” rating on the stock, but lowered its price target, as did Wedbush Morgan. On Jan. 20, however, Matrix Research according to Yahoo Finance upgraded the stock from “hold” to “buy.” In addition, the stock closed the week on Jan. 20 at 14.99 on a volume of 2,669,500, starting what seemed to be a teeny hedge back upward although no where near its 52-week high of $29.65 in July 2005.

“The Street’s confidence in Nautilus’ guidance is somewhat eroded, and we anticipate that the stock in the near term (i.e. at least the next two quarters) will languish,” wrote BB&T analyst Kathryn Thompson.

Nautilus, with a Q4 earnings call scheduled for Feb. 1, said in its pre-earning statement that it continues to expect 15 percent to 20 percent annualized sales growth, and 20 percent to 30 percent annualized earnings growth, through its 2006-08 strategic business plan.

“Given the breadth of the supply issues and risks to big ticket consumer spending in 2006, we believe it’s appropriate to gain clarity on operational improvements before revisiting the stock,” wrote RBC’s Aaron, who lowered its price target to $15 from $22. “We have lowered our multiple assumption to reflect the volatility in Nautilus’ operating performance.”

Bally finalizes sale of Crunch Fitness
On Jan. 20, Bally Total Fitness (NYSE: BFT) finalized the sale of Crunch Fitness to Marc Tascher and Angelo, Gordon & Co. for $45 million. Under the terms of the agreement, the new owners have acquired all of the Crunch sites in New York, Chicago, Los Angeles, Atlanta, Miami and San Francisco, as well as two Gorilla Sports Clubs and two Pinnacle Fitness clubs in San Francisco.

The new company will be called “Crunch Fitness” and all clubs will operate under the Crunch Fitness brand, beginning first quarter 2006. Tascher, co-founder and former chairman and CEO of Town Sport International, has been named chairman and CEO of Crunch Fitness. In addition to the 25 Crunch clubs, the new company will include seven additional health clubs owned and operated by Tascher’s previous company, Sports and Fitness Ventures, which will be converted to the Crunch brand name.

Crunch Fitness said it has an aggressive plan for club conversions, which includes $15 million for new equipment, capital improvements, and increased marketing. In addition, there are plans to expand Crunch’s presence by adding several new locations in the coming year.

Russell’s new restructuring plan includes plant closures, 2,300 layoffs
In a move that it says will improve its long-term competitiveness, Russell (NYSE: RML) plans to cut about 2,300 jobs and freeze retirement benefits to cut costs and save as much as $40 million on a pretax, annualized basis. In the United States, 1,700 positions will be cut with approximately 1,200 eventually replaced in Honduras and Mexico.

The parent of Brooks and Moving Comfort said the after-tax cost of the restructuring is expected to be $45 million to $52 million, with projected annualized pre-tax cost savings in the $35 million to $40 million range, or approximately $22 million to $26 million on an after- tax basis. About half of the charges are expected in the 2006 fiscal year, with approximately 20 percent of the savings expected to be realized in 2006, approximately 80 percent in 2007, and the full impact in 2008 and beyond, it added.

The restructuring game plan announced on Jan. 19 will be combined with “focused marketing efforts, improved asset utilization and efficiency improvements, which should lead to increased sales, higher margins and improved profitability,” the company said in a statement. It added: “The goal of these actions is to favorably impact ongoing financial results in 2006 and, more importantly, to better position the company for 2007 and beyond.”

Russell’s plans are focused include the continued shift offshore of textile/apparel manufacturing operations, expected to result in pre-tax savings of $22 million to $25 million annually. It will also see reductions of $8 million to $10 million in overhead costs, pre-tax.

It will also reorganize the sales and marketing within the Russell Athletic Group, and eliminate 90 positions in corporate and division offices. Additionally, the company is changing in its retirement program, freezing the current benefit plan and improving the 401(k) employee savings plan, effective April 1.

The company said larger manufacturing facilities will be more efficient, creating lower- cost operations, which are expected to increase its gross margins. Coupled with overhead reductions from eliminations in certain support areas, these improvements should lead to higher operating margins, while allowing for a greater investment in building the company’s brands long term, it added.

Russell said it now expects GAAP earnings for 2005 to fall in the range of $0.83 to $0.89 per share on sales of approximately $1.435 billion. For 2006, it expects mid-single digit growth and sales in the $1.450 billion to $1.480 billion range. Plus, it expects earnings per fully diluted share in the $1.10 to $1.25 range for 2006, excluding restructuring charges of approximately $0.66 to $0.78 per share associated with its announcement.

Shares of Russell rose $1.24, or 9.2 percent, to $14.68 on the New York Stock Exchange, where it was among the biggest percentage gainers in midday trading. Its stock price hit a 52-week low of $12.31 in October last year.

Sun Trust Robinson Humphrey initiated coverage on Russell on Jan 19 with a cautious report. By Jan. 20, it had switched its initial assessment from “neutral” to “buy,” saying the plan will improve Russell’s profit outlook for the next two years. It set a $20 price target.

adidas close to EU approval of Reebok acquisition
It looks like the way is almost clear for the biggest takeover of adidas’ (ADSG.DE) history — the planned $3.8 billion acquisition of U.S. rival Reebok (NYSE: RBK) — in its attempt to go head-to-head with industry leader Nike.

On Jan. 24, the routine one-month antitrust review of the European Commission ends, a long-awaited step toward closing the deal. Analysts expect Brussels to approve the transaction without launching a longer review. U.S. antitrust authorities have already approved the takeover, which will create a firm with combined annual sales of around $11 billion. One analyst noted that he doesn’t expect any problems because both firms have a much larger combined dominance in North America than in Europe where Reebok is weak.

Despite reigning as the world’s second largest maker of sporting goods, adidas hopes with the takeover to increase its market share in the United States, where it has failed to pose any serious competition to Nike. Reebok has a much stronger position there due to key license sponsoring agreements with U.S. sports leagues.

Just a day after the commission’s review period ends, Reebok shareholders will decide at a general meeting on the acquisition. adidas has said it would buy all outstanding Reebok shares for $59 each. One analyst is confident Reebok shareholders will say yes, adding that they’ll never get such a good offer again after the firm recently reported weak sales. Reebok shares came under pressure after it posted an 11 percent decline in third-quarter sales but have rebounded to levels at around adidas’ offer of $59 as investors anticipate an approval.

In the past few weeks, investors have become more upbeat on the takeover, which originally caused concern that adidas was taking on too much. But reportedly it has allayed some fears with forecasts that the deal will boost earnings by a double-digit percentage rate in the medium term by complementing the strength in its classic three-striped sportswear with Reebok’s successful lifestyle clothing.

adidas shares have gained 13 percent since the deal was announced in August, helped by a 28 percent rise in third-quarter net income, regaining ground after initially falling. Fifteen analysts out of 22 tracked by Reuters Estimates have a “buy” or “outperform” rating on the stock, while six have a “hold” and just one analyst an “underperform” rating.

Reebok said in a recent regulatory filing the takeover could be concluded by Jan. 31.

Puma shares up after Mayfair denies plans to sell stake
Shares of Puma rose 2.8 percent to Euro 258 (USD $311.54) in Frankfurt trading, after one of its largest shareholders denied rumors it was looking to unload its stake in the company. Investment firm Mayfair Vermoegensverwaltungsgesellschaft — controlled by billionaire siblings Guenter and Daniela Herz — said it had no plans to unload its 25.3 percent stake in the Germany-based company.

Rumors have been floating around that Nike was looking at taking a stake in the company, and last month, the German financial newspaper Handelsblatt reported that the Herz siblings were contemplating a takeover of Puma.

Puma has tripled its revenue since 2001 and expanded its growing line of apparel to include casual wear alongside its sport-oriented offerings — prompting the brand’s adoption by the hip-hop crowd. It has also has expanded its presence in soccer, and is set to equip 11 of the 32 teams playing at the World Cup finals in Germany next year — including four of the five competing African teams.

Finish Line announces cash dividend
The Finish Line’s (Nasdaq: FINL) board 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 March 13, 2006, to stockholders of record on Feb. 24, 2006.

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