Nautilus Inc. reported net profits slumped 45.8 percent in the third quarter as weakness in the company’s Direct segment offset strength at Retail. Results were generally in line with expectations.
Net sales for the third quarter of 2018 totaled $91.1 million, up 3.3 percent compared to $88.1 million in the same quarter of 2017. The increase in net sales was driven by strong performance in the Retail segment, up 14.9 percent from the prior year quarter reflecting double-digit growth in both the mass retail channel and the specialty and commercial channel due to broad-based strength across several product offerings including bikes, treadmills and Max Trainer. Overall sales growth was partially offset by lower Direct segment sales which were down 14.8 percent and reflect a reduction in media spend of 17.7 percent versus the same period last year. All product categories in the Direct segment declined with the exception of the Bowflex LateralX trainer which was soft launched during the quarter. Royalty revenue in the third quarter of 2018 was $0.6 million, flat compared to the same quarter of last year. For the first nine months of 2018, net sales were $281.4 million, up 1.1 percent compared to the same prior year period. Gross margins for the third quarter of 2018 totaled 42.3 percent versus 46.9 percent for the same period last year, reflecting higher product costs across all channels coupled with a shift in segment revenue mix from Direct to Retail.
Operating income for the third quarter of 2018 was $6.2 million compared to $13.4 million in the same period last year as lower gross margins drove a decline in gross profit dollars coupled with higher operating expenses. The third quarter of 2017 operating expense included a $2.1 million favorable retroactive adjustment to finance fees related to a contract extension and a $1.0 million favorable settlement related to an indemnification claim. Operating expenses for the third quarter of 2018 were 35.5 percent of revenue versus 31.7 percent in the same period last year. Excluding the finance fee adjustment and indemnification-related settlement from the prior year, operating expenses in the quarter were essentially flat as a percentage of revenue versus the same period in the prior year. Through September 30, 2018, year-to-date operating expense as percentage of revenue remained flat versus prior year at 40.1 percent, even with additional investments made this year in support of strategic initiatives. For the first nine months of 2018, operating income was $18.1 million compared to $29.9 million in the same period last year.
Income from continuing operations for the third quarter of 2018 was $4.5 million, or $0.15 per diluted share, compared to $8.3 million, or $0.27 per diluted share, for the same period last year. Income from continuing operations for the first nine months of 2018 was $13.7 million, or $0.45 per diluted share, compared to income from continuing operations of $19.1 million, or $0.61 per diluted share for the same period last year. EBITDA from continuing operations for the third quarter of 2018 totaled $8.5 million compared to $15.3 million in the prior year period.
At September 30, 2018, cash and marketable securities decreased to $71.1 million, and debt decreased to $36.0 million compared to $85.2 million and $48.0 million, respectively, at December 31, 2017.
Bruce M. Cazenave, chief executive officer, stated, “Our third quarter performance was substantially in line with our expectations driven by strong growth in the Retail segment reflecting double-digit increases in both our mass retail channel as well as the specialty and commercial channel. During the quarter, we successfully launched a number of new products including the Bowflex LateralX trainer in the Direct segment and the Octane MTX Max Trainer, the commercial grade version of our popular Max Trainer line. Media spending in the Direct segment was reduced in the third quarter, as we prepared to transition our media and promotional support to the new upgraded and refreshed Max Trainer line that is planned to launch in November. We anticipate a reversal of recent sales trends in our Direct segment during the fourth quarter based on these new products and the planned marketing support behind the introduction of our exciting new digital platform.”
Cazenave continued, “We are pleased with progress on our strategic investment initiatives and are excited about our growth opportunities in 2019. Specifically, we have ramped up investments in the international channel, and key logistics and systems integration initiatives have been completed. The new products we have introduced over the last 18 months give us a good base for growth by themselves, but the new digital platform coming this quarter provides an even broader foundation for near-term and long-term growth. This upgraded platform will change the way we engage with consumers including new methods like offering value added content rich subscriptions. We remain grounded as a company focused on designing and marketing a broad range of high-quality innovative products but will be layering on a new level of enhanced customer experience with AI-driven technology that uniquely adapts to individual user desires and needs as they progress through their fitness journey. Although the initial launch leads within the Direct segment with our most popular product line, ultimately, we expect to offer it across many of our brands, product lines, and channels of distribution.”
Net sales for the Direct segment were $29.0 million in the third quarter of 2018, a decrease of 14.8 percent over the comparable period last year due to reduced media spend of 17.7 percent and a decline in Max Trainer sales partially offset by the launch of the Bowflex LateralX trainer during the third quarter. Operating loss for the Direct segment was $1.4 million for the third quarter of 2018 compared to operating income of $5.3 million in the third quarter of last year. Operating income was negatively impacted by the decline in sales and gross margins as well as an increase in operating expense. The third quarter of 2017 operating expense included a $2.1 million favorable retroactive adjustment to finance fees related to a contract extension. Gross margin for the Direct segment declined by 620 basis points which resulted from higher product costs due to rising material costs and inventory that was purchased under unfavorable exchange rates coupled with unfavorable product mix due to lower Max Trainer sales.
Net sales for the Retail segment were $61.5 million in the third quarter of 2018, an increase of 14.9 percent when compared to $53.5 million in the third quarter last year. The increase reflected robust growth across a variety of product lines driven by double-digit growth in both the mass retail channel and the specialty and commercial channel. Operating income for the Retail segment was $12.7 million for the third quarter of 2018 compared to $12.1 million in the third quarter of last year. The increase in Retail segment operating income was primarily due to the higher revenue partially offset by an increase in operating expense. The third quarter of 2017 operating expense included a $1.0 million favorable settlement related to an indemnification claim. Retail segment gross margin was 34.7 percent in the third quarter of 2018 compared to 35.7 percent in the same quarter of the prior year reflecting higher product costs due to unfavorable changes in foreign currency exchange rates.
As of September 30, 2018, the company had cash and marketable securities of $71.1 million and debt of $36.0 million compared to cash and marketable securities of $85.2 million and debt of $48.0 million at year end 2017. During the third quarter, the company purchased $1.9 million of stock in the open market as part of its previously announced stock repurchase program. As of September 30, 2018, $22.0 million remained available for future repurchases under the share repurchase program. The company has repurchased an additional $4.7 million of stock between October 1, 2018 and October 26, 2018. Working capital of $88.5 million as of September 30, 2018 was $2.6 million lower than the 2017 year-end balance of $91.1 million. Inventory as of September 30, 2018 was $55.5 million compared to $53.4 million as of December 31, 2017 and $57.6 million at the end of the third quarter last year.
Photo courtesy Bowflex