Q4 2020 Nautilus Inc Earnings Call
Greetings and welcome to the Nautilus, Inc. Fourth quarter 2000, and 'twenty earnings results Conference call. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation if anyone.
Our operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host John Mills ICR.
Thank you good afternoon, everyone, well up and did not all of this fourth quarter 'twenty and 'twenty conference call for.
Participants.
And should recall from Nautilus are Jim Barr Chief Executive Officer.
And I knock on the old Chief Financial Officer. Please note. This call is being webcast and 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 our.
Our earnings release was issued today.
On the the five P M 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 will have a presentation accompanying the call.
Management will refer to during their 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 and click on the investors' tab and then click on the events and webcast and the presentation.
And we'll be there.
I would like to remind everyone that during this conference call Nautilus management will make certain forward looking statements the.
These forward looking statements are based on the current beliefs of management and information currently available to us.
Forward looking statements are not guarantees of future performance and therefore once you.
And not place undue reliance on the.
Our actual results will be affected by known and unknown risks uncertainties.
The 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 for our SEC filings, which can be found and the investor relations.
Relations section of our web site.
And with that it's my pleasure to turn the call over to knowledge. The CEO Mr. Jim Barr. Please go ahead Jim.
Yeah.
Thank you John Good afternoon, everyone and thank you for joining today's call.
I'm delighted to speak with you today about our company's record breaking performance and the fourth quarter.
And the Catholic game changing year for Nautilus.
I'll highlight our financial and operational performance underscore the profound contribution from our people and partners discuss our outlook for the future and finish with a few words about northstar and our upcoming Investor day.
We ended the year, where the tremendous fourth quarter.
And executing on all fronts with growth across all brands channels and products.
To achieve our record results, we met the continued strong demand with significant increases and supply.
Our incredible growth was somewhat tempered short term by disruptions and global logistics and similar to what many other.
Companies and industries have experienced.
Let me start with our financial highlights and they are truly remarkable.
Our fourth quarter was not just good it was the best quarter in the company's 35 year history by both top and bottom line measures.
Full company revenue was over 180.
$89 million up 82%.
On an apples to apples basis, excluding the recently divested octane business revenue and the fourth quarter more than doubled versus the year ago period up 108%.
Both of our reporting segments also turned in their best quarter ever.
Ever direct was up 129% and retail excluding octane was up 96 per cent.
Yes.
For the year, the company generated $553 million and revenue the highest sales year for Nautilus since 2006 and easily the best comp and our history as a public company plus.
79% and plus 97% excluding octane.
This came in within our guidance and would have been even higher if it werent for a severe shortage of shipping containers.
At year end, we had over $16 million of completed and sold inventories sitting near our factories just.
Plus inc for retailers to pick them up.
The so called factory fulfill the orders are common and our business, but the magnitude of sold and unshipped inventory is far from typical.
Under this F F O arrangement retailers are responsible for arranging transportation finding containers and picking.
Just wake up at our factory.
At which point title passes and our revenue is recognized.
And even leading retailers like Amazon are not able to take possession of product they badly want.
Due to an inability to find shipping containers. It serves as a strong illustration of the global disruption that is occurring.
All.
Picking them, all and we enter 2021 with $91 million and backlog.
Operating income for the quarter was $41 million second only to third quarter 2020, and our history and 1100 per cent increase over fourth quarter 2019.
Excluding the gain on octane, we recognized one.
Quarter earlier fourth quarter 2020 is the highest ever for Nautilus.
For the full year operating income was $78 million compared to a loss of $101 million and 2019.
Excluding the octane net loss on disposal operating income for the year was $98 million.
And adjusted EBITDA was $107 million exceeding the top end of our guidance by $7 million.
This is a swing of $125 million versus last year's EBITDA loss of $18 million.
That $125 million improvement and EBITDA resulted in a massive change.
And year to year cash and short term investments we ended the year with $94 million of cash and short term investments, giving us additional resources to invest and our company's long term growth.
While our results were aided by the at home fitness tailwind for much of the year I want to emphasize that.
Far from easy to achieve and many ways 'twenty and 'twenty may have instead been our most challenging year and history, we faced many unprecedented and unanticipated obstacles and navigated through them to produce this outcome.
We also had key learnings, we can apply for the future to execute even better.
They were for record results were driven by execution of improvements.
We began implementing and late 2019, well before the pandemic hit.
Our employees and partners agility, and endurance and confronting adverse conditions and their professional and personal lives and their grit determination and creative problem solving.
And in the face of the Numerable operational challenges.
I'm very proud of our whole company for facing challenges and for delivering for customers and shareholders and a truly incredible performance.
Underlying these financial results and the extraordinary efforts are some impressive operational achievements worthy of calling out.
These working out working with our valued partners, we dramatically increased production and supply chain capacity.
To accelerate connected fitness, we launched seven new cardio products, including the debut of the industry's first unstate urinary dual mode bike Vela core.
Introduced the next generation of Bowflex Max.
Max trainer.
And expanded the Bowflex treadmill lineup.
In addition, we launched our instantly popular select Tech 2080, barbell set updated bowflex debt the bowflex benches.
And refresh of our Schwinn <unk> bike series.
All in all our portfolio of features strong.
Tumor choice of strength and cardio on.
Modalities and the price points.
Our new products and a more modern and go to market approach have gotten us into the conversation and connected fitness and of big way.
As tangible examples our earned media impressions through our public relations effort.
Efforts were up over for X year over year, and our social media and Influencer program produced eight times of the reach compared to a year ago.
Our products on not only in the conversation, but winning reviews and awards such as Vela core of winning the prestigious award for innovation at this year's consumer Electronics show.
And we continue to Rev journey, our individualized connected fitness digital platform with the new user interface more features many more classes.
And the on demand workouts, including for the first time off machine workouts such as yoga.
Journey offers more choices for less of.
Other popular fitness.
And the platforms tend to focus mostly on trainer led group classes, where you follow along.
Bernie includes classes, but its focus is on each member individually, providing a one to one AI driven personalized experience based on each individual's own progress and goals providing.
And a virtually.
Unlimited number of suggested workouts.
It also provides entertainment options and immersive experiences, which can be used standalone or at the same time as the adaptive workouts and individualized coaching.
Our members value variety and we deliver all of this for a fraction of the price of the nearly 40.
Per month fee that has been trending among connected fitness competitors.
We continue to listen to consumers and observe usage, which guides our ongoing development efforts.
We've also been able to accelerate our growth of journey memberships in tandem with the recent increase and connected fitness devices sold.
The dollars, we improve margins through select price increases on key products and decreasing the level of product promotions.
We capitalized on the opportunity and introduce new customers to Bowflex and schwinn and high quality of products. We added four times more new customers and 2020 versus 2019.
Website.
<unk> was up approximately three X for Bowflex Dot com and Forex for sure and fitness Dot com for the full year.
We stood by our retailer partners and allocated scarce inventory to them as we continue to build long term relationships with our top partners, such as Amazon and Amazon and Dick's Sporting goods, we continue.
Our recent expansion with best buy as well as Costco U S and Canada and added shields to our key retailer partner list and.
And lastly, we completed the sale of octane to reduce costs and focus on the at home fitness market.
Many of these operational accomplishments such as new customers New retail partners.
<unk>, our new products.
Manufacturing capacity are durable and have lasting impacts to our business.
In addition to financial results and operational improvements I am proud of our enduring progress on people capabilities and culture.
During 2020 for example, we pivoted.
From home within 72 hours and took explicit actions to support our people and this past year of.
A few examples include giving HQ employees of stipend to outfit their home office, providing additional time off for refreshment and to volunteer for causes that are important to them and importantly shared the company's success.
And to work in the form of financial rewards commensurate with our accomplishments.
We won best places to work for the eighth straight time.
We significantly improved employee engagement and lower turnover.
We have implemented a new mission vision and values that build on the strong foundation, but strive to take.
The next level as we aim for our North Star.
Since December of 2019, we built a stronger more diverse executive team to take US forward with the new Chief Financial Officer, Chief Marketing Officer, and Chief Digital Officer.
The executive team has a nice balance between experienced nautilus veterans and outside.
And as to the vectors and we recently hired a new Chief people officer, whom we will announce shortly to help US continue building, our talent capabilities and culture and develop and develop our people for the road ahead.
I'm inspired by the accomplishments of our leadership team and 2020 and in particular, how they succeeded.
Ceded on multiple dimensions simultaneously, including executed on the day to day optimization of the business produced record breaking financial results launched impressive new products and improved journey.
Provided strong leadership and support to our teams as they dealt with the pandemic and other stressful events.
Completed the sale of octane.
Octane and finally completed and rolled out our long term strategy North star to the entire company.
Two or three of these would have made for a good year, but executing well on all of these levels to this degree of a 2020 of year to be truly proud of.
With that let me bridge to our outlook for 2021 and the long term.
We continued to see strong demand for all products, especially bikes new connected fitness cardio products are select tech line and home gyms.
Demand and consumer sentiment for home fitness has not slowed with the availability of vaccines.
Polling results remained stable with more than 20% of former gym goers, saying.
We'll never returned to the gym.
This sentiment is driven partly by feeling unsafe, but more durably that many have discovered or rediscovered the convenience of working out from home.
And now with the added ability to replicate much of what they got from the gym through connected fitness.
Those who have.
Half of our plan to return to Jim's tell us they will the balance there Jim and at home routines much differently than before Covid hit when the pandemic is behind us they do not see themselves going to their workplaces every day, which was a key driver of Jim habits.
All of this leads us to be optimistic.
That of large driver of.
Of the surge and demand will continue long term to permanently.
Hence, we continue to make significant investments and supply chain and inventory.
We're coming closer to meeting demand with supply, but still have some more work to do.
And we still battle major challenges and global logistics at least short term and we continue to monitor.
Monitor leading indicators such as consumer sentiment.
Web traffic and retail sell through.
And I will cover our guidance for the quarter ended March 31, 2021 and her remarks.
Importantly, we were strive and while we were striving to meet our customers' needs. This year, we didn't lose sight of the long term.
We completed and Northstar, our insights driven long term vision and strategic plan.
And we rolled it out for the full company and the fourth quarter and are now and full implementation mode.
Our plan builds on the company's notable strength, including well known brands reputation for quality and innovation broad product portfolio.
Leo on the channel go to market and customer focused company culture.
And also addresses the company's underlying issues and weaknesses, which I diagnosed when I arrived.
Some of which I previously shared with you.
Under our plan Nautilus will be a stronger more resilient and more digitally focused company.
Notably.
And with Star vision is enduring.
It would have been the same COVID-19 or not.
But the resulting home fitness trend has added opportunity of sense of urgency to meet the evolving needs and habits of gym goers and provided fuel to accelerate our key initiatives.
While 2021 is the first official.
<unk>.
Of our Northstar plan. It is important to take stock of actions, we've already taken and early wins.
Our progress and accelerating connected fitness and the portfolio our progress on improving journey, our digital membership platform.
We have a balanced product portfolio of strongly demanded products.
<unk> year are focusing decisions, such as selling octane and SKU rationalization work and.
And we've added top talent to our team and key areas.
The entire team is embracing the direction, we will be holding a virtual investor day next month on March 18, and I look forward to sharing more details about northstar.
And many additional improvements we have made to our company at that time.
Let me close by saying that 2020 has indeed been a game changer for our company.
Operational improvements got us started.
Strong execution permitted us to benefit profoundly from at home fitness trends, which we believe are here to stay.
Nautilus has already a more on trend and a more digital version of itself.
And our long term vision and strategy will lead us to a sustainable industry leadership position.
I could not be more excited about our long term prospects and the steps we are already taking.
With that I'd like to turn it over to.
Our CFO of <unk>, who will go over our financial results in more detail on them.
Thank you Jim and good afternoon, everyone.
During my first earnings call with not only from a year ago. I said that this company has incredibly strong brands and the loyal customer base.
And that we have the right assets in place.
To return to profitable growth and that we are already addressing the issues that caused the performance to falter and 2019.
Importantly, we are investing and the future.
One year later on behalf of our whole team I proudly share with you our Q4 and full year 2020 results.
I'll begin by speaking to total.
And the P&L results for Q4 2020 with comparisons to Q4 2019.
Net sales were $189 million up 82% or 108, excluding octane.
Gross margin rate increased by 450 basis points to 41% gross profit was 78.
<unk> hundred and 4% higher than last year.
Strong execution across both segments was the key driver of the increase.
Favorable segment mix was also a factor as directors of 43% of sales this year versus 34% last year.
And and Cosby sales leverage on fixed costs offset by continued pressure on <unk>.
Lot of cleanup costs.
Operating expenses were 4% higher increasing to $36 million or 19% of net sales.
Selling and marketing costs were down 14% to $22 million or 12% of net sales compared to $25 million or 24% of net sales last year.
Given our tight inventory position the opted to redirect spend for R&D and G&A.
R&D was up 34% of $4 million or 2% of net sales compared to 3 million of our 3% of net sales last year per.
Merrily driven by increased investments and journey.
G&A was up 61%.
Were sent to $10 million or 5% of net sales this year compared to $6 million or 6% of net sales last year, primarily driven by early investments and our north star initiatives.
Operating income was nearly 1200% higher increasing to $41 million driven by increased gross profit.
Operating margin was 22%.
Income from continuing ops increased by 699% to $29 million or <unk> 90 per diluted share.
EBITDA from continuing operations improved by 578% to $40 million.
Turning now to Q4 2020 performance by segment again, and I'll be comparing it to last year's Q4.
Direct net sales were up 129% on all time high of $82 million driven by strength, which grew 372% day.
Demand remains strong for our select tech weights and benches.
The direct segment totaled more strength product and this quarter, then and all of 2019.
Cardio grew 78% driven by our connected fitness bikes, the bowflex <unk> $6000 of core and the Schwinn IC for.
Cardio sales growth was relatively constrained by disruptions and global logistics, which delayed the launch.
Some of our new connected fitness equipment like the treadmill and the new Max trainer did.
Direct entered Q4 with 46 million and backlog.
Gross margins expanded by 370 basis points of 54% and gross profit grew by 146%.
Segment contribution.
Launch was $24 million.
29 million higher than last year's $5 million loss the.
And the improvement was driven by increased gross profit and lower marketing spend.
Turning now to retail.
Net sales hit a historic high of $106 million up 58% versus last year.
Or up 96, excluding octane.
Cardio was up 59% driven by the schwinn IC for and elliptical.
Strength was up 52% driven by select tech weights and ventures.
Retail backlog at the end of Q4 was $45 million.
We disclosed retail customers, whose sales are greater than 10%.
Percentage of total company net sales this quarter DSG and Amazon are both 14% of total company net sales.
Gross margins expanded 230 basis points of 31% and gross profit grew by 70%.
Segment contribution was $25 million of 107% higher.
And last year, primarily driven by higher gross profit.
And just the last quarter of the year I'll now turn to total company P&L results for the full year 2020 with comparisons to full year 2019.
The P&L day I'll be speaking to with adjusted to remove the impact of one time significant charges.
This year and last year. Please.
Please see our press release on our website for a reconciliation of these non-GAAP numbers to our reported results.
Net sales were $553 million up 79% or 97%, excluding octane versus last year.
These.
These full year sales for at the midpoint of our guidance of $5 $40 million to $565 million.
We incorporated logistics disruptions into our guidance and I'm really proud of how the team overcame port congestion reduce sailings and in December and unexpected reduction and the number of delivery trucks available to pick up shipments.
From our Dcs, we quickly implemented on it solution to allow us to ship the additional carriers will.
While we could not overcome with the severe container shortage that Jim mentioned earlier.
We had $16 million of S. <unk> factory fulfilled orders sitting in the warehouse waiting for pickup in December.
Gross margins expanded by 560 basis points of 41% and gross profit grew by 107%.
I'm really pleased by our progress on gross margin, we're seeing the fruits of our SKU rationalization and price and promo optimization.
This will help us weather headwinds, we're seeing and 2021 related to shipping costs and increasing.
<unk> steel prices.
Channel mix also helped US direct was 44% of sales this year versus 39% last year.
Adjusted operating expenses were 6% lower decreasing to $130 million or 24% of net sales.
Selling and marketing expenses were down 17.
17% of $78 million or 14% of net sales compared to $95 million or 31% of net sales last year.
Given our limited inventory and strong organic demand, we pulled back on paid media and redirected spend for R&D and ish and the G&A in support of journey and other North star initiatives.
<unk> also much more active on the PR front and on media impressions increased forex versus 2019.
R&D costs were up 11% of $16 million on a 3% of net sales compared to $14 million of 5% of net sales last year.
G&A was up 20% to $36 million or 7% of net.
<unk> compared to $30 million or 10% of net sales last year.
Adjusted operating income was $98 million and improvement of $127 million compared to last year's loss of $29 million.
Adjusted income from continuing ops increased to $79 million or $2.
Net <unk> and <unk> 46 per diluted share.
Adjusted EBITDA from continuing ops was $107 million.
Versus last year's loss of $18 million. This is 7% higher than the top end of our guidance range of 90 million to $100 million.
Turning now to other year and highlights.
So we are ending the year with a much stronger liquidity position cash and investments were $94 million.
750% higher than last year's balance of $11 million.
Debt level stayed flat of $14 million, and we had $55 million available for borrowing on our wells Fargo credit facility.
I was 91 million and 67% higher than last year, primarily due to the timing of customer payments.
Trade payables were 96 million, 30% higher than last year, primarily due to timing of inventory payments and higher advertising related payments.
Inventory was $51 million compared.
And to $55 million last year.
The global logistics disruptions as a well covered topic as it affects not just our industry, but any company the sources products from Asia, or Hasnt and E Commerce presence.
I'm really proud of how our team overcame the challenges that we encountered this year it's.
It started with factory manufacturing delays as China.
AOS country to deal with COVID-19.
As other countries began implementing stay at home orders demand spiked to five to six times, what it was last year, we needed to move beyond just restarting production and had to significantly ramp up capacity.
And then as we were getting supply closer to the demand we needed to deal with reduced.
And was the for information of transportation availability.
Well isn't downshifted outbound delivery trucks, which we overcame by choosing to pay of charges in order to deliver for our customers.
And then as I said earlier in December there was the severe container shortage, which even our largest retail partners what unable to fully mitigate.
At this.
Time, our largest suppliers of stabilized against our elevated demand. Therefore, we no longer need to issue <unk>, two or three quarters into the future.
We have gone back to issuing them closer to normal lead times of several weeks at.
At the end of Q4, we had about $166 million of open pose compared to $28 million last year.
Year.
I have a couple of more topics before I turn it back to Jim.
In December we announced that we are changing our fiscal year end for.
<unk> the 12 months, beginning Jan one and ending December 31, two the 12 months beginning April one and ending March 31.
We will file of transition report on.
On form 10-Q for the transition period from January one 2021 to March 31 2021.
The company's fiscal year 2022 will begin April one 2021, and and March 31 2022.
We made this change because we wanted to.
Include the entire fitness season for exercise equipment and the same fiscal year. Additionally.
Additionally, this new fiscal year and is better aligned with the four of $5 for retail calendar used by our retail partners.
Turning now to our forward looking guidance for the transition period from January one 2021 to March 31 2000.
'twenty one.
We expect net sales growth of 55% to 75% versus the same period last year.
Do the pressures from increased logistics costs and higher commodity prices and continued FX headwinds, we expect gross margins to be relatively flat to the same period last year.
We.
We expect many of these temporary increases and cost to subside as we move through our fiscal 2020 year.
We expect operating expenses to be higher in dollars, but achieved leverage as these expenses are expected to be lower as a percentage of sales than the same period last year.
Driven by increased investments in marketing.
<unk> and journey and other North star initiatives.
And we told you a year ago that we were addressing the issues that caused the performance of falter and 2019, while we are far from done we have made consistent progress every quarter.
Importantly, we took full advantage of the tailwind of experienced this year to strengthen our balance.
Sheet, giving us the fuel to accelerate progress on our North star strategy and invest in our company's long term growth now.
Now I'd like to turn the call back over to Jim for his final comments Jim.
Thank you Ina 2020 of the year, we will not soon forget for many reasons and was filled with personal and professional challenges and taught.
What about resilience our company and our employees are resilient resourceful and extremely hard working.
<unk> emerged from 2020 with a stronger platform and a stronger balance sheet and at the end of 2019.
We are positioning the company for long term growth and profitability driven not by.
The product offering, but by our balanced portfolio and strong subscription revenue.
We have the team and the tools in place to implement our growth strategy and show the market and consumers that we are not the novelis of old, but our and innovative equipment and technology company committed to delivering.
I want the best in class fitness experiences.
I wanted to and by thanking our employees and our partners for their commitment to our mission.
I am proud to be part of this organization and I believe the future for our company is bright and there is much we will accomplish together.
And now I'd.
<unk> and up the call for your questions operator.
At this time and will be conducting and question and answer session. If you'd like to ask the question. Please press star one on total keypad, a confirmation tone will indicate your line is and the question queue.
You May press star two if you'd like to report on the question from the queue.
Participants using speaker equipment and May.
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Okay.
Okay.
And our first question is from Steve Dyer with Craig Hallum on stage.
The question.
Good afternoon, Roy nice finish.
Congratulations to all of you.
Couple of questions for me first as it relates to Jeremy and I'll ask a few.
Quarters on him.
And I'm sure it's not overly.
Material, yet, but just any anything you can give us in terms of being able to quantify.
On the journey.
Jeremy participation task.
Et cetera would be helpful.
Yes for sure.
And I definitely understand where the question comes from.
One of the things, we're really going to focus on and on our Investor Day is where we want to go with debt.
And how we're going to get there and that.
That's really what we're going to address.
For the year I will tell you that.
Like we were hoping once you get enough of.
Equipment that that runs journey you.
And you accelerate the adoption of it if you recall I know you know for sure Steve that in 2019, the only product that we sold that had embedded journey and of screen.
And was was the the top and Max total so that was our starting point as you've seen we've launched seven new products.
Since then starting in the fall with <unk> and we have one more to go which is the the new Max total.
Going forward and as.
The address the proliferate the portfolio that will be a big driver for what we're talking about but at Investor day, and we'll talk much more about that and I think thats really what you want to look at is what are the things that we can do how will we win with this particular platform.
In the meantime, we will just continue to say that we will report the.
The hard.
Those numbers and when it becomes material and it's not it's not yet there given the journey I just mentioned.
I guess on the yes.
And in the absence of maybe enough.
<unk> running for long enough I guess, just generally speaking are you happy with the uptick and maybe retention rate that youre seeing and the very early days, yes, absolutely.
Hard and absolutely we are we and it's been exactly what we've what we've expected one point we were.
Offering six months or so free now of the main offers two months free it gets people go and it gets people to see what we have as I mentioned, we believe we have more for less and.
<unk> and people make even the equipment purchase what they are telling us now.
Is the equipment purchases somewhat driven by what you get in the in the platform and how much you pay for that platform it's kind.
Of total cost of ownership situations and we do very well there even when some of our products are closer to some of the competitors.
On.
Actual products.
Our our journey.
Subscription is significantly less, especially if you pay on an annual basis. So we've got a real advantage and those and those.
And that that total cost of ownership is really weighing in to both the decision of what platform and.
And which equipment to buy.
Got it.
And then I guess just.
As you as you look into the Germany further and you talked about some of the off product.
Capabilities videos et cetera that you've put up can you talk a little bit more about how you've done that and you're doing the same.
Costs are you licensing it et cetera.
Sure well first of all as you know the center of the universe for journey has not been.
On on demand videos, it's been it's been that adaptive coaching AI driven.
Individualized workout however, when the pandemic.
And the highest we saw tremendous.
Acceleration of using.
The classes at home so we've added more and more of those those classes we've taken on.
Kind of a hybrid approach so far so for things like let's say Vela core Theres no. Other content you could license for <unk>.
<unk> there that somebody else makes we've got to make a lot of our own there and then we extend it with some of them some licensing.
And for other things like a normal.
Spinning class or whatnot, we're able to license from from third parties and include that and our library long term, what we'll continue to.
<unk> kind of what I think as you know.
I think a few of our competitors over index on that one thing.
Trainer led video and those classes.
They have under index initially but.
It's not a difficult thing to overcome over time, and we're continuing to add add.
Do as more of that and as I mentioned, we'll continue to watch what people use that's the best part of our connected fitness, it's like especially for your data Junky you can just see the stuff and see what people use and what they don't and invest more on what they like and then honestly with <unk>.
Social media and some of the groups out there.
Hear about things.
More and like and don't like a lot sooner than we used to do it used to be something that would have to kind of.
Bruce for a while until someone felt like picking up the phone and telling us what they thought it's so easy these days to see that and so based on the usage and just listening to what people do and what we're going to continue to invest where we think will make a huge difference, but again, probably overall I like.
People about it is more for less.
Got it.
The strength continues to be strong and our personally I am on my third month of waiving for select Tech.
Are you are you continuing to see sort of the new order.
The strength there are you still has that slowed at all and you kind of work.
The thing we're off backlog and I know the strength for kind of maybe caught all of US, including you guys of off guard right away.
No we're not seeing any decrease demand in anything and the strength category.
And it continues to just do everything we can to.
To meet that we did work through <unk>.
<unk> of thousands of leads like we talked about on those five <unk>. Our approach was we created kind of a Q. So that people didn't get frustrated that they didn't get on the website exactly the right day and the right moment and rather we had on kind of a line there and so we've worked through.
Most of those thing those and you.
And now ordered them on our website, but there is still a three to four month period waiting on sorry about your own personal situation. We can we can talk we can talk offline about what we could do for you there, but we continue to see that demand at the answer yes.
Yes, no problem on one more for me and then I'll turn it over.
You were kind of enough to give.
You can net guidance for the first quarter, so I don't want to be true up too badly, but and it.
It was good and don't get me wrong, but I look at it and I say youre, starting the quarter with more inventory youre, starting the quarter with the biggest backlog ever you've got the $16 million and revenue deferrals. So why I guess, where the revenue would be down $45 million at the midpoint of quarter.
For the quarter kind of given given the tailwind that you have coming in and that's it for me. Thanks, Yes sure I'll start and then this is a good question for Ian and a follow up on I think the first thing is to say that.
The first answer of seasonality right.
It's quite rare and our company history for first quarter to be higher than.
Quarter on in the fourth quarter, so you're just seeing.
<unk>.
More and more of more of that happen and then we had a pretty good pretty good comp on the fourth quarter of 2019, one of the one of the better ones. So when you look sequentially.
You'll you'll you'll see that.
But we are trying to be as the helpful. As we can honestly where folks.
Focus 99% of our brands are focused on the long term right reorder of our inventory and we get things and we want to produce a great quarter for you guys, but we're focused on the long run and if this stuff wasn't going on and we wouldn't be giving any guidance at all right. We would just keep marching towards our long term goal and we would be focused on that but we wanted to give you we're halfway through the quarter.
So we want to give you as much as much we cant anything you would add to that on and then you covered it Jim.
All right got it thank you.
Thanks.
And our next question is from Aaron.
And in fact with.
And with William Blair.
Hi, good afternoon.
The question Hi, so.
And I was hoping you could quantify the logistics cost that youre expecting in the March quarter.
And it sounded as if from your commentary that you do expect those Joe Bae and the second half of the year and as I think about and I'm talking calendar year.
And I think about kind of the big buckets.
Buckets here as well I'm wondering if you're expecting retail of outpaced direct for this year. Given the addition of it sounds like Costco you ask of the Gal, maybe I misunderstood that and your <unk>.
Lapping some of the brick and mortar shutdowns on the year ago period.
So let me take it.
And pieces, so I'm not going to tell you the specific dollar amount for the three drivers of the cost increase but.
And definitely a lot of weight on transportation and that new thing, that's hitting us with steel prices going on and agree with you with that based on what we see right now we really believe it to be.
The temporary because things are starting to get rebalanced I mean theres all of this demand the supply will catch up and it should from our vantage point subside as we get towards the tail end of the year.
And then alright.
Oh I forgot your second question can you repeat it.
Alright, and just thinking about channel mix as we think about.
Calendar 'twenty one.
And if so.
Couple of things. So we still are you know Jim had talked about the hikes of how quickly can we get supply to not be constrained and be able to just meet demand. We just keep seeing that demand is not abating.
And I don't think we're anywhere and near ready to say that.
Gotten to that point because of the demand is climbing so we're going to probably still be and some sort of supply constrained situation for most of this year and we're going to follow the same.
The path that we did in 2020, where you think about what's the best thing to do for overall company and then strategically allocate to retail.
That we believe is needed while making sure that our direct to consumer business can.
Can have what they need to also grow that business one of the cool things about retail which is obvious is they tell us what they want and advance, whereas our direct business. While it has many great quality that sort of the day to day week to week type of thing and we react based on that.
Retail, but when we talk to retailers about what they want for the rest of the year its robust and it continues so.
It was really close last year between retail and.
And direct.
But so I don't know who is going to win that one this year, but we will tell you I know a little bit more about.
Retail than I do direct at this point because just the way the business works and the forward commits that we get from our retailers.
And Jim did I hear you right are you and fall rollout with Costco U S.
We've got several programs there we have more programs hitting in the third and fourth quarter. When you would expect.
And that people would be looking for that for that seasonally but we are of great relationship with them and we have we've.
And we've really taken it to the next level and like many of the other retailers really they're very interested in.
Getting their hands on a number of our products.
And then just one last question on Germany.
You mentioned that you are starting to do more of machine classes.
Are you and is there a thought here that you might have digital only subs that that kind of of our independent of any of the machines that you might sell.
It could be I mean, as I've said before I sort of see three use cases number one and.
And I think really core for the near future is as an operating system for.
Our machines and second of all in home off machine. When you want to do every third day, you want to do some yoga or some stretching or.
Some of body weight exercises.
And maybe some maybe some.
The strength exercises, we want to be there for you right and we want that to be part of part of the ecosystem and then finally when you go outside even though youre not working out with us if we want to really provide some view to your overall fitness level and we can't forget that either so we see those all as future.
For you right now we're focused most on on that.
And at that part, where it's an operating system for our for our products, but more so we don't want to we don't want people the churn because look they need of different a different.
Experience to do yoga and occasionally right, we think most of our customers love our Ms.
And are on our machines most of the time, but.
Widely of that door open for someone else to go ahead and do so we're going to continue to monitor what what what our customers want and what they use and we will give them more of that.
That's the way that's the way, we think about that but it is for the first time.
Getting a little bit into that.
She is the scenario.
Okay. Thank you.
Sure. Thank you.
And our next question is from Mike Swartz with the true Securities.
Hey, good evening guys.
Just one point of clarification.
Secondly, the guidance, the 55% to 75% increase year over year, and the March quarter that Youre and.
Is that.
Does that exclude octane or as octane and the base when you're talking about that.
Octane is and the base.
Okay.
That's a good answer.
On the because it of the higher if we exclude the octane.
Right.
The point of clarification of the government policy just wondering.
Thank you for asking that.
And then just just in terms of.
And the cadence of product development Jim.
For the last few years something until 2020.
The cadence was really maybe three four products a year in the and the Bowflex business. This year.
And then eight.
I guess, what's the right number and what's the level of R&D spend that will support that cadence going forward.
Yes, I mean, it's been on highly unusual year.
Your Covid reasons.
We didn't quite see the seasonality and we also didn't see our launches go as we wanted in terms of the exact dates and stuff. So we had some delays that was.
Kind of the learning that I mentioned to be completely honest, but.
But we knew.
We were behind and connected.
For this so it had to be part of our catch up to do more than what we would normally do in terms of of.
Advancing our portfolio and connected fitness, that's why you saw.
And so far a total.
In the cardio line is we really wanted to refresh that whole thing I.
The fit rate about those trends they are getting great uptake the two <unk> bikes fantastic. The six seven is doing extremely well and and retail and then we've got one of the maxes out already and we've got the next one to come so we really kind of profoundly ripple of that through the portfolio.
I feel you have got to do and you're a little behind on on what we've discussed so that really drove us.
And you've probably depends on which employ you ask if that was too much or not to me. It was not of choice to our head of product development, Chris Q wasn't of choice. It was something we had we had to go go for so going forward.
So what I think we've done most of what we want.
Cardio I don't think Youll see 789, each year anymore, I think that was the big year for that but we'll be we'll be talking soon about what we'll be doing.
For other products for 2021, we've got some exciting things, but it'll be it'll be fewer.
To your point I think thats the.
And we did a lot and we maybe did a couple of years' worth of refreshment to that cardio portfolio and one year and now we're going to focus on some other modalities coming up.
Okay, great. Thanks, a lot from the Covid Mike.
Yes.
And.
And our next question is from Mark Smith with Lake Street capital markets.
Hey, guys, Hey, guys first one from me is just can you quantify or talk at all about retail channel inventory and kind of where that sitting today and maybe how long it's going to take to catch up there.
When you say retail kind of like in the stores of the brick and mortar stores or just for the segment really.
And we have really kind of in store.
What you are looking at out there and what you can see and what you have visibility into today.
I think I am.
And I'm, probably speaking for our head of retail it's not.
I mean, this we get the men and they go they get sold out really really quickly.
On kind of just going back to our earlier comment on where we're still trying to get closer to the matching supply and demand and.
For both the direct and the retail side.
Demand has just not abated, even with vaccines rolling out.
Okay and.
And then as we look at retail versus direct and maybe talk Big picture of how you guys are kind of weighing the balance there.
Obviously, a lot of profitability of that come through going direct but how do you balance that with your partnerships and relationships with the retail partners and getting them the supply that they need.
Yes, you've laid it out perfectly I mean that is exactly what happens and honestly, it's one of those new learnings and muscles, but we hadn't ever used before because we haven't had the portfolio on fire. All at the same time and we haven't had as many products the crossover from retail and direct it used to be the.
<unk> had its own products that you could only get indirect and retail there were a few products the crossover but not as many as they do today and the true Omni channel sent you want to give you want to give everyone a.
Chance to.
Periods of your product however, they want to experience so we feel really good.
About that.
The direct.
We have definitely had many many sit downs and they are not they're not friendly sometimes I mean, they are really you know we've got.
We've got people, who are strong advocates for their customer base, but youre exactly right. The trade off is if you only cared about short term profitability and cash Gen.
The approach everything to direct and we could sell at all.
I will say virtually everything just to cover myself, a little bit and my absolute but we.
We know and I just told you things, we love about retail right.
It's more predictable its more stable they tell us.
Retailers tell us, what they want and and demand.
Vance, we have a good picture on what 2021 is going to look like and.
And retail we have a better picture of that because they are used to giving us those types of things. So.
And we love retail, but we have literally sat down and and put retailers and priority order.
We've done it product by product and we've gone.
You would get to and said what can we give everyone and still support our own direct business I feel like we've done a great job, but it's one of those years, where if you ask any retailer. If you asked our head of direct everyone would say that they didn't get enough. So it's like it's one of those things, but we're doing I think of really good systemic weight I would say it is art and.
Science together.
But it is it's the way we've been doing it and we want to grow those long term retailer relationships and the big way, we want of fuel new retailers that debt.
For carried this category before because of one point, we were kind of topped off with people who sell fitness and now that's not the issue at all so we want to keep moving.
Gone through law, and all of those things and I wish I could tell you there were some magic black box algorithm that would give us the result, but honestly, it's through discussion debate and really looking partner by partner and what can we do and how can we do as much for all of our partners and for our direct business as we possibly can.
And.
Moving the book and as we look at that relationship with your retail partners as you've brought in new partners as they are of significant demand or how how much as you guys talked a little bit about price increases the help boost margin how much of that maybe was there any more of that fit into retailed and there was and the direct segment and is there opportunities due to the demand.
And the environment.
To be able to take more pricing and that retail segment.
I don't know and if its one more than the other I will say that when you raise the price and euro and omni channel. If you had separate product and each channel you would just.
You would increase the price.
Independently and it would be a lot easier.
And when you carry the same products across multiple channels you have to really coordinate and also takes it takes a little bit longer to to.
And to get to your price increases because you've you've set an expectation for a retailer of of cost and then you have to go back of that retailer and say hey, It still went up FX is going against us.
<unk>.
Going to have to do something here too.
US and so it takes a little bit longer if you are a direct only business.
And or you were favoring direct disproportionately like I think some competitors do then that would be and easier decision, but I don't think that theres any.
No.
Price.
Difference I mean, I wouldn't say that.
And it helps one versus the other it's just it takes a little bit longer and retail and it has to be very much coordinated we can't do we can't do one channel without the other else we have.
Our own version of arbitrage going on.
Okay. That's helpful.
Yes. Thank you.
And our next question is from George Kelly with World Capital markets.
Hi, George.
Hi, everyone. Thanks for taking my questions.
So I have a couple of for you first on <unk>.
Media advertising and I was wondering.
Thank you could I may have missed it in your remarks, but could you share what media advertising and wasn't in the quarter and then have you seen it start to kind of normalize at all so far this year and what's your anticipation just about when we could start to see it get to sort of pre COVID-19.
Type of thrive.
Type levels.
And I'm just going to go find the number for you well while on starting so.
The pre and post Covid thing is again continues to be.
Crystal ball exercise I mean as of as we said we've not seen any.
Any change in in the and demand we haven't seen any.
Any drop there at all so we feel like that's still going and so many of the say the reasons why we spent less initially initially are still there.
You are selling your entire portfolio you don't need to spend to continue to drive that at the same time, we look at our brands and you'll hear more about.
This at Investor day, but our brands are so well known but sometimes they are not known for what we want to be known for so we get sometimes it's Oh, yes, you guys used to do late night infomercials back and the.
Picking a decade and that of who we want to be we want to be that debt.
And that digital forward company, we are a technology company now and so we want to be perceived as such so if you look at some of the develop of our advertising that we saw it's a lot more highlighting our technology and as we step forward youre going to see more and more of that that come out so all of that to say.
And that we do marketing for kind of two reasons, one is to drive demand generation ie transactions and when things when we have our back up against the wall. That's sometimes all we can afford to do but one of the things you'll see of Northstar and one of the things we want to stay committed to is to advance our brand and get it to where we'd like it to be.
Not where we were but where we are.
Not that it's just known but it's also driving purchase consideration and a greater with and it has and so we're going to continue to spend there. So even if we could sell everything we have you will see us begin to advertise more.
More of just for that reason as well and we're going.
Try to put money aside to continue to do.
And that that that type of thing. So I think that just gives you a view I don't know Inc.
Exactly when we're going to go heavy on one or the other we make these decisions not.
Hugely and advance just by looking at how things are things are going and the.
And the marketplace and we're going to ask the new spots coming up we're going to take it to the next level, we're going to have brand and transactional advertising.
And we're going to make sure we commit to to getting our brands and our transactions, where the where they need to be.
And when is very tough to tell that's of short term quarter to quarter, but we will give you an idea.
Investor Day, what we kind of think or are more evergreen model for how we think we will need to spend over time and what we're gonna put aside for that I think that that will be more helpful.
Yes.
Okay great.
And then you were asking about the media advertising.
It's about 10 million of it was 34.
<unk> million dollars for the direct media for the year and about $10 million ish for Q4.
Okay, Great. Thank you and then next question for me about your product portfolio.
And.
At least one of your sort of big legacy modality is good discount speaking of tread climber and get discontinued this year.
I was wondering.
If you think your portfolio and now is and sort of a good place and I think Tim I think you said in response to one of the earlier questions that Youre working on new modalities and I was curious if that's something we should learn more about and if thats the 2021 of it.
First of all I'm, not necessarily saying, new modalities and I was just saying we haven't said wherever we're going to invest in terms of modalities just the.
To clarify that and then your question yes.
I think I told you one of the things I really thought when the first came in here is that we were over skewed.
And in a few areas.
I think that that happens that companies like ours, when you're trying to give each retailer is something unique for example.
We think we can give retailers many many things and our value.
Equation without <unk>.
Having exactly of unique product for each individual retailers so were.
I think we're over skewed still a trek glamour of it would be the example of that I did mentioned in my prepared remarks that we were continuing to SKU rationalize and we will continue to do that I think one of the things you will see when we talk about North Star is its focus right you've already seen the focus on at home and not commercial youre going.
And see focus on fewer skus and we've already seen our sale of our balance of sales is coming from just the top skus.
Proportionately the top skus compared to other.
Other years Youre going to see what we're going to do with brands, we've got five or six brands and our portfolio, but theres going to be of priority and youll see that priority.
But you will see lots of focusing decisions because strategy in my opinion is deciding what not to do as much as it is what to do so.
And I am sorry, if we've got real big fans for tread climbers and factory of one of our board members that I insurance Chuckling right now who is the.
Tread climber and zelle, it but we.
Have to make these decisions. These are you can't just add you've got the you've got the per and you've got the focus and Thats. An example of precisely that.
Okay, Great and then last question for me and your balance sheet is and such.
Such.
Improved condition now versus a year ago, what do you think.
Is there any kind of unique use of cash and thinking of big Capex projects. This year for any region or.
Or M&A.
And what is what is this balance sheet now sort of what are you considering anything.
Yes, as we've said and I'll start and <unk> and can back me up here, but.
And our priorities that will make a lot clearer and northstar when we're talking about that and I'm talking long term priorities, but you've already.
Aware of some of them right, we we want to continue to invest.
In marketing, we want to continue to invest in journey and becoming a more digital company.
We've got there is probably a little bit of technical debt on our it systems that honestly you discover even faster when you get high volume like we did in 2020, it would be one of those learnings that I'm talking about.
You've got you've got to say look if I want to get places faster and strictly organic or do I look at inorganic ways to grow the business and.
We're not going to buy and other octane or anything like that but if we feel like there's great technologies out there if we feel like theres ways to scale journey faster through partnerships.
We will absolutely take those those bets and and so we feel like that's a good fuel we're not exactly how share how we're going to spend all of that fuel just now, but we know what our.
And these are and will be even clearer about those priorities when we talk about Northstar.
Okay.
At the peak.
The gym.
Thanks George.
And ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to CEO, Jim Barr for closing.
Priorities.
Thank you everyone for joining today's call. We really appreciate it and we look to speak to you again, rather shortly when we start talking about.
Our long term vision and growth strategy at Investor day. Thank you very much and have a great day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and again have a great day.
Yeah.