Fitness financials: Voting advisory firms reject Sherborne's bid for control of Nautilus board, plus Forzani Group, Iconix, Collective Brands, Finish Line, Costco, Wal-Mart

Voting advisory firms reject Sherborne’s bid for control of Nautilus board, stock up on Dick’s partnership

Three independent voting advisory services have all issued recommendations to their clients, saying that Sherborne Investors LP’s bid for control of Nautilus’ (NYSE: NLS) board is not in the interest of all shareholders. Sherborne is an investment firm that owns 7.9 million shares of Nautilus and has initiated a proxy battle.

Each advisory service — ISS Governance Services, Glass Lewis & Co., and PROXY Governance — has rejected Sherborne’s proposal to remove four directors and replace them with four Sherborne nominees. The governance firms’ clients include institutional investors, mutual funds, pension funds and other fiduciaries.

ISS and Glass Lewis both recommended shareholders vote to remove directors Peter Allen and Donald Keeble and replace them with nominees supported by Sherborne Investors.

But the advisory firms said in reports that investors should not remove two other directors, Evelyn Follit and Diane Neal. If all four are replaced with the dissident directors, Sherborne would gain control of the seven-member board.

ISS Governance Services indicated in its recommendation: “On the whole, we note that while the dissident has highlighted some of the issues at the company, they have not presented any specific solutions. Comparatively, the management’s plan includes detailed initiatives to address the problems at the company. As such, it is difficult to ascertain if the dissident’s plan is superior to the more detailed plan presented by management.”

In its weekly bid to sway shareholders to its side, Nautilus sent out a letter (click here to read) on Dec. 5 to shareholders highlighting changes at the company under new CEO Bob Falcone’s direction, urging shareholders to stick by Nautilus’ plan of action.

“Despite the fact that Sherborne appears to be stuck in ‘fight mode,’ (the) board and company has continued to move forward with our turnaround plan, implementing the cost reductions and evaluating the potential divestitures of non-core assets,” it wrote. “We agree with Sherborne that ‘a fresh, realistic and straightforward attitude on the board could make a major difference to the shareholder value of Nautilus’ — we already have that attitude and we have already taken actions to realize shareholder value.”

Sherborne followed up with its own letter (click here to read) on Dec. 10 to Nautilus shareholders urging them to vote for all of its nominees to the company’s board. With Nautilus’ share price falling 62 percent in the past two years, Sherborne said it feels strongly that immediate action is required to enhance shareholder value.

“On its current course, we believe the company is facing a prolonged period of underperformance and a material risk of failure,” the Sherborne letter said. “There is a better way to unlock the value hidden in Nautilus, and we ask for your support to enable us to implement a fresh approach that can create value for all shareholders.”

Sherborne wants to see the roles of chairman and CEO separated, and said Nautilus’ previous offer of two board seats is insufficient.

“We would have been locked into an ineffective position with only two directors out of 10 and would have been subject to an onerous company-drafted ‘standstill’ agreement, which could have effectively precluded us from taking any matters directly to shareholders and from voting our shares in what we believe to be the best way,” Sherborne wrote in the letter.

The special meeting is scheduled for Dec. 18.

Separately, shares of Nautilus rose on Dec. 7, after an analyst raised his price target on the stock and forecast gains from a partnership with Dick’s Sporting Goods.

The stock gained $1.01 to $7.08 in afternoon trading. It closed day’s trading at $7.

In a client note, D.A. Davison analyst Reed Anderson forecast gains from a partnership with Dick’s Sporting Goods that will “essentially double the assortment of Nautilus products starting next fall.”

Anderson kept a “Neutral” rating on the stock but raised his price target by $0.75 to $6.25 and said management is taking the right steps to better performance later in 2008.

Forzani Group’s profit up 6 percent

The Forzani Group (TSX: FGL), Canada’s largest retailer of sporting goods, reported third-quarter net earnings of CDN $12.6 million (USD $12.5 million), or CDN $0.36 (USD $0.35) per share — up 6 percent over the prior year’s third quarter of CDN $11.9 million (USD $11.8 million), or $0.35 (USD $0.34) per share. Cash flow from operations was $0.63 (USD $0.62) per share versus $0.70 (USD $0.69) in the prior year.

Retail system sales for the quarter were CDN $344.6 million (USD $342.9 million), an increase of 1.5 percent from the comparable 13-week sales of $339.5 million (USD $337.8 million). The increase came despite aggressive pricing actions taken in response to the stronger Canadian dollar, it said.

Same-store sales in corporate locations were down 2.4 percent and increased 3.0 percent in franchise locations, for an overall same-store sales decrease of 0.7 percent. The same-store sales decrease is compared to a very robust 7.7 percent increase in the third quarter of fiscal 2007.

Revenue, consisting of corporate store sales, wholesale sales, service income, equipment rentals, franchise fees and franchise royalties, was $333.5 million (USD $331.9 million), down $12.8 million (USD $12.7 million), or 3.7 percent from the comparable period last year.

Combined gross margin for the quarter was 34.2 percent of revenue, or $113.9 million (USD $113.3 million), compared to 34.5 percent, or $119.4 million (USD $118.8 million) in the previous year. Forzani said the decrease is a result of an aggressive pricing strategy in light of the deterioration in the U.S. dollar throughout the quarter and the impact of a slower start to the winter selling season where the company typically realizes the benefit of higher margins on winter apparel.

Earnings before interest, taxes and amortization were $32.9 million (USD $32.7 million), or 9.9 percent of revenues, compared to $31.4 million (USD $31.2 million), or 9.1 percent of revenues for the 13-week period last year.

(Conversion of Canadian dollars into U.S. dollars is for information only, is not necessarily relative to earnings, and is based on the currency rate as of Dec. 7.)

Moody’s affirms Iconix brand ratings

Moody’s Investors Service affirmed its ratings and a stable outlook for Iconix Brand Group (Nasdaq: ICON), which owns and licenses such brands as Danskin Fitness, after the company said it would increase an existing loan.

The company said it intended to increase its existing term loan to about $270 million from $210 million and will use the increase to fund the buyout of the Starter brand from Nike.

Moody’s affirmed a rating of ‘B1,’ or highly speculative probability of default rating, and speculative, or ‘Ba2,’ rating for the company’s secured term loan. It also affirmed a highly speculative, or ‘B3,’ rating for the company’s $287.5 million in senior subordinated notes.

The ratings affect about $550 million of debt securities.

Moody’s said Iconix’s B1 corporate family rating reflects its relatively stable and predictable revenue streams from royalty payments received by the company. The stable outlook reflects expectations that the company will maintain its financial metrics and stable licensing revenue, it added.

Collective Brands profit falls 12 percent

Collective Brands (NYSE: PSS), parent of Saucony and Hind, said its third-quarter profit dropped almost 12 percent on costs tied to its acquisition of the Stride Rite chain in June.

The company, which changed its name earlier this year from Payless ShoeSource, reported earning $25.5 million, or $0.39 per share, for the three months ended Nov. 3, compared with $28.9 million, or $0.43 per share, during the same period a year ago.

Not including the effect of $28.6 million in purchase accounting, the company said it earned $33.3 million, or $0.51 per share.

Revenue for the quarter rose 18 percent from $703.4 million last year to $830.7 million.

Finish Line Q3 same-store sales drop

Finish Line (Nasdaq: FINL) said third-quarter same-store sales fell 3.6 percent, hurt by a calendar shift and soft results at its stores.

Same-store sales for Finish Line dropped 3.2 percent, while Man Alive same-store sales slid 9.8 percent. Same-store sales for the period ended Dec. 1 were compared with results for the period ended Dec. 2 last year.

Third-quarter total sales from continuing operations declined 4 percent to $268.7 million from $280 million. The company said the calendar shift resulted in an extra week last year. The shift pushed about $6.7 million in additional sales related to an extra week for the back-to-school selling period into the third quarter of 2006.

The company added that it expects a third-quarter loss on expenses related to its proposed $1.5 billion Genesco acquisition and related legal costs as well as charges from closings its 15 Paiva stores earlier in the year.

The company anticipates a third-quarter loss between $0.34 and $0.36 per share, which includes about $0.12 per share in proposed buyout and related legal expenses and $0.07 per share for the Paiva closings.

Excluding the costs, Finish Line expects a loss between $0.15 and $0.17 per share.

Late last month Finish Line received a subpoena from New York federal prosecutors related to its proposed acquisition of Genesco. Finish Line agreed in June to pay $1.5 billion for the shoe retailer, but has tried to back out of the deal.

Costco November same-store sales up 9 percent

Costco Wholesale (Nasdaq: COST) reported a 9 percent increase in same-store sales for the November period, driven by double-digit growth in its international segment.

Costco said same-store sales rose 6 percent in the U.S. segment and 21 percent internationally. The domestic segment benefited from higher gas prices, while international gained from the weak U.S. dollar. Excluding those two factors, same-store sales would have risen 4 percent domestically and 7 percent internationally.

For the month of November, net sales were $5.72 billion for the month of November, an increase of 13 percent from $5.04 billion in the same four-week period last year.

Wal-Mart same-store sales up 1.5 percent for November

Wal-Mart Stores (NYSE: WMT) said its November sales at U.S. stores open at least a year grew 1.5 percent excluding the impact of fuel. Including fuel, same-store sales rose 1.9 percent for the four weeks ended Nov. 30.

Total sales for the month rose 8.4 percent to $31.72 billion from $29.27 billion a year earlier, including a 4.8 percent jump at Wal-Mart Stores, a 8.7 percent rise at Sam’s Club and international sales growth of 18.6 percent.

Looking ahead, Wal-Mart Stores sees December U.S. same-store sales growing between 1 percent and 3 percent.

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