Focus Article: Nautilus Inc. (NLS)

Nautilus Inc. (NLS) $2.44

The Company:

Bowflex SelectTech Dumbbells

Bowflex SelectTech Dumbbells

Nautilus Inc. is a marketer, developer and manufacturer of consumer fitness products primarily in the United States and Canada. The company was founded in the year 1986 as Bowflex of America. Most consumers interested in strength training have probably heard of Bowflex thanks to the incessant commercials and informercials promoting their home gym products. In 1999, the company acquired Nautilus Inc. and expanded into commercial clubs. Nautilus was invented by Arthur Jones and refers to a mollusc whose shell is in the shape of a logarithmic spiral. A patented logarithmic-spiral cam is used in the Nautilus exercise machines.

In 2001, Nautilus acquired Schwinn Fitness and entered the retail market. In order to expand into the fitness apparel market, the company acquired Pearl iZumi, a brand popular in cycling circles, in 2005. This acquisition got me interested in the company and for a brief period of time in mid-2007, I owned the stock. Unfortunately with the implosion of the housing market and a sharp decline in business, Nautilus sold the Pearl iZumi business in 2008 to reduce its debt. In 2009, Nautilus further divested commercial brands through sales and licensing agreements and restructured itself in 2010 to focus on the consumer. The company went from $600 million in revenue and over 2,000 employees in 2006 to just $180 million in revenue and 330 employees in 2011. After reporting losses for several years, the company achieved annual profitability in 2011. It also managed to strengthen its balance sheet by going from over $70 million in net debt in 2006 to over $10 million in net cash in 2011.

Nautilus 2011 Revenue by Segment

Nautilus 2011 Revenue by Segment

Nautilus sells its products under the following brand names: Nautilus, Bowflex, Schwinn, Universal, TreadClimber and CoreBody Reformer. The products are marketed through two distribution channels, Direct and Retail. These two channels also represent the two primary business segments of the company. The Direct business offers products directly to consumers through television advertising, catalogs and the Internet. The Retail business offers products through a network of independent retail companies including Amazon.com (AMZN), Dick’s Sporting Goods (DKS), Sears (SHLD) and Walmart (WMT).

The Nautilus brand of the company offers a complete line of cardio equipment. Almost 68% of the company’s revenue in 2011 was derived from the sales of consumer cardio products. Despite their restructuring over the last 6 years, the company has not stopped innovating and launched the CoreBody Reformer line of products in November 2011. The CoreBody Reformer is a tool that combines elements of Pilates, yoga and dance to provide a complete fitness solution, primarily for women. Unlike the Bowflex products, the CoreBody Reformer is priced at a more affordable $250.

Business Statistics & Financials:

Nautilus reported second quarter revenue of $39.6 million, up 14% from Q2 2011. Gross margins of 43.4% improved 150 basis points year-over-year and operating margins of 5.56% were 670 basis points better than Q2 2011. However the company reported a net loss of $164,000 for a quarter that is traditionally one of their weak quarters (the company makes most of its money in Q1 and Q4). In contrast, the loss in Q2 2011 was $3.27 million, which included a $1.1 million loss from discontinued operations.

The company improved its net cash position with $16 million in net cash on the balance sheet. Wall Street (or what little of it is still paying any attention to this company) was not pleased and the stock dropped 21% in response. The small insider purchase by the company’s COO happened just 3 days after this drop.

Trading at 6 times EBITDA and 0.43 times sales, the stock appears to be cheap. The balance sheet is also strong with $16 million in net cash and current assets exceeding total liabilities.

Competitors:

Stock Symbol Mkt Cap EV/EBIDTA P/B Operating Margin
Nautilus Inc. NLS 80.90M 6.56 2.22 3.58%
Escalade Inc. ESCA 75.21M 6.76 0.82 6.76%
Cybex International Inc. CYBI 21.09M 3.63 1.08 4.40%

Insider Buying:

Three insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Nautilus Inc. here.

Owner Relationship Date Cost # Shares Value($) Total Shares
William B McMahon Chief Operating Officer 9-Aug $2.50 8,000 19,978 25,760
William B McMahon Chief Operating Officer 10-May $2.57 3,000 7,710 17,760
TOTAL 11,000 27,688
Richard A Horn Director 14-May $2.60 2,400 6,240 5,000
Richard A Horn Director 11-May $2.63 2,500 6,573 2,600
Richard A Horn Director 10-May $2.50 100 250 100
TOTAL 5,000 13,063
Wayne M Bolio SVP, Law & Human Resources 14-May $2.61 15,000 39,150 30,800
TOTAL 15,000 39,150

Conclusion:

We have had some luck with a turnaround stock recently (Nokia) but for the most part turnaround stocks are difficult to invest in because the company may not turn around or the stock may remain dead money attracting very little attention despite a successful turnaround. Nautilus falls in the latter category. Nautilus appears to have not only completed its turn around but is also growing revenue with the introduction of new products. The company expects the CoreBody Reformer product to gain traction in the second half of the year and is also launching new products in the next two quarters.

 

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