Sidestepping product availability issues stemming from the West Coast port slowdown that impacted its Retail segment, Nautilus Inc. reported earnings soared 99.7 percent in the first quarter, to $10.7 million, or 34 cents a share. Revenues jumped 33.8 percent, to $96.2 million.
Gross margins for the quarter improved 250 basis points to 56 percent, reflecting margin increases in the Direct segment as well as a favorable mix between segments.
The gains were driven by the Direct segment, which saw sales improve 46.0 percent to $74.1 million, benefiting from continued strong demand for cardio products, especially the Bowflex Max Trainer product line, partially offset by a decline in strength products.
Operating profits in the Direct segment vaulted 89.1 percent to $19.6 million. Gross margin for the Direct business improved 150 basis points to 65.2 percent, reflecting inventory write-downs for discontinued product in the prior year.
Retail segment sales rose 5.9 percent to $21.3 million. The improvement reflected strong retailer and consumer acceptance of the company’s new lineup of cardio products including the recently launched treadmill line. The gains were partly offset by weaker sales in Canada and international markets. The port slowdown situation finally extended delivery schedules that adversely affected sales and replenishment orders.
Operating profits in the Retail segment slumped 40.2 percent to $1.5 million. Retail gross margin eroded 340 basis points to 22.0 percent, impacted by unfavorable product and customer mix along with increases in overhead. Margins were particularly impacted by weakness in international markets, which carry higher margins.
On a conference call with analysts, Bruce Cazenave, CEO, said the retail segment “continues to steadily grow,” despite challenges created by West Coast ports during the past two quarters, and facing some challenging comparisons from last year, when the first-quarter revenue increased 33 percent.
“Sell-through performance and consumer acceptance of the new Schwinn and Nautilus branded products introduced since the fall 2013 are meeting our expectations,” said Cazenave.
Bill McMahon, COO, believes the Retail segment’s growth continues to outpace overall industry performance. He added, “We are in the middle of a key selling season for this fall, and while it is early, we are encouraged by the ongoing conversations. Our retail partners are pleased with our product quality and sales performance.”
Retail margins are expected to be challenged in Q2 but improve in the second half. International growth is expected to be boosted by the launch of Nautilus cardio products and the MAX Trainer. Overall innovation is expected to helped by the opening of its Nautilus Innovation Center located next to its corporate headquarters that consolidates its design and development teams closer to its prototype and testing lab.
Demand at retail is also expected to be bolstered by the introduction of the next generation of Bowflex TreadClimber products, as well as the launch this fall of the Bowflex SelectTech 560 dumbbell. Building on the strong demand for the model year 13 Schwinn and model year 14 Nautilus products over the past two years, the Schwinn 80 Pro Bike will launch this fall. The Schwinn Airdyne Pro bike has also become “very popular today in the CrossFit and vertical market environment,” said McMahon.
Nautilus over the past two years has also made “significant strides” in feeding digital connectivity into its product line. Its partnership with MyFitnessPal is being complemented with integration with the Google Fit platform a well as Apple's HealthKit.
Regarding the West Coast port slowdown, normal service levels was resumed to retailers. Said McMahon, “The promise periods for our high-velocity direct channel products is improving. We anticipate being fully clear of all impacts from the port situation by the end of Q2.”
Looking ahead, Cazenave said the company remains on track for “continued revenue and earnings growth in the coming quarters,” although its media spend will increase to support MAX Trainer growth.