----------------------Long Post re BTIF -------------------------
Pancho:
From M FOOL today:
"
Bally Total Fitness Holding Corp.
(Nasdaq: BFIT)
Phone: 773-380-3000
Website: ballyfitness.com
Price (11/28/97): $18 5/8
HOW DID IT DOUBLE?
For years, Bally was running a treadmill, all but dispensing with monthly dues for its health clubs so long as customers plopped down hefty paid-in-full membership fees upfront. Deeply in debt, the company simply needed the money. Yet, sacrificing long-term profits for short-term cash flow isn't a great way to get into better financial shape.
No pain, no gain. Bally's turnaround began in October 1996 when Lee S. Hillman was named CEO, marking the final management shift from marketing types to a team more seasoned in finance and operations.
Bally's rejuvenation strategy? Boost membership while curtailing discounting and making sure that members pay higher monthly dues. To make this work, the firm is now focusing on financing membership fees. At 16% to 18% interest over three years, financing is a lucrative arrangement for Bally that now applies to over 80% of new accounts.
But Bally also needed some financial breathing room. In August, the company raised $88 million through a secondary offering of 8 million shares. Part of the money is being spent to open new clubs and to remodel or enhance existing facilities, including major changes at about 25% of its clubs where seldom-used pools, racquetball courts, and basketball courts will be scrapped.
In October, the company also managed to refinance $200 million of 13% notes through an offering of $225 million in 9 7/8% senior subordinated notes, which should cut its interest payments. A new $70 million revolving credit facility should help, too.
Investors have pumped up the jam, launching Bally for a three-bagger since April.
BUSINESS DESCRIPTION
Bally Total Fitness was spun off to shareholders of Bally Entertainment in January 1996. It's currently the largest commercial operator of fitness centers in the U.S., with about 4 million members making 100 million visits a year.
The firm operates 316 clubs, mainly in major cities, with plans to add up to 25 facilities next year. These clubs target middle-income 18- to 34-year-olds by offering cardiovascular, conditioning and strength, and aerobic training.
Membership-related fees account for most of Bally's revenue, with about a third of that coming from monthly dues, which now average $6.50 per month. That's significantly below the industry average of $30, according to the company. The move toward financed membership fees led to 22% higher average contract prices during the third quarter.
Hillman wants to expand Bally's revenues by selling nutritional products and workout clothes and marketing co-branded credit cards and other financial services through in-club sales. The clubs also now offer outpatient rehab services in conjunction with healthcare providers.
Bally competes with the YMCA and other commercial health clubs. In July, the company restated previous earnings reports after the SEC advised a change of policy regarding revenue recognition. Insiders own 16.6% of the stock.
FINANCIAL FACTS
Income Statement
12-month sales: $656.6 million
12-month income: ($19 million)*
12-month EPS: ($1.33)
Profit Margin: N/A
Market Cap: $383.1 million
(*Includes $6.5 million in special charges for restricted stock awards)
Balance Sheet*
Cash: $63.4 million
Current Assets: $264.8 million
Current Liabilities: $398.1 million
Long-term Debt: $371.8 million
(*Prior to the October debt offering.)
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.58
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Straight spin-offs are usually worth following because they often dip, only to recover with a vengeance 6 to 18 months down the road. Yet to play a turnaround story like this, you need to evaluate management's strategy, the firm's chance of selling more stock and refinancing its debt, and the dilution to result from that.
Like other health clubs, Bally has often been more interested in signing up members than in providing them with quality service. Finding this Double, then, would have required a close look at the new management team's ability to revitalize the business.
WHERE TO FROM HERE?
For the third quarter, Bally's revenues rose 5% (11% under the old revenue recognition policy), thanks in part to an 11% jump in fees from new memberships and a 24% increase in financed new memberships. For the first nine months, the company lost $1.68 per share, less than the $1.76 analysts had projected.
On November 21, Hillman said he didn't have a problem with First Call analysts' earnings estimates for FY98 of $0.29 per share (range $0.15 to $0.41). According to Reuters, he said operating margins on memberships should rise substantially, from the current 12% level to 20% "in the next several years."
Rated B minus, or "junk," by Standard & Poor's, the new debt requires no principal payments until October 2007. Bally now expects interest expenses to run about $45 million over the next twelve months.
Since fitness centers do wear out, EBITDA, or operating income before depreciation and amortization, is not a wholly satisfactory way of looking at Bally's business. Still, it's worth knowing that the EBITDA was $58.2 million for the first nine months of the year, up 71% excluding all charges. So Bally should have no trouble meeting its debt payments. Hillman projects this cash flow will increase to $100 million next year and to $120 million in FY99.
Bally now sports an enterprise value of about 6.8 times next year's projected EBITDA. On November 6, Jefferies & Co., one of Bally's underwriters, cut its rating to "accumulate" from "buy," citing the rally that pushed the shares toward Jefferies' $21 price target.
The current price seems to discount an improving situation. If management can stick to its workout regimen, Bally certainly has a chance to exorcise its remaining demons and get into even better shape. But before trying to sweat out any further gains, an investor might do well to visit a local Bally fitness center and see if the remodeling and other changes are making for happier customers.
-- Louis Corrigan
(TMFSeymor@aol.com)
--------
Looking for Trouble? Check out today's edition of the Daily Trouble.
Have You Given? The Fool Charity Fund
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.
Transmitted: 12/01/97 11:31 (double)
drsvelte |
