Inside the Call: Nautilus Rides Home Fitness Boom Amid Pressure on Margins

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Driven by strong demand for its connected fitness offerings, Nautilus Inc.’s earnings and sales in its first quarter ended June 30 far exceeded expectations, but officials warned that rising commodity prices and transportation costs could weigh on margins over the next few years. quarters.

In the quarter, sales were $ 184.6 million, up 61.7% year-over-year. Sales were up 74.4% excluding the Octane brand, which was sold in October 2020. On May 10, Nautilus predicted that first quarter sales would increase between 40% and 50% from the previous year or between 51% and 62% excluding Octane Fitness. .

In a conference call with analysts, Jim Barr, CEO, said sales were the company’s highest quarter in June and the fourth highest of any quarter in the company’s 35-year history. company. The gains were made from high sales a year ago due to increased demand as the pandemic arrived.

The direct segment grew 26 percent in what is traditionally Nautilus’ lightest quarter of the season. The retail segment continued to set records, generating its highest quarterly sales as holiday products begin to ship. Barr said: “This is an early indicator that our extended stable of retail partners are betting on a strong fitness and vacation season.”

The company’s international chain posted its second-highest quarterly sales, up 70% or 102% excluding Octane.

Barr said, “The strong sales of our new connected cardio machines, including our VeloCore Bikes, combined with the strong performance of many of our resistance products, including the continued momentum of our SelectTech Line, led to these better than expected results.

Nautilus said it reached over 40,000 new customers through its website during the quarter thanks to the attractiveness of its connected offerings, bringing its number of new customers to over 380,000 in the past 15 months. Before the pandemic, the number of new Nautilus customers averaged around 100,000 per year.

“The growth in the number of direct customers and our expanding retail universe are fueling membership growth for connected product sales,” Barr said. “JRNY membership growth accelerated after the launch of our first integrated display product in September 2020. And by the end of June, we had more than doubled the number of members compared to the beginning of January. “

Gross margins affected by chip shortages and transportation costs
Gross margins were affected by higher component costs, including shortages of chips and higher prices for commodities such as steel, and still high transportation costs. Gross margins eroded to 30.1% from 41.5% for the same period last year.

A traditional seasonal shift to larger direct sales has also reduced margins. Direct accounted for 34% of sales this quarter compared to 44% last year.

Barr said, “I want to stress that we view these pressures on the margins as temporary challenges as the world recovers from the disruption caused by COVID-19. While this impact is significant in the short term, we believe that these external pressures on margins will normalize over time. “

Despite the pressures on gross margins, operating margins improved to 9.7%, ahead of expectations between 6.5% and 8%. The improvement was driven by strong results and a strategic decision to shift certain investments from its North Star growth strategy from Q1 to Q2, including brand marketing for the Tour de France and Olympic advertising.

Operating expenses were $ 37.6 million, a decrease of 30.9% mainly due to the loss of $ 29.0 million related to the sale of the Octane business. The loss was partially offset by increased sales and marketing spending as its direct business returned to more normalized advertising levels and the company invested in incremental brand marketing. Total ad spend was $ 11.6 million this year from $ 2.8 million last year. General and administrative costs and product development costs also increased compared to last year, mainly due to investments in JRNY.

Operating income was $ 17.9 million compared to a loss of $ 7.1 million for the same period last year. JRNY’s investments were $ 4.6 million this year versus $ 1 million last year and brand marketing was $ 3.4 million this year versus $ 0 last year. Excluding these investments, operating margins for Q1 2022 would have improved by 4 percentage points.

Earnings from continuing operations improved to $ 14.0 million, or 43 cents per share, compared to a loss of $ 5.0 million, or 17 cents, for the same period last year. Net income was $ 13.9 million, or 43 cents, compared to a net loss of $ 5.1 million, or 17 cents, for the same period last year.

On an adjusted basis, excluding the impact of the Octane business, operating income was $ 17.9 million compared to $ 21.9 million last year, due to lower gross margins, return to normalized brand marketing levels and North Star investments. Adjusted earnings from continuing operations were $ 14.0 million, or 43 cents per share, from $ 16.8 million, or 56 cents, a year ago. Adjusted EBITDA from continuing operations was $ 21.0 million, compared to $ 25.5 million last year.

Direct segment sales rise 26%
Direct segment sales were $ 63.4 million, up 25.7%. Sales of strength products rose 559.4 percent to an all-time high, led by SelectTech weights and Bowflex home gyms. Cardio sales were down 31.1%, mainly due to end-of-life products that are no longer available for sale this year and lower sales of the Schwinn IC4 and Bowflex C6 bikes which were partially offset. through VeloCore sales.

As of June 30, Direct’s backlog was $ 3.1 million, compared to $ 26.5 million as of March 31, 2021. These amounts represent unfulfilled consumer orders, net of promotional programs and sales. current sales discounts. Direct’s sales results, excluding backlog, were more in line with typical seasonality, with quarters ending in June and ending in September representing the weakest quarters of sales volume.

Gross margins for the Direct segment were 38.7% compared to 54.6% last year. The segment’s contribution income was $ 6.8 million or 10.7 percent of sales, compared to $ 17.0 million or 33.7 percent of sales last year. The decrease is mainly due to lower gross margin and a return to normalized advertising spend. Advertising spend was $ 8.0 million compared to $ 2.4 million last year.

Retail segment sales increase 91%
Retail segment sales reached $ 120.5 million, up 91.4% year-over-year, and the best quarterly sales in segment history. Growth was 120.7% excluding sales related to the Octane brand. Retail segment sales outside of the United States and Canada increased 70% or 102% without Octane.

Sales of strength products were up 119.3 percent, driven by its SelectTech weights and benches and Bowflex Home Gyms. Cardio sales increased 83.5%, hitting an all-time high, thanks to connected fitness bikes and treadmills.

As at June 30, the backlog of its Retail segment totaled $ 141.9 million, compared to $ 178.6 million as at March 31, 2021. These amounts represent customer orders for future shipments and are net of contractual discounts and of the consideration payable to applicable retail customers.

Gross margins in the Retail segment were 25.1 percent compared to 30.3 percent last year. Segment contribution revenue was $ 22.1 million or 18.3 percent of sales, compared to $ 11.6 million or 18.4 percent of sales for the same period last year, mainly due higher gross margin and spending leverage.

The back half should see continued pressure on the margins
For the fiscal second quarter, Nautilus expects sales to be between $ 145 million and $ 155 million, up from $ 155.3 million in the September quarter of the previous year, but representing a revenue CAGR over two years from 53 to 59%.

Nautilus said given the distortion the pandemic caused to sales patterns, it would measure activity against last year and against the same period two years ago for the next few quarters.

Nautilus said that like many other companies, external gross margin issues are expected to continue into the second quarter and increased pressure on prices due to the current chip shortage.

Continued investments in its North Star strategy are expected with encouraging initial results. The brand’s marketing spend in the second quarter will be between $ 5 million and $ 6 million compared to $ 3 million in the last quarter and zero last year. JRNY’s investment will be between $ 5.5 and $ 6.5 million compared to $ 5 million last quarter and $ 1 million last year. JRNY’s investments are expected to further improve the platform’s functionality through improved adaptive training, the addition of a member portal and the addition of new content, such as that provided by its new strategic partner. Fit on. These investments are expected to dilute operating margins by 7 to 8 percentage points.

Considering these investments and external macroeconomic pressure on gross margin, operating margins are expected to be in the lower single digit range.

For the second half of its fiscal year, external macroeconomic factors are expected to continue to negatively affect gross margins and operating margins are expected to be in the low to mid range. Nautilus reiterated its expectation to reach 250,000 JRNY members by the end of FY22.

Longer-term, Nautilus reiterated that it believes short-term external pressures on gross margin are temporary and still expects to achieve sustainable operating margins above 15% by fiscal 2026 so as commodity prices stabilize and return closer to pre-pandemic and North Star levels. The strategy generates higher quality recurring revenue as Nautilus shifts from a product-focused hardware business to a consumer-focused digital business.

Photos courtesy of Nautilus, FitOn


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