Nautilus Inc. reported earnings slid in the fourth quarter after absorbing an impairment charge for the Octane Fitness trade name. Operating income before the charge fell 21 percent due to lower gross margins and increased media spend. Revenues grew 1.7 percent.
The company is reporting certain results on an adjusted and unadjusted basis where adjusted excludes a non-cash impairment charge related to the carrying value of the Octane Fitness trade name intangible asset, as well as a tax benefit related to recent changes in the United States tax law.
Q4 2017 Highlights
All comparisons relate to the fourth quarter of 2016 unless otherwise indicated:
- Total revenue increased 1.6 percent to $127.8 million compared to the prior year quarter of $125.8 million.
Direct segment sales increased 9.9 percent to $71.6 million as sales growth across several product offerings, including the Bowflex MaxTrainer and the Bowflex HVT, more than offset the anticipated decline in TreadClimber sales.
- Retail segment sales decreased 7.5 percent to $55.5 million, reflecting the previously reported timing shift from Q4 into Q3, coupled with continued weakness in specialty and commercial customers.
- Total company gross margins decreased by 210 basis points to 48.9 percent, primarily due to margin reductions in both segments, partially offset by a shift in segment revenue mix from Retail to higher margin Direct.
Direct margins decreased by 340 basis points due to a shift in product mix to lower margin HVT and treadmills, coupled with increases in product costs due to unfavorable changes in foreign currency exchange rates.
- Retail segment gross margins decreased 380 basis points due to unfavorable product mix and increases in product costs, coupled with higher seasonal discounting.
- As a percent of revenue, operating expenses increased 830 basis points to 43.9 percent versus 35.6 percent in the fourth quarter last year, driven primarily by an $8.8 million non-cash impairment charge related to the carrying value of the Octane Fitness trade name intangible asset. Excluding the non-cash impairment charge, operating expenses were 37.0 percent of revenue.
Operating income decreased by 66.8 percent to $6.4 million compared to $19.3 million in the prior period.
Adjusted operating income, excluding the non-cash impairment charge of $8.8 million, decreased 21.3 percent to $15.2 million compared to the prior year period reflecting the lower gross margins and increased media spend.
The effective income tax rate for continuing operations in the fourth quarter of 2017 was a credit of 32.2 percent versus an expense of 36.4 percent in the prior year quarter. The current year tax rate reflects the company’s net benefit related to the reassessment of certain deferred tax assets and liabilities to reflect the impact of recently modified United States tax law.
Income from continuing operations was $8.5 million, or $0.28 per diluted share, compared to income from continuing operations of $12.0 million, or $0.38 per diluted share in the prior year quarter. Adjusted income from continuing operations, excluding the impairment charge and tax benefit related to the tax law change, was $8.3 million or $0.27 per diluted share.
EBITDA from continuing operations decreased by 58.6 percent to $8.9 million versus $21.4 million in the same quarter of the prior year. Adjusted to exclude the impairment charge, EBITDA from continuing operations decreased by 17.4 percent to $17.7 million.
At December 31, 2017, the company had cash and marketable securities of $85.2 million and debt of $48.0 million, compared to $79.6 million and $64.0 million, respectively, at December 31, 2016.
Full Year 2017 Highlights
All comparisons relate to the full year 2016 unless otherwise indicated:
Total revenue was $406.2 million compared to the prior year revenue of $406.0 million.
Direct segment sales decreased 2.5 percent to $219.4 million, primarily due to lower TreadClimber® sales, slightly offset by the introduction of the new Bowflex HVT® and higher sales in the strength category.
Retail segment sales increased 3.3 percent from the prior year to $183.9 million, reflecting sales increases across a variety of product offerings in the traditional and e-commerce channels, partially offset by weakness in sales to specialty and commercial customers.
Total company gross margins decreased by 190 basis points to 50.2 percent due to lower margins in the Direct channel and a shift to a higher Retail segment sales mix.
Operating income decreased by 32.0 percent to $36.3 million compared to $53.4 million in the prior year.
Excluding the fourth quarter impairment charge of $8.8 million, adjusted operating income was $45.1 million, reflecting the impact of lower gross margins and higher media spending.
For the full year 2017, income from continuing operations totaled $27.6 million, or $0.89 per diluted share, compared to $35.1 million, or $1.12 per diluted share, for the same period last year. Adjusted income from continuing operations, excluding the impairment charge and tax benefit related to the tax law change, was $27.4 million, or $0.88 per diluted share.
EBITDA from continuing operations decreased by 26.0 percent to $45.2 million. Adjusted to exclude the impairment charge, EBITDA from continuing operations decreased by 11.6 percent to $54.0 million.
Bruce M. Cazenave, chief executive officer, stated, “Although we achieved our fourth quarter and full year revenue and operating income guidance when excluding the non-cash trade name impairment charge, we came in considerably below the overall full year performance targets we had established for 2017. Importantly, we managed through 2017’s challenges, generating $54M of Adjusted EBITDA, while continuing to advance our long-term strategic initiatives. We also continued to strengthen our balance sheet during the year, generated $35 million of cash flow from operations and repurchased $11 million of stock in the open market.”
Cazenave continued, “As previously communicated, in 2018 we will continue executing our multifaceted plan to support achievement of our long-term growth goals. This plan envisions investment in resources including talent additions, repositioning our supply chain and inventory to maximize efficiencies and upgrading and integrating systems to realize cost synergies. Also, as always, stepping up the cadence of true product innovation and developing advanced digital capabilities that resonate well with all of our customer bases are front and center priorities, and there will be significant incremental investment in this area. As part of the plan, we recently restructured our international sales and support teams under one leader to provide added focus on a targeted doubling of international revenue by 2020. We also anticipate additional expense related to the redeployment of resources, consolidation of warehousing facilities and supply base realignment in order to support international growth. Despite these added investments and other underlying activities which are all designed to better align and position our business with key growth initiatives, we do expect all segments to return to full year top-line growth in 2018.”
Net sales for the Direct segment were $71.6 million in the fourth quarter of 2017, an increase of 9.9 percent over the comparable period last year. The Direct segment sales grew across several product offerings, including the Bowflex HVT, but were partially offset by the expected decline in TreadClimber sales. For the full year 2017, net sales for the Direct segment were $219.4 million, a decrease of 2.5 percent over last year, reflecting the decline in TreadClimber® sales.
Operating income for the Direct segment was $11.8 million for the fourth quarter of 2017, a decrease of 1.7 percent compared to operating income of $12.0 million in the fourth quarter of 2016. The decrease reflected lower gross margin rates that were partially offset by favorable consumer financing costs. Gross margin for the Direct business was 63.4 percent for the fourth quarter of 2017, compared to 66.8 percent in the fourth quarter of last year. The margin decline reflected a shift in product mix, coupled with increases in product costs due to unfavorable changes in foreign currency exchange rates.
Net sales for the Retail segment were $55.5 million in the fourth quarter of 2017, a decrease of 7.5 percent over the fourth quarter last year. The decrease in sales reflected the year over year timing shift of fall orders from Q4 into Q3 as stronger-than-usual seasonal sell-in occurred in Q3 this year. Also, there was continued weakness in the specialty and commercial channel. For the full year 2017, net sales for the Retail segment totaled $183.9 million, an increase of 3.3 percent over the prior year, reflecting high single-digit growth in mass retail accounts, partially offset by sales declines in the specialty retail and commercial channel.
Operating income for the Retail segment was $7.1 million for the fourth quarter of 2017, a decrease of 42.2 percent compared to operating income of $12.2 million in the fourth quarter of 2016. Retail gross margin was 29.5 percent in the fourth quarter of 2017, compared to 33.3 percent in the same quarter of the prior year due to unfavorable product mix and increases in product costs, coupled with higher seasonal discounting.
Royalty revenue in the fourth quarter of 2017 was $0.6 million compared to $0.6 million for the same quarter last year.
As of December 31, 2017, the company had cash and marketable securities of $85.2 million and debt of $48.0 million, compared to cash and marketable securities of $79.6 million and debt of $64.0 million at year end 2016. During the full year of 2017, the company purchased $11.1 million of stock in the open market as part of its previously announced stock repurchase program, including $6.2 million of repurchases in the fourth quarter of 2017. Working capital of $91.1 million as of December 31, 2017 was $6.2 million higher than the 2016 year-end balance of $85.0 million, primarily due to a $5.6 million increase in cash and marketable securities. Inventory as of December 31, 2017 was $53.4 million, compared to $47.0 million as of December 31, 2016. The increase in inventory is due to the addition of several new products and timing of purchases.
Share Repurchase Program
The company announced today that its Board of Directors has authorized an additional $15 million share repurchase program, bringing the total authorization under existing programs to $30 million. The company has completed approximately $3.0 million in total share repurchases under the $15 million program announced in May 2017. The balance of approximately $12.0 million under that program may be repurchased from time to time through April 25, 2019. Under the newly authorized program, shares of the company’s common stock may be repurchased from time to time through February 21, 2020. Repurchases under the company’s share repurchase programs may be made in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases will be funded from existing cash balances and repurchased shares will be retired and returned to unissued authorized shares.
Headquartered in Vancouver, WA, Nautilus Inc.’s brands include Bowflex, Nautilus, Octane Fitness, Schwinn and Universal.
Photo courtesy Bowflex