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Nautilus, Inc. (NYSE:NLS)

Q2 2013 Earnings Conference Call

August 5, 2013 4:30 p.m. ET

Executives

John Mills - ICR, Investor Relations

Bruce Cazenave - Chief Executive Officer

Bill McMahon - Chief Operating Officer

Analysts

Reed Anderson - Northland Securities

Joseph Munda - Sidoti & Company

Ian Corydon - B. Riley & Co.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Nautilus Q2 fiscal 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 call is being recorded Monday, August 05, 2013. I would now turn the conference call over to John Mills, Senior Management Director of ICR. Please go ahead, sir.

John Mills

Thank you. Good afternoon and welcome to Nautilus’ second quarter 2013 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer; and Bill McMahon, Chief Operating Officer.

Remarks during today’s conference call may include forward-looking statements concerning the company’s prospects, current and 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 results 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. I would like to begin today's call with a general overview of the quarter and an update on our business and then I will move on to review our financial results in more detail. During the second quarter we continued to achieve growth in our direct business primarily driven by the steady growth of our core cardio products as well as increased sales versus last year on both the CoreBody Reformer and the new Bowflex UpperCut.

The second quarter is our seasonally slowest quarter of the year and is a time when our focus is directed towards positioning ourselves for the back half when the fitness season gathers momentum and the scale of opportunity is greater. To that end, we made a strategic decision to increase our media spend in the quarter versus last year in order to continue to build awareness of our new products and create a sales lead foundation for the back half of the year. In addition, we invested in launch activities associated with our licensing initiative, which will leverage our strong brands and help drive high margin revenue for our licensing business in the years to come.

While these investments put pressures on our short term operating results, particularly as mentioned in the seasonally slowest quarter of the year, we believe they are important to the exposure to further improve the longer term foundation of the Nautilus including increasing exposure of our brands and providing key complementary sources of revenue and profitability of our overall business. As a point of reference, despite the slower growth of revenues in the second quarter, the direct business year-to-date is running 16% ahead of last year in revenue and 79% ahead in terms of profit contribution.

Moving to retail. As we previously discussed, we expected the second quarter for retail to be challenging from a year-over-year point of view because of tough comparison to second quarter of 2012. In the second quarter of last year, our retail revenue increased 23% as some customers accelerated their normal buying pattern from the back half of the year into the second quarter in anticipation of the price increase implemented mid-year last year. This year we expect our retail sales to follow the usual seasonality pattern and be weighted more towards the back half of the year.

One of our key focus areas has been improving the foundation of our retail segment, particularly in terms of product innovation and margin improvement. It is for this purpose, we developed whole new line up of cardio equipment for this fall season. And we have been very encouraged by our retail partners responses to these new products. We are optimistic based on the product placements and initial customer orders, which will begin shipping in the third quarter and accelerate in the fourth quarter, that we will experience increased revenues in the back half, enough to return to positive growth on a full year basis in 2013 as compared to 2012.

While for the reasons I mentioned, our second quarter results are not representative of our target long-term profitability trajectory, the underlying trends are positive and we are pleased with the position of our business going into the back half. And with the long term improvements we are making in our operating platform. Importantly, we continue to make progress improving gross margins as evidenced by a overall margin improvement in the quarter, as well individual improvements in both of our retail and direct businesses. Our focus continues to be on expanding our product portfolio with innovative fitness products that capitalize on our deep brand heritage.

Improving our product margins and leveraging our operating structure. Before I move on to discuss our financial results in more detail, I would like to comment on our chief financial officer's search. We are still early in the process but have already received significant interest from very experienced and talented CFO's from across the country. We will update you on our progress as appropriate.

Now turning to our financial results, net sales for the second quarter totaled $36.2 million, a decrease of 8.4% as compared to the same period prior year, year-to-date through two quarters, net sales are $95.5 million, a 5.1% increase over the same period last year. As mentioned, the second quarter overall gross margin improved 440 basis points to 47.8% versus 43.4% last year. This increase is primarily due to higher gross margins in both retail and direct businesses. Secondly, to a greater of percentage of sales coming from the company's higher margin direct segment, and thirdly, to greater overhead efficiency.

On a year-to-date basis, gross margin is 50.3%, a 510 basis point improvement over the same period last year. 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 expected lower net sales in the retail segment as well as our strategic decision to increase media spend to drive awareness of new direct products and increase its sales lead foundation for the back half of the year. Year-to-date operating income increased to $4.3 million, up from $2.2 million last year.

Income from continuing operations was $32.7 million for the second quarter of 2013 which includes a $34.3 million income tax benefit due to a partial reversal of the valuation allowance following a review of the objective evidence which indicated that a portion of the valuation allowance is no longer appropriate given recent profitability improvements. Excluding this tax benefit, our loss from continuing operations before income taxes one $1.6 million. This compares to a loss from continuing operations before income taxes of $0.7 million for the same period last year.

On a year-to-date basis, income from continuing operations excluding the net income tax benefit, increased to $4.3 million as compared to $2.2 million last year. Income per diluted share for continuing operations for the second quarter of 2013 was $1.04, which includes $1.09 related to the income tax benefit. Excluding this 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 the same quarter a year ago. On a year-to-date basis income per diluted share excluding the net income tax benefit is $0.13, up from $0.07 last year. We reported total net income including discontinued operations of $32.9 million or $1.05 per diluted share which includes the aforementioned income tax benefit.

Excluding the net income tax benefit, the net loss was $1.4 million or a loss of $0.04 per diluted share. In the second quarter 2012, our net loss including discontinuing operations was $0.2 million or a loss of $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 and net income in the second quarter last year included income of $0.3 million or $0.01 per diluted share from discontinued operations. Total operating expenses for the second quarter as a percentage of sales increased to 52.6% from 44.9% for the second quarter last year. The increase in operating expenses as a percentage of sales was primarily due to increased selling and marketing expenses which totaled $13.8 million or 38% of sales for the second quarter compared to $12.6 million or 31.7% sales for the second quarter last year.

As I previously stated, this reflects our decision to invest in media spend and support the launch of our licensing initiative. We were pleased with our creative messaging surrounding our new products as well as our existing products and believe that it is prudent to make an investment to build leads in order to help drive sales in the coming quarters. General and administrative expenses decreased to $4.0 million or 11% of sales for the second quarter of 2013, which compares to $4.3 million or 10.8% of sales in the same period last year. Research and development cost in the second quarter of 2013 were $1.3 million compared to $0.9 million in the same period last year.

We continued to invest in new products at a greater pace than last year, in line with our commitment to rollout new products with a regular cadence. Turning now to our segment results. Net sales in the direct business totaled $25.3 million for the second quarter, a 2.5% increase over the same quarter last year. Direct segment sales benefitted from increased sales of our new products, CoreBody Reformer and Bowflex UpperCut, as well as strong demand for our cardio products especially our Bowflex TreadClimber product line. This growth as partially offset by a decline in strength products.

U.S. credit approval rates rose to 33.8% in the second quarter of 2013, up from 30% for the same period last year. Operating income for the second quarter in our direct segment was $0.5 million, compared to $1 million in the same quarter prior year. Higher sales and higher gross margins were offset by the previously mentioned sales and marketing investments we made. Gross margin for the direct business was 57.6% for the second quarter of 2013, compared to 55.1% in the second quarter of last year. Direct business gross margins benefitted from higher overall overhead operating efficiency and cost improvements.

Net sales in our retail segment for the second quarter were $10.2 million, a decrease of 27.5% compared to $14 million in the second quarter last year. As mentioned, the retail segment sales in the second quarter of 2012 benefitted from some retail customers accelerating a portion of their purchases into the second quarter from back half compared to their typical buying patterns. In addition, the overall retail environment for fitness equipment remains soft in the second quarter of fiscal 2013. Operating income for the retail segment was $0.1 million compared to $1.1 million for the second quarter last year. Retail gross margin was 19.5% in the second quarter of 2013 compared to 19.2% in the same quarter last year, a 30 basis point improvement which is directionally encouraging considering the lower volume base to absorb overhead cost this year versus last year.

I would like to reiterate that we are optimistic about the back half and do expect our retail segment to show growth and improved operating results on a full year basis in 2013 compared to 2012. As it relates to our consolidated balance sheet, we continue to be in a strong financial position. Cash and cash equivalents increased to $28.4 million as of June 30, 2013 with no debt financing, as compared to $23.2 million and no debt at the end of 2012. Inventories were $13.3 million as of June 30, 2013, compared to $18.8 million at the end of last year and $12.6 million at the of end of second quarter 2012. We tightly manage inventory and believe that inventories that are at proper level to support our sales in the back half of the year.

Trade payables were $16.6 million as of June 30, 2013 compared to $32.8 million as of December 31, 2012 and $16.9 million at the end of the second quarter 2012. 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 products. Bill?

Bill McMahon

Thank you, Bruce. I would like to add a few comments regarding our operations and provide additional background on our second quarter results in positioning for the back half of 2013. Starting with our direct business. We continue to make progress in this segment. In our seasonally slowed quarter, our cardio product lines including the TreadClimber, continue to grow. While we routinely discuss our investments in new product advertising, it's very important for us to maintain a regular cadence of new marketing assets for our mature product platforms as well.

As such, we continue to invest in refreshed advertising in support of TreadClimber. In early July, we launched a new television ad for TreadClimber, and while it is early in this ads lifecycle, we are pleased with the gains it has provided to date. Our results also benefited from the performance of the Bowflex UpperCut, which was launched early in the first quarter of this year. This product leverages the strength of our Bowflex brand combined with an innovative yet affordable strength training package. Uppercut media response and conversion continues to exceed our expectations. As Bruce said, we have strategically accelerated our media spend in support of this product to help drive awareness and build sales leads.

While the direct business has experienced rapid growth over the past 18 months, we continue to expect improved direct segment results in the back half of 2013 compared to 2012 due to our strategic investments. As Bruce mentioned, consumer financing approval rates improved on a year-over-year basis in Q2. Product approval rates do historically exhibit a seasonal trend, but on a comparison basis they have continued to improve over the past several quarters. We remain in closed communication with our credit provider partners, and based on what we know today, we do not forecast or anticipate a degradation in approval rates. We are hopeful that continued improvement in the housing market which is highly co-related to fitness equipment sales, will drive still more improvement in the second half of 2013.

We continue to focus on developing new products to further diversify our direct portfolio. Later in Q3, we will launch our long anticipated fitness activity monitor the Bowflex Boost Band. Boost is a low cost digital tracking device integrated with a smartphone application that allows users to set their goals across a variety of choices and track their progress throughout the day. The digital tracking market is large and growing. With Boost we sought to differentiate the product from existing offerings by finding segments and features not being served in the current market.

Boost features extended battery life and the ability to synchronize and track results via low energy Bluetooth versus requiring a physical connection to a computer. In short, it's an activity tracking appliance that fits the lifestyle of consumer looking to measure their progress that doesn’t require them to be a technical expert in doing so. The product will retail for $49.95, which is competitive in this space. We will market Boost initially via online, social media and public relations, as well as using Boost as a complement to sales of our other direct products.

More information on the product is available at our prelaunch website, www.bowflexboost.com. Lastly, in terms of our direct business, we intend to maintain a regular cadence of product launches. The majority of our recent direct launches have been in the lower price point product space. This is not coincidence as we have been under-represented in our offerings at those lower price points. And so it was strategically important to enter that space. However, our pipeline of product ideas is not limited to items below $500. Our next launch in the direct business will involve a mid-range price point product beginning at $999. Just as the TreadClimber changed the treadmill category, we feel this product will be an advancement within the very large elliptical machine space. We will provide more detail on this product in our Q3 earnings call in the early November and the product is scheduled to launch late this year or early Q1 2014.

Turning now to our retail business. As Bruce described during his remarks, we face difficult comparisons for this segment in the second quarter. In addition, the overall retail environment for fitness products has been challenging as our retail partners continue to be cautious with their spending throughout the first half of this year. In a response to these challenges, we have been focused for the past year on developing an updated line of cardio products including bikes including bikes and elliptical machines, build from the ground up with our consumer insights and research findings incorporated into a highly competitive design.

These products will first reach our partners stores in the September, October timeframe. We know that retailers have generally been disappointed with our overall fitness departments sales over the past several quarters, and they are looking for improved traditional products as well as new and innovative products that capitalize on evolving fitness trends. We kept this in front of mind throughout the product design and development process, and we are optimistic about our new retail portfolio and its potential in the marketplace.

We have long felt that the combination of our well recognized brands along with high quality products that are designed based on extensive consumer research and insight, would enable us to begin gaining retail market share and lead to long-term growth and profitability in this segment. Based on our current order book for Q3 as well as on the very positive feedback we have received from our customers regarding the new product offering, we feel we have succeeded in our initial goal. We expect, based on our current understanding, customer buying forecast to compare favorably to prior year and in the second half and to grow on a full year basis in retail in 2013.

I am proud of the Nautilus team's efforts to drive improvement in our retail segment and we will see positive effects from those efforts in the second half. However, as with our direct business, we feel this is only a first step and we intend to continue to utilize product innovation to gain market share in this space going forward. For both of our business units, much of our strategic direction is driven by our product development roadmap. We are endeavoring to create greater awareness of our products via public relations and outreach efforts, oftentimes in advance of a product launch, such that we can be reviewed in appropriate fitness and gift guides.

One key new component of these efforts will be an annual product preview even where we will showcase the new fall launches as well as new products near launch in our pipeline. We will hold our first event on September 10, in New York City. At this event we plan to display the new fall 2013 retail product line and the Blowflex Boost Band. It is also a chance to potentially preview the next direct product we plan to launch later this year. Information on time and location will be released closer to the event date.

Now turning to our third revenue source, which is the strategic licensing of our intellectual property and our brands. Nautilus has several know brands and we believe that there is an opportunity to better leverage these brands and potentially increase our royalty revenue. Earlier this year, we announced our partnership with the Seltzer Licensing Group to explore possible options. In June, we invested in a launch event at the 2013 Licensing Expo Show in Las Vegas. Over 15,000 product and brand licensing professionals attended this show, which allowed us to accelerate the introduction of our brands to those looking for partners.

We exited the show with many new connections. We are pleased with our progress and believe that over the long term this will be a key contributor to our top and bottom line growth. But as we stated previously, we do not expect this to be reflected in our financial results in the current fiscal year. Regarding the licensing agreement in place for commercial TreadClimber, our partner, Star Trac, began to ship and install units in July. The product is impressive and has passed a detailed series of prelaunch and field tests before being introduced to the commercial club.

We are pleased with the work that’s been done with this technology and look forward to seeing TreadClimber grow in the commercial markets for years to come. Nautilus will drive royalty revenue based on net sales on a quarterly basis moving forward. In summary, we are in a strong position as we began the second half of 2013 and remain on track to deliver a solid year. We continue to launch products as planned for our strategic roadmap which is designed to drive the business towards the long range objectives that Bruce has outlined for Nautilus.

Additionally, we feel we have a strong ability to support current and future products with the full portfolio of highly recognized brands and diverse marketing capability. With the launch of our new fall 2013 products, we will have improved the foundation of our retail business and believe that we are on a path returning to growth in this segment over the next several quarters. We are confident about our new product pipeline and look forward to discussing our plans further later this year.

Now I would 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. Over the past few years we have made tremendous progress and built a much stronger foundation for Nautilus including an expanded product portfolio and improved gross margins while continuing to operate in a lean and efficient manner to leverage our infrastructure over increasing revenues.

Our formula for growth remains the same. To drive top and bottom line growth by increasing the demand for our existing products while strategically launching new complementary, innovative fitness solutions. Concurrently, we are also focused on supporting our products with the proper levels of investment in marketing and media, including developing the right creative content. Our management team remains confident that the course we are on is the right one and we will continue to advance priority initiatives with a brisk while also proceeding cautiously and with patience when appropriate.

That concludes our prepared remarks and now I would like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Reed Anderson with Northland Securities. Please go ahead.

Reed Anderson - Northland Securities

Couple of questions. First I want to follow up on the expense timing. You talked about media spend, kind of feeling like it made sense to ramp that up. And then some of that also looks like was related to kind of launching license related stuff. You know, Bruce, I wondered if you could just maybe quantify that or give us sense of the order of magnitude. And then secondly, just from a timing standpoint, is this something you were kind of contemplating throughout the quarter, or was there an event or something that triggered it as the quarter kind of unwound and you decided you know what we've got to do this now. Just want to get a sense of, kind of, what you were thinking?

Bruce Cazenave

Yeah, I think it became apparent more during the quarter that it made sense to do it. Remember we launched UpperCut as an example in January. And the first few months we were feeling out in terms of what -- testing different creative messages etcetera and media plans. And as we got into the second quarter, it became apparent that this is an item that we needed to support at a higher level than what we normally would do, as the product goes through its first few quarters of introduction. So I would say it was more during the quarter. In terms of order of magnitude, it's approximately the difference between last year versus this year in terms of media spend increase. And that will be more apparent in our Q when it comes out later this year.

Reed Anderson - Northland Securities

Okay. Got you. And so, okay, that’s helpful. Would you say kind of the same in terms of -- a similar rationale when you talked about the incremental spend you had to get the licensing launched, or was there other factors related to that.

Bill McMahon

Yeah, Reed, this is Bill, good afternoon. The licensing was not nearly as high an investment as the media was but certainly it was incremental spend in order to support a show.

Reed Anderson - Northland Securities

And then just back to the media piece of that. Did the incremental dollars go towards more creative broader distribution, just qualitatively, what was it kind of directed at?

Bruce Cazenave

Primarily media versus creative, and primarily in support of new products as compared to last year where we weren’t on TV with new products.

Reed Anderson - Northland Securities

Okay, that’s very helpful. Thank you. And on the retail side, you talked about shipping the new products, you feel very -- obviously you've got some nice visibility there over the near term. You're going to be shipping those in 3Q. From a consumer standpoint, will those show up in your core customers, your retail stores, the bigger chains, that kind of thing? Will they be there in the third quarter or will they may not hit the floor until fourth quarter?

Bruce Cazenave

Most likely October timeframe. That’s usually when the floor sets are happening. Certainly they will buy in Q3, but floor deployment is based on several factors, not the least of which is clearing out other products to make room.

Reed Anderson - Northland Securities

Okay, that's great. And then a follow up to the retail piece is, again, as you look at your order book and who's interested in that product, it sounds like you've got some pretty broad excitement there. Is it a lot of the same customers you've had in the past, again, thinking more of the core bricks and mortar retailer, or are you seeing some other people garner some interest here as you've got now really a new line?

Bruce Cazenave

You know it's a little of both Reed. We certainly expanded with the majority of our core customer base but we have layered in some new customers. We can't speak to specifically yet but you will certainly see our product show up in some new places this fall.

Reed Anderson - Northland Securities

Okay, good. And then last one and then I'll let somebody else jump in. Bruce, so you had, in the direct side you had huge growth in the first quarter. It's a little bit slower in the second, but net, net on the six-month basis, you're still up a nice teens rate. Does that cause you to think differently about the second half in terms of growing that direct business, whether it's a double-digit rate or whatever? Is there anything that's changed there or, just kind of curious of your thoughts as we look in the second half on the direct?

Bruce Cazenave

No, nothing has changed, Reed. There is still a lot to be done in direct and you know the kind of growth trajectory that we have called out in some of our presentations in the past is the pace that we expect to continue.

Operator

Our next question comes from Joseph Munda with Sidoti & Company. Please go ahead.

Joseph Munda - Sidoti & Company

Real quick, first off, I want to start with the CFO search and you guys had said that it's still early in the process. I'm just wondering, any idea on the number of candidates that have been interviewed? Have any been interviewed and when do you expect a resolution?

Bruce Cazenave

It's difficult to say because we are, like I said, early in the process, Joe. We have probably a handful already that we talked to. We are in the initial -- what I would call the initial screening phases. So it will take some time and we will have the help of a national search firm to send out a broad net to make sure it's not just the referrals that we are looking at but actually a proactive search out for people who may not even be aware of the opportunity.

Joseph Munda - Sidoti & Company

Okay, that's helpful. And then I assume, Bill, the unallocated corporate expense you guys were talking about was the licensing for the show. Was that expense, that $2.4 million in the quarter?

Bruce Cazenave

Unallocated corporate expense, that would include a lot of other things, including incentive and things like that, Joe. The licensing will show up in the sales and marketing area and I don’t think we allocated to direct versus retail. It's just unallocated. But as Bill said, there was the expense of the show, there was also some expense getting it off the ground with our licensing agents and partner.

Joseph Munda - Sidoti & Company

Okay. And then as far as some of the other products that you had launched, the fitness DVD, any word or any news on that?

Bruce Cazenave

Yeah, in the DVD sales we are finding that it's a pretty crowded market and I am not sure that that product is going to justify television advertising in the near future. We take a look at the lot of opportunities there but the DVD product is not a major element of our sales at this point. We certainly continue to evaluate the space though, to see if we can find some messaging that would work.

Joseph Munda - Sidoti & Company

Okay. And then on the Boost Band, is that something that would get allocated TV ad spend? Or is this more -- I know you had mentioned you're going to launch it on the site. But I know of a number of products, and I'm not going to name competitors, that have already made headwinds in the space, much like a DVD. I'm just wondering how you guys are going to position that product when it launches.

Bill McMahon

Yeah, Joe, it will not be a TV product in the beginning. We feel like we have enough extensibility through our online and PR efforts, as well as the ability to tag it on as part of our existing direct marketing efforts. That we can grow awareness that way in the beginning. If the product proves itself out, we will certainly evaluate ways to expand it or perhaps share it between retail and direct, moving forward. But for now it makes for a pretty effective way to enhance our direct sales against our existing marketing spend. So we are going to initially launch it that way.

Bruce Cazenave

The other thing I would add, Joe, is the product is -- we studied the market place pretty carefully and it's part of the reason that we retracted the original launch we had scheduled, if you remember, last year, in order to come up with something that’s even more compelling. So we studied what's out there and we have a very compelling proposition in terms of the value. And it will appeal to different people in some of the products that are out there that you might be aware off. So it’s a big market and we have got a unique proposition and we have got on a really good value in the form of $49.95 for what this product does.

Joseph Munda - Sidoti & Company

Yeah. No, that does seem like an extremely nice number to -- a nice purchase price to go off that for consumers. I have two more and then I'll hop back in. Even though retail sales were down, gross margin actually improved in the quarter, and I just want to know, is this going to be a trend that we're going to see going forward or is this more of a product of variable cost and volume in the quarter?

Bruce Cazenave

Actually the volume would have been a detraction from the margin improvement. When we start to see more volume in the back half, you should start to get better leverage of the overhead, warehousing cost etcetera. So that should help with margins in the back half. So it's all driven by the new products, the margins of the new product and the increased volume that we anticipate in the back half that bill and I commented on.

Joseph Munda - Sidoti & Company

Okay, and then just one final and I'll hop back in. You guys have been making tremendous headway domestically. I was wondering if any plans internationally going forward, any new markets that you're taking a look at. I mean, you guys are sitting on $28 million in cash and no debt. Just wondering what the plans are possibly to go international going forward.

Bill McMahon

Joe, this is Bill again. We definitely have aggressive hope in international sales. In this quarter our international retail sales were up quite a bit, which is to say we are against a extremely low base and we are seeing many multiples of improvement. I think that that comes from product. We are looking for good distributors around the world. We have identified several already. Now we need to give them internationally compliant products to begin to flush out our product lines globally. The new model year '13 product in retail is compliant for sales in Europe and pretty much everywhere else in the world. So we are hopeful we will be able to -- part of the retail growth will come from continuing to accelerate our international efforts.

Operator

(Operator Instructions) Our next question comes from Ian Corydon with B. Riley & Co. Please go ahead.

Ian Corydon - B. Riley & Co.

A lot of my questions have been answered. Just on the Boost, do you expect that to have gross margins that are roughly similar to your direct gross margins?

Bill McMahon

Maybe a little bit less given the lower price point. But certainly still high margins and without an initial TV spend to support that, Ian, it still will be quite profitable against the bottom line.

Ian Corydon - B. Riley & Co.

Okay. And then also in the direct Segment. Could you give us a sense for how much of a headwind strength was in Q2? And then it sounds like you're looking for a healthy increase in revenues in the back half in direct. Do you expect that strength will be up or will strength continue to be a headwind there?

Bill McMahon

On the direct segment, Ian, we continue to see some decline in that segment though it is beginning to slow. We do anticipate revenue growth in direct every quarter. But I don’t know that strength will be positive contributing going forward, we just anticipate that it will continue to level out in the long term. UpperCut will begin to help that but UpperCut gains are being offset a bit by the legacy home gyms continuing to ramp down over time. There will be a crossing point for that but I don’t think it's near term. I should note though that the home gym market and strength is doing better in retail. So some of the lower price point strength products, home gyms, are performing reasonably well in the retail space and both channels are seeing reasonably good strength performance in Canada. So we think that even though home gyms maybe a little bit weaker in the United States, there are certainly markets for them that we continue to explore.

Operator

(Operator Instructions) There are no questions at this time. I will turn it back to management for their concluding remarks.

Bruce Cazenave

Okay. Thanks everyone again for your participation and interest in our call today. We look forward to speaking with you next in our third quarter 2013 conference call in November. Thank you again.

Operator

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

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