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Nautilus, Inc. (NYSE:NLS)

Q1 2014 Earnings Conference Call

May 5, 2014 04:30 PM ET

Executives

John Mills - ICR

Bruce Cazenave - CEO

Sid Nayar - CFO

Bill McMahon - COO

Analysts

Reed Anderson - Northland Securities

Andrew Burns - D.A. Davidson

Frank Camma - Sidoti

Ian Corydon - B. Riley & Company

Steven Martin - Slater

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Nautilus Q1 FY 2014 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 today May 5, 2014.

I’d like now to turn the call over to Mr. John Mills with ICR. Please go ahead, sir.

John Mills

Great, thank you. Good afternoon, everyone. Welcome to Nautilus’s first quarter 2014 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer; Sid Nayar, Chief Financial 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 includes 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 including statements concerning the company’s current or future financial and operating trends, anticipated new product introductions, available supply of certain product, planned and anticipated results of facility initiatives and forecast related to international sales are subject to a number of risks and uncertainties and actual results may differ materially from those statements. For more information about these risks, please refer to our quarterly and annual reports filed with the SEC as well as 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 pertains to our continuing operations.

With that, it is 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. On today’s call I would like to start by providing a general overview of the first quarter and then we’ll turn it over to Sid Nayar to review our financial results in more detail. Bill McMahon will then had some details on each business as well as updates on product activity and then I will close with some summary remarks before we open up the call for questions.

During the first quarter we achieved top line growth of 21% over the same period last year reflecting strong sales increases in both our retail and direct businesses. Operating income for the first quarter increased 50% over the first quarter last year as all three of our previously communicated key initiative areas new product innovation, margin improvement and improving operating leverage all continued to move in a positive direction. The improved financial performance this quarter also reinforces that the strategies we set in motion three years ago are working well and we have put us on a solid trajectory to build an even stronger and more profitable company for the future.

At this time, I’d like to turn it over to Sid Nayar, our Chief Financial Officer, who will provide some additional details about the first quarter financials. Sid?

Sid Nayar

Thank you, Bruce. I would like to review the details of our financial results for the first quarter of 2014. Net sales for the first quarter total $71.9 million, an increase of 21.4% as compared to the same period in the prior year. First quarter gross margins increased in both our retail and direct segments to 25.4%, up 50 basis points and 63.7%, up 390 basis points respectively. On an overall basis, total company gross margins improved to 53.5%, up 170 basis points versus prior year.

Total operating expenses for the first quarter as a percentage of sales decreased to 41% from 41.7% in the same period last year, underscoring our initiatives to leverage operating expenses across higher sales volume. The improvement in operating expenses as a percentage of sales was primarily due to the disproportionately larger growth in the retail business this quarter and that business carries a much lower variable sales and marketing expense.

General and administrative expenses were $5.8 million or 8.1% of sales for the first quarter of 2014, which compares to $4.9 million or 8.4% of sales in the same period last year. The increased dollar spending in G&A reflects increased legal fees for intellectual property and patent initiatives and higher incentive reserves based on improved performance. The improvement in G&A as a percentage of sales highlights favorable operating efficiencies and our ability to leverage the existing operating platform as business expands.

Research and development cost in the first quarter of 2014 were $1.9 million compared to $1.1 million in the same period last year. This increase reflects our commitment to continue to invest in the product development and engineering resources required to innovate and broaden our product portfolio through new and refreshed products. Operating income for the first quarter of 2014 increased to $9 million, a 50% increase compared to $6 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. Operating margin improved over 200 basis points to 12.5% compared to 10.1% for the same period last year.

Pre-tax income from continuing operations for the first quarter of 2014 was $8.9 million or $0.28 per diluted share compared to $5.9 million or $0.19 per diluted share in the same period last year. Beginning in the first quarter of 2014, the company started to record income taxes at a normalized rate following the partial reversal of its valuation allowances in 2013. We believe that pre-tax income comparisons provide a useful metric to gauge underlying business performance. Given the company’s U.S. net operating loss carry-forward position, we expect to have minimum cash tax payments in the near term.

Net income from continuing operations for the first quarter was $5.7 million or $0.18 per diluted share compared to $5.5 million or $0.18 per diluted share for the same period last year. Total net income including discontinued operations for the first quarter of 2014 was $5.4 million or $0.17 per diluted share. This includes $0.4 million loss net of taxes or $0.01 loss per diluted share from discontinued operations. This compares to the first quarter last year where we reported total net income including discontinued operations of $5.2 million or $0.17 per diluted share which included a loss from discontinued operations of $0.4 million net of taxes or $0.01 loss per diluted share.

Turning now to our segment results. Net sales in the direct business total $50.7 million for the first quarter of 2014, a 19% increase over the same quarter last year. Direct segment sales benefited from strong demand for our cardio products with continued strength of the Bowflex TreadClimber category and initial sales of the recently launched Bowflex MAX Trainer product line. This growth was partially offset by a decline in strength products in the direct channel as we continue to see some of these products cascade into the retail business. U.S. credit approval rates rose to 41.3% in the first quarter of 2014, up from 35.1% for the same period last year. Attributable to several factors including our media strategy focused on driving quality customer leads and an expanded lender base. Gross margin for the direct business improved to 63.7% for the first quarter of 2014 compared to 59.8% in the same quarter of last year. The direct business gross margin benefited from overall overhead operating efficiency and product cost improvements.

Operating income for the first quarter of 2014 in our direct business was $10.4 million compared to $6.7 million in the same quarter prior year. The higher sales and gross margin were partially offset by higher expenses from media and advertising as we made investments in new creative design to help drive new product awareness and expand sales leads. Net sales in our retail segment for the first quarter of 2014 were $20.1 million, an increase of 32.8% compared to $15.1 million in the first quarter of last year. The improvement reflects strong retailer sell through with the company’s new line up of cardio products.

Gross margins for the retail business increased by 50 basis points to 25.4% in the first quarter of 2014 as, compared to 24.9% for the prior period, driven by the mix of new products and improved overall overhead operating efficiency. In the first quarter of 2014, operating income for the retail business increased $0.5 million to $2.5 million as compared to $2 million in the same period of last year.

Now turning to the consolidated balance sheet, we continue to improve our financial position. Cash, cash equivalents and marketable securities increased to $55.6 million as of March 31, 2014, with no debt. This compares to $41 million in cash, cash equivalents and marketable securities and no debt at the end of 2013. Inventories were $13.5 million as of March 31, 2014 compared to $15.8 million at the end of 2013. Trade payables were $27.3 million as of March 31, 2014 compared to $37.2 million at the end of 2013. Capital expenditures total $0.5 million for the quarter and we anticipate spending $3 million to $3.5 million for the year.

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

Bill McMahon

Thank you, Sid. I’d like to add a few comments regarding our operations and provide additional background on our first quarter results and the overall position of our business. Starting with our direct business, we made strong progress in this segment in the first quarter and delivered robust sales and operating income growth as Sid outlined. Our direct business is experiencing continued improvement in consumer financial approval rates and this combined with favorable lead generation driven by strong creative assets is allowing us to expand our marketing efforts in the higher visibility television network as well as a broader mix of web marketing, social media and public relations efforts.

Sales of our Bowflex TreadClimber products continues to grow. As we discussed on our last call, we increased our investment in television media in Q4 2013 with the objective of capitalizing on our strong creative to build our base of leads. And this same investment continued into Q1 of this year. Our strong TreadClimber sales indicated that our investment in this product was justified. We were also very pleased with the initial performance of the Bowflex MAX Trainer, our new revolutionary high performance cardio machine that combines the movements of our traditional elliptical with a stair stepper. The television launch of MAX Trainer was in early January and we have continued to be encouraged by consumer reception of this product both from a media and sales perspective but also in terms of satisfaction after the sale. Early response for the MAX Trainer was stronger than anticipated and we spent much of Q1 working with our supply chain to increase production capacity related to the product. Given the observed media metrics and conversion we anticipate that MAX Trainer will be an area of significant media investment in 2014. We are confident that going forward our supply chain will be ready for potential sales in this category.

Turning now to our retail business. Retail customer response to our new line up that we launched in the fall of 2013 continues to be positive. Our retail business grew in Q1 versus period year in all key categories including bikes, elliptical machines and home gyms, the success that we had with Schwinn exercise bikes and elliptical gives us confidence that we have strong product that will perform on the retail floor. We plan to build on this foundation and we will expand on our product offering as we move into the selling seasons for fall 2014 store replacement. In addition to our successful model year ’13 Schwinn line of bikes and elliptical we anticipate launching a complete line in model year ’14 Nautilus branded cardio products. These bikes and ellipticals will carry feature sets representative of the Nautilus brand which is focused on fitness enthusiast and know to aspire to make serious fitness as part of their live. These products are designed to be compliant with international product regulation and are expected to play a key role in our international growth.

One category that’s being conspicuously absent in our product mix for several years is Treadmills. While elliptical machines represent the fastest growing category in fitness, it is still Treadmills which remain the largest category accounting for about 25% of wholesale fitness volume in the United States alone. We have previously noted that the Treadmill category is commoditized and is right with competition and thus we would not enter the space unless we felt we had compelling product that would support profitable sale. For fall 2014, we feel we have developed that product that can compete in this space and do sort reasonable margin. We plan to launch Treadmills at the 799 and 999 price points under both the Schwinn and Nautilus brands. With the launch of our Treadmill line we will now have a complete set of cardio products under both the Schwinn and Nautilus brands which will allow us to better compete in the global cardio fitness market.

On our last call we discuss that in 2014 we plan to devote more energy on growth in the international market. While starting from a low base, we are pleased to report that international retail sales grew significantly year over year in Q1 and we project that international sales will continue to grow at a strong pace. With our brands that are well recognized in many global markets we see good opportunity to further increase our international business.

Finally we’d like to add some comment on our operational structure moving forward. Our performance over the past few years is enabling us to make investments in our infrastructure to support growth to briefly describe some of our investment areas for 2014. In the area of information systems, this spring we launched the new cloud based ERP and CRM system. This platform is far better fit for our future plans and will provide significant improvement and access the data by our key decision makers. In regards to our distribution and fulfillment network, our sales growth necessitates that we have a second United States distribution center which we anticipate opening in the fall of 2014. This new facility will be located in the Midwest and it will be leased. This expansion will allow us to better serve our customers on the East Coast with improved delivery times as compared to our currently Portland, Oregon center alone. Also it’s important to note that this dual positioning capability is expected to reduce our outbound freight cost overall.

Having sufficient distribution center capability to support growth will also enable us to make prudent additional investments in finished goods inventory especially in our high volume, high velocity SKUs. Improved safety stock positions will better enable us to react to surgeons and direct channel demand or emerging opportunities in retail. Finally our mission as an organization is to design and market equipment that helps consumers achieve their fitness goals. We have continually increased our investment and product development and innovation over the past two years. Our three year product roadmap necessitates the addition of new resources and capabilities. In order to support our research and development needs we are investing in consolidation of our rapid prototype and lab facilities into a new building also leased adjacent to our corporate headquarters in Vancouver, Washington, bringing our entire product development team together in one state will drive significant efficiencies in our go to market processes. In summary we’re off to a strong start in 2014 and we are well positioned moving forward.

As Bruce said we remain focused on the key initiatives that have driven our improvement over the past couple of years. The foundation of our business has improved including a more diverse product portfolio and better product margins in each segment. Lastly, we’ll also continue to focus on investing our media strategically to drive revenue while keeping a focus on our bottom-line. And 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 a few final summary comments, the first quarter represents another quarter of meaningful improvement for our business and gives a strong momentum to start the year. While it is easy to look at the quarter’s results in isolation, it’s important to note that the factors contributing to the improved results this quarter were started in some cases as far back as three years ago. The ideation of Max Trainer started over three years ago and the consumer research and development of a new retail cardio line started two years ago, last year we made the strategic decision to invest in incremental media during our seasonally slowest and historically most profit challenged second quarter in order to test creative and bill leads well before the peak season started, clearly these and other decisions we made have provided early stage investment returns that are very encouraging and provide a basis to build upon. On the flip side, we also learnt from decisions that did not produce an acceptable or desired result and in those cases our team exhibited the ability and agility to recognize, adapt quickly and redirect our efforts as appropriate. Bottom-line is, I’m very proud of our team for continuing to find and drive improvements in the business and the rigor and prioritization applied in the decision making process. Looking ahead our plans and strategies support moving into another stage of steady profitable growth, and we are fortunate that there’re a number of robust growth opportunities in sight. In order to fully optimize the returns on existing investments and or opportunities we have already created, whether it be Max Trainer, the additional new cardio line or international, we still have a number of operational and infrastructure investments to put in place this year. Some of these investments are the ones Bill previously mentioned, like information system enhancements, an R&D innovation center and an additional US distribution point. All of these have been advancing for a while and are being implemented starting this year. Most importantly they are strategic enablers for future growth. That concludes our prepared remarks now I’d like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir, (Operator Instructions) and our first question comes from the line of Reed Anderson from Northland Securities, please go ahead.

Reed Anderson - Northland Securities

Couple of questions, Bruce I got to start with the big one, obviously we all suspected Max is off to a good start, kind of seemed that delivery time that are included in the numbers bear that out, where are you in terms of capacity. I know that’s something that it’s a good problem to have but where are you in terms of ramping that up and when does it normalize this year. Is it 2Q is it later in the second half; just give a sense of where we are in that cycle please.

Bill McMahon

Reed, this is Bill, I’ll take that. We believe that our partners who produce the product are at capacity sufficient for our future growth plans at this point and we’re catching up, as we speak there’s some time on the water for product, our promised periods are coming down and we would anticipate, certainly by the end of this quarter that we’ll have normal order today and very shortly thereafter.

Reed Anderson - Northland Securities

Is a normal order cycle Bill like if I went and placed an order that I’ll have a product within two to three weeks or should it actually be shorter than that?

Bill McMahon

You know it should be shorter than that, that’s one of the, it’s a combination, there’re two answers for you on that, one is the reason we want a second distribution point is just to cut down distribution time period from two weeks down to five days let’s say, on the other hand with Max there is a promise period that has been communicated and that’s been steadily declining as we’ve acquired more product and we catch up on the orders, certainly our supplier has more than sufficient capacity to meet our needs, it was a case of the product exceeded our expectation out of the gate.

Reed Anderson - Northland Securities

And then I’d be my guess as long as I have got you in terms of can you talk about making the incremental investment you’ve made late last year and continued on the creative side on television et cetera, does the success you have -- it’s two part question, does the success you have with the better conversion rate does that allow you to be than more efficient going forward or does that make you want to invest more, how should we think about that piece of the puzzle in driving continued growth?

Bruce Cazenave

You’ve hit one of the key factors direct on the head. We’re definitely addressing continue to grow profitability in the direct business year-over-year but we’re not pulling back and going to completely optimize. We continue to invest in media and expand our media where possible. So we feel like in the long run we have strong creative and certain credit approval that supports our effort. We should be able to get on to additional net work higher volume network and continue to grow the business while still maintaining the target Bruce sets for us which is to grow our profitability at a more robust pace and even the revenue. So it’s always that balance. We’re looking for expanded network that we can reasonably project will perform for us in long run. But if you saw last year sometime those investments are upfront in the down period to start to gain traction and then pay off later in the year.

Reed Anderson - Northland Securities

And just a couple of more before someone else jump first on the treadmill, you’re going introduce the 799 and 999 and just curious will that more of a price point differentiator and brand differentiator or will there may be some unique features, I am sure there is just some quick comments and lastly Bruce really for your big picture, given the start you’ve had at the year given the success you’ve otherwise couple of years are you contemplating maybe bumping up so you long term expectation whether it’s sales growth or margins just because it feels like where we need to be and you’ve got some headroom from here? Thank you.

Bruce Cazenave

Let me turn over to the Bill for the first part of that and then I’ll come back to your latter question.

Bill McMahon

On the treadmill with the differentiators between 799 and 999 and then there is also differentiators based on the brand, Schwinn brand and Nautilus brand have different sort of target consumers segment and the products are designed to meet those segments and those price points and be competitive on the floor with the existing product and we think obviously a little piously that our product is better.

Bruce Cazenave

And we’ve gotten some favorable feedback on some of the features going back as early as three to four months ago from customers. So we’re optimistic that we think we hit the mark again just like we did some of the cardio products that we’ve already introduced. But to your question in terms of the longer range operating margin targets, we actually are going through the process I would say over the next three or four months. We have an annual strategic planning process that we’re in right now and we discussed thoroughly with our Board of Directors and during that process we lay out years where we see our growth opportunities what it will take to realize them and what does that mean both resource wise and financially bottom line working capital et cetera. And I would say that we’re fair to say preliminarily that when we have that plan complete and approved by the board then we’ll start to share that in terms of what the newer longer range ideal state kind of metric would be for our company but it’s fair to say that it will probably be some key metrics will be higher, higher level of performance than what we’ve laid out originally up now.

Operator

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

Andrew Burns - D.A. Davidson

Just a follow-up on Reed’s question in terms of the marketing investment and I was hoping you might be able to spend a little bit more time in terms of the return parameters you’re seeing on the higher visibility network versus digital media where is the bulk of the incremental marketing dollars go into these days? Thanks.

Bill McMahon

The bulk of our media still has been on television but we’re increasing spend wherever possible on digital and online and other social media aspect. Important to note though that without the general TV efforts to create the overall awareness we see a fall often performance of the other elements; on an individual ROI basis your search turns, branded search turns may deliver a higher ROI than TV alone does but it’s really the collection of our entire media effort that we measured by -- and we know that there is impact if we cut back on some of more expensive element that will eventually impact the other elements that are really driving some of their benefit due to the awareness that television creates. So I know that will roundabout but does that makes sense?

Andrew Burns - D.A. Davidson

Sure, it does. Thank you. And just to be clear in terms of your strategy for this off season Q2, Q3 it is to build lead generation so invest in marketing as you did last year and also as the MAX Trainer product is increasingly available to ramp that as well regardless of the months.

Bruce Cazenave

Yes. And would be correct in both cases. There is a seasonality to our media spend as you know through the year, but we will continue to invest in the products as our metrics display that they can be supported by that spend.

Andrew Burns - D.A. Davidson

Great. Thanks. And it looks like some of the new Schwinn products plan (ph) to get in Dick’s Sporting Goods stores can you talk about the opportunity there?

Bruce Cazenave

Indeed, we are conducting some work with one of our partners to exporting goods with some of the Schwinn bikes that they had not previously carried. And pending the outcome about that goes through; there may be additional opportunities to follow on from that. We can’t really talk about too much about fall 2014 coming up; we’re right in the middle of that selling season right now. And I would prefer not to speak out a score on anything while they are in the middle of their decision process at all of our key accounts.

Andrew Burns - D.A. Davidson

Okay. Thanks. And last question during the call there was lot of commentary around investing in media in systems and inventory just wondering if there’s anything we want to call out just from a modeling perspective if this a significant change from how we’ve been thinking about the business in the past, any areas that you’d like to quantify in terms of investments?

Bruce Cazenave

I think we can do that may be when we have some more specific calls there certain things I know for sure we modeled what some additional inventory not just in a second warehouse, but also what could have been done if we would had more inventory in the first quarter as an example, we churned our inventories at about almost eight in the first quarter and that was on top of another eight or so in the fourth quarter. And frankly, particularly given that our product is on the water for three weeks almost four weeks in some cases, we have less than a month in the barn and that’s not enough to service our customers the way we would like to do. So there, we will be quantifying going forward, little bit in terms of what we would like to carry that you can put into your models, Andrew.

Operator

(Operator Instructions) And our next question comes from the line of Frank Camma from Sidoti. Please go ahead.

Frank Camma - Sidoti

Just a couple of quick question. One, can you comment on the inventory levels at the retailer himself and since you’re going into this seasonally slow part of the year?

Bruce Cazenave

Yeah, Frank. The reports we are in close with communication with all of retailers and we have visibility to point of sale and I would say at this point the retailers are very reasonably stocked on inventory.

Frank Camma - Sidoti

Okay. And as far as the R&D spend; obviously you’ve signaled that that’ll go up kind of in the future. Is this the sort of trajectory we should look at I mean is it kind of a normalized level of spending or is it -- or was it something unusual in the quarter?

Bruce Cazenave

No I think if you are comparing year-over-year first quarter obviously there was a big jump and because we’ve been adding resources and capitalizing for new products and so forth, capital expenditures for new products. We’ve said before Frank that you know when we are 2.3% sales that’s on the low side of where we think we should be closer to 3.0 let just say as a percentage of sales and we’re not there yet, I don’t think even the quarter we would have been there.

Frank Camma - Sidoti

No, okay. And final question is just a kind of big picture question. You’ve top up quite a bit of cash now and I was just wondering if you could talk about the priorities of the cash at this point?

Bruce Cazenave

Yeah. I think the first thing is everything we do relative to not just cash but financial resources in general as well as human capital as we try to look through what we call in investor lands in terms of how can uses of cash to your question, best return shareholder and create more shareholder value going forward. So it’s a pretty rigorous process I would say that we’re looking at all the options and we recognized that we’re at a state right now and our company’s maturity where optimum capital deployment is even more critical but it’s going to take, we are going through rigorous analytics having on discussion with our board looking at a number of different options and I think what the one thing that we do as a filter in terms of prioritization is we want to make sure that we are first and foremost taking care of putting things in place that will enable us to grow the way we think we can grow profitably. So that’s a warehouse, that’s R&D center, that’s inventory that we didn’t have which consumes cash and so forth. First and foremost we want to make sure we’ve got those building blocks in place and then we will look at some of the other possibilities in terms of again, taking -- continuing to improve shareholder value.

Operator

And our next question comes from the Ian Corydon from B. Riley & Company. Please go ahead.

Ian Corydon - B. Riley & Company

Very strong revenue growth against the tough comp indirect and very strong margins as well and is there anything there that was unusual or did those metrics as reasonable to think those metrics can continue at that pace?

Bill McMahon

In terms of revenue growth we certainly as discussed saw increased performance in all of our cardio lines including the introduction of MAX help with that. The margin gains we think most of that is reasonably sustainable going forward. We’ve had some optimization of our cost structure and so there weren’t any onetime events benefiting that, but as you know direct margins have continued declined a little bit and we also say I’m sure we can go any higher. I would say I’m not sure we can any higher on those at this point.

Ian Corydon - B. Riley & Company

Got it. And in terms of the treadmills you’re adding to retail, are you getting incremental floor space for that or is that at all cannibalizing your other products?

Bill McMahon

This would not cannibalize our product at all and it would be our desire to acquire incremental floor space with every placement.

Ian Corydon - B. Riley & Company

And then last questions on the international opportunity, could you just talk a little bit whether that opportunity is more cardio or strength in any particular products that you’re going lead with there?

Bruce Cazenave

Certainly we think it’s like the global market it’s potentially more cardio then strength, but we do have find in our SelectTech product has a good global presence around the world and has the ability to expand and it has been one of the drivers of our growth. But having that line of products that first the Model Year 2013 Schwinn and now the Model Year 2014 Nautilus that is internationally compliant should open doors for us. And some of those markets are crowded but our brands are known and we believe that we should be able to expand in cardio which is a larger market in strength globally.

Bill McMahon

Ian let me come back as well if you don’t mind on me on the treadmill question. I think it’s important to emphasize that we’re going into this very selectively. I think as Bill mentioned we’re entering the marketplace with a couple of price points and that said and compared to 100s of skews that are out there and competing in treadmill world. We’re just going to be very selectively I would say in terms of distribution as well as price points in terms of how we go into that market. We’re not going into it with a shotgun approach. It’s very much selective strategic entry that we’re making. It’s another way to say, don’t add another whatever big millions of dollars, you’ve got it.

Ian Corydon - B. Riley & Company

I understood. Thank you.

Operator

And our next question comes from the line of Steven Martin from Slater. Please go ahead.

Steven Martin - Slater

I’d like approach the operating expense lines in a different way. G&A is up year-over-year from $4.9 million to $5.8 million, if you had to guess as to run rate going forward what would that be?

Sid Nayar

Our G&A spending, we did have some timing issues in the first quarter. We had certain legal fees for IP and patent work that’s built into the first quarter that really would be spread up more evenly through the year. And compared to the prior year we had there was reversal way claim from last year that was settled which also heightened the gap between the first quarter of last year versus this year again just in terms of the other factors that were accruing some incentive reserves based on performance versus a straight line method that we adopted last year. So we’re trying to better balance the -- better match the expense to the period drive in the performance. So I think those factors would suggest sort of the first quarter was skewed a little heavier than we see the future quarters.

Steven Martin - Slater

Okay and same question on the R&D line?

Bruce Cazenave

As I said R&D, Steven, it’s a big increase year-over-year for the first quarter. We’ve been stepping it up all along and I think that if you want for modeling purposes we’ve talked openly about the fact that we’re still not where we want to be on an R&D spend basis as a percentage of sales. But as we get closer to 3% of sales then that’s closer to where we think we want to be and that’s for the reason being we know what our pipeline looks for the next three years and that’s when we basically have to spend in order to deliver and bring those products in.

Steven Martin - Slater

Right, but R&D isn’t going to vary by quarter?

Bruce Cazenave

No, it’s not.

Steven Martin - Slater

Right so when we model it, it’s got to be based on some form of annual sales to follow your 3% lead we’d have to be looking at a sales projection for the year, because I assume that’s what you are doing, you’re looking at your ‘14 sales number and saying we got to get the 3%?

Bruce Cazenave

Actually, we’re building it up more alike, looking at the next three years, not just this year’s revenue. So you can take the, if you want to, you take whatever your revenue forecast is for the year and apply the high twos or even 3% and then back that in every quarter and you’d be pretty close because it is, it’s building but once it get closer to 3% then it’s going to slowdown if not stabilized.

Steven Martin - Slater

Okay.

Bruce Cazenave

We can take talk more offline if you like Steven on this.

Steven Martin - Slater

Okay. I think I have got that. And given the -- you have a better sense of what the deliveries of the products could have been if you had them in-house, can you give us a better sense of guidance sort of for growth rates going forward as you catch up on your supply chain?

Bruce Cazenave

I think right now what we have said is that we are ambitious to grow our business rather talking revenue now, in the high single digits, low double digits. And obviously we’re starting the first quarter off very strong there’s three quarters yet to go a big fourth quarter that we’re camping, okay from last year. So right now we are just sticking to that and that’s kind of little level, say low double digit kind of level of growth coming from both our retail and our direct businesses. And then as we get into later in the year, we might be able to share with your more as a three or five year horizon what we can expect on an annual growth rate basis from our revenue standpoint.

Steven Martin - Slater

Okay. Let me ask you another question. Knowing for well that you didn’t have the sufficient inventory in the pipeline, but you did say you grew immediate spends, should we presume you would have spent more if you had more inventory?

Bill McMahon

Yes, in retrospect we would have spent more in the MAX trainer category if we had predicted correctly the response we would have saw out of the gate.

Operator

And that were all the questions from the phone lines at this time I’d like to turn the call back to you.

Bruce Cazenave

Very good. Thanks again for everyone’s participation and interest in our call today. As an FYI, we do plan to attend a couple of investor events over the next few months. We hope to see you at one of these events and either way look forward to speaking to you next on our second quarter 2014 conference call in August. Hope everyone has a great day. Thank you.

Operator

And ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you to disconnect your lines. Have a nice day everybody.

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