Nautilus Inc. said sales in its retail segment were down in the fourth quarter due to timing issues, but retail sell-throughs were strong for the Bowflex MaxTrainer as well as the recently-introduced Bowflex cardio line of treadmills and ellipticals. Companywide, earnings were slightly down but in line with targets.

Fourth-quarter highlights:

  • Revenue increased 1.6 percent to $127.8 million as a 9.9 percent increase in the direct segment, offset by a 7.5 percent decline at retail.
  • Gross margins decreased 210 basis points to 48.9 percent primarily due to margin reductions in both segments, partially offset by a shift in segment revenue mix from retail to higher-margin direct.
  • As a percent of revenue, operating expenses increased 830 basis points to 43.9 percent versus 35.6 percent, driven primarily by an $8.8 million impairment charge related to the carrying value of the Octane Fitness trade name intangible asset. Excluding the non-cash impairment charge, operating expenses were 37.0 percent of revenue.
  • Operating income decreased 66.8 percent to $6.4 million in the prior period. Adjusted operating income, excluding the impairment charge, decreased 21.3 percent to $15.2 million, reflecting the lower gross margins and increased media spend.
  • The effective income tax rate for continuing operations was a credit of 32.2 percent versus an expense of 36.4 percent in the prior year quarter with the latest year reflecting the benefit of tax reform.
  • Income from continuing operations declined 21.2 percent to $8.5 million, or 28 cents. Adjusted income from continuing operations, excluding the impairment charge and tax benefit, was $8.3 million, or 27 cents per share, a decline of 30.8 percent.
  • EBITDA from continuing operations tumbled 58.6 percent to $8.9 million. Adjusted to exclude the impairment charge, EBITDA from continuing operations decreased 17.4 percent to $17.7 million.

For the full year, revenue was essentially flat at $406.2 million compared to the prior year revenue of $406.0 million. Income from continuing operations declined 21.4 percent to $27.6 million, or 89 cents per share. On an adjusted basis, earnings from continuing operations were down 21.9 percent to $27.4 million, or 88 cents per share.

On a conference call with analysts, CEO Bruce Cazenave said fourth-quarter revenues were in line with guidance as the strength in direct offset an expected decline in retail segment revenue due to the timing of some mass retail customer orders which shipped late in the third quarter as opposed to early in the fourth quarter.

Looking at the third and fourth quarters that eliminates the timing issues, revenues grew over 10 percent versus the same two quarters combined from last year. Outside the mass channel in its retail segment, the commercial and specialty channels “experienced continued weakness,” said Cazenave.

Excluding specialty items, earnings in the fourth quarter were in line with guidance, but earnings for the year were “significantly below what we had expected to achieve as we entered the year.” Cazenave noted that the company was still able to generate $54 million of EBITDA and invest in key strategic initiatives “designed to get our company back on the desired accelerated growth trajectory”

Retail Segment Seeing Good Response to Bowflex Treadmills 

At its retail segment, sales reached $55.5 million in the quarter, a decrease of 7.5 percent. The decrease reflected the previously-reported sales timing shift from Q4 into Q3 in the mass retail channel that resulted in stronger-than-usual seasonal selling in Q3 coupled with continued weakness in specialty and commercial customers. Mass retail channel grew 10.5 percent in the second half of 2017 while specialty commercial sales saw declines in that same period.

Gross margins for the retail business declined 380 basis points to 29.5 percent in the quarter, driven by unfavorable product mix and increases in product cost related to unfavorable foreign exchange rates coupled with higher seasonal discounting.

Operating income for the retail business totaled $7.1 million as compared to $12.2 million in the same period of last year. The decrease is due to the lower gross margins coupled with operating expense increases related to creative and video production for new product launches.

On the call, Bill McMahon, COO, said growth in its retail channel was driven by continued strong performance of Bowflex MaxTrainer, as well as with the introduction of the Bowflex cardio line of treadmills and ellipticals. The performance of Bowflex treadmills “was especially encouraging as traction here will allow Nautilus to make gains in the single largest category of fitness equipment, a category in which we have previously been underrepresented,” said McMahon.

During the second half of 2017, introductions included the Schwinn Crewmaster rowing machine, the Schwinn IC3 indoor cycling bike, the Schwinn 87 and the Octane ADX Airdyne bikes and the Octane ZR7000 commercial quality Zero Runner as well as updates to its popular Schwinn 70 Series line of cardio products.

“These new products, more than 20 new to market SKUs, are performing well,” said McMahon. “We are seeing solid results and excellent reviews on these new products and I want to reiterate that because of the earlier selling of products in the third quarter, you should not view the down fourth quarter sales as an indication of how well these products are performing. We are in fact experiencing good point-of-sale sell-through at retail and we would expect that our retail sales will be up in 2018 as compared to 2017.”

Cazenave added, “We continue to gain market share with traditional and e-commerce retail customers, and are expecting that our recently-introduced new Octane-branded products will help drive growth in our commercial and specialty retail channels of distribution as well.”

Direct Segment Fueled by Bowflex Maxtrainer 

Direct segment sales increased 9.9 percent in the quarter to $71.6 million as sales growth across several product offerings, including the Bowflex MaxTrainer and the Bowflex HVT, more than offset the anticipated decline in TreadClimber sales.

Direct margins decreased 340 basis points due to a shift in product mix to lower-margin HVT and treadmills, coupled with increases in product costs due to unfavorable changes in foreign currency exchange rates. Direct operating income was $11.8 million, a decrease of 1.7 percent. The decrease reflected lower gross margin rates that were partially offset by favorable consumer financing costs.

Gross margin for the Direct business eroded to 63.4 percent compared to 66.8 percent in the fourth quarter of last year due to a shift in product mix, coupled with increases in product costs due to unfavorable changes in foreign currency exchange rates.

McMahon said the Q4 sales increase for direct was driven by a number of products, including solid growth in Bowflex MaxTrainer, as well as contributions from its recently-introduced Bowflex HVT and the Bowflex Results Series of cardio products. New media and network mix approaches contributed to growth in Bowflex MaxTrainer.

Said McMahon, “We feel these changes are sustainable during peak seasons and the measured performance gives us confidence that MaxTrainer should remain a strong contributing category for direct going forward.”

The addition of free, personalized training is also expected to heighten the appeal of the Bowflex MaxTrainer.

Bowflex HVT benefited from new creative that addressed barriers to purchase for the item. Consumer reviews and satisfaction “remained very positive” and the HVT was able to capture the ISPO Health & Fitness Award for design, innovation and quality. HVT will explore sales in the mass market in 2018 just as Nautilus has done with the MaxTrainer.

While the Bowflex MaxTrainer continues to deliver the majority of sales in its direct segment during Q4, the company also generated “meaningful growth” in its strength product category and the new line of Bowflex treadmills exceeded expectations. The Bowflex TreadClimber continued to decline at a rate worse than expectations, but the company expects overall TreadClimber sales will be at a level that will no longer have material growth impact by midyear 2018.

Looking ahead, Nautilus plans for $3 million to $4 million in incremental expenses and $5 million to $6 million in additional capital expenditures to help the company return to a healthy level of top-line growth in 2018.

The investments will be focused on four areas:

  • Building a new digital platform involving core product as well as paid subscription content to capitalize on the growing use of digital subscription models and online group exercises in the fitness space. The platform will be able to be used across a variety of its products with launch set for the fourth quarter. Cazenave said the “capabilities this platform will provide will resonate well with all of our customer bases, plus give us potential entrée into subscription services.”
  • Cover the restructuring of its international sales and support teams that recently consolidated the Nautilus and Octane teams under one leader. Said Cazenave, “This will give us added focus in order to drive targeted doubling of international revenue to $60 million by 2020.”
  • Consolidate warehousing facilities and realign its supply base. The goal by the end of 2018 is to have an integrated worldwide network of fewer third-party warehousing locations, and for the first time each of its global facilities will be able to service all of its brands. Said Cazenave, “Not only will this give us added supply chain flexibility and the ability to be more responsive, but it is also expected to be at a lower cost.”
  • Complete the ERP integration of Octane Fitness that will enable other integration and resource optimization activities to occur and the schedule to be completed by mid-year.

In the first half of 2018, incremental expense related to redeployment of resources to support international, as well as ramped-up marketing translations, training videos and creating new websites, will have a near-term impact on results.

On a full year basis for 2018, Nautilus is projecting company revenues of between $428 million to $437 million with operating income in the range of $42 million to $45 million. That compares to $406.2 million in sales and $45.1 million in operating profits on an adjusted basis in 2017.

For the first quarter of 2018, revenues are projected between $110 million and $113 million and operating income in the range of $8.5 million to $9.5 million. That compares with sales of $113.3 million and operating income of $12.7 million in the 2017 first quarter.

Photo courtesy Nautilus