If you watched ESPN for any length of time in 2001, you would have seen a commercial for Bowflex, a home gym unit sold by Direct Focus ($DFXI), which sold/marketed using the TV advertising model. These were the early days of these ads - well before the age of social media. This stock was also the core of many small and microcap portfolio managers because it was a growth story, and the stock was volatile - moving up or down 15% on certain days. If you could master this as your core position and stay away from damaging downdrafts, you could grow the amount of money managed, which is the goal of all money managers.
Finding Surprising Value from Bowflex Commercials...for Awhile
Direct Focus sold Bowflex units and you could estimate sales by tracking the number of commercials run by ESPN. This was perfect for a portfolio manager, because I could input these numbers to my spreadsheet and determine what total sales would be for the upcoming quarter - ostensibly, I was able to determine what the stock price would be at the end of each reporting quarter, which made managing my portfolio of 20+ stocks much easier. This went on for awhile, until Nautilus purchased the Direct Focus brand and these revenues were absorbed into a variety of products and the jig was up - you could no longer smooth the unpredictability of the volatile DFXI stock.
Flash forward to today and Nautilus (NLS) has so many products that you can no longer input them into a spreadsheet and predict that shares would be up or down. Shares were up about 20% as net sales for the first quarter totaled $96.2 million, a 34% increase compared to $71.9 million in the same quarter of 2014. The strong growth was driven by higher sales in both the direct and retail segments. Gross margins for the first quarter improved by 250 basis points to 56.0%, reflecting margin increases in the direct segment as well as a favorable mix between segments. Operating income from continuing operations for the first quarter of 2015 was $17.6 million, a 96% increase over operating income from continuing operations of $9.0 million reported in the same quarter of 2014. The increase in operating income primarily reflects higher sales and gross margins in the direct segment, as well as improved leverage of sales and marketing and general and administrative costs across higher sales volumes.
Income from continuing operations for the first quarter of 2015 was $10.9 million, or $0.34 per diluted share compared to income from continuing operations of $5.7 million, or $0.18 per diluted share for the first quarter of last year.
For the first quarter of 2015, the company reported net income of $10.7 million, or $0.34 per diluted share, which includes a loss from discontinued operations of $0.1 million. In the first quarter of 2014, the company reported net income of $5.4 million, or $0.17 per diluted share, which included a $0.4 million loss from discontinued operations.
In short, the days of predicting how many units were sold has gone by, and Bowflex has reached a saturation point. But the search by portfolio managers to smooth the risk in predicting stock price and sales continues to live another day.
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