Fitness financials: Nautilus highlights turnaround progress in light of deep sales losses

The regular quarterly earnings call for Nautilus (NYSE: NLS) this period became more of a discussion about the company's future and its restructuring progress and plans in light of ongoing management changes -- and a 7-percent drop in net sales, as well as a net loss, for the second quarter.
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The regular quarterly earnings call for Nautilus (NYSE: NLS) this period became more of a discussion about the company's future and its restructuring progress and plans in light of ongoing management changes -- and a 7-percent drop in net sales, as well as a net loss, for the second quarter.

Most of the slow sales were in its direct and commercial business, Nautilus CFO Bill Meadowcroft reported to analysts during the July 31, 2008, call that was "packed" in a virtual sense based on comments from the facilitator about taking pauses to let the large group line up for questions and find its place in a 17-page PowerPoint presentation about the company's progress presented by CEO Edward Bramson.

"The balance sheet is quite a bit better," noted Bramson, not trying to point all things rosy. "I think we're half way through the turnaround."

"We know we have much work still to be done," Meadowcroft said.

Bramson said the company sees a lot of opportunity in the fitness industry and for its products and plans but "to turn these into concrete plans it will take a bit longer."

Net sales from continuing operations for the three months ended June 30 were $95.6 million compared to $102.5 million for the corresponding period last year. Nautilus said sales increases in its retail business were offset by declines in the direct business from a weak consumer and tight credit environment.

In a subsequent question-and-answer period, he was asked why retail had been so strong. Bramson said, one, that the comparable quarter in 2007 had been particularly "horrible" making this quarter simply look better and, two, the company is "de-emphasizing" specialty retail and relationships and sales which its largest retail customers are picking up.

Meadowcroft also noted declined sales in its commercial segment, which was hurt by suspended sales of the commercial TreadClimber. Bramson said the company sees a lot of potential with the TreadClimber at retail since it is a truly different product and it helps beef up the cardiovascular equipment segment for the company. He said the company will "need to do better" with the retail product and is working on redesigns now, noting the commercial product "wasn't so great."

"The key is product differentiation," he said, "and getting the price points right."

Loss from continuing operations was $9.6 million, or $0.30 per diluted share, after recording restructuring related and other charges of $6.6 million, or $0.14 per diluted share after-tax. Nautilus said the charges related to severance, inventory reserves and anticipated settlements related to licensing agreements.

In the second quarter of 2007, the company reported income from continuing operations of $0.7 million, or $0.02 per diluted share, including a benefit of $18.3 million, or $0.34 per diluted share, after-tax from a litigation settlement.

Net loss for the second quarter 2008 was $8.9 million, or $0.28 per diluted share, compared to net income of $1.1 million, or $0.04 per diluted share, for the second quarter of 2007.

Part of the company's restructuring activities has been to establish separate teams for each global business unit. It will now report the commercial, direct and retail businesses on a global basis. As a result of the changes, the company is in the process of determining whether a goodwill impairment charge is required as of June 30, 2008. An impairment charge, if any, would be a non-cash charge, it said. The company expects to complete this goodwill impairment assessment prior to the filing of its Form 10-Q for the second quarter.

"In addition to managing our expenses tightly, we are continuing our thorough review of each business unit with a particular focus on profitable growth," Bramson said in a statement. "The four areas of strategic focus are new product development, resolving channel conflict, expanding our share of the cardio market, and capitalizing on our strong portfolio of brands. In order to improve our profitability in the current economic environment, we have initiated a restructuring program which is expected to reduce fixed costs significantly."

Presently, Nautilus said it had a net cash position of $4 million and unutilized borrowing availability of approximately $35 million versus net debt of $71 million on Dec. 31, 2007. That came mostly because management after former CEO Gregg Hammann was forced out took action to sell the Pearl Izumi apparel business and to terminate the deal to acquire manufacturer Land America, with which Nautilus remains on good terms, Bramson noted.

He said one of the biggest problems with the way the company was run since Hammann took over in mid-2003 was the focus on just growing the topline while the cost of getting sales became so high that the company was still losing money.

During the second quarter of 2008, the company repurchased $2.2 million of common stock. As of July 29, the company had repurchased 981,398 shares of common stock for $5.1 million, leaving $4.9 million remaining on the $10 million share repurchase program authorized by its board in May 2008.

Major goals for the restructuring process are, Bramson explained, to:

>> Strengthen balance sheet and liquidity -- The reversal on Land America and sale of Pearl Izumi were key, in addition to consolidating manufacturing and distribution.

>> Improve profitability at current sales levels -- That means a continued refocus on the bottom line.

>> Develop strategy for profitable growth -- Until 2003, all business units were profitable but by 2007 only direct was and it was still down while company overhead had shot up about 70 percent.

>> Increase financial transparency.

"We've made a good effort to protect the things we can grow again in the future," he said. "While we haven't achieved (our) goal, we are on the way to getting there."

To view the presentation on the turnaround as shown on the call, click here and then click on 2nd Quarter Earnings Presentation.

SNEWS® View: Bramson sure has his hands full but his no-nonsense way of calling a spade a spade and seemingly slowly but surely ticking off items on the to-do list seem to be making some forward steps. This is the first time, however, Nautilus has been as forthright about its turn away from specialty retail although it's been clear in the last few years that specialty retail has in many areas already turned away from Nautilus. What isn't clear yet is if, one, Nautilus will try to win back specialty as it looks to differentiate channels and products better or, two, if specialty will respond. Another update on progress will happen in another six months, so until then, we'll have to just watch and assess actions taken.

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