Q4 2022 Nautilus Inc Earnings Call

Thank you for joining US today. This program will begin momentarily. Please remain on the line. Thank you for joining US today. This program will begin momentarily. Please remain on the line.

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Yeah.

Greetings, ladies and gentlemen, and welcome to the Nautilus incorporated fourth quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. It is now my pleasure to introduce your host Mr. John Mills. Thank you you may begin.

Thank you good afternoon, everyone welcome to not always the fourth quarter and year end fiscal 2022 conference calls.

Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer, and IRA Konold 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 question.

<unk> of our prepared remarks, our earnings press release was issued today at <unk> PM Pacific time, and May be downloaded from our website at Nautilus, Inc. Dot com on the Investor Relations page.

The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. Please note unless otherwise stated all comparisons in this call will be against our results for the comparable period of 2020.

For today's call we have a presentation that management will refer to during their prepared remarks on slide two is our goal.

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 Tab, and then click on the events and webcast and the presentation will be there for your viewing.

I'd like to remind everyone that during this conference call <unk> management will make certain forward looking statements. These forward looking statements are based on the beliefs of management and information currently available for us as of today.

Such forward looking statements are not guarantees of future performance and therefore, one should not place undue reliance on them.

Our actual results 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 and to our SEC filings, which can be found in the Investor Relations section of our website.

With that it is my pleasure to turn the call over to Donaldson's CEO , Mr. Jim Barr.

Thank you John and thank you all for joining us today.

As we have closed out fiscal 'twenty two I'm very pleased with the progress of our transformation and we are well positioned to continue our momentum as we begin fiscal 'twenty three.

On today's call I'll cover four key points.

Why do we believe in the long term opportunity second I'll update you on our Q4 and full year results.

Then I'll take stock in year, one progress on our North Star transformation I'll finish by discussing how we intend to navigate through the near term macro challenges.

We have recently.

Reinforced evidence that long term changes in habits favoring home fitness will persist pre pandemic about 40% of people for whom fitness is important worked out at home.

Two years later, even as more people headed back to the gym that number is close to 70% and has now held steady for a full year consumers have adopted a hybrid model for fitness similar to what they've done for work locations.

And our new target consumer segment, which we call enthusiastic cross trainers the importance of home workouts is even more pronounced with nearly 90% of them working out at home.

They are building home gyms with multiple modalities and are becoming more brand loyal.

As we predicted early in the pandemic the home industry more than doubled to two a peak then regulated from its high point and has trended down to its new normal level. We continue to expect the natural demand settle point will be well above pre pandemic. We believe in these long term trends coupled with our well.

Known brands strong product portfolio differentiated connected fitness offering and Omnichannel go to market position us well to capture the elevated opportunity.

Despite the strong long term positive outlook the opportunity for growth demand current demand is less clear.

Over the past several weeks, we've seen an uncommon and unexpected combination of factors conspire to slow top line momentum.

We have not seen normal retail orders due to their heavy inventory positions.

Fearful of not having enough inventory after holiday 2020 retailers ordered early in at elevated levels beginning in our Q1 last year.

Despite solid demand in seasonal sell through and the most recent fitness season, some retailers still have more inventory to sell through.

We are monitoring these inventory levels sell through rates and are assisting our retailers and working through their inventory to.

To enable reorders later in the year.

We have also experienced a rapid deterioration of the macro economic environment with elevated inflation and interest rates and declining consumer confidence the stock market performance.

Adding COVID-19 resurgence in China, and a war in Europe, and the current situation as both volatile and very challenging.

We have reflected these short term factors in guidance that I know will provide.

Next I will briefly review our financial results, we delivered fourth quarter and full year results that were in line with our guidance and underscore.

Strong execution in the face of post COVID-19 demand in a tough macro environment.

I'm very pleased with our team's performance in fiscal 2022 another historic sales year, demonstrating strong demand for our products.

For the fiscal year 'twenty, two net sales were $590 million, a 112% increase compared to the same period two years ago, excluding octane.

Fiscal 'twenty two was the second highest annual revenue in the last 15 years.

Turning to the quarter, our overall financial results were inline with guidance as we achieved fourth quarter net sales of $120 million down from last year's all time record high, but 41% up versus two years ago, excluding octane.

Our omnichannel approach and assortment of strength and cardio offerings enabled us to strongly compete and meet fourth quarter expectations.

Retail was up over 60%, excluding octane, a direct was up over 27% versus L. L y.

Our diversified product portfolio, featuring a wide array of modalities and price points worked as designed and helps us better weather the regulating industry demand for IC bikes.

For the fourth quarter, our research shows that we captured a number one market share in unit sales.

According higher unit volume than any of our competitors highlighting not only our popular products, but also improvements in supply chain capabilities.

Journey membership growth was also a bright spot as we significantly eclipsed our fiscal 'twenty two year end goal delivering 325000 journey members exceeding our goal of 250000 by fully 30%. We grew journey members by 200000 for the year.

I'll provide more journey highlights in just a few minutes.

Our adjusted operating margin rate guidance was also in line with the results even as gross margin continued to be affected by increased product cost global supply chain cost and discounting at the beginning of the fourth quarter I know, we will provide more color on these items shortly.

Turning now to year one of Northstar.

The first fiscal year of our transformative North Star strategy is complete.

Our path to transform not listened to a leading digitally enabled at home fitness company is on track and we are already showcasing what the future holds for the business.

Our strategic decision to accelerate key investments in our technology platform and marketing initiatives is paying off.

As we enter year two of Northstar, we are proud of the tremendous progress we've made.

I'll cover important progress across all five pillars of our strategy.

Consumer led customer progress.

Advancing our connected fitness experiences in bodied and journey.

Value and agility created by focus and disciplined execution as operators.

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And new capabilities and talent.

Northstar has a differentiated strategy embodied in our mission to empower healthier living through individualized connected fitness experiences.

And our long term vision to build a healthier world one person at a time.

Our employees fully embraced the strategy and are passionate about our progress.

The cornerstone of Northstar is transforming not less from a product led hardware company to a consumer led digital company over indexed historically in a consumer segment that generally did not enjoy exercise and we're seeking quick often unsustainable results at minimal effort, we moved to a new segment, we call enthusiastic.

Cross trainers for whom fitness is more important is the more important part of their lives.

That pivot has turned out to be on target and highly correlated with those who favor home workouts post pandemic.

As a result, we are very proud to have acquired new customers at three times the rate compared to pre pandemic with nearly 600000, new customers in two years compared to our pre pandemic average of about 100000 per year.

We invested in our top of the industry Bowflex brand began to modernize it and as a result purchase consideration so far is up more than 10%.

We have already leveraged this growing customer list with a rebuy rate that doubled in fiscal 'twenty two over fiscal 'twenty one.

As our customers build their home gyms.

We have nearly tripled the number of retail doors since the onset of the pandemic added many more retailers, making it easier for consumers to buy directly from us.

Or from a growing set of leading retailers.

Notably as I mentioned, we now believe we have recently become the market leader in unit sales.

Finally, we have enhanced the level of research about consumers. These insights now drive all product and go to market market decisions and the results are exciting.

Our second pillar of North Star is to become a leader in connected fitness journey. Our early stage digital membership platform is being fueled by our successful equipment business, which bears much of the cost of customer acquisition and provides the funds to develop improve and scale journey.

To that end so far we completed the launch of a new full line of cardio machines treads bikes and Max trainers, all running our differentiated digital platform journey.

Once we built journey to work with each of these modalities. This became the installed base from which to grow our connected fitness business.

Recently, we expanded the installed base by making it possible to use journey, even if you do not own a connected cardio product.

We have begun to include journey and Bowflex advertising under the tagline Bowflex with journey.

Bowflex brings users to journey and journey helps modernize the Bowflex brand.

As a result of these actions as mentioned I'm delighted to say that we ended fiscal 'twenty two with over 200 with over 325000 journey members.

Surpassing our original goal.

Because of the enhancements we made to journey in fiscal 'twenty. Two members are realizing how journey can help them meet their training goals through adaptive personalized training journey access it personal trainer and provide you with progress tracking by measuring and analyzing your improvements and continually adapting to your fitness level and goals.

In addition to the AI driven individualized adaptive workouts, we have expanded our instructor led content library added and added more of our popular immersive explore the world experiences.

Journey brings an industry leading level of variety to the fitness experience. It is available across both cardio and strength. It offers a variety of ways to work out which is what our target consumer craves and.

In addition.

So now having hundreds of thousands of people doing millions of workouts a year on journey, we have now begun to build our subscription business.

While it's still early I'm happy to begin, giving some additional journey metrics now.

Over 325000 members 20 times higher than fiscal 2019, when we had just one cardio product the Max total collectible to journey.

Of the 325000 members 111000, our subscribers.

Our year end subscriber count has increased nearly twentyfold since fiscal 19.

One of the things I'm. Most excited about is the installed base, we have built over the last two years.

In the slide we show how many units we sold of each of the connective all collectible the journey in 2020, a small number and by contrast at the end of fiscal 'twenty. Two we had a much larger installed base of connected both to journey cardio machines and have recently connected journey to our select tech weights.

In fiscal 2022 <unk>.

Approximately 80% of total units sold were connected to journey compared to only 22% in fiscal 'twenty.

Think of this chart is not only showing great progress, but also showing the potential for future growth.

Churn has been improving as we've shared we've begun offering one year trials in late September last year to scale, our member count and get feedback from a larger number of users about which features about which features they enjoy best and which ones need improvement.

As these one year trials begin converting to paid we'll be able to share more meaningful information about churn for now churn will be a factor embedded in the subscriber numbers.

We'll continue to update you and evaluate the best ways to provide visibility into journey and expect to expand metrics as they become more useful to evaluate our progress.

Looking forward, we believe investments we made in fiscal 'twenty two will continue to drive membership growth in particular fiscal 'twenty three and 23, we're really excited about additional enhancements to the select tech experience on journey last fall, we acquired way a leader in vision systems, we have been focused on integrating way.

Motion tracking capabilities into journey.

To further advance and accelerate our highly personalized strength workouts, including rep counting and form coaching with our product offerings as well as others. We are on track to begin beta testing. These features with consumers during the second quarter further enhancing the select tack on journey experience, we launched last November .

Bowflex has long been a leader in strength and we shipped more units of strength equipment than anyone else in fiscal 'twenty two.

Select Tech Dumbbells are wildly popular we believe attaching journey to 552, and 10 90 dumbbell purchases will serve as a powerful accelerator of journey memberships.

We want to ensure that journey continues to evolve and adapt to what our consumers want and love.

Wireless was late to connected fitness, but I'm incredibly proud of the progress and pivoting the company towards a future where we're helping millions of people work out every week.

Northstar included early focusing decisions that have paid off we exited the commercial business selling octane, we reduced skus by more than 25% and we have narrowed our brand choices.

While more than doubling our revenue at the peak, we increased our head count by less than 20% and intentionally kept our cost structure variable to maintain agility in volatile times.

We manage our company through extraordinary extraordinarily challenging times with disciplined execution.

All of this will not only help us navigate the business through inevitable cycles, but provide wherewithal to invest in Northstar.

Next I'll highlight supply chain, we shipped a record number of units in fiscal 2022.

Improvements in planning and execution across our supply chain, we're leading factors, which contributed to this achievement.

We made significant strides in delivery and cost for the quarter.

For the quarter, we experienced significant improvement in on time delivery at 95% and we successfully implemented a 4% cost reduction across our top 30 products.

We also successfully opened a new D C and southern California to expedite our supply chain by being closer to larger ports.

And lastly, we began diversifying our production facilities and expect by the end of this calendar year, we will be shipping product out of Mexico cutting down on transit time and cost of Pan Pacific Transportation.

For fiscal 2023, we expect to actively manage the situation, including align US a line of sight on inbound freight and third party storage costs. We also expect to capture cost savings from our distribution footprint consolidation with our decision to exit our Portland D C.

Finally, and most importantly.

We've made a lot of progress on our fifth pillar, creating organizational capabilities to win.

We've enhanced talent to drive North Star transformation recruited new leaders, including the company's first chief people officer.

Significantly refreshed our board of directors.

Added new capabilities and increased in house expertise.

Expanded our talent pool, given our hybrid work model, bringing in new skills and more diversity of thought experiences and backgrounds to drive our transformation.

This gives me additional confidence that the company has the ability to navigate near term volatility and ultimately deliver long term goals.

The opportunity in home fitness is strong and we position nautilus well to capture it.

We have the right strategy and Northstar it has taken root and our people have delivered incredible and tangible results.

I am proud of how we have moved the company to an exciting new place.

And being nimble and agile have delivered strong operating results in the face of an incredibly dynamic series of challenges.

We are already a vastly different company compared to fiscal 'twenty and our emerging from the pandemic much stronger and well positioned to navigate near term challenges.

We will draw on her experiences to keep our focus on the long run continuing northstar momentum while at the same time navigating a new set of unusual short term talent challenges, including current retailer inventory levels and volatile macroeconomic conditions.

We have several levers to actively manage these challenges, including gross margin improvement and efficient cost structure focus and disciplined execution. This approach will keep our long term strategy moving forward and also put us on path to deliver positive adjusted EBITDA for the back half of fiscal 2023.

I'll now turn it over to INO, who give us more detail on our fourth quarter financials, and our guidance for fiscal year 2023, I know thanks, Jim.

Today I'll be speaking to total company results for Q4 and will provide guidance for fiscal year 'twenty three.

Please go to our website to view our press release and the slides accompanying this call for more information on total company full year 'twenty two results and provide additional information on our segments.

I'll start with slide 16 of the presentation P&L results for Q4.

As discussed previously because I've heard the two highest sales quarters in our company's history in the back half of 'twenty one.

Joe will then part by pandemic driven demand.

Given the unique nature of last year's results, we'll talk about sales growth versus last year fiscal year, 'twenty, one and versus last last year in fiscal year 2020 to gauge our growth in overall company improvements when compared to more normalized results.

Net sales for the fourth quarter were 120 million down 42% versus last year and up 41% versus last last year, excluding octane.

Gross profit was 21 million and gross margins for 18% down 21 points from last year.

16 points of the decline were related to higher product costs logistics and increased discounting the remaining five points related to Germany investments.

Turning to operating expenses on slide 17.

And the acquisition of way in Q2 'twenty two.

The next few lines of the P&L had been adjusted to remove costs associated with the acquisition.

Please see our press release for a reconciliation to GAAP.

Adjusted operating expenses were 42 million or 35% of sales versus last year's $39 million or 19% of sales.

Selling and marketing expenses in our adjusted G&A expenses were flat in dollars to last year, but didn't have that consultative sales R&D costs were up 3 million, primarily driven by investments in Germany.

In fiscal year Q4.

On advertising was $14 million versus 12 million last year and journey Opex was $5 million versus $4 million last year.

Adjusted operating loss was $21 million and adjusted operating margins were negative 18% in line with our guidance and lastly, adjusted EBITDA loss from continuing ops was $17 million of negative 14%.

On Slide 18, we included a waterfall that describes a year over year change in operating margins.

The drivers of the year over year, despite our increased product costs logistics in this county.

Higher levels of investments in journey and incremental advertising.

Turning now to the balance sheet as of March 31.

Cash was $14 million.

Inventory at 331 was $111 million down versus the 128 million at 12, 31 and up versus the 68 million 12 months ago.

We're really pleased with how we're managing inventory down about 14% of the balance at yearend was in transit and importantly, our inventory is concentrated in our best selling skus over a quarter of our inventory cautiousness select tech weights and benches, which include high M. P S product like our <unk>.

Hey, I was $61 million in trade payables for $53 million.

That was 29 million versus 13 million at yearend and we had 66 million available for borrowing on our facility.

Before we turn to our expectations for fiscal 'twenty, three I'm going to talk about liquidity.

We had about 80 million of liquidity at year end and even with the seasonally lower Q1 revenue we are comfortable about our liquidity coming into the year.

James spoke to our ability to navigate the near term macro headwinds our confidence stems from the framework, we use as we were planning our star.

We started our strategy work pre pandemic and at that time, he assumed growth would come from taking market share.

We knew we needed to fuel for growth. So we make focusing decisions like selling octane to free up resources from our star.

We also prepared for the inherent volatility in this industry by creating a cost structure that was more semi variable versus fixed we've intentionally used a combination of employees and key outsourced partners to execute against our initiatives growing head count by only 20% since year end 2020.

This type of org structure allowed us to ramp up quickly during the pandemic, adding supplier partner capacity in Asia to meet demand and Onboarding Tech partner resources to calibrate joining development.

Today this structure gives us the flexibility to ramp down if needed in response to volatile sales.

Turning now to fiscal 'twenty three guidance on slide 20.

For fiscal 'twenty, three we expect to return to a more typical pre pandemic seasonality, where the second half of the year contributing more of the full year's revenue.

Typically the first quarter ending in June is the lowest revenue quarter with September quarter being second lowest.

The third quarter ending in December is usually the strongest with the fourth quarter ending in March being the second strongest.

As we started doing in the back half of fiscal year 'twenty, two we'll be comparing ourselves to the same period in fiscal year 'twenty and we believe comparing to the last P. Pandemic here allows us to better gauge of growth and progress.

We expect Q1 fiscal year 'twenty, three sales to be between 45 and $55 million or $50 million at the midpoint.

This represents growth versus pre pandemic Q1, 'twenty 'twenty of 4% excluding octane.

The more muted growth versus fiscal year 'twenty is driven by softer demand. This year as retailers are still working through the elevated levels of inventory.

Given lower topline and deleveraging of fixed costs, we expect Q1 fiscal year 'twenty three adjusted EBITDA loss of between minus 22 and minus $27 million.

Turning to the second half and full year 'twenty three guidance, we expect full year revenue of between 380 and $460 million.

At the midpoint this represents about 52% growth versus fiscal year 'twenty excluding octane.

Elevated inventory levels at retail partners are slowing down reorders and shifting them to later in the year. Therefore, we expect the second half to represent between 65% and 70% of full year sales.

Lately higher than pre pandemic second half seasonality of approximately 60%.

We're expecting the start of gross margin recovery in the second half and expect gross margins to be in the range of 27% to 30% driven by T actions, we've taken particularly in supply chain.

Northstar pillar.

We expect lower inbound freight as we have negotiated new rates that while higher than pre pandemic are much lower than the spot market rates last year.

Well, we're detention and demurrage fees as we digested the inventory we purchased last year.

We plan to close one of our Dcs at lease expiration. This fall and we won't be renewing leases for some of the storage locations be obtained at the height of the pandemic.

Additionally, we have negotiated lower cost for our top skus, new incoming inventory will have a lower cost base and lastly, while our guidance includes room for discounts to be competitive during fitness season, our better inventory position reduces some of the pressure relative to L y.

Given higher sales levels in the second half improved gross margins and our continued cost discipline to online variable cost in line with sales.

Back to deliver positive adjusted EBITDA for the second half of fiscal 'twenty three.

And we expect full year adjusted EBITDA loss of between negative 25 and negative $35 million.

Lastly, we expect journey members to cross the half million Mark at year end 'twenty three.

The board and the management team are committed to creating enduring shareholder value through our norstar transformation. We intend to continue appropriately balancing short term with long term and believe we have the liquidity and the flexibility to <unk>.

Having gone through this challenging environment.

I'll turn it over now to Jan for his final comments.

Thank you Ina I'm pleased with the progress we made in fiscal 'twenty two.

Looking forward our opportunity is great.

We have created the right strategy and made the right incredible progress all while executing in a disciplined way navigating in an incredibly volatile environment.

I'm very proud of our people in doing this.

So let me end by thanking all of our employees and all of our partners for their tireless dedication and support of our mission.

I'd now like to open it up for questions operator.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Information from my indicate your line for questions too.

You May press star two to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Please limit yourself to one question and one follow up one moment, while we poll for questions.

Our first question comes from the line of.

Steve Dyer with Craig Hallum, You May proceed with your question.

Oh. Thank you good afternoon, if I could start with just a couple on Germany first of all your guidance suggests 500000.

Members as of March 31st of all 22, I presume that that was supposed to read 23.

Oh, yes, yes, thank you I have that.

Thank good catch thank you.

Got it no problem and then yeah.

Just interesting slide $2 7 million our installed base are you having any success with journey kind of cultivating the installed base or are you I mean you.

Your new your new subscribers are new members to come sort of primarily at the time, they buy a new piece of equipment.

Yeah, I mean, as we've said it I'll just start and I don't know if you want to add anything to it. So as we said when we had the original member goal of 250000, we announced at Investor Day, a year ago, we talked about there being three ways to get to that number one is attaching to products at the time that you purchased them.

Two was to go back to the installed base and three was our partnerships over time and of course, when we're talking about a five year period, we want to consider all of those pass and we will continue to look at all those paths so for sure.

Selling at the time, you know selling the subscription and attaching at the time of purchase is an important thing in particular indirect where we have the ability to do that kind of nearly 100% in retail it's a little bit it's a little bit tougher we have to use some creativity to do that but yes that is very important and of course, when we start talking about things like churn.

Youll see that its lowest when it's in the console or an embedded experience and it's a it's more variable and at B Y O D experience, but yeah. We're having success on all of those all of those fronts, especially attaching to the products. We sold that's why that connected fitness.

Journey enabled portfolio that we began.

You know really shipping in the last.

18 months or so has really built that install base and that part is super important and then.

It's a big number when you look at dumb bells, and <unk> six in IC for and what we call. The the more connected bull instead of embedded those would be like B Y O D things, that's a little bit less of a take rate, which is exactly what we expected. When you go back to that but really the one thing we did see this year is the reorder.

The rate of our equipment go up and one of the reasons, we think that reorder rate is going up is because.

People don't want to really have a a different app for each piece of machinery. They have it used to be this industry was a bit more one and done and your second purchase didn't have much to do with the brand affiliation of your first one and we think that's really changing because we got a doubling of of that repurchase rate, but long story short, yes, we're seeing success across that about.

What we expected.

Got it thanks, Jim.

It relates to new products going forward you guys have done a very good job. The last several years of sort of rationalizing I guess, the SKU base and really focusing.

You'll look forward should we think about new products, new skus or is that primarily going to be focused you know the the innovation so to speak more on journey and the connectivity there.

No it'll be at all I mean really.

We when we talk about our mission, we talk about connected fitness experiences and we define that as typically a machine software and some content. That's what keeps people working out longer it gives them the variety they want so where we're up we're looking to innovate.

Wait on all those fronts. We think you know we're looking at the the way stuff I was talking about today. That's a good start we're not ready to announce our future products there, but we've done a pretty strong job on on cardio.

We're doing more on strength and we are all so theres a few items in cardio that will be we'll be working on but we're not ready to announce all of those but but yes mechanical engineering is alive and well here at at Nautilus, It's not just about about the digital experience you look at our.

A product like <unk> that does something different anything else doesn't you know being able to have their kind of a revitalization of the Max trainer, we still strive to innovate on both of those are both of those levels, both the software and the hardware.

Great. Thanks, very much that's it for me good luck great. Thank you.

Our next question comes from the line of Mark Smith with Lake Street Capital Markets. You May proceed with your question.

Hi, guys.

First off just wanted to ask a little bit about pricing you know could you guys talk about if you're taking any you know if you have the ability and kind of where pricing is at today.

Yep.

Yes. So so it's a great question of course, you know we have to continue to monitor the macro.

But we have taken some price increases on some core products.

So far they've been holding but you know as we discussed demand has been lower than expected. So we'll have to keep continue to monitor that has a lot to do with what's going on competitively in the market places as you saw we we did a fair amount of discounting as did everyone in the industry and the and the holiday season, you kind of have to follow in the in the season, you're it's a little bit more.

<unk> in the off season, you've got to you've got to make your hay in the in the season, so but right now we're just looking.

You know a product by product, we've been able to take price on several of them and we'll continue to monitor it.

And that leads to the next question just discounting environment, what does it look like today kind of out of season, primarily at retail.

Yeah, I think I think great question, I think it looks it looks pretty normal right.

We saw a lot of discounting.

Over over the fitness season, but it started to regulate kind of right. After January we've had more you know I think everybody runs a like a mother's day sale and everyone to run some sort of memorial day.

<unk> sale.

But you know.

Where will we ourselves are doing kind of some flash sales and things like that so yes, everybody is doing something to move it but you can really make more choice full decisions and again, it's really focused on the market, but we've seen that come way down to a seasonal seasonal level level and also I'll say you didn't ask about this but also what we've.

Really seen over the last quarter or so is.

We look at our competitors advertising in our own advertising, obviously, we've pulled back as this has happened and I think pretty much everyone by Tony let's pull back on advertising. So we're kind of more in line with with everyone else and that is somewhat related to that the discounting question is how often you're out there.

Okay. So in that.

Advertising is as we look at the waterfall on operating margin this year versus a year ago.

We look forward should we expect to see that advertising impact being less significant moving forward.

So great questions. So on a year over year basis, especially when comparing to last year last year's still benefited from a lot of the pandemic driven.

We didn't need to advertise us might try and give us our highest ever quarter quarter ending March last year. So some of that is going to be less of an issue on a year over year comparison 'twenty three to 'twenty. Two also in 'twenty. Two we did a lot of brand advertising and you know that might moderate in fiscal year 'twenty three.

Okay, and then I think the last one for me just Big picture should we think about journeys here you know a 110000 subscribers versus 325000 members you know if if we think about that ratio. What are you looking for what do you feel like is a healthy place to be or even a goal.

Yeah.

Yeah, we're not we're not providing goals on that but as we I know everybody's been itching to get more of more information on journey and of course, we're trying to balance.

Giving giving information to our competitors and and giving the right things that we find will be helpful to you and to our other investors. So.

So we will continue to to to offer more overtime. We picked a set that's expanded from what we've traditionally given and we'll continue to expand that further as I mentioned about the churn to that's kind of one thing that.

You know everybody asked about but when you're doing a lot of these free trials, which we are right now and those will kind of come up in the September October November timeframe, which is exactly as we designed then those churn numbers will what will be a lot more understandable.

Then then there would be right now so that was also part of the part of it.

Okay, great. Thank you.

Thank you.

Our next question comes from the line of Matt Curtis with William Blair. You May proceed with your question.

Hi, good afternoon, Thanks for taking my question.

I want to ask your question.

Full year EBITDA guidance 2023.

Or is that pretty significantly I think you're right.

As previously thought.

But could you just clarify the main reason for the shift.

Primarily the slowdown in retail demand or is it more related to other things like maybe higher than expected commodity inflation.

Supply chain pressures or something else.

You were kind of breaking up a little bit in the beginning part of your question, but I think what I heard you say is.

You were asking if we had thought that it would be for the full year that we'd have breakeven adjusted EBITDA and you're asking why is it only the second half can you confirm.

Oh, yes, sorry.

Sure.

23, EBITDA guidance was positive and its been now it's significantly negative so I'm wondering if the main reason.

The slowdown demand versus your prior view.

Yes, yes, it's more related to the slowdown in the demand and.

Especially a lot of the shifting of the topline for the first half to the second half so it's more related to that.

We're actually seeing for inflation in out.

We're expanding gross margin so we're able to do things to kind of.

Do some take some actions against cost, but really that was the main reason for the decline versus our previous expectation is that the lower <unk> orders, which we think is affecting the first half of the year and I'll just add that on the gross margin. It's a combination of things that we hope of course like commodity prices that we don't control and FX.

<unk>.

But there are we have line of sight as I mentioned, two things that we actually control we paid for a lot of storage last year, we don't have to pay for that storage. This year, where it will be down to a D. C. This year.

We've got a number of what else theres attention and demurrage, we've digested the inventory they weren't very O N E.

Naturally just even that the great work, we're doing with the top Skus you know when you rationalize Skus and you really are focusing your assortment you can do a lot of work to make sure that the suppliers are able to get good costing and pass it on to us on those top 30 skus.

Okay got it okay. Thanks for that detail.

And then I guess on the retailer inventory levels that are elevated right now I mean, when do you think they will be able to kind of work their way through this excess I mean is this something more near term where they could get for potentially by the end of the summer or would this take longer.

Yeah first of all say that each retailers in a different position and we have better visibility into some than others, if they choose to share with us, sometimes and not others, but right now we've got a pretty good view of that and it does vary.

By retailer.

It really does depend on.

A couple of things first of all.

You know a consumer's buying right. So if consumers stopped buying that'll be later, if they if they continue buying then.

That will be.

That will be earlier.

It's really just a number of different a different factors there.

I think it's also there's also going to be some risk taking that I would guess and this is just my speculation retailers that are over inventoried would typically order maybe 90 days in advance of needing the inventory and so we would start to see that in the in the second quarter for the holiday season, the fitness season.

My guess is that you may not see that that they may be a bit more risk averse and moving that inventory and.

And then will we may see the orders that would normally come in second also also come into the third and they will expect us to react more rapidly than 90 days. They will expect us to have the inventory in our warehouse and the good news is we actually do have inventory so not for any retailers listening but.

But that is that is something I think we would expect to expect to see and then I'll just the only thing I'd add to that is that's a little bit what's driving the wide range in our full year expectation is on the lower and it would mean that it took them a bit longer to clear it through an end than the higher end that they were able to clear it through by summer early fall and by the way.

It's not like it's not like we say youre on your own on this stuff too as I mentioned, a few times, we work with the retailers.

They have map windows, where they have to sell where they can sell at below typical prices.

We are working with them to be able to clear that clear that inventory occasionally and then we coordinate that with our own direct business to make sure nobody is at a disadvantage when we do.

We actually have the same leader now running both direct and retail running North America overall, and and we are better coordinating in what I call, our omni channel execution.

Our next question comes from the line of George Kelly with Roth Capital Partners. You May proceed with your question.

Hey, everyone. Thanks for taking my questions.

George.

First one for you.

First one for you is just about your inventory.

I'm just curious if you could.

Give us any kind of target or I'm just trying.

Trying to.

Figure out how much dry dog.

Skus me draw down could there be in fiscal year 'twenty three.

Where do you target inventory to end the year.

Oh, it's great.

Great question, we haven't really previously guided to like ending inventory balances, but I would tell you that.

I prefer it to be more like you know.

13 weeks 16 weeks out that rather than the current level. So we have a fair bit to go but as Jim just said, it's actually a little bit of silver lining having all this inventory because of what's happening with the retailer environment, if they're unable to order S. F O factory fulfilled at their normal cadence and they want it.

I'm for holiday. It is helpful to us to have it already in our D C.

Okay. Okay, and then second question for me is on the select Tech.

Germany, the tech enhancements, you're beta testing I didn't quite follow in the prepared remarks trying to keep up but can you just go through the big features that you're testing there.

Yes, I mean really we started by connecting.

Journey to select tech with.

Call it some.

Trainer led videos right that walk you through various workouts with select tech and that's compelling and we were providing that but really what way ads is is the tech element of that and kind of the it works by itself element of it. So the first thing is really rep counting.

You're standing in front of a phone or a normal camera of any sort and we'll be able to count your reps, how many curls youre doing all those types of things.

And then the second thing that I am excited about is what we call foreign coaching so if youre doing it wrong, whether it's a floor exercise where it's a it's a journey dumbbell exercise in a way that might hurt you or not get the maximum benefit in your work out we will coach you actively with voice coaching to tell you that you.

You haven't done it correctly. So that's those are the two things I really like so then you add that to an expanding library of content and you start to have a really compelling experience and that was our whole view in and and buying way other than getting great software engineers to attack any problem in <unk>.

US be a more digital company also really bringing home those features.

Okay, and then last question.

The guidance for the back half weighting on guidance is that I understand that the normal seasonality, but are there any kind of a big new product launches that are influencing that guidance or is it really just a return to normal seasonality.

It's primarily a return to normal seasonality. We typically at this time wouldn't talk about new products that are coming in but it's primarily just return to seasonality driven really by the lower first half because of the retailer elevated inventories.

Okay understood. Thank you.

Thanks George.

Okay.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Molly poll for questions.

Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jim Barr for closing remarks.

Thank you to everyone on the call today for your continued support of Nautilus, We look forward to talking to you again on our first quarter fiscal 'twenty three earnings call in August have a great rest of the day onwards and upwards.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoyed the rest of your day.

Okay.

Yeah.

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