Description

I’m not going to reiterate what treetop333 & magundun wrote about Nautilus when its market capitalization was at 350-400M.

At 150-180M market cap, Nautilus is simply a steal— while Nautilus may be selling a commodity product—  fitness equipment which ultimately can be copied (patents that run for 2 decades); with enhanced with proprietary software to increase attrition and recurring revenues, it is still worth at least 500M or half a billion. At this price, even if Nautilus fails to turnaround, there's a huge margin of safety.

For all the tangible progress after hiring new management and improving their product offering, the market has unreasonably beaten Nautilus to the ground. Nautilus continues to release award-winning connected fitness equipment. The new flagship bike, the Bowflex Velocore, was released and sold out in a few days. With Nautilus’s product versatility, there isn’t a single product or brand that can bring down the entire company— sales for cardio and strength products cover a wide range.

Most reviews on Amazon indicate assembly takes 1 to 3 hours. Ratings for customer service and warranty were varied— most complaints for the bowflex trainer were the squeaking, which required additional lubricant, and for the Schwinn Fiteness Cycling bike at $800, most customers were satisfied except for the tension control.  

Nautilus has not over extended itself in price and marketing like Pelaton— they offer the best value for the top brands — Nautilus, NordicTrack, Bowflex, Schwinn and Sole (Nautlius sold Octane Fitness which was 10% of revenues) This means getting the treadmills, bikes, ellipticals with modern features but within a reasonable price range of $1,000 to 3,000. 

Consider Nautilus’s progress—

Nautilus realizes software subscriptions (one free year of JRNY membership) is the key to sticky customers

CEO James Barr understands the need to hire software UX staff to develop software for JRNY membership to pivot the company into asset light manufacturing.  Previously, in 2019, there were only 10 software staff members, now there’s 250 committed to software. In 2021, only 10-15% of sales are from connected equipment. Connected cardio products now make up 60% of the backlog for direct retail. Nautilus expects full year capital expenditures to be between 12 to 14M for JRNY.

With the JRNY membership platform, more fitness and cardio machines are connected to acquire more members— in 2018, there were 65,000 members. By the end of 2021, there were 200,000 members. Nautilus has grown members by nearly 3x year over year and by 700% over the last 2 to 3 years. 70% of all cardio units shipped in the most recent quarter was JRNY enabled. 

To acquire new customers, a free 1 year trial for JRNY was implemented, which brings 6-7 million of deferred revenue. At around 20 dollars a month for 100,000 subscribers, that brings in approximately 24M in sales. With a modest estimation of margins, that’s approximately 12M in income.

During recent earnings calls, management has indicated JRNY has lowered churn significantly. Specific figures are not given but connected cardio devices since 2019 has quadrupled, with 15 connected brand models in the product portfolio. Nautilus’s products have become stickier and no specific product or model can sink their ship. By 2025, Nautilus has stated in their earning call they want to acheive operating margins of around 15%. 

JRNY has cooperated with Netflix, Disney+ and HBO to bring content during exercise, with travel videos simulating certain scenic views. For instructor’s videos—300 or more videos were added in 2021. In addition, there are 100 videos JRNY uses algorithms to recommend workouts that are tailor made for the specific individual. With Nautilus’s acquisition of VAY, motion sensor powered products catering to individual needs and experiences are expected to launch during the end of 2022.

Open System Architecture open for collaboration

Look at Amazon reviews— Customers are quite pleased with Nautlius, but its software has not caught up yet. Nautlius is embracing an open system architecture like Android, where as Pelaton has a closed system similar to Apple.

More new connected fitness products (ellipticals and treadmills) are going to be released which supports 3rd party apps like Peloton's 12.99 digital app. Functionality for Pelaton’s app is limited when running the digital app on non-Peloton hardware - subscribers cannot access the leader board (one of the main selling points) or power, speed, and distance metrics (the equivalent of castrating a connected bike - what's the point of paying Peloton if you can't access basic statistics?). These restrictions convert Peloton subscribers towards more robust and well thought out apps like JRNY.

Nautilus has fixed or found temporary solutions for its inventory and supply chain problems

Supply chain and inventory problems causing 6-12 week delays were due to a severe shortage of shipping containers, and factory orders representing 22M of retail backlog (unfulfilled consumer orders). Backlog for retail segment totalled 178.6M on March 2021, 6 months later, on Sept 2021, this was reduced to 82.9M. Backlog for direct segment 1.1M in Sept 2021, compared to 26.5M on march 2021. Inventory has ballooned from 64-68M in March 2021 to 162-163M in September 2021 due to supply chain problems, but 56% finally got shipped on October 2021.

Problems have been addressed with task forces focused on spot buying microchips and finding new ways to ship products across the ocean. Nautilus has reduced lower margin SKUs and since 2020, discontinued 22% of product SKUs, thus tripling revenue per product carried.

In addition, to address chip shortage, Nautlius promoted and aggressively marketed strength products such as the SelectTech line which does not require chips. Nautilus was stocked out on a few of their best welling cardio products such as VeloCore and M9, so churning out dumbells was not a bad option.

Inventory turnover was 3x in 2019, as of 2021-2022, inventory turnover is now 7-8x. Average days inventory outstanding was 113 days, whereas it is around 40-50 days currently. 

Nautilus has shipped more units this quarter than any other quarter in history.  Nautilus has fewer SKUs by focusing on the bestselling SKUs such as Bowflex Cardio machines. Inventory was down 21% compared to September 2021 at 163M. As of December 2021, 15% of inventory was in transit. 

In addition, about 61% of orders were shipped by contract manufacturers in Asia directly to retail customer locations in container loads, which eases up inventory in American warehouses in Oregon and Ohio—bringing down freight, insurance and other logistics costs. Inventory purchases from Asian manufacturers are non-exclusive, and typically take 2 to 4 months depending on lead times and transit times. While margins have been affected by logistics—inventory will be worked off and extra transportation and storage costs incurred will be gone. A newly built distribution center in Southern California will help receive heightened inventory levels for peak seasons.

Improved Distribution and Retail Channels

Nautilus has improved marketing and distribution by employing newer avenues— instead of TV ads, they are using social media and upgrading their own website.

For retail, Nautilus products has expanded their network— management has added 3,000 new retailers with greater online capabilities over the last 15 months, including Best Buy, Amazon, Costco’s, Costco’s Canada, Sam’s Club, and Target. Amazon now fluctuates from a tenth to a fifth of total sales. Dick’s sporting goods is roughly a tenth. In the most recent earnings call, CEO James Barr has indicated offering discounts for retailers.  

Due to a greater breadth of channels and a strong holiday season, direct retail has a 9M backlog coming out this quarter. 

This, in turn, has added 400,000 new customers in the last 15 months and the demographic, with new digital marketing channels, reaches a younger audience, including ambitious female athletes. In the most recent earnings call, sales and marketing expenses were 32M or 22% of sales, which is a 10M increase primarily due to increased advertising.

Expanded Credit Facility for greater liquidity

Previously, Nautilus’s revolving credit facility was only 50M. Now, with a backing by Wells Fargo, Nautilus has a 94-100M facility with 55M to borrow.

The credit agreement was amended with a more lenient springing trigger event which benefits Nautilus. The credit facility now contains a single market-based 1.0x springing fixed charge coverage ratio tested only when availability is less than 6M and 12.5% of the loan cap.

The maturity date of the credit facility was previously in 2025, and has been pushed backed to October 29, 2026. The unamortized balance on the term loan was 11.5M, and will amortize on a new 60-month straight line basis to coincide with the extended maturity date.

Eligible in-transit inventory sub-limit is 22.5M and the total inventory sub-limit is 65M.There are no additional financial maintenance covenants.

Catalyst

JRNY subscriptions brining attrition, increased retail channels and improvement of supply chain.

Customers realize that at Nautilus's (Schwinn, Bowflex, etc.) price and offering, they're getting more value for fitness equipment than premium brands like Pelaton.