Nautilus Inc (NLS) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Nautilus first-quarter 2013 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded, Monday, May 6, 2013.

It is now my pleasure to turn the conference over to Mr. John Mills of ICR. Please go ahead.

Good afternoon, and welcome to Nautilus's first-quarter 2013 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer; Linda Pearce, Chief Financial Officer; and Bill McMahon, Chief Operating Officer.

Remarks during today's conference call may include forward-looking statements concerning the Company's prospects, current or future financial and operational trends, or new product introductions. These statements, along with other information presented that are not historical facts, are subject to a number of risks and uncertainties. Actual risk may differ materially from these forward-looking statements. Nautilus undertakes no obligation to publicly update any forward-looking statements to reflect new information, events, or circumstances after they are made, or to reflect the occurrence of unanticipated events. Please refer to our quarterly and annual reports filed with the SEC for more information about the risks and uncertainties that could cause actual results to differ. Unless otherwise indicated, all information and comments regarding our operating results pertain to our continuing operations.

With that, it is my pleasure to turn the call over to Bruce. Go ahead, Bruce.

Thank you, John. Good afternoon, everyone, and thank you for joining our call today. We are pleased to report a solid start to our fiscal 2013. We continued our momentum from last year, and recorded strong overall growth in revenue, gross margin, and profitability in the first quarter. The improved financial performance of the Business continues to be largely due to our team's successful execution on the key areas of focus, including introducing compelling new products, improving gross margin levels, and leveraging our infrastructure cost. We are creating a stronger foundation for our Business that we believe will position Nautilus for long-term profitable growth and success.

Linda Pearce will provide more detailed discussion of our financial results in a moment, but first I'd like to call your attention to a few highlights. In the first quarter, our direct business continued to perform very well. Sales from this segment increased approximately 26% year over year, and gross margin for the direct business increased 330 basis points to 59.8%. Our direct sales performance is attributable to the steady growth of our existing products, as well as initial success of new products, including the Bowflex UpperCut, which we launched early in the first quarter.

Turning to our retail business -- as we anticipated, sales were impacted by the soft overall retail environment for fitness equipment. Despite generating lower revenue, we were pleased that retail gross margins improved 110 basis points year over year to 24.9%. This reflects our efforts to improve product margins for this segment of our Business. As we've previously discussed, we have been focused on the development and placement of a new line of cardio products for our retail partners, which is scheduled for shipment this Fall. Based on conversations with retailers thus far, the new products have been favorably received. But at this stage, it is still too early to determine to what degree these initial positive meetings will translate into improved financial performance for retail this year.

We do remain confident in the long-term potential for our retail business. However, we believe that it is prudent to reiterate caution as to the short-term year-over-year comparisons for this segment, until later in the year when new products are fully launched, and the level of consumer acceptance in the marketplace is established.

Overall, we are very pleased with the direction and momentum of our Business. Our marketing plans and our internal improvement initiatives have been on target thus far, and will allow us to layer in future potential opportunities. This is supported by our strong balance sheet and our talented employee base, who are very capable and willing to pursue and take on the next challenge or opportunity.

Now I'd like to turn the call over to Linda to discuss our financial results for the quarter in more detail. Linda?

Thank you, Bruce, and good afternoon, everyone. As Bruce mentioned, we had a solid first quarter, and we are pleased with the results. Net sales for the first quarter totaled $59.2 million, an increase in 15.5% as compared to the same period last year. First-quarter gross margins improved 520 basis points to 51.8% versus 46.6% last year. The gross margin improved in each of our channels, including an increase in royalty revenue. The increase in royalty revenue over the prior-year first quarter added 30 basis points to the overall gross margin improvement.

Income from continuing operations improved $5.5 million for the first quarter of 2013, compared to $2.6 million for the first-quarter last year. Income per diluted share from continuing operations for the first quarter doubled to $0.18, compared to $0.09 per diluted share for the same period last year. This strong improvement in results from continuing operations is primarily attributed to higher sales, improved gross margins, and higher operating income in the direct business.

We reported total net income, including discontinued operations, of $5.2 million, or $0.17 per diluted share, for the first quarter of 2013, which compares favorably to net income of $2.5 million, or $0.08 per share -- per diluted share, for the same quarter last year. Net income for the first quarter of 2013 includes a loss of $400,000, or $0.01 per diluted share, from discontinued operations. This is primarily due to normal legal expenses of closing the entities, which were budgeted and expected. Net income for the first quarter of 2012 included a loss of $100,000, or $0.01 per diluted share, from discontinued operations.

Total operating expenses for the first quarter as a percentage of sales increased just slightly to 41.7% from 41.1% for the first-quarter last year. Selling and marketing expenses totaled $18.6 million, or 31.5% of sales for the first quarter, compared to $16.1 million, or 31.3% of sales for the first-quarter last year. Our media strategy and creative messaging was very effective at driving awareness of our new products, and generating higher sales of our existing products.

General and administrative expenses amounted to $4.9 million, or 8.4% of sales for the first quarter, which compares to $4 million, or 7.8% of sales in the prior-year period. The increase was due to one-time personnel costs and IT infrastructure spending. The first quarter of 2012 was unusually low, due to some one-time anomalies going the opposite direction.

Research and development costs in the first quarter of 2013 were $1.1 million, compared to $1 million the same period last year. We continue to invest in new products at a greater pace than last year.

Now turning to our segment results. Net sales in the direct business totaled $42.6 million for the first quarter, a 26.4% increase over the same quarter last year. This improvement reflects strong demand for our cardio products, especially our Bowflex TreadClimber line. This strong demand was partly driven by increased advertising and call-center effectiveness, and higher US consumer credit approval rates. US credit approval rates rose to 35% in the first quarter of 2013, up from 30% for the same period last year. Bill will explain shortly some of the things driving the improved credit approval rates.

First-quarter 2013 direct sales also benefited from sales of CoreBody Reformer and the Bowflex UpperCut. Our direct team continues to drive efficiencies by balancing the right creative content, media mix, and placement. This has generated strong leads, and driven our top- and bottom-line improvements for this segment of our Business.

Operating income for the first quarter in our direct segment improved to $6.7 million, a 121.5% improvement compared to $3 million in the prior year. This improvement reflects stronger sales, as well as a 330-basis-point improvement in the direct segment gross margin. As Bruce mentioned, gross margin for the direct business was 59.8% for the first quarter of 2013, compared to 56.5% in the first quarter of last year. Direct business gross margins benefited from better product mix of higher-margin cardio sales.

Net sales in our retail segment for the first quarter were $15.1 million, compared to $16.6 million in the first-quarter last year. This year-over-year decline reflects a soft overall retail environment for fitness equipment. Operating income for the retail segment was $2 million, compared to $2.3 million for the first-quarter last year. Retail gross margin was 24.9% in the first quarter of 2013, compared to 23.8% in the same quarter of last year. The 110-basis-point improvement in retail gross margin reflects the results of our efforts to improve product margins for the retail business.

For modeling purposes, it is important to keep in mind that, last year, our retail sales in Q2 reflected a significant shift of retail customer orders from the third quarter to our second quarter, in anticipation of a mid-year price increase. Please keep this in mind when modeling our retail sales for Q2 and the back half of this year. Regarding our increase in royalty revenue, it is important to note that part of the increase was due to a one-time true-up with one of our licensing partners.

Now turning to our consolidated balance sheet. We had another quarter of strong positive cash flow. Cash and cash equivalents increased to $28.7 million as of March 31, 2013, with no debt financing, which compares to $23.2 million and no debt at the end of 2012. Inventories were $13.7 million as of March 31, 2013, compared to $18.8 million at the end of last year, and $13.5 million at the end of the first quarter of 2012. The Company tightly manages inventory, and the reduction in the first quarter was planned, and reflects the seasonal nature of our Business. Trade payables were $17.8 million as of March 31, 2013, compared to $32.8 million as of December 31, 2012, and $23.5 million at the end of the first quarter of 2012. Inventory purchases were brought in earlier in the first part of the quarter, reducing our trade payables at quarter end.

Now shifting to our tax provision. The Company has prior state and Federal net operating losses, a capital loss, and income tax credit carry-forwards in various jurisdictions. All of these are fully offset by valuation allowances, and are available to offset future taxable income generated in such jurisdictions, if any. We periodically evaluate the potential realization of our deferred income tax assets. It is at least reasonably possible that within the next 12 months, a review of the objective evidence may indicate that a portion of the Company's valuation allowance is no longer appropriate. If such a determination is made, release of the valuation allowance would be recognized as an income tax benefit to continuing operations in the period in which such assessment is made, and the amount recognized could be material. As of March 31, 2013, there has been no material change to the Company's valuation allowance.

At this time, I would like to turn the call over to Bill McMahon, our Chief Operating Officer, who will provide some additional insights into our Business and key product initiatives. Bill?

Thank you, Linda. I'd like to make a few comments regarding our operations to provide additional background on our first-quarter results. Our direct business continues to experience strong growth, driven by the performance of our cardio product lines, and with sales in Canada. The Bowflex TreadClimber cardio machine continues to perform well, as the awareness of the proprietary TreadClimber brand trademark increases in the marketplace.

Our direct channel results also benefited from the performance of two of our new products, the Nautilus CoreBody Reformer and the Bowflex UpperCut. The Nautilus CoreBody Reformer, which we relaunched utilizing new creative content in the fourth quarter of last year, has performed in line with our expectations, with sales more than doubling over the same period in the prior year. We will continue to invest in and refine our messaging approach for this product.

Our direct sales also benefited from solid initial sales for the Bowflex UpperCut, which was launched early in the first quarter. This product leverages the strength of our Bowflex brand, which our research confirms is the most recognized brand in consumer fitness, and builds on the established Bowflex heritage of effective and efficient strength training that provides fast results. The UpperCut product exceeded our expectations for media performance and conversion at initial launch. We have, in a controlled manner, accelerated our media spend in support of this product. It is early in the awareness-creation phase, so caution is always in order as we attempt to grow. But we are optimistic about our creative message, given the performance of UpperCut to date.

Our direct channel also benefited from year-over-year improvement in consumer credit approval rates, which in turn, helped drive sales for higher-priced items in our direct portfolio. Some of this improvement is due to general economic conditions, trends in consumer spending, and consumer willingness to take on debt. However, as with the improvement seen in Q4 2012, we were able to attribute much of this credit improvement to our media strategy and creative messaging that is focused on, where possible, drawing more credit-worthy consumers towards considering our unique and innovative products.

For direct, our product strategy continues to be focused on identifying new, incremental market and price-point segments, and deploying products that provide solutions and value to consumers within those segments. We have additional products in the development pipeline, spanning a variety of modalities and price points. We expect to announce further new product launches in direct later in 2013.

Turning now to our retail business, as Bruce described during his remarks, the overall retail environment for fitness products has been challenging, as we are finding that our retail partners continue to be very cautious with their spending in this category. We have been focused for the past year on developing an updated line of cardio products, including bikes and elliptical machines, built from the ground up with our consumer insights and research findings incorporated into a highly competitive design. These products are on track, and scheduled for introduction this Fall. We feel that combining our already high product quality profile with compelling consumer insight-driven product feature sets under the umbrella of our strong brands will be the key to acquiring incremental retail market share, and ultimately driving higher sell-through and growth within the retail business.

We know that generally retailers were disappointed in the overall performance of their fitness category in the second half of 2012, and they are looking for improvements in traditional on-floor categories, such as bikes and ellipticals, as well as new and innovative products. We are immersed in the final decision process across all of our retailers for their Fall 2013 assortments, so very little is firm and final. Timing for the Fall assortment varies by retailer, but in general, will be determined in the next 30 days. That said, we are encouraged by how retailers are responding to our products during the evaluation phase. At a minimum, we believe the initial positive reception validates that our design efforts are focusing on the proper areas of opportunity that should drive improvement over time. We will be able to provide additional color on this during our call in August.

In terms of our outlook for the retail business for the next quarter, it's important to keep in mind that our Q2 fiscal-2012 sales benefited from certain of our retail partners accelerating their buying patterns in advance of our price increases in the back half of 2012. Additionally, as retailers make their buying decisions for the Fall 2013 season, if those decisions include adoption of our new bikes and ellipticals, it will be less likely that they will purchase large replenishment amounts of current inventory in Q2. As this transition occurs, our retail business is facing a difficult comparison year over year in Q2. As always, it's important to keep in mind that our retail business contributes to strong -- strongly contributes to our overall profitability. Looking further to the back half of the year and into next year, we feel that we have taken the right steps to position our retail business for sustained future growth.

Now turning to our third revenue source, which is the strategic licensing of our intellectual property and our brands. Nautilus has several well-known brands, and we believe that there is an opportunity to better leverage these brands, and potentially increase our royalty revenue. In Q1, we announced our partnership with the Seltzer Licensing Group to explore possible options. We have just completed our first review of research design to identify potential services and categories where our brands could be extended via licensing. Work with our partner is ongoing, and is highly prioritized, though it is important to emphasize that these activities will not provide immediate results. The phase of identifying potential license partners has been followed by development time to bring products to market that, in turn, will generate royalties based on their success. Thus, while it is unlikely we will see increased revenue in 2013 from these specific efforts, over the long term, we feel this investment will pay dividends.

Regarding the licensing agreement in place for commercial TreadClimber, our partner Star Trac showcased the new in-production commercial TreadClimber at the March IHRSA trade show in the United States, and at the FIBO trade show held in April in Germany. The feedback and interest from this product unveiling was quite positive. Star Trac has begun to sell the product, and expects to begin installing units during Q2. Availability will be initially limited, per plan, as Star Trac verifies field performance and customer satisfaction within the install base. Nautilus will drive royalty revenue based on sales on a quarterly basis moving forward.

In summary, Nautilus is in a strong and improving position. We are encouraged by the performance of our newest products, and are optimistic that they will be important long-term contributors to our top- and bottom-line growth. We also have several exciting new product ideas in the pipeline, and we expect to continue introducing new products with a regular cadence. Importantly, we have continued to refine our sales and marketing strategy, including our creative content, internet marketing, and social media efforts, which will help support the launches of future products. We are excited about our outlook for fiscal 2013, and the long-term potential for Nautilus.

Now I'd like to turn the call back over to Bruce for his final comments. Bruce?

Thank you, Bill. Before opening up the call for questions, I would like to take a few moments to comment on the Business in general.

Following the improvements we made over the past two years, our Business is achieving strong momentum, and beginning to realize the financial benefits of our team's successful implementation and execution on the key areas of focus. Our focus this year is continuing to generate strong top- and bottom-line growth in direct by capitalizing on the growing demand for our established product lines, and driving awareness of new products. As Bill discussed, we are encouraged by the sales of our most recently launched products. To further expand consumer awareness of new products, we will continue to prudently invest in sales and marketing efforts, with the goal of building a strong foundation across a more diversified offering of products. This will enable more sustained growth in the future.

We are also committed to improving and growing our retail business. The share growth opportunity is still significant, and we believe we are moving in the right direction with our new product offerings scheduled to launch in the back half of this year.

That concludes our prepared remarks, and now I'd like to open up the call for questions. Operator?

(Operator Instructions)

Reed Anderson of Northland Securities.

Nice quarter, good job. A couple questions. First off, just kind of looking at the direct side, the revenue lines. Nicely above where we were forecasting. Curious, and I know you don't want to give a lot of detail, which, for competitive reasons but if you look at like a CoreBody, where you reposition that, kind of after the anniversary. You said it was up 2X in the first quarter, year-over-year. Curious, would it have been up sequentially? Would the first quarter CoreBody been a bigger revenue number than it was in the fourth quarter?

I don't think it would be bigger than in the first -- fourth quarter.

Okay. Seasonality-wise, that's why I was curious.

Yes, the single largest month would be January, really. So, we are finding with CoreBody, it's performing -- it's improving overall year-over-year, and its meeting our hurdles. But, it's not yet mature enough to get a real, I'd say seasonal trend out of it yet. There's other factors, like how many ads are run, et cetera, that are playing a bigger part.

I'm curious, too, nice to see the good traction early with the UpperCut. Two questions on that. One is, you talk about accelerating the media spend. Just curious if that's more spend in the same areas, or if you are tweaking that in certain ways, any color there? I guess secondly, is there a thought here, Bruce, potentially that as you get into some of these lower price-point products, that you maybe won't have quite the seasonality skewed heavily to a few months that you would in the bigger ticket items? Just thoughts on that, please?

Let me let Bill handle the first part, and I will take the second part.

Yes. On the spend, we certainly accelerated ahead of our original plan on UpperCut. Generally, that was a higher spend than planned overall. However, we do routinely shift monies around in media, as you know, Reed, as opportunities present. So it wasn't a dramatic increase over plan, but it was certainly more than we planned.

Okay.

Yes, and Reed, on the de-seasonalization of the business, certainly we like to have products that are more stable, or flat throughout the year. UpperCut could be that. CoreBody, actually, in some of our positioning photography, et cetera, and marketing materials, are positioning it more as an outdoor item, particularly at this time of the year. So the more we can do that, the better. It certainly level loads our warehouse and other infrastructure costs, which would be a nice thing. But we can only -- sometimes we can only do that so far.

Understood. Good. Linda, on the royalty piece, you said that there was a true-up in there. Just curious, was that -- did that account for a lot of the year-over-year increase? Or was it a smaller portion?

It wasn't all of it. I think it was really about maybe 0.5 of the increase.

About 0.5? Okay. Good. And then, just last question from me, and I will let somebody else jump in. On the card approval side, continue to see progress there. I mean, Bill, do think there's more headroom to that 35% number? Or are we kind of inching up to where you figure it might start to stall out here, where you will sustain it, that kind of thing?

Well, I think, as we've discussed before, I think a lot of it comes down to if the housing market continues to improve and unemployment creeps down generally, then our providers might take a look at their scorecard and approve more, or take or risk. We're always pushing for that, as you might guess. So, we are always hopeful that there's more room to grow. But I don't know if it will come in the large changes that we've seen year-over-year the past few quarters. We'll certainly strive for it, but I can't promise that.

That makes sense. Well, good. Best of luck.

Chris Armbruster with B. Riley and Co.

Congratulations, again on a fantastic porter.

Thank you, Chris.

On the gross margin in the direct business, it's getting -- it's exceeding the numbers from --on a year-over-year basis by a pretty wide margin. Is that sort of year-over-year improvement something that you could sustain for another couple of quarters before you come up against the comparisons maybe in Q4? I'm just trying to get a feel for how sustainable those large increases on the margin side, given that you are expanding the portfolio, how sustainable that they can be?

Well, Chris, we plan to sustain our gains in terms of drawing further improvement. It's always -- a lot of times it's coming down to mix, at this point. In the first quarter, we benefited from selling a pretty good mix of our higher priced products, and that always helps margins. We're constantly looking at our product costs and trying to optimize across the board in terms of value engineering. But, we are starting to reach a high end where I think will be happy to sustain what we have, and perhaps smaller improvements will be coming. We won't give up on improving, but it is reaching a ceiling that's starting to reach the area that Bruce outlined in his long-term strategy.

Right.

And part of it is greater absorption of our fixed cost. So, as our revenue volume goes down, we will lose that advantage. So think about that as you forecast out the other quarters.

Right. Okay. That's helpful. Then, on retail, you had the year-over-year improvement in margins there. I know Q2 is going to be a little tricky, because of you pulling sales forward. But do you expect year-over-year margin increases now going forward, even if they are small? Or is there's still some risk that retail margins could slide back, just on -- maybe on the lower absorption of the fixed side of the cost?

Yes, Chris, I think Linda made a good point is to definitely, when you get into the slower parts of the year, particularly Q2 and to some degree Q3, the volume, through overhead absorption during those quarters, is not as much as it would be in the first or fourth quarters. So, you have that working against you. But I would say, generally, we are doing everything that we can to get it -- the trajectory to continue. So I would say once we come out of the slower part of the year, and we've talked about the back half of the year with new products and the margins in new products, that we should be in a better trajectory, is our hope going forward.

Okay. And then just one quick housekeeping item, and then I'll let it go. But what was the depreciation and amortization in the quarter, if I can have it?

Can we get back to you on that on a second?

Sure, no problem. Thanks, guys.

Joe Munda of Sidoti and Co.

Bruce, I got a quick question for you here. As far as the sales and the media spend that you guys have been going through. Do you have a system in place to track the -- or gauge the effectiveness from some of the ads that are run, let's say on ESPN for UpperCut? Can you directly correlate that that ad was effective in one buyer purchasing the UpperCut?

Hi, Joe. This is Bill. To the extent that people use the methods that, for instance, the phone number in the ad, or other ways that we have of tracking, we can correlate the effectiveness of any given ad placement. More and more today, though, it's important to note that there is awareness that's generated, and then people come to your website and buy. You can only do indirect correlations of that performance. But we definitely do analyze on a weekly basis down to the ad and placement level how well it's working.

Yes, that's all I was wondering, if the ad run, and then 20 minutes later you are starting to see a spike in sales. Can you see that in real time?

Yes. In fact, a lot of times the response is while the ad is running.

Okay. Then, on the retail side, you guys, with the environment being challenging and you're talking about the new bikes and ellipticals, I'm just curious. What is so different on these bikes and ellipticals as in past offerings? I know you don't want to give away the store, but I'd like to know, is it new technology that's being introduced, or is it going to be an iteration to the current model? I'd like to just get some color there.

Yes, Joe, it's a little bit of everything. Some of it is just incorporating the research where we got together with consumers and learned, what are they using the product for and why, and how do they want to track their workout, et cetera. So, it creates a more engaging environment to help coach people along towards their goal. The products we make are already pretty high-quality. So, it's a matter of creating an environment for them that's easier to use and track. We will have more news on that as we get closer to the launch of the product.

Will it have like some iPhone or iPod capabilities? Just curious.

It will have capabilities to engage and track your workouts over time in an online environment.

Okay.

The other thing, Joe, I would add that there is a lot of work over the last year to improve what we call touch points on the product. So there are design elements, industrial design kind of thing, where the user interacts with the product that we think we've taken a step ahead in regards to those points.

Okay. Then Bruce, you had spoke about media guys are in the final decision process. So, has production begun on some of these new products? Or is this more of a second, third quarter type of situation where you guys will begin production and then roll it out at the same time? I'm just --

Yes, the actual bulk production hasn't started yet. It wouldn't start for another couple of months. But they are running prototypes, and doing what we would call preproduction kind of work to make sure everything is ticked and tied, and the product has the quality that we want in the bulk production, which is what we will end up shipping to our customers. Normally in the retail cycle, it works that they would start receiving product, maybe as early as August or more likely September and October.

Okay. And Linda, my last question, then I will hop back in the queue. You spoke about a difficult comp. I know some other callers brought this up. I'm just curious, how many of those sales that occurred in 2Q of last year, I mean, I don't need an exact number, I'm guessing a percentage-wise, were sales that were pulled through? I'm just trying to get a sense of what percentage of those sales in 2Q '12 were basically bought upfront.

Joe, let me handle that. That was before Linda's time with us. But actually, it's very difficult to tell exactly how much was moved forward in anticipation of the price increase. So, all we know is it's affected Q3 last year significantly, and maybe even to some degree, Q4. But it very difficult to quantify.

Okay. Thank you.

Let me get back to also, Chris, if you are on the line, our depreciation and amortization in the quarter was $818,000.

Thank you. Matt Dhane of Tieton Capital Management.

It's Matt Dhane of Tieton Capital Management. I was curious, are you seeing retailers cutting back on floor space that they are willing to dedicate to fitness? I guess, in particular, for the next fitness season, due to the category weakness that you've seen here?

Well, I think, Matt, this is Bill. Thanks for asking the question. We certainly are aware of discussions with several retailers who are rationalizing what they're looking at for fitness on their floor space for the fall. It's similarly tied to our sell-in confirmations. We don't know for sure what some of the retailers are doing. I would say in general, it's certainly possible some retailers will cut back on their floor space. We think, though, that if that occurs, it is going to be primarily in areas that we aren't necessarily a player in, such as treadmills.

Okay. Thank you.

(Operator Instructions)

Chris Armbruster with B. Riley and Co.

Just a couple other quick ones. Did I hear correctly, that the CoreBody Reformer in Q1 was twice -- the sales in Q1 were twice what it was from the Q1 last year?

That's correct.

Okay. And then on your -- the retail, the new retail equipment that is going to be out in the second half of this year, do you guys start booking revenue on that in Q3? And is the bulk of it in Q3, or is it in Q4, too?

It's late in Q3, generally in Q4, corresponding with retailers who set their floors around just after back-to-school and into October timeframe.

Okay. I mean, do you have kind of a ballpark percent of what would be -- what you would expect in Q3 versus Q4, in terms of the incremental sales that could accrue to you guys from the new equipment?

The lion's share, generally, would probably be in the Q4, early Q4 timeframe.

Okay. Fair enough. Thanks, guys.

Andrew Burns of D.A. Davidson.

A couple questions for you. Just in terms of this evaluation phase currently with the new retail products, the bikes and ellipticals, can you walk me through your conversations in terms of how the external environment is affecting, perhaps open to buy? Obviously, there would be a willingness to buy new and exciting product, but I would suspect that open to buy budgets would be pretty tight, given the category weakness.

Well, I think you are hitting on a key factor that impacts us near term, Andrew, in that not just with us, but generally overall, most, especially your bricks-and-mortar retailers were unhappy with their fall season. Some of them are public and have talked about it. That does impact the near-term open to buy. It also means that they will probably be trying to clear inventory near-term before the fall season. I think the majority of retailers, no matter what they do with their floor size, are definitely hungry for new product. We certainly hope to get a piece of that. In the near term, though, they do need to clear some inventory down.

Okay. So, it sounds like on these new retail programs, that the potential for financial impact for you guys is a little bit greater in the fourth quarter versus the third?

I think that's -- I think that's what we will see the majority of the sales happening, is traditionally in retail it would be in Q4.

Okay. Thanks. Then in terms of media spend, it sounds like with the UpperCut success, picking up some dollars there for that, that particular product, but overall, relative to where you started the year, with budgeting, is your media spend a bit -- growing a bit higher than you would've thought, given the success you are seeing in -- to start the year?

Yes. I would say it's slightly higher, Andrew, but not outrageously so. I mean, we manage media pretty tightly, but we are willing to expand additional funds if opportunities present. So far, it's pretty much in line, maybe a little higher.

So when you talk about potentially taking up a little bit from the UpperCut, that's more -- or placing dollars to the UpperCut, that's more about balancing spend within the portfolio versus growing the overall spend?

I think, in year-over-year comparisons, our selling and marketing will be higher because we will continue to invest in the new products as they grow. Within a given quarter versus our plan, we routinely shift media dollars around as opportunities present or go away in a bid environment such as media is. So, and that's the confusing answer. But basically year-over-year, we will invest in selling and marketing, specifically media, in support of the new products. You will see higher expenses in that category. Obviously, we hope, attendant higher revenue.

The other thing is, I know a lot of people focus on media, but we have been stepping up our efforts in digital, social media, and even PR campaigns. So there's other venues to reach the consumer, which we've been, actually, stepping up besides what we are doing in media.

Great. Thanks. One more quick one here. (Multiple speakers) In terms of the new product launches in direct-to-consumer later in the year, are those items that could have a financial impact? Or in the second half, are we talking about announcements where really, the bulk of the initial launch would be more towards '14?

I would say we would rather withhold that until we get to the August Q2 earnings call. Then we could give you a little bit more guidance there, in terms of what potential impact some of these new things will have in '13 versus '14.

Great. Thanks, and good luck.

Thank you, Andrew.

There are no further questions. I'll turn the call back to our speakers for their closing comments.

Thank you everyone for participating, and your interest in our call today. We look forward to speaking with you in our next and second quarter conference call in August. Thank you all very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.