Huge quarter for NLS. Net sales up 152%, accelerating from 94% last Q. EBITDA was $35.7mm vs a loss of $5.5mm last year. Direct sales were up 278% with gross margins up ~1900bps, Retail segment sales we up 108% with gross margins up 720bps. The company also booked an $8.3mm gain on its sale of Octane fitness (at a base price of $25mm). Management noted that in the quarter it saw 7x the new customers that it saw a year ago. Management guided 2020 sales to be $540 million and $565 million and full year 2020 Adjusted EBITDA to be between $90 million and $100 million. At the top end of that revenue range 4Q is guided to grow at 94% vs the street at +26%, and the EBITDA guide is almost 2x where the street was for the year headed into this event ($58mm). Management also noted that with the elevated demand, it thinks it will be supply constrained until around 2Q21. Meanwhile the street only has 1% sales growth expected for 1H21. Our stance on NLS has been that the industry demand would significantly exceed and outlast what consensus was expecting. This print clearly demonstrates that to be the case.
The stock had a rough trading day due to the positive news around vaccine efficacy in trials, but we’re not so sure that news changes anything for the NLS fundamentals. Covid will be around (and likely surging) through winter. We still have the New Year’s resolution season before gyms will be open, and management mentioned something we thought is the case, which is that consumers are going to want a backup to the gym now for the future regardless of when they re-open. It will be worth it to have that bike/treadmill/elliptical available at home for the next pandemic, the next time you don’t have time for the trip, or the next time it’s just too cold to venture out to the gym. Consensus trend numbers should be marching materially higher alongside guidance. 2020 sales expectations entered the year at $298mm and now should end up around $565mm given guidance. The EV/sales has gone from 0.3x to ~1.2x. EBITDA expectations have gone from -$4mm to roughly $100mm after guidance, roughly a 6.5x EV/EBITDA on 2020. Though we expect sales to remain strong in early 2021, we think sales will likely be down slightly and profits down further given the company’s incremental investments, we’re coming out around $85mm, or the company trading at about 7.5x 2021 EBITDA. This company, when it has had EBITDA, over the last 5 years has traded around 6x-10x. The impressive results this quarter mean we are likely at the peak of rate of change, so revenue looks likely to slow in the coming quarters. At the same time management is noting it needs to invest more in its DCs and logistics team, which means cost leverage will decrease. So it looks like both revenue and profit growth will slow in the coming quarters meaning multiple pressure from here. The company also filed a mixed shelf after the close. We’ll see where consensus numbers go and where the stock trades, but on the margin we’re less bullish on the trend setup after this print.
