Nautilus Exercises A Singular Focus And Looks Fit

| About: Nautilus, Inc. (NLS)

Summary

Nautilus boasts strong brands and quality equipment which command a premium over less expensive copycats.

A digital subscription component to 2018/2019 equipment for integration into fitness apps represents an exciting development for future quarters.

Double-digit revenue and cash flow growth demonstrates Nautilus' ability to thrive and flex their muscles even in a highly competitive gym space.

Nautilus (NLS) is a consumer fitness products company headquartered in the Pacific Northwest with a strong brand presence in the gym space with three of the top five brands—Boflex, Swinn, and Nautilus—commanding a price premium on equipment. Eighty-four percent of their 2017 revenue was derived from consumer cardio products for home use or multi-user environments. This is a seasonable business, with the strongest sales in the fourth quarter of the year due to the holiday season and the first quarter due to the poor weather.

It’s an even split between retail and direct-to-consumer sales for Nautilus’ equipment sales. Sixty-nine percent of direct sales are made through their web properties, with fifty-four percent of the visitors browsing and buying using a mobile device. Direct advertising includes TV commercials from 30 seconds to three minutes long, internet advertising, and mailers, amounting to $65 million in total advertising spending in 2017.

Opportunities: In Q4 2018, Nautilus is launching a digital subscription model that will offer a host of features which will be integral to many of the leading fitness apps. This will also introduce a recurring revenue stream to bolster the bottom line.

Nautilus Digital Source: Nautilus, Inc. Investor Presentation - May 2018

With Europe and North America constituting the majority of sales regions, considerable strides and inroads are devised to be made into Asian and Latin American markets by 2020 through local advertising.

In the retail space, despite Nautilus’ strong brands, they command only a three percent share of the current $3.8 billion market, affording comfortable room for growth. Within the cardio space, treadmills and ellipticals tie in terms of popularity, with stationary bikes in third position.

In 2017, fifty-four percent of those that applied for third party credit to finance the purchase of a piece of equipment were approved, with marketing efforts focused on finding people with strong credit as the inability to finance a unit often means that the sale falls apart.

This exercise equipment is sourced from Asia, taking three months from start to delivery to warehouses in Oregon and Ohio. Multiple sourcing centers bid and the best combination of price and quality is awarded a short-term, non-exclusive contract, affording Nautilus the ability to continually cut costs through competition. More than half of the time retail customers get the orders directly from Asia, bypassing warehouse storage and cutting on expensive shipping costs for units that are quite large.

Direct sales saw a nineteen percent CAGR between 2012 and 2017, lifting from $63 million to $152 million. Revenue growth averaged sixteen percent, inclusive of the 2016 to 2017 year which saw zero growth. Profitability has risen in 2012 from 5.6% to 11.1% in 2017. Cash flow also looks solid with a 22% CAGR from 2012. $15 million in a stock buyback was announced in Q1 2018. $15.4 million was spent in research and development in 2017.

Conclusion: The future of stationary exercise equipment is intertwined with the growth of exercise apps. There are even apps where you can wager on whether you’ll keep-up to a defined running schedule. Other apps keep you motivated through virtual personal trainers or exercise plans that sync with the internet in real time.

Nautilus represents a value play based on the quality of their brands, retail relationships, and direct-to-consumer marketing effectiveness. Through robust app integrations, Nautilus aims to build a loyal subscription base, positioning them to be a key player for tech-savvy gym goers and at-home exercisers who want the latest technology to bolster their efforts to stay fit.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.