Nautilus Q3 Sales Slip Due to Focus on Margins…

Nautilus’ new focus on margins and profitability is driving a short-term sales decrease as the company eliminates less profitable product lines and backs away from certain low-profit customer relationships. Declining sales in nearly every product category and distribution channel were almost offset by a double-digit increase in apparel sales and a slight up-tick in Nautilus’ international business. The elimination of old SKUs as the company transitioned inventory to newer models caused a temporary reduction of about $8 million in sales and an additional $5 million in business planned for Q3 to shift into the fourth.

Low traffic during the summer at specialty fitness retailers began to increase late in the quarter. As a result, some volume the company expected in September was delivered in early October, shifting revenues to Q4. After NLS completed its profitability analysis, the company decided to transition out of some less profitable products, including a number of treadmill SKUs and “refining and eliminating” certain customer relationships. The company expects about 10% growth for 2006. The International business saw some slight growth, but Nautilus began shipping direct to several commercial customers in China, which will move about a million dollars of sales to the fourth quarter when the product installs.

Nautilus’ apparel business delivered the only substantial growth for the quarter. Spring 2007 pre-bookings came in “solid” according to management. Nautilus expects 15% growth in apparel for the year.

Management believes that the company will be able to deliver net sales of around $190 million to $210 million with 39 cents to 45 cents in diluted earnings per share. The company expects full-year 2006 sales growth of roughly 10% with earnings growth of 22% to 32%.