A mass recall of sports equipment made by Nautilus (NYSE:NLS) sent the company's shares down some 15% yesterday. The fitness products maker's shares have already rebounded -- back up more than 8% so far today in morning trading -- in the wake of news that some 420,000 Bowflex machines were being called back because of safety issues.
This isn't surprising. The recall, Nautilus' first, will have a minimal financial effect on the company. Nautilus has set aside a reserve of $3 million to cover the costs associated with repairing the machines, or sending a replacement kit out to its customers. That's slightly higher than the $2.6 million the company mentioned in a December filing with the SEC, but given that Nautilus had $73 million in cash and equivalents (and no debt) to end 2003, it doesn't seem like reason to panic.
Following last night's assurance that the recall won't impact its Q1 or full-year 2004 earnings-per-share estimates, the shares are on the rise again. More important than the recall is the company's performance in the year ahead. Nautilus' 2003 wasn't so pretty: Revenues fell year over year, while cost of sales and selling, general, and administrative (SG&A) expense rose. As a result, net income cratered, falling to $34 million from $98 million in 2002.
This year stands to be a tense one for Nautilus investors. While the company is on sound financial footing -- with a clean balance sheet and at least $25 million in free cash flow for the first nine months of 2003 -- management is clearly aware of the "difficult environment" surrounding it.
Renewed focus on the product mix may rejuvenate sales, but may also hurt profits in the near term. Furthermore, the company ended last year with inventories about flat with 2002 levels. With sales falling, Nautilus may find itself having to mark down some goods, even as it looks to fire up enthusiasm for new products. Gross margins may fall, while R&D expenses are expected to rise.
Turnarounds -- and the company does use the "T" word -- cost money. To Nautilus' credit, its strong financial position can only help as it feels for its new path.
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Dave Marino-Nachison can be reached at [email protected].
