Nautilus 2003 Annual Report Download - page 31

Table of Contents
business we have found that second quarter influences on television viewership, such as the broadcast of national network season finales and
seasonal weather factors, cause our spot television commercials on national cable television to be less effective in the second quarter than in
other periods of the year. Our retail business is also highly seasonal. We believe that sales within our commercial/retail segment are
considerably lower in the second quarter of the year compared to the other quarters. Our strongest quarter for the commercial/retail segment is
generally the fourth quarter, followed by the first and third quarters. We believe the principal reason for this trend is the commercial/retail
fitness industry’s preparation for the impact of New Year’s fitness resolutions and seasonal weather patterns related to colder winter months.
As we continue to move to a more diversified revenue stream, we expect to experience overall seasonality similar to the retail and commercial
sales channels. We believe our revenue and earnings will be lower in the first half of 2004 compared to the latter half of the year, with the
second quarter experiencing the most softness. In the first six months of 2003, our commercial and retail sales channels generated
approximately 37% of its full year revenue and 22% of its full year net income.
Gross Profit
Gross profits decreased 26.0% in 2003 compared to 2002. As sales of inherently lower margin products in the commercial/retail segment
continued to grow as a percentage of total sales, our overall gross profit margin decreased to 49.3% in 2003, compared to 56.8% in 2002.
The gross profit margin within our direct segment was 69.3% in 2003 compared to 73.4% in 2002. Direct segment margin was significantly
impacted by $3 million of estimated product safety reinforcement costs associated with the Bowflex Power Pro that was announced by our
Company and the CPSC in January 2004. In addition, direct segment gross profit margin was negatively impacted by declining sales resulting
in higher fixed costs per sale and a change in sales mix from the higher margin Bowflex to the TreadClimber. As we continue to sell more units
of the TreadClimber we believe our TreadClimber margins will increase due to the leveraging of our fixed costs.
The increase in gross profit margin within our commercial/retail segment to 29.7% in 2003, compared with 23.0% in 2002, was primarily due
to sales of Bowflex products through the retail channel. On average, Bowflex products have a higher gross profit margin than do our other
commercial/retail products.
Operating Expenses
Selling and Marketing
Selling and marketing expenses increased 2.7% in 2003 compared to 2002. As a percentage of net sales, overall selling and marketing expenses
increased to 29.9% in 2003 from 24.8% in 2002. Selling and marketing expenses within our direct segment were 48.9% of net sales in 2003,
compared to 30.9% in 2002. Selling and marketing expenses within our commercial/retail segment were 11.3% of net sales in 2003, compared
to 12.4% in 2002. The overall increase in selling and marketing is mainly due to reduced effectiveness of our direct advertising campaigns,
partially offset by leveraging the direct channel advertising investment in the retail channel.
We experienced an increase in direct marketing advertising spending during 2003 in response to declines in our sales conversion rates coupled
with a higher advertising cost environment. We believe the decline in conversion was a result of increased competition. In addition,
depreciation associated with our newly implemented customer relationship management information system also contributed to the increase in
selling and marketing costs.
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