Q3 2020 Nautilus Inc Earnings Call
[music].
Greetings and welcome to not what's incorporated third quarter 2020 earnings results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded it is now it is now my.
Pleasure to introduce your host Mr., John Mills that I see are please go ahead mr. Mel.
Thank you good afternoon, everyone welcome and not always this third quarter 2020 conference call.
Participants today from Nautilus are Jim Burke, Chief Executive Officer.
Looking old Chief Financial Officer.
He also chief marketing officer.
Chris Chris Retro GE senior Vice President of product development.
And Bill Mcmann special assistant to the CEO.
Please note. This call is being webcast will be available for replay for the next 14 days, we will be happy to take your questions at the conclusion of our prepared remarks.
Earnings release was issued today, one of <unk> five PM Pacific time, and May be downloaded from our website at Nautilus Inc. Dot com on the Investor Relations 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 accompanying the call with management will refer to during your prepared remarks and on slide two is our full safe Harbor statement, which we ask everyone to read.
You can access the presentation by going to Nautilus Inc. dot com click on the Investor tab and.
And then click on the events <unk> webcasts to access the presentation.
I'd like to remind everyone that during this conference call management will make certain forward looking statements. These forward looking statements are based on the current beliefs of management and information currently available to US such forward looking statements are not guarantees of future performance and therefore, one should not place undue reliance upon them.
Our actual results will be affected by known and unknown risks friends, 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 into our FCC filings, which can be found in the Investor Relations section of our website and now it is my pleasure to turn the call over to dogs, the CEO Mr. Jim Barr.
Thank you John Good afternoon, everyone and thank you for joining todays call.
A pandemic has been a challenging time for the world, we're well today to positive news a progress on a vaccine and our uplifted by it.
While we are sensitive to the devastating impact that has had the resulting trend towards home fitness has continued to boost demand for our products and brands.
I'm extremely proud of our amazing team for their resiliency and enduring as they've successfully navigated the new challenges in our business to deliver for our customers.
Today, I'm pleased to discuss our phenomenal third quarter financial results.
I will also also highlight key elements of our very strong execution, our key accomplishments and challenges and how we're planning our business in such uncertain times.
I'll end with a report on the progress of our long term strategic planning, which we will call our north star strategy.
For the quarter, our revenue was up an incredible 152% compared to last year.
Driven by broad growth across brands channels and products.
Our direct segment had its best third quarter ever nearly quadrupling its sales versus a year ago quarter.
Not to be outdone, our retail segment had its best sales quarter in its history.
Up 108% year over year.
Total company gross profit was up 256% with margins expanding to 44%.
And adjusted EBITDA, improving by $43 million from a loss of $6 million in the prior year.
Strong customer response to our IC bikes, the schwinn IC for and the Bowflex see six our Bowflex home gyms, and our best selling selecttech weights and benches.
Fueled our strong performance these.
These results were achieved despite being supply constrained throughout the quarter.
This quarter was the third consecutive quarter of positive comps and the fourth straight quarter of positive cash flow from operations, increasing our fleet flexibility to invest in our long term transformation.
As the pandemic hit the World earlier this year, we showcased our ability to be agile and nimble in the third quarter. It became increasingly increasingly clear that what was that first the sprint had turned into a 10-K and now in its eighth month.
A marathon.
This resulted in a now sustained effort as we adjust to our new normal.
Our people have been remarkable and their passion to serve customers in their time of need and are the real reason why we've been able to capture so much of the market opportunity.
Delivering our most profitable quarter in Nautilus history, and put us putting us on track for one of the best annual performances Nautilus has ever had.
The operational improvements we began implementing late last year combined by the execution by our team.
Are the keys to fully capitalize and capture such a large portion of the market. This year.
Let me give you some examples of our operational achievements in the quarter.
We further increased production and supply chain capacity.
We have increased production across our portfolio for bikes by as much as five x. and for strength products by two to three acts.
We added a second supplier in late September for our incredibly popular Selecttech dumbbells and are working to further increase capacity for cattle bells and our newly launched barbells. These are fantastic space saving products and our amazing values.
We successfully launched the Bowflex Vela core the industry's first on stationary dual mode bike that combines leaning technology with digital connectivity.
Well of course is a fantastic example of innovation, combining a highly differentiated product where they more realistic ride that works more of your body, including your core and your arms come.
Combining physical product with digital content and connectivity, we believe vela core produces a more realistic and immersive experience than any other bike out there.
We quickly sold out of inventory and have been expediting production of more bikes. We are now selling them again and are working hard to further reduce product lead times.
This quarter is the first time that advertising spend was higher than last year as we invested in launch marketing for abella core.
Our advertising is not only driving sales.
These new ads served to move our well known Bowflex brand to an even better place.
They techforward provider of innovative equipment and immersive connected fitness experiences.
Speaking of connected fitness experiences in tandem with the Vela core introduction, we launched journey to point out.
Running our individualized AI, driven custom workouts that automatically adapt to your progress and simulate one on one personal training John.
Journey 2.0 also features a new user experience and more on demand trainer let videos.
To further accelerate our efforts to differentiate our digital experiences and scale our journey membership platform.
We established a new journey business unit and hired an accomplished software leader as Chief Digital officer to spearhead our efforts and assist with our overall long term digital transformation.
I'm really pleased at how we've been able to drive profitability. In addition to topline growth by significantly decreasing the level of product promotions implementing select price increases on key products and cross promoting in stock items when core items go out of stock.
During the quarter, we continued to produce strong customer metrics versus the same quarter, a year ago, including a three X increase in traffic on Bowflex dotcom much of which was organic.
In addition, we saw a sevenx increase in new customer acquisition as we capitalized on the opportunity to introduce new customers to our brands.
We continue to be a strong partner in our retail channel during a time when others have pulled back working closely with our retail partners to allocate scarce inventory. We further increased our momentum with best buy and launched a program with Costco Canada in July.
We believe many of these accomplishments will bring enduring long term value to the company.
It's notable that we produce these results while fighting through a constant series of operational challenges, including intermittent port closures inbound shipping delays due to an imbalance of shipping containers in China.
Outbound shipping constraints imposed by domestic carriers and launching new products at factories, despite travel restrictions.
One of the things I'm most proud of is the way our leadership team performed and in particular, what they achieved on multiple dimensions all at the same time.
Balancing short term and long term routine issues with emerging new challenges and the delivery of outstanding business results, while caring for our customers and our people.
Producing these financial results would have been incredible on their own but we also.
Completed our long term Northstar planning work, which I will elaborate on in a moment.
Successfully completed the sale of octane fitness to reduce cost and focus on the in in home fitness market.
And provided strong leadership and support to our teams as they faced a series of personal challenges the effects in stressed that the pandemic greater isolation of working from home on an extended basis and racial and equity concerns.
In addition, the region, we call home and experienced threats and health concerns due to devastating wildfires like.
Like a family we pulled together to support one another during the quarter.
We learned we also learned that our company earned a best places to work award for the eighth straight year.
Well no one can predict the magnitude and duration of the at home fitness trend.
No investors want to know how we're thinking about it reacting to it and planning accordingly.
The quarter evolved our results and research reaffirmed our previous statements that there will be both short term temporary effects and longer term to permanent impacts from cove it at home trends.
More states reopened gyms as a as the quarter progressed, yet the demand for for home fitness did not waiver over.
Overall, we continue to see signs of a prolonged and permanent new normal for the home fitness market and our brands and products.
First a significant percentage of gym goers, 12% to 30% say they will not ever return to the gym.
Even if only partly true this will have a profound permanent impact second the majority of the reps say they will stay away until the vaccine has been administered at scale or when they feel safer. We believe we will see long term impacts from this group as well with some lasting changes in workout habits and spending why.
In the pandemic many more people were exposed to both the convenience of at home fitness and the benefits of connected fitness. This.
This group will minimally balance Jim and at home workout in a new normal similar to the way we suspect many will change the way they are balancing being in the office and working from home. We do not think they will choose either or but instead balance at home and gym workouts differently.
We have also heard from many that in the event of a resurgence of this virus or if another virus or strain emerges they do not ever want to be caught again without an option to work out at home.
Third more people have been exposed to our brands and products than ever before.
Fourth retailers have seen an acceleration of their own digital transformations towards online ordering both ecommerce growth and greater use of installing curbside pickup as an omnichannel seller. We believe we stand to benefit from this where the relaxation of traditional store space and price point restrictions and from more retailers carrying fitness.
Products.
The final point I'll mention is that the growth and resulting cash generation can be used to fuel our increased investment on what we believe will matter most in the long run.
Brand marketing and consumer insights technique.
Technology and digital experiences.
And new capabilities and talent in targeted areas.
Accordingly, with this long term outlook in mind, we have made short term decisions in all areas of our business.
Here are a couple examples we have invested heavily in inventory for the next few quarters focusing on key products, we believe will be perennial bestsellers.
Our teams are working with our supply chain partners to grow globally to alleviate supply constraints. We have an ambitious goal to note no longer be supply constrained by sometime in Q2 of 2021.
We believe the pandemic effect has already significantly increased the size of our addressable market as the much larger club membership market blends with the at home market.
To help capture this opportunity we have launched new marketing initiatives modified the journey roadmap accordingly, and we'll be adding new products targeted at the need to displace gym goers.
We will monitor leading indicators and evolving consumer insights as we continue to make strategic decisions.
At this time, we see no indicators of waning demand or evidence of saturation.
To this end the pandemic has made it difficult to forecast the next quarter, let alone the full year, but we now feel like we have enough visibility to share some guidance for the fourth quarter I know, we'll discuss that with you in just a moment.
Before I pass this to Iona I want to briefly cover progress on our Northstar strategic plan.
As Youve heard on our past calls I came to novice because I thought we had some of the right ingredients to turn the company around and return to our industry leadership position, but we needed a point the ship in the right direction with a new transformative strategic plan.
I'm happy to report we have completed this work on this plan and are currently rolling it out company wide.
By the end of the fourth quarter, we will be in full execution mode to allow us to focus on implementing it internally, we will not be discussing it externally until early 2021.
But I'd like to offer some of my thoughts on our plan.
First our plan built on the company's strengths are well known brands our reputation for quality, our broad an option filled product portfolio, our legacy of innovation and our resilient and customer focused company culture.
It addresses the weaknesses, we had and the underlying issues such as failure to understand consumer segments their wants needs and shopping habits as much as we should have falling behind on connected fitness and general lack of focus.
It will continue to turned the company into a stronger more resilient and more digital version of itself.
As a long term strategy. This is the right direction with or without the cobot impacts.
All of it at home trend merely adds greater opportunity enhance your urgency.
Our strengthened balance sheet will provide the fuel for this acceleration.
We are now entering full execution mode, but in fact, we've been executing on elements of this plan for the last year.
Examples include the new products launched in 2020 to accelerate connected fitness across the portfolio.
The sale of octane fitness.
A key executive hires, including Chief Financial Officer, Chief Marketing Officer, and Chief Digital Officer.
I'd now like to turn it over to our CFO on a controlled will go over our financial results in more detail China. Thank you, Jim and good afternoon, everyone.
Before I begin I'd like to Echo Jim's comments about how incredibly proud we are of the way our team worked together to overcome so many challenges in Q3 and deliver these truly phenomenal results.
I'll start by speaking to the total company PML for Q3 2020 with comparisons to Q3 2019.
Similar to last quarter I'll be speaking to adjusted numbers because of a nonrecurring entry related to our commercial brand octane fitness, which we sold on October 14th.
The adjusted piano excludes the 8 million dollar gain on the disposal group.
Please see the press release on our website for a reconciliation of these non-GAAP numbers to our reported results.
Net sales were up 152% to $155 million.
This quarter sales are the best in this decade and marked our third consecutive quarter of sales growth.
Our team performed extremely well to meet an extended period of heightened demand.
And though we continue to expand production and invest an expedited shipping supply remained insufficient to meet the demand in the quarter and we entered Q4 with nearly $68 million in back orders.
Our gross margin rate increased by almost 1200 80 basis points to 44%.
Gross profit was 68 million up 256%.
Strong execution across both segments was a key driver of this increase.
Change in sales mix was also a factor typically retail makes up the vast majority of Q3 sales, but this year direct penetration was higher 39% of net sale of total sales versus only 26% last year.
Lastly in calls and we saw tremendous expense leverage partially offset by increases in transportation costs driven by the disruptions in global logistics.
We thought this was a sprint than a 10-K and now we're realizing it's turned into a marathon.
This amount of cost leverage is not sustainable and we have already begun to invest more in our Dcs and logistics teams to meet the surge in demand.
Turning now to adjusted operating expenses.
We saw incredible expense leverage in Opex down to 21% of net sales versus 44% last year.
Selling and marketing expenses were down to 12% of net sales versus 20% last year.
We spent 90 million this quarter versus 17 last year and the increase was in advertising to support the launch of the new Vela Sykes.
Advertising spend was $8 million this year compared to $6 million last year.
R&D costs were down to 3% of net sales versus 5% last year.
Costs increased by 1 million to $4 million. This year, primarily driven by investments in Germany and in product development targeting gym goers.
Gn expenses were down to 6% of sales versus 11% last year.
Costs increased by 2 million to 9 million driven by increased bonus and stock comp due to our improved performance and initial investments in capabilities needed for our North star transformation.
We're really proud of how our team stretch to meet the increased workload in the last two quarters, but we recognize that the significant levels of expense leverage are not sustainable.
Certainly it's difficult to predict the magnitude and duration of the enhanced demand for our products, but since we haven't seen any leaning in demand we began to reinvest in areas where increased sales volume generates incremental work.
Adjusted operating income was 36 million an improvement of 44 million versus last year's loss.
This quarter's adjusted operating margin of 23% is a 15 year high.
Adjusted income from continuing ops increased to 28 million or 87 cents per diluted share compared to last year's loss of $9 million or minus 29 cents per diluted share.
And lastly, adjusted EBITDA from continuing ops improved by 43 million.
We delivered 37 million of adjusted EBITDA compared to a loss of 6 million last year.
Adjusted EBITDA margin was 24%.
Turning now to Q3 2020 performance by segment.
I'll be comparing this year's Q3 results with last year's Q3 results.
Starting with direct.
Net sales were 61 million up 278% with both cardio and strength delivering strong performance.
Cardio grew 256% driven by our connected fitness by the Bowflex see six inch when I see for.
Selecttech weights and Ben just drove the 349% increase in strength.
The Q3 backlog was 23 million compared to 21 million in Q2.
The gross margin expanded by 19 percentage points to 57% driven.
Driven by strong execution and expense leverage partially offset by higher transportation costs gross.
Gross profit of 35 million was up 463%.
Segment contribution was 18 million compared to a loss of $9 million last year. The 26 million dollar improvement, let's driven primarily by increases in gross profit, partially offset by the 2 million dollar increase in advertising for the Vela core bike launch.
Turning now to retail net.
Net sales were a historic high of $93 million up 108% cards.
Cardio sales were up 103, driven by bikes like this when I see for an elliptical.
Strength sales were up 128% driven by Selecttech weakened benches.
Importantly.
If we exclude octane brand sales.
Three net sales for the retail segment grew 132%.
She was respect while this $45 million compared to 14 million acute too.
The gross margin rate was 34% up 720 basis points, driven by favorable customer mix and expense leverage partially offset by higher transportation costs.
Gross profit of $32 million was up 162%.
Segment contribution was 23 million up 391%.
Improvement was driven largely by higher gross profit and operating expense leverage.
Turning now to the balance sheet another two three highlights quicker.
A quick reminder, similar to Q2, we grouped the assets and liabilities associated with octane into current assets held for sale and current liabilities held for sale on the face of our balance sheet.
Please see our press release on our website for more detailed regarding this presentation.
Strong sales growth and great flow through to earnings resulted in a much stronger liquidity position at the end of the quarter.
Q3 was our fourth consecutive quarter of positive cash flow cash.
Cash was 72 million.
$61 million higher than year end 2019.
Get a $14 million was flat to year end, and we had $49 million available for borrowing on our wells Fargo credit facility.
Hey, our was 69 million 26 higher than the year end.
The increase was due primarily to the timing of customer payments, partially offset by certain receivables be included in the octane held for sale disposal group.
Trade payables were $83 million, 12% higher than year end due primarily to the timing of inventory payments and increased advertising related payments.
Capex at the end of Q3 totaled 8 million.
Inventory is down 38% to $34 million compared to $55 million at year end.
The decrease is due to 11 million of inventory being reclassed into the Hossein held for sale disposal group and the continued heightened demand.
Even though we have significantly expanded our factory capacity demand is still outpacing supply.
So to guarantee capacity in our supplies factories, we further increased our PEO commitments.
At the end of Q3, we had about 227 million of open Peos far Bowflex Schwinn and Nautilus products.
We havent seen any indication of waning demand or saturation and appeals is committed to our for our perennial bestsellers.
Should demand slowdown we believe it will still be able to sell through these units just at a slower pace.
I'd like to turn now to our expectations for the full year.
We don't typically provide forward looking guidance, but given how a typical this year seasonality has been.
We wanted to provide some color on how we're viewing full year results.
We expect full year net sales to be between 540 million and $565 million.
The sales range is intended to capture the volatility in the logistics environment as our revenue recognition is tied to win items our ship.
We think it is helpful to share with you. The three factors, we considered when forecasting net sales.
The first is supply.
Given we're six weeks into the quarter, we have clear visibility to factory capacity and output.
The second is demand, we entered the quarter with over $68 million in backlog and have not seen a drop off in demand when Jim's began to reopen.
The third is related to shipping.
Given the current environment. It has been more difficult to predict inbound and outbound shipping schedules, which directly impacts our ability to predict when sales are recognized.
Like other companies, we are working through the full impact of the disruptions in the global logistics network. The transportation industry is preparing for an unprecedented E commerce volumes this holiday season.
The lack of outgoing shipping containers from China was a big driver, we just backlog in Q3 and it appears that this issue will continue for the next few months.
Domestically our carriers have already limited our shipping volumes were adding more carriers to our network, but cannot fully predict at this time, how much more constrained we will be after black Friday.
Turning now to Capex, we are raising our full year capital expenditure guidance to be between 10 million and 13 million.
We plan to invest more in Germany into our overall technology infrastructure.
And we expect full year adjusted EBITDA to be between 90 million and 100 million.
We expect Q4 gross margins to be lower than Q threes size.
Aside from continued pressure on transportation costs, we've already invested in additional resources in our Dcs and logistics teams to support the increased volume.
We also expect increases in operating expenses as we plan on investing more in marketing to support our new connected fitness products that we'll be launching between now and early Q1, and we are making continued investments in our journey digital platform, which is a key pillar in our long term transformation.
One final item to mention today, we'll be filing an S. Three.
We view this as good corporate finance housekeeping.
We have no immediate plans to raise them use additional capital.
We completed our long term strategy and have begun to roll it out internally with a plan to share it externally early next year.
A shelf registration will provide us with more efficient access to the capital markets and will allow us to act opportunistically to support the growth objectives outlined in our North Star strategy now.
Now I'd like to turn the call back over to Jim for final comments Jim.
Thank you I know the past four quarters have been a real journey for our company, we endured a devastating 2019 and lost 22% of our revenue base, resulting in a 13% cut of our workforce.
Morale was low but people could see a change on the horizon.
A moderate change in the trajectory of our business began at the end of Q4 as we rolled out new products hired key members of our executive team began to take action against the root causes of the company's decline and focused on personalized connected fitness Q.
Q1 was shaping up to be a good quarter, and then cove it hit and it turns into be a great quarter.
We had our first topline growth since 2018 and began selling out of product with the team quickly responding to meet the surge in demand.
What started out as a temporary surge became longer term in Q2.
And what's the historical blockbuster quarter for the company.
All channels delivered historic results.
We sustained that performance in response, which led to Q3 being our most profitable quarter in history.
It is important to point out that pre co bid we were already on track for sequential improvements and had been implementing changes to position ourselves for long term profitable growth cobot only accelerated those plans.
We have been and will continue to be dedicated significant time and energy to our transformative long term strategic work.
Lastly, but most importantly, I want to end by again thanking our employees and our partners, whose Dan committed to our mission.
I look forward to all that we can accomplish together.
And now I'd like to open up the call to your questions operator.
At this time, we'll be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad a confirmation Tom will indicate your line is in the question queue you.
You May press star two if he would like to remove your question from the Q4.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star key one moment, please while we pull for questions.
Our first question is from Mike Swartz Trust Securities. Please proceed with your question.
Hey, good evening guys.
Just wanted to start out and I know, Jim and I know you. Both mentioned the number of times some incremental investments in the business and understanding some of that near term is it simply working capital inventory, but.
You also mentioned DC.
Just stick marketing, maybe give us a sense of I know this is a very odd year, but give us a sense you know maybe the magnitude of those investments how we should think about those running through the PME now.
Over the next couple of quarters.
Well for Q4, you know that the adjusted EBITDA guidance should give you that perspective, you know I'm Guy I'm, telling you that Q Q4, gross margins are going to be lower than Q3 and that expenses will be higher.
When it comes to beyond Q4.
I'd like to just sort of wait until we launch and talk about our externally our long term transformation because that will give you more color on how much investment will have for the next few years.
Absolutely I'll, just add that they kind of fall in a couple of buckets one is.
You know sort of activity base based on volume both places like adding people in our Dcs and in our customer care, you know where you just see the.
A massive spike of of activity and we have to continue to serve our customers that way. So that's some of what you've seen and what you'll continue to see and then as we now go into execution mode for our long term strategy as I said I mentioned I mentioned that we we really are going to be investing in a few different ways one well.
What we're investing in marketing and in in our brand.
To technology, and our digital experiences and three.
Not not a lot of head count, but in key areas, where we think.
Our North Star plan is essentially a new sport, we want to play or a change in the sport want to play so.
When you do something like that you see you need new athletes and a few a few spots and I think one. Good example of that is the chief Digital officer that we we launched or that we hired.
A couple of weeks ago, and Gary Wiseman.
Okay. Thank you for that and just second question. If I can just in terms of new product cadence in launch schedules I know again this is an odd year.
Relative to <unk>.
Stork years, but.
Typically in the past you launch most of your your product for the upcoming year in kind of the the August to October timeframe is that is that the way we should be thinking about the business going forward and this year is just kind of an anomaly or are you going to be looking to space product launches out throughout the year.
Yeah, I mean, I think you have to start with saying is there's really been no seasonality. This year in the reason our product cadence had been the way that it was because there was some seasonality in the way people were buying products with the accelerated demand and kind of a global lack of supply.
You know, it's it's not quite a normal year, we'll say and you know.
I'll just be honest with you when we launched Vela core for example, we launched it in a normal way and we sold out too fast. So we kind of looked at that and said Hey should is it most important to be first to market, but then run out or should we built some inventory and then launch at a later date so.
We're still working through things like that and obviously the options on the table would be too you know presell ahead of having inventory in and just have an extended promise period or delay that and do do a proper launch once we built up the inventories it's been a really different year I know, we'll end up.
Launching all those things between now and very early first quarter, but kind of the black Friday cadence and things like that is probably not going to hold up exactly this year, we'll try to get as much as we can by then.
But but even then it would be extended promise periods and.
It'd be one of these things where I think.
You know as it normally would be great to have your your your your product and your gift.
You know in your home by the time, the holiday hits, but I think more than anything else. This year people have learned that hey, if you can just see your way see a clear path to getting your your product what you want your weight, you'll wait a little bit for it and you know both us and our competitors have kind of seen that type of thing so little bit different year, Mike This year end.
And we're just trying to figure out the very best ways to to bring these products to market.
Okay, great. Thanks, a lot sure. Thank.
Thank you.
Our next question is from Sharon Zackfia with William.
William Blair. Please proceed with your question.
Hi, Good afternoon, I have I'm sure we'll have questions Hi, I guess I'm curious you know with the pandemic and the growth in the space alongside the Bella core introduction kind of how.
Both you know separately are impacting your customer demographic and your reach you know that's if you're seeing any shift there versus kind of the 2019 traditional demographic further bowflex or schwinn or you know pick your brand and then I also wanted to ask about Costco in Canada, or whether there was an opera.
Kennedy to also bring the brand to Costco in the U.S.
Yes, Great question, Sharon I'll start on the customer part, but we got lucky.
Becky all Seth our CMO on the phone and as she has spent most of our year in deep deep segmentation analysis, and new customer segment analysis and so she may have more to add there it's a great observation churn.
We've seen first of all as I mentioned in my remarks.
This quarter, we saw seven times the number of new customers that we saw in the year ago quarter. So we're introducing our brands and products to people that I've never seen them before and I think that makes sense based on you know everybody's need for this and.
Maybe they tried us a long time ago, they're going to try this again, but building up that those those new customers.
Then we have sent segmentation work that I think back you will explain better than than me we've.
We've had a traditional segment.
Of people, who has been our strongest segment and that segment of people has a name internally, but I won't I won't confuse you with the name but.
But we've really been successful for years and years in and getting reaching out.
A set of customers that honestly doesn't love exercising as much as some of the other segments and if it's sort of astounding to me that we've been able to do as well as we have.
Getting those folks off the couch getting them in gear, and then helping them on their journey and we feel fantastic about that and and still that Thats a major part of our mission.
While doing that I think we missed some segments of a couple of different segments that actually like exercising quite a bit more.
And I don't know if it was the way we went to market it or you know infomercials late at night or or what exactly it was but we ended up you know kind of over indexing on that on that first group I mentioned, an under indexing on people. We think we can XP extremely.
Extremely successful with so.
Maybe that with a backdrop Becky anything to add there.
Yes, Jim Thanks, Sharen I think that the other thing is.
As Jim said, we really went to market. After one set of consumers to really preferred home fitness, but has many more consumers have returned home fitness, we have actively targeted them. So people that in the past would've been gym goers, we're really using some of our our media and our messaging to actually target those.
People and when you see that the growth in some of our products there, it's not coming from our traditional customer and then in addition to that you know I think it's 30 years of advertising behind Bowflex. It's it really have quite high awareness for the brand. So you see people organically coming to it.
And I think your other question was about.
Cosco and yes, the relationship with Costco is quite good we.
We've chosen to start with them in Canada, but were very helpful to have some programs very soon in the in the us.
Okay, great. Thank you.
Sure. Thank you Sharon.
Our next call. Our next question is what Steve Dyer with Craig Hallum. Please proceed with your question.
Oh, good afternoon, and congratulations to all of you on the exceptional results.
Thanks, Steve.
I guess digging into journey for a moment.
I think everyone sort of hungry for anything to sort of look at engaged the traction there.
The closest I can call them aside from App downloads would be you know other non royalty revenue.
Looks like there is a little bit of transportation in there as well but.
Very very small number still is that a decent proxy sort of for the traction that you're seeing with with the p. jury apps.
You're right, that's where that is found I think semi.
Similar to what you said you know our focus right now it's not just the subscription dollars that the other metrics that we're looking at to see that it's become the lives by our members and that we're doing the right things to really make it.
An important pillar in our.
Company go forward so.
We don't see a lot of metrics about it right now because it is small but underlying it or are these key things. We're looking at to make sure that we provide really the best digital experience for our members and then from there. We can talk about more of those metrics when it becomes a bigger portion of our pie and I'll just I'll just add you know as.
We've discussed one of the key things that our company missed was connected fitness.
And we actually recovered quite quite well with the quality of the product and what's in it and we've got some really great differentiating features and and people who use journey really love it.
However, you know if youve not gotten it across the portfolio on on as many machines and an a b Y O D format as you'd like that.
The revenue is not where you want it to be so that is a big focus of our long term strategic plan is to not only make.
Journey continue to evolve and be a differentiating experience, but more so to scale it and that's where you'll start to see those those particular numbers and we're going to be doing everything we can to scale. It and you've heard me talk about investing more in journey and we have we've got a leader in place we've got a.
New business unit. The focus is just on that on that particular business, you know and as it becomes material, we'll be we'll be reporting that size, but make no mistake. This is this is the the the number one strategic initiative for our company is to scale journey and our digital experiences and.
We will do everything both organically and inorganically to make that happen.
Got it. Thank you next one for me just kind of jumping topics as you look at the backlog that you have today is there anything notable sort of in the composition looking forward maybe be should be how it's what's your revenues look like over the last six months are you seeing any trends or where does that all holds pretty true to form with.
What you've seen so far.
It's holding pretty true to form you know a lot of them are the pent up demand we've had such long promised periods for some of our key best sellers to now.
The usual suspects us IC bikes and also address what the weights in the benches, but whats really exciting is the great response, we've had developed core.
As Jim mentioned like we ran out weaker quickly.
We thought we had put down a pretty bold.
Expectation there, but it was.
Phil insufficient so.
Usual suspects in the past I'm seeing some really really good initial.
Initial responses develop core and then in addition to develop or.
The Selecttech five five to as you know kind of the.
The fitness version of toilet paper in the pandemic, we we ended up with a well.
We started taking in a notify me when list when we went out of stock initially back in.
March April and we collected over 200000 of those leads.
And since then as we've gotten.
The supply of the five five twos, we kind of when an order on that list and worked our way down.
Where almost worked through that entire list now so you'll be seeing that going back on stock in stock on the site.
As an ecommerce skylake, the one thing I hate more than anything in the world and our team knows this is a great out button on our website because you've generated that demand you have the fantastic product you've done on the marketing you need to do and someone can't buy it.
But in the case of the five five twos people could buy you just couldn't tell because we felt obligated to serve the customers in the order that they expressed an interest and we worked that down.
And now we're about ready to go.
To go where you can begin to order that and even then as we work. This list down people are still willing to to wait a couple of months more in addition to what they've already weighed weighted so that tells you a lot about the the product portfolio and the backlog.
It includes quite a quite a bit of a select text, whether they'd be the five five to the 20 eightys or the or the 10 ninetys.
Got it last one for me your retail partners you out to several of them you talked about them last quarter Amazon.
Amazon gross 23% I think the revenue this quarter, what's the contribution but unlike what some of the new but some of the new retail partners that you announced and would you anticipate sort of further.
Distribution from anything there. Thanks, Yeah, Yeah, I mean, the the growth has been fantastic. The demand is obviously there and.
And it's one of those things like everything these days, we wish we had greater supply to satisfy that demand and we've had some you know some difficult decisions to make and you know what supply goes to direct what supply goes to retail and then among retailers.
How do how do we serve the accounts the best way in a very strategic way I mean, obviously those allocation decisions. If they were completely done on the basis of making the most money we would sell most things direct and would not allocate to retail partners, but retail for US is we're committed to it in the long run we think people.
Want to touch and feel these products, we know that our retailers expand our reach in market in different ways and get different customers and we actually want arc you know any consumer that wants to buy things to have multiple choices on and how they do that so.
Our our decisions are very strategic and not just numerical and we are doing the best that we can but the great thing is.
More and more retailers are finding that their customers really want fitness products I mean pretty much anyone that has anything to do with the home.
Has sort of extended into this category and as as long term followers of the company and the category of said.
I've seen for a while we had really not enough retailers that or not enough new retailers that wanted to carry fitness products and it's been outstanding that these folks have found out that their customers really care about these products and and add them. So lots of great lots of great traction with our existing.
Retailers like like Dick's, and Amazon and best buy and as the new ones come on we're doing our best to fulfill those as well.
Thank you.
Sure. Thank you.
Okay.
Our next question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question.
Hi, guys not not sure if you can or will answer this but just looking for additional insights on vela core can.
Can you give us any insight into you know and I know it was a short time period, but the impact on the quarter from Goldcorp.
We launched it really late in September I mean, a lot of the sales ended up shipping in late September so impact on the quarter is.
It's not material.
But the.
The number of items that we were able to sell it and then they ended up in our back order is really really encouraging.
So yes, it exceeded our expectations.
Very much so so I'm weyrich were excited about it and you know really just excited also like I said, it's not only the product availability and I think theres no other product like this but you know.
Also the way that our advertising is able to show us in the life that we'd like like to be.
More tech.
Techforward brand.
With an innovative product that that does something very differentiating thats not only different but better because it's got benefits for your core an arm. So we we've been very very pleased with the traction so far and we're.
We do even more pleased if we had made more of them.
Okay and it's my next question the advertising can you talked about excluding Vela core what your advertising costs, how that kind of tracked sequentially and then any benefit that you feel like maybe you're getting from the Vela core advertising that that's really helping the rest of the portfolio.
So I mean, as I mentioned and Becky is on the phone. So she may she may have some some additional comments on this but.
This year really well, we wanted to do actually to drive.
Traffic to our website to buy any of the products. We had available we just chose the vela core as the lead for that and.
For the reasons I just mentioned, we thought that was a you know a terrific way to do it and then hopefully.
Some or most of you have seen these.
These commercials and hopefully you agree with me that that they really do show us in the right light. So then we evaluate our spend as we always do on kind of a transactional basis first how much you spend versus how much you get back and we have a required rate of return for those transactions and.
If we're not we're not getting that return one of the lessons we learned in the last few years as we pulled back on that.
You know for example in the in the second quarter, we didn't have to do any advertising and then in the third quarter. When we did this we thought we wanted to get a good a good launch. So the good news is we were getting a good return on investment if we just viewed it as a transactional element, but as I also mentioned.
Unlike I think some of our ads in the past it was a great ambassador for our brands. It really showed us the way that we would like to be shown and at least we're trending in the right direction.
On our on our brand so Becky I don't know if I, if I stole all your Thunder or you have anything to add on top of that.
Hey, Thanks, Jim No I would just add for the quarter, we spent about eight.
$8 million overall, which was a $2 million increase versus year ago, and if you remember I remember last year, we introduced.
Max trainer.
During during Q3 and Jims right, we really spent behind I look forward to drive traffic to two bowflex Dot com, but then we did use some tactical spending where we had.
Some significant inventory and we wanted to bring people you know whether it was for strength or some of our other products as well for a transactional level and.
And Thats TV really a lot of that's TV.
We also did a heck of a lot of digital advertising and in that regard we were pushing all the products that were for sale in the portfolio. So while we talk about bellcore.
As you can see TV TV commercials, if you're on any of our social feeds or.
You see our online search advertising and things like that you you will see that we were driving it through the portfolio pretty much whatever we had in stock right. You could you could target that spend to the exact skews that that you had for the exact amount of time, you actually had inventory.
Okay, Great and then last one for me just can you just give US a reminder, on on tariffs on exposure and any kind of exemptions are changes or anything that we've seen here recently.
Yes, sure why don't I, let bill do that Bill is our head of supply chain, you've got another fancy title. They put on these things, but but really as main job is is is ahead of our supply chain and so he has been involved in all of those tariffs.
Yes, we're currently subject to a 15% incremental tariff on the vast majority of our products that we import.
And that is on top of roughly four and a half points of duty normally so think of effect that sort of Burton.
Okay does that yes.
Sorry go ahead.
I was just curious if you want to look into your Crystal ball a little bit does do you guys feel like any change in administration.
You didn't do that.
The tariff did reduced to 7.5% sorry, I got my numbers mixed up so for for that for the third quarter essentially if you remember last year. They came in September 1st at 15% and then earlier this year they were reduced to seven and a half so you're kind of for part of the quarter, you're you're you're going 15%.
Again, seven and a half for the full fourth quarter, it will be that seven and a half point difference right Bill. So yes. So we're comping favorably in Q3, you had already for the Miss mistake, sorry can you start with your your other question.
Yeah. It was just if you look in your Crystal ball at all here looking forward you know with what looks like a new administration coming in or you know are there opportunities do you think that maybe we see less tariff exposure.
As we look at 2021 or maybe later.
Yeah, I mean, all I can say is too early too early to tell you know whether relations with China will will be better we hope that that will be the case right.
But but you just don't know and then tax policy is completely up in the air, especially if you've got you know split Congress in.
And executive branches. So just like everyone else will we'll just monitor and react to those things as we've been doing.
Great. Thank you guys.
Thank you.
Okay.
Our next question is from George Kelly with Roth Capital Partners. Please proceed with your question.
Hi, everybody. Thanks for taking my questions sure George.
So I have a few for you all start with.
Industry size in Tam.
I appreciate that I think you shared you've done surveys that I forget the exact number but it was 12% to 30% or something like that of gym goers Yep, Oh, probably not going back. So I guess my question is.
Hello.
Compared to a pre co bid you are kind of the regular customer group pre co bid how much bigger will the industry at home industry be when this all kind of normalizes a year or two years from now how much bigger do you think the at home industry will be versus pre kobin levels, yes.
Yeah, I mean this was a huge.
The issue in our strategic planning right because when we started our strategic planning we thought that the at home fitness market. If you add it all up was about $3.6 billion and the we thought it would grow at about a little less than 3%. So our plan would have been in those circumstances to go.
Gainshare in a slightly growing market.
So then when this whole trend hits, all bets are off and for all the reasons that I mentioned in my remarks, Youve got a massively growing.
Market.
So the way, we think about it and we don't know for sure how big it gets but you've got a roughly 40 billion dollar.
Gym membership market.
And you've got that many people that you mentioned, the 12% to 30% that say it will never go back in.
No never is a long time, so do you believe it or not I don't know if it's if some of that is true then you've got to a permanent shift from that that group at 40 billion to the three point sexy just add that on top and then for the people who will eventually go back.
For the reasons that I said in my remarks as well we just we just don't think they're going to flood back right, they're going to go back when they are safe and then they're going to have a new normal they are going to balance. It differently then they're going to buy also buy things for the home just in case. So you've got all those things and you add them, all up and who knows where it where they where they get too I mean.
Unfortunately, if we were all public in this space, we could just add up everybody's results and we know exactly where we are but there's just a couple of us that are that are public. So you know, it's our best our best guess, we feel like we are getting more than our fair share.
But you know our estimate maybe four.
For this year, maybe that went from 3.6 to maybe six.
Something like that 6 billion, but we don't really know you know, it's not an industry that tracks, it's market share as well is that we.
As as were becoming more and more.
Data driven we do our best job to continue to survey that and try to make our best estimate.
But thats, what where it kind of looks like and that's a pretty good opportunity for all of US you know if you say that the maybe it won't quite double.
In a year there aren't too many industries out there that you know are coming close to.
The doubling in a year so that that helps.
And then for the reasons that I said, then it's anybody's guess how much of that is retained at how much of it how that growth continues to grow I think we all feel like it would be higher than maybe that six or.
Billion, if we weren't all supply constrained, but as far as I know, we all are so that that will work itself out as more and more of us.
You know are able to fulfill more inventory and we'll see where we are there, but we do think there's probably a time sometime in maybe you know it.
It is crystal ball, maybe sometime in early to mid 2022 that we all kind of.
See where this thing lands in the meantime, we're looking at lot of.
Leading indicators things like traffic on our website.
Retail sell through things that you would see if there was any waning demand you'd see it there first and then we would react based on that and there's a whole bunch of other ones, but but those would be a couple of the ones that we monitor but.
Hopefully that gives you a sense theres some theres some hard numbers, but I wouldn't say they're scientific.
In any major way, we've done surveys and Weve crunch, the numbers and that's what we think but.
Yes.
Good listen Anybodys anyway.
Anybody's call that maybe you'll get a different number.
Okay. That's that's helpful. And then next question.
And so it sounds like journey is.
You're you're going through a sort of transformation there.
And sounds to me I mean, correct me, if I'm wrong, but it's kind of early innings and so I guess my question is is lies.
Life's content and important.
As you learn more about what everyone else is answering it do you think wives content is important to drive at some point I've got the father of journey on the phone here, So I will let Chris.
Hi, George I'll give you give my two cents, we've talked about this a little bit on previous calls but.
Content has has proven to be.
Fairly.
Big commodity in our space, especially in this in this in this time and so one of the things. We found out really is that people aren't really looking for live content because it actually is.
Impacts are schedule, but they are looking for all types of of on demand content and and we've been actually architected, our product to really be able to respond to the bus to cut that the world has to offer so we're starting and take that when you see the journey platform, especially in both core and the other products coming out you will see that we are going to be.
Two newly adding on demand content, because that's 99%.
Of what people are looking to to use.
Okay. Okay, and then last question for me.
About the north shore strategy Chuck.
But it is M&A, an important dynamic of of that incurred or how do you think about M&A rich sure well you know when you do in my opinion. When you do long term strategy you have to be confident that.
Even without a major M&A event that you have what it takes to make it to make it happen.
And our our strategy when we roll it out you'll see it's it's largely organic but especially when you have a kind of a short term sense of urgency like we have here of displaced a gym goers.
And the fact that we are.
A bit behind where we'd like to be in terms of number of products that have journey on it I mean, all bets are kind of on the table. We really do want to look for partnerships that will help us scale in particular, and maybe some cases accelerate the content and improve the content in a in a in a big way. So overall as we execute.
We will we will be executing on kind of both those levers and inorganic and inorganic.
Way.
Okay. Thank you.
Sure.
We have reached the end of our question and answer session I would like to turn the floor back over to Jim bar for closing comments.
I'd like to thank everyone for joining our call today and for your continued support of Nautilus, We look forward to providing you with another update on the business in a few months on our fourth quarter earnings call. Please stay safe and healthy have a great rest of the day onwards and upwards. Thank you.
This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.