Nautilus Inc. reported essentially flat earnings as a modest sales gain was offset by a 320 basis point drop in gross margins. Margins were impacted by a reduction in Direct gross margins, coupled with a shift in segment revenue mix from Direct to Retail.

Q1 2018 Highlights

All comparisons relate to the first quarter of 2017 unless otherwise indicated.

Revenues

  • Total revenue increased 1.4 percent to $114.8 million compared to the prior year of $113.3 million and guidance range of $110.0 to $113.0 million.
  • Direct segment sales decreased 4.7 percent to $71.2 million, primarily from the expected decline in TreadClimber sales, partially offset by growth of new products, including the Bowflex HVT product.
  • Retail segment sales increased 13.7 percent to $43.0 million, reflecting strong growth across a variety of product lines, as well as growth in specialty and commercial customers.

Gross Margins:

  • Total company gross margins decreased by 320 basis points to 51.3 percent, primarily due to a reduction in Direct gross margins, coupled with a shift in segment revenue mix from Direct to Retail.
  • Direct margins decreased by 250 basis points due to a shift in product mix to lower margin HVT products and treadmills.
  • Retail margins decreased by 80 basis points due to increased product costs.

Operating income decreased 15.7 percent to $10.7 million compared to prior year of $12.7 million due to the decline in gross margin and added investments in key strategic initiatives.

Income from continuing operations for the first quarter of 2018 was $8.1 million, or 27 cents per diluted share, compared to income from continuing operations of $8.2 million, or 26 cents per diluted share in the prior year quarter.

EBITDA from continuing operations decreased 11.8 percent to $13.1 million compared to $14.9 million in the prior year period.

At March 31, 2018, cash and marketable securities increased to $92.7 million and debt decreased to $44.0 million, compared to $85.2 million and $48.0 million, respectively, at December 31, 2017.

Repurchased $2.7 million of stock in the open market as part of previously announced stock repurchase program.

Bruce M. Cazenave, chief executive officer, stated, “First quarter 2018 revenue and operating income exceeded the guidance range we provided and were driven by solid momentum in our Retail segment. The Retail segment achieved 14 percent growth in the first quarter as we experienced broad-based sales growth across existing and recently introduced products with several key partners and improved performance in the specialty retail channel. As anticipated, we experienced a decline in the Direct segment revenues due to the phase-down of the mature TreadClimber product line, but are well-positioned to return to growth in this segment beginning the third quarter of 2018. New products introduced during the middle of last year such as the Bowflex Results Series™ and HVT products continued to meaningfully contribute during the first quarter, and we are on track to launch additional Direct and Retail segment products later this year. The introduction of the Commercial Max Trainer product at the recent IHRSA show have been extremely well-received, and we look forward to the anticipated uplift in Octane sales when the product starts shipping during the third quarter of this year.”

Cazenave continued, “Implementation of the multi-faceted 2018 plan we described in previous communications is proceeding as planned and on schedule. This includes systems integration, consolidation of warehousing facilities, supply base realignment and restructuring of our international sales and support teams. Progress in developing our new digital technology platform is also advancing as planned. These initiatives are anticipated to enhance and support our growth initiatives, including new product introductions and improved margins going forward. Based on our first quarter results, planned rollout of new offerings and operational improvements, we are well-positioned to return to full year top line growth in 2018, and reaffirm our full year guidance range on revenue and operating income.”

Segment Results

Net sales for the Direct segment were $71.2 million in the first quarter of 2018, a decrease of 4.7 percent over the comparable period last year as the expected decline in TreadClimber sales, coupled with a decline in Max Trainer sales, was partially offset by the growth of new products, including the Bowflex Results Series™ treadmills and ellipticals. Operating income for the Direct segment was $11.3 million for the first quarter of 2018, compared to $15.3 million in the first quarter of last year. Operating income was negatively impacted by the decline in gross margins and lower media returns, partially offset by a decrease in consumer financing fees. Gross margin for the Direct segment declined by 250 basis points, resulting from a shift in product mix to lower margin HVT products and treadmills.

Net sales for the Retail segment were $43.0 million in the first quarter of 2018, an increase of 13.7 percent when compared to $37.8 million in the first quarter last year. The increase reflected robust growth across a variety of product lines and sales growth with specialty and commercial customers. Operating income for the Retail segment was $3.9 million for the first quarter of 2018 compared to $2.2 million in the first quarter of last year. The increase in Retail segment operating income was primarily due to the higher net sales, coupled with the non-recurrence of a $1.2 million reserve recorded in the same period of the prior year. Retail segment gross margin was 31.2 percent in the first quarter of 2018, compared to 32.0 percent in the same quarter of the prior year, reflecting increased product costs due to unfavorable changes in foreign currency exchange rates.

Royalty revenue in the first quarter 2018 was $0.6 million, compared to $0.7 million for the same quarter of last year. The reduction in royalty revenue reflects the renegotiation of a certain license.

Balance Sheet

As of March 31, 2018, the company had cash and marketable securities of $92.7 million and debt of $44.0 million, compared to cash and marketable securities of $85.2 million and debt of $48.0 million at year end 2017. During the first quarter, the company purchased $2.7 million of stock in the open market as part of the previously announced stock repurchase program. Working capital of $93.6 million as of March 31, 2018 was $2.4 million higher than the 2017 year-end balance of $91.1 million. Inventory as of March 31, 2018 was $37.7 million, compared to $53.4 million as of December 31, 2017 and $34.3 million at the end of the first quarter last year.