Nautilus Q2 profit plummets 34 percent; new specialty brands, Hawkins’ departure discussed

Second-quarter profit for Nautilus (NYSE: NLS) fell 34 percent overall, with the company blaming the drops primarily on a lackluster home gym sales. Revenue for the quarter was down 15 percent.

Second-quarter profit for Nautilus (NYSE: NLS) fell 34 percent overall, with the company blaming the drops primarily on a lackluster home gym sales. Revenue for the quarter was down 15 percent.

“The home gym market has been tough across the country,” said Gregg Hammann, CEO and president, on a July 16 earnings call announced 49 minutes before its 2 p.m. PST start. Later, Hammann noted that “home gym sales for the back half of the year are going to remain pretty ugly.

“We can’t panic and, at the same time, we have to be cognizant of what’s happening,” he said. ‘We’ll get through this immediate crisis.”

For the period ended June 30, net income dropped to $1.1 million, or $0.04 per share, from $1.7 million, or $0.05 per share in the prior year quarter.

The latest results included a $10.6 million gain from intellectual property received through a litigation settlement with Icon Fitness. Excluding that gain, the company posted a loss of $9.5 million, or $0.30 per share. Analysts had expected earnings of $0.04 per share.

The company's revenue fell below analyst estimates of $135 million. Nautilus reported second-quarter revenue of $117.1 million -- a 15 percent drop from the year-ago revenue of $137.6 million. Gross profit came in at $45.5 million on a cost-of-sales of $71.6 million, compared to the year-ago quarter that showed gross profit of $60.6 million with $77 million in cost of sales.

Gross margins were also down, with earlier expectations of hitting 43 percent to 46 percent, and current expectations now for the second half of the year of 42 percent to 43 percent, said CFO Bill Meadowcroft.

“Our business is down significantly, and probably more than it should be,” Hammann said in the call, addressing one analyst’s statement about “nobody else doing that badly,” while noting that it was the middle tier at sporting goods that was “taking it in the shorts.”

“I think our retail presence has gotten pretty pathetic-looking in the last six months,” Hammann added. “We’ve got to fix that.”

Nautilus expects to earn between $0.20 and $0.30 per share in the second half of the year, well below analysts' cumulative forecast of $0.74 per share. On average, analysts expect the company to earn $0.27 per share in the third quarter and $0.47 in the fourth quarter. The company blamed consumer spending trends on discretionary items and softness in the North American home fitness market.

The company also said it expects to report revenue between $350 million and $380 million for the combined third and fourth quarters. Analysts predict the company will report sales of $169.3 million in the third quarter and $212.9 million in the fourth, for a slightly higher combined figure of $382.2 million.

Hammann said in the call that the company planned to battle the problem on several fronts:
>> an aggressive advertising campaign similar to the one a year ago.
>> utilization of the Universal brand for equipment it acquired in bankruptcy auction for “premium” price points at sporting goods.
>> one or maybe two new brands specifically for specialty retail, an area that has shown the worst results this year.

The specialty campaign would “launch a new brand and bring one back to life for th back half of the year,” Hammann said, declining to reveal more detail. He told analysts who questioned the need for more brands as delivering on something the specialty channel was requesting.

Hammann said the company used to have what he called “firewalls” between the channels but those have been eroded over time and have confused the consumer. He said the company intends to work on that aspect.

“We’re trying to re-establish those firewalls so when we have innovation we can cascade it between channels,” he explained.

Nautilus shares shed $1.42, or 12 percent, to $10.52 in electronic after-hours trading. The stock, which has ranged between $11.49 and $18.63 over the past year, closed the regular session down $0.06 at $11.94.

Land America acquisition
On June 29, Nautilus announced the exercise of an option to purchase substantially all the assets of its largest contract manufacturer, Land America Health and Fitness Co. Ltd., in the Peoples Republic of China. With that, Nautilus has deposited $30 million into an escrow account. Upon the closing, the amount will be applied to the total purchase price for the assets, which is approximately $72 million in cash and stock, adjusted for the amounts of fixed assets and inventory held on the closing date. Nautilus said it anticipates that the transaction will close on or about Jan. 2, 2008.

Personnel changes
In addition, Nautilus officially announced the departure of Tim Hawkins, the president of the fitness equipment business, who according to a SEC filing departed the company June 29. Hammann will take on Hawkins’ duties for the time being and the company said on the call it is looking at its options.

In the spring, Jim Brenner, who was vice president of marketing, also departed and his duties were assumed by Jim Liggett, head of commercial sales and marketing, while Rick Soberanis, who was senior vice president of sales, also left and his duties were assumed by Jon Levin.