Nautilus Inc. reported sales declined 11.2 percent in the second quarter due to lower direct sales and shipping constraints but grew 124 percent on a two-year basis driven by triple-digit gains across Retail and Direct segments compared to 2019 levels.
The fitness equipment manufacturer showed an operating loss in the period due to the impact of logistic costs and investments in its JRNY platform.
Management Comments
“Our second-quarter results reflect the continued momentum of our North Star Strategy, as we capitalize on the sustained expansion of the home fitness addressable market. Second-quarter fiscal 2022 net sales were up 124 percent on a two-year basis, driven by triple-digit gains across both Retail and Direct segments compared to 2019 levels. We also increased revenue by 20 percent for the first half of fiscal 2022 compared to the first half of fiscal 2021. While our results were affected by global shipping constraints, we continued to advance our supply chain process, including the opening of a new distribution center, that has allowed us to work down backlog and improve our inventory position relative to last year,” said Jim Barr, CEO, Nautilus Inc.
Barr continued “As we look ahead, we have great conviction that a winning personalized connected fitness experience is the future of Nautilus. We have made significant progress executing against our North Star Strategy, including the recent VAY acquisition that enhances our software development capabilities and adds new and innovative features to the JRNY platform. The business impact of these strategic initiatives has already exceeded our expectations, with nearly 200,000 JRNY members today, about 3x where we were a year ago. While we are thrilled with this initial success, we are just scratching the surface of where we believe we can take the business and cement our leadership position within the digitally connected fitness space. We have made the strategic decision to accelerate our investment in JRNY for the remainder of fiscal 2022 and in fiscal 2023, with a focus on product innovation and marketing. This will enable our digital subscription business to be accretive sooner than previously expected and ultimately accelerate our roadmap to achieving a sustainable operating margin target of 15 percent by one year to fiscal 2025, with margins expanding to high teens by fiscal 2026.”
Total Company Results
Fiscal 2022 Second Quarter Ended September 30, 2021, Compared to September 30, 2020
- Net sales were $138.0 million, compared to $155.4 million, a decline of 11.2 percent versus last year, or down 5.4 percent excluding sales related to the Octane brand, which was sold in October 2020. Net sales are up 160 percent, or a 61 percent CAGR, when compared to the same period in 2019, excluding Octane. The sales decline was driven primarily by lower direct sales and shipping constraints. Due to the shortage of shipping containers, some factory fulfilled orders, representing over $22 million in revenue, did not ship as planned in late September. 56 percent of those orders shipped in October.
- Gross profit was $42.1 million, compared to $67.9 million last year. Gross profit margins were 30.5 percent compared to 43.7 percent last year. The 13.2 ppt decrease in gross margins was primarily due to logistics (-8 ppts), commodities, components, foreign exchange (-4 ppts), and increased investments in JRNY (-1 ppt).
- Operating expenses were $44.0 million, an increase of $20.1 million, or 83.8 percent, compared to last year, primarily due to last year’s $8.3 million Octane gain on Disposal Group, a legal settlement of $4.7 million, $4.0 million more in advertising, $3.5 million increase in JRNY investments and acquisition expenses of $0.8 million. Total advertising expenses were $12.1 million versus $8.0 million last year, trending more towards historical levels.
- Operating loss was $2.0 million or a negative 1.4 percent operating margin, compared to operating income of $44.0 million last year, primarily due to lower gross profits and higher operating expenses.
- Loss from continuing operations was $4.6 million, or -$0.15 per diluted share, compared to income of $34.0 million, or $1.05 per diluted share, last year.
- Net loss was $4.6 million, or -$0.15 per diluted share, compared to a net income of $33.8 million, or $1.04 per diluted share, last year.
- The effective tax rate was negative 96.4 percent this year compared to 21.7 percent last year, primarily due to the impact of the VAY acquisition.
The following excludes the impact of the legal settlement and acquisition costs for the three-months ended September 30, 2021 and gain on disposal group for the same period in 20201.
- Adjusted operating expenses were $38.5 million, or 27.9 percent of sales, compared to $32.3 million, or 20.8 percent of sales, last year. The increase was driven by increased advertising and JRNY investments;
- Adjusted operating income decreased to $3.5 million compared to last year’s $35.7 million, driven by lower gross profit and higher adjusted operating expenses;
- Adjusted income from continuing operations was $0.9 million, or $0.03 per diluted share, compared to $28.0 million, or $0.87 per diluted share; and
- Adjusted EBITDA from continuing operations was $7.1 million compared to $38.2 million last year.
Six-Months Ended September 30, 2021
(compared to 6 months ended September 30, 2020 in first half)
- Net sales were $322.6 million up 19.7 percent compared to $269.6 million last year. Excluding sales related to the Octane brand, net sales were up 28.2 percent compared to last year and up 215 percent or a 77 percent CAGR when compared to 6 months ending September 30, 2019. The sales increase was driven primarily by robust sales of our popular SelectTech weights.
- Gross profit was $97.6 million compared to $115.3 million last year. Gross profit margins were 30.2 percent compared to 42.8 percent last year. The 12.6 ppts decrease in gross margins was primarily due to logistics (-7 ppts), commodities, components, foreign exchange (-5 ppts), and increased investments in JRNY (-1 ppt).
- Operating expenses were $81.6 million, an increase of $3.2 million, or 4.1 percent, compared to $78.4 million last year, primarily due to $12.5 million more in advertising, increased JRNY investments of $5.9 million, a legal settlement of $4.7 million, acquisition expenses of $1.0 million, and partially offset by last year’s $20.7 million Octane Loss on Disposal Group.
- Total advertising expenses were $22.9 million compared to $10.4 million last year.
- Operating income was $15.9 million compared to $36.9 million last year. The decrease was primarily due to lower gross profit and higher operating expenses.
- Net income was $9.3 million compared to $28.7 million last year.
The following statements exclude the impact of the legal settlement and acquisition costs for the 6 months ended September 30, 2021 and loss on disposal group for the same period in 2021.
- Adjusted operating expenses were $75.9 million, or 23.5 percent of sales, compared to $57.8 million, or 21.4 percent of sales, last year. The increase was driven by $12.5 million of increased advertising and $5.9 million of increased JRNY investments.
- Adjusted operating income decreased to $21.6 million compared to last year’s $57.6 million, driven by lower gross margins and higher operating expenses.
- Adjusted income from continuing operations was $15.1 million, or $0.46 per diluted share, compared to $44.9 million, or $1.40 per diluted share.
- Adjusted EBITDA from continuing operations was $28.3 million compared to $63.7 million last year.
JRNY Update
Nautilus, Inc. continues to enhance its JRNY platform. On September 17, 2021, the company completed its acquisition of VAY AG. This acquisition will “enhance the JRNY connected-fitness experience by driving innovation and functionality for members, keeping them engaged and helping them reach their fitness goals,” said the company.
It also announced that the JRNY platform includes a video library of instructor-led strength workouts for its Bowflex SelectTech 552 and 1090 dumbbells and that, for a limited time if offering a one-year free trail JRNY membership to new and existing SeltectTech customers worldwide.
The company also recently introduced the Bowflex Max Total 16 cardio machine, which includes a 16-inch embedded HD touch screen that integrates with the JRNY platform, which integrates with other fitness app workouts.
Segment Results
(Fiscal 2022 second quarter ended September 30, 2021 compared to September 30, 2020)
Direct Segment
- Direct segment sales were $37.9 million, compared to $61.2 million a decline of 38.1 percent versus last year, and up 134 percent or a 53 percent CAGR compared to the same period in 2019. Demand trends and sales results for the quarter were more in line with pre-pandemic seasonality.
- Cardio sales declined 49.4 percent versus last year and were up 80 percent or a 34 percent CAGR compared to the same period in 2019. Lower sales this quarter were primarily driven by lower bike sales, partially offset by increased sales of treadmills and the Max M9, which was the Direct segment’s best-selling model. Strength product sales declined 8.7 percent versus last year and increased 310 percent or a 103 percent CAGR compared to the same period in 2019. Lower sales this quarter were primarily driven by lower sales of Bowflex home gyms partially offset by increased sales of SelectTech weights.
- Given the company’s improved inventory position and ability to fulfill orders in the quarter, its Direct segment’s backlog as of September 30, 2021 was down to $1.1 million compared to $26.5 million as of March 31, 2021. These amounts represent unfulfilled consumer orders net of current promotional programs and sales discounts.
- Gross profit margins were 36.9 percent versus 57.2 percent last year. The 20.3 ppt decrease in gross margin was primarily driven by logistics (-13 ppts), increased investments in JRNY (-5 ppts) and commodities, components, and foreign exchange (-2 ppts). Gross profit was $14.0 million, down 60.1 percent versus last year.
- Segment contribution loss was $1.8 million or 4.8 percent of sales, compared to $17.6 million or 28.7 percent of sales last year. The decline was primarily driven by lower gross profit, including increased investments in JRNY, partially offset by decreased media spending. Advertising expenses were $6.8 million compared to $8.0 million last year.
Retail Segment
- Retail segment sales were $99.2 million, up by 6.4 percent versus last year. Excluding sales related to Octane, net sales were up 18.6 percent compared to last year and up 175 percent or a 66 percent CAGR compared to the same period in 2019. Retail segment sales outside the United States and Canada were 57 percent excluding Octane and up 655 percent or a 175 percent CAGR compared to the same period in 2019.
- Cardio sales declined by 18.2 percent versus last year. Excluding sales of the Octane brand, cardio sales were down 5.6 percent compared to last year, or up 120 percent or a 48 percent CAGR compared to the same period in 2019. Lower sales this quarter were primarily driven by bikes and ellipticals. Strength product sales grew by 89.8 percent versus last year, or up 333 percent or a 108 percent CAGR compared to the same period in 2019, led by the popular SelectTech weights.
- As of September 30, 2021, the Retail segment’s backlog totaled $82.9 million compared to $178.6 million as of March 31, 2021. These amounts represent customer orders for future shipments and are net of contractual rebates and consideration payable to applicable Retail customers. Due to the severe shortage of shipping containers, some factory fulfilled orders, representing over $22 million of the Retail backlog, did not ship as planned in late September. 56 percent of those orders shipped in October.
- Gross profit margins were 27.4 percent compared to 34.3 percent last year. The 6.9 ppt decrease in gross margin was primarily driven by: commodities, components, and foreign exchange (-4 ppts) and logistics (-3 ppts). Gross profit was $27.1 million, a decrease of 15 percent versus last year.
- Segment contribution income was $18.7 million, or 18.9 percent of sales, compared to $23.4 million, or 25.2 percent of sales, last year. The decline was primarily driven by lower gross profit.
Cash and Liquidity
- Cash, cash equivalents and restricted cash were $21.5 million, compared to cash, cash equivalents, restricted cash and available-for-sale securities of $113.2 million as of March 31, 2021. The decrease was primarily due to the strategic decision to increase on-hand inventory for the holiday season and the acquisition of VAY.
- Debt and other borrowings were $17.2 million compared to $13.3 million as of March 31, 2021.
- $49.0 million was available for borrowing under the Wells Fargo Asset Based Lending Revolving Facility (“Facility”) compared to $54.4 million as of March 31, 2021.
- On October 29, 2021 it amended its facility to increase revolver size from $55.0 million to $100.0 million and extended the maturity date to October 29, 2026.
- Inventory was $162.7 million, compared to $68.1 million as of March 31, 2021. The increase in inventory is driven by the strategic decision to increase on-hand inventory levels ahead of the fitness season given the continued disruption in global logistics. About 40 percent of inventory as of September 30, 2021 was in transit.
- Trade receivables were $88.7 million as of September 30, 2021 and March 31, 2021. Trade receivables were flat due to the timing of customer payments on decreased sales.
- Trade payables were $115.2 million, compared to $98.9 million as of March 31, 2021. The increase in trade payables was primarily due to the timing of payments for inventory.
- Capital expenditures totaled $5.0 million for the 6 months ended September 30, 2021.
Forward-Looking Guidance
(back half of Fiscal 2022)
- The company’s revenue for the next few quarters will be compared to record results due to the pandemic’s effect on net sales last year. To gauge continued progress against the expanded addressable market, the company will be measuring business versus the same period two years ago for the next few quarters.
- The company expects total company net sales for the back half of fiscal 2022 to be between $290 million and $320 million, a 2-year revenue CAGR of 21 percent to 27 percent. Sales guidance reflects $6.0 million to $7.0 million of deferred revenue related to the company’s plan to continue bundling 12-month JRNY trials with cardio equipment sales.
- The company expects global supply chain challenges to continue pressuring gross margins in the back half. Gross margins are expected to be 15-to -7 percentage points lower than the same period last year driven by increased logistics, deferred revenue, and investments in JRNY.
- The company was pleased with the results of the JRNY investments in the first half and plans to increase investments in the back half to accelerate membership acquisition. The company expects these investments to dilute operating margins by 5-to-6 percentage points.
- The company expects to increase advertising spend in the second half by 9-to-11 percentage points as a rate of sales to market the latest connected fitness offerings to remain competitive in the upcoming fitness season.
- The company expects to continue investing in infrastructure to scale and expects these investments to dilute operating margins by 4-to-5 percentage points.
- Given these investments and the external macro pressure on gross margin, the company expects a loss in the back half with negative operating margins in the mid-teens.
- The company continues to expect full-year capital expenditures to be between $12 million and $14 million with the majority earmarked for JRNY investments.
- The company raised its guidance for JRNY members to 250,000-to-350,000 by the end of FY22.
Long Term View
(beyond Fiscal 2022)
- For fiscal year 2023, the company expects gross margin to improve to the low 30 percent range driven by stabilization in the logistics environment and the accretive impact of the higher-margin subscription business. The company expects to return to positive adjusted EBITDA in fiscal year 2023.
- The company stated that it has made the strategic decision to accelerate investment in JRNY for the remainder of fiscal 2022 and through fiscal 2023 with a focus on product innovation and marketing.
- The company believes that JRNY will be accretive sooner than previously expected and will accelerate the achievement of its long-term operating margin goal of 15 percent by one year to FYE 2025, with margins expanding to high-teens by FYE 26.
Photo courtesy Nautilus