Nautilus Slims Down

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July 17, 2007 | SIN Picks | | Author Asif

Nautilus (NLS), the maker of the well-known Bowflex line of fitness products, reported terrible second quarter results last evening with both revenue and earnings coming in below expectation. Barring a one time gain due to a litigation settlement, the company actually lost $9.5 million or 30 cents a share. The bad news did not end there as the company now expects to earn only between 20 to 30 cents in the second half of 2007, less than half what it earned in the second half of 2006 and well below analyst estimates of 74 cents over the same time period.

With housing showing no signs of improvement and the other divisions of Nautilus not picking up the slack from low fitness equipment sales, the outlook for 2008 may not be encouraging either. Four analysts who had ratings of buy to outperform on the stock have now downgraded the stock and while unfortunate, I believe it is best to sell this stock both in the SINLetter model portfolio and my personal portfolio. As long time readers are aware, Nautilus almost made the cut numerous times but I finally pulled the trigger and bought the stock last month after it had dropped a lot. Unfortunately I pulled the trigger a little too soon and now have a loss of roughly 20% to show for it.

As a long-term investor, I ought to stick it out with Nautilus but with the lowered outlook, the stock is expensive even at these levels. The company made 8 cents a share last quarter and 4 cents this quarter. Based on the second half outlook, a price of $10/share and not taking stock buybacks into account, the P/E for 2007 would work out to between 24 and 32. Despite the high dividend yield, I think it is best to sell Nautilus at this point as I believe the stock is either heading lower or is likely to stay flat for the foreseeable future.

I will use the closing price today as the selling price for Nautilus in the SINLetter portfolio.




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Comments

  1. Khaled
    July 28th, 2007

    Actually I was taken by surprise to see it drop that sharply to this new level after it reached the 11-12 levels, I expected another short term poor Qtr but I think the business fundamentals are good, better than other stocks around with less risk.

    I think the company’s plan for growth are good and promising if the restructure and integration of companies and brands and plants are completed.

    I don’t believe the HOUSING macroeconomic issue is the only one to blame but also some of the below issues.

    From my humble understanding I think the management focused on acquisitions, restructuring of plants/distribution centers, more on outsourcing, and moving dept/staff to the HQ which could forced people to leave and made some disturbance and also more time/focus was put on the China plant and trading arm acquisition.

    All of the above didn’t help while the company was working on a new Nautilus apparel business, relaunching the universal brand, expanding in retail and expanding Internationally.

    Still I think the company could make it back before it is anticipated, looking at their latest deals, Qtr CC, disclosures and more importantly their job postings.

    Points that could make the difference in the future:

    {Biz model and Restructure}

    -few days back turnaround’ investment firm Sherborne Investors reported a 19.9% stake in the company which hopefully will help the management in putting it together and free the management to do it’s day to day work.

    -Company is moving from the dependent direct Bowflex USA biz model to various sales channels which retail, commercial, direct, online.

    -The company going beyond the North America market, in China, Europe, India, Latin America, Australia.

    -The Company is focusing on its newly born baby the apparel and footwear, Pearl izumi is doing fine, Nautilus new apparel line-up still in the testing phase.

    -The China plant will add more on controllable capacity & availability & quality with less dependability on outsourced suppliers in Asia.

    -Moving the International division HQ to London will eventually payoff. -Hiring management leadership for channels as more focus will be given to each biz and Channel.

    -More bizs, more channels, more geographical expansion, more brands with Unique offering with stable biz environment will eventually

    {Sales and Marketing}

    -The Company got various globally recognized brands in the biz and will soon relaunch the Universal brand, bring to life another and add more as requested by some retailers (from CC), the full global launch of the Nautilus Apparel yet to happen.

    -The Company Adding more factory outlet, Branded shops, more shop floor utilization expected with Retailers.

    -The newly acquisition of the trading Arm of Land America Treuriver Investments Ltd add more sales muscles in Asia and globally.

    -from the job posting there is more jobs posted for new products line-up, Online, Retail, Geographical territory mangers, etc.

    –Advertisement to baby boomers, XP bowflex that could be fitted in small apartments, about diet myth,Obesity and inactivity with youth (Schools rewards program), 2000 schools signed up.(from CC)

    –On floor staff execution with retail partners.(From CC)

    -unique products for channels.(from CC)

    -New Affiliate program, 1200 after 2 full qtrs.(from CC)

    - Nutrition? (from 10-K)

    -New Nautilus One innovative line-up coming and more expected at back half

    -More regional staff on the ground.(from CC and Job posting)
    -Automated system to double Pearl izumi retailers that use it.(from the CC)

    {OTHER}

    -Paying dividend.

    -High % of Short Interest VS floated shares.

    -Royalty.

    -Need for Health and Fitness is growing.

    Still anything could happen, it is a matter of execution and timing.

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