Nautilus Inc. saw a 5.7 percent gain in sales of the company’s Retail segment, driven by double-digit expansion in the mass retail channel, offsetting weakness in commercial and specialty channels. The fitness equipment giant raised the company’s overall sales guidance for the year due to healthy retail momentum and promising back-half launches.
Nautilus also indicated that the company has completed the selling and planning period for the fall 2018 mass retail fitness season, and “we’re excited about the back half of 2018,” said William McMahon, COO, on a conference call with analysts.
“Q2 sales increase versus prior year was driven by performance in the mass retail space,” said McMahon. “We experienced solid growth in many of our cardio product lines, including our Upright, Recumbent and wind bikes. Our Bowflex Results treadmill lineup continue to perform extremely well, and we anticipate this traction will allow Nautilus to continue to gain share in the single largest category of fitness equipment.”
Looking to the second half, one driver of expected growth in the commercial and vertical space will be the new Octane Max Trainer, MTX. Designed through a collaboration with Nautilus and Octane, the MTX has received “very positive” reviews at both domestic and international trade shows
“The MTX model of commercial Max is specifically designed to perform well in the rapidly growing functional training area of the commercial club space,” said McMahon. Orders are being taken for launch with multiple national accounts with shipments to begin within the next few weeks.
McMahon added that based on the early feedback from previews of new Retail product launches, as well as current visibility into the fall season order plans for its partners, “we anticipate continued strong growth” in the Retail segment for the back half of 2018. He said, “This growth is expected to be driven by the ongoing performance of our existing product lines and enhance further by expanded product offerings across Octane, Nautilus and Bowflex brands.”
Sales in the quarter in the Retail segment reached $39.2 million against $37.1 million in the second quarter of last year. Operating income fell 41.0 percent to $3.6 million due to the lower gross margin rate coupled with higher sales and marketing costs and product development expenses incurred. Prior year sales and marketing expenses also included a $1.4 million recovery related to the settlement of an escrow dispute.
The second quarter is the company’s seasonally slowest part of the year as the company finalizes preparations for product launches coming up in the back half in both the company’s Retail and Direct segments.
Said Bruce Cazenave, Nautilus’ CEO, “Even in the slow period, we achieved top-line results and operational improvements that position us well for the back half and give us added confidence in our ability to achieve and even raise our full year 2018 revenue guidance.”
Companywide, net income from continuing operations fell 61.5 percent to $1.0 million, or 3 cents per share, compared to $2.6 million, or 8 cents a year ago.
Sales reached $75.5 million, down 2.0 percent, as the 5.7 percent gain in the Retail segment was offset by a 11.0 percent drop in sales in the Direct segment. Direct sales reached $34.8 million in the period.
Gross margins eroded to 44.6 percent from 49.8 percent. Gross margins in the Direct segment decreased 370 basis points to 59.6 percent and were down 540 basis points in the Retail segment to 29.1. Margins in both segments were negatively impacted by higher product cost due to unfavorable changes in foreign currency exchange rates and commodity price increases. Freight costs and product mix has also contributed to a lesser extent. Additionally, Direct margins were negatively impacted by product mix due to an increase of Results Series treadmill sales. The net margin drop also reflected a shift in channel mix to an increased percentage of Retail segment revenues.
“Our intention is to reverse these trends, and we’ve taken steps to address these challenges via pricing and supply chain optimization,” said McMahon. “It’s the nature of such changes that they take effect over multiple quarters. However, we do anticipate that our corrective actions will begin to favorably impact results as compared to the current trend in the second half of this year.”
McMahon further said Nautilus is closely monitoring the direction of ongoing trade disputes and potential resulting tariffs. He added, “To date, our business has not been materially impacted by the imposition of tariffs, but we recognize this as a potential risk. A risk which would represent still more product cost pressure, and we’ll react to mitigate the problem should it arise.”
Total operating expenses for the quarter as a percentage of net sales decreased to 43 percent from 44.8 percent in the same period last year, primarily reflecting decreased sales and marketing expense.
For the full year, Nautilus raised the company’s full year revenue guidance by $3 million to a range of $431 million to $439 million, reflecting a more robust outlook for the company’s Retail segment coupled with the added visibility into key product launches scheduled in the back half. The operating income guidance was maintained in the range of $42 million to $45 million.
In a research note, Michael Kawamoto of D.A. Davidson said his team was disappointed that Nautilus missed consensus targets in the target of $78.7 million and 4 cents a share as well as his targets. But he noted that the quarter is the seasonally slowest and was encouraged about the raised revenue outlook for the year. Reiterating his “Buy,” rating, Kawamoto wrote, “With a number of new products set to be launched in 2H, we are confident that NLS can execute on its growth agenda, and believe that the company’s favorable profitability, cash generation and long-term growth potential are not adequately reflected in shares.”
Photo courtesy Octane Fitness
