Nautilus' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 4.13 | About: Nautilus, Inc. (NLS)

Nautilus, Inc. (NYSE:NLS)

Q3 2013 Earnings Call

November 4, 2013 4:30 PM ET

Executives

John Mills – IR

Bruce Cazenave – CEO

William McMahon – COO

Analysts

Joseph Munda – Sidoti & Company

Ian Corydon – B. Riley & Company

Andrew Burns – D.A. Davidson

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Nautilus Third Quarter 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, November 04, 2013.

I would now like to turn the conference call over to, John Mills of ICR. Please go ahead.

John Mills

Good afternoon, everyone and welcome to Nautilus’s third quarter 2013 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer; and Bill McMahon, Chief Operating Officer. Our earnings release was issued earlier today and may be downloaded from nautilusinc.com on the Investor Relations page. The earnings release include a reconciliation of the non-GAAP financial measures mentioned in today’s call, to the most directly comparable GAAP measure. Remarks on today’s conference call may include forward-looking statements within the meaning of the securities laws.

These statements include statements concerning the company’s prospects, current or future financials and operating trends are subject to a number of risks and uncertainties and actual results may differ materially from these statements. For more information about these risks, please refer to our quarterly and annual reports filed with the SEC as well as the Safe Harbor statements in today’s press release. Nautilus undertakes no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after they are made, or to reflect the occurrence of unanticipated events. Unless otherwise indicated, all information and comments regarding our operating results pertaining 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’d like to begin today’s call with a general overview of the quarter and an update on our business. And then I’ll move on to review our financial results in more detail. During the third quarter, we achieved top-line growth of 22% over the same period last year, primarily reflecting a strong sales increase in our retail business, combined with continued growth in our direct business. Operating income in the third quarter nearly doubled compared to the prior year period, which can be attributable to higher sales but also, higher margins in both businesses and improved leverage of sales and marketing and general, administrative expenses. While we are pleased with this strong improvement and operating results, it is important to also note that we continue to make incremental strategic investments, in our overall marketing initiatives, including new creative and additional media exposure for our direct products.

The improved financial performance this quarter is a result of numerous initiatives, all of which are centered around three previously disclosed focus areas of the business; product innovation, margin improvement and achieving operating leverage. The last few quarters we have selectively layered in new marketing and media approaches enabling us to efficiently reach a broader audience, in order to share our compelling product and brand story. A great example of this is what we did towards the end of the quarter in New York City, when we unveiled the whole new suite of products for the direct and retail businesses under the Bowflex and Schwinn brands. Bill will discuss the new products launch at this event and the success of the event itself in more detail during his remarks.

Now I would like to share some details of our financial results for the third quarter. Net sales for the third quarter totaled 46.3 million, an increase of 21.6% as compared to the same period in the prior year. For the first nine months of 2013, net sales are 141.7 million, a 9.9% increase over the same period last year. Third quarter gross margins increased in both our retail and direct segments. However, our overall gross margin declined 160 basis points to 47.1%, due to a greater percentage of sales in the quarter coming from our lower gross margin retail segment. On a year-to-date basis gross margin was 49.3%, a 310 basis points improvement over the same period last year. Total operating expenses for the third quarter as a percentage of sales decreased to 44.2%, from 46.9% in the third quarter last year, underscoring our initiatives to leverage our operating expenses across higher sales volume. The improvement in operating expenses as a percentage of sales was primarily due to improved efficiency in our sales and marketing expenses, which totaled 14.2 million or 30.6% of sales for the third quarter compared to 12.4 million or 32.7% of sales in the third quarter last year.

While some of the reduced operating expense to sales ratio is due to disproportionately larger growth in the retail business this quarter and that business carries less variables sales and marketing expense, we are pleased that we were able to achieve this leverage improvement, while continuing to invest in the appropriate spending areas to help increase awareness and build sales leads for our existing and new products. General and administrative expenses were 4.9 million or 10.6% of sales for the third quarter 2013, which compares to 4.4 million or 11.5% of sales in the same period last year. The improvement in G&A as a percentage of sales highlights our operating mode and initiative, to deliver further efficiencies from our operating platform. Research and development cost in the third quarter of 2013 were 1.4 million compared to 1 million the same period last year. We continue to invest in new products at a greater pace than previous years, in line with our commitment to roll out new products with a regular cadence.

Operating income for the third quarter 2013 increased to 1.3 million, a significant increase compared to 0.7 million in the same quarter of last year. The increase reflects higher sales and gross margins in both direct and retail segments, combined with improved operating leverage of sales and marketing and general and administrative expenses. Year-to-date operating income increased 92% to 5.6 million from 2.9 million last year. Net income from continuing operations was 1.5 million for the third quarter of 2013 compared to 1.2 million in the prior year period. Net income for last year’s third quarter included a tax benefit of 0.6 million. On a year-to-date basis, income from continuing operations was 39.7 million, which includes a 34.2 million net income tax benefit, due primarily to the partial reversal of the valuation allowance recorded against the company’s deferred tax assets during the second quarter last year. Excluding the net income tax benefit, net income from continuing operations year-to-date, was 5.5 million compared to 3.4 million in the same period last year.

Income per diluted share for continuing operations for the third quarter of 2013 was $0.05. This compares to income per diluted share of $0.04 in the third quarter last year, which as mentioned approximately $0.02 per diluted share of tax benefit in that quarter. On a year-to-date basis for 2013, income per diluted share from continuing operations was a $1.26 compared to $0.11 per diluted share for the same period last year. This reported $1.26 includes the aforementioned tax benefit due to the partial reversal of the company’s deferred tax asset valuation allowance. Excluding this tax benefit, income from continuing operations year-to-date was $0.17 per share, which compares to $0.11 per share in the same period prior year.

Total net income including discontinued operation for the third quarter of 2013 was $1.4 million or $0.04 per diluted share. This compares to the third quarter last year where we reported total net income including discontinued operation of $1 million or $0.03 per diluted share which included $0.02 previously mentioned tax benefit in that quarter. Net income for the third quarter of 2013 included a loss of 0.1 million from discontinued operation and net income in the third quarter last year included a loss of $0.3 million or $0.01 loss per diluted share from discontinued operations. I would like to point out that starting next year we expect to return to a more normalized tax rate in the range of 35% to 40% for our continuing operations. This income tax expense will have only a minor impact to cash, since we have significant net operating loss deferred tax assets.

Turning now to our segment results. Net sales in the direct business totaled 25.7 million for the third quarter, a 2.5% increase over the same quarter last year. Direct segment sales benefited from the increased sales of our new product Bowflex UpperCut, as well as a strong demand for our cardio products especially the Bowflex TreadClimber product line. This growth was partially offset by a decline in home gyms. While home gyms products continue to decline in our direct business, they are increasing in the retail channel. Year-to-date, our direct business net sales has increased 12.1% to 93.7 million. U.S. credit approval rates rose to 34.3% in the third quarter of 2013, up from 31.4% for the same period last year. Gross margin for the direct business improved to 61% for the third quarter of 2013 compared to 57.9% in the same quarter of last year. The direct business gross margin benefited from improved, overall overhead operating efficiency and cost improvements. Operating income for the third quarter in our direct business was 1.3 million compared to 1.9 million in the same quarter prior year. The highest sales in gross margin were offset by higher media and creative investment, designed to help drive new product awareness and expand the sales leads for the fourth quarter of 2013.

Net sales in our direct – in our retail segment for the third quarter was 19.4 million, an increase of 70.1% compared to a 11.4 million in the third quarter last year. The improvement was broad based in terms of product and reflect strong retailer acceptance for the company’s new line up of cardio products, as well as increased sales for existing strength products. On a comparative basis, it is worth noting that retail segment sales in the third quarter of last year were adversely affected as a result of some retail customers accelerating a portion of their purchases into the second quarter from the third and fourth quarters when compared to their typical buying pattern. We believe this shift in buying patterns was an anticipation of the price increase the company implemented in the third quarter of last year. Net sales year-to-date for the retail business was 44.7 million, an increase of 6.2% compared to the same period last year. Operating income for the retail business was 2.9 million, compared to 0.8 million in the third quarter of last year. Retail gross margin increased to 25.4% in the third quarter of 2013, compared to 21.4% in the same quarter last year. Our gross margin benefited from a combination of the mix of new products, the price increase put in place last year and improved overall overhead operating efficiency.

Now turning to our consolidated balance sheet. We continue to be in a strong financial position. Cash and cash equivalents increased to 27.7 million as of September 30, 2013 with no debt financing. This compares to 15.2 million and no debt at the same point in time last year and 23.2 million and no debt at the end of 2012. Inventories were 17.5 million as of September 30, 2013, compared to 18.8 million at the end of 2012 and 16.9 million at the end of the third quarter last year. We continue to tightly manage our inventory levels and believe that our inventory is at proper – at the proper levels, when combined with plan purchases to support our sales in the fourth quarter of this year. Trade payables were 27 million as of September 30, 2013 compared to 32.8 million at the end of 2012 and 21.1 million at the end of the third quarter last year.

At this time, I’d like to turn it over to Bill McMahon, our Chief Operating Officer, who will provide some additional insights into our business and key products. Bill?

William McMahon

Thank you, Bruce. I’d like to add a few comments regarding our operations and provide additional background on our third quarter results and our positioning for the final quarter of 2013. Starting with our direct business, we continue to make steady progress in this segment. Our cardio product lines including the Bowflex TreadClimber continue to grow. As we discussed on our last call in July, we launched the new television ad for TreadClimber and have continued to see improvement in lead generations attributable for this ad. Overall, our direct business is faced challenging prior year comparable sales numbers through the summer. And while we have seen lead generation improvement described [ph] along with modest sales growth, our overall conversion is running below our target. We feel this is related to general consumer sentiment during the summer in early fall. We anticipate improved conversion as we enter our historically stronger quarters.

Our sales results also benefited from the performance of the Bowflex UpperCut, which was launched early this year. We continue to be pleased with the performance of this product and are optimistic about its potential, as we approach our seasonally strongest month. We will continue to invest the appropriate media exposure, to help drive sales for the UpperCut in the fourth quarter. While we continue to find growth in direct cardio and with UpperCut, our legacy direct strength category products such as home gyms, continue to decline offsetting some of our gains. Some of this lag is due to the effect of eliminating television exposure in the United States beginning two years ago. But another contributor is the cascading effect of selling these products in the retail space, where we are seeing improved sales. Overall, this strategy change has been beneficial to profitability and represents the traditional product lifecycle of an initially direct to consumer product line as it matures. We will continue to develop products such as UpperCut, which are intended to address the strength segments.

Our media, creative and marketing investments in Q3 similar to our investments in Q2 this year, are intended to drive long-term success to our products. We will continue to balance additional media investments with demonstrated consumer response in product performance. We recently announced new and innovative products for our direct business. In September, we launched the Bowflex Boost band, which is an affordable 24 hour monitoring band, that tracks activity through the day, calories, steps and distance and into the night. This band is designed with Bluetooth Smart technology, provides extended battery life of up to 11 days and is available currently for iOS devices. We plan to introduce support for the Android platform by the end of this year. The free software automatically syncs with mobile devices allowing user to set and monitor progress for its daily fitness goals. We have been pleased with the early response of this product, which represents our first offering in the rapidly growing personal tracking device market. While this product was initially intended as a supplement to our direct business, we do feel the product also has potential to succeed in the retail market and we are exploring options.

Additionally, we’ve also previewed the Bowflex Max Trainer which we’ll launch by early Q1 2014. The Bowflex Max Trainer is a groundbreaking full body cardio machine that provides the workout that burns more than 2.5 times calories of an elliptical machine. Additionally, Max engages the upper body 80% more than the traditional elliptical and is easier on the joints than running on the treadmill. The secret behind this new concept lies in the industrial design as it relates to total body movement. We believe, this design combined with programming that supports both integral training and traditional elliptical like sessions, maximizes the potential target audience for this product. Its unique and upright design and small footprint make it ideal for in-home use.

Our consumer research shows that treadmill users and elliptical users rarely cross over between the two modalities. While our TreadClimber product provides a unique and more effective machine, targeting the large treadmill category, prior to Max Trainer we have not had an equally unique product for the very large elliptical market. We feel this product will be an advancement within that category. Max Trainer will be initially offered at $999 and $1499 and will be supported by television, online, social and public relations efforts. The initial impression for Max have been positive and we look forward to the launch of this important direct segment initiative. These new products both serve as examples of our efforts to expand and diversify our product offerings. We intend to maintain a regular cadence of product launches in both of our business units. We do have additional products in the pipeline for the direct business and we will comment on those products as those projects test out and prove out their readiness later in 2014.

Turning now to our retail business. It’s important to remember when revealing our results for Q3, the prior year buying behavior exhibited by our retail partners in advance for the price increase we implemented in the summer of 2012. We have discussed this factor in prior calls. Our Q3 results do benefit from comparing sales to an unusually low third quarter in 2012. That said, our Q3 results represent real growth despite these timing factors and the results of return this segment to growth for the full year. We are very encouraged by the direction of this channel of our business as we feel that our new line up is more in line with what our retail partners are looking for. We know that retailers have generally been disappointed with their overall fitness department sales over the past several quarters and they seek new solutions. We kept this 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.

A key contributor to our future retail sales growth will be our new line up for model year ‘13 Schwinn cardio products. These products have been well received by retailers and are now being set on the floor at our partners. The new product features a dual track LCD display and tracking functionality that sets and records time distance and calories. This advanced cardio line from Schwinn features new upright and recumbent exercise bikes and elliptical at price points. Other features include 29 motivational workout programs, four individualized user settings and goal tracking to measure results. Users can upload their results via USB through the schwinnconnect.com website for weekly, monthly and yearly progress tracking. Additionally, all fitness activity can be synchronized with the popular MyFitnessPal mobile application which has more than 30 million users in the United States. This connectivity means a key consumer desire and our approach enables the user to track their progress in the manner they find most comfortable. Perhaps most encouraging, our retail sales were improved versus the prior year in all categories of products from bikes and elliptical machines to strength products such as selectorized weights and home gyms. Our fall[ph] placements will represent gains and skew placements and doors across the breadth of our account base in North America.

Additionally, we’ve begun to achieve traction with our international sales efforts and anticipate continuing to grow in the global market. One year ago, we communicated our intention to revamp our retail business in order to return this important and profitable channel to a revenue and margin growth trajectory. Step one in this task was updating our knowledge of consumer needs and improving our product offerings to meet those needs. Step two has been to reengage with our retail partners and reestablish our presence with these offerings. With these results we have released today, we believe we are showing strong progress against our first two tasks. Please keep in mind though, that these results represent our initial sell-in of products ultimately as the sell-through of our product representing consumer acceptance that will be the true test of our efforts. Thus our work is not done. Our next task is to helping our retail partners to succeed. In the long run, our desires to become a category leader in the retail space by continuing to earn increased floor share with existing retail partners and by adding new partners.

For nearly every challenge Nautilus faces in our future, solutions began with excellence in product development. Our products must be compelling, deliver on our claims and meet the needs of our customers. Absent that compelling product, any amount of marketing or supply chain efficiency will be offset. For the past few years, we have consistently increased our research and development budget, expanding our in-house capabilities and improved upon our time to market. These are critical elements of our objective to become category leaders. We plan to continue to prudently expand our investment in R&D going forward. Before I move on to the next segment of our business, I do want to highlight our successful inaugural product preview event, which we held in September in New York City. At this event, we showcased our new Schwinn model year ‘13 retail lines along with Bowflex Max Trainer and the Bowflex Boost band. We are very pleased with the outcome of this event, which help generate buzz and publicity for our new products and facilitated placement of user reviews in a wide range of media outlets. We can directly attribute over 10 million impressions due to this event in the follow on coverage. Based on the success of our first event, it’s likely we will plan to hold similar events in the future.

Turning now to royalty and licensing. We have started to receive royalties from the launch of the commercial TreadClimber cardio machine. Our partner, Star Trek, continues to monitor early performance of the product in the field and they are observing results that neither exceed their very high quality and performance expectations. Nautilus will continue to drive royalty revenue from this product line as with our other intellectual property licenses, on a quarterly basis moving forward. Our brand licensing efforts kicked off early this year and that work continues. We are in the base of scoping and betting potential end license partners in categories. It’s important to remember that this process could take some time and when agreements with partners are reached, they’ll be further time required for the product development on the part of the licensee. We have previously stated that we do not anticipate additional income from brand licensing efforts in 2013 itself and that continues to be our outlook. However, our brands are well recognized with many positive and transferrable attributes, so we continue to believe our investment in this area of opportunity will drive long term benefits.

In summary, we are well positioned from a product offering, marketing capability and inventory position, as we begin the final quarter of 2013. We continue to execute on our plan of expanding our product portfolio and leveraging our highly recognizable brands in diverse marketing capability. By diversifying our product offerings, we will improve the foundation of both segments of our business. We’re excited about the opportunity for our business and remains focused on the long range objectives we have set forth in our strategic plans.

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 make up a few final summary comments. We have made tremendous improvements in our business over the past few years and I’m really proud of our team’s efforts and accomplishments in many areas. We still have work to do, but we are pleased with the steady progress we are making towards building the underlying foundation we need for long-term profitable growth and market success. Importantly, given the new product launches to-date and those still on the way, we will have significantly advanced our key initiatives to expand and diversify our product portfolio. These compelling new products along with new marketing approaches have provided access to consumers we previously wouldn’t reach delivering innovations that address consumer needs is and will continue to be a key area of focus for our business.

We plan to utilize our vast fitness market experience combined with in depth consumer insights and feedback and a growing database of learnings from our new products, to continue to enhance our product portfolio to drive top and bottom line growth over the long term. As we begin the fourth quarter which is historically our strongest quarter of the year we feel that we are well positioned going into this year’s peak fitness season. Although current overall consumer confidence indicators and planned spending levels continue to be concerning, we have taken the appropriate steps to improve the foundation of our business and improve our operating platform. The underlying trends that we are seeing across all segments of the business give us confidence that we are working on the right things and are tracking well towards our goal of building a business, which can deliver improved and sustainable and profitable growth.

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]. Our first question comes from the line of Reed Anderson with Northland Securities. Please proceed.

Unidentified Analyst

Hey, guys. It’s Dan on for Reed. How are you?

Bruce Cazenave

Hello, Dan.

Unidentified Analyst

Hey. Have all the new Schwinn models for 2013 already surged and who are the primary retailers that are carrying the product?

William McMahon

The Schwinn product ad shipped in and was shipping in Q3. It’s being placed on the floor some of it in the last few weeks some of it just now getting out it’s a retailer set up for the fall. We haven’t historically disclosed the retailers, but we have gains across nearly all of our retail base.

Unidentified Analyst

Okay, great. Thanks. Then one other quick question, can you give us any idea of the difference in margins between these new products and some of the products you may be replacing within direct and in the retail channel? And what gross margins might look like next year given these new products? Thanks.

William McMahon

I [indiscernible] speaking about gross margin directions we generally haven’t provided that guidance Dan, but what I can say is we do have some rules out here which is when we go out in the market with products, the new products that we launch need to have improved margins over the categories they are replacing. So in general, the products that we launch you should expect to see better margins.

Unidentified Analyst

Okay. Thank you very much.

Bruce Cazenave

Okay. Thank you, Dan.

Operator

The next question comes from the line of Jo Munda with Sidoti & Company. Please proceed.

Joseph Munda – Sidoti & Company

Yeah good afternoon Bruce and Bill. Thanks for taking the questions.

Bruce Cazenave

Hi, Jo.

William McMahon

Hey, Jo.

Joseph Munda – Sidoti & Company

Hello. Real quick couple questions here, Bruce typically fourth quarter for you guys tends to be strongest on the direct side but with the launch of these retail products, how can we look at the product mix going forward into the holiday season? Are we going to see a bear contribution from retail or more of the historical contribution? I know you just want the product but I’m just trying to get a sense of where we’re heading into the holiday season?

Bruce Cazenave

Yeah I think Jo that clearly there was a mix between a mix shift in our business versus the last year anyway may be even two years, a little bit heavier towards retail as we fill the pipeline with these new products. I would say that you will see, I don’t know what the mix change will be in the fourth quarter, but we do expect the growth to continue in the fourth quarter for retail. So it’s possible that the mix will shift a little bit more towards retail towards the end of the year.

Joseph Munda – Sidoti & Company

Okay.

Bruce Cazenave

Keep in mind that long range ambition is to grow both businesses in the high single digit low double digit kind of pace revenue wise.

Joseph Munda – Sidoti & Company

Okay, that’s very helpful. And then as far as marketing initiatives I saw the Walk TC commercial. It was pretty effective because my wife actually wanted to buy it I literally jumped up and said, do you know what this thing is? And she said yeah and I’m like, do you know it’s Nautilus and said no. So along those lines I know that they are very effective but I’m just wondering what other types of creative media that you do talk about that you’re currently on you will look to enhance on or expand upon?

William McMahon

Jo when it comes to TreadClimber specifically, we are pretty broad based media and marketing approach for that product. We do everything from digital, online search, television as you know some print, social, public relations, we do pre-roll video for video on demand products etcetera. So as products warranted and we can measure results, we expand our marketing efforts wherever it’s prudent to do so. When we start out with the new product like say UpperCut, it might receive some of those elements as we prove it out. So there really aren’t too many stones that we have uncovered. Radio we really don’t do we just haven’t found the response that we’re looking for in terms of radio, but otherwise you’ll find our presence just about everywhere.

Joseph Munda – Sidoti & Company

Okay. That’s helpful. And then as far as to see more questions here, the launch of the Max Trainer why delayed into the first quarter of ‘14? Why not really target the fourth quarter and try to get some of those people that would be buying in the holiday season?

William McMahon

Well Jo we find that peak fitness season is actually New Year’s resolution timeframe. Certainly we’ve given guidance that says that Max will watch by Q1 2014, what we’re trading off here is making sure the products are ready to go. Clearly, we showed it in New York so the design is effectively done. We’re finishing up our final work on it, shooting some commercials for it. If it’s – everything’s checked out and we’re happy with the product we may launch it sooner.

Joseph Munda – Sidoti & Company

Okay that’s helpful. And then Bruce

Bruce Cazenave

But in any case, Jo just to add to what Bill’s saying, you shouldn’t expect material revenue in the fourth quarter from Max. That will happen more in the first quarter, even if we can get it out then

Joseph Munda – Sidoti & Company

Okay. And then as far as you touched on international I thought that was pretty interesting. Can you give us a little bit more color on what you guys are doing there country wise as far as may be contributions to revenue going forward? Any of that will be helpful.

Bruce Cazenave

Yes we've identified, Jo it’s a good question, we’ve identified it as one of our key growth areas for our business profitability wise as well as market potential wise. Our brands have good awareness there particularly Nautilus and Bowflex and what we’ve been doing is first of all gearing up in terms of resources ability to go through distributors in various parts of the world. But we’ve had some basic product limitations in terms of what we could sell where we didn’t have the right standard UL type compliance with the regulations around the world etcetera. We now have that, starting in the back half of this year with the MY ‘13 so we’ll start to get more and more traction on the international front. As far as the potential, part of the reason we believe that’s big because the market is big and many of our competitors have almost a disproportionate portion of their sales and profits coming from overseas as opposed to North America. So we feel like we should participate in that too.

Joseph Munda – Sidoti & Company

Okay. So really the impact there would be in 2014 or we should see a ramp in international in 2014?

Bruce Cazenave

Our anticipation is that it’s going to be bigger in ‘14 than ‘13 and ‘13 will be bigger than ‘12 but it’s still in the grand scheme of things it’s still a small portion, but we hope to make it larger as soon as we can.

Joseph Munda – Sidoti & Company

Okay, okay. And then my final question regarding retail partners, how many current retail doors or the expectations of retail doors that you’re going to be in and the number of retail partner?

William McMahon

We haven’t disclosed that but it’s several thousand doors would be what we could say.

Joseph Munda – Sidoti & Company

Okay. Okay. Thank you, guys.

Bruce Cazenave

Okay, Jo. Thank you.

Operator

[Operator Instructions]. The next question comes from the line of Ian Corydon with B. Riley & Company. Please proceed.

Ian Corydon – B. Riley & Company

Thank you. Do you expect that the launch of the Max Trainer will be enough to get that direct segment growing at a more robust rate? And then could you talk about what the gross margin impact of that product is going to have on that segment that’d be helpful?

William McMahon

Hi Ian this is Bill I’ll take that. On Max I would say like any direct product, it initially will not be a large contributor, it needs time to build up awareness. But we believe in the product and think it could be a significant long-term contributor to the direct business. In terms of margin, it’s a good margin product for us as compared to the channel norm.

Ian Corydon – B. Riley & Company

Great. And then last question just on the retail segment, do you have any I know it’s early, but do you have any sell through data on the new Schwinn cardio products that are retail?

Bruce Cazenave

We are starting to get reports in and I would just say that they are encouraging.

Ian Corydon – B. Riley & Company

That’s great. Thank you very much.

Bruce Cazenave

Thank you.

Operator

The next question comes from the line of Andrew Burns with D.A. Davidson. Please proceed.

Andrew Burns – D.A. Davidson

Hi thanks and congratulations on a solid quarter. Couple of questions for you, could you provide the credit approval percentage as you have in past quarters? And was that a factor in the quarter for direct?

Bruce Cazenave

Let’s see what we did report here in the commentary that it went it was a 34.3% versus 31.4% last year in the third quarter.

Andrew Burns – D.A. Davidson

Okay. Thanks. Sorry I missed that there. Could you perhaps elaborate a bit on your – the TreadClimber trends you’re seeing and specifically where you’re getting the confidence for improved conversion in 4Q that’d be helpful? Thank you.

William McMahon

Sure. We can measure the lead quality that we’re getting in essence to lead volume that we’re getting from sources that we know convert seasonally. And so we do know the conversion improves traditionally as we approach fitness peak season, so we have some confidence that, that historical trend will occur again. In general, during times where we’ve had slower conversion periods, we have seen that improvement happen once you get in the peak fitness cycle. So we still need to see that happen but we’re taking a look at the leads that we are getting and the volume at which we’re getting them we have no reason not to have confidence that we’ll see our usual seasonality.

Andrew Burns – D.A. Davidson

Okay. And just a point of clarification on the Max Trainer, is the launch schedule the same as it’s been all along or has it pushed a little bit out of December into January?

Bruce Cazenave

No we said like when we were in New York, we said that the product would be late December early first quarter and that’s pretty much what we’re holding to, but it will be late December or early first quarter. It’s not any different than that. But as I point earlier was that we do not expect them to have material impact on our Q4, this Q4 revenue or earnings it’s going to be very small it’s been all this quarter. Is that clear Ian or Andrew?

Andrew Burns – D.A. Davidson

Yes, thanks. And last question for you, the tax rate guidance you provided for ‘14 and go forward, was that GAAP tax rate and would that be expected to hit that run rate in the first quarter?

Bruce Cazenave

Yes and yes.

Andrew Burns – D.A. Davidson

Okay. Great. Thanks and good luck.

Bruce Cazenave

Okay. Thank you, Andrew.

Operator

And gentlemen, I’ll turn the call back over to you for your closing remarks.

Bruce Cazenave

Thanks again, everyone for your participation and interest in our call today. We look forward to speaking with you next on our fourth quarter 2013 conference call early next year. We will also be attending a few investor events over the next few months and we hope to see some of you there. Thank you again and have a great day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!