Nautilus Q4 Bottom Line Suffers from Operational Issues; Pearl Provides Some Top-Line Relief…

Nautilus, Inc. pointed to trouble in its domestic manufacturing and operations groups in the fourth quarter as the primary reason for a sales decline in its Direct channel and a plunge in the bottom line for the quarter. Total net sales increased 6.9% to $181.3 million for the fourth quarter ended December 31, compared to $169.6 million for the corresponding period last year, but $8.9 million of that total was attributed to the Pearl Izumi business. Hardgoods sales were up just 1.7% for the period. Net income fell more than 80% to $2.8 million, or 8 cents per diluted share, from $14.2 million, or 42 cents per diluted share, for the fourth quarter of 2004.

Company Chairman and CEO Greg Hammann attributed the issues in the quarter to a slower-than-expected ramp-up on manufacturing of new products at two domestic manufacturing facilities and issues with the implementation of a new ERP system. The issue on the manufacturing side had to do with six new cardio products that experienced problems in components from suppliers, delaying production in time for the holiday shipping season. Hammann said they lost sales on those products, but also sales of existing products that were to be bundled with them for sale. He said four of those products are now in “full market launch” and they are “completing refinements” in the other two. The issue hurt the bottom line, because the company incurred the expenses of launching the new products, but did not see the expected associated revenue increase. They also missed the all-important holiday window.

Heads apparently rolled on the operational side. The company appointed a new domestic manufacturing chief, Mark Muser, who is based at the Tulsa, Okla. facility, but also has responsibility for the Tyler, Tex. operation. Hammann said they also brought in three new product engineers.
Additionally, NLS has brought back Dustin Groves as a consultant to oversee operations. As part of the changes, NLS expects to shift more of its product handling and packaging upstream from the domestic centers to its Asian suppliers.

The Retail channel, which includes sporting goods, warehouse, and department stores, posted a 46% increase in sales for the period to $46 million. The company said they saw 55% growth in the channel for the year and expect growth in the 30% to 40% range for 2006.

The Specialty Retail channel, which includes fitness specialty retailers, grew 14% in the quarter to $23 million. They saw 11% revenue growth in Specialty for 2005 and see 10% to 20% growth for 2006.

The Commercial channel saw revenues grow 5% for Q4 to $18.2 million. Total sales growth for the year was pegged at 6% in this channel, while 2006 sales are seen improving in the 15% to 20% range for the year.

The Direct channel took the biggest hit, declining 17% to $17.2 million for the quarter. The channel experienced 10% growth in revenues for the year and sees single-digit sales growth in 2006.

International sales were down 4% to $14 million for the quarter, but sales were up 8% for the year. NLS is forecasting 20% growth in the International business in 2006.

For the first quarter of 2006, the company estimates diluted EPS will be in the range of 14 cents to 18 cents per share on sales in the $180 million to $185 million range. The EPS estimate includes an estimated two cents per share charge for expensing of stock options.