Nautilus 2003 Annual Report Download - page 29

Table of Contents
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
Net Sales
Net sales decreased by 14.7% in 2003 compared to 2002. We experienced a challenging business environment in 2003. We believe this was
primarily due to increased competition and higher advertising costs due to increased demand for advertising time. These factors reduced sales
conversion rates for our direct-marketed products.
Sales within our direct segment were $246.9 million in 2003, a decrease of 37.1% compared with 2002. Our direct segment accounted for
49.5% of our aggregate net sales in 2003, down from 67.2% in 2002. Within our direct segment, Bowflex sales accounted for 84.7% of sales in
2003 compared to 91.2% of sales in 2002. The decrease in direct segment sales can be attributed to a combination of factors including
increased competition for our Bowflex product line and managing our advertising spending in a higher advertising cost environment to
optimize profitability. We believe competing products have adversely affected demand for our Bowflex products as unit sales through the
direct channel declined to 138,000 in 2003 from 240,000 in 2002, a decline of 42.5%. Additionally, advertising costs have risen when
comparing 2003 to 2002, resulting in lower sales of direct-marketed products for comparable advertising spending. As a percentage of sales,
selling and marketing expense for the direct segment was 48.9% in 2003 compared to 30.9% in 2002. In July of 2003, we introduced the
Bowflex Xtreme to compete more effectively with our lower-priced competition. The average Bowflex selling price increased 2.1% year over
year, but declined 3.2% in comparing the fourth quarter of 2003 to the same period in 2002. We anticipate the introduction of lower
-priced
competing products to increase going forward, especially upon expiration of the main Bowflex patent in April 2004.
During the second quarter of 2003, we began a process of reassessing the marketing plan for our Nautilus Sleep Systems product line. This has
involved a reduction in the amount of advertising spending for this product line, which has also resulted in a reduction in sales compared with
2002. We are repositioning the Nautilus Sleep System by improving the features of this brand and exploring unique, specialized channels of
distribution. Our repositioning effort will not be complete on this product until the latter half of 2004, and at that time we expect to re-launch
the Nautilus Sleep Systems.
Our new TreadClimber product line, introduced in March 2003, has exceeded our expectations having achieved $18.9 million in sales for the
year. These sales were achieved despite our plan of restrained demand. When we introduced the TreadClimber, we wanted to ensure that our
manufacturing, marketing and operations were all performing in unison before we expanded our marketing efforts. We are excited about the
potential this newly created brand will offer for years to come. The TreadClimber represents a significant milestone as we attempt to further
diversify our revenue and earnings streams. We expect TreadClimber sales to be a significant portion of our non-Bowflex revenue, which
increased to 48% of consolidated net sales in 2003 compared to 39% and 26% in 2002 and 2001, respectively. In 2004 we believe the
TreadClimber product line will generate approximately $50 to $60 million in revenue.
Sales within our commercial/retail segment were $251.9 million in 2003, an increase of 31.2% over 2002. Excluding our acquisition of
StairMaster, commercial/retail segment sales increased 36.5% during 2003 compared to 2002. The increase in sales within the
commercial/retail segment is primarily attributable to the introduction of the Bowflex to the retail side of the business, which equated to sales
of $49.2 million. Bowflex sales accounted for 19.5% of overall commercial/retail segment sales and 82.1% of the increase in commercial/retail
sales during 2003. Due to encouraging results from our initial test-marketing plan that began in the first quarter of 2003, we expanded the retail
distribution of Bowflex products throughout the remainder of 2003. We were able to leverage the hundreds of millions of dollars spent on
television advertising of the Bowflex product line to create consumer demand in the retail sales channel where many consumers prefer buying
premium fitness products. In the future, we anticipate more of our direct segment products being sold through the commercial/retail sales
channel in order to leverage our significant direct marketing advertising investment.
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