Nautilus : FQ1 2024 Earnings Call Transcript

Corrected Transcript

09-Aug-2023

Nautilus, Inc. (NLS)

Q1 2024 Earnings Call

CORPORATE PARTICIPANTS

James Barr

Chief Executive Officer & Board Member, Nautilus, Inc.

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OTHER PARTICIPANTS

Michael Swartz

Analyst, Truist Securities, Inc.

George Arthur Kelly

Analyst, ROTH Capital Partners LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good day and welcome to the Nautilus Fiscal First Quarter 2024 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to John Mills with ICR. Please go ahead, sir.

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John F. Mills

Managing Partner, ICR, Inc.

Thank you. Good afternoon, everyone. Welcome to Nautilus' fiscal 2024 first quarter ended June 30 conference call. Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer; and Aina Konold, Chief Financial Officer. Please note this call is being webcast and will be available for replay for the next 14 days. We'll be happy to take your questions at the conclusion of our prepared remarks.

Our earnings press release was issued today at 1:05 PM Pacific Time and may be downloaded from our website at nautilusinc.com on the Investors page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures.

For today's call, we have a presentation that management will refer to during their prepared remarks. And on slide 2 is our full Safe Harbor statements, which we ask everyone to read. If you can access the presentation by going to the Investors page on our website and clicking on Events & Webcasts.

I'd like to remind everyone that during this conference call, Nautilus management will make certain forward- looking statements. These forward-looking statements are based on the beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore one should not place undue reliance on them. Our actual results may be affected by known and

unknown risks, trends, uncertainties and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the Safe Harbor statement and to our SEC filings, which can be found in the Investor Relations section of our website.

And with that, it is my pleasure to turn the call over to Nautilus' CEO, Mr. Jim Barr.

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James Barr

Chief Executive Officer & Board Member, Nautilus, Inc.

Thank you, John, and thank you all for joining us. To start, I'd like to emphasize four key topics that will be the focal points of today's call. First, our Q1 results show substantial progress on our path back to profitability, driven by strong gross margin improvement and operating expense reduction, resulting in a significant improvement in year-over-year adjusted EBITDA.

Second, consumer sentiment around home exercise is encouraging, with solid demand in Direct despite our seasonally low Q1 and some visible sell through in Retail. Third, through a series of proactive efforts, we strengthened our balance sheet, improved liquidity and created greater financial flexibility to better navigate an uncertain retail and macroeconomic landscape. Finally, with consumer demand in Direct, a stronger financial position and our confidence in the long-term industry opportunity, we are proud to begin introducing a new generation of BowFlex products, carrying our refreshed visual branding.

Turning to the first quarter, we are pleased with the results we achieved, which demonstrate our ability to navigate the challenges posed by the macro environment. For Q1, net sales were $42 million, including Direct sales of $22 million. Notably, Direct achieved a flat comp to last year in strength products. This bright spot can be attributed to enhancements we've made [audio gap] (00:04:12) strength portfolio, a topic we'll cover later when we discuss our exciting new product launches.

Results in our Retail segment were in line with our expectations, as retailers maintained a conservative approach to inventory. As I mentioned earlier, we are encouraged by the movement of some inventory in Retail and we believe we are well-positioned in this segment as we approach our peak Retail sales quarters of Q3 and Q4.

While the path back to profitability is our number one priority, scaling JRNY also remains a focus, and our efforts have been fruitful, with over 535,000 JRNY members at the end of Q1, representing 48% year-over-year growth. Among these members, 150,000 are subscribers, showcasing 17% year-over-year growth.

Our operational excellence efforts continue to gain traction. We delivered our seventh consecutive quarter of sequential improvement in our inventory position. We have now rightsized our inventory and reduced our lead times, enabling us to further optimize our working capital investments. Going forward, we will focus on aligning inventory with sales trends.

We have also continued to deliver improvement on gross margin, reflecting an expansion of 800 basis points year-over-year in Q1 2024, a testament to the progress achieved through our supply chain initiatives. As a direct result of the deliberate cost-cutting actions announced in February, adjusted operating expenses were reduced by approximately $12 million, or 40% year-over-year.

The notable gross margin expansion and lower adjusted operating expenses translated into a $14 million improvement in adjusted EBITDA as we make headway on our efforts to return to profitability. We've also taken decisive steps to further fortify our financial position, enhance liquidity and strengthen our balance sheet.

Throughout the quarter, we diligently pursued this core focus. Notably, we completed the sale of certain non-core assets, made amendments to our credit agreements, paid down debt and significantly improved our inventory position.

Additionally, in June, we made a public offering of common stock to raise additional cash for the balance sheet, as well as provide additional flexibility to opportunistically invest in marketing and drive sales growth. This places us in a better position as we prepare for our product launches in the upcoming fitness season.

At quarter end, net cash position was a positive $2 million, a significant sequential improvement to our net cash position of negative $10 million in Q4 of fiscal 2023. These proactive actions add fuel to maintain and grow our strong leadership in connected home fitness while effectively managing the complexities of the challenging and dynamic operating environment. At the same time, our comprehensive review of strategic alternatives is ongoing. Our board remains focused on identifying opportunities that will accelerate our company's transformation and deliver enhanced value to our shareholders.

Our expertise in crafting top-of-the-line equipment is evident through our powerful brands such as BowFlex and Schwinn. Guided by our consumer-first mindset under our North Star strategy, we are constantly evaluating opportunities to innovate and align our products with consumers' continually evolving preferences.

First, we've refreshed our number one brand. The fitness industry is a sea of sameness, and the new BowFlex brand is designed to stand apart. Our new brand identity is inclusive, empowering and inspiring, reflected outwardly in our visual system, like our imagery, emotive color selections and yes, a new logo.

The brand is also a mindset embodied with the following statement, at BowFlex, our job is to help you find, strengthen and follow the one inside you. That's why everything we make, every treadmill or set of weights, is a way for you to move and move closer to the you you already are. Our new branding and identity empower consumers to move towards what matters most to them.

Next, our recent launch of our lower-priceddigital-only JRNY SKU, featuring rep counting and form coaching and strength training has been extremely well-received and it is just beginning - it is just the beginning of JRNY in strength. This fall, we are also thrilled to be announcing a robust first wave of updated, connected fitness equipment featuring our brand-new BowFlex visual branding.

Ahead of the holiday fitness season, we are enhancing our cardio offerings with two new products under the new BowFlex branding, the BowFlex C6 SE, an update of our wildly popular C6 bike; and the new Max SE, a quieter version of our top selling Max Trainer high-intensity interval training machine, which takes up about half the space of the treadmill at an excellent value.

We are also launching a new elliptical under the Schwinn brand. Schwinn Elliptical 490 delivers a very strong value, features a compact footprint, terrain control and thousands of structured workouts and hundreds of virtual routes via JRNY and third-party apps. We plan to follow up this wave of exciting new BowFlex products and JRNY features in calendar 2024 in both strength and cardio portfolios. Stay tuned.

To complement these launches, we have enhanced the shopping experience by introducing a new navigation website design and product imagery, all under the new brand-new identity system. The goal is to elevate an engaging experience for our customers as they explore our offerings.

In addition to these exciting developments, the recent sale of the Nautilus brand has further strengthened our strategic direction. As a result, we are currently in the process of executing a total company rebrand by the end of the calendar year. This corporate rebranding initiative will reinforce our identity [audio gap] (00:10:45) leader in the connected home fitness industry. Our dedication to quality and innovation remains at the core of our identity, and we are enthusiastic about the future.

I would also like to touch on our fiscal 2024 outlook, where we have reiterated our full year guidance for revenue, adjusted EBITDA and JRNY member count. Our diligence in testing and learning with JRNY is driving steady member growth. Conversion rate from trial to paid subscriptions has always - has also improved over 30% in July as we enhanced our - and our welcome communications and moved towards a greater mix of two-month trials.

In tandem, our unwavering focus on driving operational excellence stands as a crucial pillar in our path back to profitability. With efficient and streamlined operations, we are paving a clear and viable framework to regain profitability. As a result, we anticipate a significant year-over-year improvement in adjusted EBITDA for the full year 2024. Our dedication to innovation, operational efficiency and consumer-centric equipment and services positions us to deliver long-term value for our shareholders.

I will now turn it over to Aina, who will give us more detail on the first quarter results and our fiscal 2024 guidance. Aina?

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Aina E. Konold

Chief Financial Officer, Nautilus, Inc.

Thank you, Jim. And good afternoon, everyone. Today, I'll be speaking to results of the first quarter of fiscal 2024 and will provide guidance for the full year. Please go to our website to view our press release and the slides accompanying this call for more information.

Turning to slide 9, total company P&L results with comparisons to last year. Net sales for the first quarter were $42 million, down 24%, versus last year. Direct segment declined by about 17%, driven by cardio. We're pleased with the continued momentum and strength where sales were flat to LY. Retail segment declined by 29% as retailers continue to take conservative approach to inventory purchases. Gross profit was $9 million, up 24% to last year, and gross margins were 21%, up 800 basis points from last year.

I'll now go through the drivers of the significant gross margin expansion from last year. About 1,100 basis points of improvement were due to lower landed product costs. In the US, we've now cleared through older inventory that was burdened by pandemic-related detention and demurrage and higher inbound freight.

New imports are benefiting from our efforts to optimize our distribution network, resulting in lower inbound freight. Additionally, we've negotiated lower factory costs for our top SKUs. 200 basis points of the improvement are due to decreased discounting, primarily in Retail, demonstrating our disciplined approach to promotions. 100 basis points of the improvement is due to favorable logistics overhead, driven by the cost-cutting actions we took in February 2023.

Partially offsetting these margin gains are 100 basis points of decline related to outbound freight, driven primarily by mix as this year, the Direct segment saw higher portion of sales versus last year. 500 basis points of deleverage related to JRNY COGS. JRNY COGS are increasing year-over-year, primarily due to depreciation. If we exclude depreciation, JRNY COGS deleverage is about 300 basis points.