The innovative home fitness solutions provider, Nautilus Inc. (NLS) has been facing severe uncertainty for the past year. Shares are down nearly 85% in the last 12 months and 60% in six. Early 2021 proved to be historical for the company, as it saw a record boost in demand due to the pandemic lockdowns fueling at-home workout routines. The Covid-19 outbreak brought about the best time for the company as outdoor gyms were closed and people sitting at homes were in dire need of a solution to keep fit.
However, with the economies reopening after the Covid surge relaxed, NLS has been facing immense uncertainty from investors. Concerns over it being just a pandemic play remain at large as the company has only seen a decline since then. Even the latest earnings of the company demonstrated a huge decrease in demand for its solutions. Losing in all key areas, the company’s shares have been tumbling down since it posted the results yesterday. But the latest earnings decline isn’t the only reason warranting its downfall. The company is expected to deliver a highly negative earnings growth in the next few years as future uncertainty remains high. Factors like economic instability, rising inflation, and a looming recession overhead are also adding fuel to the uncertainty.
Following the latest earnings report yesterday, NLS shares plunged by a huge 22.31% in the after-hours. Continuing the momentum, the stock has currently lost 12.35% in the pre-market today, on May 24. At the time of writing, the stock was trading at a new low of $2.20 per share.
NLS’ Latest Earnings
Yesterday, the company posted its financial results for the fiscal Q4 and full-year, which ended on March 31, 2022.
In the fourth quarter, NLS generated revenues of $119.7 million, which declined by 41.9% from $206.1 million in the comparable period. The quarterly sales also fell below the analysts’ expectation of $121.57 million.
Increased product costs, investments in JRNY®, and logistics/discounting had the gross profit margin reduced by 20.9 ppt to 17.5% against 38.4% last year. Thus, the gross profit went down from $79.1 million to $21.0 million in fiscal Q4 2022.
A further blow came from the fact that the company’s operating income and net income converted to a loss this quarter. Both the loss from continuing operations and the net loss were $18.2 million in the quarter. The same amounted to an income of $30.6 million from continuing operations and a net income of $30.4 million in the year-ago quarter. However, the earnings per share of $(0.58) were just in line with the expected.
For the full year of fiscal 2022, the company had a net loss of $22.4 million on net sales of $589.5 million. This compares to a net income of $88.1 million on net sales of $664.9 million last year.
Future Guidance
Due to the wider economic and geopolitical instability, the company is seeing a decline in short-term demand. According to the company:
Hence, NLS expects the Q1 fiscal 2023 sales to be $45-$55 million, with an adjusted EBITDA loss of $22-$27 million. The full-year guidance stands at sales of $380-$460 million, with the second half of fiscal 2023 representing 65-70% of the total sales. With an improvement expected in the second half of the year, NLS is anticipating delivering positive adjusted EBITDA for H2 fiscal 2023.
Thoughts?
While the company does see some improvement in the second half of the current year, the market conditions are very hazy at the moment. The war in Ukraine is most likely to continue through the foreseeable future. And the economic conditions are only expected to become even more unstable. This wider instability stems from the growing inflationary pressure, which has the Fed eyeing a further increase in interest rates. Added to this, China’s zero Covid-19 policy is also taking a toll on the global supply chain turmoil, as it is the second-largest economy in the world.
The Nasdaq Composite is already in the bear-market territory and the S&P 500 just had a near brush with it on Friday. If the current downfall continues, it is most likely that equities will fall further to square the S&P 500 in the bear market territory as well.
On top of this wider market instability and bleak outlook, the company’s own financial situation is becoming more and more concerning. Demand is only expected to decrease further. The highest inflationary pressure and interest rate hike in the U.S. in the past 40 years will have consumers reserving their spending even more.
Conclusion
While NLS is trading at a price-to-earnings ratio below its peer average, the stock is best avoided. The company’s dwindling cash position, increasing losses, and declining sales in the current unstable market conditions warrant a wider downfall in its earnings. Even the investment management firm, Olstein Capital Management has sold its NLS stake recently to avoid losing on it.
