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Why Nautilus stands a good chance of a comeback despite a recent drop in sales

BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR

Wednesday June 8, 2022

Shifts in consumer behaviour benefited a number of companies over the course of the pandemic: Zoom, Tesla, Pinduoduo, CrowdStrike and Peloton all prospered, to name a few in a variety of sectors. Another that bulked up substantially was Nautilus Inc. (NLS-N). The stock price soared from a prepandemic level of about US$6.50 to just over US$30. Alas, it has since atrophied, as have some of the other names; Nautilus currently trades around US$2.45.
 

Critical to the performance were Nautilus’s cardio products: Bowflex, Modern Movement, Schwinn Fitness and Universal brands. Net sales in 2021 were up more than 90 per cent to US$590-million, from US$309-million in 2019. That’s packing on the muscle!
 

Many people ask about the process that Benj uses that has resulted in a 19.1-per-cent annualized return in his President’s portfolio over the past 10 years. Let us apply it to Nautilus.
 

First, a filter is applied for all U.S. stocks to show the ones that had tumbled at least 33 per cent in the past 52 weeks and were trading under US$10. Then only those that had been around for at least 10 years were selected and their price history was checked see whether a 100-per-cent-plus upside seemed reasonable. If the name had not traded at least double the current level for a period of time in the past, it was discarded. Only home runs and grand slams are of interest here. Nautilus checked all of these boxes.
 

A couple of other parameters were examined. The fact that the share count has remained stable at around 31 million for the past decade and that it trades well under the book value of US$5.25 is heartening. Negatively, the woebegone price has not been enough to tempt insiders who own just north of 4 per cent to buy in the open market and grow their positions. In fact, insiders have been net sellers to the tune of US$2.91-million in the past 12 months.
 

Next, Benj contacted Nautilus’s investor relations department to see whether they would send us annual reports and much more comprehensive 10-Ks, required by regulators, for the past four years. He’s still waiting. (While enterprises used to send these willingly, now many corporations do not print many, if at all. The cost saving here can be substantial, and of course, avoiding printing all that paper is also better for the environment. Not being a complete Luddite, Benj knows that he can look up this information and much more on the internet. Quite simply, he likes to have the paper in his hand when making a final analysis of a company before buying it.)
 

Once a stock is discovered, a gestation period commences, and we do not buy it for a minimum of six months. Sometimes it can be years. And yes, many opportunities are missed during this time frame as the stock price recovers, but overall, patience generally serves well, and means that candidates that have another shoe to drop are often avoided. Of course, the vast majority of firms that pass the initial filter are never purchased.
 

With Nautilus, the recovery process, if it happens, could take years. When the stock careened downward in 2006, it took almost a decade until it retraced its value. We don’t think it will take as long this time, but the sales decline has been staggering. A year ago was the highest quarterly sales in the company’s history as people exercised at home rather than going to the gym. Revenues for its fiscal fourth quarter ended March 31, 2021, registered US$206-million – while the most recent quarter ended March 31 was US$120-million.
 

Fiscal fourth-quarter gross profit tumbled from US$79-million a year ago to US$21-million, and the gross profit margin was squeezed from 38 per cent to less than 18 per cent. Even so, operating expenses were up almost 9 per cent to about US$43-million. Something is wrong with this picture. The net income of US$30-million one year ago morphed into a loss of US$18-million, and liquidity dropped to slightly less than half at US$80-million. Meanwhile debt jumped from US$13-million to slightly north of US$29-million. If this pattern continues long enough, NLS could become a 99-pound weakling in bankruptcy.
 

However, we don’t think that will happen. Management is taking steps to right the business, but to assess properly, it should be recognized that the leadership mostly joined the company in 2019-20 for the good times. They have no experience with the difficulties the enterprise faced in the past, when the corporation appeared on the cusp of bankruptcy, bottoming in 2009 at 65 US cents. Looking at their rsums though, it appears to be a skilled bunch that seemingly have the wherewithal to stage a revival. And they do have additional funds at their disposal, if needed, as almost US$66-million is available under a credit facility with Wells Fargo.
 

In the meantime, Benj is content to pause between reps while making certain he breathes deeply and continues his research.