Nautilus 2008 Annual Report Download - page 32

Table of Contents
In the retail business, net sales decreased $8.0 million, to $106.7 million in 2008, compared to $114.7 million in 2007, a decrease of 7.0%. The
overall decline in sales was driven by lower sales volumes of rod-based home gyms, due to a reduction in the number of rod-based products
offered in this business, so as not to compete with our direct business, and declines in other Nautilus and Bowflex branded cardio products. In
order to offset the decline in rod based gyms, we increased the presence of our SelectTech dumbbells, Schwinn ellipticals, and bikes.
In the commercial business , net sales declined $19.3 million, to $115.3 million in 2008, compared to $134.6 million in 2007, a decrease of
14.4%. The decrease in net sales was primarily the result of a difficult economic market, management’s decision to increase prices, reduce
discounts and eliminate low volume products in order to improve margins. Revenues also declined due to the suspension of sales of the
commercial TreadClimber due to durability and maintenance issues. Revenues for 2008 were favorably impacted by increased sales of the
Nautilus One product line, which was introduced in the third quarter of 2007, and increased demand of updated StairMaster products.
International sales for 2008 and 2007 totaled $90.4 million and $108.0 million, respectively, representing approximately 22% of the Company’s
total net sales in each period. Changes in average foreign currency exchange rates had a $4.4 million positive impact on our 2008 revenues.
Royalty income represents the revenue the Company receives for licensing certain owned patents, trademarks and brands to other companies.
Royalty income increased to $3.5 million in 2008, compared to $3.1 million in 2007.
Gross Profit
Gross profit margins increased, to 36.6% in 2008, compared to 35.8% in 2007. We implemented a number of cost savings initiatives during 2008
and implemented sales price increases in all segments. The impact of these efforts were substantially offset by an 18.0% decline in total sales and
a change in sales mix resulting in a 25.4% decline in direct business revenue. Gross profit for 2008 was reduced by charges of $5.7 million for
discontinued inventory, $1.0 million in reserves against inventory owned by our China subsidiary, $1.4 million for severance and $2.7 million
for costs incurred with closing the Tulsa manufacturing facility. The direct business is generally our highest margin business.
During 2007, the Company’s gross profit margins benefited from rebates due to us under our supply agreement with Land America. As a result
of the termination of the agreement to purchase the Land America assets, those rebates were not available in 2008. The Company’s 2007 gross
profit margins were negatively affected by approximately $16.9 million in warranty and inventory reserves related to the commercial
TreadClimber and a commercial elliptical product.
Operating Expenses
Selling and Marketing
Our selling and marketing expenses principally consist of media and advertising expenses for our direct business, costs associated with our
internal sales efforts, marketing costs for trade shows and bad debts.
Selling and marketing expenses were $135.3 million in 2008 compared to $179.8 million in 2007, a decrease of $44.5 million or 24.7%. The
reduction reflects the Company’s efforts to reduce expenses to better match the declining revenue. During 2007, we were investing heavily in
programs that were designed to generate revenue, including the Bowflex catalog, attending tradeshows, extensive travel to customer locations
and the use of a third party to assist in selling our close-out products on the internet. Many of these activities were scaled back or stopped in late
2007 and early 2008 as we began implementing our restructuring and cost reduction plans. In addition, in 2008, we reduced our media and
advertising expenses by approximately $12.1 million in our direct
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