Nautilus, Inc. reported net sales of $38.5 million in the third quarter ended Sept. 30, 2010 compared to $41.4 million in the third quarter of 2009.


Continuing operations include the company’s direct and retail businesses. The company’s commercial business is reported as a discontinued operation. Unless otherwise indicated, all information regarding the company’s operating results pertains to continuing operations.


Operating loss was $3.2 million for the third quarter 2010, compared to a loss of $2.8 million for the third quarter 2009. The company said the third quarter 2010 operating loss was favorably impacted by the company’s reduction in general & administrative and research & development expenses. The favorable impact of these lower operating expenses was more than offset by lower sales and reduced margins in the direct business.


An improved performance in the direct business in the month of September, due in part to increased availability of consumer credit, was not sufficient to offset the weakness in July and August. Included in the third quarter 2009 operating loss are an asset impairment charge of $2.1 million related to an intangible asset of the Company’s retail business and $0.2 million of restructuring expenses.

For the quarter ended Sept. 30, 2010, the company’s loss from continuing operations, net of tax, was $2.4 million, or 8 cents loss per share. Loss from continuing operations, net of tax, in the third quarter of 2009 was $1.5 million, or 5 cents per share.


Loss from discontinued operations, net of tax, in the third quarter of 2010 was $1.9 million, or 6 cents loss per share, compared to a loss of $22.9 million, or 75 cents loss per share, in the third quarter of 2009.


Net loss, including continuing and discontinued operations, in the third quarter of 2010 was $4.3 million, or 14 cents loss per share, compared to a net loss of $24.4 million, or 80 cents loss per share, in the third quarter 2009.


As of Sept. 30, 2010, the company had cash and cash equivalents of $14.5 million. The company had $0.8 million of assets of discontinued operations held for sale as of Sept. 30, 2010.


 

































































































Comparative net sales by segment: 
  
Three Months Ended 
  
Sept 30, 2010 
  
Sept 30, 2009 
  
$ Change 
  
% Change 
 
 
 
 
 
 
 
 
  
(thousands) 
 
 
 
 
 
 
 
 
Direct 
 
$ 
21,504 
 
$ 
25,253 
 
$ 
(3,749 
) 
 
-14.8 
% 
Retail 
 
 
16,118 
 
 
15,656 
 
 
462 
 
 
3.0 
% 
Unallocated Corporate 
 
  
852 
  
  
522 
  
  
330 
  
  
63.2 
% 
Net Sales 
 
$ 
38,474 
  
$ 
41,431 
  
$ 
(2,957 
) 
  
-7.1 
% 


The company’s third quarter 2010 net sales in its direct business declined compared to the third quarter of 2009, primarily due to a 35.2% year-over-year decrease in the average rate of credit approvals for the quarter by the company’s consumer credit financing provider. As previously disclosed, the company experienced considerable declines in approval rates from its prior provider and has replaced that program. The company has experienced increased credit approval rates since implementation of its new consumer credit financing program with GE Money Bank in late August 2010, although approval rates have not yet returned to levels experienced during 2009.


In September, direct sales improved by 4.3% compared to September of 2009, while sales in July and August of 2010 were below those in the prior year. The company continues to optimize its credit offerings and currently expects further incremental improvement in credit approval rates in the fourth quarter 2010 and in 2011.


Net sales in the company’s retail business increased 3.0% in the third quarter of 2010, compared to the same period in 2009, primarily due to customer demand for its newly redesigned fitness bikes and sales to new customers.


As previously announced, in response to lower credit approval rates earlier in the year the company reduced advertising expenditures in its direct business pending improved availability of consumer credit. The Company expects to begin increasing advertising expenditures in the fourth quarter of 2010 and in 2011.











































































































Comparative segment operating income (loss): 
  
Three Months Ended 
  
Sept 30, 2010 
  
Sept 30, 2009 
  
$ Change 
  
% Change 
 
 
 
 
 
 
 
 
  
(thousands) 
 
 
 
 
 
 
 
 
Direct 
 
$ 
(2,686 
) 
 
$ 
1,740 
 
 
$ 
(4,426 
) 
 
-254.4 
% 
Retail 
 
 
2,001 
 
 
 
2,229 
 
 
 
(228 
) 
 
-10.2 
% 
Unallocated Corporate 
  
  
(2,540 
) 
  
  
(6,791 
) 
  
  
4,251 
  
  
62.6 
% 
Operating (Loss) 
  
$ 
(3,225 
) 
  
$ 
(2,822 
) 
  
$ 
(403 
) 
  
-14.3 
% 





 

Consolidated gross profit margin in the third quarter 2010 was 43.2% of net sales, compared to 49.0% for the same period in 2009, reflecting reduced pricing on certain products. Gross profit margin in the direct business was 55.1% for the third quarter 2010, compared to 62.8% for the same period in 2009, primarily due to the company’s test of market reaction to various levels of pricing in certain product lines. Gross profit margin in the retail business was 24.4% in the third quarter of 2010, compared to 26.6% in the third quarter of 2009, primarily due to lower pricing on excess treadmills the Company had in stock.

 

Operating expenses in the third quarter 2010 declined by 14.1% to $19.8 million, compared to $23.1 million in the third quarter of 2009. Operating expenses in 2009 included the previously mentioned $2.1 million asset impairment charge and $0.2 million of restructuring expenses.

 

For the nine months ended Sept. 30, 2010, net sales were $114.8 million, compared to $135.6 million in the first nine months of 2009. Loss from continuing operations for the first nine months of 2010 was $11.8 million, or $0.38 loss per share, compared to a loss of $21.6 million, or $0.71 per share, for the first nine months of 2009. The loss for the first nine months of 2009 included a $2.1 million asset impairment charge and $14.0 million in restructuring expenses.

 

Edward Bramson, Chairman and Chief Executive Officer of Nautilus, Inc., stated, “We are pleased that sales and operating income in our retail business continued to grow and that our direct business began to show improvement in September of this year. During the third quarter we experienced improved response to our cardio product advertising. We believe that this improvement combined with new consumer credit offerings, and continued good demand for our retail offerings will enable us to take better advantage of the underlying demand for our products.”

 





















































































































































































NAUTILUS, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
 
  Three Months Ended   Nine Months Ended
September 30, September 30,
2010   2009 2010   2009
Net sales $ 38,474 $ 41,431 $ 114,760 $ 135,588
Cost of sales 21,856   21,150   61,708   65,194  
Gross profit 16,618   20,281   53,052   70,394  
Operating expenses:
Selling and marketing 14,347 14,278 47,935 53,202
General and administrative 4,797 5,240 14,750 18,587
Research and development 699 1,283 2,290 3,917
Restructuring 201 14,046
Asset impairment losses   2,101     2,101  
Total operating expenses 19,843   23,103   64,975   91,853  
Operating loss (3,225 ) (2,822

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