Q1 2021 Nautilus Inc Earnings Call
Okay.
Greetings and welcome to the Nautilus, Inc. 2021 transition periodic conference call at this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Mr. John Mills with ICR. Thank you you may begin.
Thank you good afternoon, everyone. Welcome to Nautilus is 2021 transition period conference call as previously announced Nautilus change its fiscal year from the 12 months beginning January one and ending December 31 to the 12 months beginning April one.
March 31 to include the primary fitness season for exercise equipment, and the same fiscal year and to better align with the fiscal year and our retail partners.
Today Nautilus is reporting financial results for the period January one 2021 to March 31, 2021 referred to as the transition period.
On the call from Novelis are Jim Barr, Chief Executive Officer, and <unk> 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 earnings press release was issued today.
At <unk> 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.
On today's call we have a presentation accompanying the call that 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 now by going to Nautilus, Inc. Dot com and click on the investor's tab.
And then click on the events and webcast and the presentation will be there.
I'd like to remind everyone that during the conference call Nautilus management will make certain forward looking statements. These forward looking statements are based on the beliefs of management and information currently available to us as of today such forward looking statements are not guarantees of future performance and therefore, one should not place undue reliance on them on.
Our actual results will be affected by known and unknown risks trends uncertainties and factors that are beyond our control and ability to predict.
For additional information concerning these factors please refer to the safe Harbor statement into our SEC filings, which can be found in the Investor Relations section of our website.
And with that it is my pleasure to turn the call over to the knowledge the CEO Mr. Jim Barr.
Thank you John.
I'll spend the first part of today reviewing the exceptional performance in our 2021 transition period, and then move on to the progress we've made against our North Star strategy.
In this transition period, we delivered record breaking results for the second straight quarter and produced our highest revenue quarter in company history.
Results were driven by leveraging the continued strong demand for at home fitness along with the team's impressive efforts to solve unprecedented challenges in global logistics, bringing supply much closer to matching demand.
Our growth and profitability contributions were once again broad based across brands segments products and geographies.
For the transition period net revenue was up 120% to $206 million. This is the first time revenue topped $200 million and our 35 year history.
Excluding the divested octane business revenue for the period was up 143% year over year.
The direct segment grew 115% crossing the $100 million Mark for the first time in segment history, while the retail segment grew 183%, excluding octane and posted its second highest quarterly revenue second only to last quarter.
Importantly, international revenue grew 200% versus last year or 340% excluding octane inter.
International is a smaller part of our business, but it is an important beachhead for continued growth.
Strong sales of our new connected fitness cardio machines, bellecourt bikes, the new treadmills and Max trainers combined with continued momentum of our select tech strength products drove these record numbers.
The market reception to our new connected products has been tremendous and we are proud to have introduced our brands to hundreds of thousands of new customers.
Acquiring nearly 340000, new customers in the last 12 months.
We've achieved strong growth in journey memberships from connected product sales and I'm really pleased with the progress that the team is making and responding to member feedback to maintain and further build out our world class fitness experience and journey.
As we show during Investor Day journey membership growth accelerated after we introduced our first embedded screen product in September and at the end of March we had nearly four times as many members as we did at the end of September.
Despite pressure from increased inbound and outbound logistics costs higher commodity prices, including steel and electronic components and continued foreign exchange headwinds gross margins came in higher than expected.
Operating income for the period was $40 million, our third highest in company history.
EBITDA was $40 million compared to just $2 3 million last year.
And leading to a dramatic change in year to year cash and short term investments. We ended the period with $113 million of cash and short term investments.
Which has us very well positioned to invest in Northstar and our company's long term growth.
I'd now like to turn to an update on the execution of our North Star strategy.
We unveiled this strategy on March 18th at our Investor Day.
Hope our enthusiasm for the future of Nautilus came across and that you gained a greater understanding of our long term objectives and goals.
This is a great time to be in the at home connected fitness industry.
A portion of the Tam former gym goers are shifting into home fitness and we believe our Sam our serviceable addressable market has at least doubled and.
And the now full year since the pandemic hit habits and attitudes towards at home fitness have changed in profound ways.
Consumers experience at home connected fitness and saw that technology could deliver on many of the elements. They could no longer get from the gym trainers online classes connectedness community and variety.
We have closely followed the sentiment of consumers since the beginning of the pandemic and the trend has stayed remarkably consistent.
We still see that 25% of former gym goers do not ever plan on going back to the gym as many have found they prefer the convenience and safety of working out at home, which now has the added benefit of a more digital offering tact with variety.
We also believe the emerging work from anywhere model will be widely adopted and helps sustain the demand for our products and services.
Studies indicate that two thirds of U S workers prefer a hybrid workplace and many of the world's largest employers already are committing to hybrid and remote work alternatives.
As a result, we believe a meaningful number of gym goers will continue to work out at home on day to day work from home. In addition to maintaining their gym memberships balancing between home and Jim based on their work schedule.
Our strong brand heritage of product innovation and wide on the channel distribution are key strengths that we can build on as we enter the next phase of our company's evolution and build out our digital capabilities.
We are transforming novelist from a product led hardware company to a consumer led digital company.
Our strategy is rooted in five pillars designed to position Nautilus to deliver long term value.
Including revenue of $1 billion.
In 2026, which equates to a 10% CAGR over the next five years.
While we may have just introduced investors to Northstar and the vision in mid March It has been part of our organization for a few months now at Investor Day, We highlighted what we called early points on the board such as the sale of octane and personnel changes that enhance our capabilities and I'm pleased to report that this quarter. We continued to may.
Important progress.
One of the biggest opportunities is to become consumer obsessed which is pillar number one of Northstar.
This means consistently working to deeply understand consumers and their needs and wants around fitness, which becomes the underpinning for our product and digital roadmap.
We have evolved our media choices and are using more digital tactics to efficiently reach target consumers with newly refreshed marketing messaging.
The key takeaway is for consumers to note that Bowflex offers a broad portfolio of connected cardio options as well as industry, leading strength products something for everyone really.
As I mentioned earlier, we acquired nearly 340000, new customers in the last 12 months another clear indication, we dramatically expanded our serviceable market.
Our ability to continue to engage with these consumers and capitalize on their propensity to buy more than one product gives us confidence in future healthy top line growth.
We plan on returning to pre COVID-19 levels of marketing spend in fiscal 'twenty two.
In March we introduced new creative that further speaks directly to the needs of gym goers, who what variety in their workouts and also want to be pushed to get their very best work out every time.
It is still very early days, but we are extremely pleased with the initial results.
Pillar two of our strategy is to scale journey. Our members have told us they want variety hyper personalized one to one adaptive workouts immersive experiences like explore the world and trainer led workouts on and off the equipment.
We're meeting these needs through our innovative lineup of connected fitness products powered by a continually evolving digital platform journey.
The seven embedded screen Dirty offerings, we launched in the last few quarters to value for bikes and the <unk> seven by two new treadmills, and <unk> and the <unk> nine Max trainer continues to be tremendously successful.
We will be introducing an eighth product Max total in the next few months.
As I mentioned earlier, we've seen a four times growth in membership count since we launched our first first embedded screen product in September 2020.
Not only are we rapidly accelerating growth of our member base, we are constantly innovating and improving the journey experience.
In the quarter, we added new adaptive workouts expanded the number of explore the world routes and added new video content, including some new off machine trainer led content.
And a few days ago, we launched the latest version of journey mobile the <unk> experience.
It's important to acknowledge that we're just getting started equipment and digital experiences are considered together on the consumer purchase path and we plan on making incremental investments in journey. This year as we continually improve our members' experience.
We are reiterating our fiscal year end 2022 goal of 250000 members and our longer term goal of over 2 million members, which equates to approximately 20% of revenue being digital by fiscal year 2026.
Journey is critical to our North star strategy as it enhances and differentiates our award winning products and we need to ensure we capitalize on the opportunity in front of us.
Our progress on vision has also helped us attract talent. This quarter, we have hired a world class Chief supply chain officer, John Gals to lead us in continuing to turn our supply chain into a strong competitive advantage and an incredibly accomplished chief people officer, Ellen range, who will help us leverage our talent into our strategic advantage.
<unk>.
Ellen is replacing an awesome 18 year Nautilus veteran Wayne Bolio, who retired last Friday.
We thank Wayne for his incredible leadership, and we wish him and his wife Grace the very best in their next stage.
As on a discusses our plans for the first quarter of fiscal 'twenty, two you'll hear that we plan to leverage our strong cash flow and increased investments into the digital future of our business.
As discussed during Investor day, we will be making investments in the following areas.
Journey marketing innovation and technology.
Product cost to accelerate membership growth.
People and capabilities and partnerships and tuck in acquisitions.
Our intent is to reinvest a portion of our operating cash flow on a pay as you go basis.
This means our objective is to continue to be profitable. Unlike some of our competitors, while we invest in our long term vision.
As we discussed the areas of focus and investment that we have planned for this fiscal year. It is important to bridge to the tremendous opportunity that our north star strategy offers and reinforce our view on the long term trajectory of this business performance.
To that point as part of our Investor day to illustrate our ambition.
We provided long term targets for fiscal year 2026.
We said, we wanted to cross $1 billion on revenue.
With 20% of revenue coming from digital subscriptions.
And that our goal is to reach 2 million members by the year end of 'twenty six.
We wanted to highlight the strong upside we see in our digital transformation and share additional perspective about the long term operating margins for the total company as well as equipment and the digital side of our business for.
For the total company. We previously said that we expect a floor of sustainable operating margins of at least 10% by fiscal year end 2026.
The intent of this statement was to establish a more reliable long term baseline for profitability and to emphasize that unlike the nautilus the past double digit operating margins should be more sustainable due to recurring revenue from journey and a more balanced portfolio of products and services versus an overreliance on hero product revenue.
This statement did not fully illustrate the upside of the transformation to the new operating model.
To provide more insight into the expected upside of that range, we are providing the following updated information.
Total target target operating margins are projected to be well above the minimum 10% on closer to 15% by fiscal year end 2026.
The rapidly growing digital subscription business journey is expected to have operating margins in the range of 20% to 25% by fiscal year 2026.
As membership numbers rise in the digital business begins continues to scale.
The operating margin rate for the journey business is expected to continue increasing beyond fiscal year 2026.
As a result, we see a path to total company operating margins sustainably moving higher than 15% after 2026.
Our equipment business margins are expected to normalize given the return to typical advertising spend and the incremental costs related to higher mix of products with embedded screens, partially offset by improvements in the cost structure.
As I mentioned on Investor day, the past 2026 operating margins may not be linear as we intend to invest in the business opportunistically to accelerate the growth of the subscription business and the achievement of our Northstar vision.
We are confident that this additional transparency will help underscore our conviction in the North star strategy and the path forward for the new Nautilus.
We are transforming into a company that will deliver more predictable top line growth and sustainably higher long term margins because of a growing recurring revenue of digital subscriptions.
Using a long term ROI lens, we'll reinvest a portion of our earnings and investments that deliver the requisite ROI and bring us closer to achieving our fiscal 'twenty six goals of $1 billion on revenue and $2 million journey members.
As I close I'd like to emphasize how incredibly proud I am for our tremendous progress and the accelerated turnaround and growth transformation of our company that will take Nautilus to places it's never been before.
We werent equipment only company that suffered multiple years of revenue declines on a large loss in 2019.
Pre pandemic, we began to address the fundamental causes by adding bikes that had a stronger value proposition changing our go to market approach and adding key talent and capabilities.
During the pandemic, we are fully leverage the market opportunity to produce record breaking financial results, including back to back the two best quarters in our 35 year history.
We also built assets, we believe will last well beyond whatever it is whenever it is that the world gets back to its new normal, including new customers greater retail distribution.
And enhanced team and cash on the balance sheet.
Finally.
We have now have a strategic vision that will take our company to a place it's never been before.
Providing a differentiated winning fitness experience that is driven by consumer insights and combines equipment and digital experiences that put us in partnership with our members on their journeys to achieve long term success.
We are committed to putting.
We are committed to putting.
Sorry.
Committed to putting our consumer first and our entire organization has adopted this mindset as we work to advance our vision of a healthier world one person at a time.
When we achieve our transformational vision, we not only will it turned the company around but it will be a new kind of company more on trend more digital and better prepared to be a leader in the fitness industry.
We are proud of our accomplishments, so far and even more excited and passionate about our future.
With that I'd like to now turn it over to <unk>, our CFO who'll go over our financial results on next year's guidance in more detail.
Thank you Jim and good afternoon, everyone.
I'm going to refer to the three month period ended March 31, 2021 at the transition period, and we will be comparing it to the same three month period last year.
As Jim covered earlier, our net sales were 206 million up 120% versus last year.
143% excluding octane.
Gross margin increased by 40 basis points to $38 four per.
Gross profit was $79 million up 122% versus last year.
The deceleration in margin rate improvement is because of continued inflationary pressures on product landed costs and FX as the renminbi continues to strengthen.
Operating expenses grew by 9% to 39 million net leverage at the rate of sales to 19% versus 39% last year.
Selling and marketing expenses were down 5% to $23 million or 11% of net sales compared to 25 million or <unk> 26 per cent of net sales last year, driven by a $3 million decrease in media spend.
R&D costs were up 1% to $4 million or 2% of net sales.
Two 4 million or 4% of net sales last year.
Driven by increased investments in journey.
G&A expenses were up 58% to $12 million or 6% of net sales this year compared to 8 million or eight per cent of net sales last year.
Primarily driven by bonus and stock comp and investments in Germany, and other north star initiatives.
Operating income increased to $40 million.
Versus last year's loss of 600000.
Driven by increased gross profit.
Income from continuing ops increased to $31 million or 94 cents per diluted share.
Compared to last year's income of 2 million or eight cents per diluted share.
EBITDA from continuing ops improved to $40 million compared to $2 million last year.
Turning now to performance by segment.
Direct segment net sales were up 115% to an all time high of $102 million.
Strength grew 179% driven by both <unk> weights and home gym.
Cardio grew 96% driven by our connected fitness bikes Bowflex <unk>, six and schwinn IC for in our new Bowflex connected fitness treadmills.
We're really pleased that direct backlog at the end of the transition period was down to 27 million from $46 million last year.
Appliance coming closer to meeting demand and our consumers are getting their product faster.
Gross margins declined by 120 basis points to 50% driven by higher landed product costs growth.
Profit grew by 110% to $51 million.
Segment contribution was $28 million versus last year's 2 million driven by increased gross profit and lower media spend.
Turning to retail segment results.
Net sales were $103 million up 127% versus last year, 183% excluding octane.
Strength grew up.
243% driven by both life, Tom Jim since the life Tech Winston benches, cardio was up 96% driven by Schwinn and Bowflex connected fitness bikes and the new Bowflex connected fitness treadmills.
Similar to direct we were able to reduce retail backlog a quick note on this.
Further refined our retail backlog to include all unfilled future retail orders.
We used to report only current orders that should have shipped that quarter, but missed the cut off.
At the end of this transition period retail backlog was $179 million.
The comparable number for last quarter was $209 million.
Gross margins expanded 340 basis points to 26% driven by favorable customer mix and fixed cost leverage partially offset by higher landed product costs.
Gross profit grew 161% to $27 million.
Segment contribution was $20 million compared to $2 million last year, the improvements primarily driven by higher gross profit.
Turning now to other highlights.
We entered this period with a much stronger liquidity position.
Cash and short term investments were $113 million compared to $26 million last year.
Debt levels decreased to $14 million from $28 million last year, and we had $54 million available for borrowing on our wells Fargo credit facility.
A R was $89 million, 159% higher than last year, driven by the timing of customer payments on increased sales.
Trade payables from $99 million up 189% versus last year, primarily due to timing of inventory payments.
Inventory was $68 million compared to $35 million last year.
As a reminder, our inventory levels at the end of March 2020 were unusually low.
Selecting the initial surge in demand due to the first set of stay at home orders.
We had about $216 million of Noncancelable post the end of the quarter.
<unk> to $35 million for the same periods last year.
Turning now to our forward looking guidance.
When we unveiled our long term strategy in March I said that at this earnings call I would give a perspective on fiscal year 'twenty to you one of our norstar long range plan.
While many areas still struggled to battle COVID-19, I mean keep them on our thoughts we are thankful to see progress towards returning to normal.
We're committed to communicating the progress of our transformation and expected impact of our North star investments.
While balancing the need to further learn how market conditions will evolve over the coming months.
Perhaps the most helpful approach, we can take at this time is to communicate trends. We're currently seeing.
First we remain bullish about the industry.
We believe our Sam as increase on the strategy. We unveiled several weeks ago has a bright line to capitalize on this tremendous growth opportunity.
Orders from our retail partners have not abated from previous quarters and this segment is driving the growth in our upcoming quarter.
Further we are highly encouraged by the strong reception to our new connected fitness cardio products.
Sales of these products are growing at a much higher rate than non connected products across both segments and represent a larger portion of our cargo equipment sales versus a year ago.
Our research continues to show that about 25 per cent of gym goers have no intention of returning to the gym and that those who want to return to the gym and tend to have an option to work out at home coinciding with our hybrid return to work plans some days at home on some days at the office.
Our research also indicates that people intend to spend a greater share of their wallet on out of home activities during the holiday season.
And at the same time direct traffic more so much higher than calendar 2019 is suggesting a return to more typical late spring seasonality trends.
Our guidance for the first quarter of fiscal year, 'twenty, two which is the three months ending June 32021 incorporates these trends that I've just mentioned.
But the first quarter of fiscal year 'twenty two.
We expect net sales to grow between 40 and 50% versus prior year or.
Between <unk> 51 per cent of 62% when excluding octane.
This assumes no new major challenges in global logistics or atypical end of quarter flow of goods.
Compared to last year and consistent with prior year, we are experiencing gross margin pressures from related to FX and pandemic, driven inflationary increases in steel and plastics and higher global logistics costs.
Additionally, in Q1 fiscal year 'twenty, two we expect incremental cost pressure due to the global microchip shortage.
As these chips are a key component of our embedded screens were investing in spot buys to protect supply and meet up and stuff.
Customers demand for embedded screen products.
We have temporarily paying 40% plus more for spc's much more elevated pricing than we experienced in the transition period.
We have a slide in the presentation to help investors understand the impact of these factors on Q1, 'twenty two's operating margin.
It's important to begin with a normalized operating margin of $14 two for the quarter ending June <unk>.
For the quarter ending March 20, <unk> June 2020, operating margin, which reflects the return to normalized media spend.
We are expecting a five point impact to gross margin related to commodity FX global logistics and spot buying of microchip.
These external factors are temporary in nature, but are likely to continue for the next few quarters.
Additionally, we expect our retail segment to be a larger percentage of total sales versus last year.
Given this is the quarter when retailers begin their load ins for holiday.
This shift effects margins by about one and a half point.
The next set of impacts are related to strategic investments.
We told you at Investor day that we intend to reinvest a portion of our cash flow from operations and Northstar with a particular focus on journey marketing supply chain and it infrastructure.
We call this past week because it means our objective is to balance both near term and long term obligations.
<unk> will first seek to generate an appropriate amount of operating income, making sure that variable cost move with sales.
Then we'll evaluate the next tranche of North Star investments moving forward on the ones that will get us closer to our 2 million members and deliver the requisite long term ROI.
In Q1, 'twenty, two we are making incremental investments in journey and supply chain.
Some of these costs had Cogs and SG&A.
These investments have attractive rois on our critical drive digital transformation.
The last point on the waterfall, which I've called operational improvements includes things like price increases that will go into effect on a rolling basis throughout the quarter.
And the benefits that we're starting to realize from the divestiture of octane.
As a result of the short term gross margin pressures discussed and our intentional investments to build the new Nautilus, we're expecting operating margins for the quarter to be between six and a half and 8%.
Turning now to our expectations for the full fiscal year 2022.
Like many other companies, we're still working to understand how our consumers will react once herd immunity is reached we will continue to follow our past we go philosophy on evaluating additional investments in Northstar.
We'll give you more color on our expectations for each upcoming quarter when we report earnings.
At this time, we are providing full year capital expenditure guidance.
Net capital expenditures to be between 12 million and $14 million with the majority of the investment earmarked for Germany.
And we are reiterating that we expect to have 250000 journey members at the end of fiscal year 'twenty two.
Now I'd like to turn it back over to Jim for his final comments Jim.
Thank you Ina, we're very well positioned to solidify and build on our profound turnaround.
And for continued strong long term growth and profitability as we transform into a digital leader in fitness.
Our North Star is the absolute right direction for the company. It has traction and it is already generating early positive results.
I want to end by thanking our employees and our partners for their commitment to our mission you inspire me every day and.
Over a year into the pandemic I am blown away by what you have accomplished and proud to be your leader and.
And now I'd like to open up the call to your questions operator.
Thank you ladies and gentlemen at this time, we will conduct a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a confirmation total indicate your line is in the question queue.
You May press star two if he would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Mike Swartz with Truest. Please proceed with your question.
Hey, good evening guys.
Just wanted to touch on the 2000 22026, our long range targets and specifically on on the margin.
The outlook that you have now changed and understanding the 10% that you gave US a couple months ago was just kind of a base line.
Now going to the mid teens range, maybe give us a sense of just maybe what's changed in the past several months to give you more comfort.
Net margin should be a couple of points higher.
The low end of your expectations back in back in March.
Sure I'll start and I'll.
Ask I know the follow on so first of all I think the real answer to your question is there has been no change there is no more information available.
We just wanted to provide more clarity.
On what was going on we provided we emphasized as you know that we wanted to get at least 10% operating income and then it would be sustainable that is true, but it's more of a comment on the floor. Then it is the upside.
So in retrospect, we said look we'd like to provide a little more clarity to add to what we said before not change it just add to it that we've got upside in that range. So we've always had these numbers they've always been in our model. It's what we've always believed in.
We just wanted to make sure we provided more transparency and a greater look at the upside of what this business is going to deliver.
Once it gets to 2026 that makes sense.
Did you want to add.
No no I think you've covered it.
The main clarification is instead of giving a range of only gave the floor. We now feel like it's appropriate to really talk about like where it's more likely to end up.
Okay. That's extremely helpful. And then if I just kind of parse through the targets and then again specifically on the margins.
Given what.
On the margin target is for the subscription business it looks like you're kind of calling out the low double digits, maybe even low teens for the equipment business in terms of operating margin you have done that in the past, but in the past when you achieve that you didn't have the benefit of a lot of the optimization initiatives that you've undertaken over the past year plus so maybe you can give us.
Some more color or context around.
Why that's the right number for equipment margins share.
Sure I'll start and again, we'll ask on to add on so for.
For the equipment business as I pointed out we've got kind of downward pressure on.
On forget about the short term stuff that short term, but on the long run you are still going to provide screens and put them on machines that didn't have them before that is going to have some downward pressure. There may be some things like last mile distribution that will that consumers will begin to demand even more there.
So there's a there's a lot there's a lot of things that are changing in our business over time right now youre not seeing the full impact of that because there arent screens on everything but that's the way we're going.
And so they'll there'll be those downward pressures I know what else would you add to that.
Nothing I don't have anything to add just want to reiterate it's the screens and also that expanded increased customer touch point like final mile and the orientation before it was a little bit of you bought something we dump. It on your front step and we never hear from you again. This is a little bit more than that and we're just incorporating that into our <unk>.
Margin, Yeah last mile kind of becomes our first touch point or one of our early touch points as we talked about in Investor day. So we want to invest in that and we've got we've got that in the in the projections.
Okay. That's helpful. And then maybe just one final question from me if I may.
It looks like Youre, turning back on marketing pretty heavily particularly here in the first quarter.
Is that are we to read that.
Uh huh.
A sign that you now have the capacity you now have the bandwidth to meet demand.
It's been more normalized shipping windows.
While we are seeing as I talked about we're seeing kind of more seasonality indirect.
Assuming that hey, this is going to be more like a normal a normal season.
So we're just going to return to the normal level of advertising looking at the ROI, it's very much it works like a variable cost and.
What will drive the revenue based on that so, yes, we're getting closer and closer to supply meeting demand, especially in the in the direct segment that we're seeing first retail very very strong, but we want to do advertising for all of that and of course, we've got still pretty new products to that we want to talk about and then increasingly we own.
Talk about journey I mean, it's you know about it but we need more consumers to know about it because the purchase path really.
Total cost of ownership or you look at the actual equipment, how it works innovation things like <unk> and leaning and all of that and you also think about hey, what's the what's the membership experience what content do I have what keeps it interesting day to day and so we're going to we're going to you'll see a lot more of a journey and our advertising as well so.
And we want to spend some money on that so hopefully that answers. Your question on anything you want add anything.
Jim.
Okay, great. Thank you thank.
Thanks, Mike.
Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.
Hi, good afternoon.
Couple of questions I, just wanted to make sure I've got though the waterfall right. So.
Or are you kind of implying I guess mid 30% gross margins for the second quarter, just going through that kind of waterfall.
Similar yes.
Okay.
The five points from product cost increases.
100% in Cogs and then.
Journey is mostly in Cogs as well.
Okay perfect.
And then on the gross margin in the kind of the chip shortage impact on logistics and all of that I mean is this it.
On a situation that based on what you know now it gets worse before it gets better I mean, I know you mentioned that it might be a couple of quarter issue, but I'm just trying to think about the impact to the business.
And as well as to your your back orders.
Yes, I mean, I'll start and <unk> can jump on to yes.
Yes, I mean, it's tough to tell it's like you know we look at the steel prices. Similarly, and say look that's got to be COVID-19 and balance of supply and demand driving that and that should come that should come back and.
That's why we think these things are temporary but what what constitutes temporary how the world how quickly the world gets back to being balanced on its various commodities and inputs too.
What we all enjoy.
That's not exactly clear when we say short term, we don't know if it's going to be a couple of quarters, but we don't think it's going to be longer longer than a year. For example, but we're just guessing like everyone else.
While we did make a decision to do though is to pay more for it to make sure. We had the flow of connected fitness equipment that is the installed base for for our journey membership so.
We thought it's worth paying a little bit more for that component and making sure that we don't have a more restricted supply of those and we can meet consumer demand for that so.
I think the answer is we don't know it certainly doesn't act like it's a long term problem, but I don't know when it exactly abates, so we baked it in at.
At least at least through this quarter.
You want to add anything on it.
So share on the way I'd put it as similar to when we started recognizing that this was not a sprint for the pandemic. When we started ordering from our supply or several quarters in advance. We're assuming that this is going to be it's a temporary situation, but not a sprint. So we wanted to make sure that we have enough.
Put aside in our supply chain that we can meet demand through holiday and where.
I think the one part of your question maybe didn't get too is that we're not anticipating it gets worse from where it is we think it's pretty it's pretty bad right now in terms of the spot prices.
And we're not anticipating it gets worse, but again, it's a crystal ball exercise.
I guess, that's a good time to have a new chief supply chain officer.
Sure Ananda.
I think he is he's been on the job less than 45 days, but.
Is there any kind of low hanging fruit that he's identified or like what what is his other than getting chips why why does is his.
As a major thrust of what he's focused on for 2021, Yeah. I mean, as we discussed at Investor Day, and this as you walked in the door to these these things I think short term, it's meeting supply with demand, we still have elevated elevated demand.
Especially in certain products, where we just plain can't even see a way to make make enough of them still so we've got that so he's got to bring that closer and he is working with our very valued suppliers to see.
Better transparency no no what they can make and how quickly they can make it and so he is working on that short term and then long term, we kind of referred to our China plus strategy. We will continue to make things in China, but we'd like to diversify a bit globally, and so that'll be a bit of a longer term thing.
We are we are looking at a.
Third DC to handle all this volume this year that we're going to bring online so he's going to help help bring that online as well.
So he's got his hands full as you pointed out and you know he.
He is.
Bill Mcmahon, who has been doing this very well for US has done a great job, but it's great to have somebody who's spent their career in supply chain and global sourcing in particular to go after after these types of things and so we have high expectations.
John doesn't let us down so far it's looking at he is looking great. He has landed extremely well just started April one.
<unk> already making a great impact.
Alright, okay. Thank you.
Thanks Sharon.
Our next question comes from the line of Steve Dyer with Craig Hallum. Please proceed with your question.
Good afternoon, Jim and Diana. Thank you for taking my question.
I don't want to.
Overkill, the commodity cost chip et cetera.
Yes, Jim.
Are you far enough into it to where you feel like from an operating margin perspective, given all the moving parts the six and a half from.
Sort of a baseline or a low watermark for the year, just assuming that everything eases a bit from here.
I'll ask either to jump on that one.
<unk>.
I would I think it's a good it's a good baseline I put them on to say, it's the low watermark because.
You know, we thought transportation costs were really bad like in Q3 last year and then it got worse, so I'd like to say like as far as we can see this is a good baseline and every quarter. We'll update you if we see something different.
Got it.
And you've talked a little bit about retail vs direct within the direct segment I guess, you alluded to it as being sort of more.
Normal seasonality normal seasonality for the June quarter historically.
Jim on the Ida.
Was was fairly soft and I think would work.
It seems to indicate a pretty significant softening versus the last several quarters just any.
Any other color there that you could sort of help US you know.
Maybe the last 45 days.
You're seeing there relative to the previous call it six months.
Yeah, I mean, I'll start on that one and two and I'll ask on to jump on after so I think it's just normal seasonality right now people are going outside.
If you look at Google searches for all sorts of turns related to.
Fitness and its down significantly probably started January late January early February like the normal seasonality would do.
Still stayed pretty high, though and then a little bit further down as the weather began to get get better so it looks exactly like.
Normal seasonality, whereas you look at the retail business of course, they're thinking about.
The other side of that seasonality when people are really back to looking at fitness equipment and now with this elevated demand maybe doubling of the category, they're all trying to load up for the for the holiday. So we're very confident in the in the holidays, but the short term as always seen so I don't know if that has any additional.
Color, but it's things that as you can see in kind of non.
In public information as well that the interest in the category is sort of what we'd call on a normal non COVID-19 year, which I guess, maybe we as a society should feel pretty good about.
You want to add the one thing I'd want to add Steve is don't forget we still working through a bunch of backlog so the underlying kind of traffic and <unk>.
Demand currently is probably more like the normal seasonality, but because we still have that big backlog. It may not look like that from the shift revenue perspective.
That's a great point, that's a great point, so you're working off that backlog that we had coming into the quarter.
Yeah, Yeah, that's what I was trying to get a little bit last one from me just as it relates to Germany, you talked about 250000 members by the end of the year are you able to sort of characterize does that imply an acceleration is that sort of the rate that you've been kind of adding over the last call it year or so and then if you assume.
I'm sure that those would be mostly all paid subscribers I know on Investor Day, you had talked about maybe doing some promotional stuff to sort of get people on an ingrained in the user experience.
Yeah sure no problem.
Sure.
We're not providing any additional guidance on that we just wanted everyone to know look we've said it once at Investor day.
And we made it again, we are still on track to do that it's what the organization is focused on getting early traction in membership.
Is super important to our long run and so we're putting a lot of emphasis on that in terms of our our goal setting and things like that where we're definitely.
Seeing the increase in embedded products definitely helping but that was the way. It was before we're continuing to see the mix of embedded products.
You need to accelerate so that definitely.
<unk> us going forward in terms of paid in paid in regular look we're early in this business. So that's.
That's a that's a level of detail that we're not providing at this point that you can imagine that where we're going to promote journey, we're going to make sure as many people get to experience. It is possible. It's got a great price. It is very attainable, but we'll run promotions on that as well so.
We'll definitely do that we want people to try it already we're doing.
Two months free and we May try other other types of marketing to get get members even faster than that so hopefully that gives you something.
But really not a lot more than what we talked about before.
Got it alright, thanks, Thanks, Dave.
Our next question comes from the line of George Kelly with Roth Capital Partners. Please proceed with your question.
Hey, everyone. Thanks for taking my questions.
So just a few for you first.
Jim in your prepared remarks, you talked about a new Max trainer product.
Just curious if you can tell us anymore, whether its timing or anything about that product and also should we expect additional I would call that a big sort of one of your big Skus should we expect additional product launches this year.
Yeah sure. So first of all we're not providing more information as one of the few public companies in the space on any more of our product launches and we've been so ambitious the last.
12 months or so getting all of these things things out there, but we do have a great innovation pipeline, but we're not going to talk.
Any any more more about about that going forward back to the Max total, yes, we've talked about it before.
Essentially it's the top of the line Max trainer.
And.
We're excited at the bigger screens on the last Max trainer.
And therefore.
And therefore, it really gets to benefit from journey that was as you would know following us for a long time the Max total.
Last time.
Was the only embedded screen products, we had until September when we went to <unk>. So now that we're kind of refreshing everything across all those lines, including all the way to the top at the at the Max total which is.
Which is going to be a great product and as we've talked about before that high intensity interval workout.
That comes from the Max trainer is enhanced with.
With journey training, so and journey running it. So we're really excited that more and more people will have that that great experience.
Okay, Okay, and then a couple of questions on the retail business.
So I guess you answered that.
Retailers are just sort of floating up for the holiday season, but how is retail inventory do you feel like.
Thats looking more healthy and then second part of your question is.
What is your so your journey embedded.
Compatible machines do you feel like you have a good selection at retail of these machines.
Net off Roger journey Yep no. Good good question, so the journey embedded and the inventory, yes I would.
Maybe I know you want to take the inventory one and then I'll come back on embedded.
I want to make sure I understand your question George are you asking how I feel about the inventory at retailers our inventory for our retailers.
Inventory at retailers I'm, just trying to see if.
What we're seeing is retailers, just finally sort of replenishing their inventory.
So sell through has been really good. So we haven't seen any kind of deceleration there sell through so but I think similar to what we wanted to do also for direct where people just one on not being that really deficit position. We were in last holiday, where they might have built a little bit of a safety stock that might be what's driving it but their sell through is fine.
Hmm.
We are accommodating there, they're they're ordering for not just this quarter, but next quarter on the quarter after that order. So we're meeting that demand.
Yes and of course, yes.
Exactly exactly right and so back on the on.
On the connected products look I mean, we went from one to nine of those in one year, we think its great selection across all modalities and price points.
Some of our retailers also have.
Have begun to sell some of the higher priced items for example, best buy so much of its work cells.
Selling online that they they've been going higher than the typical kind of retail price ceiling of $500. We still have several great products below $500 or you could buy retail that are connected but.
But now.
When you're selling even even even Dick's and Amazon Youre able to sell products more online and not worried about the floor space and the inventory per door and all that that typically has been eliminate factor for us we're able to sell more and more of these of these products at retail.
Okay, great. Thank you great great questions. Thanks.
As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line of Mark Smith with Lake Street Capital markets. Please proceed with your question.
Hey, guys first question from me is on the media spend can you just give us where that was in Q4 was that right at about 2% in the transition period.
And can you answer them unless you mean like last year.
No. This year, just the reported transition period.
Oh.
I'm going back from my notes ask your next question, but I just grab it.
No problem. My next question is really on international growth at retail really looks solid can you call out any specific geographies that are doing well and then maybe discuss opportunities to boost international sales.
And potential to really kind of hedge some FX in that manner.
So yeah.
Yes, so we have long done business in many countries through distributor shifts I think it's something like 30, some odd countries that we do business in with value distributor partners partnerships.
Recently, we have been making some traction.
Going more direct to retail.
Vs through distributor shifted just.
A limited number of countries and of course, there is theres better economics as you as you.
Approach it approach it that way in terms of geographies of course.
Canada, we call North America, So that's international but not really the way that we talk about it so outside of that and Thats been great growth outside of that it's it's Ben.
Europe that that has led the way for US we have very strong growth in Europe, and some great distributors and retail partners in Europe, and we continue to expand that particular business.
Perfect.
And then are you ready on the other one.
Yes.
I'm going to I'm, sorry, I can't find it easily I'll call you back and give you that number no. We can follow up offline. Thank you guys.
Here is on the actual median number it's 10 $10 million.
In fiscal year, this transition period to $10 million versus last year's 13 point too.
From 2.2.
Okay.
Thank you.
Thank you thank you Mark.
There are no further questions in the queue I'd like to hand, the call back to CEO James Bar for closing remarks.
Thank you to everyone on the call today and for your continued support of Nautilus, We're looking forward to talking with you again on our first quarter fiscal year 2022 earnings call on August <unk>.
Have a great rest of the day onwards and upwards.
<unk>.
Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.