Nautilus Inc. reported first-quarter earnings declined due to challenging year-ago comparisons, but both sales and earnings were in line with guidance.

Q1 2017 Highlights
All comparisons relate to the first quarter of 2016 unless otherwise indicated:

Revenues

  • Total revenue was $113.3 million compared to guidance range of $110 million – $112 million and prior year of $120.9 million.
  • Direct segment sales decreased 8 percent to $74.7 million, primarily due to lower TreadClimber sales.
  • Retail segment sales decreased 2.6 percent to $37.8 million, reflecting the impact of certain customers rebalancing their inventory levels, coupled with some softness in the retail market.

Gross Margins

  • Total company gross margins decreased by 40 basis points to 54.5 percent due to a shift in segment mix, reflecting an increased percentage of Retail sales.
  • Retail margins improved by 210 basis points due to favorable product mix.

Operating Expenses

  • Operating expenses increased 440 basis points as a percentage of net sales with planned increases in sales, marketing and product development, slightly offset by a decline in general and administrative costs.
  • Operating income of $12.7 million compared to guidance range of $12.5 million – $14 million, and prior year of $19.3 million, with operating margin of 11.2 percent, down 480 basis points versus prior year.
  • Income from continuing operations for the first quarter of 2017 was $8.2 million, or 26 cents per diluted share, compared to income from continuing operations of $11.6 million, or 37 cents per diluted share.
  • EBITDA from continuing operations totaled $14.9 million compared to $21.1 million in the prior-year period.
  • At March 31, 2017, the company had cash and marketable securities of $88.8 million and debt of $60 million, compared to $79.6 million and $64 million, respectively, at December 31, 2016.

Bruce M. Cazenave, chief executive officer, stated, “First quarter 2017 revenue and operating income was in-line with our expectations. As anticipated, the first quarter presented a difficult comparison to prior year, but we are pleased that underlying factors such as Direct segment response rates continue to improve versus the back half of last year, and new product launches are tracking as planned, developments which together position us well for a strong second half of 2017.”

Cazenave continued, “We are very excited about the upcoming launch of our newest Direct product, the Bowflex Hybrid Velocity Trainer. This unique product delivers cardio and strength training simultaneously in one effective workout, along with customized programming tailored to user needs. In our Retail segment, the upcoming launch of the Bowflex Cardio Performance series represents our first entries into higher price points on key retail cardio products, which will further augment our position in this channel. In addition, new Octane Fitness products, including the Airdyne X and another Zero Runner (the ZR7000) for commercial gyms are scheduled for introduction in Q3 2017. Based on these, and other planned new product introductions, as well as a more normalized media environment this year, we believe we are well positioned to return to double-digit growth in the back half of 2017.”

Segment Results
Net sales for the Direct segment were $74.7 million in the first quarter of 2017, a decrease of 8 percent over the comparable period last year. Direct segment sales were impacted by a decline in TreadClimber product sales. Operating income for the Direct segment was $15.3 million for the first quarter of 2017, compared to $21.1 million in the first quarter of last year. Operating income was impacted by the decline in net sales and gross profits, coupled with increased spend in media. Gross margin for the Direct business declined by 80 basis points due to higher discounting of TreadClimber products.

Net sales for the Retail segment were $37.8 million in the first quarter of 2017, a decrease of 2.6 percent when compared to $38.8 million in the first quarter last year. The decline reflected weakness in the retail market, along with certain customers rebalancing their inventory levels. Operating income for the Retail segment was $2.2 million for the first quarter of 2017 compared to $3.9 million in the first quarter of last year. The decrease in Retail operating income was primarily due to a $1.2 million reserve related to a royalty dispute. Retail gross margin was 32 percent in the first quarter of 2017, compared to 29.9 percent in the same quarter of the prior year. The higher gross margins reflected improved product mix.

Royalty revenue in the first quarter 2017 was $0.7 million, compared to $0.9 million for the same quarter of last year. Royalty income for the prior year included a settlement from a certain licensee.

Balance Sheet
As of March 31, 2017, the company had cash and marketable securities of $88.8 million and debt of $60 million, compared to cash and marketable securities of $79.6 million and debt of $64 million at year end 2016. Working capital of $86.1 million as of March 31, 2017 was $1.1 million higher than the 2016 year-end balance of $85 million, as an increase in cash and marketable securities offset a decline in other working capital accounts. Inventory as of March 31, 2017 was $34.3 million, compared to $47 million as of December 31, 2016 and $36.8 million at the end of the first quarter last year.

Share Repurchase Program
The company announced today that its Board of Directors has authorized an additional $15 million share repurchase program, bringing the total authorization under existing programs to $25 million. The company has completed approximately $5.4 million in total share repurchases under the $10 million program announced in May 2016. The balance of approximately $4.6 million under that program may be repurchased from time to time through May 4, 2018. Under the newly authorized program, shares of the company’s common stock may be repurchased from time to time through April 25, 2019.

Repurchases under the company’s share repurchase programs may be made in open market transactions at prevailing prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. Share repurchases will be funded from existing cash balances and repurchased shares will be retired and returned to unissued authorized shares. More details on the share repurchase program are included in a separate press release issued today.

Photo courtesy Nautilus