Nautilus Sees Q2 Sales Slower than Expected…

Nautilus experienced softer-than-expected consumer demand that made Q2 sound like a bit of a roller coaster ride for management. Company Chairman & CEO Gregg Hammann said, “There were days where it looked like we were going to have an unbelievable quarter, and days we thought we were going to be looking at having a tough quarter.” In the end it came out somewhere in between.

Softer sales, a chaotic macro-economic environment, fuel surcharges as high as 20%, and a fragile consumer confidence all combined to pull Nautilus’ second quarter margins and earnings down. While NLS management said that backroom inventories at store level appear to be very low, open to buy authorizations remain modest, and floor resets are later than usual. Margins were 80 basis points lower than a year ago, due mostly to channel and product mix. NLS expects to realize margin improvement as the company’s new information systems provide data regarding profitability by customer and product SKU. Operating expenses were 90 basis points higher due to the two acquisitions that were fully annualized during the quarter.

Specialty Retail first quarter net sales were up despite a “very soft retail environment.” NLS added about six new specialty retailer accounts during Q2 bringing the total number to 260 specialty retail doors, and about 950 independent bike dealers, both up from 2005.

Retail, which includes sporting goods, warehouse clubs, and department stores, reported flat sales for the period. Management said that retailers are maintaining low inventories at the store level and the open to buy is later and smaller than recent years. NLS says that it has “kept firm on protecting profitable margins,” even if it means loosing volume. For 2006, NLS now expects about 15% to 20% growth through this channel.

Commercial sales were down in part due to a $3 million boost last year due to the first commercial TreadClimber units. Some commercial customers slowed their purchase commitments in the second quarter on softer membership trends. However, NLS expects “substantial year-over-year growth” in the next few quarters.

Direct sales were down. NLS said that it is in a period of higher advertising rates and tighter direct response media inventory, causing them to further diversify direct response methods.

International Equipment sales were up due to strength in many Western European countries, commercial and retail expansion in China, and commercial sales progress in Sweden, India, Russia, and the Benelux countries. NLS expects around 20% growth in international sales.

Apparel sales increased from core Pearl iZUMi cycling and running business to specialty dealers and retailers like Performance Inc. and REI. In addition, NLS is testing Schwinn branded apparel with one retail partner. The company is rolling out a line called “Nautilus Responsiv Fitness Apparel,” positioned for indoor workouts. Both new lines are expected to deliver modest sales this year and strong growth in future years. NLS continues to expect 20% growth in apparel.

For the third quarter of 2006, Nautilus’ net sales should be in the $165 million to $180 million range, with earnings of 16 cents to 24 cents per diluted share. NLS said full year net sales are expected to be within its three-year range of 10% to 20% growth, and earnings expected to be above the high end of its three-year range of 20% to 30% growth.