Nautilus Inc. reported first-quarter sales in its second quarter ended June 30 jumped 61.7 percent on the strength of sales from its connected fitness bikes and treadmills, like the Bowflex VeloCore bike and Bowflex T22 Treadmill, and robust sales of its SelectTech weights.
Fiscal 2022 First Quarter Ended June 30, 2021 Compared To June 30, 2020
- Net sales were $184.6 million, up 61.7 percent compared to $114.2 million for the same period last year, and up 74.4 percent, excluding sales related to the Octane brand, which was sold in October 2020. Sales growth was driven primarily by continued demand for connected fitness bikes and treadmills, like the Bowflex VeloCore bike and Bowflex T22 Treadmill, and robust sales of SelectTech weights.
- Gross profit was $55.5 million, up 17.1 percent compared to $47.4 million for the same period last year. Gross margins were 30.1 percent this year compared to 41.5 percent for the same period last year. This margin pressure is the result of current macro events affecting most companies. The 11.4 ppt decrease in gross margins was primarily due to higher landed product costs driven by inflationary price increases in commodities and components, foreign exchange and elevated transportation costs, partially offset by sales price increases (-6 ppts), channel mix as Direct segment sales were 34 percent versus 44 percent last year (-3 ppts), outbound freight (-1 ppt), and a strategic decision to end production of select SKUs (-1 ppt).
- Operating expenses were $37.6 million, a decrease of $16.9 million, or 30.9 percent, compared to the same period last year, primarily due to the $29.0 million loss on disposal group for the same period last year partially offset by increased selling and marketing expenses, as the Direct business returned to more normalized levels of advertising and the company invested in incremental brand marketing.
- Total advertising expenses were $11.6 million this year versus $2.8 million last year. General and administrative expenses and product development expenses also increased versus last year primarily driven by investments in JRNY.
- Operating income was $17.9 million, or 9.7 percent operating margin, a $25.0 million improvement compared to a loss of $7.1 million for the same period last year. JRNY investments were $4.6 million this year versus $1 million last year and brand marketing was $3.4 million this year versus $0 last year. Excluding these investments, its Q1 2022 operating margins improved by 4 percentage points.
- Income from continuing operations improved to $14.0 million, or $0.43 per diluted share, compared to a loss of $5.0 million, or $0.17 per diluted share, for the same period last year.
- Net income was $13.9 million, or $0.43 per diluted share, compared to a net loss of $5.1 million, or $0.17 per diluted share, for the same period last year.
- The effective tax rate was 19.7 percent this year compared to 32.0 percent for the same period last year.
Nautilus Inc. said it continues to enhance its JRNY platform, creating differentiated connected fitness experiences for its members. In the past quarter, the company enhanced the content library and commissioned additional Explore the World content. It introduced the JRNY app for use with its IC4 and C6 bikes to further expand its lineup of connected products.
Today, Nautilus also announced a strategic partnership with FitOn, a digital fitness provider. Under the agreement, JRNY members will have access to off-product workouts through the JRNY digital fitness platform and app.
“I’m really pleased by how our team delivered in comparison to last year, the first full quarter that benefitted from the COVID-19-related tailwinds. We delivered the highest fiscal Q1 net sales in company history, highlighting the continued demand for at-home fitness products. Retail grew sales by 91 percent or 107 percent, excluding Octane, delivering record net sales of $120 million, while Direct grew by 26 percent. We generated $18 million in operating income and 10 percent operating margins even with the continued external pressure of elevated logistics costs and supply inflation. Importantly, we made great progress on our North Star Strategy, with improved incremental brand advertising and further enhancements to our JRNY digital fitness platform,” said Jim Barr, CEO, Nautilus, Inc.
“We have generated record results for three sequential quarters, underscoring the momentum of our execution of North Star, our long-term transformation plan. We believe that our planned North Star investments, particularly in marketing and our JRNY platform, will result in more predictable growth and consistent and expanding profitability. We will continue to enhance JRNY to provide our members with a differentiated experience and our recently announced FitOn partnership is an example of that commitment. Our team’s focus on executing North Star has enabled us to reach more of our target customers, grow our member base, add new retailer partners, reduce backlog, and improve our inventory position. These areas of focus, combined with our improving connected fitness experience, have us very well positioned to deliver sustainable long-term growth and profitability,” continued Barr.
Fiscal 2022 First Quarter Ended June 30, 2021 Segment Results Compared To June 30, 2020
- Direct segment sales were $63.4 million, up 25.7 percent compared to the same period last year.
- Strength product sales grew 559.4 percent to a historical record, led by SelectTech weights and Bowflex Home Gyms. Cardio sales declined 31.1 percent, primarily due to end-of-life products that are no longer available for sale this year and a decline in sales of its Schwinn IC4 and Bowflex C6 bikes that were partially offset by VeloCore sales.
- As of June 30, 2021, the Direct’s segment’s backlog totaled $3.1 million compared to $26.5 million as of March 31, 2021. These amounts represent unfulfilled customer orders net of current promotional programs and sales discounts.
- Direct’s sales results, excluding backlog, were more in line with typical seasonality, with the quarters ending June and ending September representing the lower sales volume quarters.
- Gross margins were 38.7 percent versus 54.6 percent last year. The 15.9 ppt decrease in gross margin was primarily driven by higher landed product costs (-6 ppts), higher outbound freight costs (-6 ppts), deleveraging of fixed costs as direct sales grew slower than retail’s (-2 ppts), a strategic decision to end production of select SKUs (-1 ppt), and increased investments in JRNY (-1 ppt). Gross profit was $24.5 million, down 10.9 percent versus last year.
- Segment contribution income was $6.8 million or 10.7 percent of sales, compared to $17.0 million or 33.7 percent of sales last year. The decline was primarily driven by lower gross profit and the return to normalized advertising expenditures. Advertising expenses were $8.0 million compared to $2.4 million last year.
- Retail segment sales were $120.5 million, the best quarterly sales in its segment history.
- Net sales were up 91.4 percent from the same period last year, or 120.7 percent excluding sales related to the Octane brand.
- Retail segment sales outside the United States and Canada grew 70 percent or 102 percent excluding Octane.
- Strength product sales grew by 119.3 percent, led by SelectTech weights and benches and Bowflex Home Gyms.
- Cardio sales increased by 83.5 percent, a historical record, driven by connected-fitness bikes and treadmills.
- As of June 30, 2021, the Retail segment’s backlog totaled $141.9 million compared to $178.6 million as of March 31, 2021. These amounts represent customer orders for future shipments and are net of contractual rebates and consideration payable to applicable Retail customers.
- Gross margins were 25.1 percent compared to 30.3 percent last year. The 5.2 ppt decrease in gross margin was primarily driven by higher landed product costs (-6 ppts), a strategic decision to end production of select SKUs (-1 ppt), offset by leverage on fixed costs as retail segment sales grew faster than direct segment sales (+2 ppts). Gross profit was $30.3 million, an increase of 59 percent versus last year.
- Segment contribution income was $22.1 million or 18.3 percent of sales, compared to $11.6 million or 18.4 percent of sales for the same period last year, primarily driven by higher gross profit and expense leverage.
Balance Sheet And Other Key Highlights As Of June 30, 2021
Cash and Liquidity
- Cash, cash equivalents, restricted cash, and available-for-sale securities were $82.8 million, compared to cash, cash equivalents, restricted cash, and available-for-sale securities of $113.2 million as of March 31, 2021. The decrease was primarily due to the increase in inventory.
- Debt was $13.4 million compared to $13.3 million as of March 31, 2021. $53.6 million was available for borrowing under the Wells Fargo Asset Based Lending Revolving Facility compared to $54.4 million as of March 31, 2021.
- Trade receivables were $98.2 million, compared to $88.7 million as of March 31, 2021. The increase in trade receivables was primarily due to the timing of customer payments on increased sales.
- Inventory was $111.1 million, compared to $68.1 million as of March 31, 2021. The increase in inventory was driven by the decision to increase on-hand inventory levels ahead of the fitness season given the continued disruption in global logistics. More than 60 percent of inventory as of June 30, 2021 was in transit.
- Trade payables were $114.6 million, compared to $98.9 million as of March 31, 2021. The increase in trade payables was primarily due to the timing of payments for inventory.
- Capital expenditures totaled $1.9 million during the quarter ended June 30, 2021.
Second Quarter Fiscal 2022
- The company’s revenue for the next few quarters will be compared to record results due to the pandemic’s effect on net sales last year. To gauge continued progress against the expanded addressable market, the company will measure business versus last year and versus the same period two years prior for the next few quarters.
- Demand curves for its Direct segment in Q1 and in the first month of Q2 have started to revert to more typical seasonality patterns. Now that Direct’s backlog has returned to more normal levels, the company expects Direct sales in Q2 to be lower than Q1.
- The company expects total company net sales for the second quarter of fiscal 2022 to be between $145 million and $155 million, a two-year revenue CAGR of 53 percent to 59 percent.
- The company expects external gross margin challenges to continue in Q2 and anticipates increased price pressure due to the ongoing shipping shortage.
- The company was pleased with the results of its North Star investment in Q1 and plans to continue investing in Q2.
- Brand marketing expenditures will be between $5 million and $6 million versus $3 million last quarter and zero last year.
- JRNY investment will be between $5.5 million and $6.5 million versus $5 million last quarter and $1 million last year. JRNY investments will further enhance platform functionality via improved adaptive workouts, the addition of a member portal, and additional fresh content, including its partnership with FitOn. The company expects these investments to dilute operating margins by 7 to 8 percentage points.
- Given these investments and the external macro pressure on gross margin, the company expects operating margins to be in the low-single-digits.
Back Half Of Fiscal 2022
- The company expects to continue investing in North Star on a “pay as we go” basis;
- The company assumes that the external macro factors negatively affecting gross margins will continue in Q3 and Q4. Although it’s unclear when the pressure will ease, the company expects that over time, prices will stabilize and eventually return closer to pre-pandemic levels;
- Until the macro environment improves, the company expects operating margins to be in the low- to mid-single-digits for the back half of the year;
- The company continues to expect full-year capital expenditures to be between $12 million and $14 million with the majority earmarked for JRNY investments; and
- The company reiterates its expectation of reaching 250,000 JRNY members by the end of FY22
Longer-term View, Beyond Fiscal 2022
- The company’s conviction in its North Star strategy continues to be strong. Growth in its JRNY members and their increased engagement confirm the company’s expectations that its North Star investments will ultimately yield higher quality recurring revenue and long-term profitable growth.
- The company believes the near-term external gross margin pressures are temporary and are not delaying its expectations of achieving sustainable operating margins upwards of 15 percent by FYE 2026 as it realizes the long-term benefits of its transformational investments.
Photo courtesy Nautilus, Inc.