Nautilus Inc. reported a loss in the third quarter as sales fell 32.2 percent.
Net sales for the third quarter of 2019 totaled $61.7 million, a decrease of 32.2 percent compared to $91.1 million in the same quarter of 2018.
Direct segment sales were down by 44.1 percent from the prior year quarter, primarily driven by lower Max Trainer product sales and related to a 37.0 percent reduction in advertising expense compared to the prior year quarter as the company prepared to increase spend on a new advertising campaign in the fourth quarter of 2019.
Retail sales were down by 27.1 percent from the same quarter of the prior year, primarily reflecting partial shipment delays to October 2019 related to recently imposed tariffs further discussed below, as well as a decline in Bowflex Max Trainer product sales. Royalty revenue in the third quarter of 2019 was $0.7 million, an increase of 12.4 percent compared to the same quarter of last year primarily due to a new agreement. For the first nine months of 2019, net sales were $205.1 million, a decrease of 27.1 percent compared to $281.4 million in the same period in the prior year. Gross margins for the third quarter of 2019 were 30.9 percent versus 42.3 percent for the same period of last year, primarily due to unfavorable product mix and unfavorable overhead absorption related to the decline in sales.
Total operating expenses for the third quarter of 2019 decreased by $5.0 million to $27.3 million compared to $32.3 million in the same period of last year, primarily due to lower advertising spend and product development costs, partially offset by increased advertising production costs. Operating loss for the third quarter of 2019 was $8.3 million, compared to operating income of $6.2 million in the same period of last year, primarily due to lower sales and unfavorable gross margins, partially offset by lower operating expenses.
Loss from continuing operations for the third quarter of 2019 was $10.6 million, or $0.36 per diluted share, compared to income of $4.5 million, or $0.15 per diluted share, for the same period of last year. Tax expense in the third quarter of 2019 included a $3.9 million, or $0.13 per diluted share, valuation allowance against the company’s deferred tax assets.
EBITDA loss from continuing operations for the third quarter of 2019 totaled $5.5 million compared to income of $8.5 million in the same quarter of the prior year.
Jim Barr, chief executive officer, stated, “Third quarter results were impacted by declines in both of our segments. The Direct segment results were related to a significant reduction in advertising spend while we continued to fine-tune our refreshed brand and advertising messaging and finalize our fourth quarter advertising plan. The Retail segment experienced a partial shipping delay to October 2019 related to recently imposed tariffs implemented with a shortened notice period, as well as lower sales of our existing Max Trainer products. In late August, we began the Direct segment rollout of the new Max TotalTM product. This trainer features our first integrated digital screen that directly connects the user to the features of our upgraded AI-powered digital platform. Our new advertising and brand campaign launched with limited media weight to test messaging effectiveness and efficiency across television, social media, PR, and other digital platforms. The marketing spend during the third quarter included content development costs that we do not expect to incur on a similar scale in the fourth quarter. We anticipate ramping up a more robust marketing campaign during the fourth quarter of 2019 and the first quarter of 2020, incorporating learnings from the initial campaign test launch.”
Barr continued, “Now that I’ve been at Nautilus for 90 days, I am even more excited about the overall strength and potential of our brands. We believe that the digital platform, combined with a growing number of connected fitness offerings, is setting the stage for future performance and positions Nautilus as a global technology-driven fitness company. On October 30th, we relaunched our digital platform under the new JRNYTM name, reflecting our belief that fitness is a life-long pursuit and we continue to make that pursuit more attainable for everyone through our products and experiences. At its core, JRNYTM features an AI-driven true personalization engine that suggests customized workouts and adjusts to individual fitness levels, along with friendly coaching that customers tell us feels like having an on-demand one-on-one personal trainer. Accompanying these digital launches are our multichannel introductions of the connected fitness experience with the Bowflex 216 and 116 treadmills, the Schwinn IC4 bike, and the Bowflex C6 bike. Our efforts to right-size the business that we announced in July 2019 are progressing and we expect to save approximately $6 million in workforce and shared support cost reductions in 2020. In addition, we expect to have positive EBITDA from continuing operations in the fourth quarter and generate positive cash flow from operations in the fourth quarter.”
Net sales for the Direct segment were $16.2 million in the third quarter of 2019, a decrease of 44.1 percent over the comparable period last year driven primarily by lower Max Trainer product sales and related to a 37.0 percent reduction in advertising expense compared to the prior year quarter. Operating loss for the Direct segment was $8.7 million for the third quarter of 2019, compared to an operating loss of $1.4 million in the third quarter of the prior year. Operating income was negatively impacted by the decline in sales and gross margins, partially offset by a decrease in sales and marketing expense. Gross margin for the Direct segment declined from 57.3 percent in the third quarter of 2018 to 38.3 percent in the third quarter of 2019, which resulted primarily from unfavorable overhead absorption related to decreased net sales and unfavorable product mix.
Net sales for the Retail segment were $44.8 million in the third quarter of 2019, a decrease of 27.1 percent when compared to net sales of $61.5 million in the third quarter of last year. The decrease primarily reflected partial shipping delays resulting from recently imposed tariffs, as well as a decline in Bowflex Max Trainer product sales. Operating income for the Retail segment was $4.8 million for the third quarter of 2019 compared to income of $12.7 million in the third quarter of last year. The decrease in Retail segment operating income was primarily due to lower revenue and gross margins. Retail segment gross margin was 27.1 percent in the third quarter of 2019, compared to 34.7 percent in the same quarter of the prior year, which resulted primarily from unfavorable product mix and unfavorable overhead absorption related to the lower sales.
As of September 30, 2019, Nautilus had cash and cash equivalents of $5.8 million and debt of $20.6 million, compared to cash, cash equivalents and marketable securities of $63.5 million and debt of $32.0 million at year end 2018. Working capital of $42.9 million as of September 30, 2019 was $33.7 million lower than the 2018 year-end balance of $76.6 million. Inventory as of September 30, 2019 was $50.1 million, compared to $68.5 million as of December 31, 2018 and $55.5 million at the end of the third quarter of last year. The company had $12.7 million available for borrowing on its line of credit as of September 30, 2019.
Photo courtesy Bowflex