Q1 2023 Nautilus Inc Earnings Call

fif.

All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. To withdraw your question, please press star then two.

Please note that this event is being recorded. I would now like to turn the conference over to John Mills, ICR. Please go ahead.

Great, thank you. Good afternoon everyone. Welcome to Nautilus's fiscal 2023 first quarter into June 30th conference call.

Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer, and Ina Knoll, Chief Financial Officer.

Please note this call is being webcast and will be available for replay for the next 14 days.

We'll be happy to take your questions at the conclusion of the prepared remarks.

Our earnings press release was issued today at 1.05 p.m. Pacific time and may be downloaded from our website at Nautilusinc.com on the investors page.

The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. Please note we will be comparing results versus last year fiscal 2022 and also versus fiscal 2020, as we believe comparing to the last pre-pandemic period is helpful in demonstrating our growth and progress.

For today's call, we have a presentation that management will refer to during their prepared remarks. On slide 2 is our full Safe Harbor Statement, which we will ask everyone to read. If you can access the presentation now by going to the investors page on our website and clicking on the events and webcast.

I'd like to remind everyone that during this conference call, Nautilus Management will make certain forward-looking statements. These forward-looking statements are based on the beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance and therefore one should not place under 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 on our website.

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

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

I am proud of our team's perseverance and grit in the face of challenging macroeconomic conditions, and I am pleased with our results for the first quarter and our progress on our long-term, transformative strategy.

Starting with the financial results.

We achieved the high end of our revenue guidance, and EBITDA was better than expected even during our seasonally soft fiscal first quarter.

Given the strength of our operating capabilities, our increasing understanding of consumer post-pandemic demand, and our balance sheet, we continue to expect positive adjusted EBITDA in the back half of fiscal 2023, and are reiterating our full year revenue, EBITDA, and Journey Member Growth Guidance.

INA will provide additional color on our financial results and guidance shortly.

Our well-known brands, Omnichannel go-to-market model, wide choice of price points in both strength and cardio offerings, and tight cost control were important drivers of our first quarter results.

Our direct segment was up 27% compared to the same pre-pandemic period in fiscal 2020.

Despite consumer macro weariness and even in the sector's low season, we were encouraged that the consumer responded well to our holiday offers for Mother's Day, Memorial Day, and Father's Day.

As expected, retail segment growth, excluding octane, was slightly down compared to the same pre-pandemic quarter in fiscal 2020.

This decline was driven by retailers' higher inventory positions after their heavy ordering last year.

We closely partnered with retailers and supported promotional actions to work down inventory levels in Q1, generating some early reorders, beginning to build some backlog, all with the goal of generating more reorders as we enter fitness season.

While delivering expected Q1 results, we also advanced our long-term strategy.

Two strong examples I'll cover on this call are advancements in Journey and optimizing supply chain.

Journey membership growth was a bright spot during the first quarter.

Total members were 360,000 at 630, 133% higher than the same period last year.

We have worked hard to design our business for long-term growth, but maintain a culture of agility and a cost structure that permits us to adjust to and navigate through short-term challenges.

As such, we believe we are relatively well positioned in the current macro conditions.

Our first quarter results show that consumers will buy fitness equipment even in off-peak times of the year if they believe they are getting a good value.

Having a diversified product portfolio versus having only one or two modalities is an advantage in this current environment.

Our wide range of modalities and price points will give our consumers more affordable choices this fitness season.

Similarly, unlike some competitors who charge $500 per year or more, we feature an attractively priced digital platform at $149 per year.

Together, our equipment and digital platform deliver an outstanding comparative total cost of ownership.

We highlight this value proposition both in advertising and on our website.

Additionally, as we've mentioned on prior earnings calls, we have an asset-like operating model. We work with contract suppliers in Asia and partner with contractors for elements of our talent needs.

Our strong focus on cost control and our decision to invest in supply chain capability give us more flexibility to navigate the current economic situation.

Pillar 4 of our North Star is about optimizing supply chain for competitive advantage.

Our investments in supply chain are beginning to pay off and we believe will become even more evident later in the year.

We've made several moves to give us line of sight to improve gross margins in the second half of fiscal 23.

We negotiated lower inbound freight costs which, while still higher than calendar 2019, are much lower than peak market rates last year.

We actively managed our inventory down and won't be incurring the detention and demurrage fees that hit us last year.

We also won't be renewing leases for storage locations that we took on to house elevated levels of inventory last year.

As part of our supply chain planning, we are exiting the Portland DC in Lake Fall.

And we renegotiated the cost for our top SKUs, which will positively benefit the P&L once we sell through the inventory already on hand.

Finally, we have instituted tight cost control, including for now pausing incremental brand marketing.

As much as possible, we will remain vigilant in continuing to match variable SG&A costs with sales.

For these reasons, we believe we are better positioned than some key competitors to weather short-term challenges.

As a leader in home fitness, we are buoyed by the strong long-term market opportunity.

Through our first quarter, we continue to see evidence that post-pandemic exercise habits favoring home fitness are here to stay.

Pre-pandemic, about 40% of people for whom fitness is important worked out at home.

Even as more people headed back to the gym, that number is close to 70% and is now held steady for over 15 months.

Consumers have adopted a hybrid model for fitness, similar to what they've done for work locations.

In 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.

Despite some possible pull-forward sales over the last two years, we believe that 27% growth in our direct channel compared to pre-pandemic levels further supports this data.

Let me now give you some more color on Journey.

A core tenant of our transformation is being consumer-led, listening to what fitness consumers are asking for and providing them with leading cardio and strength equipment combined with digital connectivity to help them achieve their goals.

Journey, our 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 improve and scale Journey, which we believe will elevate the long-term operating margins of the company.

While we just completed year one of our transformation and though we are still learning and have work to do, I am pleased with our progress and believe we are well positioned to continue our growth.

I would like to highlight a few of our key journey accomplishments.

We've completed the launch of a full line of embedded...

screen cardio machines, threads, bikes, and max trainers, all running our differentiated digital platform journey.

Journey must be connected to and be optimized for each modality and in cardio this work is behind us.

Last year, we launched the SelectTech journey experience, making it available to millions who own these wildly popular products.

As a result, we've increased our install base from only one Journey-enabled product a little over two years ago to over 80% of our total units in Cisco 2023.

We also offer Journey BYOD, bring your own device, an attractive option for those who want to spend a little less on their equipment or want to use Journey without any equipment at all, such as bodyweight workouts.

We continue to advance the rich and differentiated feature set of Journey. We offer a variety of different ways to work out so the consumer's fitness routine does not become boring and they stay at it longer, including personalized connected fitness that suggests workouts just for you, a content library that continues to grow, the ability to stream your favorite entertainment services while being coached at the same time, and much, much more.

We have also made important improvements with the recent over-air updates to Journey to enhance quality for better instrumentation, playback capabilities, and UX improvements.

Finally, we are in the process of adding automatic rep counting and form coaching to the Journey SelectTech offering, which will incorporate the vision and motion technologies from WAE.

We are in alpha testing now and expect to get this enhanced and highly differentiated experience more broadly to consumers in the third quarter.

We continue to grow our journey user base with marketing and promotion.

We now include Journey in most Bowflex advertising under the tagline Bowflex with Journey.

Bowflex brings users to Journey and Journey helps to modernize the Bowflex brain.

We began offering 12-month trials in late September last year to scale up our member count and get feedback from a larger number of users.

As those 12-month trials begin converting to paid, we will be able to share more meaningful information about churn. For now, churn will be a factor embedded in the subscriber numbers.

The advancements of Journey are paying off, enabling us to grow Journey members to over 360,000 as of 6-30-22.

This represents 133% growth versus the same period last year.

About 35% or 127,000 of our current members are subscribers, which represents 290% growth year over year.

We are proud of our first quarter results in the face of a challenging environment and moving forward on key aspects of North Star as we continue transforming Nautilus.

We believe we have also taken responsible actions as good operators that position us well to achieve our full year guidance.

This approach will move our long-term strategy forward while also keeping us on path to deliver positive adjusted EBITDA in the back half of fiscal 2023.

I'll now turn it over to Ina who will give us more detail on our first quarter results and guidance for the year. Ina? Thank you, Jim, and good afternoon, everyone.

Today I'll be speaking to total company results for 2-1 and will reiterate guidance for the full year.

Please go to our website to view our press release and the slides accompanying this call for more information.

Let me start with slide eight of the presentation, P&L results for 2.123.

Given the unique nature of last year's results, we will be comparing this year's results versus last year, fiscal year 2022, and also versus fiscal year 2020 to gauge our sales growth and overall company improvements when compared to more normalized pre-pandemic results.

Net sales for the first quarter of 55 million down 70% versus last year and up 11% versus the same quarter in 2020 excluding octave.

Importantly, our direct segment grew 27% versus the same quarter of fiscal year 2020.

Gross profit was 7 million and gross margins were 13 percent, down 17 points from last year.

Eight points of the decline was related to increased discounting.

We strategically use discounts during key holidays to drive incremental business to direct and to assist our retail partners in selling through their inventory.

The level of year-over-year decline is partially driven by tough compares as Q1 last year is still supported by pandemic-driven demand.

But the level of discounting has moderated when compared to last year's fitness season, Q3 and Q4 fiscal year 22.

Another eight points of the decline were related to deleveraging of logistics fixed costs.

Four points of the decline are related to journey investments.

And these were partially offset by three points of improvement in other costs.

Turning to operating expenses.

The next few lines of the P&L have been adjusted to remove the impact of the non-cash impairment we booked this quarter.

Please see our press release for our reconciliation to GAP.

Adjusted operating expenses were $31 million or 57% of sales versus last year's $38 million or 20% of sales.

Given the large decline in revenue, although total operating expenses were lower versus last year, they deleverage at the rate of sales.

Telly and marketing expenses were down $8 million, driven by lower advertising.

In June 23, advertising was $5 million versus $11 million last year.

versus last year G&A expenses were up 1 million and R&D was up 1 million with increases in both areas driven by journey investments.

Total journey off-backs was 7 million versus 4 million last year.

Adjusted operating loss was $24 million. Adjusted EBITDA loss from continuing ops was $20 million.

than our guidance of a loss of minus 22 to minus 27 million.

Turning now to liquidity and the balance sheet as of June 30th. In line with our expectations, we ended the quarter with about $44 million of liquidity, reflecting the impact of a seasonally lower revenue quarter.

Cash was $9 million, debt was $37 million, and we had $35 million available for borrowing.

We remain comfortable about our liquidity and our confidence stems from our decision to implement a cost structure that is more semi-variable versus fixed.

This structure allowed us to ramp up quickly during the height of the pandemic and now gives us the flexibility to adjust as needed.

Inventory was $104 million down versus $111 at $331. About 8% of our inventory was in transit and consistent with our inventory management strategy is concentrated in our best-selling SKUs.

Nearly 30% of our inventory cost is in SelectTech weights, which include high NPS products like our 552 dumbbells.

AR was $27 million and payables were $27 million.

Turning now to Fiscal 23 guidance on slide 11.

We are reiterating the guidance be provided last quarter.

We expect full year revenue of between $380 and $460 million and expect the second half to represent between 65 and 70% of full year sales.

We are 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 key actions we've already taken to lower costs in logistics, which include

lower inbound freight as we've negotiated new rates that are much lower than the spot market rates last year.

Lower detention and demerge fees.

lower rental costs as 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 we obtained last year.

Additionally, we've negotiated lower costs for top SKUs, so new incoming inventory will have a lower cost base.

And lastly, while our guidance includes room for discounts to be competitive during the upcoming fitness season, our better inventory position reduces some of the pressure relative to last year.

Given higher sales in the second half, improved gross margins, and our continued cost discipline to align variable costs in line with sales, we continue to expect positive adjusted EBITDA for the second half of fiscal 23.

we expect full year adjusted EBITDA loss of between negative 25 million and negative

Lastly, we expect journey members to cross the half-million mark at year-end 23.

Let me now turn it over to Jim for final comments.

Thank you, Ina. All things considered, I am pleased with our start to fiscal 2023. We will continue to monitor and react with agility to any changes in the consumer mindset and retail inventory levels as we navigate through the year.

I am very proud of our people for all we have achieved and believe we are very well positioned to continue to leverage all the investments and strength of our platform with higher margins and improving cash flow beginning in the second quarter.

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

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

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2.

The first question comes from Steve Dyer of Craig Hallam. Please go ahead.

Thanks, good afternoon, Jumanae.

Hi Steve. A couple questions as it relates to the retail channel. Wondering if the number of doors that you're in is trending in one direction or another. Obviously, everybody and their brother wanted to sell the equipment during COVID, but wondering if you're seeing that remain pretty steady, or are you seeing some retailers maybe exiting the category or the product? And then I guess, secondly, what is your sense of inventory at the retail channel?

Sure, great question, Steve. We have not seen any change and it's been very steady in the number of doors. It's really just the inventory levels that we're dealing with. And then, we have really even better ways to monitor not only sell-through, but also inventory levels by SKU, by retailer, and we manage that very closely. We actively manage it with them, right? It's not like we just leave them alone.

to trend positively. That said, it really just matters how quickly these folks can really move through the inventory. Obviously, it's seasonal, so we expect this momentum to increase as we get closer to fitness season.

Got it. That's very helpful. And then as it relates to Journey, I was going to ask about additional metrics, but I missed what you had said about churn and how you're going to communicate that.

Yeah, as you know, you know, this has been kind of a journey for us, pun intended, where we've been giving more and more guidance and metrics as we go along. So we started last quarter with some more of those. We're just holding to that set of metrics. The churn one in particular will be more meaningful once we start turning those 12-month trials that we began in late September last year into interpaid. Thank you.

So then you'll really see churn be a meaningful number. Right now, it's not meaningful, so we're not providing it for competitive reasons. But we'll continue to expand the set of metrics that we provide so that investors have a good transparency into how that business is doing.

Got it. And I just want to make sure I'm hearing the verbiage right as it relates to EBIT.positive in the second half. Are you intending to say at some point in the second half, so at least one quarter, are you saying for the totality of the second half of the year you will be EBIT.positive? EBIT.rica.gov.

Hi, Steve. It's Ina. For the totality of the second half, so the second half period, two quarters together, adjusted EBITDA positive.

That's what I thought. Okay, I'll turn it over. Thank you.

Thanks Steve.

The next question comes from Mark Smith of Lake Street. Please go ahead.

Hey guys, just wondering if you can dig a little deeper into kind of the promotional environment and sales, you know, during the quarter and just do you feel like at retail that you've worked through kind of aged inventory and kind of your comfort level with the retail inventory.

Yes, our inventory, you know, overall, like I said, they still have elevated levels of inventory, but we have been working through them and we have been actively managing it with them so that, you know, we provide promotional dollars to move that through. We still, you know, believe that there's a permanent shift in fitness habits that help us. We continue to see demand when they ran promotions.

the number of doors we are selling through, all very strong, not retreating in any way. And we just continue to monitor that. And I will also say it's also very helpful to be an omnichannel company. So when retail channels a bit stopped, we can go with direct and you see the growth we got in direct. And we did it in a very coordinated way. It's not like we ran a sale to undercut them, because that really would not be a good result. We coordinate very well with them.

Jay McGregor runs both direct and retail now, and he coordinates those things extremely well. And, you know, I don't know if you have any follow-up questions on that, but that's hopefully answered your question.