Nautilus' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 6.13 | About: Nautilus, Inc. (NLS)

Nautilus Inc. (NYSE:NLS)

Q1 2013 Results Earnings Call

May 6, 2013 4:30 PM ET

Executives

John Mills - ICR, IR

Bruce Cazenave - Chief Executive Officer

Linda Pearce - Chief Financial Officer

Bill McMahon - Chief Operating Officer

Analysts

Reed Anderson - Northland Securities

Chris Armbruster - B. Riley & Co.

Joe Munda - Sidoti & Co.

Matt Dhane - Tieton Capital Management

Andrew Burns - D.A. Davidson

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Nautilus First Quarter 2013 Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being Monday, May 6, 2013. It is now my pleasure to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir.

John Mills

Good afternoon. And welcome to Nautilus’ first quarter 2013 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer; Linda Pearce, Chief Financial Officer; and Bill McMahon, Chief Operating Officer.

Remarks during today’s conference call may include forward-looking statements concerning the company’s prospects, current or future financial and operating trends, or new product introductions. These statements, along with other information presented that are not historical facts, are subject to a number of risks and uncertainties. Actual risks may differ materially from these forward-looking statements.

Nautilus undertakes no obligations to publically update any forward-looking statements to reflect new information, events or circumstances after they are made or to reflect the occurrence of unanticipated events.

Please refer to our quarterly and annual reports filed with the SEC for more information about the risks and uncertainties that could cause actual results to differ. Unless otherwise indicated, all information and comments regarding our operating results pertain to our continuing operations.

With that, it’s my pleasure to turn the call over to Bruce. Go ahead, Bruce.

Bruce Cazenave

Thank you, John. Good afternoon, everyone, and thank you for joining our call today. We are pleased to report a solid start to our fiscal 2013. We continued our momentum from last year and recorded strong overall growth in revenue, gross margin and profitability in the first quarter.

The improved financial performance of the business continues to be largely due to our team’s successful execution on the key areas of focus, including introducing compelling new products, improving gross margin levels and leveraging our infrastructure cost.

We are creating a stronger foundation for our business that we believe will position Nautilus for the long-term profitable growth and success. Linda Pearce will provide more detailed discussion of our financial results in a moment, but first I’d like to call your attention to a few highlights.

In the first quarter, our Direct business continued to perform very well. Sales from this segment increased approximately 26% year-over-year and gross margin for the Direct business increased 330 basis points to 59.8%.

Our Direct sales performance is attributable to the steady growth of our existing products, as well as initial success of new products, including the Bowflex UpperCut, which we launched early in the first quarter.

Turning to our Retail business, as we anticipated, sales were impacted by the soft overall retail environment for fitness equipment, despite generating lower revenue, we were pleased that Retail gross margins improved 110 basis points year-over-year to 24.9%. This reflects our efforts to improve product margins for this segment of our business.

As we previously discussed, we have been focused on the development and placement of a new line of cardio products for our retail partners which is scheduled for shipment this fall.

Based on conversations with retailers thus far, the new products have been favorably received but at this stage, it is still too early to determine to what degree these initial positive meetings will translate into improved financial performance for the -- for Retail this year.

We do remain confident in the long-term potential for our Retail business. However, we believe it is prudent to reiterate caution as to the short-term year-over-year comparisons for this segment, until later in the year, when new products are fully launched and the level of consumer acceptance in the marketplace is established.

Overall, we are very pleased with the direction and momentum of our business. Our marketing plans and our internal improvement initiatives have been on target thus far and will allow us to layer in future potential opportunities. This is supported by our strong balance sheet and our talented employee base who are very capable and willing to pursue and take on the next challenge or opportunity.

Now, I’d like to turn the call over to Linda to discuss our financial results for the quarter in more detail. Linda?

Linda Pearce

Thank you, Bruce, and good afternoon, everyone. As Bruce mentioned, we had a solid first quarter and we are pleased with the results. Net sales for the first quarter totaled $59.2 million, an increase of 15.5% as compared to the same period last year.

First quarter gross margins improved 520 basis points to 51.8% versus 46.6% last year. The gross margin improved in each of our channels, including an increase in royalty revenue. The increase in royalty revenue over the prior year first quarter added 30 basis points to the overall gross margin improvement.

Income from continuing operations improved $5.5 million for the first quarter of 2013, compared to $2.6 million for the first quarter last year.

Income per diluted share from continuing operations for the first quarter doubled to $0.18 compared to $0.09 per diluted share for the same period last year. This strong improvement in results from continuing operations is primarily attributed to higher sales, improved gross margins and higher operating income in the Direct business.

We reported total net income, including discontinued operations of $5.2 million or $0.17 per diluted share for the first quarter of 2013, which compares favorably to net income of $2.5 million or $0.08 per share -- per diluted share for the same quarter last year.

Net income for the first quarter of 2013 includes a loss of $400,000 or $0.01 per diluted share from discontinued operations. This is primarily due to normal legal expenses of closing the entities which were budgeted and expected.

Net income for the first quarter of 2012 included a loss of $100,000 or $0.01 per diluted share from discontinued operations.

Total operating expenses for the first quarter as a percentage of sales increased just slightly to 41.7% from 41.1% for the first quarter last year.

Selling and marketing expenses totaled $18.6 million or 31.5% of sales for the first quarter, compared to $16.1 million or 31.3% of sales for the first quarter last year. Our media strategy and creative messaging was very effective at driving awareness of our new products and generating higher sales of our existing products.

General and administrative expenses amounted to $4.9 million or 8.4% of sales for the first quarter, which compares to $4 million or 7.8% of sales in the prior year period. The increase was due to one-time personnel cost and IT infrastructure spending. The first quarter of 2012 was unusually low due to some one-time anomalies going the opposite direction.

Research and development cost in the first quarter of 2013 were $1.1 million, compared to $1 million the same period last year. We continue to invest in new products at a greater pace than last year.

Now turning to our segment results. Net sales in the Direct business totaled $42.6 million for the first quarter, a 26.4% increase over the same quarter last year. This improvement reflects strong demand for our cardio products, especially our Bowflex TreadClimber line. This strong demand was partly driven by increased advertising and call center effectiveness, and higher U.S. consumer credit approval rates.

U.S. credit approval rates rose to 35% in the first quarter of 2013, up from 30% for the same period last year. Bill will explain shortly some of the things driving the improved credit approval rates.

First quarter 2013 Direct sales also benefited from sales of CoreBody Reformer and the Bowflex UpperCut. Our Direct team continues to drive efficiencies by balancing the right creative content, media mix and placement. This has generated strong leads and driven our top and bottom line improvements for this segment of our business.

Operating income for the first quarter in our Direct segment improved to $6.7 million, a 121.5% improvement, compared to $3 million in the prior year. This improvement reflects stronger sales, as well as a 330 basis point improvement in the Direct segment gross margin.

As Bruce mentioned, gross margin for the Direct business was 59.8% for the first quarter of 2013, compared to 56.5% in the first quarter of last year. Direct business gross margins benefited from better product mix of higher margin cardio sales.

Net sales in our Retail segment for the first quarter were $15.1 million, compared to $16.6 million in the first quarter last year. This year-over-year decline reflects a soft overall retail environment for fitness equipment.

Operating income for the Retail segment was $2 million, compared to $2.3 million for the first quarter last year. Retail gross margin was 24.9% in the first quarter of 2013, compared to 23.8% in the same quarter of last year. The 110 basis point improvement in retail gross margin reflects the results of our effort to improve product margins for the retail business.

For modeling purposes, it is important to keep in mind that last year, our Retail sales in Q2 reflected a significant shift of retail customer orders from the third quarter to our second quarter in anticipation of a midyear price increase. Please keep this in mind, when modeling our Retail sales for Q2 and the back half of this year.

Regarding our increase in royalty revenue, it is important to note that part of the increase was due to a one-time true-up with one of our licensing partners.

Now, turning to our consolidated balance sheet, we had another quarter of strong positive cash flow. Cash and cash equivalents increased to $28.7 million as of March 31, 2013, with no debt financing, which compares to $23.2 million and no debt at the end of 2012.

Inventories were $13.7 million as of March 31, 2013, compared to $18.8 million at the end of last year and $13.5 million at the end of the first quarter 2012. The company tightly manages inventory and the reduction in the first quarter was planned and reflects the seasonal nature of our business.

Trade payables were $17.8 million as of March 31, 2013, compared to $32.8 million as of December 31, 2012, and $23.5 million at the end of the first quarter of 2012. Inventory purchases were brought in earlier in the first part of the quarter reducing our trade payables at quarter end.

Now shifting to our tax provision. The company has prior state and federal net operating losses, a capital loss and income tax credit carry forwards in various jurisdictions. All of these are fully offset by valuation allowances and are available to offset future taxable income generated in such jurisdictions if any.

We periodically evaluate the potential realization of our deferred income tax assets. It is at least reasonably possible that within the next 12 months a review of the object evidence may indicate that a portion of the company’s valuation allowance is no longer appropriate.

If such a determination is made, release of the valuation allowance would be recognized as an income tax benefit to continuing operations in the period in which such assessment is made and the amount recognized could be material. As of March 31, 2013, there has been no material change to the company’s valuation allowance.

At this time, I would like to turn the call over to Bill McMahon, our Chief Operating Officer, who will provide some additional insights into our business and key product initiatives. Bill?

Bill McMahon

Thank you, Linda. I’d like to make a few comments regarding our operations to provide additional background on our first quarter results. Our Direct business continues to experience strong growth driven by the performance of our cardio product lines and with sales in Canada.

The Bowflex TreadClimber cardio machine continues to perform well as the awareness of the proprietary TreadClimber brand trademark increases in the marketplace. Our Direct channel results also benefited from the performance of two of our newer products, the Nautilus CoreBody Reformer and the Bowflex UpperCut.

Nautilus CoreBody Reformer, which we relaunched utilizing new creative content in the fourth quarter of last year has performed in line with our expectations, with sales more than doubling over the same period prior year.

We will continue to invest in and refine our messaging approach for this product. Our direct sales also benefited from solid initial sales for the Bowflex UpperCut, which was launched early in the first quarter. This product leverages the strength of our Bowflex brand, which our research confirms is the most recognized brand in consumer fitness and builds on the established Bowflex heritage of effective and efficient strength training that provides fast results.

The UpperCut product exceeded our expectations for media performance and conversion at initial launch. And we have in a controlled manner, accelerated our media spend in support of this product. It is early in the awareness creation phase, so caution is always in order as we attempt to grow. But we are optimistic about our creative message, given the performance of UpperCut today.

Our Direct channel also benefited from year-over-year improvement in consumer credit approval rates, which in turn helped drive sales for higher-priced items in our Direct portfolio. Some of this improvement is due to general economic conditions, trends in consumer spending and consumer willingness to take on debt.

However, as with the improvement seen in Q4 2012, we’re able to attribute much of this credit improvement to our media strategy and creative messaging that is focused on, where possible, drawing more credit worthy consumers towards considering our unique and innovative products. For Direct, our product strategy continues to be focused on identifying new, incremental market and price-point segments and deploying products that provide solutions and value to consumers within those segments.

We have additional products in the development pipeline spanning a variety of modalities and price points. We expect to announce further new product launches in Direct later in 2013.

Turning now to our retail business, as Bruce described during his remarks, the overall retail environment for fitness products has been challenging, as we’re finding that our retail partners continue to be very cautious with their spending in this category. We have been focused for the past year on developing an updated line of cardio products, including bikes and elliptical machines, both from the ground up with our consumer insights and research findings incorporated into a highly competitive design.

These products are on track and scheduled for introduction this fall. We feel that combining our already high product quality profile with compelling, consumer insight driven product feature sets, under the umbrella of our strong brand, will be the key to acquiring incremental retail market share and ultimately driving higher sell through and growth within the retail business.

We know that generally retailers were disappointed in the overall performance with their fitness category in the second half of 2012. And they are looking for improvements in traditional on floor categories such as bikes and ellipticals as well as new and innovative products.

We were immersed in the final decision process across all of our retailers for their fall 2013 assortments, so very little is firm and final. Findings for the fall assortment varies by retailer but in general will be determined in the next 30 days.

That said, we are encouraged by how retailers are responding to our products during the evaluation phase. At a minimum, we believe the initial positive reception validates that our design efforts are focusing on the proper areas of opportunity, that should drive improvement over time. We will be able to provide additional color on this during our call in August.

In terms of our outlook for the retail business for the next quarter, it’s important to keep in mind that our Q2 fiscal 2012 sales benefited from certain of our retail partners accelerating their buying patterns in advance of our price increases in the back half of 2012. Additionally, as retailers make their buying decisions for the fall 2013 season, if both decisions include adoption of our new bikes and ellipticals, it will be less likely that they will purchase large replenishment amounts of current inventory in Q2.

As this transition occurs, our retail business is facing a difficult comparison year-over-year in Q2. As always, it’s important to keep in mind that our retail business contributes to strong -- strongly contributes to our overall profitability. Looking further to the back half of the year and into next year, we feel that we have taken the right steps to position our retail business for sustained future growth.

Now, turning to our third revenue source, which is the strategic licensing of our intellectual property and our brands. Nautilus had several well-known brands and we believe that there’s an opportunity to better leverage these brands and potentially increase our royalty revenue.

In Q1, we announced our partnership with the Seltzer Licensing Group to explore possible options. We have just completed our first review of research design to identify potential services and categories where our brands could be extended via licensing.

Work with our partner is ongoing and is highly prioritized though it is important to emphasize that these activities will not provide immediate results. The phase of identifying potential license partners has been followed by development time to bring products to market that in turn will generate royalties based on their success.

Thus, while it is unlikely we will see increased revenue in 2013 from these specific efforts. Over the long-term, we feel this investment will pay dividends. Regarding the licensing agreement in place for commercial TreadClimber, our partner Star Trac showcased the new in-production commercial TreadClimber at the March IHRSA trade show in the United States and at the FIBO trade show held in April in Germany.

The feedback and interest from this product unveiling was quite positive. Star Trac has begun to sell the product and expects to begin installing units during Q2. Availability will be initially limited, per plan as Star Trac verifies fuel performance and customer satisfaction within the install base. Nautilus will drive royalty revenue based on sales on a quarterly basis moving forward.

In summary, Nautilus is in a strong and improving position. We are encouraged by the performance of our newest products, and are optimistic that they will be important long-term contributors to our top and bottom-line growth.

We also have several exciting new product ideas in the pipeline. And we expect to continue introducing new products with a regular cadence. Importantly, we have continued to refine our sales and marketing strategy, including our creative content, internet marketing and social media efforts, which will help support the launches of future products.

We are excited about our outlook for fiscal 2013 and the long-term potential for Nautilus. Now, I’d like to turn the call back over to Bruce for his final comments. Bruce?

Bruce Cazenave

Thank you, Bill. Before opening up the call for questions, I would like to take a few moments to comment on the business in general. Following the improvements, we made over the past two years, our business is achieving strong momentum and beginning to realize the financial benefits of our team’s successful implementation and execution on the key areas of focus.

Our focus this year is continuing to generate strong top and bottom-line growth in Direct by capitalizing on the growing demand for our established product lines line and driving awareness of new products. As Bill discussed, we are encouraged by the sales of most recently launched products.

To further extend -- expand consumer awareness of new products, we will continue to prudently invest in sales and marketing efforts with the goal of building a strong foundation across a more diversified offering of products. This will enable more sustained growth in the future.

We are also committed to improving and growing our retail business. The share growth opportunity is still significant and we believe we are moving in the right direction with our new product offerings scheduled to launch in the back half of this year.

That concludes our prepared remarks. And now, I’d like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of Reed Anderson of Northland Securities. Please go ahead.

Reed Anderson - Northland Securities

Good afternoon.

Bruce Cazenave

Hi Reed.

Reed Anderson - Northland Securities

Nice quarter. Good job. A couple of questions, first off, just kind of looking at the Direct side, the revenue lines nicely above where we were, kind of, forecasting. Curious, and I know you don’t want to give a lot of detail for competitive reasons. But if you look at CoreBody where you reposition that kind of after the anniversary.

You said it was up two x in the first quarter year-over-year. Curious, was -- would it been up sequentially with the first quarter CoreBody been a bigger revenue number than it was in the fourth quarter?

Bruce Cazenave

I don’t think it would be bigger than in the fourth quarter.

Reed Anderson - Northland Securities

Okay. Seasonality wise, that’s why I was curious.

Bruce Cazenave

Yeah. The single largest month would be January, really. So, we are finding what CoreBody is performing -- it’s improving overall year-over-year and its meeting our hurdles. But it’s not yet mature enough to get a real, I’d say, seasonal trend out of it yet. There’s other factors like how many ads are run, et cetera that are playing a bigger part.

Reed Anderson - Northland Securities

Yeah. And then, I’m curious too, is it nice to see a good traction early with the UpperCut. Two questions on that, one, is you talk about accelerating the media spend. Just curious if that’s just more spend in the same areas. If you are tweaking that in certain ways, any color there?

And then, I guess, secondly, is there a thought here, Bruce, potentially, that as you get into some of these lower price-point products, that you maybe won’t have quite the seasonality skewed heavily to a few months that you wouldn’t in the bigger ticket items? Thoughts on that, please.

Bruce Cazenave

Let me let Bill handle the first part of it. And I’ll take the second part, Reed.

Bill McMahon

On the spend, we certainly accelerated ahead of our original plan on UpperCut. And generally, that was our higher spend than planned overall. However, we do routinely shift moneys around in media, as you know, Reed, as opportunities present. So, it wasn’t a dramatic increase over plan but it was certainly more than we planned.

Reed Anderson - Northland Securities

Okay.

Bruce Cazenave

Yeah. And Reed, on the PCs utilization of the business. Certainly we like to have products that are more stable or flat throughout the year. UpperCut could be that. CoreBody, actually, in some of our positioning photography, et cetera, marketing materials are positioning it more as an outdoor item, particularly at this time of the year. So, the more we can do that, the better. It certainly level loads our warehouse and other infrastructure costs, which would be a nice thing. But we can only sometimes -- we can only do that so far.

Reed Anderson - Northland Securities

Understood. Good. Linda, on the royalty piece, you said that was a true-up in there. Just curious, what was that -- did that account for a lot of the year-over-year increase or was it the smaller portion?

Bruce Cazenave

Not all of it.

Linda Pearce

It wasn’t all of it. I think it was really about maybe half of the increase.

Reed Anderson - Northland Securities

About half? Okay.

Linda Pearce

Yeah.

Reed Anderson - Northland Securities

Okay. Good. And then I’ll let somebody else jump in me. But on the credit approval side, we continue to see progress there. I mean, Bill, do you think there’s more headroom to that 35% number or are we kind of inching up to where you figure it might sort of start to stall out here or will you sustain it, that kind of thing.

Bruce Cazenave

Well, I think as we discussed before, I think a lot of it comes down to -- if the housing market continues to improve and unemployment creeps down. Generally, then our providers might take a look at their scorecard and then approve more or take more risk.

And we’re always pushing for that, as you might guess. So, we are always hopeful that there’s more room to grow. But I don’t know if it will come in the large changes that we’ve seen year-over-year in the last past few quarters. We’ll certainly try it forward but I can’t promise that.

Reed Anderson - Northland Securities

That make sense. Good. Best of luck. Thank you.

Bruce Cazenave

Thank you, Reed.

Operator

Thank you. And our next question is from the line of Chris Armbruster with B. Riley & Co. Please go ahead.

Chris Armbruster - B. Riley & Co.

Hey guys. Thanks very much. And yeah, congratulations again on a fantastic quarter.

Bruce Cazenave

Thank you, Chris.

Chris Armbruster - B. Riley & Co.

On the gross margin in the direct business, it’s getting -- it’s exceeding the numbers from a year-over-year basis by a pretty wide margin. Is that sort of year-over-year improvement something that you could sustain for another couple of quarters before you come up against the comparisons maybe in Q4? I’m just trying to get a feel for how sustainable those large increases on the margin side, given that you are expanding the portfolio? And how sustainable they can be?

Bruce Cazenave

Well, Chris, we plan to sustain our gains in terms of drawing further improvement. It’s always -- a lot of times it’s coming down to mix at this point. In the first quarter, we benefited from selling a pretty good mix of our higher-priced products and that always helps margins.

We’re constantly looking at our product cost and trying to optimize across the board, in terms of value engineering. But we are starting to reach a high end where I think we’ll be happy to sustain what we have and perhaps smaller improvements will be coming. We won’t give up on improving, but it is reaching a ceiling that’s starting to reach the area that Bruce outlined in his long-term strategy.

Chris Armbruster - B. Riley & Co.

Right.

Linda Pearce

And part of it is greater absorption of our fixed cost. So, with our revenue volume goes down, we will lose our advantage. So, think about that, as you forecast out the other quarters.

Chris Armbruster - B. Riley & Co.

Right. Okay. That’s helpful. And then, on retail, you had year-over-year improvement in margins there. I know Q2 is going to be a little tricky because of you pulling sales forward. But you expect year-over-year margin increases now going forward, even if they are small or is there still some risk that retail margins could slide back, just on -- maybe on the lower absorption of the fixed side of the cost?

Bruce Cazenave

Yeah, Chris, I think Linda made a good point is to definitely, when you get into the slower parts of the year, particularly Q2 and to some degree Q3, the volume, through overhead absorption during those quarters is not as much as it would be in the first or fourth quarters. So, you have that working against you.

But I would say, generally, we are doing everything that we can to get the trajectory to continue. So, I would say once we come out of the slower part of the year and we’ve talked about the back half of the year with new product’s and the margins in new products, that we should be a better trajectory, is our hope, going forward.

Chris Armbruster - B. Riley & Co.

Okay. And then just one quick housekeeping item and then I’ll let it go. But what was the depreciation and amortization in the quarter? If I could have it.

Bruce Cazenave

Can we get back to you on that on a second?

Chris Armbruster - B. Riley & Co.

Sure. No problem. Thanks, guys.

Operator

And our next question is from the line of Joe Munda of Sidoti & Co. Please go ahead.

Joe Munda - Sidoti & Co.

Good afternoon. Thanks for taking the questions.

Bruce Cazenave

Hey, Joe.

Joe Munda - Sidoti & Co.

Bruce, I got a quick question for you here. As far as the sales and the media spend that you guys have been going through, you have a system in place to track the -- or gauge the effectiveness from some of the ads that are run? Let’s say on ESPN for UpperCut. Can you directly correlate that that ad was effective in one buyer purchasing the UpperCut?

Bill McMahon

Hi, Joe, this is Bill. To the extent that people use the methods, for instance, the phone number in the ad or other ways that we have of tracking, we can correlate the effectiveness of any given ad placement. More and more, today though it’s important to note that there is awareness that’s generated and then people just come to your website and buy. You can only do indirect correlations of that performance. But we definitely do analyze on a weekly basis down to the ad and placement level…

Joe Munda - Sidoti & Co

That’s why I was wondering if the ad run and then 20 minutes later you are starting to see a spike in sales. Can you see that in real time?

Bill McMahon

Yeah. In fact, a lot of times the response is while the ad is running.

Joe Munda - Sidoti & Co

Okay. And then, on the retail side, you guys -- with the environment being challenging and you’re talking about the new bikes and ellipticals, I’m just curious, what is so different on these bikes and ellipticals as in past offerings? I know you don’t want to give away the store but I’d like to know if it’s new technology that’s being introduced or is it going to be an iteration to the current model? I’d like to get some color there.

Bruce Cazenave

Yeah. Joe, it’s a little bit of everything. Some of it is just incorporating the research where we’ve got together with consumers and learned what are they using the product for and why? How do they want to track their workout, et cetera?

So, it creates a more engaging environment to help coach people along towards their goal. The products we make are already pretty high-quality. So it’s a matter of creating an environment for them that’s easier to use and track. We will have more news on that as we get closer to the launch of the product.

Joe Munda - Sidoti & Co.

And will it have like some iPhone or iPod capabilities?

Bruce Cazenave

It will have capabilities to engage and track your workouts over time and in an online environment.

Joe Munda - Sidoti & Co.

Okay.

Bill McMahon

The other thing, Joe, I would add that there is a lot of work over the last year to improve what we call touch points on the product. So, there are design elements, industrial design kind of thing where the user interacts with the product that we think we’ve kind of taken a step ahead in regard to those points.

Joe Munda - Sidoti & Co.

Okay. Then, Bruce, you had spoken about media guys are in the final decision process. So, has production begun on some of these new products or is this more of a second, third quarter type of situation where you guys roll, begin production and then roll it out at the same time?

Bruce Cazenave

The actual bulk production hasn’t started yet. It wouldn’t start for another couple of months. But they are running prototypes and doing what we would call pre-production kind of work to make sure everything is ticked and tied and the product has the quality that we want in the bulk production, which is what we will end up shipping to our customers. Normally, in the retail cycle, it works that they would start receiving product maybe as early as August or more likely September and over.

Joe Munda - Sidoti & Co.

Okay. And Linda, my last question and I will hop back in the queue. You spoke about a difficult comp. I know some other callers brought this up. I’m just curious, how many of those sales that occurred in 2Q of last year, I don’t need an exact number, I’m guessing it percentage-wise, where sales that were pulled through. I’m just trying to get a sense of what percentage of those sales in 2Q ‘12 were basically brought up front.

Linda Pearce

Joe, let me handle that. That was before Linda’s time with us. But actually, it’s very difficult to tell exactly how much was moved forward in anticipation of the price increase. So, all we know is it’s affected Q3 last year significantly and maybe even, to some degree, Q4 but is very difficult to quantify.

Joe Munda - Sidoti & Co.

Okay. Thank you.

Bruce Cazenave

Let me get back to also, Chris, if you are on the line, our depreciation and amortization in the quarter was $818,000.

Operator

Thank you. And our next question is from the line Matt Dhane of Tieton Capital Management. Please go ahead.

Matt Dhane - Tieton Capital Management

It’s Matt Dhane of Tieton Capital Management. I was curious, are you seeing retailers cutting back on floor space that they are willing to dedicate the fitness. I guess, in particular, for the next fitness season, due to the category weakness that you’ve seen here?

Bill McMahon

I think, Matt, this is Bill. Thanks for asking the question. We certainly are aware of discussions with several retailers who are rationalizing what they’re looking at for fitness on their floor space for the fall. It’s similarly tied to our sell in confirmations we don’t know for sure what some of the retailers are doing.

But I would say in general, certainly possible some retailers will cutback on their floor space. We think though that if that occurs it’s going to be primarily in areas that we aren’t necessarily a player in, such as treadmills.

Matt Dana - Tieton Capital Management

Okay. Thank you.

Operator

(Operator Instructions) Our next question is a follow-up question from the line of Chris Armbruster of B. Riley & Co. Please go ahead.

Chris Armbruster - B. Riley & Co.

Just a couple other quick ones. Did I hear correctly that the CoreBody Reformer in Q1 was twice -- the sales in Q1 were twice what it was from like Q1 last year?

Bruce Cazenave

That’s correct.

Chris Armbruster - B. Riley & Co.

Okay. And then, on your -- the Retail -- the new retail equipment that is going to be on the second half of this? Do you guys start booking revenue on that in Q3 or, I mean, is the bulk of it in Q3 or is it in Q4 too?

Bruce Cazenave

Late in Q3, generally in Q4, corresponding with retailers who set their floors around just after back to school into October timeframe.

Chris Armbruster - B. Riley & Co.

Okay. So, I mean, give a kind of a ballpark percent of what would be -- what you would expect in Q3 versus Q4 in terms of the incremental sales that could accrue to you guys from the new equipment?

Bill McMahon

The lion share generally would probably be in the Q4, early Q4 timeframe.

Chris Armbruster - B. Riley & Co.

Okay. Fair enough. Thanks, guys.

Operator

Thank you. And our next question is from the line of Andrew Burns of D.A. Davidson. Please go ahead.

Andrew Burns - D.A. Davidson

Thanks. Good afternoon. A couple of questions for you. Just in terms of this evaluation phase currently with the new Retail products, the bikes and ellipticals, can you walk me through your conversations in terms of how the external environment is affecting, perhaps open to buy, obviously, there would be willingness to buy new and exciting product that I would expect that open to buy, but just it would be pretty tight given the category weakness?

Bruce Cazenave

I think you are hitting on a key factor that impacted us near-term, Andrew and that that not just with us but generally overall, most especially bricks and mortar retailers were unhappy with their fall season. Some of them are public and have talked about it and that does impact the near-term open to buy, it also means that they will probably be trying to clear inventory near-term before the fall season.

I think the majority of retailers, no matter what they do with their floor size are definitely hungry for new product. We certainly hope to get a piece of that and in near-term though they do need to clear some inventory down.

Andrew Burns - D.A. Davidson

Okay. So, it sounds like on these new Retail programs that the potential for financial impact for you guys is a little bit greater in the fourth quarter versus the third?

Bruce Cazenave

I think that’s -- I think that’s when we’ll see the majority of the sales happening, traditionally in retail it would be in Q4.

Andrew Burns - D.A. Davidson

Okay. Thanks. And then, in terms of media spend, it sounds like with the UpperCut success, picking up some dollars there for that, that particular product. Overall, relative to where you started the year with budgeting, is your media spend a bit -- growing a bit higher than you would have thought, given the success you are seeing in to start the year?

Bruce Cazenave

Yeah. It’s -- I would say it’s slightly higher, Andrew, but not outrageously so. I mean, we manage media pretty tightly and but we are willing to expand additional funds if opportunities present. So far it’s pretty much in line maybe a little higher.

Andrew Burns - D.A. Davidson

Okay. So when you talk about, potentially taking up a little bit from the UpperCut that’s more placing dollars to the UpperCut, that’s more about balancing spend within the portfolio versus growing the overall spend?

Bruce Cazenave

I think in year-over-year comparisons our selling and marketing will be higher because we will continue to invest in the new product as they grow. Within a given quarter versus our plan we routinely shift media dollars around as opportunities present or go away in a big environment such as media is.

So that’s the confusing answer but basically year-over-year we will invest in selling and marketing specifically media in support of a new products. You’ll see higher expenses in that category and obviously, we hope attendant higher revenue.

The other thing is, I know a lot of people focus on media. But we do -- we have been stepping up our efforts in digital, social media and even PR campaigns. So there is other venues to reach the consumer, which we’ve been actually stepping up besides what we are doing in -- on media -- in media.

Andrew Burns - D.A. Davidson

Great. Thanks. One more -- one more here. In terms of the new product launches in direct-to-consumer later in the year, are those items that could have a financial impact or in the second half, were you talking about announcements where really the bulk of the initial launch would be more towards ‘14?

Bruce Cazenave

I would say we would rather withhold that until we get to the August Q2 earnings call and we can give you a little bit more guidance there in terms of what potential impact some of these new things will have in ‘13 versus ‘14.

Andrew Burns - D.A. Davidson

Great. Thanks and good luck.

Bruce Cazenave

Thank you, Andrew.

Operator

Thank you. And there are no further questions. I’ll turn the call back to our speakers for their closing comments.

Bruce Cazenave

Thank you everyone for participating and your interest in our call today. We look forward to speaking with you in our next and second quarter conference call in August. Thank you all very much.

Operator

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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