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Bally Plans to Evaluate Operations and Invest in Clubs

CHICAGO -- A rise in expenses, unfavorable pricing and membership trends led to a third quarter net loss for Bally Total Fitness. The fitness operator’s nine-month net revenues, operating income and number of members all declined, and the operating income for the third quarter of 2006 dropped 11 percent compared to the third quarter of last year. Bally also experienced drops in different market segments—personal training revenue declined 1 percent, and retail products revenue decreased 12 percent from the same period last year. General and administrative charges also increased due to the $5.4 million in severance payments to Paul Toback, former president and CEO. Net revenues for the third quarter increased $.5 million, and membership revenue bumped up 1 percent.

Looking forward, Bally is fine-tuning its Build-Your-Own-Membership model, working to create a bottom-up rather than a top-down culture at the clubs and conducting member research to better target its marketing efforts. The company is also evaluating all of its existing operations in order to achieve an optimal club footprint and improve returns, says Barry Elson, chairman. As part of this process, Bally plans to upgrade 100 of its clubs in the larger cities, Elson says.

“We will direct the capital expenditure in those clubs that have a competitive advantage and growth potential going forward,” he says. “This will be easier to solve as we finish our evaluation of the club footprint.”

While Bally’s board authorized some incremental spending to improve the company’s top clubs, the chain plans to sell its underperforming clubs, arrange sale-leasebacks and franchise in select geographic areas. Bally relaunched its U.S. franchise program in June and is focusing on cities where the company doesn’t have a presence, such as Jacksonville, FL, where a new club will open next year.

During today’s investor conference call, Bally’s management also announced that the company could enter in a joint venture agreement. One of the listeners to the Nov. 10 investor conference call asked Elson if Bally was considering partnering with Planet Fitness, which recently bought World Gym. Elson responded by saying that Bally is talking to several parties, and it was premature to talk about any specific negotiations at this time.

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