Nautilus 2010 Annual Report Download - page 7

Table of Contents
56% of our direct revenues in 2010, compared to 46% in 2009.
Late in 2009, we began reallocating a greater portion of our television advertising budget toward the Bowflex TreadClimber product line and
expect to commit an increased portion of such expenditures to this product line during 2011. Currently, our Bowflex TreadClimber product line
is sold exclusively through our direct sales channel. We expect to emphasize lower-cost Internet-based advertising for our Bowflex rod-based
home gyms during 2011, which are able to capitalize on the extensive consumer product awareness that already exists. Based on current trends,
we expect that increased sales of TreadClimbers should more than offset anticipated declines in sales of home gym products in our direct
channel by the second half of 2011.
Our marketing efforts are based on an integrated combination of media and direct consumer contact. In addition to television advertising, which
ranges in length from 30 seconds to as long as five minutes, we utilize extended 30-minute television infomercials, Internet advertising, product
websites, inquiry-response mailings, catalogs and inbound/outbound call centers. Marketing and media effectiveness is measured continuously
based on sales inquiries generated, cost-per-lead, conversion rates, return on investment and other key performance metrics. Almost all of our
direct customer orders are received either on our Internet websites or through company-owned and third-party call centers.
During the first eight months of 2010, less than one-third of our direct customers used financing programs offered by our third-party credit
providers to purchase our products, compared to approximately one-half in 2009 and two-thirds in 2008, reflecting the application of more
stringent credit approval standards by our former primary third-party credit provider. As a result, 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.
Retail
In our retail business, we market and sell a comprehensive line of consumer fitness equipment under the Nautilus, Schwinn, Universal and
Bowflex brands. Our products are marketed through a network of retail companies, consisting of sporting goods stores, Internet retailers, large-
format and warehouse stores, and, to a lesser extent, smaller specialty retailers and independent bike dealers. Similar to our direct business,
cardio products represent a growing part of our business and present an opportunity to increase our market share in the future. Sales of cardio
products represented 64% of our retail revenues in 2010, compared to 59% in 2009.
We offer programs which provide price discounts to our retail customers for ordering container-sized shipments or placing orders early enough
in the season to allow for more efficient manufacturing by our Asian suppliers. These programs are designed to reduce our shipping and handling
costs, with much of the savings being passed on to our customers. In addition, our retail customers generally are eligible for other types of sales
incentives, including volume discounts and various forms of rebates or allowances, which primarily are intended to increase product availability
for consumers, reduce transportation costs and encourage marketing of our brands.
PRODUCT DESIGN AND INNOVATION
Innovation is a vital part of our business, and we continue to expand and diversify our product offerings by leveraging our research and
development capabilities. We constantly search for new technologies and innovations that will help us grow our business, either through higher
sales or increased production efficiencies. To accomplish this objective, we seek out ideas and concepts both within our company and from
outside inventors.
We rely on financial and engineering models to assist us in assessing the potential operational and economic impacts of adopting new
technologies and innovations. If we determine that a third-party technology or innovation concept meets certain technical and financial criteria,
we may enter into a licensing arrangement to utilize the technology or, in certain circumstances, purchase the technology for our own use. Our
product design and engineering teams also invest considerable effort to improve product design and quality. As a consumer-driven company, we
invest in qualitative and quantitative consumer research to help us assess new product concepts, optimal features and anticipated consumer
adoption.
In the past, our business was led by our strength products, including the Bowflex rod-based home gym and SelectTech
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