Q3 2023 Nautilus Inc Earnings Call
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Good day and welcome to the Nautilus, Inc. Third quarter 2023 earnings results Conference call. All participants will be in a listen only mode. After today's presentation there'll be an opportunity to ask questions, but if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note today's event is being recorded.
I would now like to turn the conference over to Mr. John Mills with ICR. Please go ahead Sir.
Thank you Paul Good afternoon, everyone welcome to model a since fiscal 2023 third quarter ended December 31 conference call.
Participants on the call today from Nautilus 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> PM Pacific time, and May be downloaded from our website at Nautilus, Inc. Dot 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.
Of 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.
In today's call we have a presentation that management will refer to during their prepared remarks on slide two is our full safe Harbor statement, which we ask everyone to read.
You can access the presentation by going to the investors page on our website and clicking on events and webcast.
I would 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 once you do 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.
Our 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 novel <unk> CEO , Mr. Jim Barr.
Thank you John and thank you all for joining US before I review, our Q3 performance I would like to highlight three key topics, we will focus on during todays call.
Through our focus on operational excellence we.
We have implemented strategic margin management initiatives that drove significant gross profit and EBITDA improvement in the third quarter.
Second we are continuing to face headwinds in our retail channel and I've taken deliberate actions to address them and returned to positive EBITDA in 2024.
Third we are confident in the long term opportunity because we are on the right side of industry trends.
Turning to Q3 I'm pleased with the results. We delivered Q3 net sales were $98 million with direct sales up 30% compared to Q3 fiscal 2020.
Growth was driven by our broad portfolio of strength and cardio offerings, reinforcing our strategic advantage of being able to offer products in bulk.
Our strategic actions to enhance supply chain and improve our inventory position are yielding margin improvement.
As such gross margins for the third quarter expanded 300 basis points year over year.
Largely driven by our planned improvements in inventory levels.
In Q3, we continued to reduce our operating expenses driven by our efforts to optimize and lower advertising expense.
These results translated to continued improvement in our adjusted EBITDA with Q3, adjusted EBITDA loss, reducing by 67% year over year.
We see continued momentum in our differentiated digital offerings.
We added more than 50000 journey members in Q3, reaching approximately 450000 total journey members an increase of over 88% compared to the same period last year.
Members of 156000, where subscribers, representing a 134% growth year over year.
While we continue to see solid demand in our direct business.
And with sales up 30%.
So Q3 fiscal 2020 and momentum on journey, the retail headwinds that we've been discussing at length have persisted.
This resulted in retail net sales declines of 6% compared to Q3 fiscal 2020, excluding sales related to the octane breath.
Retailers continue to take a conservative approach across many categories, including home fitness.
As a result of inventory positions and uncertainty in the near term economic environment.
So while sell through to consumers at retail is progressing we're seeing lower levels of Reorders, which is impacting our outlook for our retail segment in the fourth quarter and likely into the first half of fiscal 2024.
We have taken additional near term steps to rightsize, our business to reflect our current expectations.
With our strong market share, having and having significantly increased the number of retailers and retail doors over the past couple of years. We believe the retail channel will remain an important long term component of our business model as the macro environment stabilizes.
As part of our ongoing commitment to operational excellence, we have driven operational efficiencies across our business, including enhancements to our supply chain improvements to our inventory management and optimization of our advertising spend.
As challenges in the retail business persist we have taken proactive.
Proactive steps to reduce our costs I unexpected $30 million on an annualized basis, we operate an asset light semi variable operating model, which enables us to adjust our cost structure to align with demand trends.
Leveraging the flexibility of this operating model, we reduced our contracted labor separately. We also implemented a reduction in our workforce by about 15%. These actions while difficult are grounded in our priority to continue to align our cost structure with our revenue expectations and are aimed at <unk>.
Driving profitability and improving cash flow.
We are also taking the necessary steps to strengthen our balance sheet, we continue to improve our inventory position for our plant.
Inventory was $77 million at the end of Q3, 23 down 40% versus Q3 last fiscal year, and we expect inventory levels to come down further in the coming quarters.
We are implementing cost reduction initiatives initiatives aimed at improving cash flow and we believe we have the right levers to pull to maintain our balance sheet.
We are actively managing near term challenges within the business, while maintaining while remaining committed to our north star strategy, which is made up of five key pillars adopt.
Adopt a consumer first mindset.
Scale, a differentiated digital offerings.
Focus investments on our core businesses.
Of all of our supply chain to be a strategic advantage.
And build organizational capabilities to win.
We have made strong progress on all these pillars over the past few years and I firmly believe we have set the foundation to.
To becoming a leader in connected fitness by leveraging our equipment business and scaling differentiated awesome.
At our core we excel as quickly.
We continue to see demand for our fast moving top sellers and traction in our direct channel.
Our focus remains on providing consumers with a broad variety of superior products at a range of price points.
We have an exciting pipeline of new products planned for calendar year 2023, with a strong lineup of updated connected fitness equipment carrying our innovative new bowflex visual branding.
It's important to stress that we make money in the equipment business and this will be key to our path back to profitability.
At the same time, we've continued to enhance and scale our differentiated digital offerings journey, enabling.
Better serve our customers and capture long term revenue and profit.
While we have made we have made tremendous progress in bringing hyper personalized experiences to journey members.
We recently debuted journey with motion tracking which offers personalized form coaching and feedback rep.
<unk> counting and individualized workout recommendations.
This enhances our strength offerings with workouts that are designed.
With Bowflex select text by five twos and Bowflex select Tech 10, 90, dumbbells and can be used on Android and iOS tablets.
We continue to target approximately 500000 members by the end of the fiscal year, which implies approximately 54% year over year growth in fiscal 2023.
We are also seeing progress on conversion to paid subscribers, which are growing faster numbers.
The groundwork for journey as late thanks to our investments to date, which enables us to reduce near term spend while continuing to drive consumer adoption.
Moving forward, we will be disciplined in our investments in journey with a focus around quality personalization and adaptability.
We have conviction in the long term opportunity at home fitness.
Our research shows that the shift to home exercise remained steady now for two plus years.
Over 65% of U S. Adults recently survey continue to say they work out at home up from 43% who reported the same at the beginning of 2020.
In our target segments. This trend is even more pronounced with about 85% working out at home.
This is a prevailing shift in trends and Nautilus is well positioned to take advantage of this sustainable increase in demand in our long term addressable markets.
I would also like to touch on our updated outlook on which I know will expand.
Due to the current economic environment, and a conservative position of our retail partners, we are lowering our previous revenue and profitability expectations for the remainder of fiscal 2023.
We are taking the necessary actions that will best position us to operate more efficiently minimize cash consumption returned to profitability and ultimately progressed towards our goal of being EBITDA positive for fiscal 2024.
I will now turn it over to Ina, who will give us more detail on the third quarter results and the guidance for the full year, China. Thank you, Jim and good afternoon, everyone.
Today I'll be speaking to total company results for Q3 fiscal year 'twenty, three and we will provide guidance for full year fiscal year 'twenty three.
Please visit our Investor Relations website to view, our press release and the slides accompanying this call for more information on Q3 and year to date results.
Given the unique nature of last year's results will be comparing this year's revenue into fiscal year 2020 to gauge our growth in overall company improvements versus more normalized pre pandemic results.
Turning now to slide eight total company P&L results for the quarter with comparisons primarily to last year.
Net sales for the third quarter were 98 million down 33% versus last year and up 9% versus the same quarter in fiscal year 'twenty excluding octane.
Our direct segment grew 30% versus the same quarter in fiscal year 'twenty, while the retail segment decline.
Gross profit was 23 million and gross margins were 23, 3%.
Gross margins for up three percentage points from last year and up sequentially six percentage points to last quarter.
As Jim mentioned earlier, we've executed on several initiatives aimed at driving operational efficiency.
In addition, we've lapped unfavorable pandemic related supply chain costs were.
We're pleased that our equipment gross margin.
Returning to more normalized levels.
I'll now review the drivers of this quarter's gross margin improvement from last year.
Up two percentage points due to improved product costs.
And up three percentage points due to decreases in inventory adjustments.
Improvements were partially offset by one point of deleverage logistics overhead.
One point related to higher outbound freight and 40 basis points of deleverage in Germany investments, which were lower in dollars year over year.
Turning now to adjusted operating expenses.
The next few lines of the P&L had been adjusted to exclude acquisition and other costs related to the purchase of way and last year's legal settlement.
Please see our press release for a reconciliation to GAAP.
Adjusted operating expenses were $33 million down 32% versus last year's $49 million.
The primary driver of the decrease was lower media spending which was $10 million versus $22 million last year.
Adjusted operating expenses, excluding advertising for $23 million down 13% versus last year, even with continued investments in journey.
<unk> dollar spend was down slightly versus last year.
Variable expenses across all functions to ensure that they remained in line with lower sales.
Adjusted operating loss was $10 million compared to $19 million last year.
And adjusted EBITDA loss from continuing operations was $5 million or $10 million improvement compared to last year's loss of $15 million.
Yeah.
Turning now to the balance sheet as of December 31.
Cash was $17 million.
Per our plan quarter, ending inventory was $77 million down 40% versus last year and down 30% versus year end fiscal 'twenty two.
About 18% of our inventory at 12 31 was in transit and continues to be weighted to our best selling skus.
AUR was $43 million and trade payables were 35 million both down from year end.
That was $60 million, we had $27 million of borrowings.
Bringing our liquidity at the end of December to $44 million.
We're introducing free cash flow to enhance our disclosures around our balance sheet and liquidity.
At 12, 31 free cash flow was negative $5 million in the quarter, an improvement of 2 million versus last quarter, and an improvement of 34 million versus last year.
While we recognize the headwinds impacting our business, we feel good about the levers available to us to continue to support our balance sheet.
As Jim said earlier, we implemented additional cost reductions to keep us on path to profitability despite market headwinds.
We structured our operating model to give us flexibility to respond to evolving market dynamics to take advantage of attractive demand trends and streamline in softer periods.
Consistent approach, we are proactively realigning our cost structure to support our current expectations for the business.
As such we reduced our contracted labor and yesterday implemented a reduction in force, which affected about 15% of our employees.
As a result, we expect to recognize annualized cost savings of approximately $30 million beginning in Q4 fiscal year 'twenty three.
Yeah.
Incur restructuring and other one time charges of approximately $3 million over the next six months between Q4 fiscal 'twenty three in Q1 fiscal 'twenty four.
We believe these actions better position Nautilus to manage through near term headwinds in our retail segment, while continuing to drive performance in direct and serve our growing base of journey members.
Turning now to guidance for the rest of the year.
Our revised guidance reflects lower expectations in the retail segment as our retail partners have taken very conservative inventory position amid an uncertain macro environment.
As a result, lowering full year revenue guidance to about $270 million.
Which implies Q4 revenue of about $52 million.
Given the adjustment to our revenue expectations. We are now guiding to full year adjusted EBITDA loss of approximately $15 million, which implies Q4, adjusted EBITDA loss of about $15 million.
Our adjusted EBITDA guidance excludes the impact of about $3 million of restructuring costs.
Lastly, we continue to target approximately 500000 journey members at year end 'twenty three.
While we expect retail headwinds to impact sales for the first half of 'twenty for the cost actions, we've already taken give us the flexibility to navigate the near term and keep us on path to improving cash flow and returning to profitability.
I'll turn now back to Jim for his final comments.
Thank you Anna.
For the near term.
Necessary actions to realign our cost base, while executing on ongoing strategic margin management initiatives we.
We recognize the impact some of these actions have on our employees and are focused on supporting those impacted.
I want to thank both our current and departing employees for all that they have done to advance novel. This is noble mission to build a healthier world one person at a time.
Looking further ahead we.
We are confident in the long term because we are on the right side of industry trends as we continue to execute on our vision of being a leader in connected fitness, we excel at equipment and are building and scaling a strong differentiated digital platform.
The shift to home fitness remained solid and.
And we see an attractive opportunity for upside over time.
Lastly, our comprehensive.
Strategic alternatives is ongoing.
And our board remains focused on identifying partner by opportunities to accelerate the company's strategic transformation and enhance shareholder value.
We have no additional information to share regarding this process at this time.
And with that I'd like to turn it over for questions operator.
Operator.
Thank you we will now be conducting a question and answer session. If you would.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you'd like to remove your question from the queue for participants using speaker equipment.
May be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question is from Sharon Zackfia with William Blair. Please proceed with your question.
Hi, Good afternoon, I was guess I was hoping to get some clarity on the retail channel and I am sorry, If you mentioned this but how are inventories in the retail channel is it just a matter of retailers being cautious or are they still over inventoried and then I guess kind of with that question.
Look for this decline in revenue in the March quarter.
How should we dimensionalize or think about the delta between the direct and retail channels as we're here in the March quarter.
Sure I'll start and then I'll kick it to either for the second part.
That's a good it's a good question.
Retailers continue to sell down so we are seeing active sell through through the retail channel.
Not as much as we'd like it to be but we've continued to see that all the way through the end of the of the fitness season.
Really what we're seeing is this.
Very cautious nature, where retailers are kind of acting instead of.
And I'll call it.
Sales optimizer and margin optimizer is they're willing to stock out on certain products in order to just drive down their overall inventories not just in our category, but in several categories. So.
When faced with those choices, they're choosing more often to continue to drive down their inventory levels and not take on much much more inventory and then as we kind of looked at the outlook.
As you get to the end of our fitness season, as you well know.
Where things start to tail off a bit at the end of January .
This is kind of our low period between kind of right now and when they start to reorder for next year.
Then you have a realization that it's probably not going to cut if they've been conservative so far they'll probably continue to be somewhat conservative and we baked that into our outlook and that's why it has changed.
Quite quite dramatically from the last time, we spoke and we've we've taken the actions we think are necessary to address that so that.
No no matter, how long that takes to come back.
Since that's uncertain that where we are here to to address that.
It's also I would also say there hasn't been anything structural change. So it's not like retailers have dropped the product dropped the number of doors.
Or any retailers dropped the category altogether. So that structurally has held up its just this conservative nature of reordering that's.
That's been at play here and then.
Maybe you could.
The one thing Sharon maybe to help you I want to just reiterate that the reduction in our Q4 expectations is really primarily driven by retail.
Okay. Thank you.
Sure. Thanks sure.
Thank you. Our next question is from J P. William Roth.
Please proceed with your question.
Hi, Jim Hi, Thanks for taking the question.
Maybe if we could just start high level.
It's perhaps a little follow up from the first question, but maybe.
Maybe what are some of the biggest takeaways from the holiday season, whether that's on the equipment.
You're selling whether thats, where buyers are meeting your product just kind of as we move into the last quarter here and into next year.
What are the biggest takeaways we saw over the holidays.
Yeah, So talking about Q3, including the holiday period, we had a strong we had a strong black Friday.
And really direct held up for the entire quarter up 30% as we mentioned versus pre pandemic.
We continue to be able to both discount products to be competitive.
And increase our gross margins, while we're doing that and that allowed us.
Other things down the income statement allowed us to also reduce the EBITDA burn.
We definitely manage down our inventories. So you can see that I think that's a highlight of the quarter. I mean, just continues to be from I think a peak of $160 million down to $77 million at the end of last quarter and an even lower now as we sit here in early February So I think that's part of it.
And we continue to make progress on Germany, I think those are kind of the highlights.
Of that holiday season.
And then we did start to see.
That retail retail down 6%. So we started to see a little bit of that but most of what we're reacting to is our forecast what we think will happen going forward and we're trying to proactively get ahead of that so I think again kind of a solid Q3, but when we look at Q4 really all about retail.
And retailers not acting like they would normally act, we think that regulate over time, but right now we have to be smart in the way, we address that and we've taken those actions.
To do just that so.
Okay, you covered it Jim.
So now if you had a follow up but hopefully I answered your question.
Yeah, Yeah that's.
Helpful.
Maybe kind of as a follow up there.
Well, when we think kind of the best of your understanding about the market share in home fitness.
Without without trying to quantify any one company's market share I guess, maybe over the holidays, how would you categorize your market share relative to your expectations going into the season.
It's a great question and as you well know, it's very difficult to get the denominator for this industry, we spend a lot of time with our own numbers and science a number of other alternatives.
Trying to calculate that.
We think I think we've talked before you talked about.
At the peak of the pandemic.
We think this market size, probably tripled doubled tripled and now it has come down we think it's still about 20%, 25% ahead of where it was pre.
Pre pandemic, so it's still relatively high and if you take that as a given and we measure our performance versus our competitors, we picked up share pretty steadily as the market decline.
Mark.
Everyone was buying everything.
As things have come down over time, I think when you start looking at people looking at the brands. They know and trust and you look at our product portfolio, which is very choice full and the price points and the options that they offer consumers and then journey being a value relative to other connected fitness experiences.
No.
That's kind of how we're doing.
We believe we picked up market share during that period and.
We're quite proud of it I mean, nobody nobody taking victory laps as the market decreases, but we knew this was coming and we knew there were some kind of regulation over time.
So.
That's as far as we know it we picked up share at times during the pandemic. We were number one in unit share I was speaking to dollar share a timeframe.
Number one we think we're either number one or number two now in unit sales and Thats helped out a lot by R. R.
Our 505 two dumbbells.
Okay.
Great. Thank you.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will materialize in the question queue.
Our next question is from Steve Dyer with Craig Hallum. Please proceed with your question.
Great. Thanks, Good afternoon, Jim and Anna.
With respect to the $30 million of cost savings could you sort of break out where we should expect to see that from.
Between Cogs and the different categories of operating expenses.
Yeah. Great question. Thank you. So as we said you know this was a proactive choice to rightsize our model to lower revenue expectations. So you're really going to see the cuts enterprise wide now some of our functions are part of Cogs. So youll see most of them coming to opex, but some of it coming through Cogs and then Inc.
Mentally the lapping of the supply chain headwinds will result in margin expansion in the upcoming quarters as social Costco shed and they can now benefit from lower input costs.
And also you know tailwind so in supply chain like inbound freight costs being down compared to the pandemic highs.
Got it okay, and I would expect I mean, you've already taken down your selling and marketing by quite a bit I would expect that thats going to theres, probably not much left there for retail.
Selling and marketing its probably largely to support the direct business.
Amit, it's enterprise wide and you know, but the one thing that I will tell you because we are pleased with how direct performed especially in the last quarter, we're going to make sure that they remain supported as they continue to drive performance and support our journey members.
Yes.
Gotcha. So as you look forward to next year, just playing around with the model, it's hard to get sort of anywhere near EBITDA profitable or EBITDA breakeven, obviously, the $30 million is a chunk of that but but that would imply some some fairly meaningful revenue growth for next year.
Youre not guiding to next year, but is that sort of part of the assumption or the plan is that you guys will grow pretty meaningfully next year.
So we're not guiding to 'twenty four revenue right now, but I will remind you that we have gross margin expansion coming from reduction in supply chain costs. So a lot of what happened to us starting in latter part of fiscal year 'twenty two with all of those.
Supply chain market issues like high inbound freight cost the detention and demurrage costs that we talked about that we've now lapped and are no longer in there. Our standard costs are much lower than they were and that's really going to drive margin expansion. So the path to profitability is a combination of these cost cuts you've already taken and then continued.
Margin expansion.
Okay got it.
And then lastly for me.
As you look at the next 12 or 18 months should we expect.
Any new products or modalities from a hardware perspective or is all of your sort of your investment pretty tightly focused on improvements to journey.
No in fact, the contrary and we are <unk> the hardware business, we know our path back to profitability centers around continuing to be good at creating great hardware and selling it and as I mentioned on the call. We do have some really exciting new products coming out.
For this holiday calendar.
Calendar 2023.
Not prepared to announce what those are yet for competitive reasons, but we.
We are very very excited about that and they're also going to be wearing our new visual brand language, which we know a lot more externally or internally then you know externally, but we're taking a really.
We've invested in taking the Bowflex brand to a new level.
And really have changed the branding and the brand identity and thats going to come across on this equipment. We've learned a lot in the pandemic about how people are using equipment, which rooms of the house. It's migrated to how many pieces people are buying all of these things have changed profoundly and so youll see our lineup.
For calendar year, 'twenty, three reflecting all of those learnings and we're very very excited to launch these products and then keep going with the same in 'twenty four and beyond.
Okay.
We will continue to to scale, our differentiated digital offering.
But we think look connected fitness is our play in connected fitness isn't journey connected fitness is our equipment portfolio paired up with journey.
And Thats, what consumers want that's what our target once and we will continue to deliver both of those things.
Got it okay. Thanks for the time and good luck.
Thank you there are no further questions at this time I would like to turn the floor back over to Jim <unk> for closing comments.
Thank you Paul and thank you all for joining US today, we look forward to speaking to you again, following our fourth quarter results.
Everyone have a have a good day onwards and upwards.
Yes.
Okay.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.