Q1 2024 Nautilus Inc Earnings Call
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Good day and welcome to the Nautilus fiscal first quarter 2024 earnings results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation there will be.
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Note. This event is being recorded I would now like to turn the conference over to John Mills with ICR. Please go ahead Sir.
Thank you good afternoon, everyone. Welcome to Nautilus is fiscal 2020 for first quarter ended June 30th Conference call.
Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer, and IRA can all the 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 and one at five P M Pacific time.
Can 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 for today's call. We have a presentation that management will refer to during their prepared remarks and on slide two is our safe Harbor statement, which we ask everyone to read.
If you can access the presentation by going to the investors page on our website and clicking on events and Webcasts.
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, once you're not place undue reliance on them.
Our actual results may be affected by known and unknown risks trends uncertainties and factors that are beyond our control and ability to predict.
For additional information concerning these factors please refer to the safe Harbor statement into our SEC filings, which can be found in the Investor Relations section of our website and with that it is my pleasure to turn the call over to Nautilus's CEO , Mr. Jim Barr.
Thank you John and thank you all for joining us to.
To start I'd like to emphasize four key topics that will be the focal points of today's call.
First our Q1 results show substantial progress on our path back to profitability.
And by strong gross margin improvement and operating expense reductions, resulting in a significant improvement in year over year adjusted EBITDA.
Second <unk>.
Consumer sentiment around home exercise is encouraging.
With solid demand and direct.
Fight, our seasonally low Q1, and some visible sell through and retail.
Third through a series of proactive efforts, we strengthened our balance sheet improved liquidity and created greater financial flexibility to better navigate an uncertain retail and macroeconomic landscape finally, we.
With consumer demand indirect a stronger financial position and our confidence in the long term industry opportunity. We are proud to begin introducing a new generation of bowflex products carrying our refreshed visual branding.
Turning to the first quarter, we are pleased with the results, we achieved which demonstrate our ability to navigate the challenges posed by the macro environment for.
For Q1, net sales were $42 million, including direct sales up $22 million, notably direct achieved a flat comp to last year and strength products. It's bright spot can be attributed to enhancements we've made.
Strength portfolio, a topic will cover later, when we discuss our exciting new product launches.
Results in our retail segment were in line with our expectations as retailers maintained a conservative approach to inventory as I mentioned earlier, we are encouraged by the movement of some inventory in retail and we believe we are well positioned in this segment as we approach our peak retail sales quarters of Q3 and Q4.
While the path back to profitability is our number one priority scaling journey also remains a focus and our efforts have been fruitful with over 535000 journey members at the end of Q1, representing 48% year over year growth.
These members 150000 are subscribers showcasing 17% year over year growth.
Our operational excellence efforts continue to gain traction we.
We delivered our seventh consecutive quarter of sequential improvements in our inventory position.
We have now right sized our inventory and reduced our lead times, enabling us to further optimize our working capital investments going forward, we will focus on aligning inventory with sales trends.
We've also continued to deliver improvement on gross margin.
Reflecting an expansion of 800 basis points year over year in Q1, 24, a testament to the progress achieved through our supply chain initiatives.
As a direct result of the deliberate cost cutting actions announced in February adjusted operating expenses were reduced by approximately $12 million or 40% year over year.
The notable gross margin expansion and lower adjusted operating expenses translated into a $14 million improvement in adjusted EBITDA as we make headway on our efforts to return to profitability.
We've also taken decisive stack steps to further photo fortify our financial position enhanced liquidity and strengthen our balance sheet.
Throughout the quarter, we diligently pursued this core focus.
Notably we completed the sale of certain noncore assets made amendments to our credit agreements.
Pay down debt and significantly improved our inventory position.
Additionally in June we made a public offering of common stock to raise additional cash for the balance sheet as well as provide additional flexibility to opportunistically invest in marketing and drive sales growth.
This places us in a better position as we prepare for our product launches and the upcoming fitness season.
At quarter end net cash position was a positive $2 million a significant sequential improvement to our net cash position of negative $10 million in Q4 of fiscal 'twenty three.
These proactive actions add fuel to maintain and grow our strong leadership in connected home fitness, while effectively managing the complexities of the challenging and dynamic operating environment.
At the same time, our comprehensive review of strategic alternatives is ongoing.
Our board remains focused on identifying opportunities that will accelerate our company's transformation and deliver enhanced value to our shareholders.
Our expertise in crafting top of the line equipment as evidenced through our powerful brands, such as Bowflex and schwinn.
Guided by our consumer first mindset under our North Star strategy, we are constantly evaluating opportunities to innovate and align our products with consumers continually evolving preferences.
First we've refreshed our number one brands the fitness industry is a sea of sameness and the new Bowflex brand is designed to stand apart.
Our new brand identity is inclusive empowering and inspiring.
Reflected outwardly in our visual system like our imagery and load of color selections and yes, a new logo.
The brand is also a mindset embodied with the following statement.
At Bowflex, our job is to help you find strengthen and follow the one inside you.
That's why everything we make every treadmill or set of weights is a way for you to move and move closer to the U you already are.
Our new branding and identity empower consumers to move towards what matters most to them.
Next our recent launch of our lower priced digital only journey SKU featuring rep counting inform coaching and strength training has been extremely well received and it is just beginning.
Just the beginning of the journey and strengths.
This fall we are also thrilled to be announcing a robust first wave of of updated connected fitness equipment, featuring our brand new bowflex visual branding.
Ahead of the holiday fitness season, we are enhancing our cardio offering offerings with two new products under the new Bowflex branding. The Bowflex six six S E and update of our wildly popular seasick Spike and the new Max S. E. A quieter version of our top selling Max trainer high inter.
Tensity interval training machine, which takes up about half the space of a treadmill at an excellent value.
We are also launching a new elliptical under the Schwinn brand Schwinn Olympic elliptical for 90 delivers a very strong value feature.
Features a compact footprint.
<unk> control and thousands of structured workouts and hundreds of virtual routes via journey and third party apps.
We plan to follow up this wave of exciting new Bowflex products and journey features in calendar 'twenty 'twenty, four and both strength and cardio portfolios stay tuned.
To complement these launches we have enhanced the shopping experience by introducing a new navigation website design and product imagery.
All under the new brand new identity system.
The goal is to elevate and engaging experience for our customers as they explore our offerings.
In addition to this exciting developments the recent sale of the Nautilus brand has further strengthened our strategic direction. As a result, we are currently in the process of executing a total company rebrand by the end of the calendar year. This corporate rebranding initiative will reinforce our identity as a leader in the connected home fitness interest.
Our dedication to quality and innovation remains at the core of our identity and we are enthusiastic about the future.
I would also like to touch on our fiscal 'twenty four outlook, where we have reiterated our full year guidance for revenue adjusted EBITDA and Gertie member count.
Our diligence and testing and learning with journey is driving steady member growth.
Conversion rate from trial to paid subscriptions as always has also improved over 30% in July as we enhanced <unk>.
And our welcome communications and move towards a greater mix up two months trials.
In tandem our unwavering focus on driving operational excellence stands as a crucial pillar and our path back to profitability.
With efficient and streamlined operations, we are paving a clear and viable framework to regain profitability.
As a result, we anticipate a significant year over year improvement in adjusted EBITDA for the full year of 2024.
Our dedication to innovation operational efficiency and consumer centric equipment and services positions us to deliver long term value for our shareholders.
I'll now turn it over to Ian who will give us more a bit more detail on the first quarter results and our fiscal 2020 for guidance.
Thank you Jim and good afternoon, everyone.
Today I'll be speaking to results for the first quarter of fiscal 'twenty, four and we'll provide guidance for the full year. Please go to our website to view our press release and the slides accompanying this call for more information.
Turning to slide nine total company P&L results with comparisons to last year.
Net sales for the first quarter or 42 million down 24% versus last year.
Direct segment declined by about 17% driven by car T M.
We're pleased with the continued momentum and strength of our sales were flat to Hawaii.
Retail segment declined by 29% as retailers continue to take a conservative approach to inventory purchases.
Gross profit was 9 million up 24% to last year and gross margins were 21%.
800 basis points from last year.
Now I'll go through the drivers of the significant gross margin expansion from last year.
About 1100 basis points of improvement due to lower landed product costs.
In the U S. We've now cleared through older inventory that was burdened by pandemic related detention and demurrage and higher inbound freight.
New imports are benefiting from our efforts to optimize our distribution network, resulting in lower inbound freight.
Additionally, we have negotiated lower factory costs for our top skus.
200 basis points of improvement or did it decreased discounting primarily in retail demonstrating our disciplined approach to promotions.
100 basis points of the improvement is due to favorable logistics overhead driven by the cost cutting actions. We took in February 23.
Partially offsetting these margin gains are 100 basis points of decline related to outbound freight driven primarily by mix as this year. The direct segment has a higher portion of sales versus last year.
500 basis points of deleverage related to journey Cox journey caused are increasing year over year, primarily due to depreciation if we exclude depreciation journey cause deleverage, it's about 300 basis points.
Turning now to adjusted operating expenses on slide 10.
Few lines of the P&L and have been adjusted to exclude the impact of noncash impairment charges and restructuring costs.
Please see our press release for a reconciliation to GAAP.
Adjusted operating expenses were 19 million down $12 million or 40% versus last year.
Key drivers of the decrease were.
For a million less in advertising as we reallocated marketing dollars to later quarters to support our seasonally stronger back half.
4 million decrease in personnel expenses and 2 million decrease in contracted services, reflecting actions we took in February 23.
$1 million decrease in variable selling and marketing expenses in the rest of the decrease coming from all other expenses.
Excluded from adjusted operating expenses are restructuring and exit charges of about 400000.
Adjusted operating loss was 10 million, an improvement of 14 million versus last year and.
An adjusted EBITDA loss was 6 million an improvement of 14 million versus last year's 20 million loss.
Turning now to the balance sheet as of June 30th.
Cashless 18 million in line with our cash position at fiscal year end 'twenty three.
That was 16 million and our liquidity at the end of June was $28 million.
We used the proceeds from our noncore asset sales to pay down a portion of our term loan.
As of June started he has made a minimal balance on our ABL and our net cash position was positive $2 million and improvement to our net cash position of negative $10 million last quarter.
You get a 43 million at the end of third quarter of fiscal 'twenty, three and negative 28 million at the end of the same quarter last year.
For Q1 fiscal 'twenty four we improved our free cash flow by 6 million.
Free cash flow was negative 4 million this year versus negative $10 million for the same quarter last year.
Other key callouts in the balance sheet or our plan to right size, our inventory in the quarter, ending Q1 with inventory of $40 million down 15% versus here in fiscal 'twenty, three and down 62% versus the same quarter last year.
Looking ahead, we will continue to be disciplined with inventory purchases and will work to align inventory with sales.
E. R was 13 million of trade payables were 21 million both down from year end.
Turning now to guidance, we are reaffirming guidance for full year revenue full year, adjusted EBITDA and year end fiscal 'twenty four journey members.
We're guiding to full year net revenue of between 270 million and 300 million.
We expect retailers to continue being conservative with Reorders and based on the seasonality of our business expect the second half to represent between 60% and 65% of revenue.
Given the sale of the Nautilus brand, we expect full year royalty revenue to be about $1 8 million.
We're focused on returning to profitability and are targeting break even adjusted EBITDA for fiscal 'twenty. Four however, given the uncertain macro and our net revenue guidance range. We are guiding to a range of adjusted EBITDA loss of negative 15 million to breakeven.
To achieve break even adjusted EBITA, we need to deliver 47 million up year over year improvement.
About $30 million of the improvement will come from lower costs, resulting primarily from the restructuring that we implemented in February 'twenty three as.
As we demonstrated in Q1. These cost reductions will result in lower operating expenses and gross margin expansion of some of these costs are part of comps.
The rest of the EBIT improvement will come from lower landed product cost, which will drive further gross margin expansion as we demonstrated in Q1.
Partially offsetting these gross margin gains will be some deleveraging journey Cogs as fiscal 'twenty. Four dollar spent is planned to be higher year over year, primarily due to the depreciation.
While we saw reduced discounting in our retail segment in Q1, we continue to expect no improvement in the discounting environment for the full year, which is reflected in our guidance.
Well, all we have right sized our inventory and exit Q1, and a position of strength our competitors in the retailers continue to be pressured on the inventory front. So we have planned discounts to be flattish year over year.
And lastly, we expect journey members to be about 625000 at year end, approximately 23% growth versus last year.
Like many other companies we are preparing for a continuation of the difficult operating environment, we have secured the financial flexibility necessary to navigate the current landscape and we will remain focused on operational excellence, while continuing to execute on our North Star strategy I'll now turn it back over to Jeff.
Thank you Ana.
We're excited by the momentum of our operational excellence efforts and for the launch of our portfolio of new connected fitness features and equipment ahead of the holiday season, which reinforces our strong belief in the enduring long term shift towards home fitness.
We are committed to staying agile and adaptable in the face of any challenge or opportunities that may arise.
Our focus remains on driving strong cash flow and supporting our path back to profitability.
We are pleased with our performance to start the year, but recognize that there's still a long way to go in fiscal 'twenty four we're committed to delivering exceptional equipment and experiences to consumers and charting a course that leads to a sustained long term growth.
Finally, I would like to thank our employees and partners for their passion to deliver winning products and experiences for our customers.
And with that I'd like to turn it over 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 if at any time. Your question has been addressed and you would like to withdraw your question.
Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Michael Swartz with Truest Securities. Please go ahead.
Hey, good afternoon.
Maybe just.
First question.
I think he made some comments about retail the retail environment is still youre still kind of cautious around it and retailers have worked down inventory, but maybe give us a little bit of the of your visibility into the back half of the year around maybe they're ordering planned or merchandising plans for the fitness category.
Yeah.
Yeah, I'll start and I'll see if I I know wants to add anything to this so retail you know of course is always going to be an important part of our omnichannel approach to the market right there and so we believe in retail.
The retail environment remains uncertain I'm, we're definitely encouraged by a few things we're seeing we're seeing sell through not only indirect which is indicative of consumer demand, but also as retailers work down that inventory as we cited on the call. So that that is a good leading indicator you know.
You know the the rebuy is only to re buy when they make it but we look for these types of leading indicators there. So.
So we know our products are moving in indirect that gives us greater confidence in retail as well same products in many cases, and we haven't seen any structural changes in retails retail like we've been watching whether certain retailers would get out of the fitness category or do you emphasize the fitness category in any way.
A positive event was Amazon's Prime day, it was very encouraging though it's off season at the sell through there far exceeded our expectations, especially in the strength category and it's another leading indicator for us that our brands and portfolio are strong as we as we get into the replenishment season that said you know the holiday ordering typical.
Happens in late second quarter early third quarter, as you're well aware, so even with reduced lead times, we're hopeful that we start to see those orders, we're getting some of them.
See them and in that time frame, so anything you would add.
I think you covered it Jim.
Okay. That's great. Thank you for the color and then maybe just with the rebranding and I think you talked about to rebranding as one of the the Bowflex brand and then.
Corporate rebranding, maybe just walk us through high level your thoughts around doing that and then were there.
I would assume those costs related to that.
Those cars.
It's already embedded in your prior guidance.
Yes, the answer to that is the costs are already already in there as.
As I mentioned, we wanted the reason one of the reasons, we wanted to get enhanced.
Balance sheet is to be able to to flex up and down on the opportunity in marketing in particular.
So, we'll we'll definitely do that but look at you know both flex is a great brand it has tremendous <unk>.
Equity stands for quality, particularly the strength category, we've made it a an excellent cardio brand on top of that but.
It needs to refresh it right because I think still people think about the old Rod gyms, and maybe a Chuck Norris commercial and the Guy never actually worked for US. So that's that's kind of some of the vision and in the cloud that we here and so it's time to modernize it and we modernized it around some of the statements I made.
In the slide you see the imagery, but it's really it's really about getting out of the sea of sameness Everything's block in red in this whole industry and we're changing it up a bit where we know that equipment now fits in the living room, and it's gotta look great and sleek and so you'll see that in our branding on our products, but it's just time to really take advantage.
Of the emotional aspects of exercise of why people do it and and and we feel very strongly about bringing this to market and then of course, the first manifestation of the products that I mentioned as well on anything you would add no I just was want to echo what Jim said about how important it is for us to two.
To elevate this really remarkable asset both likes is one of the leading brands in the fitness category and it really harkens back to like our North Star strategy. We've always said, we're going to focus on short term responsibilities that never lose sight of the long term and this is the result of several you know many quarters of effort to bring the bowflex.
The new boyfriend that Bowflex market, and then you're absolutely right and that was a great way to parse. It there will also be a company rebranding.
We haven't announced the new name yet we're kind of want you to be on the edge of your seats, we'll announce that a bit later and plan to complete it by the end of the calendar year.
Okay, great. Thank you.
Thank you.
Again, if you have a question. Please press Star then one.
The next question comes from George Kelly with Ralph M. K M. Please go ahead.
Hey, everybody thanks for taking my questions.
Thanks George.
I have three for you the first one on your own.
Media spending I was curious if you could.
Disclose the advertising spend in the quarter and I see just didn't even before getting that number. It's it was looks like it was down quite a bit year over year and so just curious like what's the strategy. There when do you plan to turn it back on a more aggressive maybe it's around these new products, but.
Any kind of information on that would be helpful.
Sure why don't we start with the facts. So advertising was about $1 million. This year, so down versus last year. So that's about $5 million last year and our intent really was to focus the spend on our highest revenue quarter. So you'll see it increase in Q2, and then our highest spend in Q.
Three quarter ending December and the next highest central being Q4, because January is a big month for us.
And I'll just add that you know given that spend which is extraordinarily low.
You know I was very pleased with our direct performance right. That's that's where most of that spend goes and despite that LOE spend we were able to drive revenue and I I think it goes back to what I was saying before you have got a known brand you've got a choice full portfolio of both strength and cardio at different price points.
And.
Front and center in a in a low seasonal quarter theyre still buying from you and we still see demand. There. So we were we were pleased on that in terms of the trajectory I mean, obviously as I said.
It's cute, it's Q2, a little bit, but mostly Q3, where where we're planning to up our spend but.
It's in both our guidance and our profitability numbers that we are.
Spending more in advertising.
Okay, Great and then second question for me on your.
Your inventory I was curious I know you said in your prepared remarks, a couple of times that you.
You might tweak around your inventory just to you know make it commensurate with sales or I forget the exact language, but just curious.
I mean should.
Should we expect you to start building inventory again or like what's the near term outlook for your your inventory.
Yes, you should expect us to start building inventory again, especially for direct we want to make sure that the inventory is in our D. C is ready to meet consumer demand November silver made started buying it you'll start seeing an increasing will reflect higher balances in September I think it's extraordinary.
And I applaud our people for managing the inventory balanced the way that they have I mean, I recall, having about $160 million of inventory in October 21, as we all went into what we thought it was going to be the second COVID-19, a holiday season and from that point on.
I would put our team up against anyone in the way that they've really worked down those inventory balances and as <unk> says when you have opportunity and you're you're talking about them getting year over year growth in the back half of the year as we expect do you want to make sure that you've got the fuel for that and the inventory. So we will be building those positions commensurate with our sales expectations.
Gotcha Gotcha, Okay, and then last question for me.
So I guess two quick ones on your full year guidance on your revenue guidance.
The two are the first one is can you help just with a high level split between direct and retail I mean, I'm using a 50%.
Rough split between the two does that seem reasonable and then the second question is what hints or are you looking at right now I'm sure. Your retail order book is one but what else do you look just to get comfort around the holiday season, and how do you try to gauge that this early.
Sure I'll start maybe with your second question and well I know it looks up what we can tell you to try to be helpful.
On that side. So I did mentioned before what we had seen in retail the inventory balances are coming down the sell through is good the good Amazon Prime day, which actually leaks over into our own direct business in July a bed as well. So we're seeing demand for our products, we're not seeing any structural changes in who care.
Areas of the business, we are still seeing.
The CFO of many retailers being very cautious in their inventory positions. Overall, I said, we'd worked ours down very well, but not all of them. They have many more categories than we do so they haven't worked that down and so there they're still cautious we have.
A retailer a CFO on our board and she she reiterates that from that that we're hearing that kind of conservative nature, that's going on in retail right now.
So the demand seems seems good for the products the products seem to be moving when we look over to direct if acting seasonally as expected, especially like I mentioned with the slope of the low AD spend so to get get that out of the low AD spend that that tells us.
Something we feel more in control in the direct business of course, we have that marketing lever, we have a new refreshed brand that people love, we have new products coming as well. So all of those things give US you know a fair amount of optimism going into the to the to the holidays.
And.
Yeah, we're excited about it where we feel like the whole thing is look we've showed meaningful progress on our path to profitability and that gives us.
You know kind of the wherewithal and the confidence to do these rebranding these new products additional marketing those types of things and then I'll I'll try to be helpful. I think for like if I look at it for the full year I would say, assuming they're about 50 50.
Yes, it's been that way in normal times, if you kind of remove some of the Covid movement and then I'll just remind you of the typical seasonality for each segment, there a little bit different.
Direct highest volumes would be the quarter ending December and then next highest quarter ending March because January is such a big month put direct for retail their highest it starts actually building up a little bit in the quarter ending September because that's when some of the early orders come in and then their highest.
December and their quarter ending March is not as high because.
You know if they're going to sell it to customers in January they needed to have bought it from us and receipt of debt in the quarter ending December so hopefully that helps you with the split of quarterly seasonality.
Thank you.
Thanks George.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Jim Barr for any closing remarks.
Thank you to everyone on the call today for your continued support of Nautilus.
We eagerly anticipate providing our next update on our second quarter of fiscal year 'twenty four earnings call in November have a great rest of the day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.