Nautilus 2010 Annual Report Download - page 22

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Table of Contents
Direct Business
Net sales of our direct business were
$96.7 million in 2010 , a decrease of $26.4 million , or 21.4% , compared to direct net sales of $123.0
million in 2009 . The decline in net sales in our direct business reflected a 36.4% decline in sales of strength products, primarily rod-based home
gyms, which was due in part to reduced availability of consumer credit financing during the first three quarters of 2010. Partially offsetting the
decline in home-gym sales was an increase in sales of our Bowflex TreadClimber products, due in part to new creative advertising and greater
customer awareness of the TreadClimber product line. Revenues of all cardio products in our direct channel decreased by only 3.9% in 2010 ,
compared to 2009
. Based on sales trends observed in the fourth quarter of 2010, we expect that increased sales of TreadClimber products should
more than offset anticipated declines in home gym sales in our direct channel by the second half of 2011.
In September 2010, we completed our transition to a new consumer credit program with a new primary third-party financing provider, GE
Money Bank ("GE"), and since then we have experienced incremental growth in customer financing approval rates. In addition, we added two
secondary third-party consumer credit financing providers during 2010, both of which offer credit to certain qualified consumers whose credit
applications have been declined by GE. Customer credit approvals by our primary and secondary third-party financing providers increased
throughout the fourth quarter of 2010 and averaged approximately 20% of the applications we processed during the period, compared to 18% in
the fourth quarter of 2009. Management expects customer credit approval rates in 2011 will remain at the levels experienced late in the fourth
quarter of 2010 or improve modestly as we continue to optimize our consumer financing programs.
Gross profit margin of our direct business was 55.9% in 2010 , a decrease of 5.5 percentage points compared to 2009
. The comparative decrease
in direct gross profit margin was attributable primarily to lower sales of higher-margin home gyms and deep discounts offered on one specific
home gym model.
Retail Business
Net sales of our retail business were
$67.8 million in 2010 , an increase of $4.2 million , or 6.6% , compared to retail net sales of $63.6 million
in
2009 . The increase in retail net sales was attributable primarily to customer demand for our newly-redesigned fitness bikes and elliptical
products and sales to new customers. Sales of all cardio products in our retail channel increased by 16.7% in 2010 , compared to 2009 , which
was partially offset by a 7.8% decrease in retail channel sales of strength products.
Gross profit margin of our retail business was 27.6% in 2010 , a decrease of 2.8 percentage points compared to 2009. Higher gross profit margin
in 2009 was attributable primarily to adjustments to previously-recognized reserves for warranty and freight costs.
Operating Expenses
Operating expenses were $86.3 million in 2010 , a decrease of $39.4 million , or 31.3% , compared to operating expenses of $125.7 million in
2009 . Operating expenses in 2009 included restructuring expenses of $14.2 million and intangible asset impairment charges of $5.9 million .
Beginning in the fourth quarter of 2010 we began to reallocate television media advertising away from home gyms due to declining sales and
toward our Bowflex TreadClimber product line. We expect to direct an increased portion of our television advertising expenditures toward the
TreadClimber product line in 2011, in order to build greater customer awareness with the goal of increasing our share of the cardio-oriented
fitness market.
Selling and Marketing
Selling and marketing expenses were $64.0 million in 2010 , a decrease of $11.8 million , or 15.5% , compared to 2009 . Advertising expense of
our direct business, a component of selling and marketing expenses, in 2010 was $40.6 million, a decrease of $7.7 million, or 16.0%, compared
to 2009 . The comparative decrease in direct advertising expense was primarily attributable to management's decision to reduce television media
spending in order to balance the ability to convert customer leads into sales in an environment where advertising fees had increased compared to
the prior year, while consumer financing approval rates had declined substantially over the same period. In 2010 the number of new unique
consumer leads increased on less marketing spend, compared to 2009, due to the strong performance of our new TreadClimber television ads. In
addition, marketing expense was $2.0 million higher in 2009 due to media production costs in support of a new product introduction.
Beginning in the fourth quarter of 2010 we began to reallocate television media advertising away from home gyms due to declining sales and
toward our Bowflex TreadClimber product line. We expect to direct an increased portion of our television advertising expenditures toward the
TreadClimber product line in 2011, in order to build greater customer awareness with the goal of increasing our share of the cardio-oriented
fitness market.
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