New Nautilus CEO tells SNEWS® specialty retailers still key to financial turnaround, company future

After a week of big news at Nautilus (NYSE: NLS) with a new CEO named followed by a quarterly earnings call that didn’t mince words about how bad the company’s situation is, CEO and President Robert Falcone took a few minutes to talk to SNEWS®.

With the company’s retail division showing a reported net sales decline of 49 percent, down to $22.6 million, Falcone told SNEWS® he can’t pretend the problems experienced at retail don’t exist.

“I can understand where they’ve had these problems,” said Falcone, who spent eight years as CFO at Nike Inc. in the ’90s. “We have a new sheriff in town, and we’re working on all of these issues — quality, customer service, delivery…. We have some key people working on that.

“We have over-promised and under-delivered. Believe me, it’s one of our highest priorities,” he added.

“I can’t speak to the past,” he told SNEWS® about the company’s relationship to specialty retail. “Going forward, we are taking a hard look.”

The day after naming Falcone, who had been acting as interim CEO since former CEO Gregg Hammann left the company in late August, the company held its quarterly call, announcing a 16-percent loss in third-quarter sales. The company attributed that loss primarily to a reduction in sales of rod-based home gyms in retail and an overall shift in sales mix for customers, channels and products.

Net sales for the quarter ended Sept. 30, 2007, were $134 million, compared to $159.6 million for the same period last year. Net loss for the third quarter, including charges of $0.13 related to bad debt reserves for a sporting goods retail customer’s pending bankruptcy and costs associated with the departure of the company’s former CEO, was $13.3 million, or $0.42 per diluted share, compared to income of $9.4 million, or $0.29 per diluted share, for the third quarter of 2006. The year-ago third quarter included a tax reserve reversal of $3.0 million, or $0.09 per share. Excluding the tax reversal, net income for the quarter was $6.4 million, or $0.20 per diluted share.

“I know the performance is unacceptable to shareholders and it’s unacceptable to me,” Falcone told analysts and media on the call Oct. 18, which was announced about 55 minutes before it was held.

Sales were up in international (26 percent to $18.7 million) and apparel, which is the Pearl Izumi division (10 percent to $18.4 million), while they were down in all other segments. Commercial was down 13 percent to $15.5 million, direct 13 percent to $58.4 million, and retail 49 percent to $22.6 million.

For the fourth quarter, Nautilus said it expects net sales of approximately $160 million and earnings from operations to be about break-even. The company added that it is undergoing a comprehensive review of the business and expects some restructuring charges — such as severance costs and inventory adjustments for discontinued products — in the fourth quarter, which are not included in the estimate. The company a week ago announced lay-offs of about 140 employees or 9 percent of the workforce to trim expenses by $10 million.

Falcone said on the call that despite the weaknesses he still believes in the company, its market opportunities, the fitness market in general, the brands they own and that the right strategy not to depend on direct so much was the correct call.

“Why haven’t we been performing to our potential?” he asked. “The primary cause of our problem has been a failure to execute…. The company was trying to grow too fast for our capacity and capability.”

He said there was too much emphasis previously on top-line growth over bottom line results, for example sending some products to market before they were ready and implementing marketing without long-term plans. Nautilus, he said, will still pursue all channels but with more distinct products and prices.

“While our fitness equipment strategy is correct, we’ve been trying to do too much too quickly,” he said, “and now we need to improve our execution.”

Steps to improvement will include, for example, re-negotiating the deal to buy its largest manufacturer, Land America, earning a price concession of $7 million and extending the payment schedule to close a year later, in January 2008. Other steps include exploring the sale of Pearl Izumi, which although has been performing well is not in line with the company’s core or its focus. Falcone said, however, if Nautilus can’t sell it for a good price, it would hold onto it as an investment.

Another step announced was to suspend its 10-cent-per-share quarterly cash dividend to provide an additional $13 million for operations.

He answered analysts on the call questioning how long this would take, saying it could be another year.

“We will take some lumps in the back half of 2007 as we clean things up,” he said. “We are on the path to profitability and I believe our future is bright.”

Falcone, who has been an independent director on the Nautilus board since 2003, also told SNEWS® separately that if he had the chance he would tell specialty retailers, who have increasingly lost trust in Nautilus, to “have faith in Nautilus. It’s a great brand.”

He also said he will lead an analysis of the product segmentation to look at brands, prices and channels, and noted “we have to be careful” how the company approaches products being sold online vs. at brick-and-mortar retail.

Nautilus’ brand portfolio includes Nautilus, Bowflex, Schwinn Fitness, StairMaster, Universal and Pearl Izumi. Stock prices on Oct. 19 continued their slide, hitting another all-time low of $5.36 before closing at $6.25 on a volume of 3,029,200. Wedbush Morgan Securities cut its price target on Oct. 19 from $13 to $7, noting the company was facing “difficult macroeconomic trends.”

To see an interactive chart plotting the price of Nautilus stock historically, click here.