Nautilus’ Q3 Sales Climb 9 Percent

Nautilus Inc. reported earnings rose 6.4 percent in the third quarter ended September 30 on a 9 percent revenue gain.

Q3 2017 Highlights

All comparisons relate to the third quarter of 2016 unless otherwise indicated.

• Revenues
  • Total revenue increased 9 percent to $88.1 million compared to prior year of $80.8 million.
  • Direct segment sales increased 0.8 percent to $34 million as sales growth of new products, including the Bowflex HVTTM, offset the expected decline in TreadClimber sales.
  • Retail segment sales increased 15.8 percent to $53.5 million, reflecting strong seasonal sell-in with key traditional and e-commerce partners, partially offset by weakness in specialty and commercial customers.
• Gross Margins
  • Total  company gross margins decreased by 160 basis points to 46.9 percent primarily due to a shift in segment revenue mix from Direct to Retail.
  • Direct margins decreased by 220 basis points due to a shift in product mix and increased discounting of the TreadClimber product line, coupled with select promotional offers on other products.
  • Retail margins increased by 60 basis points as stronger revenue translated into improved absorption of fixed costs and benefited from a $0.6 million settlement related to an indemnification claim.
• Operating Expenses
  • Operating expenses decreased 9.9 percent to $28 million due to lower finance fees related to a contract extension with a financing partner that provided a retroactive adjustment, coupled with ongoing lower costs in the Direct segment and a $1 million favorable settlement related to an indemnification claim.
• Operating income increased 62.8 percent to $13.4 million compared to prior year of $8.2 million, with operating margin of 15.2 percent, up 500 basis points versus prior year.
• Income from continuing operations for the third quarter of 2017 was $8.3 million, or 27 cents per diluted share, compared to income from continuing operations of $7.8 million, or 25 cents per diluted share in the prior-year quarter.
• The effective tax rate for the third quarter of 2017 was 36.8 percent compared to 1.9 percent for the prior-year period. The prior-year period was favorably impacted by the release of previously unrecognized tax benefits associated with certain non-U.S. filing positions.
• EBITDA from continuing operations totaled $15.3 million compared to $10.2 million in the prior-year period.
• At September 30, 2017, cash and marketable securities decreased to $77.8 million and debt decreased to $52 million, compared to $79.6 million and $64 million, respectively, at December 31, 2016.

Q3 2017 YTD Highlights

All comparisons relate to the first nine months of 2016 unless otherwise indicated.

• Revenues
  • Total revenue was $278.4 million compared to prior year of $280.3 million.
  • Direct segment sales decreased 7.6 percent to $147.8 million primarily due to lower TreadClimber sales, slightly offset by the introduction of the new Bowflex HVTTM.
  • Retail segment sales increased 8.9 percent to $128.4 million, reflecting sales increases across a variety of product offerings and traditional and e-commerce partners, partially offset by weakness in sales to specialty and commercial customers.

• Gross Margins
  • Total  company gross margins decreased by 180 basis points to 50.8 percent due to a shift in segment mix, and lower margins in the Direct segment, partially offset by higher Retail margins.
• Operating income decreased by 12.3 percent to $29.9 million and operating margin decreased by 150 basis points, from 12.2 percent to 10.7 percent.
• EBITDA from continuing operations decreased by 8.5 percent to $36.4 million.

Bruce M. Cazenave, chief executive officer, stated, “Our third quarter 2017 top line results were driven by stronger sell-in and broader placements of both existing and new products in traditional and e-commerce retail. In our Direct Segment, we experienced a slight increase in overall sales as the recently launched Bowflex Hybrid Velocity Trainer ‘HVT,’ offset the continued declines in TreadClimber sales. We achieved over 60 percent growth in our operating income due to the strong Retail results and certain one-time benefits, including the retroactive finance fee adjustment and favorable settlement of an indemnification claim.”

Cazenave continued, “As indicated on the prior earnings call, we planned to invest a significant amount of time during the third quarter to test, modify, and optimize our messaging and media plans to support the new HVT line. As a result of these efforts, our media planning has been updated and refined for the critical holiday season, November through January 2018, but the level of success achieved from these changes remains to be seen. As such, we felt it prudent to provide updated guidance for 2017 based on some of our early learnings. While we expect that recent new product contributions will again drive growth in the fourth quarter, they will not likely be enough to offset the slow first half of the year. Therefore, on a full year basis, we now expect to achieve revenues of $405 million to $410 million for the year, which is roughly flat to prior year. We are projecting operating income for the full year of $44 million to $46 million, a 13 percent to 18 percent decrease over prior year. These expectations are below our previous estimates and reflect higher expected media spend to drive top line growth in the Direct segment. The Bowflex HVT offering is gaining traction, but our return on media investment is not currently optimized, and the backdrop of continued declines in TreadClimber sales creates a drag on achieving near term profitable growth in our Direct segment. Regarding our Retail segment, we remain cautiously optimistic with our broader product offering and strong placements, but since the timing of sell-ins occurred primarily in the third quarter this year, we do not anticipate achieving the same year over year growth in the fourth quarter as delivered in the third quarter of 2017. Overall, we expect another strong year of cash generation in 2017 and continue to focus on investing in our strategic priorities of product innovation, expansion of market access points, and improved operational efficiencies, while optimizing use of capital to deliver positive long term shareholder returns.”

Segment Results

Net sales for the Direct segment were $34 million in the third quarter of 2017, an increase of 0.8 percent over the comparable period last year. The segment benefited from the growth of new products, including the Bowflex HVTTM, which offset the continued decline in TreadClimber sales. Operating income for the Direct segment was $5.3 million for the third quarter of 2017, compared to $2.6 million in the third quarter of last year. Operating income was positively impacted by a decline in financing fees resulting from a retroactive contract renegotiation adjustment. Gross margin for the Direct business declined by 220 basis points due to unfavorable product mix and increased discounting for older products.

Net sales for the Retail segment were $53.5 million in the third quarter of 2017, an increase of 15.8 percent when compared to $46.2 million in the third quarter last year. The increase reflected robust growth with key traditional and e-commerce partners, partially offset by weakness with specialty and commercial customers. Operating income for the Retail segment was $12.1 million for the third quarter of 2017 compared to $9.2 million in the third quarter of last year. The increase in Retail operating income was primarily due to the higher net sales and gross margins, coupled with the receipt of a $1.5 million settlement related to an indemnification claim, $1 million of which was recorded against sales and marketing expense and the balance in cost of sales. Retail gross margin was 35.7 percent in the third quarter of 2017, compared to 35.1 percent in the same quarter of the prior year. The higher gross margin reflected favorable absorption of fixed costs over the increased sales and the previously mentioned indemnification claim.

Royalty revenue in the third quarter 2017 was $0.6 million, compared to $0.9 million for the same quarter of last year. Revenue in the prior period included a settlement from a certain licensee.

Balance Sheet

As of September 30, 2017, the  company had cash and marketable securities of $77.8 million and debt of $52 million, compared to cash and marketable securities of $79.6 million and debt of $64 million at year-end 2016. Working capital of $91.4 million as of September 30, 2017 was $6.4 million higher than the 2016 year-end balance of $85 million. Inventory as of September 30, 2017 was $57.6 million, compared to $47 million as of December 31, 2016 and $49.2 million at the end of the third quarter last year. Inventory growth compared to the third quarter last year was due to shipment timing of in-transit inventory.

The company’s brands include Bowflex, Nautilus, Octane Fitness, Schwinn and Universal.