Nautilus said it conducted a comprehensive marketing study to better understand its opportunities in the fitness market. The resulting report found that while the Direct channel has been very effective for the company, it only accounts for about 20% of the consumer base NLS is targeting, while the vast majority of consumers are only reached through the Retail channel, where the company ahs been focusing more energy lately.
The other eye-opener for Nautilus was that their targeted consumers spent 70% of their fitness purchases on cardiovascular equipment, while NLS has focused predominantly on strength equipment. Newly-minted CEO Greg Hammann said, “were missing a very large part of this $5 billion market”, but sees a big opportunity for the company.
One of the key products here may be the new TreadClimber that Hammann said continues to “exceed expectations. They see it producing $16 million to $18 million in sales this year “through planned restrained demand” and have 10 years of patent protection on the product. The Bowflex brand sold 29,000 units through the Direct channel, down about 6.5% in units from second quarter. Retail channel sales of the Bowflex product jumped 82% from Q2 to Q3 this year.
Gross margin was severely impacted by this channel shift for the company, falling 1000 basis points to 47.8% versus 57.8% in the year-ago period. Nautilus sells the Bowflex machine for $1,500 through the Direct channel, but only gets $950 for the machine through the Retail market. The resulting higher fixed cost per sale and the shift of more sales to the lower margin TreadClimber also hurt GM.
Overall third quarter net sales fell 24.1% to $116.0 million compared to $152.9 million for the year-ago period, while net income plunged 73.7% to $6.6 million, or 20 cents per diluted share, compared to $25.1 million, or 71 cents per diluted share, in Q3 2002.
Direct channel sales were $51.9 million for the quarter, down 51.5% from $107 million in sales in the channel in the year-ago period. EPS for the Direct segment were three cents versus 75 cents last year. Meanwhile, the Commercial and Retail channels saw net sales increase 39.7% to $64 million versus $45.8 million in Q3 LY. The acquisition of StairMaster contributed roughly $4 million to $5 million of the increase.
The company saw shares jump 14% mid-week as investors moved quickly to cover on short positions. As recently as October 15, approximately 24% of NLS shares were shorted.
Some analysts said the company, under Hammann, has an improving outlook, helped by new cardiovascular exercise products.
NLS shares jumped 14.1% for the week to close at $5.61 on Friday.
