EXEC: Nautilus CEO Remains Bullish On At-Home Fitness Rebound

Nautilus, Inc. had another brutal quarter as sales tumbled 70.3 percent in the first quarter ended June 30 to drive a steep loss. However, Jim Barr, CEO, said consumer enthusiasm for JRNY, Nautilus’ digital membership platform, remained strong, and he believes Nautilus’ value-focused approach positions the company to gain a significant share as the at-home fitness opportunity stabilizes.

Barr said that while Nautilus had been impacted by the shift back to in-person gym workouts, consumers have shown they are adapting to a hybrid fitness, similar to what they have done for work locations.

“Through our first quarter, we continue to see evidence that post-pandemic exercise habits favoring home fitness are here to stay,” said Barr. “Pre-pandemic, about 40 percent of people for whom fitness is important worked out at home. Even as more people headed back to the gym, that number is close to 70 percent, and it has now held steady for over 15 months.”

Barr pointed to a 27 percent growth in Nautilus’ direct channel in the quarter compared to the pre-pandemic 2020 first quarter as a sign of healthy demand. The increase came despite “some possible pull-forward sales over the last two years.”

A “bright spot” in the quarter was JRNY, where membership growth reached 360,000 at June 30, up 133 percent higher than the same period last year.

“Our first quarter results show that consumers will buy fitness equipment even in off-peak times of the year if they believe they are getting a good value,” said Barr.

Having a diversified product portfolio, he said, versus having only one or two modalities is an advantage in the current environment as consumers can choose across several price points, including more affordable options.

Barr added, “Similarly, unlike some competitors who charge $500 per year or more, we feature an attractively priced digital platform at $149 per year. Together, our equipment and digital platform deliver an outstanding comparative total cost of ownership, and we highlight this value proposition both in advertising and on our website.”

The company’s equipment brands include Bowflex, Nautilus and Schwinn.

Nautilus also made further progress in optimizing its supply chain during the quarter, including negotiating lower inbound freight costs and managing its inventory down to avoid excess storage costs as required during the prior year. Nautilus is exiting its Portland distribution center in late fall and has renegotiated the cost for its top SKUs, which will positively impact profitability once on-hand inventory is sold.

Barr said, “Finally, we have instituted tight cost control, including, for now, pausing incremental brand marketing. As much as possible, we will remain vigilant in continuing to match variable SG&A costs of sales. For these reasons, we believe we are better positioned than some key competitors to weather short-term challenges.”

Revenues in the first quarter reached the high end of its revenue guidance, and EBITDA was better than expected. Both were still well below year-ago levels as the at-home fitness category continued to surge in 2021, with restrictions on gyms reopening still largely in place.
Sales in the quarter tumbled 70.3 percent to $54.8 million from $184.6 million a year ago. Nautilus had projected sales to be between $45 million and $55 million.

Net sales were up 11 percent, or 3 percent CAGR, compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which the company sold in October 2020. The sales decline versus last year is driven primarily by the return to pre-pandemic seasonal demand.

The adjusted EBITDA loss from continuing operations was $19.9 million compared to an income of $21.1 million last year. Nautilus had expected an adjusted EBITDA loss between $22 million and $27 million.

The net loss came to $60.2 million, or $1.92 per share, compared to a net income of $13.9 million, or 43 cents, last year.

Gross profit was $7.0 million, compared to $55.5 million last year. Gross margins eroded 17.4 basis points (bps) to 12.7 percent compared to 30.1 percent last year. The decrease in gross margins was primarily due to increased discounting, 8 bps, unfavorable logistics overhead absorption, 8 bps and increased investments in JRNY, 4 bps, offset by an improvement in other costs, 3 bps.

Operating expenses increased 54.5 percent to $58.1 million, primarily due to a goodwill and intangible impairment charge of $27.0 million and a $3.6 million increase in JRNY investments, partially offset by $5.7 million lower media spending and $2.7 million lower other variable selling and marketing expenses due to decreased sales. Total advertising expenses were $5.1 million versus $10.8 million last year.

Adjusted operating expenses were $31.2 million, or 56.9 percent of sales, compared to $37.6 million, or 20.4 percent, last year. The decrease was driven by lower advertising and partially offset by JRNY investments.
The reported operating loss was $51.2 million compared to operating income of $17.9 million last year, primarily driven by the goodwill and impairment charge and lower gross profit. The adjusted operating loss was $24.2 million in the latest quarter.

In the Direct segment, sales declined 58.2 percent year-over-year to $26.5 million. Sales were up 27 percent, or 8 percent CAGR, compared to the same period in fiscal 2020. The net sales decrease was primarily driven by the return to pre-pandemic seasonal demand and higher sales discounting.

Said Barr, “Despite consumer macro wariness and even in the sector’s low season, we were encouraged that the consumer responded well to our holiday offers for Mother’s Day, Memorial Day and Father’s Day.”

Cardio sales declined 45.5 percent versus last year and were up 6.5 percent, or 2 percent CAGR, compared to the same period in fiscal 2020. Lower sales were primarily driven by lower bike demand. Strength product sales declined 70.8 percent versus last year and grew 96.7 percent, or 25 percent CAGR, compared to the same period in fiscal 2020. Lower sales this quarter were primarily driven by lower demand for SelectTech weights.

Direct segment showed an operating loss of $9.9 million against an income of $6.8 million the prior year. The decline was primarily driven by a decrease in gross margin to 17.2 percent versus 38.7 percent last year tied to increased discounting, unfavorable logistics overhead absorption and increased JRNY investments.

Retail segment sales were $27.4 million, down 77.2 percent versus last year. Excluding sales related to Octane, sales were down 2 percent, or down 1 percent CAGR, compared to the same period in fiscal 2020. The decrease in sales to last year is primarily driven by lower cardio sales and higher sales discounting as retailers work through higher-than-normal inventory levels.

Barr said, “We closely partnered with retailers and supported promotional actions to work down inventory levels in Q1, generating some early reorders beginning to build some backlog, all with the goal of generating more reorders as we enter fitness season.”

Cardio sales declined 86.8 percent versus last year. Excluding sales of Octane, cardio sales were down 28.7 percent, or 11 percent CAGR, compared to the same period in fiscal 2020. Lower sales this quarter were primarily driven by lower bike sales. Strength product sales declined by 48.9 percent versus last year. Strength sales were up 36.8 percent, or 11 percent CAGR, compared to the same period in fiscal 2020, led by SelectTech weights.

The Retail segment showed an operating loss of $5.4 million compared to income of $22.1 million. Gross margins shrank to 5.5 percent compared to 25.1 percent last year. The 19.6 bps decrease in gross margin was primarily driven by: increased discounting, 11 bps and unfavorable logistics overhead absorption, 9 bps.

As of June 30, the Retail segment’s backlog totaled $48.0 million, while the Direct segment’s backlog was $400,000.

Inventory was $103.9 million at the quarter’s close, down compared to $111.2 million as of March 31, 2022. The decrease in inventory versus year-end was driven by efforts to right-size inventory levels ahead of the fitness season. About 8 percent of inventory as of June 30 was in transit.
Looking ahead, Nautilus reiterated its second half and full year 2023 guidance, including continuing to expect positive adjusted EBITDA in the back half of fiscal 2023. The company expects full-year revenue of between $380 million and $460 million. The full-year adjusted EBITDA loss is expected to be between $25 million and $35 million. JRNY members are projected to exceed 500,000 at March 31, 2023.