ANALYSIS OF FINANCIAL STATEMENTS:
I first posted an analysis on the company at SI, recommending it as a short, last November.
THE HIGHLIGHTS FROM THE INITIAL POST FOLLOW:
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 you can find )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 businesses with 0 equity
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:http://biz.yahoo.com/prnews/97/10/07/bfit_1.html I guess the good news is that even though they are not decreasing their long term debt the interest is going down to 9 7/8% from 13%.Given the precarious financial situation, "if the wind blows in the wrong direction", the company will have a hard time.
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 [this is pretty difficult at Bally's] others stop paying their membership fees [and get their credit report blemished]
Despite the above you could 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 1996 10K shows similar growth rates.
Perhaps, you could say, "Pancho, wait margins may be terrific" (i.e., BFIT 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 (a summary from the 10Q):
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30 ----------------------- 1997 1996
Cash used in operating activities............. (24,965) (14,453)
Cash used in investing activities ............ (13,781) (12,782)
Cash provided by (used in) debt transactions.. (2,961) 11,121
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[the big scam] 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. [still no signs of this in MA clubs] - 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. [still no signs of most of this stuff in MA clubs and we are in 98 already!]
[still no signs of any of this in MA clubs]
More on the next post.... |
