Nautilus, Inc. reported net sales for the first quarter of 2013 totaled $59.2 million, a 15.5 percent increase compared to $51.3 million in the same quarter of 2012. Gross margin for the first quarter of 2013 improved 520 basis points to 51.8 percent, compared to 46.6 percent for the same quarter in 2012. The increase in gross margin was primarily due to higher gross margins in both the Retail and Direct businesses, as well as the continuing shift of sales to higher margin cardio products in the Direct channel. Operating margin for the first quarter of 2013 improved 460 basis points to 10.1 percent compared to 5.5 percent in the same period last year.
Income from continuing operations for the first quarter of 2013 was $5.5 million, compared to $2.6 million for the same period last year. Income per diluted share from continuing operations for the first quarter of 2013 increased to $0.18, compared to $0.09 for the same quarter a year ago. The strong improvement in results from continuing operations primarily reflects increased sales, improved gross margins and higher operating income from the Companys Direct business.
Bruce M. Cazenave, Chief Executive Officer, stated, We are pleased to report a solid start to fiscal 2013. We continued to build on the strong momentum established last year and delivered strong growth in revenue, gross margin, and profitability in the first quarter this year.
Our Direct business continued to perform very well, reflecting both the steady growth of our existing products, as well as the initial success of our new products, including the Bowflex® UpperCut. As anticipated, our Retail business was impacted by the continued soft overall Retail environment for fitness equipment. Given the recent margin and sales challenges we have faced in Retail, we are encouraged by the margin improvement in the first quarter. As previously communicated, we have been focused on the development and successful placement of a new lineup of cardio products for shipment during the next Retail planning and sales cycle starting this fall. These products appear to be receiving a favorable reception thus far, although it is much too early to determine to what extent preliminary indications may lead to improvement in Retail results.
For the first quarter of 2013, the Company reported net income (including discontinued operations) of $5.2 million, or $0.17 per diluted share, compared to $2.5 million, or $0.08 per diluted share, for the first quarter of 2012. Net income for the first quarter of 2013 included a loss of $0.4 million, or ($0.01) per diluted share, from discontinued operations. Net income for the first quarter of 2012 included a loss of $0.1 million, or ($0.01) per diluted share, from discontinued operations.
Mr. Cazenave continued, The business is achieving momentum and is beginning to realize the financial benefits from our teams successful execution on key areas of focus, including establishing an expanded and more diversified product portfolio and improving gross margins. In order to further expand consumer awareness of our most recently launched products, we will continue to prudently invest in our sales and marketing efforts with a constant eye on building a strong foundation for continued long-term profitable growth.
Segment Results
Net sales for the Direct segment were $42.6 million in the first quarter of 2013, an increase of 26.4 percent over the comparable period last year, reflecting strong demand for the Company’s cardio products, especially our Bowflex® Treadclimber®. The higher sales were driven by continued effectiveness of our advertising and call center processes, and higher U.S. consumer credit approval rates. U.S. credit approval rates rose to 35 percent in the first quarter of 2013, up from 30 percent for the same period last year. First quarter 2013 sales also benefitted from sales of CoreBody Reformer® and Bowflex® UpperCut.
Operating income for the Direct segment improved to $6.7 million for the first quarter 2013, compared to $3.0 million for the first quarter 2012. This improvement reflects stronger sales, as well as a 330 basis point improvement in Direct segment gross margin. Gross margin for the Direct business was 59.8 percent for the first quarter of 2013, compared to 56.5 percent in the first quarter of last year. Direct business gross margin benefitted from better product mix of higher margin cardio sales.
Net sales for the Retail segment were $15.1 million in the first quarter 2013, a decrease of 9.0 percent when compared to $16.6 million in the first quarter last year. First quarter retail sales were impacted by the continued soft overall retail environment for fitness equipment. As noted above, the launch of our new lineup of cardio products for the Retail segment is currently in progress. We advise caution in comparing interim period results for our Retail business with prior year periods until the second half of the year, when these products have fully launched and the level of consumer acceptance can be evaluated.
Operating income for the Retail segment was $2.0 million, compared to $2.3 million in the first quarter last year. Retail gross margin was 24.9 percent in the first quarter of 2013, compared to 23.8 percent in the same quarter of last year, a 110 basis point improvement.
Balance Sheet
The Company ended the first quarter of 2013 in a strong financial position. As of March 31, 2013, the Company had cash and cash equivalents of $28.7 million and no debt, compared to cash and cash equivalents of $23.2 million and no debt at year end 2012. Working capital was $31.1 million as of March 31, 2013, compared to $25.4 million at year end 2012. Inventory as of March 31, 2013 was $13.7 million, compared to $18.8 million as of December 31, 2012 and $13.5 million at the end of the first quarter of 2012. The company tightly manages inventory levels and the reduction in the first quarter was planned and reflects the seasonal nature of our business.
