Nautilus (NLS) Tops Q1 EPS by 41c, Revenues Beat

Nautilus (NYSE: NLS) reported Q1 EPS of $0.93, $0.41 better than the analyst estimate of $0.52. Revenue for the quarter came in at $206.1 million versus the consensus estimate of $159.15 million.

Transition Period Highlights Compared to the Same Period Last Year (3-months ending 3/31/2020)

• Net sales were $206.1 million, up 119.9% compared to $93.7 million for the same period last year and up 143.3%, excluding sales related to the Octane brand, which was sold in October 2020. Sales growth was driven primarily by continued demand for connected fitness bikes and treadmills, like the Bowflex VeloCore® bike and T22 Treadmill, and robust sales of SelectTech® weights. Strong execution across the organization coupled with supply chain improvements that began last year drove record results.
• Gross profit was $79.1 million, up 122.2% compared to $35.6 million for the same period last year. Gross margin rates expanded by 40 basis points to 38.4% this year compared to 38.0% for the same period last year. Improved fixed costs leverage in the Retail segment offset margin pressures from inflationary price increases in commodities, FX, and continued elevated transportation costs driven by global logistics disruptions.
• Operating expenses increased by $3.2 million, or 8.9%, to $39.4 million primarily due to increased general and administrative costs.
• Operating income was $39.7 million, a $40.3 million improvement compared to a loss $0.6 million for the same period last year.
• EBITDA was $40.4 million compared to $2.3 million for the same period last year driven higher due to increased operating income.
• Income from continuing operations improved to $30.6 million, or $0.94 per diluted share, compared to $2.3 million, or $0.08 per diluted share, for the same period last year.
• Net income was $30.4 million, or $0.93 per diluted share, compared to $2.2 million, or $0.07 per diluted share, for the same period last year.
• The effective tax rate for the Transition Period was 19.9%.

Management Comments

“Our team delivered its second consecutive quarter of record-breaking results and posted the highest quarterly revenue in our Company’s 35-year history. Net revenue of $206 million exceeded the high end of guidance, growing 120% versus last year, or 143% excluding the divested Octane business. Growth was strong across both segments with Direct crossing $100 million for the first time and Retail delivering quarterly revenue second only to last quarter’s sales. In addition, our international business experienced 340% growth excluding Octane and we generated $39.7 million of operating income in the quarter,” said Jim Barr, Nautilus Inc. Chief Executive Officer.

Mr. Barr continued, “As we enter this new fiscal year, our entire organization is focused on advancing North Star, our recently unveiled digital transformation plan. We are investing in increased marketing, expanded supply chain capabilities, and in continuing enhancements to our JRNY® platform to meet our goal of 250,000 members by the end of fiscal year 2022. These investments combined with our new embedded digital offerings, deep innovation pipeline, and a strong balance sheet position us well to execute on our North Star strategy and deliver sustainable long-term growth and profitability.”

Forward Looking Guidance

First Quarter Fiscal 2022

• Net sales are expected to grow between 40% and 50% versus prior year or between 51% and 62% when excluding Octane Fitness which was sold in calendar year 2020.
• Gross margins in the upcoming quarter will continue to be pressured by higher commodity prices, FX, and continued disruptions in global logistics. Additionally, extremely elevated prices for microchips given global scarcity and incremental investments in JRNY® and Supply Chain will further pressure gross margins in the near-term.
• The Company plans to return to normalized levels of media spend, moving to about 7% of sales vs 2% of sales last year.
• As a result, operating margins are expected to be between 6.5% and 8%.

Full Year Fiscal 2022

• Full year capital expenditures are expected to be between $12 million and $14 million with the majority earmarked for JRNY® investments.
• The Company is reiterating that JRNY® members are expected to be 250,000 by the end of FY22.

Update on Full-Year 2026 Financial Targets

Following the introduction of the Company’s North Star strategy at its recent Investor Day, the Company is providing the following updates to the Financial Targets presented.

The Company is reiterating its target of approximately $1 billion in total revenue by fiscal year 2026, which would represent a 5-year CAGR of 10%.

The Company is also providing an update to its expectations for the long-term trajectory of operating margins.

By Fiscal Year 2026

• Operating margins are expected to be well above the previously disclosed minimum of 10% and closer to 15%.
• Operating margins for the existing equipment business are expected to have downward pressure given the return to normalized advertising spend and incremental costs related to a higher mix of products with embedded screens, partially offset by improvements in the cost structure.
• The rapidly growing digital subscription business, JRNY®, is expected to have operating margins in the range of 20%-25% and JRNY® margins are expected to continue increasing as membership counts rise and fixed costs are leveraged beyond 2026, thereby contributing to the expansion of overall operating margins.
• The Company continues to expect the digital subscription business to represent approximately 20% of total company revenue and is targeting to have 2 million members by the year 2026.

Mr. Barr added, "Our recently unveiled long-term financial targets demonstrate the tremendous opportunity ahead for our business. In addition to targeting outsized revenue and digital subscription growth, there is a clear path forward to sustainable margin expansion. We previously said that we expect a floor of operating margins of at least 10% by fiscal year end 2026. To further illustrate the upside of the transformation and increasing contribution of our rapidly growing JRNY® business, we have updated our margin targets to be closer to 15% with the expectation of further accretion beyond 2026. We are building a new operating model wi

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