Nautilus 2011 Annual Report Download - page 22

Table of Contents
Direct
Net sales of our Direct business were
$107.1 million in 2011 , an increase of $10.4 million , or 10.8% , compared to Direct net sales of $96.7
million in 2010 . Revenues of cardio products in our Direct channel increased by 39.6% in 2011 , compared to 2010 , primarily due to higher
sales of Bowflex TreadClimber products. The increase in Direct sales of cardio products was partially offset by a 26.5% decline in Direct sales
of strength products, primarily rod-based home gyms. The decline in sales of rod-based home gyms is attributable in part to the cessation of
television advertising for these products, as television ad spending on this mature product category was generating unsatisfactory returns. We
have marketed rod-based home gyms through more cost efficient online media since early 2011.
In September 2010, we completed our transition to a new consumer credit program with a new primary third-party financing provider, GE
Capital Retail Bank, formerly GE Money Bank ("GE"). The relationship with GE has expanded the ability of our customers to obtain third-party
consumer financing for buying our products. In addition, we added one secondary third-
party consumer credit financing provider during the third
quarter of 2010 and another in early 2011, both of which offer credit to certain qualified consumers whose credit applications have been declined
by GE. As a result, combined consumer credit approvals by our primary and secondary U.S. third-party financing providers increased from 15%
in 2010 to 25% in 2011. We expect that average consumer credit financing approval rates in 2012 will approximate the 2011 level or improve
modestly as we continue to optimize our credit program offerings.
Gross margin of our Direct business was 53.9% in 2011 , a decrease of 200 basis points compared to 2010 . The comparative decrease in Direct
gross margin was primarily attributable to relatively higher warranty costs associated with cardio products, as compared to strength products,
increased costs of certain products, largely arising from changes in foreign currency exchange rates, and higher year-over-year sales of in-home
assembly services, which are sold at low margins.
Retail
Net sales of our Retail business were
$68.6 million in 2011 , an increase of $0.8 million , or 1.2% , compared to Retail net sales of $67.8 million
in 2010 , primarily driven by growth among our e-commerce Retail customers. In 2011 , Retail sales of strength products increased by 2.9% ,
primarily due to higher sales of home gyms, and sales of cardio products increased by 0.2% , compared to 2010 .
Gross margin of our Retail business was 23.4% in 2011 , a decrease of 420 basis points compared to 2010 , primarily due to increased costs of
certain products, largely arising from changes in foreign currency exchange rates, and higher supply chain costs, including freight.
Operating Expenses
Operating expenses were $74.9 million in 2011 , a decrease of $11.5 million , or 13.3% , compared to operating expenses of $86.3 million in
2010 . This reduction was achieved primarily through more effective media advertising, which enabled more
17
Year Ended December 31,
2011 2010 Change % Change
Direct net sales:
Cardio products
(1)
$
75,982
$
54,409
$
21,573
39.6
%
Strength products
(2)
31,079
42,259
(11,180
)
(26.5
)%
Total Direct net sales
107,061
96,668
10,393
10.8
%
Retail net sales:
Cardio products
(1)
43,718
43,628
90
0.2
%
Strength products
(2)
24,873
24,161
712
2.9
%
Total Retail net sales
68,591
67,789
802
1.2
%
Royalty income
4,760
3,993
767
19.2
%
Total net sales
$
180,412
$
168,450
$
11,962
7.1
%
(1)
Cardio products include treadclimbers, treadmills, exercise bikes and ellipticals.
(2)
Strength products include home gyms, selectorized dumbbells, kettlebell weights, weight benches and CoreBody Reformer.