Nautilus Inc

NYSE:NLS

Good day, and welcome to the BowFlex Fiscal Second Quarter 2024 Earnings Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to your host, John Mills with ICR. Please go ahead, sir.

Thank you. Good afternoon, everyone. Welcome to BowFlex's fiscal 2024 Second Quarter ended September 30 conference call. Participants on the call today from BowFlex are Jim Barr, Chief Executive Officer; and Aina Konold, Chief Financial Officer. Please note, this call is being webcast and will be available for replay for the next 14 days. We'll be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1:05 p.m. Pacific Time and may be downloaded from our website at corporate.bowflex.com on the Investor Relations page. The earnings release, including a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. For today's call, we have a presentation that management will refer to during their prepared remarks. On Slide 2 is our full safe harbor statement, which we ask everyone to read. You can access the presentation by going to the Investors page on our website and clicking on Events and Webcast. I would like to remind everyone that during the conference call, BowFlex management will make certain forward-looking statements. These forward-looking statements are based on the beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Our actual results may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the safe harbor statement into our SEC filings, which can be found in the Investor Relations section of our website. And with that, it is my pleasure to turn the call over to BowFlex's CEO, Mr. Jim Barr.

Thank you, John, and thank you to all for joining us on our first earnings call as BowFlex Inc. following our comprehensive company rebrand. BowFlex is a globally renowned name known as the Beacon of Fitness excellence. Our new corporate identity mirrors our #1 brand and exceptional standing in the connected home at home fitness equipment market and reinforces our unyielding commitment to our strongest brands. Before we dig into results for the quarter, I'd like to first touch on what we're seeing in the industry. As we have moved through Q2 and into Q3, we continue to face a challenging operating environment. The macroeconomic backdrop remains uncertain, weighing on the consumer. Retailers continue to maintain a highly conservative approach to inventory. This market uncertainty is driving an increasingly promotional environment as we head into fitness season. With that being said, it is important to highlight that we are successfully executing on the things we can control, including reducing our cost structure and improving our inventory position, which is enabling us to manage through this near-term environment. At the same time, we are ensuring that we are well positioned to capitalize on the long-term shift to connected at-home fitness when consumer demand stabilizes. Turning to our second quarter results. We delivered net sales of $49 million during the quarter with direct sales of $21 million. While the direct segment was down year-over-year, we were encouraged by the positive 15% comp we delivered in strength equipment. We believe these positive results are a testament to the deliberate product enhancements we've made in this area. Similarly, though not a big part of our business, we also returned to growth in our international business, reported under our Retail segment. Together, we hope that these bright spots are an indicator that we are nearing a return to broader enterprise growth. On the other hand, domestic retail continue to face softness and overall Retail segment net sales were down 30% year-over-year. Although retailer inventory of our products is down 50% year-over-year as of October, showing significant progress in rightsizing their inventory positions, retailers are still maintaining their conservative approach to reorders. And we believe it has -- it is prudent to plan for this to continue as we enter the peak fitness season. Importantly, over the last several quarters, we have deliberately rightsized our own inventory.

This strategic move places us in a favorable position to better maintain our price discipline in an increasingly promotional environment. We continue to offset the top line softness with diligent cost management and operational excellence efforts, underpinned by our supply chain initiatives, which have led to delivering margin improvements through reduced product landed costs year-over-year for 4 consecutive quarters despite declining sales. Notably, these actions also drove a second consecutive quarter of year-over-year improvement in adjusted EBITDA loss during Q2. $17 million cumulative improvement in the first half of fiscal '24 versus fiscal '23. We have made the necessary investments in JRNY and taken deliberate steps to scale to reduce cash spend and to focus on paid subscriber conversion to accelerate breakeven. By the end of Q2, we had nearly 600,000 JRNY members, up 51% versus second quarter fiscal '23. And we now expect about 650,000 members by fiscal year -- by the end of the fiscal year versus our original guidance of 625,000. Total subscribers at the end of Q2 '24 was up 1% to 143,000. And most importantly, we achieved significant growth in paid subscribers versus the same quarter 1 year ago. This progress reflects not only additional JRNY product capabilities such as motion tracking and form coaching with SelectTech Dumbbells, but also our ongoing efforts to optimize our subscriber funnel through shorter trial periods and better communication and merchandising. As we discussed last quarter, we recently launched an exciting pipeline of new connected fitness equipment for this fitness season, 2 BowFlex products, the Max Trainer SE and the IC bike SE and our new Schwinn 490 elliptical. Paired with our rebranded identity, BowFlex continues to demonstrate its strength in producing consumer-centric equipment that is inclusive and designed for different rooms in your home. These products will be sold through our direct business as we deliberately focus our new products and innovation efforts to drive continued momentum in this segment. We are encouraged by early reception of these new products, which has been supported by our focused marketing spend. We continually evaluate and optimize our advertising strategy to make sure our products are hitting the right places and the right people. In addition, managing our marketing investments continues to be a lever we can pull quickly and adjust as we monitor the demand environment. Turning to our fiscal 2024 outlook. As I mentioned earlier, as we begin fitness season in Q3, we're seeing the macroeconomic environment continue to impact the consumer. Retailers' reorders have remained slow as our partners continue to largely service the category with existing inventory. Based on these dynamics and the visibility into fitness season orders we have today, we have revised our FY 2024 guidance. We continue to take the necessary steps that position us well to navigate the near term. As previously mentioned, we have rightsized our inventory position, enabling us to maintain our price, support our profitability and maintain our brand equity in a promotional environment. Our semi-variable operating model enables us to continually manage costs and prioritize investments that will drive the business forward. We have demonstrated our ability to drive improved results as an outcome of these efforts, highlighted by the $17 million year-over-year improvement in adjusted EBITDA for the first half of the year, which is seasonally our softer period. As reflected in our guidance, we continue to believe we can deliver significant year-over-year improvement in adjusted EBITDA this year. While managing near-term opportunity -- near-term temporary headwinds, we continue to position ourselves to capitalize on the enduring change in long-term at-home fitness habits as we introduce new products and scale JRNY. Even as workouts at gyms have risen, the percentage of consumers working out at home has remained consistent over the last 2 years at significantly elevated levels relative to pre-pandemic and we are well situated to fulfill the needs of our consumers sustained interest in home workouts with our broad portfolio of strength in cardio equipment at a variety of price points and by highlighting the total cost of ownership advantages that we have. As we look ahead, we continue to be thoughtful and responsive to consumer behavior with calendar year 2024 product priorities focusing on introducing new strength equipment, treadmills and other products that broaden our portfolio at important price points. I will now turn it over to Aina who will give us more detail on the second quarter results and our fiscal 2024 guidance. Aina?

Thank you, Jim, and good afternoon, everyone. Today, I'll be speaking to results for the second quarter of fiscal '24, and will provide guidance for the full year fiscal '24. Please go to our website to view our press release and the slides accompanying this call for more information on Q2 and year-to-date results. Turning now to Slide 10. Net sales for the second quarter were $49 million, down 26% versus last year. Direct declined by about 15%, direct cardio was down 30%, but direct strength was up 15% versus last year. The first positive comp and strength since Q1 fiscal '22. Our Retail segment declined by 30% as retailers continue to be conservative with reordering inventory. Importantly, our international business is growing again, delivering positive 41% comp in the quarter. Gross profit was $10 million, down 13% versus last year. However, we were pleased to deliver another quarter of gross margin expansion on softer year-over-year net sales. As such, Q2 gross margin of 20% was up 300 basis points versus last year. This improvement demonstrates the success of our North Star initiatives in supply chain. Digging into the specific drivers. The gross margin improvement was driven by 900 basis points increase due to lower landed product costs, 200 basis point increase due to lower inventory adjustments. These margin gains were partially offset by 400 basis points of deleverage related to JRNY COGS, negative 300 basis points due to increased discounting and negative 100 basis points due to increases in other costs. Turning now to Slide 11. The next few lines of the P&L have been adjusted to exclude the impact of restructuring and exit charges. Please see our press release for a reconciliation to GAAP. Adjusted operating expenses were $20 million, down $5 million or 21% versus last year. The key drivers of the decrease were $3 million lower personnel expenses related to the February reduction in force, $1 million lower advertising and $1 million lower other expenses. Adjusted operating loss was $10 million, an improvement of $4 million versus last year. Adjusted EBITDA loss was $6 million, an improvement of $4 million versus last year. Turning to Slide 12 of the balance sheet as of 9/30. Cash was $10 million, Debt was $16 million, which represents our term loan balance as we had 0 borrowings on our ABL. We had $29 million available for borrowing, bringing our liquidity to $39 million. Other key call-outs on the balance sheet. Inventory was $66 million, up 42% versus fiscal year-end '23, driven by purchases to support the upcoming fitness season. About 40% of our inventory at 9/30 was in transit and weighted to our best-selling SKUs versus the same quarter last year, inventory was down 33%. AR was $24 million, and trade payables were $63 million, both up from fiscal year-end '23. Turning now to guidance on Slide 13. Consumer demand remains soft amid an ongoing uncertain macro environment. Retailers continue to be conservative with their inventory reorders, and competitors and retailers are aggressively discounting to clear through their excess inventory. At BowFlex, we did the hard work last year to clear our inventory. Our inventory balances this year are in line with sales trends and units are heavily weighted to our top SKUs. Our inventory discipline gives us flexibility to navigate this fitness season and removes the pressure to aggressively discount which would only erode our brand equity. We believe we have the right assortment and value proposition to be competitive this fitness season and because we have managed our inventory well, we have the flexibility to choose whether to forgo low-margin revenue to preserve the momentum of our gross margin expansion and position BowFlex well for the long term. Given the continued challenged macro environment and year-to-date sales trends, we are lowering our expectations for full year revenue. We now expect full year revenue to be between $215 million and $240 million, compared to previous guidance of between $270 million and $300 million. The bottom of our sales guidance range assumes that second half year-over-year sales declines will be similar to first half, roughly minus 25% versus last year. The top end of our guidance range assumes for the second half, a less negative sales decline and slight growth in gross profit dollars versus last year. We continue to expect year-over-year gross margin expansion for the full year with gross margins in the back half, slightly higher than the first half of this year. Margin expansion, coupled with strong expense discipline, will minimize the impact of lowered revenue on adjusted EBITDA. As a result, we now expect full year adjusted EBITDA loss to be between $15 million and $25 million, which continues to represent significant improvement over last year's loss of $47 million. Lastly, we are increasing our guidance for fiscal year-end '24 JRNY members. We now expect to be at about 650,000 members at 3/31 '24 versus our original guidance of 625,000. Like many other companies, we are preparing for a continuation of a difficult operating environment. While it has been challenging to predict consumer demand, we are confident in our ability reflects all available levers to minimize the impact of lower top line on the bottom line, allowing us to deliver improved adjusted EBITDA loss compared to last year. I'll turn it back now to Jim for his final comments.

Thank you, Aina. As we step into fitness season in the second half of our fiscal 2024, our steadfast commitment to operational excellence and prudent inventory management has equipped us to support the successful launch of our new BowFlex and Schwinn products. As the challenges in retail persist, we will remain agile in managing our costs with a focus on driving strong cash flow and supporting our path back to profitability as we remain on track to deliver a significant year-over-year improvement in adjusted EBITDA in the fiscal 2024 as implied by our guidance. Despite the ongoing challenges, we remain encouraged by several bright spots over the quarter, including strength in our Direct segment, growth in our international retail business and conversion to paid subscribers in JRNY, all of which support our conviction in our future as we capitalize on the long-term shift to at-home fitness. I want to thank our dedicated employees and partners for their diligence, perseverance and passion for serving our consumers in their pursuit of lifelong fitness. Lastly, as a reminder, our Board of Directors remains diligent in assessing value-creating opportunities and initiatives to accelerate BowFlex's strategic transformation. We have no additional information to share regarding the process at this time. We are grateful for your continued support, and we remain focused on delivering value for our shareholders and customers as we navigate these exciting opportunities ahead. We'll now open up the call to Q&A. Operator?

[Operator Instructions] Our first question comes from JP Wollam with ROTH MKM.

Maybe just starting first, I know we're headed into the seasonally strong period. But if I can maybe just think about kind of the off-season for a minute. And Jim, I know you like to talk about kind of the permanent change we have with at-home fitness and there are more people working out at home, given kind of work hybrid that we see. So my question really is kind of just as we exit the off season, what are the biggest takeaways you have in consumers' purchasing habits? And what is really the lesson here as we get further away from COVID and really understanding kind of off-season and what people are looking for.

Yes. I mean I still continue to see what I call long-term tailwind in that home fitness is more important over time than it was prepandemic. And we see strength across -- first, it's going to come across in our strength products. We started to see that. We talked about bright spots. It's kind of -- it's kind of tough to do [indiscernible] or anything like that on a quarter like this, but where the consumer seems to be. But we're beginning to see some hopeful encouraging signals in direct strength we talked about, in international retail, JRNY. We can sort of see the light at the end of the tunnel with the investment in JRNY and we're seeing real progress there from quarter-to-quarter. And really, I'm happy about our ability to leverage the bottom line despite the things we don't control on the top line. So those are kind of some of the trends. I do see in terms of consumer trends, you can see in our products that the products are moving to a different room of the home. As people are working out at home. So these products have to be sleeker. They have to belong in the [indiscernible] room or the living room, not necessarily in the garage or some special room or your bedroom. These are things that people want to be proud of, that are things people talk about. And so they are getting slimmer. They are not as bulky as they were before. They reflect our new branding and the reality of where things will be there. We're continuing to see people building out their home gym. So we're seeing people buy a [ set ] piece more often than they were before, that's been an important trend for us. And then in Connected Fitness, it used to be that your second purchase was wholly independent brand-wise to your first purchase. That is no longer the case as connected fitness pervades, you're essentially getting people who will buy the same brand on the second purchase as well. So this is -- these are things we're seeing. I'd say, in the short term, these headwinds for sure, deals are important in this holiday. I hope that we've been seeing the consumer strengthening going into the holidays. I don't think that's happening. I think we're seeing a weakening of that going into the holidays, just reading other people's earnings reports and experiencing ourselves. So those are some of the things that we're kind of seeing and changing in the industry or short and long term. Hopefully, that answers your question. But if not, let's follow up.

No, no, I think that did. And we kind of took some of the next question about promotional environment that I was going to ask. So maybe I'll switch it instead. And just kind of ask, any changes you're seeing to fitness floor space at some of your retail partners, whether that's your products alone or just the broader kind of fitness space that retail has designated.

No, it's a great question. We're really not. I mean, that's the short answer is we're not seeing any structural differences in who's carrying fitness, how many doors are carrying fitness, our products and how many doors our products are in. So we're not seeing any, what I'll call, significant structural differences. And that's important to us because while retail may be a bit down right now, we love our omnichannel approach. We are dedicated to making sure that our consumer can reach us in a variety of different channels. And so that's going to continue to be important. What we're really seeing and what is driving the guidance revision that we've talked about is look, they're driving down the inventory. And this is the first time we've given the number on that, that units are down 50% year-over-year. So they have driven at retail significant reduction in units, and that's great. It's hard to predict when the ordering will return, right? That's what hasn't happened yet. We had hoped that it would for this holiday season, and it continues to be slow. And really, that's the case in our category and some other categories. So as the retail environment remains uncertain, we're encouraged by some of the things I talked about before, international getting a second consecutive quarter of growth. Growth in smaller retailers, I think is a notable thing that I didn't talk about in my script, but those big retailers that had a lot of inventory are not reordering, as I mentioned, and they can't be counterbalanced by the smaller ones, but our smaller retailers who didn't have those inventory problems are reordering strongly. That gives us a lot of promise in that particular area. So -- and our team has done a great job at focusing on those folks that -- those retailers that didn't have as much inventory and making sure that they were well supplied as we go into the holiday season. So we offer a premium product at a strong brand and a reasonable price point with a great total cost of ownership, and this gives us optimism that when the investments do open up, then we'll be in a good position to take advantage of the market.

Great. Really appreciate that. And then just 1 last quick one, maybe more for Aina, but -- just in terms of liquidity, I'll leave it pretty open ended, but I saw inventories creep higher. I know that's kind of building for the strong season. But maybe if you could just give us your high-level view on liquidity and cash burn. You've taken a lot of costs out of the business, but how are you thinking about it there?

Thanks, JP for the question. So we're comfortable with our liquidity. It was $39 million at 9/30 and our guidance suggests that the second half adjusted EBITDA loss would be a range of minus 3% to minus 13%, which is better than last year. And as we said several times in our script, I believe we've proven that this management team can minimize the impact of lower revenue and adjusted EBITDA.

So we're very focused on delivering stronger EBITDA year-over-year. and that gives us confidence in our liquidity. And finally, we believe we're managing through a dip, so we're concurrently preparing the company for the recovery. Gross margin is going to be important for that. We have momentum there. And we're getting new products ready for the new year, and we believe that revenue growth will come as we introduce those products in the market.

[Operator Instructions] There are no further questions at this time. At this point, I'd like to turn the call back over to Jim Barr for closing comments.

Thank you, again, to everyone on this call today that -- and for your continued support of BowFlex. We look forward to providing our next update on our third quarter fiscal 2024 earnings call in February. Have a great rest of your day onwards and upwards.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.