Nautilus, Inc. Reports Fiscal Third Quarter 2023 Results

By Staff 1 year ago

Direct Segment Net Sales of $46.7M up 30% vs pre-pandemic Q3 Fiscal 2020

JRNY® Total Members Reaches Approximately 450k with 88% Growth vs Q3 Fiscal 2022

Gross Margin Improves 300 Basis Points vs. Q3 Fiscal 2022 and 580 Basis Points vs Q2 Fiscal 2023

Adjusted EBITDA Loss Reduced by 67% versus Q3 Fiscal 2022

Executes $30M Cost Reduction Initiatives to Drive Profitable Growth

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The Company Updates Full Year Guidance

VANCOUVER, Wash.–(BUSINESS WIRE)–Nautilus, Inc. (NYSE: NLS) today reported its unaudited operating results for the fiscal 2023 third quarter ended December 31, 2022.

Management Comments

“We are pleased with our Q3 results, highlighted by continued strength in our Direct segment, with net sales growing 30% compared to the same quarter in pre-pandemic fiscal 2020. Ongoing improvement of inventory management delivered consolidated sequential and year-over year gross margin rate improvement. We see continued momentum in our differentiated digital fitness platform, JRNY®, as we reached nearly 450,000 members at the end of Q3,” said Jim Barr, Nautilus, Inc. Chief Executive Officer.

Mr. Barr continued, “Despite solid demand for our products as demonstrated in our Direct segment, headwinds in Retail re-orders persist as our retail partners continue to act conservatively in light of uncertainty in the economic environment. We are taking decisive actions to reduce our costs and realign our business with the short-term revenue outlook, positioning us to navigate these near-term challenges, enhance free cash flow, and drive long-term profitable growth.”

“We have set the foundation for our path to becoming a leader in connected fitness thanks to the strength and breadth of our equipment business and advancements in our differentiated digital fitness platform. Looking ahead, we will remain proactive and nimble in responding to market conditions. We will continue to be prudent in how we manage our costs and prioritize investments to ensure we support momentum of our transformation and enhance our profitability,” Mr. Barr concluded.

Cost Reduction Initiatives

Over the last several quarters, Nautilus has improved its operational efficiency, including executing on opportunities to enhance supply chain, improve inventory management, and optimize marketing spend. As challenges in the retail environment persist, Nautilus has taken additional proactive cost reduction actions to drive profitability despite market headwinds. This includes the difficult decision to reduce its workforce by approximately 15%. In addition, Nautilus has reduced its contracted labor, leveraging the flexibility of the Company’s variable operating model. As a result, Nautilus is better positioned to manage through near-term headwinds in its Retail business, while continuing to drive its Direct business and serve its growing base of JRNY® members.

These actions along with enterprise-wide cost optimization efforts are expected to yield annualized cost savings of approximately $30.0 million beginning in Q4 Fiscal 2023. The Company expects to incur restructuring and other one-time charges of approximately $3.0 million in the Q4 Fiscal 2023 to Q1 Fiscal 2024 time frame.

Total Company Results

To gauge sales growth against more “normalized” or pre-pandemic results, the Company will rely more heavily on measuring performance of fiscal 2023 versus the pre-pandemic twelve-month period that ended March 31, 2020 (“fiscal 2020”), rather than measuring performance against the atypical, outsized results that occurred during the pandemic.

Fiscal 2023 Third Quarter Ended December 31, 2022 Compared to December 31, 2021

  • Net sales were $98.1 million, compared to $147.3 million, a decline of 33.4% versus last year. Net sales are up 9%, when compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in October 2020. The sales decline versus last year is driven primarily by the return to pre-pandemic seasonal demand.
  • Gross profit was $22.9 million, compared to $29.9 million last year. Gross profit margins were 23.3% compared to 20.3% last year. The 3.0 ppt increase in gross margins was primarily due to decreases in inventory adjustments (+3 ppts), lower product costs (+2 ppts), partially offset by unfavorable logistics overhead absorption (-1 ppt) and higher outbound freight (-1 ppt). JRNY® investments were lower in dollars versus the prior year and negatively affected gross margins by only 0.40 ppts.
  • Operating expenses were $33.1 million compared to $49.2 million last year. The decrease of $16.1 million, or 32.7%, was primarily driven by $12.7 million lower media spending, a decrease of $2.1 million due to other cost savings, and a $1.3 million decrease in other variable selling and marketing expenses due to decreased sales. Total advertising expenses were $9.5 million this year versus $22.3 million last year.
  • Operating loss was $10.3 million compared to an operating loss of $19.3 million last year, primarily driven by improved gross margins and lower operating expenses.
  • Income tax expense was $0.3 million this year compared to a $7.0 million tax benefit last year. The income tax expense this quarter was primarily related to activities in foreign jurisdictions, as well as the recording of a $2.8 million valuation allowance.
  • Loss from continuing operations was $11.1 million, or $0.35 per diluted share, compared to a loss of $13.5 million, or $0.43 per diluted share, last year.
  • Net loss was $11.1 million, or $0.35 per diluted share, compared to net loss of $13.5 million or $0.43 per diluted share, last year.
  • The following statements exclude the impact of acquisition and other related costs1for the three-months ended December 31, 2021.
    • Adjusted operating expenses were $32.5 million compared to $48.6 million last year. The $16.1 million or 33.1% decrease was primarily due to $12.7 million lower media spending, a decrease of $2.1 million due to other cost savings, and a $1.3 million decrease in other variable selling and marketing expenses due to decreased sales.
    • Adjusted operating loss was $9.6 million compared to $18.7 million last year, primarily driven by improved gross margins and lower operating expenses.
    • Adjusted EBITDA loss from continuing operations was $4.9 million compared to $14.8 million last year.

1 See “Reconciliation of Non-GAAP Financial Measures” for more information

Nine-Months Ended December 31, 2022 Compared to Nine-Months Ended December 31, 2021

  • Net sales were $218.4 million, compared to $469.8 million, a decline of 53.5% versus last year. Net sales are up 13% when compared to the same period in fiscal 2020, excluding sales related to the Octane brand, which was sold in October 2020. The sales decline versus last year is driven primarily by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices, as our typical sales discounts were largely unnecessary during the pandemic period.
  • Gross profit was $41.3 million, compared to $127.5 million last year. Gross profit margins were 18.9% compared to 27.1% last year. The 8.2 ppt decrease in gross margins was primarily due to increased discounting (-5 ppts), unfavorable logistics overhead absorption (-4 ppts), increased investments in JRNY® (-2 ppts), and higher outbound freight (-1 ppt), partially offset by a decrease in product costs (+4 ppts).
  • Operating expenses were $117.1 million compared to $130.9 million last year. The decrease of $13.8 million, or 10.5%, was primarily due to a $28.0 million decrease in media spending, a $6.6 million decrease in other variable selling and marketing expenses due to decreased sales, a decrease of $6.5 million due to savings in other operating expenses, and a $4.7 million prior year loss contingency for a legal settlement, partially offset by a goodwill and intangible impairment charge of $27.0 million and a $5.0 million increase in JRNY® investments. Total advertising expenses were $18.3 million versus $46.3 million last year.
  • Operating loss was $75.8 million or a negative 34.7% operating margin, compared to an operating loss of $3.4 million last year, primarily driven by lower gross profit and a goodwill and intangible impairment charge of $27.0 million.
  • Income tax expense was $8.6 million this year compared to a $1.3 million tax benefit last year. The income tax expense in the current year was primarily the result of the $20.6 million U.S. deferred tax asset valuation allowance.
  • Loss from continuing operations was $86.6 million, or $2.75 per diluted share, compared to a loss of $4.0 million, or $0.13 per diluted share, last year.
  • Net loss was $84.5 million, or $2.68 per diluted share, compared to a loss of $4.2 million or $0.14 per diluted share, last year.
  • The following statements exclude the impact of non-cash impairment charges1 related to the carrying value of our goodwill and intangible assets for the nine-months ended December 31, 2022 and the impact of legal settlement and acquisition and other related costs1 for the nine months ended December 31, 2021.
    • Adjusted operating expenses were $88.2 million compared to $124.5 million last year. The $36.3 million or 29.2% decrease was driven by $28.0 million lower media spending, a $6.6 million decrease in other variable selling and marketing expenses due to decreased sales, a decrease of $6.5 million due to savings in other operating expenses, partially offset by a $5.0 million increase in JRNY® investments.
    • Adjusted operating loss was $46.9 million compared to a loss of $2.9 million last year, driven by lower gross profit.
    • Adjusted EBITDA loss from continuing operations was $34.1 million compared to income of $13.5 million last year.

1 See “Reconciliation of Non-GAAP Financial Measures” for more information

JRNY® Update

  • Nautilus continues to enhance the JRNY® platform through many unique features including the expansion of differentiated visual connected-fitness experiences for JRNY® Members.
  • As of December 31, 2022, members of JRNY®, Nautilus’ personalized connected fitness platform, reached 447,000, representing approximately 88% growth versus the same quarter last year. Of these members, 156,000 were Subscribers, representing approximately 134% growth over the same period last year. We define JRNY® Members as all individuals who have a JRNY® account and/or subscription, which includes Subscribers, their respective associated users, and users who consume free content. We define Subscribers as a person or household who paid for a Subscription, are in a trial, or have requested a “pause”‘ to their subscriptions for up to three months.
  • In January 2023, the Company introduced an innovative feature set to its JRNY® members with the launch of Motion Tracking – offering personalized coaching and feedback, rep tracking, form guidance, and adaptive weight targets. At release, the JRNY® app with Motion Tracking offers workouts that are designed for use with Bowflex® SelectTech® 552 or Bowflex® SelectTech® 1090 dumbbells, enhancing Nautilus’s strength offerings. It is optimized for use with an iOS or Android tablet and JRNY® members can access these features within their existing membership and without the need for additional equipment.
  • Leveraging proprietary technology and machine learning expertise from Nautilus’ acquisition of VAY, these new features are enhancing value within the JRNY® platform, which the Company believes will continue to drive JRNY® membership growth through the remainder of fiscal 2023 and beyond.

Segment Results

Fiscal 2023 Third Quarter Ended December 31, 2022 Compared to December 31, 2021

Direct Segment

  • Direct segment sales were $46.7 million, compared to $60.7 million, a decline of 23.0% versus last year, and up 30.2%, compared to the same period in fiscal 2020. The net sales decrease compared to last year was primarily driven by the return to pre-pandemic seasonal demand and pre-pandemic sales discounting practices.
  • Cardio sales declined 8.9% versus last year and were up 9.1% compared to the same period in fiscal 2020. Lower cardio sales this quarter versus last year were primarily driven by lower demand for Max Trainer® and elliptical equipment. Strength product sales declined 43.0% versus last year and increased 131.0% compared to the same period in fiscal 2020. Lower strength sales this quarter versus last year were primarily driven by lower demand for SelectTech® weights.
  • As of December 31, 2022, the Direct segment’s backlog totaled $2.1 million. This amount represents unfulfilled consumer orders net of current promotional programs and sales discounts.
  • Gross profit margin was 26.3% versus 29.8% last year. The 3.5 ppt decrease in gross margin was primarily driven by: increased discounting (-4 ppts), partially offset by a decrease in other costs (+0.5 ppt). JRNY® investments were lower in dollars versus prior year and were flat as a rate of sales. Gross profit was $12.3 million, a decrease of 32.2% versus last year.
  • Segment contribution loss was $6.5 million, or 13.8% of sales, compared to segment contribution loss of $9.0 million, or 14.8% of sales last year. The improvement was primarily driven by decreased media spend, partially offset by lower gross profit, as explained above. Advertising expenses were $8.9 million compared to $16.1 million for the same period last year.

Retail Segment

  • Retail segment sales were $50.6 million, compared to $85.7 million, a decline of 41.0% versus last year, and down 6% compared to the same period in fiscal 2020 excluding sales related to the Octane brand. Retail segment sales outside the United States and Canada were down 66.7% versus last year. The net sales decrease compared to last year is primarily driven by the return to pre-pandemic seasonal demand.
  • Cardio sales declined 43.7% versus last year and were down 40.5% compared to the same period in fiscal 2020, excluding sales related to the Octane brand. Lower cardio sales this quarter were primarily driven by lower demand for Max Trainer® and elliptical equipment. Strength product sales declined 38.9% versus last year and increased 61.1% compared to the same period in fiscal 2020. Lower strength sales this quarter were primarily driven by lower demand for home gyms.
  • As of December 31, 2022, the Retail segment’s backlog totaled $16.8 million. This amount represents customer orders for future shipments and are net of contractual rebates and consideration payable to applicable Retail customers.
  • Gross profit margin was 19.4% versus 12.8% last year. The 6.6 ppt increase in gross margin was primarily due to decrease in inventory adjustments (+5 ppts) and decreased discounting (+4 ppts), partially offset by unfavorable logistics overhead absorption (-1 ppt), and an increase in other costs (-1 ppt). Gross profit was $9.8 million, a decrease of 10.2% versus last year.
  • Segment contribution income was $3.4 million, or 6.8% of sales, compared to segment contribution income of $3.3 million, or 3.8% of sales, last year. The increase was primarily driven by cost savings and partially offset by lower gross profit as explained above.

Comparison of Segment Results for the Nine-Months Ended December 31, 2022 to the Nine-Months Ended December 31, 2021

Direct Segment

  • Direct segment sales were $97.7 million, compared to $162.0 million, a decline of 39.7% versus last year, and up 33.9% compared to the same period in fiscal 2020. The net sales decrease compared to last year was primarily driven by the return to pre-pandemic seasonal demand and higher sales discounting practices.
  • Cardio sales declined 26.1% versus last year and were up 13.4% compared to the same period in fiscal 2020. Lower cardio sales were primarily driven by lower bike demand. Strength product sales declined 56.4% versus last year and increased 115.1% compared to the same period in fiscal 2020. Lower strength sales this year were primarily driven by lower demand for SelectTech® weights.
  • Gross profit margin was 20.4% versus 34.9% last year. The 14.5 ppt decrease in gross margin was primarily due to increased discounting (-8 ppts), increased investments in JRNY® (-3 ppts), unfavorable logistics overhead absorption (-3 ppts), increased product costs (-2 ppts), partially offset by lower outbound freight (+1 ppt). Gross profit was $19.9 million, down 64.8% versus last year.
  • Segment contribution loss was $24.2 million, or 24.8% of sales, compared to segment contribution loss of $4.1 million, or 2.5% of sales last year. The decline was primarily driven by lower gross profit, as explained above, offset by decreased media spend. Advertising expenses were $16.7 million compared to $30.8 million for the same period last year.

Retail Segment

  • Retail segment sales were $117.9 million, compared to $305.3 million, a decline of 61.4% versus last year and flat compared to the same period in fiscal 2020, excluding sales related to the Octane brand. Retail segment sales outside the United States and Canada were down 77.6% versus last year. The net sales decrease compared to last year is primarily driven by the return to pre-pandemic seasonal demand, lower cardio sales and higher sales discounting.
  • Cardio sales declined 74.5% versus last year and were down 39.8% compared to the same period in fiscal 2020, excluding sales related to the Octane brand. Lower cardio sales this year were primarily driven by lower bike demand. Strength product sales declined by 40.9% versus last year and increased 80.4% compared to the same period in fiscal 2020. Lower strength sales this year were primarily driven by lower demand for weights.
  • Gross profit margin was 15.8% versus 22.4% last year. The 6.6 ppt decrease in gross margin was primarily due to increased discounting (-4 ppts) and unfavorable logistics overhead absorption (-4 ppts), partially offset by a decrease in other costs (+1 ppt). Gross profit was $18.6 million, a decrease of 72.8% versus last year.
  • Segment contribution loss was $1.0 million, or 0.8% of sales, compared to segment contribution income of $44.1 million, or 14.4% of sales, last year. The decline was primarily driven by lower gross profit as explained above.

Balance Sheet and Other Key Highlights as of December 31, 2022:

  • Cash and Liquidity:
    • Cash, cash equivalents, and restricted cash were $16.5 million, compared to cash, cash equivalents, and restricted cash of $14.2 million as of March 31, 2022. The increase was primarily driven by cash collection on higher busy season sales
    • Debt and other borrowings were $59.7 million compared to $29.4 million as of March 31, 2022.
    • $26.9 million was available for borrowing under the Wells Fargo Asset Based Lending Revolving Facility (“Facility”) compared to $65.8 million as of March 31, 2022.
    • Free Cash Flow1, defined as net cash from operating activities less purchases of property and equipment, was an outflow of $22.5 million for the nine-month period ended December 31, 2022 compared to an outflow of $4.2 million for the same period last year.

      1 See “Reconciliation of Non-GAAP Financial Measures” for more information

  • Inventory was $77.3 million, down 30% compared to $111.2 million as of March 31, 2022 and down 40% versus the same quarter last year. The year-over-year decrease in inventory was driven by sell-through and strong inventory management as the Company continued to right-size inventory levels. About 18% of inventory as of December 31, 2022 was in-transit.
  • Trade receivables were $42.7 million, compared to $61.5 million as of March 31, 2022. The decrease in trade receivables was primarily due to lower sales.
  • Trade payables were $35.0 million, compared to $53.2 million as of March 31, 2022. The decrease in trade payables was primarily due to reduced media and inventory payables.
  • Capital expenditures totaled $10.7 million for the nine-months ended December 31, 2022.

Forward Looking Guidance

The following forward-looking statements reflect the Company’s full fiscal year 2023 expectations as of February 9, 2023 and are subject to risks and uncertainties.

Full Year 2023

  • The Company expects full year revenue of about $270 million compared to the previous range of $315 million to $365 million. The decline in revenue is primarily due to lower expectations in the Retail segment.
  • The Company now expects full year Adjusted EBITDA1 loss (excluding restructuring costs) to be approximately $50 million compared to the prior range of Adjusted EBITDA(1) loss of between $30 million and $40 million.
  • The Company is targeting JRNY® Members to be approximately 500,000 at March 31, 2023.

    (1) We provide Adjusted EBITDA guidance, rather than net income guidance, due to the inherent unpredictability of forecasting certain types of expenses such as stock-based compensation and income tax expenses, which affect net income but not Adjusted EBITDA. We are unable to reasonably estimate the impact of such expenses, if any, on net income. The inability to project certain components of the calculation would significantly affect the accuracy of a reconciliation. Accordingly, we do not provide a reconciliation of projected net income to projected Adjusted EBITDA.

Conference Call

Nautilus will discuss our fiscal 2023 third quarter ended December 31, 2022 operating results during a live conference call and webcast on Thursday, February 9, 2023 at 1:30 p.m. Pacific Time. The conference call can be accessed by calling (877) 425-9470 in North America. International callers may dial (201) 389-0878. Please note that there will be presentation slides accompanying the earnings call. The slides will be displayed live on the webcast and will be available to download via the webcast player or at http://www.nautilusinc.com/events. The webcast will be archived online within two hours after completion of the call and will be available for six months. Participants from the Company will include Jim Barr, Chief Executive Officer and Aina Konold, Chief Financial Officer.

A telephonic playback will be available from 4:30 p.m. PT, February 9, 2023 through 8:59 p.m. PT, February 23, 2023. Participants can dial (844) 512-2921 in North America and international participants can dial (412) 317-6671 to hear the playback. The passcode for the playback is 13735508.

About Nautilus, Inc.

Nautilus, Inc. (NYSE:NLS) is a global leader in digitally connected home fitness solutions. The Company’s brand family includes Bowflex®, Nautilus®, Schwinn®, and JRNY®, its digital fitness platform. With a broad selection of exercise bikes, cardio equipment, and strength training products, Nautilus, Inc. empowers healthier living through individualized connected fitness experiences and in doing so, envisions building a healthier world, one person at a time.

Headquartered in Vancouver, Washington, the Company’s products are sold direct to consumer on brand websites and through retail partners and are available throughout the U.S. and internationally. Nautilus, Inc. uses the investor relations page of its website (www.nautilusinc.com/investors) to make information available to its investors and the market.

Forward-Looking Statements

This press release includes forward-looking statements (statements which are not historical facts) within the meaning of the Private Securities Litigation Reform Act of 1995, including: projected, targeted or forecasted financial, operating results and capital expenditures, including but not limited to net sales growth rates, gross margins, operating expenses, operating margins, anticipated demand for the Company’s new and existing products, statements regarding the Company’s prospects, resources or capabilities; planned investments, strategic initiatives and the anticipated or targeted results of such initiatives; the effects of the COVID-19 pandemic on the Company’s business; and planned operational initiatives and the anticipated cost-saving results of such initiatives.

Contacts

Investor Relations:
John Mills

ICR, LLC

646-277-1254

John.mills@icrinc.com

Media:
John Fread

Nautilus, Inc

360-859-5815

jfread@nautilus.com

Robin Rootenberg

Action Mary

925-464-8030

robin.rootenberg@actionmary.com

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