Is Now the Time to Invest in this Fitness Equipment Maker?

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Rising obesity levels in the U.S. and around the world are forcing individuals and the medical establishment to rethink health choices.  Fortunately, it is leading some people to become more proactive about their health, adding exercise and a healthy diet to their daily regimen.  The focus on physical fitness is helping the sales of equipment manufacturers, like Nautilus (NYSE: NLS), and their associated retail distributors.  So, can investors find profits with the king of cardio?

What’s the value?

The fitness equipment business is boom or bust due to its relatively high price points and its dependence on consumer disposable income.  It is also competing against a plethora of weight loss programs and pharmaceuticals that promise similar health results without the hard work and pain of physical exertion.  Nautilus has offset these competitive threats by diversifying its product line and coming up with innovative new products, like its Bowflex TreadClimber machine that incorporates motion from walking, climbing, and biking without the traditional strain on people's joints.

In FY2013, Nautilus has reported continued improvement in its financial results, with increases in revenues and operating income of 5.2% and 95.5%, respectively, versus the prior-year period.  Solid sales growth in the company’s direct selling channel more than offset declines in its retail segment, while sales of elliptical machines and exercise bikes were generally weak.  More importantly, Nautilus’ operating margin nearly doubled, to 4.5%, as it focused on the direct selling channel, which has a significantly higher gross margin.

Of course, with products that can cost upwards of $2,000, Nautilus’ sales are heavily dependent on consumer financing programs. Indeed, part of the company’s resurgence has been due to greater financing options for its customers, which has been enhanced by its growing relationship with GE Capital Retail Bank. However, Nautilus doesn’t offer its own financing programs, thereby putting it at the mercy of third-party credit decisions. As such, investors that are interested in the sector might want to look at the growing retail distributors of a diversified assortment of sporting goods products, including fitness equipment.

Best of breed

The best of breed in the retail sporting goods sector is Dick’s Sporting Goods (NYSE: DKS), a national chain of superstores with over 500 locations around the country.  With a typical store size of 50,000 square feet, the company sells every imaginable type of sporting good, with designated departments for high-touch items, like footwear, hunting and fishing gear, and fitness equipment.  Dick’s has also been leveraging the popularity of name brand manufacturers through store-within-a-store concepts, like its Nike Fieldhouse and UnderArmour All-American Shop.

In its latest fiscal year, Dick’s reported solid financial results, with increases in revenues and adjusted operating income of 12.0% and 19.6%, respectively, compared to the prior year.  The company’s sales growth benefited from rising comparable store sales, up 4.3% for the period, as well as a further expansion of its stores in underserved markets.  In addition, Dick’s increased its profitability by continuing to incorporate private label brands into its product mix, including recent purchases of the Top-Flite and Field & Stream brands in the golf and outdoor categories.

An attractive regional play

Alternatively, investors could consider smaller competitor Big 5 Sporting Goods (NASDAQ: BGFV), a West Coast chain of small neighborhood stores that is a direct play on continued growth in the California economy, the location of over half of its store base.  In FY2013, Big 5 has generated strong financial results, with increases in revenues and operating income of 9.2% and 334.0%, respectively, versus the prior-year period.  Similar to larger competitor Dick’s, Big 5 has benefited from rising same store sales, up 7.4% for the period, as well as higher demand for firearms due to the charged political environment.  While its stores are only about one quarter the size of Dick’s superstores, Big 5 has achieved comparable per store productivity, providing the profits and cash flow to grow its operating footprint beyond its West Coast home base.

The bottom line

Nautilus’ business has improved recently due to consumers’ rising disposable income and their need to increase physical fitness to generate improved health outcomes.  However, the boom and bust nature of fitness equipment sales should give investors some pause and lead them to search for more diversified plays in the sector.  With stores that cater to a wide variety of athletic pursuits, including physical fitness, Dick’s Sporting Goods and Big 5 Sporting Goods are the right moves for a “fit” portfolio.

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Robert Hanley owns shares of Nautilus. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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