Nautilus Inc. reported third-quarter profits well above Wall Street’s consensus targets as sales grew 152 percent.

Third Quarter 2020 Highlights Compared To Third Quarter 2019

  • Net sales were $155.4 million, up 151.8 percent, compared to $61.7 million for the same period last year, driven primarily by strong demand for the Schwinn IC4 and Bowflex C6 connected-fitness bikes, Bowflex Home Gyms, and SelectTech weights. Strong execution across the organization, coupled with supply chain improvements that began earlier in the year, drove record results. However, despite increased factory capacity, the company entered the fourth quarter with $72.8 million in backorders including certain held-for-sale orders of $5.2 million. Wall Street’s consensus estimate was $115.67 million.
  • Gross profit was $67.9 million, up 256.3 percent, compared to $19.1 million for the same period last year. Gross margin rates expanded to 43.7 percent this year compared to 30.9 percent last year, driven by increased full-priced selling in Direct, improved wholesale margins in Retail and fixed costs leverage, partially offset by increased transportation costs driven by global logistics disruptions.
  • On October 14, 2020, the company entered into an agreement to sell Octane Fitness, Inc. to True Fitness Technology, Inc. for a base purchase price of $25.0 million subject to adjustments for cash and cash equivalents, indebtedness, transaction expenses and working capital. The company recognized a gain on a disposal group of $8.3 million related to this transaction. As a result, operating expenses decreased 12.4 percent to $23.9 million, compared to $27.3 million last year.
  • Operating income was $44.0 million, a $52.3 million improvement, versus a loss of $8.3 million for the same period last year. This is the highest quarterly operating income in the company’s history.
  • Net income was $33.8 million, or $1.04 per diluted share, compared to last year’s loss of $8.8 million, or 30 cents per diluted share.

The following statements exclude the impact of the gain on the disposal group this quarter.

  • Adjusted operating expenses increased 18.2 percent to $32.3 million, compared to $27.3 million last year, primarily due to increased advertising and general and administrative expenses;
  • Adjusted operating income improved to $35.7 million compared to an operating loss of $8.3 million last year, driven by sales growth and expanded gross margin rates partially offset by higher operating expenses;
  • Adjusted income from continuing operations improved to $28.0 million, or 87 cents per diluted share, compared to a loss from continuing operations of $8.7 million, or 29 cents per diluted share. Wall Street’s consensus estimate had been 32 cents a share; and
  • Adjusted EBITDA from continuing operations improved to $37.1 million compared to an adjusted EBITDA loss of $5.5 million, an improvement of $42.6 million.

Management Comments
“I’m really proud of how well our team executed this quarter. We delivered record results while continuing to position our company for long-term sustainable growth. We increased sales by 152 percent, expanded gross margins by 1280 basis points, delivered operating income of $44 million, the highest quarterly operating income in our history, and generated $37 million of adjusted EBITDA,” said Jim Barr, Nautilus Inc. CEO. “Impacts stemming from COVID-19 are changing consumers’ exercise habits and preferences in profound ways. Our team’s strong sustained execution has enabled us to capitalize on in-home fitness trends and elevated demand. We were able to attract many new consumers to our brands through both our retail and direct segments. We continue to see strong consumer response to our cardio and strength offerings, particularly our IC bikes, SelectTech weights and Home Gyms. In Q3, we launched the new Bowflex VeloCore, the industry’s first (un)stationary, dual-mode bike that combines leading technology with digital connectivity for a dynamic full-body workout and an immersive digital experience. Early results for this new product have exceeded expectations. A key focus in this quarter was continuing to improve the flow of inventory in our supply chain. However, even with expanded production and improved supply chain, demand still outpaced supply, and we are entering the fourth quarter with close to a $68 million backlog.”

Barr continued, “While we focused on delivering best-in-class products for our customers, we also continued to take steps to advance our long-term transformation. We sold our commercial brand, Octane Fitness, allowing the team to be laser-focused on growing and enhancing our at-home connected fitness experiences. We hired a Chief Digital Officer who has implemented large-scale digital experiences at some of the world’s top technology companies to lead our JRNYTM and e-commerce teams and accelerate our ongoing digital transformation. We’ll be sharing the full details of our long-range plan in early 2021 but as we’ve demonstrated in the last four quarters, the work has already begun. We’ve strengthened our balance sheet, launched new products in response to consumer insights, and have continually enhanced our digital offering. These are the steps we need to take to successfully return Nautilus Inc. to sustainable long-term profitable growth.”

Third Quarter 2020 Segment Results Compared to Third Quarter 2019

Direct Segment

  • Net sales were $61.2 million, up 277.8 percent, from $16.2 million in the same period last year, driven primarily by cardio products, which grew 256.2 percent, led by the Schwinn IC4 and Bowflex C6 connected-fitness bikes.
  • Strength products grew 349.2 percent led by the SelectTech weights and Bowflex Home Gyms. The company launched the Bowflex VeloCore in September, and early results have exceeded expectations.
  • As of September 30, 2020, Direct’s backlog totaled $23.0 million compared to $20.6 million as of June 30, 2020. These amounts represent unfulfilled consumer orders net of current promotional programs and sales discounts.
  • Gross margin rate was 57.2 percent, increased from 38.3 percent for the same period last year, primarily driven by increased full-priced sales and favorable fixed costs leverage, partially offset by higher transportation costs.
  • Segment contribution income was $17.6 million, compared to a loss of $8.7 million last year. The $26.3 million improvement was primarily driven by higher gross profit, partially offset by increased media spend. Advertising expenses were $8.0 million for the third quarter of 2020 compared to $5.8 million for the same period in 2019. The $2.3 million increase was driven by the company’s investment in the launch marketing of its Bowflex VeloCore bikes.

Retail Segment

  • Net sales were $93.2 million, up 107.8 percent, from $44.8 million. Cardio sales increased 102.6 percent driven by bikes, particularly the Schwinn IC4 connected-fitness bikes and ellipticals. Strength product sales grew by 127.9 percent led by SelectTech weights and benches. Excluding sales related to the Octane brand, the third quarter of 2020 net sales for its Retail segment grew 131.6 percent versus the third quarter of 2019.
  • As of September 30, 2020, its Retail backlog totaled $49.8 million including certain held-for-sale orders of $5.2 million, compared to $13.6 million as of June 30, 2020. These amounts represent customer orders for future shipments and are net of contractual rebates and consideration payable to applicable Retail customers.
  • Gross margin rate was 34.3 percent, increased from 27.1 percent for the same period last year, primarily driven by favorable customer mix and fixed costs leverage, partially offset by higher transportation costs.
  • Segment contribution income was $23.4 million compared to $4.8 million for the same period last year. The $18.6 million improvement was primarily driven by higher gross profit and leveraging of fixed costs.

Balance Sheet and Other Key Highlights As of September 30, 2020:

  • The company’s liquidity position continues to improve.
    • Cash, cash equivalents and restricted cash were $72.3 million, an increase of $61.2 million, compared to cash and cash equivalents of $11.1 million as of December 31, 2019;
    • Debt was $14.3 million, compared to debt of $14.1 million as of December 31, 2019;
    • $48.6 million was available for borrowing under the Wells Fargo Asset Based Lending Revolving Facility;
    • This is the fourth consecutive quarter of positive cash flow; and
    • Account receivables were $68.6 million, compared to $54.6 million as of December 31, 2019. The increase in accounts receivable was primarily due to the timing of customer payments partially offset by certain accounts receivable included in assets held-for-sale.
  • Inventory was $33.7 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 assets held-for-sale.
  • To secure factory capacity, the company routinely issues non-cancelable purchase obligations for expected product deliveries in the next twelve months. As of September 30, 2020, there were approximately $240.3 million of non-cancelable purchase obligations including certain held-for-sale purchase orders of $13.8 million, compared to $47.0 million at the same date last year and $28.4 million as of December 31, 2019.
  • Trade payables were $83.4 million, compared to $74.3 million as of December 31, 2019. The increase in trade payables was primarily due to timing of payments for inventory, advertising related payments partially offset by certain payables included in liabilities held-for-sale.
  • Capital expenditures totaled $8.0 million as of September 30, 2020.

Forward-Looking Guidance
The company does not plan to provide specific guidance on an ongoing basis. However, as this year’s quarterly results have not followed the typical seasonality, the company is providing the following commentary:

  • The company expects full-year 2020 net sales to be between $540 million and $565 million and full-year 2020 Adjusted EBITDA to be between $90 million and $100 million.
  • The company is raising the full year 2020 capital expenditures guidance range to $10 million to $13 million.

Photo courtesy Nautilus