Shares of troubled gym (sorry, fitness center) operator Bally Total Fitness (NYSE:BFT) dropped 7% this morning after the company reported a small 2% revenue gain and a widening net loss.
The company's No. 1 goal for full-year 2004 is to increase gross committed revenue -- which it did by 21% in the first quarter. Don't get too excited: Management reaffirmed its 7% to 9% growth target this year. Ah, it almost looked like something exceptional was at work.
The company's No. 2 goal is to increase free cash flow. That extremely important metric was up $9.5 million last year to a negative $700,000. Ouch! Yes, the new modified cash method of accounting books expenses when they are incurred. Everyone knew that -- and that is good. But a loss is a loss.
Ironically, the backdrop for Bally couldn't be better. Two-thirds of Americans are overweight and, unless they start to exercise, risk early death from heart disease and kidney failure. States like Maine are looking at proposals to promote exercise. Even fast food giants like McDonald's (NYSE:MCD) have turned to lower-fat menu options.
And while Americans once simply ignored health warnings, that may be changing. The obese, as a percentage of the U.S. population, although daunting, actually declined for the first time last year.
Meanwhile, signs of the popularity of the Atkins and South Beach diets are everywhere. Egg demand sent prices soaring and transformed the balance sheet at Cal-Maine Foods (NASDAQ:CALM). Reduced carbohydrate consumption has hurt baker International Multifoods (NYSE:IMC) and donut purveyor Krispy Kreme (NYSE:KKD).
Even big-name orange juice brands like Coca-Cola's (NYSE:KO) Minute Maid and PepsiCo's (NYSE:PEP) Tropicana have developed new products to blunt the negative impacts from these diets.
So, why is Bally a 95-pound weakling? First and foremost, there's the issue of $708 million in long-term debt. That's equal to three quarters of projected 2004 revenue! Clearly, Bally's flexibility is limited by the cement sneakers of debt.
Then there is the inability to convert the "need to exercise" message into the "rush of the couch potatoes." Until the company can flex some muscle and goose membership sales sharply, profitability is going to be decidedly underweight. Speaking of lightweight, the stock set a 52-week low last week and is at levels not seen since 1996.
To management's credit, it has cut capital spending to help reduce debt. Nutritional supplements, which have been the growth engine over the last quarters, are now paired with a weight management program to support further sales growth. That's a solid idea, but until membership growth accelerates, the paunch of debt will keep Bally (and its shareholders) huffing and puffing.
The company's name boasts the words "total fitness." After year after year of promising to improve results, Bally might be better labeled "fitness challenged."
Since W.D. originally wrote about this fallen angel and its low price to book value in March, write-offs have sent book value to a negative $4.65 a share. Ouch! Want to discuss your Dumbest Investment , or just Bally Total Fitness , with other investors? Try The Motley Fool discussion boards.
Fool contributor W.D. Crotty owns stock in Bally Total Fitness. Please pray for him.
