Fitness financials: Nautilus shows 29 percent Q2 net sales growth, plus Cybex shows increase in net sales and says turnaround is long over

Fitness financials: Nautilus shows 29 percent net sales growth, discusses Sears strategy. Cybex shows increase in net sales and income, says turnaround is long over.

Nautilus shows 29 percent net sales growth, discusses Sears strategy
Nautilus Inc. (NYSE: NLS) has announced net sales for the three months ended June 30, 2005, of $129.6 million compared to $100.2 million for the corresponding period last year, or an increase of 29.3 percent. The direct-to-consumer segment grew 27 percent while the commercial/retail segment grew 33 percent.

Net income for the quarter was $3.3 million, or $0.10 per diluted share, up from $1.9 million, or $0.06 per share, for an increase of 70 percent. The results exclude the acquisition of Pearl Izumi USA, which was completed after the second quarter.

"Overall, our core fitness segment is poised for growth, and we expect $700 million in annual sales with Pearl Izumi," said Tim Hawkins, chief customer officer and chief marketing officer.

For the third quarter of 2005, the company estimates that net sales will grow about 30 percent in its existing business compared to the same period last year. The company also expects to achieve an additional $15 million in net sales from its recently completed acquisition of Pearl Izumi (see SNEWS® story, June 20, 2005, "Nautilus calls Pearl Izumi acquisition 'pure-play in fitness'"), for a total net sales estimate of $175 million to $180 million. Meanwhile, earnings are expected to grow about 25 percent to $0.23 to $0.24 per diluted share. The company reaffirmed its full year 2005 earnings estimate of $1.17 to $1.19, on annual sales of $690 million to $700 million.

Sears is a go
During the call, Hawkins and CEO Gregg Hammann discussed the company's entry at Sears, noting it would have five SKUs in 450 of Sears Tier 1 stores for the busy fall and holiday season.

"These are larger-format Sears stores that receive advertising. We will also have product in the catalog and online as well," Hawkins said.

When asked in the call by analysts about the deal, Hammann said the company had been working on it for awhile and the expectation is that the relationship will grow.

"This is the perfect timing for the deal with Sears," Hammann said. "We have been working on the deal for six month, and we have positioned our inventory with them in mind for the third and fourth quarters."

Added Hawkins, "The way Sears worked is that we tested Sears with bikes in 25 stores and then worked on this deal. This is our first step and we can grow it even further."

Later in a report by RBC analysts, the deal was called not the "be all end all" for Nautilus, but rather evidence of increased sell-through and profitability.

"We believe the acquisition of this account provides evidence that Nautilus' products are improving retailer sell-through and profitability trends, further legitimizing the company's retail expansion strategy," wrote RBC senior analyst Ed Aaron. "While the Street has perhaps been overly consumed by this particular account, we believe the acquisition of Sears' business could serve as a positive catalyst for the stock."

In other channels
In the specialty channel -- called an $800 million market on the call -- the company said it secured new distribution with Busy Body Home Fitness and Omni Fitness in a deal that will put product in half of the stores this fall. This quarter's total sales were $15 million, or up 15 percent from the year-ago quarter. In addition, it has focused on Independent Bike Dealers (IBD) growing its store numbers from 800 to 860 and adding staff to concentrate on that market.

"We also feel we will benefit from the Pearl Izumi acquisition as it is in 1,800 of the 8,400 IBDs in the U.S. and abroad," Hawkins said.

In the retail channel, where the company groups sporting goods and mass and noted it is a $2.7 billion market, it said it had sales of $15.9 million, up 206 percent from a year ago.

With the acquisition of Pearl Izumi, apparel will become a larger segment for Nautilus. The Pearl segment should do about $30 million in the first half of the year, with another $25 million in the second half, Hawkins commented. Growth is expected to be about 15 percent annually.

Other financial notes
Inventory in the quarter showed improvement, with CFO Bill Meadowcroft noting inventory for the quarter was $70 million compared to $40 million a year ago.

RBC said margins were below expectations but explained that away with investment spending to launch new products. It also raised its 12-month price target to $35 from $32 and reiterated its "Outperform" rating.
In addition, the company announced that its board of directors declared a regular quarterly dividend of $0.10 per common share, payable Sept. 9, 2005, to stockholders of record as of Aug. 19, 2005. BB&T Capital Markets also upgraded its rating to "Buy" after the call, while Merriman Curhan Ford downgraded to "Neutral" in the 10 days before the close of the quarter. To see a history of downgrades and upgrades, click here.

For more information on this company or its financial reports, as well as to view stock prices updated every 15 minutes, visit the SNEWS® Stock Market Updates. ClickÂ

Cybex shows increase in net sales and income, says turnaround is long over
Cybex International (NYSE: CYB), definitively noting that the company's turnaround is over, announced net sales for the second quarter ended June 25 were up 13 percent and net income was up 25 percent.

Net sales for the quarter were $27,197,000 versus $24,073,000 for the comparable 2004 period, while net income for the quarter ended June 25, 2005, was $1,038,000, or $0.07 per share on a fully diluted basis, compared to net income of $833,000, or $0.08 per share on a fully diluted basis, for the second quarter of 2004.

Average shares outstanding increased from 8.9 million to 15.1 million. Net sales for the six months ended June 25, 2005, were $51,956,000 compared to $48,493,000 for 2004, an increase of 7 percent. Net income for the six months ended June 25, 2005, was $1,157,000, or $0.07 per fully diluted share, compared to net income of $1,208,000, or $0.10 per fully diluted share, for the prior year period.

"Although revenue in the first half of the year has been better than expected," said CEO John Aglialoro during the call, "the second half will also be strong with potential for greater revenue from new sources as we will introduce several new equipment lines."

The Arc Trainer continued to be a huge part of sales growth for Cybex. Sales of the piece were up 45 percent in the first quarter and are up 59 percent year-to-date, with the full-body model accounting for a little over 60 percent of sales.

New product lineup
Aglialoro during the call noted a lineup of product introductions for fall, all scheduled to overlap. They include the new VR3 line of strength equipment to replace the VR2 line, a cordless Arc Trainer, a treadmill for the vertical market, the VR Express line for lower-end or circuit-style clubs, and the true introduction of the Trazer exergaming unit.

"We first announced the Trazer at IHRSA in 2004 and thought we'd have it in production sooner—to be honest we are a bit embarrassed by that," Aglialoro said. "We will sell 10 in August, 100 in September, and then open the gates following that."

All of the products will be released in August, September and October, he said.

"They are coming out bunched up," he said. "That's not how we planned it just the way it worked out, as we wanted to make sure we had good product and didn't want to rush the process."

Other financial and product news
Aglialoro also discussed utilizing its buildings in Medway, Mass., partly unused now, to pay down debt and improve the company's debt-to-equity ratio.

And the topic of entering the consumer market again surfaced, with Aglialoro saying the company is going that way, first with a retail Arc Trainer. But he said the company won't rush the equipment and is looking at a full line by early 2007, with some introductions in 2006. Meanwhile, it will work on expanding its dealer network.

"We are looking at the consumer market as all of our competitors are in that market," he said. "The vertical Arc Trainer we are working on will have a different structure than the commercial model, but will be close to one we would use for a home model. We are also looking at bikes, treadmills, home gyms and other strength products. I would expect a second half of 2006 launch or at least announcement. There will be a fully fleshed out line the first half of 2007. Again, we won't rush it.

"We will want to introduce as many products as possible at one time as possible rather than release them over time," Aglialoro added. "This is a huge new market and growth area for us."Â

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