Fitness financials: Stockholder files lawsuit for right to see Bally's private records, plus Gaiam, Town Sports, Big 5, Sport Chalet, GSI, Wal-Mart

Stockholder suing Bally for right to see private records
Liberation Investments LP filed a lawsuit against Bally Total Fitness (NYSE: BFT) on Nov. 10 in Delaware’s Chancery Court in New Castle County in an attempt to force it to release private company records.

Liberation Investments holds an overall 12.16 percent stake in the company — the second largest shareholder — and has said Bally “desperately” needs new leadership. It said it is considering waging a proxy fight to overhaul Bally’s board or change its bylaws so shareholders can vote to oust CEO Paul Toback. Click here to see our most recent SNEWS® story on Oct. 31, 2005, about the ongoing tug-o’-war.

Liberation’s lawsuit aims to force Bally to release its private records about the company’s recent adoption of a Stockholders Rights Plan takeover defense plan (dubbed a “poison pill” by Liberation), how it appointed some directors to the board, and retention of Russell Reynolds Associates to find independent directors and the relationship between RRA and existing directors of Bally.

The investment group said it is investigating Bally’s adoption of the plan and questions “whether all of the ‘independent’ members of the board are in fact independent of the influence of Bally’s management and whether their connections with Bally’s management were properly disclosed before they were appointed.”

In July, Liberation had lobbied for general manager Emanuel Pearlman to be allowed to join the company’s board.

That compiles Bally’s problems since its other large shareholder, Pardus Capital Management, has also begun to pursue a proxy contest, saying that it is dissatisfied with the adoption of the Stockholders Rights Plan and the retention of Russell Reynolds Associates to find independent directors for the board. Pardus has submitted three candidates’ names for board consideration that have not been pursued by Bally.

In separate news, the price of a share of Bally rose $0.21 on Nov. 11 from $6.99 to $7.20. Since Aug. 10, when its shares closed at $3, the price of Bally shares has risen 140 percent.

Good Times acquisition boosts Gaiam’s Q3 bottom line
Revenue for Gaiam (Nasdaq: GAIA) increased 43.4 percent in the third quarter — 24 percent of which was generated by recently acquired GoodTimes Entertainment’s media products. Gaiam generated $30.1 million in revenue compared to $21 million during the same period in 2004.

Gaiam’s overall percentage increase in revenue was contributed equally by the direct to consumer segment, in which revenue increased 43.2 percent to $16.2 million, and the business segment, in which revenue increased 43.5 percent to $13.9 million. Internal revenue growth was 24.4 percent for the business segment and 23.4 percent in the direct to consumer segment. Net income for the quarter was $500,000, or $0.03 per share, as compared to a net loss of $1.5 million, or $0.10 per share, for the third quarter of 2004.

Gross profit margin for the third quarter of improved 880 basis points to 55.5 percent, compared to 46.7 percent for the comparable prior-year period. As compared to the second quarter of 2005, gross margin increased 690 basis points. Gross margin improvement was primarily related to higher sales of media and kits containing media.

Gaiam said it significantly improved its bottom line performance as a result of revenue growth, a large improvement in gross margin and leveraging of operating expenses. Operating expenses declined to 52.5 percent of revenue in the third quarter from 57.8 percent of revenue last year, and the company delivered $3.2 million improvement in operating income. Third-quarter operating income was $0.9 million, compared to an operating loss of $2.3 million in the third quarter of the last year.

In September 2005, Gaiam acquired the assets of GoodTimes Entertainment and an assumption of certain liabilities for $35 million in cash. The acquisition, which was financed from the company’s existing cash on hand, is expected to be fully integrated during the next 90 to 120 days. Gaiam expects to generate over $200 million revenues in 2006.

During the third quarter Steve Case’s Revolution Living purchased $20 million of unregistered Class A common stock, and Gaiam invested approximately $7.5 million in LIME Media, a TV and radio network. Also, Gaiam raised approximately $18.7 million from the sale of unregistered Class A common stock to funds advised by Prentice Capital Management.

The company said its home media is now carried by more than 40,000 retail stores in the United States and its direct customer base exceeds 7 million. As of Sept. 30, it had over $10 million in cash, no debt and an unused $15 million line of credit.

Town Sports’ Q3 earnings driven by membership, ancillary revenue
New England club-owner Town Sports International Holdings reported a 9.5 percent increase in third-quarter revenue — $98.2 million up from $89.7 million last year.

Third quarter 2005 revenue grew 9.5 percent to $98.2 million from $89.7 million during the same period last year. For the nine months ended September 30, 2005, revenue grew 9.7 percent to $290.0 million from $264.3 million during the same period last year.

TSI said the increases in revenue were driven by growth in membership revenue and ancillary club revenue. Membership revenue for the third quarter was up 9.3 percent to $81.0 million from $74.1 million in 2004, while ancillary club revenue grew 15.0 percent to $16.2 million from $14.1 million. Same-club revenue increased 6.1 percent during the third quarter compared to the prior-year period.

Total operating expenses during the third quarter totaled $89.0 million compared to $78.6 in Q3 2004. Club operating expenses totaled $34.1 million for Q3 2005 compared to $29.8 for the same period last year. General and administrative expenses totaled $6.7 million up from $6.1 million. Depreciation and amortization expenses totaled $9.9 million also up from $8.9 million last year.

Adjusted EBITDA for the quarter decreased 3.1 percent to $19.6 million from $20.2 million in Q3 2004. As a percentage of total revenue, adjusted EBITDA margin was 19.9 percent in the 2005 third quarter, down from 22.4 percent in 2004.

Town Sports has applied to list its shares on the Nasdaq under the symbol “CLUB,” but no word yet on when it will be finalized.

Big 5 posts Q3 net income decrease
Big 5 Sporting Goods (Nasdaq: BGFV) misses analyst estimates as third-quarter profit fell 15 percent, weighed by legal costs and restatement expenses.

Its net income was $7.2 million, or $0.32 per share, down from income of $8.5 million, or $0.37 per share, last year. The company said third-quarter results included charges totaling $0.09 per share, associated with legal fees, prior restatements and its transition to a new distribution center, and gains of $0.09 per share. Excluding items, the company said it would have earned $0.32 per share in the quarter, still well below analysts’ consensus estimate of $0.37 per share.

Net sales increased by $8.8 million, or 4.5 percent, to $206.8 million from net sales, as previously restated, of $198.0 million in the third quarter of 2004.

Big 5’s same-store sales increased 3.8 percent during the third quarter versus the same 13-week calendar period last year, marking its 39th consecutive quarterly increase in same-store sales over comparable prior periods. On a fiscal quarter basis, same store sales increased 1.2 percent during the third quarter versus the third quarter of fiscal 2004. The difference in same-store sales comparisons was due to fiscal 2005 being a 52-week year and fiscal 2004 being a 53-week year and the resulting calendar shift of pre-Fourth of July holiday business out of the fiscal 2005 third quarter.

The company also said it has been receiving product at its new distribution center in Riverside, Calif., for two months and in early October 2005, it began shipping product from the new distribution center and moving product from its existing distribution center to the new facility. It expects to complete the transition to its new distribution center during the first quarter of fiscal 2006.

The retailer opened four new stores and closed one store during the third quarter. It expects to open a total of 15 net new stores during fiscal 2005, bringing its expected total year-end store count to 324 stores.

Lastly, its board again declared a quarterly cash dividend of $0.07 per share of outstanding common stock, which will be paid on Dec. 15, 2005, to stockholders of record as of Dec. 1, 2005. It initiated a quarterly cash dividend, at an annual rate of $0.28 per share, in the fourth quarter of fiscal 2004.

New stores bolster Sport Chalet’s bottom line
On the eve of opening three new stores in Arizona, Sport Chalet (Nasdaq: SPCHA and SPCHB) reported a 12.7 percent sales increase for the 2006 second quarter. Same-store sales increased 2.7 percent for the quarter.

Sales for the quarter were $81.7 million, up from $72.5 million last year, with sales from five new stores contributing $6.9 million, or 10.7 percent of the increase. Two new stores were opened in the second quarter of fiscal 2005 and three new stores were opened in the third quarter of fiscal 2005.

Gross profit increased as a percent of sales from 30.7 percent last year to 31.8 percent for the same period this year. The company said the increase was primarily due to better inventory assortments as well as an improvement in inventory shrinkage.

Selling, general and administrative expenses as a percent of sales increased to 36.9 percent for the second quarter of fiscal 2006. The increase is related to the recapitalization approved by the company’s stockholders which included the transfer of stock from the company’s founder to certain members of management and which resulted in a charge of approximately $8.6 million.

Sport Chalet said that excluding the effect of the recapitalization, SG&A as a percent of sales decreased to 26.4 percent compared to 27 percent last year. It added that the improvement reflects new store opening expenses not incurred this year as compared to additional labor and advertising expenses associated with new store openings in 2004.

Net loss for the second quarter was $5.2 million, or $0.38 per diluted share, which includes an after-tax charge of $7.8 million, or $0.55 per diluted share, related to the recapitalization. Excluding the effect of the recapitalization, net income increased 63.7 percent from $1.6 million, or $0.11 per diluted share, last year to $2.6 million, or $0.19 per diluted share, this year.

The recapitalization completed during the second quarter of fiscal 2005 doubled the company’s total number of shares outstanding, having the same effect as a 2-for-1 stock split.

Sport Chalet is expanding into its third state with the opening of three stores in Arizona. The new stores in Phoenix, Chandler and Scottsdale bring its total to 39. Craig Levra, chairman and CEO, said, “The new Arizona stores represent a major milestone in Sport Chalet’s growth, marking our entrance into our third state, and into another important area outside our core Southern California market.”

One additional Southern California store is expected to open in fiscal 2006. The company also anticipates additional store expansion to continue, with four to eight stores planned for fiscal 2007.

GSI accounting issues delay quarterly filing
GSI Commerce (Nasdaq: GSIC) will delay filing its report for the third quarter with the Securities and Exchange Commission so it can resolve the two accounting issues that led to it postponing the release of its third-quarter results Oct. 26. The company told the SEC it plans to file by Nov. 15.

The first accounting issue is an independent investigation of $283,000 in credits that GSI recorded in the fourth quarter of last year. The second is the failure of a systemic control GSI used to validate a component of its general ledger balance for accounts payable and the resulting change to a manual calculation to validate that balance.

GSI said it has concluded its investigation of the credits and completed the manual calculation to validate the general ledger balance for accounts payable. It expects the adjustments resulting from the resolution of these issues to be within the range it announced Oct. 26. That range is from a charge of $300,000 to a gain of $1.2 million.

Wal-Mart reports Q3 earnings
Wal-Mart Stores’ (WMT) earnings rose 3.8 percent in the third quarter as sales grew 10 percent. Net income rose to $2.4 billion, or $0.57 per share, from $2.3 billion, or $0.54 per share, a year ago. Earnings in the latest quarter included three items, including hurricane related costs, which reduced results by $80 million, or $0.02 per share. Net sales were $75.4 billion, an increase of 10.1 percent over $68.5 billion for the third quarter of fiscal 2005. Other income boosted overall revenue to $76.2 billion from $69.3 billion a year ago. In sales at U.S. stores open at least a year, Wal-Mart posted an increase of 3.8 percent for the quarter. In the Wal-Mart division same-store sales were up 2.9 percent. Comparable-store sales for the fourth quarter are forecast to rise between 3 percent and 5 percent.

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