Fitness financials: Nautilus Q3 retail sales flat, rattled by 34.2-percent drop in direct sales

Nautilus Q3 retail sales were flat, rattled by a 34.2-percent drop in direct sales.
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Nautilus Q3 retail sales flat, rattled by 34.2-percent drop in direct sales

Nautilus (NYSE: NLS) posted a 67-percent drop in quarterly earnings, saying decreasing sales in the current weak economy offset its expense reduction actions.

For the quarter ended Sept. 30, the company reported a loss from continuing operations of $35.4 million, or $1.15 per diluted share. This included a non-cash charge to record a deferred tax asset valuation allowance of $26.8 million, or $0.87 per diluted share, as well as restructuring and other charges of $8.2 million, or $0.17 per diluted share.

It also posted a loss from continuing operations of $14.4 million, or $0.46 per diluted share, including charges of $7.1 million, or $0.15 per diluted share, related to a large bad debt and severance costs.

Executives blamed low sales on “a difficult consumer environment.”

Excluding charges, the company's adjusted loss from continuing operations before income taxes was $5.5 million, or $0.18 per share after tax, compared with $17.2 million, or $0.54 per share after tax, in the corresponding period last year.

"We are continuing with our previously announced turnaround and restructuring efforts with particular focus on strengthening the balance sheet and improving liquidity," said Edward Bramson, chairman and CEO of Nautilus, in a statement. "The decrease in sales, primarily due to the challenging economic environment, offset our expense reductions for the quarter."

Net sales from continuing operations were $93.7 million, a decrease of 18.7 percent from $115.3 million in the corresponding period last year. Of that, direct sales dropped 34.2 percent to $38.6 million from $58.8 million the year before; retail was flat, posting $26.3 million; and commercial declined 4.6 percent to $28.3 million versus $29.7 million last year.

Nautilus said the net sales decline in the direct business was primarily due to the weak consumer and tight credit environments, while the decline in the commercial business was primarily due to the suspension of sales of the commercial TreadClimber.

"We continue to focus on introducing lower priced products into the direct channel to take advantage of the sweet spot for consumer financing," said CFO Bill Meadowcroft in an earnings call on Nov. 4.

Gross profit margins were 31.7 percent, down from 37.6 percent in the year-ago quarter. "We will continue to face gross margin pressures until the sales mix shifts back toward the direct channel," Meadowcroft noted.

Bramson in answering a question on the call noted, "We are not ignoring retail, (but) the real upside is going direct."

Operating expenses declined by about $23.5 million in the third quarter 2008 compared to the same period last year. In 2007, the company incurred a $4.8 million bad debt write off due to a customer bankruptcy. Adjusted for lower sales volumes, operating expense reductions under the company’s restructuring plan were $11.5 million in the quarter compared with last year's reductions of $8.5 million.

As of Sept. 30, the company had a debt (net of cash) position of $3.2 million compared to net cash of $4.0 million at June 30, and net debt of approximately $71 million at Dec. 31, 2007.

In other company news, CFO Bill Meadowcroft is leaving the company, effective Nov. 11, and will be replaced by Ken Fish.

Fish has over 30 years of global experience in finance and operations and has been at Nautilus for over three years, most recently as Nautilus' chief administrative officer and general manager of the commercial business.

--Compiled by Wendy Geister with Therese Iknoian



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