Fitness financials: Town Sports downgraded on expense concerns, plus Big 5, Payless/Stride Rite, Iconix, Under Armour

Town Sports downgraded on expense concerns
A Credit Suisse analyst downgraded shares of Town Sports International (Nasdaq: CLUB), saying the company’s stock is priced right and its second-quarter results could disappoint investors.

Paul Lejuez lowered his rating to “Neutral” from “Outperform,” and held a price target of $22. In the first quarter, he said, Town Sports reported greater-than-expected marketing and operating costs, and those expenses could remain high. He expects an adjusted profit of 19 cents per share in the first quarter.

Town Sports said in the first quarter that it plans to open 15 new locations this year, but the analyst said the some of those openings have already been delayed. If the clubs are unopened at the end of the year, it could hurt the stock price.

“Given that management is targeting an unprecedented seven new clubs openings for fourth quarter, we believe there is risk that the company does not open clubs according to schedule this year,” he wrote in a client note.

Despite those risks, he said, fitness companies are popular buyout targets, and that should keep the stock price from falling.

Big 5 shares fall after analyst cuts rating
Shares of Big 5 Sporting Goods (Nasdaq: BGFV) declined on June 22, after an analyst said its stock is expensive given the possibility of weaker sales at its stores.

UBS Investment Research analyst Brian Nagel said in a note to clients that company management indicated that sales were below planned levels in April. “We believe weaker sales at the company to an extent reflect a softer macro environment in the Western U.S.,” Nagel wrote. “All of Big 5’s about 350 stores are located in the Western U.S., and more than half its units are located in California.”

He cut his rating on the company to “Neutral,” from “Buy” and left his price target unchanged at $28, saying that Big 5 is a “solid” company longer-term, but near-term shares could fall because the stock has risen 32 percent over the past 12 months, and the price doesn’t reflect the potential for further sales weakness.

Big 5 shares fell $0.85 to close at $25.21 compared to the previous day. The stock has traded between $18 and $27.38 during the past 52 weeks.

Payless’ buyout of Stride Rite OK’d by regulators
Federal antitrust regulators have approved Payless ShoeSource’s (NYSE: PSS) proposed $800 million purchase of Stride Rite (NYSE: SRR). The government has completed its review and approved the transaction without conditions, according to a Federal Trade Commission notice. Stride Rite is the parent company of Saucony and Hind.

Payless said that once the deal is completed, it would change its name to Collective Branding Inc., a holding company that will operate the Payless and Stride Rite chains separately.

The transaction is expected to close in the third quarter. Payless chief executive Matt Rubel has said the deal will add to the company’s earnings this year.

Iconix closes offering of senior notes
Iconix Brand Group (Nasdaq: ICON), parent of Danskin Fitness, closed its offering of 1.875 percent Convertible Senior Subordinated Notes due 2012. The net proceeds to Iconix from the offering were approximately $280 million, after deducting the initial purchasers’ discounts and estimated offering expenses.

Iconix said it used $38.8 million of the net proceeds to fund the net cost of convertible note hedge and warrant transactions that it entered into with affiliates of the initial purchasers. It plans to use the remaining net proceeds to invest in or acquire new brands.

Under Armour shares up on analyst’s strong note
Shares of Under Armour (NYSE: UA) rose on June 20, after a UBS analyst initiated coverage on the company with a “Buy” rating and set a $54 12-month price target.

Analyst Jeffrey Edelman wrote in a note to investors that the company has “revolutionized” the athletic apparel business and has developed a strong authentic brand image. He also wrote that Under Armour sales could grow 30 percent to 35 percent annually over the next five years, helped by expansion, new products including footwear, in-store productivity efforts and a larger vendor base. He also expects earnings to grow 30 percent a year over the next five years, as merchandising mix broadens.

Shares hit a high of $47.24 on June 20, up $1.42 from the day before, on the New York Stock Exchange. By day’s end, shares had closed at $46.35.

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