Nautilus Inc. reported earnings tumbled in the third quarter due to higher input costs and a sharp drop in sales at the company’s Direct segment due to the timing of a relaunch, but management indicated results were in line with plans. Officials also expect only a modest impact from the bankruptcy of Sears.
On a conference call with analysts, William McMahon, COO at Nautilus, said Sears, believed to be the largest retailer of fitness products, was not a top 10 account for Nautilus, and the company had previously mitigated the company’s receivables risk for those sales. He added, “This bankruptcy filing will not have a direct financial impact on Nautilus.”
Asked in the Q&A session whether Nautilus may be impacted as fitness equipment in the marketplace will have to be liquidated as Sears a number of doors, Sidharth Nayar, CFO, said there might be some negative impact in the short term but still felt to the exits would be positive long term.
“There could be some short-term disruption coming out of added promotional activity or discounting or in sort of a worst-case scenario, which is a potential liquidation scenario,” said Nayar. “On the flip side, we do view it as an opportunity from a consolidation perspective, certainly, for some of the key remaining retailers who are out there.
“So I think we just need to navigate a little bit through Q4 and sort of determine how that plays out. But longer term, we certainly, from our perspective, don’t see this as a longer-term negative for us.”
When the company filed for bankruptcy on October 15, Sears said the company planned to close 142 stores. That’s in addition to 46 stores that are slated to be closed next month. The filing showed Sears Holdings has 687 stores across the company’s Sears and Kmart banners
In the quarter ended September 30, Nautilus’ net income fell 47.7 percent to $4.3 million, or 14 cents a share. Excluding discontinued operations, earnings dropped 45.8 percent to $4.5 million, or 15 cents, short of Wall Street’s consensus target of 17 cents.
Shares of Nautilus closed Tuesday at $11.57, down $1.47, or 11.3 percent, on the New York Stock Exchange. Net sales for the quarter totaled $91.1 million, an increase of 3.3 percent as compared to the same period in the prior year.
Gross margins decreased 460 basis points to 42.3 percent, reflecting higher product cost and a shift in product mix to lower margin SKUs.
Operating expenses increased to 35.5 percent of sales from 31.7 percent. The latest quarter was impacted by creative costs related to product launch of $1.1 million while the year-ago was favorably impacted by a $2.1 million retroactive adjustment to finance fees related to a contract extension and a $1 million favorable settlement related to indemnification claim. Also driving higher operating costs were higher legal expenses and continued investments in engineering and design resources to support innovation. Operating income was down 53.7 percent to $6.2 million.
In the Retail segment, sales grew 14.9 percent increase to $62 million. Double-digit growth was achieved in mass retail as well as the commercial specialty channel. The gains were due to increases in a number of product categories, including bikes, treadmills and both the Bowflex and Octane versions of the Max Trainer. Bruce Cazenave, CEO, added, “We are pleased with the quarter and the momentum we have in the Retail segment going into the peak season.“
Third quarter gross margins were down 100 basis points in the Retail segment to 34.7 percent, mostly due to higher product costs related to commodity input pricing and unfavorable foreign exchange rates.
Operating income for the Retail business totaled $12.7 million as compared to $12.1 million in the same period of last year as the higher revenue offset an increase in operating expenses. The third quarter of 2017 operating expenses included a $1 million favorable settlement related to an indemnification claim.
Elaborating on the Retail segment’s performance, McMahon noted that the 15 percent revenue gain came on top of a 15 percent gain in the year-ago quarter.
Strong sellers were many of the company’s cardio product lines, including the company’s Upright, Recumbent and IC Bikes. The commercial Max Trainer product, the Octane MTX Max Trainer, began shipment and installation during the third quarter “and was a key growth driver out of the gate.”
Said McMahon, “Commercial Max is an important catalyst in our strategy to drive growth in our commercial and specialty sales. Early feedback from commercial clubs and specialty users has been strong.”
Nautilus also continues to see strong performance from the Bowflex Results Series treadmill line-up, which will be expanded further this fitness season with the new Bowflex BXT6 treadmill starting at $999. The treadmill will initially be offered exclusively at Dick’s.
The company is also launching the Schwinn 411 elliptical, which features a new compact footprint and is priced at $499. Said McMahon, “Both of our new Bowflex and Schwinn machines offer RunSocial compatibility, the mixed reality app allowing users to train in scenic locations.”
With the Octane brand, a free, updated version of the popular Octane Fitness workout app was launched initially on iOS and soon for Android-based devices.
Said McMahon, “As we look forward to fitness season, we currently anticipate continued growth across both mass retail and commercial specialty this fall. Our retail teams continue to gain share in the mass retail space.”
In the Direct segment, sales dropped 14.8 percent to $29.0 million. Cazenave said the softness was expected and corresponded to a reduced overall media spending of 18 percent.
He noted that during the quarter, Nautilus in the Direct segment purposely pulled back spending on Max Trainer with an upgraded product line set to launch in November. Said Cazenave, “We anticipate a reversal of recent sales trends in our Direct segment during the fourth quarter based on three factors: the launch of the new Max Trainer line; second, the increased traction we expect from the recently introduced Bowflex LateralX and third, the marketing and media we plan to support in support of the launch of our new and exciting digital platform.”
Gross margin for the Direct business declined to 57.3 percent for the quarter compared to 63.5 percent in the same quarter last year due to higher product cost reflecting commodity input price increases and the unfavorable impact of foreign exchange rates coupled with a slightly unfavorable product mix.
The operating loss in Direct was $1.4 million compared to operating income of $5.3 million due to the lower sales and gross margins. The year-ago quarter included $2.1 million favorable retroactive adjustment to finance fees related to a contract extension.
Looking ahead, Cazenave said that based on expected continued growth in the Retail segment and anticipated significant improvement in the trajectory of the Direct business due to Max Trainer relaunch and the digital platform launch, Nautilus continues to expect full year revenue and operating income guidance ranges to remain unchanged at $431 million to $440 million and $42 million to $45 million, respectively. In the year-ago period, Nautilus had operating income of $45.1 million on an adjusted basis on sales of $406.2 million.
Photo courtesy Bowflex
