While seeing declines in its retail segment in the first quarter due to inventory imbalances in the marketplace, Nautilus Inc. remains upbeat about the second half of the year.
In the first quarter, sales in Nautilus’ retail segment achieved sales of $37.8 million, a decrease of 2.6 percent and in line with expectations. On a conference call with analysts, Bill McMahon, COO, noted that the company had already indicated during its fourth-quarter conference call that retail was being impacted by the heavier promotional environment and the “desire of certain large retail partners to normalize their inventory on hand levels at a new lower position.”
While certain competitors continue to employ heavier-than-normal promotions, Nautilus maintained its normal pricing strategy and the company was “pleased with our point-of-sale performance overall.”
McMahon added, “Further, we feel that the inventory balance adjusting by certainly retail partners is now largely complete and purchasing should return to a pattern more in line with point-of-sale performance.”
Sales were helped by continued strong performance in its selectorized weight category during Q1 as both new and legacy products delivered growth. Some stability was also seen the specialty retail area of its business after a full year of declines in 2016. Lastly, retail sales of Max Trainer, both domestically and in international markets, were stronger in the quarter.
McMahon also noted that Nautilus’ test of the sale of the Bowflex Max Trainer M3 at Dick’s Sporting Goods for in-store only purchase went well and the program will be expanded for the coming fall season. The test was designed to see if the popular item, previously only sold direct, would reach the customer who preferred to “buy in-store through a trusted major retailer” and Nautilus found it delivered incremental sales.
Gross margins for the Retail segment improved 210 basis points to 32 percent in the period. The lift was mostly due to improved product mix, its decision to avoid the “deep discounting strategies” employed by some competitors, and certain one-time purchase accounting related items in the prior year. Margins also continue to benefit from the addition of higher-margin Octane sales overall.
Operating income dropped to $2.2 million from $3.9 million a year ago. The size of the decrease is attributable to a previously-mentioned $1.2 million reserve related to a royalty dispute coupled with lower gross margin dollars related to the revenue shortfall.
Looking ahead, McMahon said, “Based on our current understanding of retailers plans and ongoing point-of-sale performance, we do anticipate solid retail growth in the back half of 2017.”
He noted that Nautilus has a number of product launches to support growth for the rest of the year. These include the Bowflex Results series cardio line including treadmills and ellipticals at $1,499 and $1,799, marking its first entry into the higher price point retail ellipticals and treadmills. Building on the success of its recent Airdyne product launches, the upscale Schwinn 87 Airdyne model and the Octane Airdyne X that combines the latest in Airdyne technology with a full commercial club warranty package are being introduced.
Another launch is the new Octane ZR7000, the second machine in its full commercial club rated Zero Runner line. New categories include the mass-targeted rowing machine, the Schwinn Crewmaster; as well as an incremental price point addition to its consumer indoor cycling line, the Schwinn IC3 bike.
With the recently-acquired Modern Movement line of fitness products, three products are being launched this fall: the new Modern Movement M-Board with digital app, a new M-Pad and M-Straps which deliver suspension training.
Companywide, net sales for the first quarter totaled $113.3 million, a decrease of 6.3 percent. Net income from continuing operations for the quarter slumped 29.3 percent to $8.2 million, or 26 cents a share.
Operating income also slid in the direct segment, by 27.5 percent to $15.3 million. The direct segment’s revenues declined 8 percent to $74.7 million. Direct sales were impacted by a decline in TreadClimber sales. The segment also faced a challenging year-ago comparisons due to “exceptionally favorable” response rates in Q116 for the Max Trainer M7 launch.
Looking ahead, Nautilus reiterated its full year guidance for 2017 that calls for revenue growth to be in the range of 5 percent to 7 percent over 2016 with a similar growth rate in operating income. Slower growth in the first half is expected to be offset by a return to double-digit growth run rates in the back half of the year.
Said Bruce Cazenave, CEO, on the call, “Our full year guidance also reflects continued stepped up investments in sales, marketing innovation and international and already that began in the first quarter.”
Photo courtesy Bowflex
