Year to date through two quarters, net sales are $95.5 million, an increase of 5.1 percent over the same period last year.
Gross margin for the second quarter of 2013 improved 440 basis points to 47.8 percent, compared to 43.4 percent for the same quarter in 2012. The increase in gross margin was primarily due to higher gross margins in both the Retail and Direct businesses, a greater percentage of sales coming from the company’s higher margin Direct segment, and lower overhead costs. Operating loss for the second quarter of 2013 was $1.7 million, compared to $0.6 million in the same quarter of 2012. The increase in operating loss reflects lower net sales in the Retail segment as well as the company’s strategic decision to increase media spend to drive awareness of its new Direct products and build its sales lead foundation for the back half of the year. Year to date operating income totals $4.3 million, an increase of 92 percent over the same period last year.
Income from continuing operations for the second quarter of 2013 was $32.7 million, which includes a $34.3 million net income tax benefit due primarily to partial reversal of a valuation allowance recorded against the company’s deferred tax assets. Excluding the net income tax benefit, the company’s loss from continuing operations before income taxes was $1.6 million. This compares to loss from continuing operations before income taxes of $0.7 million for the same period last year. Income per diluted share from continuing operations for the second quarter of 2013 was $1.04, which includes $1.09 related to the income tax benefit. Excluding the income tax benefit, loss per diluted share was $0.05 in the second quarter of 2013. This compares to loss per diluted share from continuing operations of $0.02 in the same quarter a year ago. On a year to date basis through two quarters, income per diluted share from continuing operations excluding the net income tax benefit increased to $0.13 as compared to $0.07 for the same period last year.
For the second quarter of 2013, the company reported net income (including discontinued operations) of $32.9 million, or $1.05 per diluted share, which includes the aforementioned income tax benefit. Excluding the income tax benefit, net loss was $1.4 million, or ($0.04) per diluted share. In the second quarter of 2012, the company reported a net loss (including discontinued operations) of $0.2 million, or ($0.01) per diluted share. Net income for the second quarter of 2013 included income of $0.2 million, or $0.01 per diluted share, from discontinued operations. Net income for the second quarter of 2012 included income of $0.3 million, or $0.01 per diluted share, from discontinued operations.
Bruce M. Cazenave, Chief Executive Officer, stated, “During the second quarter, we continued to achieve growth in our Direct business and made a couple of strategic investment decisions to build support for the back half of the year and support longer term growth objectives. We made incremental investments in media for Direct products to establish the sales lead pipeline and also invested in launch activities in support of our new licensing initiative, which we believe will develop into a meaningful revenue source over the long term. As previously disclosed, we expected the second quarter for our Retail business to be a challenge from a year-over-year comparison point of view. Our Retail business in the second quarter last year benefited from customers accelerating their normal buying pattern from the third and fourth quarters in anticipation of the price increase implemented in the third quarter last year. The price increase was a positive factor in our improving gross margins.
“Looking forward, the underlying progress on key initiatives remains positive, including strong improvement of 440 basis points in gross margin and improved net working capital utilization in the quarter versus the same period last year. The new line-up of Retail products has been well received and we are optimistic that the improvements made to our product line will lead to improved Retail segment revenue and operating results in the second half of 2013 and on a full year basis when compared to the same periods last year. Our Direct business continues to grow due to increased sales of our new products, including the Bowflex® UpperCut™, as well as the steady growth of our existing cardio products, especially the Bowflex® TreadClimber® product line.”
Mr. Cazenave continued, “The consumer and market dynamics affecting our Retail and Direct businesses in the normal seasonally slow second quarter were challenging but we are pleased with the overall position of our business as we begin the second half of 2013. We should continue to benefit from successful execution on our key areas of focus, including an expanding product portfolio, generating improved gross margins, and leveraging our cost structure. Following several product launches on the Direct side of our business over the past year and the introduction of a new cardio lineup for Retail, we have significantly improved and expanded Nautilus’ product offerings. Our team is continually working on developing additional fitness products that complement our existing line and leverage our leading brands.”
Segment ResultsNet sales for the Direct segment were $25.3 million in the second quarter of 2013, an increase of 2.5 percent over the comparable period last year. Direct segment sales benefitted from solid sales of the company’s new products, the CoreBody Reformer® and Bowflex® UpperCut™, as well as strong demand for cardio products, especially our Bowflex® Treadclimber® product line, partially offset by a decline in strength products. Net sales year to date for the Direct segment were $67.9 million, an increase of 16.3 percent over the comparable period last year. U.S. credit approval rates rose to 33.8 percent in the second quarter of 2013, up from 30.0 percent for the same period last year.
Operating income for the Direct segment was $0.5 million for the second quarter 2013, compared to $1.0 million for the second quarter 2012. Higher sales and higher gross margins for the Direct segment were offset by higher media investment designed to help drive new product awareness and build a sales lead foundation for the back half of the year. Gross margin for the Direct business was 57.6 percent for the second quarter of 2013, compared to 55.1 percent in the second quarter of last year. Direct business gross margin benefited from improved overhead operating efficiency and cost improvements.
Net sales for the Retail segment were $10.2 million in the second quarter 2013, a decrease of 27.5 percent when compared to $14.0 million in the second quarter last year. The company’s Retail segment sales in the second quarter of 2012 benefited from some Retail customers accelerating a portion of their purchases into the second quarter from the third and fourth quarters, compared to their typical buying patterns. In addition, the overall retail environment for fitness equipment remained soft in the second quarter of fiscal 2013. Net sales year to date for the Retail segment were $25.3 million, a decrease of 17.5 percent compared to the same period last year. The company is in the process of launching a new lineup of cardio products for the Retail segment in the fall this year and has been encouraged by Retailer acceptance of these new products.
Operating income for the Retail segment was $0.1 million, compared to $1.1 million in the second quarter last year. Retail gross margin was 19.5 percent in the second quarter of 2013, compared to 19.2 percent in the same quarter of last year, a 30 basis point improvement.
For further information, see "Segment Information" attached hereto.
Balance Sheet
The company ended the second quarter of 2013 in a strong financial position. As of June 30, 2013, the company had cash and cash equivalents of $28.4 million and no debt, compared to cash and cash equivalents of $23.2 million and no debt at year end 2012. Working capital was $33.2 million as of June 30, 2013, compared to $25.4 million at year end 2012. Inventory as of June 30, 2013 was $13.3 million, compared to $18.8 million as of December 31, 2012 and $12.6 million at the end of the second quarter of 2012. The company tightly manages inventory levels and believes that inventory is at the proper levels, when combined with planned purchases, to support sales in the second half of 2013.
Headquartered in Vancouver, Washington, Nautilus, Inc. (NLS) is a global fitness products company providing innovative, quality solutions to help people achieve a healthy lifestyle. With a brand portfolio including Nautilus ®, Bowflex ®, TreadClimber ®, Schwinn ®, Schwinn Fitness TM and Universal ®, Nautilus markets innovative fitness products through Direct and Retail channels.
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