Nautilus Inc. reported net sales for the fourth quarter of 2016 totaled $125.8 million, a 15.2 percent increase compared to $109.1 million in the same quarter of 2015. The strong growth was driven by higher sales in the retail segment resulting from the acquisition of Octane Fitness, partially offset by single-digit declines in organic retail segment and direct segment sales.

Income from continuing operations for the fourth quarter of 2016 was $12 million, or 38 cents per diluted share. This compares to income from continuing operations for the same period last year of $9.9 million, or 32 cents per diluted share.

For the full year 2016, net sales were $406 million, an increase of 20.9 percent over last year.  For the full year 2016, income from continuing operations totaled $35.1 million, or $1.12 per diluted share, compared to $26.8 million, or 85 cents per diluted share, for the same period last year.

Fourth Quarter 2016 Highlights

Revenues
Retail segment sales increased 43.6 percent to $60 million, reflecting the inclusion of Octane Fitness, partially offset by a 6.6 percent decline in organic growth, as improved performance at certain key retailers did not offset the loss of sales related to accounts that ceased doing business during 2016 and weakness in Canada.

Direct segment sales decreased 2.7 percent to $65.2 million as improved performance metrics in the post-election period did not completely offset the lower media response rates experienced earlier in the quarter.

Gross Margins
Direct and retail segment gross margins improved by 630 and 570 basis points, respectively; total company gross margins improved 290 basis points.

Operating Expense
As a percent of revenue, operating expenses improved 120 basis points to 35.6 percent versus 36.8 percent in the fourth quarter last year, driven by lower selling and marketing costs, partially offset by higher planned research and development expenses and incremental expenses from the addition of Octane.

Operating income increased by 56.4 percent to $19.3 million and operating margin improved by 410 basis points, from 11.3 percent to 15.4 percent. EBITDA from continuing operations increased by 61.7 percent to $21.4 million versus $13.2 million in the same quarter prior year.

The effective income tax rate for continuing operations in the fourth quarter of 2016 was 36.4 percent versus 20.3 percent in the prior-year quarter; the prior year included a non-recurring tax benefit of $2 million associated with the release of a valuation allowance related to foreign tax credits. At December 31, 2016, the company had cash and marketable securities of $79.6 million and debt of $64 million, compared to $60.8 million and $80 million, respectively, at December 31, 2015.

Full Year 2016 Highlights

Revenues
Retail segment sales increased 67.5 percent from the prior year to $177.9 million, reflecting the inclusion of Octane Fitness, and organic retail growth in excess of 9 percent.

Direct segment sales were flat at $225 million as the company made a strategic decision to reduce media spending during the pre-election period in the third and fourth quarters due to sub-optimal media response metrics at that time.

Gross Margins
Direct and retail segment gross margins improved by 340 and 780 basis points, respectively; total company gross margins improved 50 basis points reflecting the channel mix towards higher retail sales.

Operating income increased by 32.6 percent to $53.4 million and operating margin improved by 110 basis points, from 12 percent to 13.1 percent. EBITDA from continuing operations increased by 41.4 percent to $61.1 million.

Bruce M. Cazenave, chief executive officer, stated: “Our fourth quarter was strong, rounding out another year of solid revenue growth, increased profitability, and achieving greater operating leverage. Compared to the prior year, we achieved double-digit revenue growth in the fourth quarter, improved gross margins by 290 basis points and increased EBITDA by over 60 percent to $21 million. Our Direct segment response rates improved on a sequential basis, but we continued to face challenging consumer response conditions and a soft consumer retail environment. However, as reflected by our strong operating performance, our team was able to adjust our media strategy again in the fourth quarter to achieve strong operating results as we adhere to our disciplined management of expenses to achieve our long-term growth and operating targets.”

Cazenave continued, “Most importantly, in 2016, we advanced our primary strategic objectives of continuing to build our innovation pipeline and capabilities, diversifying product lines and channels of distribution, and expanding access points in international markets. The successful integration of Octane was an important contributor to advancing on all these strategic fronts, helping lay the groundwork for another year of positive growth in 2017 and beyond.”

Segment Results
Net sales for the direct segment were $65.2 million in the fourth quarter of 2016, a decrease of 2.7 percent over the comparable period last year. The direct segment sales slowed as declines in the TreadClimber product line outweighed growth of the Bowflex Max Trainer product line. For the full year 2016, net sales for the direct segment were $225.1 million, a decrease of 0.2 percent over last year.

Operating income for the direct segment was $12 million for the fourth quarter of 2016, an increase of 21.2 percent compared to operating income of $9.9 million in the fourth quarter of 2015.

Gross margin for the dfirect business was 66.8 percent for the fourth quarter of 2016, compared to 60.5 percent in the fourth quarter of last year. Prior-year gross margins and operating income results were negatively impacted by a $2.5 million arbitration settlement expense and a $1.4 million inventory reserve of nutrition products.

Net sales for the retail segment were $60 million in the fourth quarter 2016, an increase of 43.6 percent over the fourth quarter last year. The improvement in retail net sales reflects the inclusion of Octane Fitness, partially offset by a decline in strength products. For the full year 2016, net sales for the retail segment totaled $177.9 million, an increase of 67.5 percent over the prior year.

Operating income for the retail segment was $12.2 million for the fourth quarter of 2016, an increase of 75.9 percent compared to operating income of $7 million in the fourth quarter of 2015. Retail gross margin was 33.3 percent in the fourth quarter of 2016, compared to 27.6 percent in the same quarter of the prior year. The higher gross margins reflected improved product and channel mix in the organic Retail segment, coupled with the addition of the higher margin Octane Fitness business.

Royalty revenue in the fourth quarter of 2016 was $0.6 million, an increase of 65.3 percent compared to $0.4 million for the same quarter last year, reflecting a dispute with a licensee that negatively impacted prior year royalty revenues.

Balance Sheet
As of December 31, 2016, the company had cash and marketable securities of $79.6 million and debt of $64 million, compared to cash and marketable securities of $60.8 million and debt of $80 million at year end 2015. Working capital of $85 million as of December 31, 2016 was $15.6 million higher than the 2015 year-end balance of $69.4 million, primarily due to an $18.8 million increase in cash and marketable securities.

Inventory as of December 31, 2016 was $47 million, compared to $42.7 million as of December 31, 2015. The increase in inventory is due to increased stocking of specific product lines coupled with weaker than anticipated sales in the fourth quarter.

Photo courtesy Nautilus