Nautilus Inc. on Monday reported earnings per share for the fourth quarter of 12 cents, easily topping Wall Street’s estimates by 26 cents. Revenue of $104.2 million was down 9.7 percent compared to the year-ago quarter, but it topped expectations by $4.4 million.

“We are seeing signs that the improvements made during the latter half of 2019 are beginning to benefit our business. New technology enhancements to our product offerings combined with more efficient advertising and reduced overall operating expenses resulted in overall improved results for the fourth quarter,” said Jim Barr, CEO.

“We enter 2020 in a stronger financial position, having recently secured a new $70 million Senior Secured Credit Facility. We are very encouraged by customer reception of our new digital platform and new product offerings as well as the improvements in our cost structure, but we are very early in our transformation process. Throughout 2020, we will continue to focus on unlocking the potential of our brands and returning the company to sustainable profitable growth, but we do not expect the changes we are making to our company will result in immediate linear quarterly improvements.”

Fourth Quarter 2019 Highlights Compared to Fourth Quarter 2018

  • Net Sales were $104.2 million, down 9.7 percent compared to $115.4 million. The 4.8 percent increase in the Retail Segment was offset by a 28.1 percent decline in the Direct Segment.
  • Operating Expenses decreased by 27.4 percent to $34.9 million compared to $48 million, primarily due to reductions in sales and marketing expenses, general and administrative costs, and research and development costs.
  • Operating Income increased by 21.4 percent to $3.3 million compared to $2.7 million.
  • Income from Continuing Operations increased to $3.7 million, or $0.12 per diluted share, compared to income from continuing operations of $1.5 million, or $0.05 per diluted share.
  • The tax rate for the fourth quarter was minus 25.8 percent primarily due to a true-up of an income tax benefit in the prior quarter.
  • EBITDA from continuing operations increased to $5.9 million compared to $5 million.

Fourth Quarter 2019 Segment Results Compared to Fourth Quarter 2018

Direct

  • Net Sales were $35.9 million, down 28.1 percent from $49.9 million. Increased sales of Bowflex bikes and Max Total were more than offset by lower Max Trainer product sales.
  • Gross Margin was 49.9 percent, down from 58.7 percent, driven by unfavorable product mix and unfavorable overhead absorption related to the decrease in sales.
  • Operating Loss was $5 million compared to operating loss of $3.8 million. The increased loss primarily reflected lower net sales and lower gross margin rates partially offset by reductions in sales and marketing expenses. The company optimized fitness-season advertising spend and focused on higher-returning media which resulted in a 42.7 percent reduction in advertising expense.

Retail

  • Net Sales were $67.5 million, up 4.8 percent from $64.4 million. Higher sales were driven primarily by SelectTech weights and Schwinn IC bikes as well as third-quarter 2019 shipment delays that were recognized in the fourth quarter of 2019.
  • Gross Margin was 28.8 percent, down from 31.7 percent, driven primarily by unfavorable sales mix and higher tariffs.
  • Operating Income was $12.2 million, up 8.1 percent from $11.3 million. Lower gross margin dollars were more than offset by more efficient sales and marketing expenses, as well as reduced research and development costs.

Balance Sheet
As of December 31, 2019, the company had cash and cash equivalents of $11.1 million and debt of $14.1 million, compared to cash, cash equivalents and marketable securities of $63.5 million and debt of $32 million as of December 31, 2018. Inventory as of December 31, 2019, was $54.8 million, compared to $68.5 million as of December 31, 2018. The decrease in inventory was primarily due to company efforts to align inventory levels more closely with sales trends.

New Secured Credit Facility
In February 2020, the company announced the closing of a new five-year $70 million Senior Secured Credit Facility, consisting of a new $55 million asset-based revolver and a $15 million term loan with Wells Fargo Bank, NA. Nautilus, Inc. will use proceeds from the Credit Facility to refinance the existing $40 million asset-based facility, pay transaction expenses, and for general corporate purposes. The Credit Facility does not contain any financial performance covenants for the first two years of the facility except for a minimum liquidity covenant of $7.5 million.

Beginning February 1, 2022, the minimum liquidity covenant shall decrease to $5 million and only a minimum EBITDA covenant shall apply. Interest on the asset-based revolver shall accrue at LIBOR plus a margin of 1.75 percent-to-2.25 percent (based on average quarterly availability) and interest on the term loan shall accrue at LIBOR plus 5.00 percent. The Credit Facility will have a five-year term maturing on January 31, 2025, and the term loan shall contain amortization as scheduled in the credit agreement.

Guidance
The company does not plan to provide specific guidance on an ongoing basis but due to the timing of the fourth quarter 2019 release and the early stages of its business transformation, it is providing the following commentary: The company expects EBITDA from continuing operations to be a loss in the range of $4 million to $1 million. Capital expenditures for 2020 are anticipated to be in the range of $8 million to $10 million.

Photo courtesy Nautilus