Nautilus Inc. on Wednesday reported revenue for the second quarter ended June 30 totaled $59 million, a decrease of 21.8 percent compared to $75.5 million in the same quarter of 2018.
The decrease in net sales was largely driven by shortfalls in the direct segment, down 40.2 percent from the prior-year quarter, primarily reflecting a decline in sales of the Bowflex Max Trainer product.
Retail sales were down 4.4 percent from the same quarter prior year, primarily due to lower order rates reflecting, the company believes, the anticipated transition to new products being introduced and shipped during the third and fourth quarters of 2019.
Royalty revenue in the second quarter of 2019 was $0.7 million, a decrease of 51.8 percent compared to the same quarter of last year which included payments of royalties related to a new agreement. For the first six months of 2019, net sales were $143.4 million, down 24.6 percent compared to the same period in the prior year. Gross margins for the second quarter of 2019 were 29.7 percent versus 44.6 percent for the same period of last year, reflecting unfavorable product mix and unfavorable overhead absorption related to the decline in sales.
Operating loss for the second quarter of 2019 was $85.4 million, compared to operating income of $1.2 million in the same period of last year, due to non-cash impairments along with lower sales and gross margins which resulted in a decline in gross profit dollars. Included in the second quarter 2019 operating loss were $72.0 million in non-cash goodwill and intangible impairments.
Excluding these impairments, adjusted operating loss in the second quarter of 2019 was $13.4 million, compared to operating income of $1.2 million in the same period of last year. In addition to these impairments, operating expenses for the second quarter of 2019 included charges of $2.0 million related to a litigation settlement and $0.3 million of severance related to workforce reductions occurring early in the third quarter of 2019. Total operating expenses for the second quarter of 2019 increased by $70.5 million to $102.9 million compared to $32.4 million in the same period of last year as a result of the impairments and charges listed above, partially offset by lower marketing costs.
Loss from continuing operations for the second quarter of 2019 was $78.7 million, or $2.65 per diluted share, compared to income of $1.0 million, or $0.03 per diluted share, for the same period of last year. Adjusted to exclude the goodwill and intangible impairments, loss from continuing operations for the second quarter of 2019 was $9.8 million, or $0.33 per diluted share.
EBITDA loss from continuing operations for the second quarter of 2019 totaled $82.5 million compared to income of $3.3 million in the same quarter of the prior year. Adjusted EBITDA loss, excluding the goodwill and intangible impairments, was $10.5 million for the second quarter of 2019.
Carl Johnson, Chairman of the Board and former Interim Chief Executive Officer, stated, “As anticipated, our second quarter results were impacted by continued softness in the Direct segment; however, we believe the appropriate improvements are being implemented into our overall business to address this trend. The primary actions taken include extensive, in-depth consumer insights research leading to a major repositioning of the Bowflex brand and a new advertising and communication campaign, which we expect will begin airing in the third quarter of 2019 across television, social media, other digital platforms. Additionally, we expect to launch many targeted new products across all our channels in the second half of 2019. In parallel, we plan to continue our digital transformation with updated digital experience platforms on key new products, moving toward our goal of having all our products with subscription-based digital experience offerings. Our second quarter Retail segment sales were below prior year sales, tracing to declines in the Max Trainer line, partially offset by growth in other modalities. We expect sales in the second half of 2019 will include planned new product introductions and in-store merchandising in key customers. The lower revenues and unfavorable product mix trends have impacted our gross margins through the first half of 2019 and the financial results were also affected by a non-cash impairment of goodwill and intangible assets related to the decline in our market capitalization. Additionally, as part of our ongoing efforts to right-size the business, we are implementing a workforce reduction and other shared support cost reductions expected to save the company $5 to $6 million on an annual basis.”
Johnson continued, “While the past few quarters have been challenging, we are excited about the future of Nautilus and the new technology, product offerings, and improvements in our cost structure. In addition, we are very fortunate to have Jim Barr join us as our new CEO to lead Nautilus through its next phase. The robust Direct and Retail pipeline of new product introductions slated for the next few months is starting with the MaxTotalTM, which is expected to launch in late August. This new product has a built-in digital screen and includes the upgraded digital platform in delivering a customized, personalized cardio and upper body workout created by machine learning. Regarding our commercial channel, the Octane Commercial Max Trainer and the Octane XR6000S, a seated elliptical with a swivel seat, are already in the market and receiving positive reviews. We also plan to have additional new products launching later this year. We remain focused on being a differentiated player in the industry by continuing to bring new innovations to market on a regular basis with the goal of growing our top and bottom lines.”
Segment Results
Net sales for the Direct segment were $20.8 million in the second quarter of 2019, a decrease of 40.2 percent over the comparable period last year primarily due to a decline in Max Trainer product sales. Operating loss for the Direct segment was $6.3 million for the second quarter of 2019, compared to operating income of $0.7 million in the second quarter of prior year. Operating income was negatively impacted by the decline in sales and gross margins. Gross margin for the Direct segment declined from 59.6 percent in the second quarter of 2018 to 43.3 percent in the second quarter of 2019, which resulted from unfavorable overhead absorption related to decreased net sales and unfavorable product mix.
Net sales for the Retail segment were $37.5 million in the second quarter of 2019, a decrease of 4.4 percent when compared to $39.2 million in the second quarter of last year. The decrease was due to lower order rates reflecting, we believe, the anticipation of new products being introduced and shipped during the third and fourth quarters of 2019. Operating loss for the Retail segment was $0.2 million for the second quarter of 2019 compared to income of $3.6 million in the second quarter of last year. The decrease in Retail segment operating income was primarily due to lower revenue and gross margins. Retail segment gross margin was 20.8 percent in the second quarter of 2019, compared to 29.1 percent in the same quarter of the prior year, which resulted from unfavorable product mix and unfavorable overhead absorption related to the lower sales.
Balance Sheet
As of June 30, 2019, Nautilus had cash and cash equivalents of $7.9 million and debt of $20.6 million, compared to cash and marketable securities of $63.5 million and debt of $32.0 million at year end 2018. Working capital of $51.6 million as of June 30, 2019 was $25.0 million lower than the 2018 year-end balance of $76.6 million. Inventory as of June 30, 2019 was $52.0 million, compared to $68.5 million as of December 31, 2018 and $42.3 million at the end of the second quarter of last year.
