Nautilus reported earnings and sales slid in the second quarter and came in short of Wall Street’s targets as continuing weak sales of the TreadClimber within its Direct business offset strength in its Retail segment.

“The second quarter 2017 results are right in line with our expectations,” said CEO Bruce Cazenave, on a conference call with analysts. “Our retail segment delivered solid double-digit revenue growth and this growth came from both the organic retail business as well as the Octane business. Total growth of 13 percent for the segment reflected robust increases across multiple products and a number of key customer accounts.”

Retail margins also increased 100 basis points, primarily due to improved product mix. In its direct channel, a successful launch of the new Bowflex Hybrid Velocity Trainer or HVT was offset by continued lower sales from the TreadClimber product to lead to a decline in sales for the segment.

Cazenave stressed that the second quarter is Nautilus’ seasonally slowest quarter and is largely used to position itself for larger second-half opportunities.

“From that standpoint, our second quarter performance gives us the confidence to reiterate our 2017 full year guidance of 5 percent to 7 percent growth in both revenues and operating income,” said Cazenave. “Importantly, we continue to anticipate a return to double-digit top-line growth in the back-half of 2017 due to a number of factors that Bill will discuss in greater detail in a few moments.”

Regardless, shares of Nautilus fell $1.10, or 6.25 percent, to $16.50  on Tuesday due to earnings miss in the quarter.

Companywide, net earnings slumped 29.5 percent to $2.5 million, or 8 cents a share, missing Wall Street’s consensus estimate of 10 cents a share. Total revenue was $77 million, down 1.9 percent.

Direct segment sales decreased 13 percent to $39.1 million primarily due to expected declines in TreadClimber sales. Retail segment sales increased 12.7 percent to $37.1 million, reflecting robust growth across traditional and e-commerce partners in multiple product categories.

Total company gross margins decreased by 350 basis points to 49.8 percent due to a shift in segment mix, and lower margins in the Direct segment, that more than offset higher Retail segment margins. Direct margins decreased 380 basis points due to unfavorable overhead absorption related to lower volumes and increased TreadClimber discounting. Retail margins increased 100 basis points due to improved product mix and the reduction of certain warranty reserves.

Operating expenses were approximately flat as a percentage of sales due to expense management and the reversal of a reserve related to a settled royalty dispute.

Operating income dropped 44.4 percent to $3.8 million compared to prior year of $6.6 million, with operating margin of 5 percent, down 340 basis points versus prior year.

Income from continuing operations for the second quarter of 2017 was $2.6 million, or 8 cents per diluted share, compared to income from continuing operations of $3.7 million, or 12 cents per diluted share, in the prior-year quarter.

EBITDA from continuing operations totaled $6.2 million compared to $8.5 million in the prior-year period.

In the Retail segment, sales increased 12.7 percent to $37.1 million. Operating income rose to $6.1 million compared to $4.1 million in the second quarter of last year, primarily due to the higher net sales and gross margins, coupled with reversal of a $1.4 million reserve related to settlement of a royalty dispute. The higher gross margin reflected improved product mix, coupled with the experience-related reduction of warranty reserves.

On the call, Bill McMahon, COO, said the retail segment’s performance was in line with expectations.

“Retail growth was broad-based spending both online in bricks and mortar accounts as well as in domestic and in international markets,” said McMahon. ”Additionally, our sales in especially in commercial channel also grew year-over-year during the quarter and we’re pleased to see a consistent return to growth in this segment.”

He added that while certain competitors continue to use online promotional strategies involving deals of the day and deep incentives, Nautilus is relying on the “quality and value proposition” of its products to resonate with consumers.

“Our point of sale performances driven by positive consumer reviews leading to our lift in sales without sacrificing the margin gains of the past year,” stated McMahon. “Also of note as we enter the second half of the year, we feel that the inventory balance adjusting by certain retail partners is complete and purchasing as return to a pattern in line with point of sale performance.”

Strong sellers at retail in the quarter included Max Trainer, treadmills, Schwinn bikes, Bowflex Home Gyms, Schwinn Airdyne Pro and the Octane Zero Runner ZR8000. Additionally, TreadClimber as a category delivered growth in the retail channel last quarter.

For the second half, key product launches include the Bowflex Result series cardio line of treadmills and elliptical, the Schwinn 87 consumer grade Airdyne bike, the Octane Airdyne X and the Octane ZR7000. The company will also be entering new categories with the launch of a mass retail targeted rowing machine, the Schwinn Crewmaster, and a new incremental price point addition to its consumer indoor cycling line with the Schwinn IC3 bike.

Also planned is the launch of Modern Movement hand-held products as well as updated versions of its successful Schwinn 70 series and Nautilus 6 bikes, ellipticals and treadmills.

Said McMahon, ”Based on our current understanding Retail plan, retailer plans in the ongoing point of sale performance of our products, we anticipate strong retail growth in the back-half of 2017 driven by gains in retail floor placement key national accounts, as well as with new products online, and this is reflected in our guidance.”

In the Direct segment, revenues dropped 13 percent to $39.1 million due to the decline in TreadClimber product sales, coupled with difficult prior-period comps related to the launch of the Max Trainer M7 in late Q1 2016. Operating income was $2.5 million, down from $7.5 million. The profit drop reflected the declines in net sales and gross profits, coupled with higher creative costs related to the HVT product launch.

For the back half, the Direct segment is expected to return to growth due to the introduction of multiple product offerings, including its Bowflex Max Trainer and the added new HVT offering. Easier TreadClimber comps will also support the gains.

“For years now, our standard operating mode has been to focus simultaneously on both near term execution of our plans, well also building and investing for long-term continued growth,” said Cazenave. “That approach has worked well and we are pleased with the momentum our company currently has on both of those fronts, driving innovation and commercializing the robust pipeline of new products in our three year roadmap remains our top strategic focus area. Other near-term priorities particularly in 2017 and 2018 are to accelerate the growth in international markets and to optimize the opportunities that the acquisition of Octane affords us.”

Photo courtesy Bowflex