Boosted by healthy sales gains in both its direct and retail fitness equipment segments, Nautilus Inc. reported earnings jumped 49.9 percent in the third quarter ended Sept. 30, to $3.7 million, or 12 cents a share. Revenues climbed 19.7 percent to $70.7 million.
Gross margins improved 250 basis points to 51.2 percent, reflecting a margin increase in the company's direct-to-consumer segment, a favorable mix between segments, and higher royalty revenue as a percentage of total net sales. The improved profitability also reflects improved leverage of general and administrative costs across the higher sales volumes.
In its retail segment, sales grew 9.6 percent to $25.7 million as a result of strong SelectTech dumbbell sales coupled with increased placement of the company's new lineup of cardio products and treadmills launched in fall 2014.
Operating income in the Retail segment slid 13.5 percent to $3.2 million due to increased investments in R&D along with higher selling and marketing expenses. Retail gross margin eroded to 25.6 percent compared to 26.5 percent in the same quarter of the prior year. Margins were impacted by unfavorable product and customer mix, reflecting increased sales of lower margin treadmills and lower sales to Canadian customers.
On a conference call with analysts, Bruce Cazenave, Nautilus’ CEO, estimated the company’s retail growth is expanding in excess of twice the pace of industry growth.
Also on the call, Bill McMahon, COO, said the retail gains were driven by “solid domestic partner growth across a variety of categories,” including treadmills, ellipticals and select rise weights. International results were challenged by currency and economic conditions unique to various regions.
McMahon said initial performance of its Max Trainer product within the retail channel outside of North America has been encouraging. Nautilus anticipates continued positive growth in its retail segment through this fitness season, driven by growth in doors and SKUs domestically, and continued deployment of Max Trainer internationally.
Strong expectations for retail growth were also touted for the just-launched Schwinn Airdyne Pro stationary bike, which features Schwinn Airdyne technology and retails for $999.
Retail margins are benefiting from actions taken earlier this year. Added McMahon, “We are intensely focused on returning to a margin improvement path in the retail segment, and these efforts are driving an improving trend. We feel this trend will continue into Q4 and next year.”
In the direct segment, sales jumped 24.3 percent to $42.9 million due to continued strong demand for the company's cardio products, especially the Bowflex Max Trainer line. Operating income for the direct segment expanded 30.5 percent to $5.4 million. Reflecting leveraging of supply chain costs and lower reserve requirements, direct gross margins improved 210 basis points to 64.3 percent.
Additional media spending is being placed behind the Bowflex Max Trainer, which is expected to drive growth for direct in coming quarters. The strength in the Bowflex Max is taking some sales from the Bowflex TreadClimber but updated TreadClimber models are scheduled to launch by the end of the year. The TC 200 tracks and stores up to four users' data, and allows them to set, monitor and track their personal fitness goals utilizing an app, along with integrated Bluetooth connectivity.
The strength category in the direct segment grew for its second consecutive quarter. The Bowflex 560 SelectTech Dumbbell, which the company said represents the first-ever smart dumbbells, is expected to be launched before year end. The item features a counter that records reps, weight lifted, and repetition speed.
“We're very excited about our new and enhanced products in the direct portfolio,” said McMahon. “These products offer a more interactive and tailored workout experience than ever before, and complement our existing solutions in order to allow us to offer customers all the tools they need to be stronger and healthier.”
Cazenave concluded, “As we begin the final quarter of 2015, we are well positioned to end the year on a strong note, delivering another year of robust top- and bottom-line growth. The front end of our business model, namely the product development, marketing and sales areas, are giving us good reason to be optimistic about future growth, while the supply chain operations and support areas continue to find service improvements and efficiencies.”
