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Direct Focus CEO talks to SNEWS about changes, image, goals

Just a handful of years ago, Direct Focus wasn't much more than the company behind the direct-marketing phenomenon, Bowflex -- a shining jewel of which to be proud, for sure, with its profitable sales and savvy marketing, but one that put the company more on the fringes of the fitness industry.

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Just a handful of years ago, Direct Focus wasn’t much more than the company behind the direct-marketing phenomenon, Bowflex — a shining jewel of which to be proud, for sure, with its profitable sales and savvy marketing, but one that put the company more on the fringes of the fitness industry.

Today, Direct Focus CEO and founder Brian Cook, who spoke to SNEWS last week about the company’s past and future, has collected an impressive piece of fitness history with acquisitions of high-profile brands Nautilus, Schwinn and StairMaster — names recognized even by most of the non-exercising public.

His goal is simple enough: “To become the Microsoft of the health and fitness industry … without the Congressional attention.” That statement is tongue-in-cheek perhaps, but in every bit of humor lies some reality, yes?

On May 21, Direct Focus (now Nasdaq: DFXI) will turn another page in its cataclysmic progress of the last three years: It will join the New York Stock Exchange and celebrate that move in a bell-ringing ceremony that will also announce a name change to “The Nautilus Group Inc.” (ticker symbol NLS). That is the first step of an image refinement that includes a new website and a new logo, all to debut the same day. It was only three years ago the company moved from the Toronto Stock Exchange to the U.S. Nasdaq.

Love it or hate it

Still, analysts can’t figure out whether to love Direct Focus or to hate it, to rate it as a hot buy or to suggest the Vancouver, Wash.-based company, is about to flame out — all of which they’ve done from one breath to the next. In fact, two years ago, experts at The Motley Fool forecast the company’s rocketing growth was coming to a grinding halt and, although having been picked that year as the No. 1 “Hot Growth” company by BusinessWeek, that was the last time that would happen. For the record, BusinessWeek this year picked Direct Focus as its No. 2 Hot Growth company — not exactly chopped liver. And, once again, Fool came out with a piece stating that the company did not impress and its high-growth story may not last — click here to read it

But Fool wasn’t the only opinion floating around. A piece this month suggests the company’s run is going to continue and advises, “buy.” And U.S. Bancorp Piper Jaffray recently forecast that the stock, which closed at $42.66 on May 6 and had a 52-week low of $16.80 on Sept. 21, would hit $62 in 12 months — up $9 from its original price target.

Cook takes that all in stride, he told SNEWS only hours after the announcement of the name change and the move to the NYSE. His attitude? Sort of a “sticks and stones” one that any mother would be proud of — “We focus on our growth and our strategy and our execution of it,” he said. Never mind what the alleged experts say. The company’s history speaks for itself — with stupendous growth in each of the last 13 quarters that has even exceeded the company’s expectations, and a continued target of 25 percent to 30 percent growth each year.

“This is a really exciting time for our company,” Cook said. “We have a tremendous opportunity for growth on the retail side. We merge in the synergy of Nautilus, Schwinn and StairMaster. We think there is a lot of room for growth.

“Other people are entitled to their opinions.”

By the way, Direct Focus announced its first-quarter results in April, showing soaring sales reaching $135.9 million (an increase of 82 percent from $74.9 million for the first quarter last year), with a gross margin of 57 percent, down from 66 percent. That reflects the addition of commercial- and retail-focused Schwinn and StairMaster to the fold, dropping the mix of direct vs. non-direct sales from 2001’s 80-20 to 2002’s expected 60-40. Year-to-date, the company has sold 59,000 Bowflex units — 599,000 lifetime-to-date — with an average price of more than $1,400. 

A name change that makes sense — with brands that make sense

Although the company name, Direct Focus, was chosen to highlight its direct-to-consumer model, that too has changed with the acquisitions of Nautilus, Schwinn and StairMaster — all three companies that sell both commercially and at retail and have a strong international presence. Cook says The Nautilus Group will remain a company that is “being driven by the direct model,” but commercial and retail sales will now account for about 40 percent.

Nevertheless, chatter on Internet boards after the announcement May 2 was straight and to the point: “Direct Focus was a terrible name for the company,” said one posting. “Nautilus Group is a much better description of what they do.” Amen.

“We’re now more than just an effective direct-marketing company,” Cook said, and selection of a name with “Nautilus” is one that reflects its future path. “Nautilus has tremendous name recognition. It’s a very quality and trusted name and has a lot of integrity. We’ve become a complete health and fitness company.”

Which, of course, still is on the same page as the Direct Focus tagline — one that company executives and promoters never miss a beat about plugging into a conversation or other material: “the largest and best marketer of fitness and healthy lifestyle products in the world.”

Healthy lifestyle products

SNEWS knows what a fitness product is. Basically. But what is a “healthy lifestyle product?” We asked Cook, who couldn’t really give an answer.

A bed is important in a healthy lifestyle, he said, referring to the mattresses that were renamed to Nautilus Sleep Systems after the acquisition of Nautilus. If you can’t sleep, you can’t be healthy, he said. Nutrition is part of a healthy lifestyle, he said, referring to the Champion sports nutrition products the company is now upselling with its Bowflex products through personal trainers.

Sleep and nutrition — those are pretty clear to SNEWS as needed for health since we get grumpy if we can’t sleep. What else? Cook didn’t seem to have an answer, stating only that the company intends to grow “across all segments of our business,” which is grandly broad and leaves the definition of healthy lifestyle products up for grabs. Which means The Nautilus Group is as nimble as ever — ready to alight on another company deemed to fit its image. Ah, being vague can also be distinct, you see.

But for now fitness products by the likes of Schwinn Fitness (acquired in bankruptcy auction in 2001, after it lost the bid in 1997 to Questor Partners, to whom Direct Focus came in second) and StairMaster (acquired in bankruptcy auction in January this year) fill the healthy bill that is part of the expansion strategy Cook has been following. “They were bargains,” he said, “and they came with businesses too.”

Are others on the horizon? Like Precor, which is also for sale by parent ITW? Cook, of course, wouldn’t say, only commenting that he is aware it is for sale. He did call his company, founded in 1986, as “opportunistic” when it comes to acquisitions, but for now he said it would focus on “taking advantage of the synergies” of the companies they now own.

“We feel strongly about strong brands and about premium products,” Cook said. “Brand names you can acquire. Or you can build.”

The future of Bowflex

Then there’s the supercharged Bowflex strength system with its thumping-music commercials that usually make heads turn and conversations stop (Dang, are those real bodies??). So popular are the units, according to the Internet chat boards, that you’ll pay more on eBay than from the company. Said one posting: “Direct Focus can’t make them fast enough. A six-week delivery wait. What’s this tell you?”

But what does this mean when the patent for the Bowflex expires in less than two years (April 2004, Cook says). The Motley Fool wrote it was skeptical that profit margins would continue to be as high since prices may be driven down by other similar products.

“I don’t think I’m overly concerned,” Cook said. “We have a strongly branded product with strong momentum.”

The patent, he said, is for the concept of the bow resistance not the machine’s detailed construction and design.

“The power rods are like the Coca-Cola formula,” he said, slightly flippant. “It won’t be easy for competitors to duplicate. I’m not concerned.”

With $160 million invested in advertising that has established “the look and feel” of the Bowflex line, he also said the company believes it would have trade dress protection. Trade dress was established by the Lanham Act and basically prohibits the use of products, their image and design in a way that would confuse consumers. It is usually applied to both non-patented products as well as to those where the patent has expired.

Cook, who has a practiced and polished way of speaking that makes a listener wonder if he’s reading a script, didn’t grow up looking to be a marketer of fitness and those vague healthy lifestyle products. He has a degree in business administration from Western Washington University and is also a CPA. But, he said, as a youth he wanted to be a fireman. His personal passions/hobbies are golf and fishing, in that order. With a room conveniently filled with steppers, bikes, treadmills and bow-resistance machines, he also fits in workouts three days a week.

“You evolve,” he said, “into what you want to do as you move through life.”

Direct Focus, soon to be The Nautilus Group, is still moving through its life, evolving into what it has now become after 16 years. But count on the fact that it is still moving. And still evolving.

–Therese Iknoian