Fitness financials: Nautilus sales slow, but margins gain ground, plus Town Sports, Under Armour, Everlast, Crocs, Foot Locker, Costco

Nautilus sales were slow, but margins gained ground, net sales for Cybex rose 12 percent compared to a year-ago loss, the Q3 profit for Town Sports moved out of the red, Under Armour's Q3 profit jumped 90 percent, Everlast Q3 revenues jumped 27 percent, Crocs' Q3 revenue tripled, Foot Locker reported October same-store sales, and Costco's October sales were up 8 percent.

Nautilus sales slow, but margins gain ground
Despite slightly depressed sales revenues year-over-year, Nautilus (NYSE: NLS) announced that its gross profit margin for the third quarter ended Sept. 30, 2006, improved to 45 percent, the highest it has been in six quarters.

Net sales for the quarter rang in at $159.6 million, compared to $163.3 million for the year-ago quarter, or down 2.3 percent. Net income for the quarter was $9.4 million, or $0.29 per diluted share, inclusive of a tax reserve reversal of $3.0 million or $0.09 per share, and inclusive of about 1.5 cents per share for stock option expensing. Excluding the tax reversal, net income for the quarter was $6.4 million, or $0.20 per share, compared with $7.7 million, or $0.22 per diluted share, in the year-ago quarter on a non-GAAP basis when adjusted for FAS 123R.

Operating income was $11.1 million for the quarter, or 7 percent of net sales, compared to $12.5 million a year ago, or 7.7 percent of net sales. G&A costs were high, the company reported, on an earnings call with analysts, partly due to legal costs in ongoing infringement battles with Icon Health & Fitness. Inventories, however, were lower than ever, reported CFO Bill Meadowcroft, due to better planning and increased shipping directly to consumers.

"Our third quarter was solid," said CEO Gregg Hammann on the call. "And we look forward to a great fourth quarter. This will provide momentum as we move into 2007."

Division by division, Tim Hawkins, president of equipment, reported:
>> Direct -- Sales hit $67.1 million, or down 1.9 percent from the previous year. Hawkins said the company expects the direct channel to be one of two (the other being commercial) that will help drive the company's growth in the next year.

>> Commercial -- Sales reached $17.9 million and were down 1.6 percent over the year-ago quarter. Hawkins said the company expects sales in this area to be up 10 percent for FY06.

>> Retail (including sporting goods and mass) -- For retail, excluding specialty, Nautilus showed sales of $27.1 million, or down 8.8 percent over the previous year. Hawkins noted the company exited from a number of treadmill SKUs and other products to refine the mix, and he stated expected growth for FY06 to be 10 percent.

>> Specialty retail -- Sales were down 10.9 percent to $15.9 million. Low traffic over the summer seemed to have changed later in the quarter, Hawkins said. He reported another expected 10 percent growth for the fiscal year in this area.

>> International -- Sales reached $14.6 million, and the company said the division should realize 20 percent growth for the year. Hawkins said Nautilus began shipping directly to China's commercial customers.

>> Apparel -- Sales were up 10.6 percent reaching $16.7 million, with growth for the fiscal year expected to reach 15 percent.

Hammann emphasized to analysts on the call that expense management has been key to the company's drive and success, with an increase in direct shipment helping to cut costs. "Less handling equals lower costs," he said.

For 2007, Hammann said the company is looking for a 10 percent net sales growth and 20 percent to 30 percent in earnings growth.

Cybex jumps net sales by 12 percent compared to year-ago loss
Making a statement that the company has turned the corner, Cybex (AMEX: CYB) showed net sales for the third quarter ended Sept. 30, 2006, of $29.849 million, compared to $26.69 million a year ago, or an increase of 12 percent.

Of those sales, cardiovascular equipment accounted for $15.1 million, or an increase of 8 percent, and strength equipment totaled $12.1 million, or an increase of 21 percent. Other areas, including the Arc Trainer, were relatively flat, reported CFO Art Hicks, on a call with analysts.

"Q3 was a solid quarter," said CEO John Aglialoro, noting double-digit growth. "Compared to the industry, we're doing well."

On a GAAP basis, the company reported net income for the third quarter of 2006 of $817,000, or $0.05 per diluted share, compared to a net loss of $3,535,000, or a loss of $0.23 per diluted share, for the corresponding period of 2005. Excluding a third-quarter 2005 litigation-related charge, and after an adjustment to the tax provision as described below, the company's third-quarter 2005 non-GAAP net income was $346,000, or $0.02 per diluted share.

This compares to a net loss a year ago on a GAAP basis of $3.535 million. Gross profit margins, however, were down a bit to 35.4 percent compared to 35.8 percent a year go, which Hicks called "disappointing" and blamed on uncontrollables such as the cost of steel and energy.

Aglialoro on the call mentioned a revamp of its equipment lines as well as its re-entry into the home equipment market, launched at the Health & Fitness Business Show in August where it showed a prototype of its home Arc Trainer. He told listeners on the call that it fully expected to reach at least a third of its sales to the consumer market, comparing the relationship of consumer and commercial sales of other companies. They will gradually reach that as they begin to introduce high-end consumer product into 2007. He said he expected to ship the home Arc Trainer in the first quarter but will place single units in select retail stores before the holidays for them to show and to sell.

"We are excited about our re-entry into the high-end consumer market with our recent introduction of our consumer Arc Trainer," Aglialoro said in a statement. "The company is aggressively advancing our new product development pace, and Cybex is poised for an exciting new product line-up for 2007."

Aglialoro said on the call that they continue to "reinvent" the company. "The idea is, we want to have all possible price points," he said, discussing their strategy of lower-end equipment introductions while keeping the higher-end product.

"We're going to be cooking over the next six to nine months…. Now we're able to concentrate on marketing and things like cost control" with the debt and other problems out of the way, he added.

For the nine months ended Sept. 30, 2006, net sales were $88,712,000, compared to $78,646,000 for 2005, an increase of 13 percent. On a GAAP basis, the company reported net income for the nine months of $17,592,000, or $1.05 per diluted share, compared to a net loss of $2,378,000, or a loss of $0.16 per diluted share, for the corresponding period of 2005. Excluding a second-quarter 2006 reduction of the valuation reserve for deferred taxes and the third-quarter 2005 litigation-related charge, and after adjustments to the company's tax provision for each period as described below, the company's non-GAAP net income for the nine months was $2,287,000, or $0.14 per diluted share, compared to non-GAAP net income of $1,073,000, or $0.07 per diluted share, for the corresponding 2005 period.

Actual GAAP results for the nine months ended Sept. 30, 2006, include a $14,421,000 reduction in the company's deferred tax valuation reserve, resulting in a net tax benefit of $13,735,000 for the nine months. Actual GAAP results for the third quarter and nine months ended Sept. 24, 2005, included an increase in the company's litigation reserve resulting in a pre-tax charge of $4,101,000. This increase in the litigation reserve reflected the jury verdict in a patent infringement case and the reversal on appeal of a summary judgment in favor of the company in another patent infringement case. The company's appeal of the jury verdict is pending, and it continues to vigorously defend the other patent infringement suit, which has since returned to the trial level.

The company's deferred tax valuation reserve was reduced effective July 1, 2006, and the GAAP results for the quarter and nine months ended Sept. 30, 2006, include a third-quarter 2006 tax provision reflecting an effective tax rate of approximately 41 percent. The 2006 non-GAAP results include a tax provision calculated as though the company's effective tax rate for the third quarter 2006 was applicable for all of the first nine months of 2006, while the 2005 non-GAAP results include a tax provision at approximately the same effective rate. The non-GAAP adjustments have been made to provide a basis for reviewing the company's operating performance on a consistent basis for all of the periods presented.

Town Sports Q3 profit out of the red
Town Sports International's (Nasdaq: CLUB) third-quarter profit was back in the black as a result of membership and ancillary revenue growth.

Quarterly earnings rose to $785,000, or $0.03 per share, from a loss of $123,000, or a penny per share, during the same period last year. Analysts, though, were expecting net income of 13 cents per share. Revenue rose 11 percent to $109.4 million, compared with $98.2 million in the prior-year period.

Comparable club revenue was up 7.8 percent. Membership revenue grew to $89.8 million from $81 million, while ancillary club revenue increased to $18.3 million from $16.2 million.

Looking forward, Town Sports lifted its full-year adjusted earnings outlook to a range of $0.47 to $0.52 per share, up from $0.44 to $0.49 per share. Revenue estimates range between $431 million to $433 million, up from its prior outlook of $428 million to $433 million.

Under Armour Q3 profit jumps 90 percent
Third-quarter earnings for Under Armour (Nasdaq: UARM) skyrocketed 90.4 percent on revenue growth in all categories, prompting the maker of synthetic athletic apparel to raise its full-year financial outlook.

Net income rose to $16 million, or $0.32 per share, from $8.4 million, or $0.20 per share, in the year-ago period. Analysts had estimated $0.25 per share. Under Armour reported that it also received a $2.3 million benefit to net income, or $0.05 per diluted share, as a result of the impact of new state tax credits.

Net sales jumped 48 percent to $127.7 million from $86.6 million last year, exceeding analyst estimates of $119 million. The company said the sales gain was driven by the training and compression categories -- and men's, women's and youth clothing all posted double-digit revenue gains.

For 2006, the Baltimore company now expects to report a profit of $38.5 million to $39.5 million on revenue in the range of $410 million to $420 million. The previous revenue target was $400 million to $410 million.

Under Armour expects 2007 revenue and profit to grow by more than 20 percent to 25 percent from 2006 levels.

Everlast Q3 revenues jump 27 percent
Net revenues for Everlast Worldwide's (Nasdaq: EVST) third quarter increased 27 percent to $13.4 million versus $10.6 million in the same period in 2005.

The company also reported that net licensing revenues for the third quarter of 2006 were $3.0 million, as compared to $2.8 million in the same period a year ago. Revenues from sporting goods for the third quarter were a record $10.5 million compared to $7.8 million in 2005 -- an increase of 35 percent. The company said the increase was the result of organic growth, driven by new products, new channels of distribution and strong consumer awareness of the brand from the "The Contender" TV show.

Everlast said it achieved a record 29 percent increase in operating income from continuing operations to $2.2 million, versus the year-ago level of $1.7 million. The increase in operating income resulted from improved gross margins, it said.

Adjusted earnings per diluted share, excluding the $0.03 effects of stock-based compensation, and $0.06 effects of warrant issuance costs, for the third quarter of fiscal 2006 was $0.25 per diluted share, as compared to a net income from continuing operations of $0.16 per diluted share, in the 2005 comparable period.

Additionally, Everlast reiterated its guidance for fiscal year 2006, estimating net revenues ranging between $46 million to $48.5 million, EBITDA ranging between $8.7 million to $9.3 million, and diluted earnings per share between $0.68 and $0.73.

Crocs Q3 revenue triples
Crocs (Nasdaq: CROX) reported a 192 percent jump in third-quarter revenue, as demand for its colorful slip-on footwear increased.

Revenue nearly tripled to $111.3 million, from $38.3 million in the year-ago period. Quarterly income totaled $21.5 million, or $0.53 per share, compared with a profit of $7.4 million, or $0.22 per share during the same period last year. Analysts expected $0.41 on revenue of $92.2 million.

Crocs said strong sales of both its core styles and new designs exceeded expectations. "Internationally, the brand has increased retail traction, which bodes well as we prepare to launch a full line of styles overseas next year," said Ron Snyder, president and CEO.

Crocs said it expects fourth-quarter profit between $0.40 to $0.43 per share, on revenue between $92 million and $95 million. For the year, Crocs sees profit between $1.50 and $1.53 on revenue between $334 million and $337 million.

In other company news: Crocs appointed Ronald L. Frasch and Marie Holman-Rao to its board of directors. Frasch has served as vice chairman and chief merchant of Saks Fifth Avenue, a division of Saks, since November 2004. Holman-Rao served as president, design services of Limited Brands from 1997 to March 2006 and currently serves Limited Brands as a consultant.

Foot Locker reports October same-store sales

Foot Locker (NYSE: FL) reported that sales in stores open at least one year declined 0.3 percent in October. Total October sales rose 1.6 percent to $1.43 billion from $1.41 billion last year.

Foot Locker plans to report third-quarter 2006 results on Nov. 16, 2006. The company said it expects that earnings for the third quarter will be in the range of $0.39 to $0.41 per share, in line with the guidance provided at the beginning of the quarter.

Costco's October sales up 8 percent

October sales for Costco (Nasdaq: COST) were up 8 percent -- $4.59 billion compared to $4.26 billion in the same four-week period last year. Same-store sales for the total company were 4 percent. Broken out, U.S. comparable sales were up 2 percent, while international comparable sales were up 11 percent.

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