CHICAGO — Bally Total Fitness is taking a close look at all its clubs nationwide after a drop in its third-quarter financials. By evaluating all of its existing operations, the fitness chain is looking to achieve an optimal club footprint and improve returns, says Barry Elson, chairman, in an investor conference call.

The board of directors, which recently shrunk to four members with the resignation of John Rogers Jr., authorized incremental spending of $2.5 million to upgrade 100 of the company's top clubs in major cities.

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

The chain also plans to sell its underperforming clubs and arrange sale-leasebacks to earn revenue. However, Bally leases more buildings than it owns, says Rick Caro, president of Management Vision, so the revenue earned might not go far. According to Dec. 31, 2005, club breakout numbers, Bally owns 46 health clubs and leases 363 clubs, says Matt Messinger, Bally spokesperson.

Franchising in select geographic areas is another part of Bally's strategy. 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. The company plans to open five clubs in 2007, three of which replace existing clubs. In 2008, Bally will open two clubs, which will both replace existing clubs, Messinger says.

During a recent investor conference call, Bally's management also announced that the company may enter in a joint venture agreement. Speculation has been that one potential player might be Planet Fitness, which recently bought World Gym. When asked on the investor call about that speculation, Elson would only say that Bally is talking to several parties, and it is premature to talk about any specific negotiations. Messinger also declined to comment beyond the public information available on the company's plans.

The changes Bally has proposed are a good start, Caro says, but the chain must solidify a strategy for marketing, pricing, staffing and programming and deal with debt due next October, Caro says.

“I'm hoping that they will be able to achieve a successful refinancing of the debt with respect to the subordinated notes, but until that happens, we'll take a cautionary view,” he says.

Bally Third Quarter Financial Snapshot

• A rise in expenses, unfavorable pricing and membership trends led to a third quarter net loss for Bally Total Fitness. 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 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 increased due to the $5.4 million in severance payments to Paul Toback, Bally's former president and CEO.

• Net revenues for the third quarter increased $0.5 million, and membership revenue increased 1 percent.

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