Fitness financials: Surge in direct sales pump up Nautilus growth, plus Amer Group/Precor, Brunswick/Life Fitness, Bally, adidas-Salomon, Reebok, Sears, Cybex, Sara Lee/Champion, Wal-Mart

Surge in direct sales offsets retail drop to drive Nautilus growth
With a company turnaround said to be on track, The Nautilus Group reported with its fourth-quarter and year-end earnings that direct-to-consumer sales exceeded expectations with sales up 42 percent. However, commercial/retail sales dropped 8.7 percent due partly to supply constraints.

“We have wrapped up our 18-month turnaround. We expect to continue double-digit growth based on our Fit One operating principles,” said CEO Gregg Hammann during a conference call with investors. “We have a three-year plan to move in into global leadership position beginning this year.”

Net sales for the fourth quarter were $169.6 million compared to $152.8 million for the corresponding period last year, or up 11 percent. Direct accounted for $84 million, and Nautilus management said it would no longer provide sales figures for specific products, including Bowflex unit sales, or average prices. Of the quarter’s net sales, commercial/retail made up $85.6 million.

“The marketing opportunity for fitness equipment is substantial. We have about 8 percent of the market share globally,” said Tim Hawkins, chief marketing officer. “We believe we can attain that 40 percent in each category as we strive to be the global leader.”

Net income during the fourth quarter was $14.2 million, or $0.42 per diluted share, up 51 percent from $9.4 million, or $0.28 per share, in the fourth quarter of 2003. For the year ended December 31, 2004, net sales were $523.8 million, compared to $498.8 million in 2003, a 5 percent increase, while net income for the year was $30.0 million, or $0.90 per diluted share, or down 4.4 million compared to $34.4 million, or $1.04 in 2003.

The company finished 2004 with cash and cash equivalents of $104.6 million, up 44 percent in 2004 compared to the prior year.

New products, the company stated, will continue to drive the growth. On the earnings call, management said it expected to introduce two new Bowflex systems later this year: one, an “Ultimate II” unit with a new electronics package, and the second being an as yet unnamed product that will go beyond the “rod” technology the product is known for. In the commercial/retail area, the company is looking to formally introduce its commercial TreadClimber the first quarter of 2005 — one which it showed to some customers in late 2004 — as well as a commercial version of its already released variable stride elliptical. Also expected are new commercial treadmills — all intended to help increase the company’s presence in health clubs and other commercial areas.

For the first quarter of 2005, Nautilus — which plans to change its name from The Nautilus Group Inc. to simply Nautilus Inc. to show it is a single company — said it estimates net sales would be in the range of $145 to $150 million, and earnings per share will grow by more than 25 percent to approximately $0.24 to $0.26. For the full year of 2005, the company said it believes net sales will grow around 15 percent compared to the prior year, and earnings will grow about 25 to 30 percent. At least one analyst said it was trimming its 2005 EPS estimate from $1.20 to $1.18 to reflect a lower-than-anticipated 1Q. RBC Capital Markets also said it was introducing a fiscal 2006 EPS estimate of $1.48, representing 25 percent earnings growth on sales growth of 14 percent. After the call, RBC said it was changing its risk qualifier from “speculative” to “above average” to “reflect Nautilus’ improved balance sheet and recent return to growth.”

Stock closed on Feb. 2, the day of the call, at $21.43 on a volume of 837,300 or down 0.10. Its 52-week high is 25.79 from late December, and its low is 14.10 from nearly a year ago.

“Now, we are preparing our organization to drive growth and invest in our future,” Hammann said in a statement. “We’re entering the first year of a three-year growth plan…. We expect to accelerate the innovation cycle to launch more new products in 2005 than in any other year in the company’s history.”

Precor fitness group shows strongest growth of Amer family
Of Amer Group’s family of well-known sports brands, Precor led in net sales with growth in 2004 with 31 percent growth in local currencies, boosted in part by acquisitions made in January 2004 of both FPI and its Icarian brand and ClubCom.

For the year in the fitness equipment division, sales reached Euro 210.1 million (USD $273.9 million), up from 2003’s Euro 175.5 million (USD $228.8 million). However, EBIT was down 11 percent for the division to Euro 23.9 million (USD $31.1 million) from Euro 26.8 million (USD $34.9 million).

Overall for Amer, which also owns Wilson, Atomic and Suunto, exiting from its tobacco business in March 2004 improved EBIT by Euro 10.1 million (USD $13.1 million), but reduced net sales by Euro 86.4 million (USD $112.6 million) compared to 2003. The group’s 2004 net sales were Euro 1.058 billion (USD $1.379 billion), down from Euro 1.094 billion (USD $1.426 billion).

The withdrawal from the tobacco business with Philip Morris was the result of an agreement on the premature termination of Amer’s license to manufacture and sell Philip Morris products as well as on the sale of certain assets. Amer Group is now only a sports equipment company, and it “aims become the world’s leading company in its field,” the 2004 year-end statement said.

The statement went on to call 2004 a year of positive trends in the sports equipment market, with demand being good. It says the fitness market grew by about 5 percent in North America, with price competition still intensive and extensive in Europe. CEO Roger Talermo said the greatest growth was in ellipticals, treadmills and stationary cycles.

Of net fitness sales, 78 percent came from North America, where sales increased by 32 percent. EBIT was partly weakened by the rising price of steel as well as the integration of the acquired businesses.

In 2005, Amer said it expects the demand for sports equipment will plateau in the United States, while demand is anticipated to keep recovering slowly in Europe and Japan. In 2005, Amer Group’s comparable net sales in local currencies are expected to grow by 3 percent to 5 percent compared with last year. Earnings per share for 2005 are forecast to be Euro 0.90-1.05 (USD $1.17-$1.37).

In other Amer business, the company will propose at its annual meeting March 16 in Helsinki, Finland, that the company name be changed to Amer Sports Oyj (Amer Sports Corporation in English). The board said that greater clarity and consistency will be achieved in corporate communications once the Amer Sports name, which has been used for marketing purposes since 2000, is also adopted as the company’s business name. It also will ask the board to approve its financial targets, noting that its primary focus is organic growth with innovative products. In addition, Amer said it intends to make “selective acquisitions that support its strategy, strengthen the position of the group and deliver shareholder value.” It stated an average organic growth target of 5 percent per year with an operating profit of 10 percent.

(Conversion of Euros into U.S. dollars is for information only, is not necessarily relative to earning, and is based on the currency rate as of Feb. 3.)

Life Fitness contributes to parent Brunswick’s sales increases
With double-digit sales increases, Life Fitness did its share to contribute to its parent Brunswick’s (NYSE: BC) increases in sales of 23 percent (16 percent organic) and an increase in net earnings of $18.9 million to $58.8 million from $39.9, or a 47-percent increase.

“What can I say? This is a record year for Brunswick,” said Chairman and CEO George Buckley, in a quarterly earnings call on Jan. 27. “We’re on track to be in double-digit margins territory again by 2006.”

The company said the increase in net earnings came on 42-percent improvement in operating earnings overall.

In the company’s fitness segment, where Life Fitness manufactures and sells Life Fitness, Hammer Strength and ParaBody equipment, sales in the fourth quarter of 2004 were $173.2 million, up 10 percent from $157.2 million in the year-ago quarter. Operating earnings declined 13 percent to $24.7 million from $28.3 million – due partly to the bad debt of a “consumer fitness customer” of $2.4 million, it was reported in the call. Operating margins were 14.3 percent, down from 18.0 percent in the fourth quarter of 2003.

Buckley said in the call that the Omni retail division was sold, which was also expected to improve margins, and a supply contract with the new owner would keep that channel open to them. He said the increases in sales were due mostly to new products, both in the Life Fitness division and in others, and would continue to be the driver to the company’s overall growth “in 2005 and beyond.” At the coming IHRSA show in March, for example, he said the company will introduce four new products there that are more “electronically oriented,” which lends to their belief that the following factors are important in coming product: infotainment, productivity and results through monitoring and user feedback, and correct biomechanics.

For the year, Life Fitness reported sales in 2004 of $558.3 million, up 15 percent from $486.6 million in 2003. Operating earnings in 2004 increased to $45.2 million from $29.8 million, and operating margins were 8.1 percent versus 6.1 percent a year ago. Operating earnings in 2003 include a $25.0 million litigation charge recorded in the first quarter of 2003 due to a settlement in an infringement lawsuit by Precor. Excluding the charge, fitness segment operating earnings for 2003 totaled $54.8 million, and operating margins were 11.3 percent.

With the new manufacturing facility in Hungary fully operational, it will be able to provide cross-trainers and other product to all areas of the globe, except North America, more efficiently, reducing lead times and freight cost to areas such as Europe, he said.

Buckley called 2004 “brutal” economically, but one where the company finished strong.
For the quarter ended Dec. 31, 2004, the company reported that net sales increased 23 percent to $1,333.8 million, up from $1,086.9 million a year earlier. For the year ended Dec. 31, 2004, the company had net sales of $5,229.3 million, up 27 percent from $4,128.7 million in 2003.

“By leveraging an estimated 11 to 12 percent sales growth with improved operating margins, we are budgeting earnings for 2005 at $3.25 per diluted share,” Buckley said. “We are estimating earnings per diluted share in the range of $3.15 to $3.30 for 2005, and $0.55 to $0.60 per diluted share for the first quarter of 2005. This compares with earnings per diluted share of $2.77 and $0.50 for the full year and first quarter of 2004, respectively.”

Bally hires turnaround strategy advisor
Bally Total Fitness Holding (NYSE: BFT) announced that the company has retained The Blackstone Group, a leading financial advisor and investment bank, to assist in its turnaround strategy. Blackstone will work with the company on evaluating and refining its business plan and developing a long-term financial strategy to improve its capital structure and maximize free cash flow, enabling Bally to focus its financial resources on its operations.

The company also said that part of the turnaround strategy might include the possible divestiture of non-core assets. There has been a great deal of speculation about the company selling its Crunch and Gorilla Fitness branded health clubs, and sources tell SNEWS® that this should expedite the sale of those assets.

“Our commitment to financial strength is a key element of the company’s turnaround plan. We recently closed a $275 million credit facility, including a $100 million revolving credit facility that is currently undrawn, and we have no debt maturities until 2007, making this the right time to proactively and strategically position the company for long-term financial strength and success,” said Chairman and CEO Paul Toback in a release. “Blackstone has unparalleled expertise in this area, and their addition to our team will be an asset to both me and the board of directors as we continue to review and consider all strategic opportunities for improving the company’s performance and enhancing shareholder value.”

adidas-Salomon hits record earnings in 2004
Based on preliminary figures, 2004 sales for adidas-Salomon (ADSG.DE) reached Euro 6.478 billion (USD $8.470 billion), a 7 percent improvement in currency-neutral terms. In euros, sales increased 3 percent from 2003’s Euro 6.267 billion (USD $8.194 billion). Currency-neutral sales increased for all brands and in all regions.

Group gross margin increased 2.3 percentage points to 47.2 percent in 2004 from 44.9 percent in 2003. The company said it is the highest level ever and reflects the impact of increased adidas own-retail activities, an improving product mix as well as a stronger euro.

Operating expenses in 2004 grew 7 percent to Euro 2.478 billion (USD $3.240 billion) from 2003’s Euro 2.324 billion (USD $3.038 billion). Group operating profit increased 18 percent to Euro 580 million (USD $758 million) versus Euro 490 million (USD $640.7 million) in 2003 and operating margin grew 1.1 percentage points to 9.0 percent in 2004 from 7.8 percent in 2003. As a result, income before taxes grew 19 percent to Euro 520 million (USD $680 million), compared to Euro 438 million (USD $573 million) in the prior year — driven by higher sales and strong gross margin improvement.

Net income for the group in 2004 increased by 21 percent to a record Euro 314 million (USD $411 million) from Euro 260 million (USD $340 million) in 2003. Earnings per share for 2004 were Euro 6.88 (USD $8.99) compared to Euro 5.72 in 2003 (USD $7.48). The earnings growth is twice as high as the initial guidance at the beginning of the fiscal year.

(Conversion of Euros into U.S. dollars is for information only, is not necessarily relative to earning, and is based on the currency rate as of Jan. 27.)

Reebok 4Q earnings up 77 percent
Reebok International reported that sales growth and a tax benefit helped boost fourth-quarter earnings by 77 percent, beating analyst expectations. Its shares rose more than 6 percent with the news.

Net income jumped to $47.7 million, or 78 cents per share, from $28.1 million, or 44 cents per share, last year. Excluding a $12 million tax gain, income for the 2004 quarter was $35.7 million, or 59 cents per share. Sales rose 16 percent to $975.1 million from $843.6 million. Analysts had predicted earnings of 52 cents per share on revenue of $909.4 million. Reebok’s numbers were helped significantly by its June acquisition of Hockey Co., which recorded sales of $59 million during the quarter.

For the full year, net income rose to $192.4 million, or $3.05 per share, from $157.3 million, or $2.43 per share, last year. Excluding the tax gain and a $7 million charge from the early redemption of debt, net income was up at $187.5 million, or $2.98 per share. Sales rose 9 percent to $3.79 billion from $3.49 billion. Analysts expected earnings per share of $2.94 on revenue of $3.72 billion.

Shares of Reebok rose $2.64, or 6.4 percent, to close at $44.24 in Jan. 27 trading on the New York Stock Exchange, approaching its 52-week high of $44.60 reached in December.

Sears to switch exchanges, reports sales
After 94 years on the New York Stock Exchange, Sears, Roebuck & Co. is switching to the Nasdaq Stock Market, once its merger with Kmart Holding Corp. is complete. According to merger documents, the combined company — Sears Holdings Corp. — has applied to list its stock on Nasdaq under a yet-to-be-announced stock symbol. Sears has been with the NYSE since 1910, using the unique one-letter stock symbol, “S.” It will continue to trade on the NYSE until the merger is complete. Kmart is currently listed on the Nasdaq.

Also, Sears reported net income of $378 million, or $1.76 per share on an average base of 214.3 million common equivalent shares, for the fourth quarter ended Jan. 1, 2005, compared with net income of $2.7 billion, or $10.84 per share on an average base of 253.6 million common equivalent shares, in the fourth quarter of 2003. The company also reported full-year 2004 net income before the cumulative effect of a change in accounting principle of $350 million, or $1.61 per share on an average base of 216.7 million common equivalent shares, compared with net income of $3.4 billion, or $11.86 per share on an average base of 286.3 million common equivalent shares, for 2003.

Lastly, Sears’ January comparable domestic store revenues increased 0.8 percent for the four weeks ended Jan. 29, 2005. Total domestic store revenues were $1.61 billion for the four-week period in January 2005, up 1.7 percent from last year’s $1.58 billion.

Cybex tops 2004 stock lists
Cybex International (AMEX: CYB) was notified by the American Stock Exchange that it was one of the top 50 stock performers for 2004. Cybex also reported that it was ranked fourth on the annual Boston Business Journal Massachusetts Top Performing Stock List. The ranking is identified by 2004 stock price appreciation. Cybex stock appreciated 235 percent during the 2004 period measured for this listing.

Champion parent lowers guidance
Sara Lee Corp. reported a 4.5 percent increase in second-quarter net earnings but lowered its guidance for the full fiscal year below current consensus estimates. In the three months ended Jan. 1, 2005, Sara Lee earned $326 million, or 41 cents a share, versus $312 million, or 39 cents, in the year-ago quarter. Analysts had been expecting a profit of 38 cents. Total sales in the quarter were $5.2 billion, up 3.6 percent from $5.02 billion a year ago. Sales of branded apparel, which includes Hanes and Champion, rose 5.5 percent to $1.7 billion, while operating profit in the unit was $149 million, up 12.9 percent.

Wal-Mart reports January sales
Wal-Mart Stores Inc. (NYSE: WMT) reported January total net sales of $19.8 billion, up 9 percent from $18.2 billion. For the Wal-Mart Stores division, January sales were $13.2 billion, up 10.7 percent from last year’s $11.9 billion; same-store sales were 3.2 percent for January compared to 5.3 percent last year.

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