To scope and ALL: RE BFIT. Shorted this puppy yesterday at $17.25
and today at 173/4 and 1713/16. It closed at 181/8 and its 52 week
high is 1915/16. IMO, BFIT is just one more worhtless "product"
courtesy of this overpriced market. BFIT is now my second largest
short position. I agree with your assessment:
>> It is like stealing candy from a baby. Worth only $6.00<<
and think there is a very good chance it may see the new year under
$10 [despite all the crying babes that exercise there and may be long
the stock]. Here is why:
BFIT is the largest exercise gym chain in the US. A quick look at
their balance sheet (latest 10Q) shows an outrageously leveraged
company:
sec.gov
Stockholder equity is at only 9.48% of total assets. (About as bad
as I have seen)
For those who feel better with other leverage ratios:
debt/equity ratio (total liabilities/stockholders' equity)= 9.54X
(this is what I call leverage Italian style! Italians are famous for
liking to start busineses with 0 equity. All borrowed if they can
get away with it the D/E ratio they like is infinite!)
Long term debt/equity=4.06X equally bad.
BFIT also sports a negative working capital (current assets - current
liabilities) so it also has liquidity problems that require
continued refinancing of debt. Look at the latest such deal:
biz.yahoo.com
I guess the good news is that even though they are not decreasing
their long term debt the interest is going down to 97/8% from 13%.
Given the precarious financial situation, "if the wind blows in the
wrong direction", even for e short while, this company goes under.
One interesting figure is the allowance for doubtful receivables
which stand at a whooping 30.66% of receivables! (about as high as I
have seen!). This has to do with the way gyms work. Everyone signs
up the second week of January but by late February people have
stopped going to the gym. From these quitters (have not you been one
of them at some point? I have) some cancel (if they can) others stop
paying their membership fees.
On the plus side even though they were forced by the SEC to restate
their financial statements to adjust for revenue recognition. The
accountants seem to be playing an ethical game.
Well, you would say, "Pancho if this business is a gold mine and the
return on investment/cash flow is very attractive who cares about the
leverage?"
Well if you look at revenue growth is has been small. 97 (nine
months) versus 96 (nine months) show an increase of 2.9%. The 10K
shows similar growth rates.
Perhaps margins are terrific (i.e., this is a "cash cow" like MO).
Well if we go to the income statement and were to assume they were
100% equity financed (so that we could take away the burden of
interest expense). We see that ignoring debt service, instead of a
substantial loss we would see a meager 2% of revenues operating
profit, and this is before taxes!
What this tells me is that the GYM business is worst than AOL's
$19.95 flat rate. The amount people are willing to pay for
memberships is not adequate to provide a decent return to investors.
Of course if we throw in the debt service we end up with a 1997 nine
month loss per share of ($1.68).
Cash flows from operations are terrible have a look yourself:
BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF
CASH FLOWS - (CONTINUED) (In thousands) (Unaudited) <CAPTION> Nine
months ended September 30 ----------------------- 1997 1996
---------- ---------- (as restated)<S> <C> <C> SUPPLEMENTAL CASH
FLOWS INFORMATION: Changes in operating assets and liabilities, net
of effects from the sale of a fitness center, were as follows -
Increase in installment contracts
receivable................................. $ (99,817) $ (60,113)
Increase in other current and other assets... (13,307) (4,645)
(Increase) decrease in deferred membership origination
costs.......................... (1,641) 1,845 Decrease in accounts
payable................. (1,187) (8,189) Increase (decrease) in
income taxes payable.................................... 160 (1,527)
Decrease in accrued and other liabilities.... (5,369) (5,057)
Increase (decrease) in deferred revenues..... 4,372 (15,516)
---------- ---------- $ (116,789) $ (93,202) ========== ==========
Cash payments for interest and income taxes were as follows -
Interest paid................................ $ 39,445 $ 39,271
Interest capitalized......................... (691) (173) Income
taxes paid, net....................... 140 1,892 Investing and
financing activities exclude the following non-cash transactions -
Acquisition of property and equipment through capital
leases/borrowings.......... $ 3,585 $ 3,873 Repayment of long-term
debt using proceeds from sale of property and equipment........ 6,007
Of course, there is always the possibility of alternate source of
revenues (just like for AOL) I present the BS from the 10K so that
you decide yourself if you believe these are the type of things that
will turn the business around:
GROWTH OPPORTUNITIES The Company currently generates substantially
all of its revenues from the sale of membership plans and the receipt
of dues. Management believes that it can increase and diversify its
revenues by leveraging its strong brand identity, extensive
distribution infrastructure (approximately 320
facilities),significant member base (approximately four million
members) and frequency of visitation (in excess of 100 million visits
in 1996) by offering a number of ancillary products and services. In
order to pursue these growth opportunities, the Company plans to: -
Sell Nutritional Products-- The Company has successfully concluded
test marketing certain nutritional products, predominantly vitamins
and weight control supplements, and is launching the sale of these
products to members through its fitness centers and telemarketing. -
Provide Outpatient Rehabilitation Services-- The Company plans to
contract with providers of health care programs and services whereby
certain of the Company's existing facilities will also be used for
comprehensive outpatient rehabilitation services. The Company
believes it has opportunities with a number of third party providers
and managers of health care programs and services to provide similar
outpatient rehabilitation services in additional fitness centers, and
expects to offer these services within three years to members and non-
members alike in up to 100 of its facilities primarily using
equipment already on-hand. Among others, the Company has recently
contracted with Continucare Corporation to provide such services in
certain, initially four, of the Company's fitness centers. The
Company plans to spend approximately $1 million of the proceeds from
the Offering to upgrade an initial group of its facilities to provide
rehabilitation services. - Offer Other Goods and Services-- The
Company plans to sell work-out and related apparel and market certain
financial services and direct marketing programs provided by third
parties to its members such as a co-branded credit card, credit life
insurance, dining clubs and ATMs in its clubs through in-club sales
efforts and direct marketing programs. The Company has entered into
agreements with various entities to test market the provision by
third parties of financial services to its members including the sale
of credit life insurance, pursuant to which a participant's unpaid
credit card debts are paid-off if the participant dies. The programs
are typically designed such that the Company shares in either the
revenue generated by or net profit resulting from members purchasing
the offered services. Test marketing and, ultimately, the provision
of services of this type by third parties to the Company's members do
not require significant capital expenditures by the Company.
Consequently, the Company expects to explore the sale of other
similar or complimentary services and expects to make those products
that are most successful available to all of its members.
Pancho
PS: IMO your target price of $6/share is optimistic. If you are
patient enough, IMO, you can ride this baby down to zero. That is my
plan. |
