Fitness financials: RBC lowers '06 estimates for Nautilus, maintains outperform rating, plus TSA, Saucony/Stride Rite, Sport Chalet, Gaiam, Sears, Reebok

RBC lowers ’06 estimates for Nautilus, maintains outperform rating
Despite lowering its 2006 estimate for Nautilus (NYSE: NLS), RBC Capital Markets is maintaining its outperform rating for the fitness company, anticipating that it will prove resilient to any softening in consumer spending. RBC issued research comments prior to and after attending Nautilus’ Analyst Day Preview meeting at the company’s new Vancouver, Wash., headquarters on Sept. 15.

Ed Aaron, RBC’s vice president of equity research, noted that RBC’s primary goal in attending the meeting was to determine the extent to which the company is equipped to manage increased demands on product development, sourcing, logistics, quality and customer service. He said that RBC walked away from the meeting with further conviction that Nautilus is in the early stages of capitalizing on a powerful sector trend toward fitness. Nautilus reported that it believes this opportunity will equate to $3 billion to $4 billion in sales and 12 percent to 14 percent operating margins. It should translate to 15 percent to 20 percent top-line growth and 25 percent to 30 percent EPS growth annually.

Although Nautilus has had a successful turnaround under new CEO Gregg Hammann and has become a more operationally complex company, RBC said it has adjusted its 2006 estimate for Nautilus. While RBC continues to have confidence in the management’s ability to execute, it is “somewhat concerned” that 2006 estimates are on the aggressive side, it said. The $1.63 consensus estimate assumes over 35 percent EPS growth relative to 2005 guidance.

RBC said, “From our perspective, Nautilus has more revenue opportunities on its plate than it currently has the infrastructure to support. Nautilus is making important strides to improve its supply chain, but with the business growing as fast as it is, it will take some time to fully reap the benefits of leverage.”

While RBC said it fully expects robust earnings growth to continue in 2006 and beyond, it does see some risk that management will guide below these estimates due to ongoing investment spending and management’s tendency to err on the side of conservatism. Accordingly, it has reduced its 2006 estimate $1.52, $0.10 below the consensus. Its estimates for the 2005 third and fourth quarters remain unchanged.

“Although we have trimmed our price target to $31 from $35 to account for today’s earnings revision, we continue to believe NLS shares are attractively valued given our expectation for 25percent-plus EPS growth over the next three years,” Aaron said.

RBC said it foresees Nautilus outperforming because the company’s pressure points are more on the supply side than the demand side and the company will weather lowered consumer spending. Also, it said it believes the high likelihood of an estimate correction is now reflected in the company’s shares, which were off about 10 percent in the last week. It noted that Nautilus shares are relatively inexpensive and although uncertainty surrounding its ’06 estimates may wear on the stock in the near future, RBC said it believes the risk/reward is favorable at current levels.

In regard to the impact of Hurricane Katrina, Nautilus said it experienced initial volatility following the hurricane, but that business on the direct side has returned to normal and healthy levels.

TSA names Campisi president
Formerly president of merchandising, David Campisi has been promoted to president of The Sports Authority (NYSE: TSA). In his new position he will continue to be responsible for all merchandising, planning, allocation and replenishment efforts, and will now assume responsibility for the advertising and marketing departments. Campisi will continue to report to Chairman and CEO Doug Morton. Campisi has been with the company since November 2004.

Saucony shareholders vote in favor of sale to Stride Rite
At a special meeting of shareholders on Sept. 16, Saucony (Nasdaq: SCNYA and SCNYB) shareholders voted “overwhelmingly” to adopt the merger agreement under which The Stride Rite Corp. (NYSE: SRR) will acquire Saucony. Approximately 86 percent of the Saucony’s Class A Common Stock and approximately 82 percent of the its Class A Common Stock and Class B Common Stock, voting together as a single class, approved the merger agreement, which closed on Friday.

Saucony and Stride Rite entered into a definitive agreement on June 2, under which Stride Rite agreed to pay $23 in cash for each outstanding share of Saucony Class A and Class B common stock, or approximately $172 million in aggregate value. The acquisition is being financed with cash on hand and borrowings under a new $200 million revolving credit facility led by Bank of America, N.A.

Saucony brings to Stride Rite the Saucony, Hind and Spot-bilt brands, which generated $167 million in revenue in 2004. The acquisition expands Stride Rite’s portfolio of nationally recognized footwear brands, and is expected to be accretive to Stride Rite’s earnings starting in 2006.

“This is an exciting day for both Stride Rite and Saucony,” said David M. Chamberlain, Stride Rite’s chairman and CEO. “The addition of Saucony to our portfolio of nationally recognized footwear brands provides us with a well-known technical athletic brand with loyal customers and solid growth prospects.”

Chestnut Securities, Inc. and Wilmer Cutler Pickering Hale and Dorr LLP served as financial advisor and legal counsel, respectively, in connection with the transaction.

Sport Chalet execs to sell Class A shares to repay loans
Sport Chalet (Nasdaq: SPCH) executives — CEO Craig Lavra, CFO Howard Kaminsky and Executive VP Dennis Trausch — have adopted a stock trading plan to sell shares of their Class A common stock.

Trausch’s plan starts on Sept. 15, while Levra and Kaminsky’s plans go into effect Oct. 3.
They are subject to certain price restrictions and other contingencies established in the plans. Levra is selling 90,000 shares; Kaminsky, 70,000; and Trausch, 7,500.

They are selling shares to raise funds to repay loans, which were used to pay the exercise price and tax withholding obligations from the exercise of options, a statement said. In addition, Levra’s and Kaminsky’s loans also include the payment of additional tax obligations from the proposed transfer of Class B shares from the Olberz Family Trust following completion of the previously announced recapitalization plan.

The plans, effective for a term of four months, will allow Levra, Kaminskyand Trausch to sell shares of common stock through Wedbush Morgan Securities during the term.

Gaiam finalizes GoodTimes acquisition
Gaiam (Nasdaq: GAIA) has completed the acquisition of GoodTimes Entertainment’s assets for $35 million in cash and an assumption of certain liabilities. The acquisition was financed from existing cash on hand. GoodTimes Entertainment is a media company that creates and distributes entertainment programming and home video products through various channels, including TV, theaters, retailers and the Internet. Its library contains wellness franchises, children classics and numerous theatrical releases. Gaiam said it expects to generate over $200 million in annual revenues. Gaiam, which calls itself a lifestyle media company, will continue to seek acquisitions to complement its internal growth, which during the second quarter accelerated to 27 percent. It already owns and is incorporating RealGoods.

Sears board OKs buyback
The board of directors of Sears Holdings Corp. (Nasdaq: SHLD) has approved a common share repurchase program to acquire up to $500 million of its common shares. It had approximately 165 million shares outstanding on Aug. 31, 2005. The shares will be purchased in the open market or in privately negotiated transactions, the company said. Timing will be dependent on prevailing market conditions, alternative uses of capital and other factors.

Court works to freeze money in Reebok insider trading case
Defendants in a case of suspicious trading in Reebok International (NYSE: RBK) securities must place foreign gains in frozen U.S. brokerage accounts under a court order, regulators said. The preliminary injunction marks a step forward for the SEC in a case of trading misconduct and phony identities the agency said were orchestrated through a web of personal and online connections stretching from Croatia, Germany and London to New York. The order was issued against Sonja Anticevic; her nephew, David Pajcin; Zoran Sormaz; Perica Lopandic; Ilija Borac; and various unknown persons. Regulators last month charged eight people, including Anticevic, with insider trading in Reebok share options, according to an SEC statement. Central to the case, the SEC charged, was Pajcin, a former broker from Clifton, N.J., and Anticevic’s nephew. The SEC said he placed or directed some of the Reebok trades and tipped off other defendants who placed Reebok trades.

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