Nautilus Leans On Strong Retail Sales Amid DTC Weakness

By Thomas J. Ryan

Nautilus Inc. (NYSE: NLS) reported profits doubled in the third quarter, ended September 30. Strength in its retail segment supported by its acquisition of Octane Fitness, as well as double-digit organic growth, offset weakness in its direct segment that was blamed on distractions being caused by the election.

On its October 31 conference call with analysts, Nautilus CEO Bruce Cazenave said the direct business was hurt by a weak consumer response to its media investments and a resulting strategic decision to defer a significant portion of planned advertising media spending during the quarter that was dominated by U.S. election advertising.

Still, the strength from retail helped Nautilus’ third-quarter net earnings reach $7.5 million, or 24 cents a share, up from $3.7 million, or 12 cents, in the same period a year ago. A 380-basis-point decline in overall operating expenses, to 38.4 percent, helped offset a 270-basis-point decline in overall gross margins, to 48.5 percent. Companywide revenues climbed 14.3 percent to $80.8 million.

Retail Up
At its retail segment, sales jumped 79.6 percent to $25.7 million. The gain reflects the inclusion of Octane Fitness, as well as a 17-percent organic gain, driven by contributions from both its cardio and strength products.

Operating income for the retail segment nearly tripled to $9.2 million compared to $3.2 million in the third quarter of last year. Gross margins in the segment improved to 35.1 percent from 25.6 percent in the same quarter of the prior year due to improved product and channel mix in the organic retail segment, coupled with the addition of the higher-margin Octane Fitness business.

On the call, William McMahon, COO, said the company gained further shelf space and market share at retail. Strong growth was seen in all of Octane’s fitness segments, particularly in commercial products, reflecting the early acceptance of its commercial Zero Runner platform.

McMahon attributed much of the company’s recent retail business success to its product portfolio expansion. In September, it unveiled the Nautilus 618 performing series, which includes an Electric Recumbent Bike, UprightBike and a RunSocial app compatible treadmill. Bluetooth connectivity enables the user to share data through a trainer app and also to synchronize with popular fitness apps such as Apple HealthKit, Google Fit, Under Armour Record, MapMyRide, MapMyrun, MyFitnessPal and Endomondo.

McMahon also noted that as part of efforts to add a “more omni-channel approach” to its retail business, it has positioned Bowflex Max Trainer M3 as an in-store-only purchase at Dick’s Sporting Goods.

“This initiative will expose Max Trainer to new consumers and further increase awareness of this key product platform,” McMahon said. “We’re monitoring this effort closely and while the results during peak fitness season are the most important, we are already impressed with the partnership shown by Dick Sporting Goods team and representation of our products in store.”

Direct Down
Sales for the direct segment slid 21.4 percent to $33.7 million.

McMahon noted that company officials had mentioned that some weakness in consumer response rates were seen in July due to distractions caused by the election campaign and Olympics and could continue in the third quarter. Consumer response rates, McMahon added, “did in fact continue and remained consistently soft through the quarter” with both lead generation and web traffic volume impacted.

Officials decided to reduce media spend to improve ROI, and that wound up depressing revenues. The media spend in Q3 ended up being 13.7 percent lower than the prior year. The weakness in media response has also been noted in low television viewership in recent months, as well as soft consumer response rates among certain other consumer companies, he noted.

Operating income for the direct segment dropped 52.1 percent to $2.6 million as the decline in sales and gross profits was only partly offset by reductions in variable sales and marketing expenses. Gross margins improved 140 basis points to 65.7 percent, primarily reflecting favorable product mix.

To revive sales, new creative for the Bowflex Max Trainer was introduced in October and early returns are showing improved response rates. A new Bowflex TreadClimber ad will be introduced in November. With cable news channel viewing on the upswing, adjustments in media buys are being considered.

McMahon also hopes response rates pick up post-election. The majority of the fourth quarter occurs after Black Friday, “so such a change would be quite beneficial if our seasonal pattern continues.”

“That said,” McMahon added, “we are mindful that longer-term macro factors could be impacting results,” and officials are monitoring metrics such as consumer credit approval rates to make adjustment as needed.

Looking further ahead, the company is bullish about the direct channel launch in the first half of 2017 of the Bowflex HVT, which combines cardio and strength training into one machine. Said McMahon, “Our research has indicated the Bowflex customers are attracted to products that deliver quick results and the HVT is in line with current workout trend.”

Nautilus maintained its long-range annual target calling for organic growth gains in the range of 10 to 12 percent, but it now expects to slightly underperform that rate in the current year due to the disappointing direct performance in the quarter.

The company also now expects the EPS accretion from the Octane acquisition will likely to be in the 7 cents to 10 cents range this year, lower than the previously expected range of 10 cents to 15 cents due to market softness in one of Octane’s channels of distribution

“Looking ahead we are very carefully navigating through the same challenges that emerged in Q3 related to the media conditions in general consumer response,” said Cazenave. “While there were clear external factors creating uncertainty in the general consumer market and are hopeful that things will stabilize soon, we are proactively planning to operate in this environment will into 2017.”

Photo courtesy Octane/Nautilus Inc.