Nautilus 2003 Annual Report Download - page 33

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Table of Contents
Our direct segment accounted for 67.2% of our aggregate net sales in 2002, down from 80.4% in 2001, as we continued our strategies of
diversification into the commercial and retail markets and of introducing new direct-marketed products.
Sales within our commercial/retail segment were $192.0 million in 2002, an increase of 169.3% over 2001. A significant portion of this growth
is attributed to the acquisition of Schwinn Fitness in September 2001 and StairMaster in February 2002. Our commercial/retail segment
accounted for 32.8% of our net sales in 2002, up from 19.6% in 2001 as we continued to execute our strategy of expanding our presence,
product lines, and brands across all our channels, especially within the commercial/retail segment.
Gross Profit
Gross profits continued to be strong, growing 49.0% to $332.6 million in 2002 from $223.2 million in 2001. However, due to our product
diversification strategy, which increased sales of inherently lower margin products in the commercial/retail segment, our overall gross profit
margin decreased to 56.8% in 2002, compared to 61.3% in 2001.
The gross profit margin within our direct segment was 73.4% in 2002 and 69.8% in 2001. Gross margins on our Bowflex product line
continued to be strong due to cost reductions from vendors and shipping cost savings. For example, the standard cost for the Bowflex “Power
Pro” with a 210-pound rod pack was reduced approximately 18% by the fourth quarter of 2002 compared with the same period in 2001. In
addition, product delivery costs were reduced by approximately 17% by the end of the fourth quarter of 2002 compared with the same period in
2001.
The decrease in gross profit margin within our commercial/retail segment to 23.0% in 2002, compared with 26.4% in 2001, was largely due to
the Schwinn Fitness and StairMaster acquisitions. Other downward pressure on commercial/retail margins included discounts offered on sales
of discontinued retail products and manufacturing inefficiencies associated with moves and the consolidation of our treadmill facilities.
Discounts were offered to reduce inventory levels of older products in order to accommodate 16 new retail fitness products that were
introduced during the third quarter.
Operating Expenses
Selling and Marketing
Selling and marketing expenses grew to $145.3 million in 2002 from $99.8 million in 2001, an increase of 45.5%. This increase in selling and
marketing expenses resulted primarily from the expansion of our direct marketing campaign for Bowflex products and Nautilus Sleep Systems,
higher advertising costs in the second half of 2002 due to increased demand for advertising time, and the acquisitions of Schwinn Fitness and
StairMaster. Advertising costs for our direct marketing segment rose for the first time in about two years. As a percentage of net sales, overall
selling and marketing expenses decreased to 24.8% in 2002 from 27.4% in 2001. The decrease was primarily a result of executing our product
diversification strategy leading to a higher proportion of commercial/retail segment sales. Selling and marketing expenses within our direct
segment were 30.9% of net sales in 2002, compared to 31.3% in 2001.
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