Nautilus Inc. reported net earnings slumped 29.5 percent in the second quarter on a modest sales decline.

Earnings fell to $2.5 million, or 8 cents a share from $3.53 million, or 11 cents, a year ago.

Total revenue was $77.0 million compared to prior year of $78.5 million, down 1.9 percent.

Direct segment sales decreased 13.0 percent to $39.1 million primarily due to expected declines in TreadClimber sales.

Retail segment sales increased 12.7 percent to $37.1 million, reflecting robust growth across traditional and e-commerce partners in multiple product categories.

Total company gross margins decreased by 350 basis points to 49.8 percent due to a shift in segment mix, and lower margins in the Direct segment, that more than offset higher Retail segment margins. Direct margins decreased by 380 basis points due to unfavorable overhead absorption related to lower volumes and increased TreadClimber® discounting.

Retail margins increased by 100 basis points due to improved product mix and the reduction of certain warranty reserves.

Operating expenses were approximately flat as a percentage of net sales due to expense management and the reversal of a reserve related to a settled royalty dispute.

Operating income of $3.8 million compared to prior year of $6.6 million, with operating margin of 5.0 percent, down 340 basis points versus prior year.

Income from continuing operations for the second quarter of 2017 was $2.6 million, or $0.08 per diluted share, compared to income from continuing operations of $3.7 million, or $0.12 per diluted share in the prior year quarter. EBITDA from continuing operations totaled $6.2 million compared to $8.5 million in the prior year period.

At June 30, 2017, cash and marketable securities increased to $85.4 million and debt decreased to $56.0 million, compared to $79.6 million and $64.0 million, respectively, at December 31, 2016.

Q2 2017 YTD Highlights

All comparisons relate to the first six months of 2016 unless otherwise indicated:

  • Revenues:
    Total revenue was $190.3 million compared to prior year of $199.5 million.
    Direct segment sales decreased 9.8 percent to $113.8 million primarily due to lower TreadClimber® sales.
    Retail segment sales increased 4.4 percent to $74.9 million, reflecting sales increases across a variety of accounts.
  • Gross Margins:
    Total company gross margins decreased by 170 basis points to 52.6 percent due to a shift in segment mix, and lower margins in the Direct segment, partially offset by higher Retail margins.
  • Operating income decreased by 36.1 percent to $16.5 million and operating margin decreased by 430 basis points, from 13.0 percent to 8.7 percent.
  • EBITDA from continuing operations decreased by 28.6 percent to $21.1 million.

Bruce M. Cazenave, chief executive officer, stated, “Second quarter 2017 results were in-line with our expectations. Solid double-digit revenue growth and increased gross margins in our Retail segment were driven by strong performance in our traditional retail and Octane Fitness businesses, and across several product categories. In our Direct Segment, we saw increased sales of the recently launched Bowflex Hybrid Velocity Trainer, ‘HVT’, and continued gains in the Strength category, which were more than offset by continued declines in TreadClimber sales despite increased discounting.”

Cazenave continued, “Our second quarter performance gives us the confidence to reiterate our 2017 full year guidance of 5 percent-7 percent growth in revenues and operating income. We expect to return to double-digit top line growth for the back half of 2017 due to a number of factors. In our Direct segment, expected growth from multiple product offerings, including our Bowflex Max Trainer and the added new HVT offering, along with comparable quarter results reflective of reduced TreadClimber sales, will enable us to return to growth in this segment. In our Retail segment, we anticipate continued solid results driven by expanded product offerings across our Octane, Nautilus, and Bowflex brands, which are expected to garner broad commercial, traditional retail, and e-commerce placement this Fall.”

Segment Results

Net sales for the Direct segment were $39.1 million in the second quarter of 2017, a decrease of 13.0 percent over the comparable period last year. Direct segment sales were impacted by a decline in TreadClimber® product sales, coupled with difficult prior period comps related to the launch of the Max Trainer M7 in late Q1 2016. Operating income for the Direct segment was $2.5 million for the second quarter of 2017, compared to $7.5 million in the second quarter of last year. Operating income was impacted by the declines in net sales and gross profits, coupled with higher creative costs related to the HVT product launch. Gross margin for the Direct business declined by 380 basis points due to increased discounting for TreadClimber® products and lower volume resulting in lower overhead absorption.

Net sales for the Retail segment were $37.1 million in the second quarter of 2017, an increase of 12.7 percent when compared to $32.9 million in the second quarter last year. The increase reflected robust growth across multiple products and several key customer accounts. Operating income for the Retail segment was $6.1 million for the second quarter of 2017 compared to $4.1 million in the second quarter of last year. The increase in Retail operating income was primarily due to the higher net sales and gross margins, coupled with reversal of a $1.4 million reserve related to settlement of a royalty dispute. Retail gross margin was 34.5 percent in the second quarter of 2017, compared to 33.5 percent in the same quarter of the prior year. The higher gross margin reflected improved product mix, coupled with the experience-related reduction of warranty reserves.

Royalty revenue in the second quarter 2017 was $0.8 million, compared to $0.7 million for the same quarter of last year.

Balance Sheet

As of June 30, 2017, the had cash and marketable securities of $85.4 million and debt of $56.0 million, compared to cash and marketable securities of $79.6 million and debt of $64.0 million at year-end 2016. Working capital of $87.1 million as of June 30, 2017 was $2.2 million higher than the 2016 year-end balance of $85.0 million, as an increase in cash and marketable securities offset a decline in other working capital accounts. Inventory as of June 30, 2017 was $42.3 million, compared to $47.0 million as of December 31, 2016 and $43.0 million at the end of the second quarter last year.