Nautilus Inc.'s struggles continued in the fourth quarter as the manufacturer lost $47.7 million, or 99 cents a share, in the fourth quarter. That loss compares with earnings of $12.9 million, or 40 cents, a year ago. Sales tumbled 20.3% to $147.3 million from $185 million. By channel international sales were up 17% to $24.3 million, commercial sales rose 6% to $22.3 million, direct sales dropped 14% to $62.1 million, retail sales tumbled 47% to $37.1 million, and royalty income climbed 36% to $1.5 million. Apparel sales, which are now included in discontinued operations with the pending sale of Pearl Izumi, were down 5% to $12.4 million.
The loss was far worse than expectations from Wall Street. Analysts polled by Thomson Financial expected a loss of 6 cents a share in Q4.
The loss included pre-tax charges totaling $45.1 million including $19.4 million for the cancelled acquisition of a Chinese factory; $16.9 million for inventory and warranty reserves related to certain commercial cardiovascular products; $3 million for intellectual property impairments; and $5.8 million for other items, including expenses related to the special shareholder meeting, the cost to exit certain marketing contracts, and staff restructuring and debt restructuring costs.
On a conference call with analysts, Bob Falcone, company president and CEO, said the loss for the year was the first in the company's history, as the year reflected a change in the company's CEO, a proxy contest, four new directors and several changes in senior management. Since taking over four months ago, Falcone has reduced Nautilus's work force, reorganized the company along product lines instead of sales channels, renegotiated its debt agreement, moved to sell Pearl Izumi, and closed its Canadian call center, as well as a large distribution facility near Chicago.
Looking to 2008, Falcone said the company will continue to focus on cost containment and margin improvement rather than an increase in sales in what he termed as “the worst retail environment in 17 years.”
In its retail channel, Nautilus is placing more focus on fewer accounts and will continue to sell its Schwinn indoor fitness line and some of its Nautilus home equipment not available through the direct channel. The retail channel will also carry new introductions of its Universal branded products either later this year or early next year.
In the direct channel, Nautilus is “taking a fresh look at [its] significant spending” to drive sales of its Bowflex brand. The Bowflex Treadclimber for the home continues to perform well. The commercial and international channels will continue to carry the Nautilus, StairMaster and Schwinn lines, but the company added $12.7 million to its warranty reserves to cover durability issues from the Treadclimber line.
Regarding the sale of Pearl Izumi, Falcone said negotiations are “progressing nicely” and a related announcement should come in a few weeks. But he also noted that valuations have come down significantly over the past several years in the face of the many economic uncertainties. As a result, Nautilus booked a non-cash write down of $15.9 million in the carrying value of Pearl Izumi.
Since joining, Falcone said Nautilus has shored up its management with several key appointments and realigned responsibilities across the organization. “It will be a very challenging 2008 as we turn this company around in the face of a lack luster economy,” said Falcone. “However, I firmly believe we have the right people, the right products and the right brands to get the job done.”
