Nautilus, Inc. reported sales declined 53 percent in the second quarter and lowered its guidance for the year although it noted that it’s still seeing strong gains versus pre-pandemic levels.

“Our omnichannel business model enabled us to deliver Q2 revenue growth of 24 percent, compared to the same pre-pandemic period in fiscal 2020, excluding Octane, driven by 51 percent growth in our Direct segment. We continue to work with our retail partners as they destock elevated inventory levels that impacted our Retail segment during the period. Our ability to improve gross margins and effectively manage our cost structure in Q2 supported sequential improvement in Adjusted EBITDA. Further, we continue to expand our digital fitness platform, JRNY, which reached approximately 400,000 members at September 30, 2022, representing approximately 116 percent growth versus the same quarter last year,” said CEO Jim Barr, Nautilus, Inc. 

Barr continued, “Looking ahead, we are now entering the seasonally strongest part of our year and continue to expect meaningful sequential revenue growth for the back half of this fiscal year. Our ability to offer customers a diversified product assortment of strength and cardio offerings that includes our JRNY platform at a compelling total cost of ownership enables us to drive demand and expand our market position. Even with the current challenging economic environment, we remain focused on getting to breakeven on an Adjusted EBITDA basis for the back half of the year. We continue to make tremendous progress on our North Star strategy, including becoming a nimbler organization that is equipped to adapt to market conditions.”

Total Company Results
For fiscal 2023, Nautilus expects to return to a more typical pre-pandemic seasonality, with the second half of the year contributing more of the full year’s revenue. To gauge sales growth and progress against more “normalized” or pre-pandemic results, the company said it would rely more heavily on measuring the performance of fiscal 2023 sales growth versus the pre-pandemic twelve-month period that ended March 31, 2020 (“fiscal 2020”) to guide business strategy, rather than measuring performance against the outsized results that occurred during the pandemic.

Fiscal 2023 Second Quarter Ended September 30, 2022 Compared To September 30, 2021

  • Net sales were $65.5 million, compared to $138.0 million, a decline of 52.6 percent versus last year. Net sales are up 24 percent, or 7 percent Compound Annual Growth Rate (“CAGR”), when compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in October 2020. The sales decline versus last year was driven primarily by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices, as its typical sales discounts.
  • Gross profit was $11.5 million, compared to $42.1 million last year. Gross profit margins were 17.5 percent compared to 30.5 percent last year. The 13.0 ppt decrease in gross margins was primarily due to increased discounting (-4 ppts), unfavorable logistics overhead absorption (-4 ppts), increased investments in JRNY (-3 ppts), a prior year release of a special warranty reserve (-2 ppts), and an increase in inventory adjustments (-2 ppts), partially offset by an improvement in other costs (+2 ppts).
  • Operating expenses were $25.8 million compared to $44.0 million last year. The decrease of $18.2 million, or 41.4 percent, was primarily due to $9.3 million lower media spending, a $4.7 million prior year loss contingency related to a legal settlement, a decrease of $3.0 million due to other cost savings, and a $2.7 million decrease in other variable selling and marketing expenses due to decreased sales, offset by a $1.5 million increase in JRNY investments. Total advertising expenses were $3.1 million versus $12.4 million last year.
  • Operating loss was $14.3 million or a negative 21.8 percent operating margin, compared to an operating loss of $2.0 million last year, primarily driven by lower gross profit.
  • Income tax expense was $0.2 million this year compared to $2.2 million last year. The income tax expense this quarter was primarily a result of a U.S. deferred tax asset valuation allowance in the amount of $3.6 million recorded in the second quarter of fiscal 2023.
  • Loss from continuing operations was $15.3 million, or $0.48 per diluted share, compared to $4.6 million, or $0.15 per diluted share, last year.
  • Net loss was $13.2 million, or $0.41 per diluted share, compared to net loss of $4.6 million or $0.15 per diluted share, last year.

The following excludes the impact of legal settlement and acquisition and other related costs for the three months ended September 30, 2021.

  • Adjusted operating expenses were $25.2 million compared to $38.5 million last year. The $13.4 million or 34.7 percent decrease was primarily due to $9.3 million lower media spending, a decrease of $2.4 million due to other cost savings, and a $2.7 million decrease in other variable selling and marketing expenses due to decreased sales, partially offset by a $1.1 million increase in JRNY investments.
  • Adjusted operating loss was $13.7 million compared to last year’s income of $3.5 million, driven by lower gross profit.
  • Adjusted EBITDA loss from continuing operations was $9.8 million compared to income of $7.0 million last year.

Six-Months Ended September 30, 2022 Compared To Six-Months Ended September 30, 2021 (First Half)

  • Net sales were $120.3 million, compared to $322.6 million, a decline of 62.7 percent versus last year. Net sales are up 17 percent, or 5 percent CAGR, when compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in October 2020. The sales decline versus last year was driven primarily by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices.
  • Gross profit was $18.4 million, compared to $97.6 million last year. Gross profit margins were 15.3 percent compared to 30.3 percent last year. The 15.0 ppt decrease in gross margins was primarily due to increased discounting (-7 ppts), unfavorable logistics overhead absorption (-6 ppts), increased investments in JRNY (-3 ppts), an increase in inventory adjustments (-2 ppts), partially offset by improvements in other costs (+3 ppts).
  • Operating expenses were $83.9 million compared to $81.6 million last year. The increase of $2.3 million, or 2.8 percent, was primarily due to a goodwill and intangible impairment charge of $27.0 million and a $5.0 million increase in JRNY investments, offset by a $15.2 million decrease in media spending, a $5.2 million decrease in other variable selling and marketing expenses due to decreased sales, a decrease of $4.6 million due to savings in other operating expenses, and a $4.7 million prior year loss contingency for a legal settlement. Total advertising expenses were $8.8 million versus $24.0 million last year.
  • Operating loss was $65.5 million or a negative 54.5 percent operating margin, compared to operating income of $15.9 million last year, primarily driven by goodwill and an intangible impairment charge of $27.0 million and lower gross profit associated with lower sales demand during the period.
  • Income tax expense was $8.3 million this year compared to $5.7 million last year. The income tax expense in the current year was primarily a result of a U.S. deferred tax asset valuation allowance in the amount of $17.8 million recorded against our domestic uncovered net deferred tax assets to reduce our deferred tax assets to an anticipated realizable value.
  • Loss from continuing operations was $75.5 million, or $2.40 per diluted share, compared to income of $9.4 million, or $0.29 per diluted share, last year.
  • Net loss was $73.4 million, or $2.33 per diluted share, compared to net income of $9.3 million or $0.29 per diluted share, last year.

The following statements exclude the impact of non-cash impairment charges1 related to the carrying value of goodwill and intangible assets for the six months ended September 30, 2022 and the impact of legal settlement and acquisition and other related costs for the six months ended September 30, 2021.

  • Adjusted operating expenses were $55.7 million compared to $75.9 million last year. The $20.3 million or 26.7 percent decrease was driven by $15.2 million lower media spending, a $5.2 million decrease in other variable selling and marketing expenses due to decreased sales, a decrease of $3.8 million due to savings in other operating expenses, partially offset by a $4.0 million increase in JRNY investments.
  • Adjusted operating loss was $37.3 million compared to last year’s income of $21.6 million, driven by lower gross profit.
  • Adjusted EBITDA loss from continuing operations was $29.1 million compared to income of $28.4 million last year.

JRNY Update
Nautilus continues to enhance the JRNY platform expanding the software’s visual connected-fitness experiences for participating members. 

As of September 30, 2022, membership reached 396,000 representing approximately 116 percent growth versus the same quarter last year. Of these members, 142,000 were subscribers, representing approximately 258 percent growth over the same period. Nautilus defines JRNY members as “all individuals who have a JRNY account and/or subscription, which includes subscribers, associated users and users who consume free content.” Nautilus defines subscribers as “a person or household who paid for a subscription, are in a trial or have requested a ‘pause’ to their subscriptions for up to three months.”

Nautilus, over the last two years, expanded the number of products featuring JRNY connectivity. In fiscal 2022, approximately 80 percent of total units sold were JRNY compatible, compared to 22 percent in the pre-pandemic fiscal 2020. The trend of approximately 80 percent of total units sold being JRNY compatible continued in the first two quarters of fiscal 2023.

In the last two months, Nautilus expanded its cardio offerings to include the Bowflex BXT8J treadmill and Schwinn 190 upright bike and 290 recumbent bike. Prioritizing affordable prices, the products offer cardio with digital connectivity to the JRNY adaptive fitness platform, paired via a user’s mobile device.

Nautilus’ integration of VAY’s motion-tracking capabilities into JRNY is intended to further accelerate personalized strength workout options, including rep counting and form coaching for SelectTech users, which the company believes will drive JRNY membership in the back half of fiscal 2023.

Fiscal 2023 Second Quarter Ended September 30, 2022 Compared to September 30, 2021

Direct Segment
Direct segment sales were $24.5 million, compared to $37.9 million, a decline of 35.3 percent versus last year, and up 51.1 percent, or 15 percent CAGR, compared to the same period in fiscal 2020. The net sales decrease compared to last year was primarily driven by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices.

Cardio sales declined 26.4 percent versus last year and were up 32.7 percent, or 10 percent CAGR, compared to the same period in fiscal 2020. Lower sales this quarter were primarily driven by lower bike demand. Strength product sales declined 48.3 percent versus last year and increased 112.1 percent, or 28 percent CAGR, compared to the same period in fiscal 2020. Lower sales this quarter were primarily driven by lower demand for SelectTech weights.

As of September 30, 2022, the Direct segment’s backlog totaled $0.3 million. This amount represents unfulfilled consumer orders net of current promotional programs and sales discounts.

Gross profit margin was 12.7 percent versus 36.9 percent last year. The 24.2 ppt decrease in gross margin was primarily driven by: increased discounting (-7 ppts), increased investments in JRNY (-5 ppts), a prior year release of a special warranty reserve (-4 ppts), unfavorable logistics overhead absorption (-4 ppts), and increases in other costs (-4 ppts). Gross profit was $3.1 million, a decrease of 77.8 percent versus last year.

Segment contribution loss was $7.9 million, or 32.2 percent of sales, compared to segment contribution loss of $1.8 million, or 4.8 percent of sales last year. The decline was primarily driven by lower gross profit, as explained above, offset by decreased media spend. Advertising expenses were $2.6 million compared to $6.8 million for the same period last year.

Retail Segment
Retail segment sales were $39.9 million, compared to $99.2 million, a decline of 59.8 percent versus last year, and up 10.6 percent, or 3 percent CAGR, compared to the same period in fiscal 2020 excluding sales related to the Octane brand. Retail segment sales outside the United States and Canada were down 80.0 percent versus last year. The net sales decrease compared to last year is primarily driven by lower cardio sales as retailers work through higher-than-normal inventory levels.

Cardio sales declined 75.3 percent versus last year and were down 45.7 percent, or 18 percent CAGR, compared to the same period in fiscal 2020, excluding sales related to the Octane brand. Lower sales this quarter were primarily driven by lower bike demand. Strength product sales declined 37.1 percent versus last year and increased 172.2 percent or 40 percent CAGR, compared to the same period in fiscal 2020. Lower sales this quarter were primarily driven by lower demand for SelectTech weights.

As of September 30, 2022, the Retail segment’s backlog totaled $32.6 million. This amount represents customer orders for future shipments and are net of contractual rebates and consideration payable to applicable Retail customers.

Gross profit margin was 18.3 percent versus 27.4 percent last year. The 9.1 ppt decrease in gross margin was primarily driven by: an increase in inventory adjustment (-4 ppts), increased discounting (-3 ppts) and unfavorable logistics overhead absorption (-3 ppts), partially offset by improvements in other costs (+1 ppt). Gross profit was $7.3 million, a decrease of 73 percent versus last year.

Segment contribution loss was $1.0 million, or 2.4 percent of sales, compared to segment contribution income of $18.7 million, or 18.9 percent of sales, last year. The decline was primarily driven by lower gross profit as explained above.

Comparison of Segment Results For The Six-Months Ended September 30, 2022 To The Six-Months Ended September 30, 2021 (First Half)

Direct Segment
Direct segment sales were $51.0 million, compared to $101.2 million, a decline of 49.7 percent versus last year, and up 37.6 percent, or 11 percent CAGR, compared to the same period in fiscal 2020. The net sales decrease compared to last year was primarily driven by the return to pre-pandemic seasonal demand and higher sales discounting practices.

Cardio sales declined 37.5 percent versus last year and were up 17.9 percent, or 6 percent CAGR, compared to the same period in fiscal 2020. Lower sales were primarily driven by lower bike demand. Strength product sales declined 63.4 percent versus last year and increased 103.5 percent, or 27 percent CAGR, compared to the same period in fiscal 2020. Lower sales this year were primarily driven by lower demand for SelectTech weights.

Gross profit margin was 15.0 percent versus 38.0 percent last year. The 23.0 ppt decrease in gross margin was primarily due to increased discounting (-8 ppts), increased investments in JRNY (-6 ppts), unfavorable logistics overhead absorption (-6 ppts), a prior year release of a special warranty reserve (-2 ppts) and increased inventory reserves (-1 ppt). Gross profit was $7.7 million, down 80.1 percent versus last year.

Segment contribution loss was $17.8 million, or 34.9 percent of sales, compared to segment contribution income of $4.9 million, or 4.9 percent of sales last year. The decline was primarily driven by lower gross profit offset by decreased media spending. Advertising expenses were $7.8 million compared to $14.8 million for the same period last year.

Retail Segment
Retail segment sales were $67.3 million, compared to $219.6 million, a decline of 69.3 percent versus last year and up 5.1 percent, or 2 percent CAGR, compared to the same period in fiscal 2020, excluding sales related to the Octane brand. Retail segment sales outside the United States and Canada were down 82 percent versus last year. The net sales decrease compared to last year is primarily driven by lower cardio sales and higher sales discounting as retailers work through higher-than-normal inventory levels.

Cardio sales declined 82.3 percent versus last year and were down 39.2 percent, or 15 percent CAGR, compared to the same period in fiscal 2020, excluding sales related to the Octane brand. Lower sales this year were primarily driven by lower bike demand. Strength product sales declined by 42.2 percent versus last year and increased 97.6 percent or 25 percent CAGR, compared to the same period in fiscal 2020. Lower sales this year were primarily driven by lower demand for SelectTech weights.

Gross profit margin was 13.0 percent versus 26.1 percent last year. The 13.1 ppt decrease in gross margin was primarily due to increased discounting (-6 ppts), unfavorable logistics overhead absorption (-6 ppts) and an increase in inventory adjustments (-3 ppts), partially offset by improvements in other costs (+2 ppts). Gross profit was $8.8 million, a decrease of 85 percent versus last year.

Segment contribution loss was $4.4 million, or 6.6 percent of sales, compared to segment contribution income of $40.8 million, or 18.6 percent of sales, last year. The decline was primarily driven by lower gross profit as explained above.

Balance Sheet and Other Key Highlights As Of September 30, 2022
Cash and Liquidity

  • Cash, cash equivalents, and restricted cash were $6.8 million, compared to cash, cash equivalents, and restricted cash of $14.2 million as of March 31, 2022. The decrease was primarily due to the net loss, offset by increased debt and changes in working capital.
  • Debt and other borrowings were $47.0 million compared to $29.4 million as of March 31, 2022.
  • $22.2 million was available for borrowing under the Wells Fargo Asset Based Lending Revolving Facility (“Facility”) compared to $65.8 million as of March 31, 2022.
  • Inventory was $99.2 million, down 11 percent compared to $111.2 million as of March 31, 2022 and down 39 percent versus the same quarter last year. The year-over-year decrease in inventory was driven by sell-through and strong inventory management as the company continued to right-size inventory levels. About 11 percent of inventory as of September 30, 2022 was in transit.
  • Trade receivables were $33.7 million, compared to $61.5 million as of March 31, 2022. The decrease in trade receivables was due to lower sales and the timing of customer payments.
  • Trade payables were $36.5 million, compared to $53.2 million as of March 31, 2022. The decrease in trade payables was primarily due to a planned reduction in inventory levels.
  • Capital expenditures totaled $7.5 million for the six months ended September 30, 2022.

Second Half and Full Year 2023

  • The company expects full-year revenue of between $315 million and $365 million compared to the previous range of $380 million to $460 million. The decline in revenue is primarily due to lower expectations in the Retail segment.
  • The company now expects gross margins for the second half of the year to be in the range of 24 percent to 27 percent, compared to the previous range of 27 percent to 30 percent. The decline is primarily due to the lower revenue and the resulting loss of expense leverage of fixed costs.
  • The sequential improvement in gross margins versus the first half is driven by lower inbound freight, the elimination of detention and demurrage fees, and the reduction in logistics facilities’ footprint. The company closed one of its distribution centers at lease expiration in October 2022 and will not be renewing the leases of some storage locations in-line with the progress made to right-size inventory levels.
  • The company remains focused on achieving break-even Adjusted EBITDA for the 2nd Half of fiscal 2023 to minimize cash consumption and begin the return to profitability. However, given the wide range of revenue expectations driven by the current macro-economic environment, the company is now guiding to full year Adjusted EBITDA loss to be between $30 million and $40 million compared to the prior range of Adjusted EBITDA loss of between $25 million and $35 million.
  • The company continues to expect JRNY Members to exceed 500,000 at March 31, 2023.

Photo courtesy Getty