Nautilus (NLS) Q4 2022 Earnings Call Transcript

Nautilus (NLS)
Q4 2022 Earnings Call
May 23, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the Nautilus, Inc. fourth quarter 2022 earnings conference call. [Operator instructions] It is now my pleasure to introduce your host, Mr. John Mills.

Thank you. You may begin.

John Mills -- Investor Relations

Thank you. Good afternoon, everyone. Welcome to Nautilus' fourth quarter and year-end fiscal 2022 conference call. Participants on the call today from Nautilus are Jim Barr, chief executive officer, and Aina Konold, chief financial officer.

Please note, this call is being webcast and will be available for replay for the next 14 days. We will be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1:05 PM Pacific Time and may be downloaded from our website at nautilusinc.com on the investor relations page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures.

Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2020. For today's call, we have a presentation that management will refer to during their prepared remarks. On slide two is our full safe harbor statement, which we ask everyone to read. You can access the presentation now by going to nautilusinc.com, then click on the investor tab and then click on the events and webcasts, and the presentation will be there for your viewing.

I'd like to remind everyone that during this conference call, Nautilus management will make certain forward-looking statements. These forward-looking statements are based on the beliefs of management and information currently available for us as of today. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control and ability to predict.

For additional information concerning these factors, please refer to the safe harbor statement and to our SEC filings, which can be found in the investor relations section of our website. And with that, it is my pleasure to turn the call over to Nautilus' CEO, Mr. Jim Barr.

Jim Barr -- Chief Executive Officer

Thank you, John, and thank you all for joining us today. As we have closed out fiscal '22, I'm very pleased with the progress of our transformation, and we are well positioned to continue our momentum as we begin fiscal '23. On today's call, I'll cover four key points. First, why we believe in the long-term opportunity.

Second, I'll update you on our Q4 and full year results. Then I'll take stock in year one progress in our North Star transformation. I'll finish by discussing how we intend to navigate through the near-term macro challenges. We have recently reinforced evidence that long-term changes in habits favoring home fitness will persist.

Pre-pandemic, about 40% of people for whom fitness is important worked out at home. Two years later, even as more people headed back to the gym, that number is close to 70% and has now held steady for a full year. Consumers have adopted a hybrid model for fitness, similar to what they've done for work locations. In our new target consumer segment, which we call enthusiastic cross-trainers, the importance of home workouts is even more pronounced, with nearly 90% of them working out at home.

They are building home gyms with multiple modalities and are becoming more brand loyal. As we predicted early in the pandemic, the home industry more than doubled to a peak, then regulated from its high point and has trended down to its new normal level. We continue to expect the natural demand settle point will be well above pre-pandemic. We believe in these long-term trends, coupled with our well-known brands, strong product portfolio, differentiated connected fitness offering and omnichannel go-to-market position us well to capture the elevated opportunity.

Despite the strong long-term positive outlook, the opportunity for growth demand -- current demand is less clear. Over the past several weeks, we've seen an uncommon and unexpected combination of factors conspire to slow top line momentum. We have not seen normal retail orders due to their heavy inventory positions. Fearful of not having enough inventory after holiday 2020, retailers ordered early and at elevated levels beginning in our Q1 last year.

Despite solid demand and seasonal sell-through in the most recent fitness season, some retailers still have more inventory to sell through. We are monitoring these inventory levels, sell-through rates and are assisting our retailers in working through their inventory to enable reorders later in the year. We have also experienced a rapid deterioration of the macroeconomic environment with elevated inflation and interest rates and declining consumer confidence in stock market performance. Add in COVID resurgence in China and a war in Europe, and the current situation is both volatile and very challenging.

We've reflected these short-term factors in guidance that Aina will provide. Next, I will briefly review our financial results. We delivered fourth quarter and full year results that were in line with our guidance and underscore strong execution in the face of post-COVID demand and a tough macro environment. I am very pleased with our team's performance in fiscal 2022, another historic sales year, demonstrating strong demand for our products.

For the fiscal year '22, net sales were $590 million, a 112% increase compared to the same period two years ago, excluding Octane. Fiscal '22 was the second highest annual revenue in the last 15 years. Turning to the quarter. Our overall financial results were in line with guidance as we achieved fourth quarter net sales of $120 million, down from last year's all-time record high, but 41% up versus two years ago, excluding Octane.

Our omnichannel approach and assortment of strength and cardio offerings enabled us to strongly compete and meet fourth quarter expectations. Retail was up over 60%, excluding Octane, and direct was up over 27% versus LLY. Our diversified product portfolio featuring a wide array of modalities and price points worked as designed and helped us better weather the regulating industry demand for IC bikes. For the fourth quarter, our research shows that we captured No.

1 market share in unit sales, recording higher unit volume than any of our competitors, highlighting not only our popular products but also improvements in supply chain capabilities. Churn in membership growth was also a bright spot as we significantly eclipsed our fiscal '22 year-end goal, delivering 325,000 JRNY members, exceeding our goal of 250,000 by fully 30%. We grew JRNY members by 200,000 for the year. I'll provide more JRNY highlights in just a few minutes.

Our adjusted operating margin rate guidance was also in line with the results, even as gross margin continued to be affected by increased product cost, global supply chain cost and discounting at the beginning of the fourth quarter. Aina will provide more color on these items shortly. Turning now to year one of North Star. The first fiscal year of our transformative North Star strategy is complete.

Our path to transform Nautilus into a leading digitally enabled at-home fitness company is on track, and we are already showcasing what the future holds for the business. Our strategic decision to accelerate key investments in our technology platform and marketing initiatives is paying off. As we enter year two of North Star, we are proud of the tremendous progress we've made. I'll cover important progress across all five pillars of our strategy: consumer-led customer progress, advancing our connected fitness experiences embodied in JRNY, value and agility created by focus and disciplined execution as operators, improvement in the supply chain and new capabilities and talent.

North Star is a differentiated strategy embodied in our mission to empower healthier living through individualized connected fitness experiences and our long-term vision to build a healthier world one person at a time. Our employees fully embraced the strategy and are passionate about our progress. The cornerstone of North Star is transforming Nautilus from a product-led hardware company to a consumer-led digital company. Over-indexed historically in a consumer segment that generally did not enjoy exercise and were seeking quick off and unsustainable results at minimal effort, we moved to a new segment we call enthusiastic cross-trainers for whom fitness is a more important part of their lives.

That pivot has turned out to be on target and highly correlated with those who favor home workouts post-pandemic. As a result, we are very proud to have acquired new customers at three times the rate compared to pre-pandemic, with nearly 600,000 new customers in two years compared to a pre-pandemic average of about 100,000 per year. We invested in our top of the industry Bowflex brand, began to modernize it. And as a result, purchase consideration so far is up more than 10%.

We have already leveraged this growing customer list with a rebuy rate that doubled in fiscal '22 over fiscal '21 as our customers build their home gyms. We have nearly tripled the number of retail doors since the onset of the pandemic, added many more retailers, making it easier for consumers to buy directly from us or from a growing set of leading retailers. Notably, as I mentioned, we now believe we have recently become the market leader in unit sales. Finally, we have enhanced the level of research about consumers.

These insights now drive all product and go-to market decisions, and the results are exciting. A second pillar of North Star is to become a leader in connected fitness. JRNY, our early stage digital membership platform, is being fueled by our successful equipment business, which bears much of the cost of customer acquisition and provides the funds to develop, improve and scale JRNY. To that end, so far, we completed the launch of a new full line of cardio machines, treads, bikes and Max Trainers, all running our differentiated digital platform, JRNY.

Once we build JRNY to work with each of these modalities, this became the installed base from which to grow our connected fitness business. Recently, we expanded the installed base by making it possible to use JRNY even if you do not own a connected cardio product. We have begun to include JRNY and Bowflex advertising under the tag line Bowflex with JRNY. Bowflex brings users to JRNY, and JRNY helps modernize the Bowflex brand.

As a result of these actions, as mentioned, I'm delighted to say that we ended fiscal '22 with over 325,000 JRNY members, surpassing our original goal. Because of the enhancements we made to JRNY in fiscal '22, members are realizing how JRNY can help them meet their training goals through adaptive personalized training. JRNY acts as a personal trainer and provides you with progress tracking by measuring and analyzing your improvements and continually adapting to your fitness level and goals. In addition to the AI-driven individualized adaptive workouts, we have expanded our instructor-led content library and added more of our popular immersive explore the world experiences.

JRNY brings an industry-leading level of variety to the fitness experience. It is available across both cardio and strength. It offers a variety of ways to work out, which is what our target consumer craves. In addition to now having hundreds of thousands of people doing millions of workouts a year on JRNY, we have now begun to build our subscription business.

While it's still early, I'm happy to begin giving some additional JRNY metrics now. Over 325,000 members, 20 times higher than fiscal 2019 when we had just one cardio product, the MAX Total connectable to JRNY. Of the 325,000 members, 111,000 are subscribers. Our year-end subscriber count has increased nearly 20-fold since fiscal '19.

One of the things I'm most excited about is the installed base we have built over the last two years. In the slide, we show how many units we've sold each of the connectable to JRNY in 2020, a small number. And by contrast, at the end of fiscal '22, we had a much larger installed base of connectable to JRNY cardio machines and have recently connected journey to our SelectTech weights. In fiscal 2022, approximately 80% of total units sold were connectable to JRNY compared to only 22% in fiscal '20.

Think of this chart as not only showing great progress, but also showing the potential for future growth. Churn has been improving. As we've shared, we've begun offering one-year trials in late September last year to scale our member count and get feedback from a larger number of users about which features they enjoy best and which ones need improvement. As these one-year trials begin converting to paid, we'll be able to share more meaningful information about churn.

For now, churn will be a factor embedded in the subscriber numbers. We'll continue to update you and evaluate the best ways to provide visibility into JRNY and expect to expand metrics as they become more useful to evaluate our progress. Looking forward, we believe investments we made in fiscal '22 will continue to drive membership growth. In particular, fiscal '23 -- in '23, we're really excited about additional enhancements to the SelectTech experience on JRNY.

Last fall, we acquired VAY, a leader in vision systems. We have been focused on integrating VAY's motion-tracking capabilities into JRNY to further advance and accelerate our highly personalized strength workouts, including rep counting and form coaching with our product offerings, as well as others. We are on track to begin beta testing these features with consumers during the second quarter, further enhancing the SelectTech on JRNY experience we launched last November. Bowflex has long been a leader in strength, and we shipped more units of strength equipment than anyone else in fiscal '22.

SelectTech dumbbells are wildly popular. We believe attaching JRNY to 552 and 1090 dumbbell purchases will serve as a powerful accelerator of JRNY membership. We want to ensure that journey continues to evolve and adapt to what our consumers want and love. Nautilus was late to connected fitness, but I'm incredibly proud of the progress in pivoting the company toward a future where we're helping millions of people work out every week.

North Star included early focusing decisions that have paid off. We exited the commercial business selling Octane. We reduced SKUs by more than 25%, and we have narrowed our brand choices. While more than doubling our revenue at the peak, we increased our headcount by less than 20% and intentionally kept our cost structure variable to maintain agility in volatile times.

We've managed our company through extraordinarily challenging times with disciplined execution. All of this will not only help us navigate the business through inevitable cycles but provide wherewithal to invest in North Star. Next, I'll highlight supply chain. We shipped a record number of units in fiscal 2022.

Improvements in planning and execution across our supply chain were leading factors, which contributed to this achievement. We made significant strides in delivery and cost for the quarter. For the quarter, we experienced significant improvement in on-time delivery at 95%, and we successfully implemented a 4% cost reduction across our top 30 products. We also successfully opened a new DC in Southern California to expedite our supply chain by being closer to larger ports.

And lastly, we began diversifying our production facilities and expect, by the end of this calendar year, we will be shipping product out of Mexico, cutting down on transit time and cost of pan-Pacific transportation. For fiscal 2023, we expect to actively manage the situation, including a line of sight on inbound freight and third-party storage costs. We also expect to capture cost savings from our distribution footprint consolidation with our decision to exit our Portland DC. Finally and most importantly, we've made a lot of progress on our fifth pillar, creating organizational capabilities to win.

We've enhanced talent to drive North Star transformation, recruited new leaders, including the company's first chief people officer, significantly refreshed our board of directors, added new capabilities and increased in-house expertise, expanded our talent pool, given our hybrid work model, bringing in new skills and more diversity of thoughts, experiences and backgrounds to drive our transformation. This gives me additional confidence that the company has the ability to navigate near-term volatility and ultimately deliver long-term goals. The opportunity in home fitness is strong, and we've positioned Nautilus well to capture it. We have the right strategy in North Star.

It has taken root, and our people have delivered incredible and tangible results. I am proud of how we have moved the company to an exciting new place. And being nimble and agile have delivered strong operating results in the face of an incredibly dynamic series of challenges. We are already a vastly different company compared to fiscal '20 and are emerging from the pandemic much stronger and well positioned to navigate near-term challenges.

We will draw on our experiences to keep our focus on the long run, continuing North Star momentum while, at the same time, navigating a new set of unusual short-term challenges, including current retailer inventory levels and volatile macroeconomic conditions. We have several levers to actively manage these challenges, including gross margin improvement and efficient cost structure, focus and disciplined execution. This approach will keep our long-term strategy moving forward and also put us on path to deliver positive adjusted EBITDA for the back half of fiscal 2023. I'll now turn it over to Aina who will give us more detail on our fourth quarter financials and our guidance for fiscal year 2023.

Aina?

Aina Konold -- Chief Financial Officer

Thanks, Jim. Today, I'll be speaking to total company results for Q4 and will provide guidance for fiscal year '23. Please go to our website to view our press release and the slides accompanying this call for more information on total company full year '22 results and for additional information on our segments. I'll start with Slide 16 of the presentation, P&L results for Q4.

As discussed previously, we delivered the two highest sales quarters in our company's history in the back half of '21, fueled in part by pandemic-driven demand. Given the unique nature of last year's results, we'll talk about sales growth versus last year fiscal year '21 and versus last, last year fiscal year 2020 to gauge our growth and overall company improvements when compared to more normalized results. Net sales for the fourth quarter were $120 million, down 42% versus last year and up 41% versus last, last year, excluding Octane. Gross profit was $21 million and gross margins were 18%, down 21 points from last year.

16 points of the decline were related to higher product costs, logistics and increased discounting. The remaining five points are related to JRNY investments. Turning to operating expenses on Slide 17. We closed on the acquisition of VAY in Q2 '22.

The next few lines of the P&L have been adjusted to remove costs associated with the acquisition. Please see our press release for a reconciliation to GAAP. Adjusted operating expenses were $42 million or 35% of sales versus last year's $39 million or 19% of sales. Selling and marketing expenses and adjusted G&A expenses were flat in dollars to last year but deleveraged as a rate of sale.

R&D costs were up $3 million, primarily driven by investments in JRNY. In fiscal year Q4, advertising was $14 million versus $12 million last year. And JRNY opex was $5 million versus $4 million last year. Adjusted operating loss was $21 million, and adjusted operating margins were negative 18%, in line with our guidance.

And lastly, adjusted EBITDA loss from continuing ops was $17 million or negative 14%. On slide 18, we included a waterfall that describes the year-over-year change in operating margins. The drivers of the year-over-year decline are increased product costs, logistics and discounting, higher levels of investments in JRNY and incremental advertising. Turning now to the balance sheet as of March 31.

Cash was $14 million. Inventory at 3/31 was $111 million, down versus the $128 million at 12/31 and up versus $68 million 12 months ago. We're really pleased with how we're managing inventory down. About 14% of the balance at year-end was in transit.

And importantly, our inventory is concentrated in our best-selling SKUs. Over a quarter of our inventory cost is in SelectTech weights and benches, which include high NPS product like our 552s. AR was $61 million, and trade payables were $53 million. Debt was $29 million versus $13 million at year-end.

And we had $66 million available for borrowing on our facility. Before we turn to our expectations for fiscal '23, I want to talk about liquidity. We had about $80 million of liquidity at year-end. And even with the seasonally lower Q1 revenue, we are comfortable about our liquidity coming into the year.

Jim spoke to our ability to navigate the near-term macro headwinds. Our confidence stems from the framework we use as we are planning North Star. We started our strategy work pre-pandemic, and at that time, we assumed growth would come from taking market share. We knew we needed fuel for growth, so we made focusing decisions like selling Octane to free up resources for North Star.

We also prepare for the inherent volatility in this industry by creating a cost structure that was more semi-variable versus fixed. We've intentionally used a combination of employees and key outsource partners to execute against our initiatives, growing headcount by only 20% since year-end 2020. This type of org structure allowed us to ramp up quickly during the pandemic, adding supplier partner capacity in Asia to meet demand and onboarding tech partner resources to accelerate JRNY development. Today, this structure gives us the flexibility to ramp down if needed in response to volatile sales.

Turning now to fiscal '23 guidance on Slide 20. For fiscal '23, we expect to return to a more typical pre-pandemic seasonality, with the second half of the year contributing more of the full year's revenue. Typically, the first quarter ending in June is the lowest revenue quarter, with September quarter being second lowest. The third quarter ending in December is usually the strongest, with the fourth quarter ending in March being the second strongest.

As we started doing in the back half of fiscal year '22, we'll be comparing our sales to the same period in fiscal year '20, as we believe comparing to the last pre-pandemic year allows us to better gauge our growth and progress. We expect Q1 fiscal year '23 sales to be between $45 million and $55 million or $50 million at the midpoint. This represents growth versus pre-pandemic Q1 2020 of 4%, excluding Octane. The more muted growth versus fiscal year '20 is driven by softer demand this year as retailers are still working through elevated levels of inventory.

Given lower top line and deleveraging of fixed costs, we expect Q1 fiscal year '23 adjusted EBITDA loss of between minus $22 million and minus $27 million. Turning to second half and full year '23 guidance. We expect full year revenue of between $380 million and $460 million. At the midpoint, this represents about 52% growth versus fiscal year '20, excluding Octane.

Elevated inventory levels at retail partners are slowing down reorders and shifting them to later in the year. Therefore, we expect the second half to represent between 65% and 70% of full year sales, slightly higher than pre-pandemic second have seasonality of approximately 60%. We are expecting the start of gross margin recovery in the second half and expect gross margins to be in the range of 27% to 30%, driven by key actions we've taken, particularly in supply chain of North Star pillar. We expect lower inbound freight as we've negotiated new rates that while higher than pre-pandemic are much lower than the spot market rates last year, lower detention and demurrage fees as we've digested the inventory we purchased last year.

We plan to close one of our DCs at lease expiration this fall, and we won't be renewing leases for some of the storage locations we obtained at the height of the pandemic. Additionally, we've negotiated lower costs for our top SKUs. New incoming inventory will have a lower cost base. And lastly, while our guidance includes room for discounts to be competitive during fitness season, our better inventory position reduces some of the pressure relative to LY.

Given higher sales levels in the second half, improved gross margins and our continued cost discipline to align variable costs in line with sales, we expect to deliver positive adjusted EBITDA for the second half of fiscal '23. And we expect full year adjusted EBITDA loss of between negative $25 million and negative $35 million. Lastly, we expect JRNY members to cross the 0.5 million mark at year-end '23. The board and the management team are committed to creating enduring shareholder value through our North Star transformation.

We intend to continue appropriately balancing short term with long term and believe we have the liquidity and the flexibility to navigate through this challenging environment. I'll turn it over now to Jim for his final comments.

Jim Barr -- Chief Executive Officer

Thank you, Aina. I'm pleased with the progress we made in fiscal '22. Looking forward, our opportunity is great. We have created the right strategy and made the right incredible progress, all while executing in a disciplined way navigating an incredibly volatile environment.

I'm very proud of our people in doing this. So let me end by thanking all of our employees and all of our partners for their tireless dedication in support of our mission. I'd now like to open it up for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Steve Dyer with Craig-Hallum. You may proceed with your question.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Thank you. Good afternoon. If I could start with just a couple on JRNY. First of all, your guidance suggests 500,000 members as of March 31 of '22.

I presume that that was supposed to read '23.

Jim Barr -- Chief Executive Officer

Yes.

Aina Konold -- Chief Financial Officer

Yes. Sorry about that. Thank you.

Jim Barr -- Chief Executive Officer

Good catch.

Aina Konold -- Chief Financial Officer

Thank you.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. No problem. And then just interesting slide, 2.7 million installed base. Are you having any success with JRNY kind of cultivating that installed base? Or are you finding your new subscribers or your new members to come sort of primarily at the time they buy a new piece of equipment?

Jim Barr -- Chief Executive Officer

Yes. I mean, as we said, it -- I'll just start and, Aina, I don't know if you want to add anything to it. So as we said, when we had the original member goal of 250,000, we announced at investor day a year ago, we talked about there being three ways to get to that number. One is attaching to products at the time that you purchase them.

Two was to go back to the installed base. And three was partnerships over time. And of course, when we're talking about a five-year period, we want to consider all of those paths, and we will continue to look at all those paths. So for sure, selling at the time -- selling the subscription and attaching at the time of purchase is an important thing, in particular in Direct, where we have the ability to do that kind of nearly 100%.

In Retail, it's a little bit tougher. We have to use some creativity to do that. But yes, that's very important. And of course, when we start talking about things like churn, you'll see that it's lowest when it's in the console or an embedded experience and it's more variable in a BYOD experience.

But yes, we're having success on all of those fronts, especially attaching to the products we sold. That's why that connected fitness JRNY-enabled portfolio that we began really shipping in the last 18 months or so has really built that installed base. And that part is super important. And then it's a big number when you look at dumbbells and C6 and IC4 and we call the more connectable instead of embedded.

Those would be like BYOD things. It's a little bit less of a take rate, which is exactly what we expected when you go back to that. But really, the one thing we did see this year is the reorder rate of our equipment go up. And one of the reasons we think that reorder rate is going up is because people don't want to really have a different app for each piece of machinery they have.

It used to be -- this industry was a bit more one-and-done, and your second purchase didn't have much to do with the brand affiliation of your first one. And we think that's really changing because we got a doubling of that repurchase rate. But long story short, yes, we're seeing success across that, about what we expected.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Got it. Thanks, Jim. As it relates to new products going forward, you guys have done a very good job in the last several years of sort of rationalizing, I guess, the SKU base and really focusing. As you look forward, should we think about new products, new SKUs? Or is that primarily going to be focused, the innovation, so to speak, more on journey and the connectivity there?

Jim Barr -- Chief Executive Officer

No, it will be on all. I mean, really, we -- when we talk about our mission, we talk about connected fitness experiences. And we define that as typically a machine, software and some content. That's what keeps people working out longer.

It gives them the variety they want. So we're looking to innovate on all those fronts. We think -- we're looking at the way stuff I was talking about today, that's a good start. We're not ready to announce our future products there, but we've done a pretty strong job on cardio.

We're doing more on strength, and we are also -- there's a few items in cardio that we'll be working on, but we're not ready to announce all those. But yes, mechanical engineering is alive and well here at Nautilus. It's not just about the digital experience. You look at a product like VeloCore that does something different anything else does and being able to have their kind of a revitalization of the Max Trainer.

We still strive to innovate on both of those levels, both the software and the hardware.

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Great. Thanks very much. Good luck.

Jim Barr -- Chief Executive Officer

Great. Thank you.

Operator

Our next question comes from the line of Mark Smith with Lake Street Capital Markets. You may proceed with your question.

Mark Smith -- Lake Street Capital Markets -- Analyst

Hi, guys. First off, I just wanted to ask a little bit about pricing. Can you guys talk about if you're taking any, if you have the ability, and kind of where pricing is at today?

Jim Barr -- Chief Executive Officer

Yes. So it's a great question. Of course, we have to continue to monitor the macro. But we have taken some price increases on some core products.

So far, they've been holding. But as we discussed, demand has been lower than expected. So we'll have to continue to monitor that. It has a lot to do with what's going on competitively in the marketplace.

As you saw, we did a fair amount of discounting, as did everyone in the industry, in the holiday season. You kind of have to follow in the season. It's a little bit more optional in the offseason. You've got to make your hay in the season.

But right now, we're just looking product by product. We've been able to take price on several of them, and we'll continue to monitor it.

Mark Smith -- Lake Street Capital Markets -- Analyst

And that leads to the next question, just discount environment. What does it look like today kind of out of season primarily at retail?

Jim Barr -- Chief Executive Officer

Yes. I think -- great question. I think it looks pretty normal, right? We saw a lot of discounting over the fitness season. But it started to regulate kind of right after January.

We've had more -- I think everybody runs like a Mother's Day sale, and everyone will run some sort of Memorial Day sale. But -- and we'll -- we ourselves are doing kind of some flash sales and things like that. So yes, everybody is doing something to move it, but you can really make more choiceful decisions. And again, it's really focused on the market, but we've seen that come way down to a seasonal level.

And also, I'll say, you didn't ask about this, but also what we've really seen over the last quarter or so is we look at our competitors' advertising and our own advertising. Obviously, we pulled back as this has happened, and I think pretty much everyone, but Tonal, has pulled back on advertising. So we're kind of more in line with everyone else, and that is somewhat related to the discounting question is how often you're out there.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. And so in that advertising, as we look at the waterfall on operating margin this year versus a year ago, as we look forward, should we expect to see that advertising impact being less significant moving forward?

Aina Konold -- Chief Financial Officer

So great question. So on a year-over-year basis, especially when comparing to last year, last year still benefited from a lot of the pandemic driven. We didn't need to advertise as much, right? It was our highest ever quarter ending March last year. So some of that is going to be less of an issue on a year-over-year comparison, '23 to '22.

Also in '22, we did a lot of brand advertising, and that might moderate in fiscal year '23.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. And then I think the last one from me. Just big picture, as we think about JRNY here, 110,000 subscribers versus 325,000 members. If we think about that ratio, what are you looking for? What do you feel like is a healthy place to be or even a goal to be at?

Jim Barr -- Chief Executive Officer

Yes, we're not providing goals on that. As we -- I know everybody has been itching to get more information on JRNY. And of course, we're trying to balance giving information to our competitors and giving the right things that we find will be helpful to you and to our other investors. So we'll continue to offer more over time.

We've picked a set that's expanded from what we've traditionally given, and we'll continue to expand that further. As I mentioned about the churn, too, that's kind of one thing that everybody asked about. But when you're doing a lot of these free trials, which we are right now, and we'll kind of come up in the September, October, November time frame, which is exactly as we designed, then those churn numbers will be a lot more understandable than it would be right now. So that was also part of it.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. Great. Thank you.

Operator

Our next question comes from the line of Matt Curtis with William Blair.  You may proceed with your question.

Matt Curtis -- William Blair and Company -- Analyst

Thanks for taking my question. I want to ask a question on the full year EBITDA guidance 2023 -- that pretty significantly. I think you were at positive previously for the full quarter. But could you just clarify the main reason for the shift, primarily the slowdown in retail demand? Or is it more related to other things like maybe higher-than-expected commodity inflation greater supply chain pressures or something else?

Aina Konold -- Chief Financial Officer

You were kind of breaking up a little bit in the beginning part of your question. But I think what I heard you say is you're asking if we had thought that it would be for the full year that we'd have breakeven adjusted EBITDA and you're asking why is it only the second half? Can you confirm?

Matt Curtis -- William Blair and Company -- Analyst

Yes, sorry. It's just that your previous '23 EBITDA guidance was positive and it's been -- now it's significantly negative. So I'm wondering if the main reason is the slowdown in retail demand versus your prior view. Is it more related to it or something else?

Aina Konold -- Chief Financial Officer

Yes, it's more related to the slowdown in the demand and especially a lot of the shifting of the top line from the first half to the second half. So it's more related to that. We're actually seeing for inflation. We're expanding gross margins.

So we're able to do things to kind of do some -- take some actions against cost. But really, the main reason for the decline versus our previous expectation is the lower retail reorders, which we think is affecting the first half of the year.

Jim Barr -- Chief Executive Officer

And I'll just add that on the gross margin, it's a combination of things that we hope, of course, like commodity prices that we don't control and FX. But there are -- we have line of sight, as I mentioned, to things that we actually control. We paid for a lot of storage last year. We don't have to pay for that storage this year.

We'll be down a DC this year. We've got a number -- what else --

Aina Konold -- Chief Financial Officer

Detention and demurrage. We've digested the inventory. They were very -- and naturally just even the great work we're doing with the top SKUs. When you rationalize your SKUs and you really are focusing your assortment, you can do a lot of work to make sure that the suppliers are able to get good costing and pass it on to us on those top 30 SKUs.

Matt Curtis -- William Blair and Company -- Analyst

OK. Got it. And then, I guess, on the retailer inventory levels that are elevated right now. I mean when do you think they will be able to kind of work their way through this access? I mean is this something more near term where they could get through it potentially by the end of the summer? Or would this take longer?

Jim Barr -- Chief Executive Officer

Yes. First, I'll say that each retailer is in a different position. And we have better visibility into some than others. They choose to share with us sometimes and not others.

But right now, we've got a pretty good view of that, and it does vary by retailer. It really does depend on a couple of things. First of all, consumer is buying, right? So if consumers stop buying, that will be later. If they continue buying, then that will be earlier.

And it's really just a number of different factors there. I think it's also -- there's also going to be some risk-taking that I would guess, and this is just my speculation, retailers that are over-inventoried would typically order maybe 90 days in advance of needing the inventory. And so we would start to see that in the second quarter for the holiday season, the fitness season. My guess is that you may not see that that they may be a bit more risk-averse in moving that inventory.

And then we'll -- we may see the orders that would normally come and second also come into third. And they will expect us to react more rapidly than 90 days. They'll expect us to have the inventory in our warehouse. And the good news is we actually do have inventory.

So not for any retailers listening, but that is something I think we'd expect to see.

Aina Konold -- Chief Financial Officer

And then I'll just -- the only thing I'd add to that is that's a little bit what's driving the wide range in our full year expectation is, on the lower end, it would mean that it took them a bit longer to clear it through and then on the higher end that they're able to clear it through by summer, early fall.

Jim Barr -- Chief Executive Officer

And by the way, it's not like we say you're on your own on this stuff, too. So I mentioned a few times, we work with the retailers. They have map windows where they have to sell where they can sell at below typical prices. We are working with them to be able to clear that inventory occasionally.

And then we coordinate that with our own direct business to make sure nobody is at a disadvantage when we do that. We actually have the same leader now running both Direct and Retail running North America overall. And we're better coordinating what I call our omnichannel execution.

Operator

Our next question comes from the line of George Kelly with ROTH Capital Partners. You may proceed with your question.

George Kelly -- ROTH Capital Partners -- Analyst

Hey, everyone. Thanks for taking my questions. The first one for you is just about your inventory balance. Curious if you could give us any kind of target.

Or I'm just trying to figure out how much draw drawdown could there be in fiscal year '23? Like where do you target inventory to end the year?

Aina Konold -- Chief Financial Officer

It's, Aina. Great question. We haven't really previously guided to like ending inventory balances, but I'd tell you that I prefer it to be more like 13 weeks, 15 weeks out rather than the current level. So we have a fair bit to go.

But as Jim just said, it's actually a little bit of silver lining, having all this inventory because of what's happening with the retailer environment. If they're unable to order FFO, factory-fulfilled at their normal cadence and they want it in time for holiday, it's helpful to us to have it already in our DCs.

George Kelly -- ROTH Capital Partners -- Analyst

OK. OK. And then second question from me is on the SelectTech-JRNY, the tech enhancements that you're beta testing. I didn't quite follow in the prepared remarks, trying to keep up.

But can you just go through the big features that you're testing there?

Jim Barr -- Chief Executive Officer

Yes. I mean, really, we started by connecting journey to SelectTech with, call it, some trainer-led videos, right, that walk you through various workouts with SelectTech. And that's compelling. And we're providing that.

But really what VAY adds is, is the tech element of that and kind of the -- it works by itself element of it. So the first thing is really rep counting. So you're standing in front of a phone or a normal camera of any sort, and we'll be able to count your reps, how many curls you're doing, all those types of things. And then the second thing that I'm excited about is what we call phone coaching.

So if you're doing it wrong, whether it's a floor exercise or it's a JRNY dumbbell exercise in a way that might hurt you or not get the maximum benefit in your workout, we will coach you actively with voice coaching to tell you that you haven't done it correctly. So those are the two things I really like. So then you add that to an expanding library of content and you start to have a really compelling experience. And that was our whole view in buying VAY other than getting great software engineers to attack any problem and help us be a more digital company also really bringing home those features.

George Kelly -- ROTH Capital Partners -- Analyst

OK. And then last question. The guidance, the back half weighting on guidance. Is that -- I understand the normal seasonality.

But are there any kind of new product launches that are influencing that guidance? Or is it really just a return to normal seasonality?

Aina Konold -- Chief Financial Officer

It's primarily a return to normal seasonality. We typically, at this time, wouldn't talk about new products that are coming in. But it's primarily just return to seasonality, driven really by the lower first half because of the retailer-elevated inventories.

George Kelly -- ROTH Capital Partners -- Analyst

OK. Understood. Thank you.

Aina Konold -- Chief Financial Officer

Thanks, George.

Operator

[Operator instructions] Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Jim Barr for closing remarks.

Jim Barr -- Chief Executive Officer

Thank you to everyone on the call today for your continued support of Nautilus. We look forward to talking to you again on our first quarter fiscal '23 earnings call in August. Have a great rest of the day, onwards and upwards.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

John Mills -- Investor Relations

Jim Barr -- Chief Executive Officer

Aina Konold -- Chief Financial Officer

Steve Dyer -- Craig-Hallum Capital Group -- Analyst

Mark Smith -- Lake Street Capital Markets -- Analyst

Matt Curtis -- William Blair and Company -- Analyst

George Kelly -- ROTH Capital Partners -- Analyst

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