Fitness financials: Tobacco exit drops Amer's net sales, Nautilus in position to consider acquisitions, plus Brunswick, Gaiam, Big 5, Puma, Saucony, Russell, Life Time Fitness

Tobacco exit drops Amer’s YTD net sales, Precor-driven fitness division strong
The fitness equipment segment of Amer Group’s sports equipment business helped bolster the Finnish company’s bottom line, showing net sales in local currencies up 30 percent for the first nine months of 2004.

“2004 is going to be a year of good growth for Amer Sports,” said CEO Roger Talermo about the earnings release for the third quarter and first nine months of 2004 ended in September.

Overall, net sales grew 10 percent in local currencies for the company and its divisions, which include racquet sports, golf, team sports, winter sports (Atomic), sports instruments (Suunto) and fitness.

Exiting its long-time tobacco business, Amer Tobacco Ltd. ended its agreement with Philip Morris early, shutting down that division in March. Exiting from that improved EBIT by Euro 11.4 million (USD $11.54 million) for the January-to-September period compared to the same period last year, although net sales declined Euro 60.7 million (USD $77.4 million) compared to 2003.

But the fitness division held its own going into its second year with Amer after the sale by ITW announced in late 2002. Sales figures for 2004 were bolstered by the acquisitions in January 2004 of both FPI and its Icarian brand, and ClubCom.

In Euros, net sales were 151.5 million (USD $193.3 million) for the first nine months of 2004 compared to Euro 127.8 million (USD $163 million) for 2003, accounting for a 19-percent increase in Euros. The company said the fastest-growing product categories were elliptical cross-trainers, treadmills and stationary cycles.

Internationally, sales were also strong, growing outside the Americas by 38 percent. With club membership now picking up in the United States, Amer said it saw demand for equipment also starting to pick up in late 2003. Amer has continued to work to fully integrate FPI and ClubCom after the two acquisitions nearly a year ago, with the company’s goodwill related to these acquisitions up Euro 23.1 million (USD $29.5 million) as of Sept. 30, 2004.

Overall, Amer Groups net sales were Euro 797.8 million (USD $1,017.7 billion) compared to Euro 828.7 million (USD $1,057.1 billion) for the same nine-month period a year ago. EBIT came to Euro 86.9 million (USD $110.8 million) vs. 2003’s Euro 97.9 million (USD $124.9 million). Earnings per share were Euro 2.54 (USD $3.24), which included a patent litigation settlement of Euro 20.5 million (USD $26.1 million) between Life Fitness and Precor, while a year ago earnings were Euro 2.81 (USD $3.58). 

The company said it expected net sales in 2004 to grow by 5 percent.

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(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 Nov. 1.)

Nautilus continues drive to balance channels in turnaround, sees net sales grow
Marching into the final phase of its turnaround plan announced a year ago by then-new CEO Gregg Hammann, The Nautilus Group (NYSE: NLS) has driven more sales into its commercial/retail division and now will start taking steps to grow more aggressively.

In addition, the company showed about $100 million in cash in its coffers, with no debt, and said it is in a position to consider acquisitions to continue the growth “if the right opportunity presents itself,” said CFO Rod Rice in a quarterly earnings call with analysts.

Overall for the third quarter, Vancouver, Wash.-based, Nautilus announced net sales of $123.9 million, up 6 percent over the same period last year at $115.9 million. Net income for the period was $7.4 million, or $0.22 per diluted share, which was up 10 percent compared to last year’s $6.6 million, or $0.20 per diluted share.

“Our management team is very excited to have our company back in a growth mode,” Hammann said in the call. He also said that the commercial/retail and direct breakdown of about 50-50 would move slowly over the next few years until retail accounted for about 65 percent and direct-to-consumer, which a little more than a year ago was 80 percent of the business, will drop to about 35 percent.

In the commercial/retail division, net sales were $61.1 million for the third quarter of 2004, compared to $64 million for 2003. The slight drop, Rice said, accounts for a large sell-in of Bowflex units to Costco last year. International sales also grew 40 percent, to account for $11 million in revenues.

In the direct business, net sales were $62 million for the quarter compared to $51.9 million last year. Bowflex sold 52,000 units so far this year, while 49,000 were sold in 2003. Of that, 34,000 were sold direct-to-consumer this year, up from 29,000 last year. Treadclimber sales hit $11 million for the quarter and $36 million so far in 2004, with the company expected to reach the lower end of its 2004 forecast in sales, or about $50 million.

Hammann said in the call that new products should account for about 30 percent of 2004 revenues, with the Bowflex Xtreme 2 still coming this quarter and other Bowflex products planned for early 2005, including the first Bowflex without the power rod technology on which the patent expired in April 2004.

In addition, the company is doing a 30-store test of Schwinn product at Sears, mostly in the Midwest, and will introduce product at The Sports Authority later this month. Hammann also said the company would like to expand its offering at Dick’s.

Legal expenses have dropped slightly this quarter to about $1 million, after hitting $1.8 million earlier, but as the patent lawsuits against Icon go forward to a jury trial, the company said it expects costs to creep back up to about $1.5 million to $1.8 million.

“We’ve done a great job of repositioning our brands,” Hammann said. “If that puts pressure on the other guys, then that’s part of the game, isn’t it?”

RBC Capital Markets analyst Carole Buyers said in a follow-up report, “We remain comfortable with our Q4 estimate of $0.40, which represents the high end of guidance, as well as our 2005 estimate of $1.20. Our next progress report will be a measure of sell-through during the important Holiday selling season. We view this as a critical measure of the company’s turnaround effort. We are maintaining our price target of $30 (25x 2005 EPS estimate) and our ‘Outperform’ rating.”

Sales for Brunswick’s Life Fitness division up 26 percent
For the third quarter of 2004, Brunswick Corp. (NYSE: BC), parent of Life Fitness, reported net earnings of $72.9 million, or $0.75 per diluted share, for the third quarter of 2004, compared with 2003’s $37.9 million, or $0.41 per diluted share. The company said in its conference call with analysts that earnings in the 2004 third quarter benefited by approximately $0.10 per diluted share from completion of a tax audit; however, Brunswick also estimated that sales and production disruptions caused by the four major hurricanes to hit the Southeast cost it about 5 cents a share in the third quarter.

For the quarter ended Sept. 30, 2004, net sales increased 23 percent to $1,273.2 million, up from $1,036.3 million a year earlier. Operating earnings rose to $99.3 million compared with $62.5 million in the year-ago quarter, and operating margins improved to 7.8 percent from 6.0 percent.

Along with Brunswick’s marine unit, the fitness equipment unit — made up of Life Fitness, Hammer Strength, Parabody and Omni Fitness retail stores — gave the company “another excellent quarter of solid sales growth,” according to Brunswick Chairman and CEO George Buckley.

Third-quarter sales of the Life Fitness division reached $132.2 million, up 26 percent from $105.1 million in the year-ago quarter. Operating earnings for the quarter totaled $8.4 million compared with 2003’s $8.7 million, and operating margins were 6.4 percent compared with 8.3 percent a year ago. International sales were up 37 percent.

Buckley described Life Fitness’ sales growth as “spiffy” during the company’s conference call, but admitted earnings had suffered a little mainly due to materials increases (mainly steel) and pricing pressure in Europe.

“The year-over-year margin gap is narrowing as we continue to improve efficiency in U.S.-based manufacturing and restructure our overall manufacturing footprint,” Buckley added. “Our new Hungarian cardiovascular equipment plant is on schedule to open in the first quarter of next year where material costs, as well as labor, are significantly lower than in the United States (up to 40 percent). Local manufacturing will help us reduce shipping costs and improve delivery times on cardiovascular products to better serve our European customers.”

Lastly, Brunswick said that, during the third quarter, the IRS completed its routine audit of tax years 1998 through 2001. As a result, Brunswick reduced its tax reserves and, consequently, its tax provision by approximately $10 million in the third quarter of 2004 — equivalent to approximately $0.10 per diluted share in the quarter. Also, during the third quarter, Brunswick reduced its projected tax rate for the year to 32.5 percent from 33 percent, excluding the impact of the audits. The company said this was due to effective tax planning and a higher-than-anticipated tax benefit from export sales. As a result of these items, the company’s effective tax rate was 20.5 percent for the quarter.

“We are estimating diluted EPS for 2004 in the range of $2.70 to $2.75 per share. While this is above our previous estimate of $2.60 to $2.68 per share, keep in mind that this new estimate includes approximately $0.10 per share related to the completion of the four-year tax return audit. In addition, we have factored into our estimate some carryover impact of the hurricanes, which will be somewhat offset by the lower full-year tax rate,” Buckley said.

The company’s shares fell $1.29, or 2.7 percent, to $46.98 on the New York Stock Exchange on Oct. 28, off an earlier low at $46.30, because, analysts said, the company effectively lowered its fourth-quarter outlook. The new guidance equates to a $0.05 cut in fourth-quarter earnings.

Earlier, Brunswick announced that its board of directors approved a 20-percent increase in its regular annual dividend to $.60 per share from $.50 per share. The company said the annual dividend was payable Dec. 15, 2004, to shareholders of record on Nov. 22, 2004.

Gaiam hits bump in 3Q as it transitions from VHS to DVD
As it switches from VHS to DVD, revenue generated by Gaiam Inc.’s (Nasdaq: GAIA) domestic business segment, which distributes media and other proprietary products to retailers, was 35 percent lower in the third quarter of 2004 than in the comparable 2003 period. For the third quarter ended Sept. 30, 2004, Gaiam revenues were $21 million compared to 2003’s $23.5 million. Gaiam experienced higher product returns, markdowns and discounts relating to inventory markdowns and liquidation associated with the format transition from VHS to DVD. Revenue loss related to the VHS formats was $1.7 million for the quarter with 70 percent impact on operating profit, as net VHS sales were below zero for the quarter. The sales returns and deductions also negatively impacted gross margin, which declined from 52.1 percent in the third quarter of 2003 to 46.7 percent for the comparable 2004 period.

Big 5 same-store sales up 2.6 percent
For the 2004 third quarter, Big 5 Sporting Goods Corp.’s (Nasdaq: BGFV) same-store sales increased 2.6 percent versus the same quarter last year, marking the company’s 35th consecutive quarter of same-store sales growth over comparable prior periods. For the quarter ending Sept. 26, 2004, the retailer’s net sales increased 6.8 percent to $195.8 million from $183.3 million in the third quarter of fiscal 2003. Net income increased to $8.4 million, or $0.37 per diluted share, compared to 2003’s net income of $6.7 million, or $0.30 per diluted share. “Once again we produced comp store gains across each of our five geographic regions and for each of our three major merchandise categories — footwear, apparel and hard goods. We believe that we are well positioned to continue this momentum through the remainder of 2004 and beyond,” said Steven Miller, Big 5’s chairman, president and CEO. The company also announced that its board of directors has voted to initiate a cash dividend, at an annual rate of $0.28 per share of outstanding common stock. The first quarterly payment, of $0.07 per share, will be paid on Dec. 15 to stockholders of record as of Dec. 1. The retailer also announced the opening of its 300th store in San Diego, Calif.

3Q 2004 marks first time Puma doesn’t beat expectations
With its competitors posting high third-quarter earnings, Puma (PUMG.DE) experienced the reverse, posting lower-than-expected sales that affected its stock price. The reason for the shortfall is attributed to sales coming in short of forecasts, marking the first time the company didn’t beat expectations. The upset sent shares tumbling to an early low of Euro 189.30 before a recovery to Euro 196.71, down 0.3 percent on the day. Although its pretax profit was up to Euro 124 million ($158 million) from Euro 104 million a year ago, earnings were lower than analysts’ estimates of Euro 129 million. As a result, CEO Jochen Zeitz said Puma would launch its awaited new growth strategy in 2006, a year earlier than investors had expected. “I cannot rule out anything for the next stage,” he told a conference call when asked whether Puma could make a larger acquisition then. Puma upgraded its 2004 earnings guidance to a 35 percent to 40 percent rise from 30 percent. Zeitz expected a good start to 2005 on the back of double-digit percentage order growth in the first quarter, adding that Puma would pay a higher dividend for 2004. (Euro currency’s dollar conversions are based on rates in late October, are estimates only and may not reflect exact earnings comparisons.)

Saucony posts 3Q results
Third-quarter net income for Saucony Inc. (Nasdaq: SCNYA and SCNYB), parent of Hind, increased 59 percent to $3.4 million in the third quarter of 2004, compared to $2.2 million in the third quarter of 2003. For the quarter ended Oct. 1, 2004, diluted earnings per share increased to $0.45 per Class A share and $0.49 per Class B share, compared to 2003’s diluted earnings per share of $0.32 per Class A share and $0.35 per Class B share. Net sales for the third quarter increased 32 percent to $42.3 million, compared to 2003’s $32.0 million. Domestic net sales increased 38 percent to $31.3 million, compared to $22.6 million in 2003. Its domestic sales increase in the third quarter of 2004 was due primarily to increased footwear unit volume and, to a lesser extent, increased Hind apparel unit volume and increased sales at our factory outlet stores. International net sales increased 17 percent, to $11.0 million in the third quarter of 2004, compared to $9.4 million in the third quarter of 2003.

Its backlog of open orders scheduled for delivery within the next five months (October 2004 to February 2005) increased 7 percent to $46.6 million, compared to 2003’s $43.5 million. The increase is attributed to the growth in its technical running footwear category in both its international and domestic markets and to the impact of a weaker U.S. dollar. The company’s mid-priced crossover and originals categories did not meet its expectations, though. The open order backlog for delivery in the next 12 months increased 7 percent to $62.9 million, from 2003’s $58.8 million.

Despite strong 3Q, Russell lowers 4Q forecast
Russell Corp. (NYSE: RML) said that third-quarter profit rose 46 percent, driven by higher sales in its activewear business and a lower tax rate. For the three months ended Oct. 3, 2004, its earnings rose to $26.9 million, or 82 cents per share, from $18.5 million, or 56 cents per share, a year ago. Revenue rose 9 percent to $422.7 million from $388 million, driven by increases at the company’s activewear group, athletic group and international segment. Russell’s tax rate for the quarter was 23.3 percent, reflecting a $4.5 million benefit from the closure of federal tax audits from earlier years. Despite a good third quarter, Russell has lowered its forecast for the fourth quarter, expecting earnings per share of between 30 cents to 40 cents compared with an earlier forecast of 42 to 49 cents. “The benefits of anticipated sales increases and ongoing savings initiatives are expected to be offset in the fourth quarter by increases in fiber, transportation and energy, start-up costs associated with the new Merendon facility in Honduras and continued pricing pressures in the Artwear market,” said Jack Ward, chairman and CEO.

Life Time Fitness reports 3Q numbers
Third-quarter revenue for Life Time Fitness (NYSE: LTM) grew 19.9 percent, but operating expenses were up 20 percent over last year. For the quarter ending Sept. 30, 2004, the company’s revenue was $79.2 million from $66.0 million during the same period last year. Total operating expenses during the third quarter totaled $61.8 million compared to $51.6 million for the same period in 2003, driven by increased expenses to support new centers, membership growth and presales activities, according to Life Time. Net income in the quarter grew 39.8 percent to $7.9 million, or $0.22 per diluted share on 35.4 million shares — compared to 2003’s $5.7 million, or $0.20 per diluted share on 28.1 million shares. Life Time also reported that membership dues revenue for the third quarter grew 22.1 percent to $52.5 million from $43.0 million in 2003. Same-center revenue increased 7.6 percent during the third quarter compared to the prior-year period. During the third quarter, it opened Dallas centers in Garland, Sugar Land and Flower Mound, with two more planned for November. The company began selling shares on the New York Stock Exchange on June 30, 2004.

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