Nautilus Inc. reported sales grew 93.5 percent in the first quarter, driven primarily by strong demand for cardio and strength products, particularly its connected-fitness bikes, Max Trainer and treadmills, as well as sizeable backlog orders. Earnings also improved significantly excluding a charge related to the planned sale Octane Fitness.
Second Quarter 2020 Highlights Compared to Second Quarter 2019
- Net sales were $114.2 million, up 93.5 percent compared to $59.0 million, driven primarily by strong demand for cardio and strength products, particularly its connected-fitness bikes, Max Trainer® and treadmills. Nautilus said its ability to restart and then accelerate its supply chain allowed us to better respond to the heightened demand that began in March when COVID-19 shelter-in-place orders were first put in place. However, despite increased supply capacity, Nautilus entered Q3 with $34.2 million in backorders.
- Gross profit was $47.4 million, up 170.6 percent compared to $17.5 million last year. Gross margin rates expanded to 41.5 percent this year compared to 29.7 percent last year, driven by favorable product and customer mix and fixed costs leverage, partially offset by higher product landed costs. As a reminder, its products are now subject to 7.5 percent tariffs versus no tariff last year, and shipping costs from Asia are higher due to constrained supply in logistics.
- In second-quarter 2020, the company recognized a non-cash loss on disposal group of $29.0 million related to the planned sale of Octane Fitness®. In the second quarter of 2019, the company recognized an impairment of $72.0 million for goodwill and other intangible assets. As a result, operating expenses decreased by 47.0 percent to $54.5 million, compared to $102.9 million last year.
- Operating loss was $7.1 million, compared to a loss of $85.4 million last year. The $78 million improvement was driven by lower operating expenses, sales growth, and expanded gross margin rates. Net loss was $5.1 million, or -$0.17 cents per diluted share, compared to last year’s loss of $78.9 million, or -$2.66 per diluted share.
The following statements exclude the impact of the loss on the disposal group this year and the impairment last year1.
- Adjusted operating expenses decreased by 17.6 percent to $25.5 million compared to $30.9 million last year, primarily due to continued
- expense discipline and lower advertising expenses. Customer acquisition costs were meaningfully lower this year as the company pulled back on paid advertising, given strong organic demand and inventory scarcity.
- Adjusted operating income improved to a record of $21.9 million compared to an operating loss of $13.4 million last year, driven by sales growth, expanded gross margin rates, and lower operating expenses.
- Adjusted income from continuing operations improved to $16.8 million, or $0.56 per diluted share, compared to a loss from continuing operations of $9.8 million, or -$0.33 per diluted share.
- Adjusted EBITDA from continuing operations improved to $24.7 million compared to an adjusted EBITDA loss of $10.5 million, an improvement of $35 million.
“The second quarter of 2020 was one of the strongest quarters ever for our Company; highlighted by record sales, almost 1,200 basis point increase in gross margins, and a $78 million improvement in operating loss, resulting in adjusted EBITDA of $25 million,” said Jim Barr, Nautilus Inc. Chief Executive Officer. “While we benefitted from the COVID-19 at-home fitness trend, our team’s agility and strong execution were essential to our outstanding results. The operational improvements we implemented in the back half of 2019 changed our trajectory in the first quarter of 2020 and were instrumental in record results in Q2. We dramatically improved the flow of inventory in our supply chain by increasing factory capacity for our leading products by as much as 500 percent. Our team worked quickly to find solutions to move product from our manufacturers to the ports and then secured the quickest vessels to get the product to our distribution centers. Even with our expanded production and improved supply chain, demand still outpaced supply and we are entering the third quarter with a $34 million backlog.”
Barr continued, “Our strong second-quarter performance was driven by sales growth across both segments for all consumer modalities and brands, slightly offset by declines in our commercial business due to gym closures related to COVID-19. To continue providing new and existing customers with products that lead to a healthier lifestyle, we will be introducing several new strength and cardio product offerings in the fall, including an expansion of our JRNY® personalized connected fitness digital platform with the rollout of next-generation JRNY® that will include an updated user interface, new content, integration of Explore The World™ and Apple Health.”
Barr, concluded, “We are still in the early stages of our long-term transformation, but we have made good progress in the past 6 months in enhancing our digital capabilities, in our products, our marketing, and our business operations. We remain confident that the company’s resolve, resilience, and agility are qualities that, when coupled with well-known brands, a strong product portfolio, and a strengthening digital strategy should allow us to successfully return Nautilus Inc. to long-term profitable growth.”
Second Quarter 2020 Segment Results Compared to Second Quarter 2019
- Net sales were $50.4 million, up 142.1 percent, from $20.8 million last year, driven primarily by the company’s cardio products which grew 183.4 percent, led by connected-fitness bikes, Bowflex® C6 and Schwinn® IC4, and the Max Trainer®. This was the first quarter-over-quarter of Max Trainer® positive sales growth for this segment since the fourth quarter of 2017. Strength product sales growth was limited by inventory scarcity, particularly of the popular SelectTech weights.
- As of June 30, 2020, backlog totaled $20.6 million compared to $8.0 million as of March 31, 2020, which represents unfulfilled consumer orders and is net of current promotional programs and sales discounts.
- Gross margin rate was 54.6 percent, up from 43.3 percent, primarily driven by favorable product mix and fixed costs leverage, partially offset by higher product landed costs.
- Segment contribution income was $17.0 million, compared to a loss of $6.3 million, last year. The $23.3 million improvement was primarily driven by higher net sales, expanded gross margin rates, and $4.2 million reduction in media spend. Advertising expenses were $2.4 million for the second quarter of 2020 compared to $6.6 million for the same period in 2019.
- Combined consumer credit approvals by its primary and secondary U.S. third-party financing providers for the second quarter of 2020 were 48.4 percent, compared to 53.2 percent in the same period of 2019. The decrease in approvals reflects lower credit quality applications.
- Net sales were $62.9 million, up 68.1 percent, from $37.5 million. Cardio sales increased by 88.2 percent driven by the Schwinn® IC4 connected-fitness bikes and Max Trainer®. This was the first quarter-over-quarter of Max Trainer® positive sales growth for this segment since the fourth quarter of 2018. Strength product sales growth of 22.2 percent was limited by inventory scarcity of the popular SelectTech® weights and benches.
- Excluding sales related to its Octane brand, the second quarter of 2020 net sales for the Retail segment grew 95 percent versus the second quarter of 2019.
- As of June 30, 2020, backlog totaled $13.6 million compared to $5.8 million as of March 31, 2020, primarily related to customer orders including firm orders for future shipments. The estimated future revenues are net of contractual rebates and consideration payable for applicable Retail customers.
- Retail customer, Amazon.com, had sales greater than 10 percent of total company net sales. Amazon.com accounted for 18.0 percent of total company net sales this year versus 20.9 percent last year.
- Gross margin rate was 30.3 percent, up from 20.8 percent last year, primarily driven by favorable sales mix and fixed costs leverage, partially offset by higher product landed costs due to increased tariffs and shipping costs from its suppliers in Asia.
- Segment contribution income was $11.6 million compared to a loss of $0.2 million. The $11.8 million improvement was primarily driven by higher sales and leveraging of fixed costs.
Balance Sheet And Other Key Highlights
As of June 30, 2020:
- Cash, cash equivalents and restricted cash were $47.9 million, and debt was $14.8 million, compared to cash and cash equivalents of $11.1 million and debt of $14.1 million as of December 31, 2019.
$28.6 million was available for borrowing under the Wells Fargo Asset Based Lending Revolving Facility.
- Accounts receivable was $33.7 million, compared to $54.6 million as of December 31, 2019. The decrease in accounts receivable was primarily due to the timing of customer payments and certain accounts receivable included in held-for-sale.
- Inventory was $21.3 million, compared to $54.8 million as of December 31, 2019. The decrease in inventory was primarily due to the surge in demand for home-fitness products and certain inventory included in held-for-sale. Strong customer preference for its Bowflex and Schwinn products drove record-setting traffic depleting its entire stock of consumer products. Inventory turns this quarter were at historic highs and a growing portion of sales in its retail segment are being fulfilled directly from the supplier.
- To secure factory capacity, Nautilus said it routinely issues non-cancelable purchase obligations for expected product deliveries in the next twelve months. As of June 30, 2020, there were approximately $127.7 million of non-cancelable purchase obligations, compared to $20.4 million last year. As of March 31, 2020 and December 31, 2019, the amounts were $34.6 million and $28.4 million, respectively.
- Trade payables were $45.2 million, 39.1 percent lower than compared to $74.3 million as of December 31, 2019. The decrease in trade payables was primarily due to the timing of payments for inventory, reduced advertising-related payments and certain payables included in held-for-sale.
- Capital expenditures totaled $4.7 million as of June 30, 2020.
- Second-quarter results did not follow the typical seasonality in its business, and given the highly volatile environment, Nautilus said it believes historical relationships may not hold over the next few quarters.
- Nautilus’ perspective on continued consumer demand depends in part on the duration of the constraints placed on gyms by local governmental authorities and prevailing consumer comfort regarding returning to gyms. Given this uncertainty, the company is not providing specific guidance for the remainder of the fiscal year 2020, but the company is providing the following insight into factors that may affect its performance.
- Nautilus said it believes that, in the near-term, demand for its products will continue to be elevated relative to pre-COVID levels, and that consumers will react favorably to the new products that Nautilus is launching later this year. However, structural production constraints in its asset-light model will likely limit its ability to fulfill all the demand. In addition, any unforeseen disruptions to its supply chain could further impede its ability to meet this demand and could also impact its sales in any particular quarter. Gross margins will be further pressured by increased logistics costs as demand for logistics services is currently outstripping supply. Lastly, Nautilus expects sales and marketing expenses for the remainder of the year to be higher than they were in the first half of the year, driven by launch marketing for its new JRNY-connected products.
- Nautilus said it is reiterating its full-year capital guidance range of $8 million to $10 million for 2020.
Photo courtesy Nautilus