Nautilus, Inc. reported net sales of $53.7 million in the fourth quarter of 2010, unchanged from the fourth quarter of 2009. Continuing operations include the company’s direct and retail fitness businesses.

The company’s commercial fitness business is reported as a discontinued operation. Unless otherwise noted, all information regarding the company’s operating results pertains to continuing operations. 
Comparative Q4 net sales by segment:
       
Three Months Ended      
Dec 31, 2010
   
Dec 31, 2009
$ Change
% Change
 
(in thousands)
Direct $ 28,219 $ 28,876 ($657 ) -2.3 %
Retail 23,920 24,037 (117 ) -0.5 %
Unallocated Corporate (Royalty Income)   1,551       759       792   104.3 %
Net Sales $ 53,690     $ 53,672     $ 18   0.0 %
 
Direct Channel:



Total sales through the company’s direct channel in the fourth quarter of 2010 were $28.2 million, a slight decline of 2.3% from total direct sales in the comparable period in 2009. In the fourth quarter of 2009, the company experienced a 19.9% decline in total direct sales from sales levels in the fourth quarter of 2008.
 
Direct channel sales of the company’s cardio oriented products in the fourth quarter of 2010 increased 17.0% compared to the fourth quarter of 2009, primarily due to increased sales of its proprietary Bowflex® TreadClimber cardio product line. This largely offset continuing sales declines of the company’s legacy strength oriented products, including Bowflex rod-based home gyms, which fell 32.3% in the fourth quarter of 2010 compared to 2009. Sales in the fourth quarter of 2010 benefited from an increase in television and online marketing expenditures in support of the Bowflex TreadClimber product line.
 
In 2011, the company will continue to focus more of its advertising efforts around the Bowflex® TreadClimber product line to gain greater consumer awareness of the product with the goal of increasing market share in the cardio oriented fitness market which is significantly larger than the strength market. TreadClimber sales have continued to be strong in Q1 2011 and we believe that, by the second half of 2011, increases in sales of cardio products should more than offset future declines in sales of home gym products. Sales in the fourth quarter of 2010 were also favorably impacted by new financing programs.
 
During most of 2010, the company experienced significantly declining credit approval rates from its previous consumer financing source from levels typically attained in prior years. In September 2010, the company began to transition to a new third party financing source which has designed financing options that better fit its customers’ needs. Total credit approvals from the company’s primary and secondary financing sources increased throughout the quarter, but averaged approximately 20% of applications processed compared to approximately 18% in the fourth quarter of 2009. The company expects that credit approval rates in 2011 will remain at the levels experienced late in the fourth quarter of 2010 or improve modestly as the company continues to optimize its consumer financing programs.

Retail Channel:

Total sales through the company’s retail channel in the fourth quarter of 2010, were $23.9 million, essentially unchanged from total retail sales in the comparable period in 2009. Retail channel sales of the company’s cardio oriented products in the fourth quarter of 2010 increased 9.6% compared to 2009, primarily due to increased sales of Schwinn exercise bikes. Similar to what the company experienced in the direct channel, retail sales of strength oriented products in the fourth quarter of 2010 declined 13.6% compared to the fourth quarter of 2009 due in large part to declining sales of home gyms.
 
Comparative segment operating income (loss)
       
Three Months Ended      
Dec 31, 2010
   
Dec 31, 2009
$ Change
% Change
 
(in thousands)
Direct ($1,578 ) ($5,771 ) $ 4,193 72.7 %
Retail 5,806 5,998 (192 ) -3.2 %
Unallocated Corporate (1,874 ) (4,065 ) 2,191 53.9 %
Restructure & Impairment         –       (3,908 )       3,908   100.0 %
Operating Income (Loss)       $ 2,354       ($7,746 )     $ 10,100   130.4 %
 
Consolidated gross profit margin in the fourth quarter of 2010 was 44.1% of net sales, compared to 48.7% for the same period in 2009. Gross profit margin in the direct business was 52.1% for the fourth quarter of 2010 compared to 60.7% for the same period in 2009, primarily due to the company’s decision to offer deep discounts on one specific end-of-life home gym. The use of promotional programs for home gyms is expected to be more limited throughout 2011. Gross profit margin in the retail business was 31.2% for the fourth quarter of 2010 compared to 32.6% in the fourth quarter of 2009 due to changes in product mix.

Operating expenses in the fourth quarter of 2010 totaled $21.3 million, compared to $33.9 million for the same period in 2009. The company began reallocating a greater portion of its television and online advertising budget toward the Bowflex® TreadClimber product line during the fourth quarter of 2010 and expects to continue to direct the vast majority of such expenditures to this product line during 2011.

Also in 2011, the company expects to rely on a lower cost internet based advertising strategy for its home gyms, which are able to capitalize on the extensive product awareness that currently exists for Bowflex® rod-based home gyms. Operating expenses in the fourth quarter of 2009 included $5.2 million of advertising and related creative content incurred with the introduction of the Nautilus Mobia® cardio product. In addition, in the fourth quarter of 2009, the company incurred non-cash impairment and restructuring charges of $3.9 million which are included in Operating Expenses.

Net loss for the quarter ended Dec. 31, 2010 was $39.0 thousand and included income from continuing operations, net of tax, of $2.0 million or $0.06 per share and a loss from discontinued operations of $2.0 million or a loss of $0.06 per share. Net income for the quarter ended December 31, 2009 totaled $5.7 million or 19 cents per share due in large part to recognition of $11.4 million of tax loss carry-backs, which more than offset pre-tax losses from continuing operations of $8.4 million. In the fourth quarter of 2009, income from discontinued operations totaled $2.7 million, or 9 cents per share, due primarily to gains realized from an adjustment to previous fair value estimates of assets in process of being sold.

For the full year ended Dec. 31, 2010, net sales were $168.5 million compared to $189.3 million in 2009. Loss from continuing operations, net of tax, in 2010 was $9.8 million or loss of 32 cents per share compared to a loss, net of income tax benefit, of $18.6 million or a loss of 61 cents per share in 2009. The loss from continuing operations in 2009 included $20.1 million of non-cash charges related to goodwill write-downs, other intangible asset impairments and restructuring charges, which were offset in part by an income tax benefit of $10.9 million.

At Dec. 31, 2010, the company had cash and cash equivalents of $14.3 million compared to $7.3 million at Dec. 31, 2009.

Edward Bramson, Chairman and Chief Executive Officer of Nautilus, Inc., stated, “We are pleased with the progress we are making in many areas of our business. Our strategy is to reposition Nautilus with a dominant emphasis toward cardio based products, as they represent the largest segment of the fitness market. We are seeing positive results from our consumer credit finance program with GE Money Bank and anticipate that, in 2011, we will continue to benefit from credit approval rates attained late in 2010. In addition, we implemented a new, Tier II consumer finance program in the middle of January 2011 and its initial results are encouraging. While we see sales beginning to improve after several quarters of declining sales, we need to continue to diligently manage our operating expenses at all levels of the business to ensure that we remain on a path to profitable growth.”