Direct Focus Explores Avenues for Continued Growth

Direct Focus Inc., the direct marketer of Bowflex home fitness machines, has been pumped up by a recent wave of positive publicity and on the strength of its financial performance, but analysts say the company will need to diversify if it is going to continue to strut a buff fiscal physique.

The company began trading on the Nasdaq Stock Exchange a little over a year ago after previously trading on the Toronto Stock Exchange. Since its debut at $21.50 per share in the United States, the stock has risen by almost 50 percent, closing at $31.50 on May 30. The stock hit a 52-week high of $37.25 earlier in May, and its slip in recent weeks could be attributable to some investors selling to take profits on previous investments, analysts said.

In an effort to get the word out on its performance to date and its growth potential, Direct Focus, Vancouver, WA, is in its second week of a national tour of meetings with investors this week. Business Week in its May 22 issue named it as the No. 1 small company on its list of “Hot Growth Companies,” and it has received some other favorable coverage in the financial press.

“We think the story continues to be very positive,” said James Bellessa, an analyst at D.A. Davidson & Co., Great Falls, MT. “The company's opportunities are greater now than what they were when they had this U.S. stock offering 13 months ago.”

The company's core products for the past five years have been its Bowflex home fitness machines. The devices, which sell for as much as $1,600, use flexible rods that users bend instead of lifting weights. The company realizes profit margins on these machines of as much as 75 percent to 80 percent, Bellessa said.

Although analysts said there is still tremendous potential to sell the product to aging, financially secure baby boomers, they caution that there is a danger the product could be a fading fad or that the current strong economy will reduce spending on such high-ticket items. Direct Focus therefore needs to explore other alternatives for growth, they said.

Bellessa said he expects the company to continue to diversify through two different vehicles. First, it will try to market unique products that carry the Nautilus brand — which it acquired in January 1999 — through direct marketing channels; and second, he thinks the company will use its substantial cash position to make another acquisition in the fitness sector.

“They are masters at using direct marketing through the TV airwaves,” he said. “They know with quite good precision if they put 'X' number of dollars down on advertising, how many sales they can generate.”

The company already has introduced one product — an air mattress called the Nautilus Sleep System — through its direct response TV channels, and has enjoyed some success, according to Bellessa. He said he would not be surprised to see the company adopt the Nautilus name and seek to capitalize on its widespread recognition as a maker of fitness equipment.

A company spokeswoman said the company was exploring the possibility of offering more Nautilus-brand equipment through direct marketing channels. She also said that the company would consider acquisition opportunities as they presented themselves.

Scott Mondrow, an analyst with Sidoti & Co. LLC, New York, said he expects that the company will introduce more products under the Nautilus name to sell through the retail channel, but he said the product would have to be very unique for the company to attempt to duplicate the Bowflex direct-marketing paradigm.

“It would have to be something that cannot be knocked off easily,” he said. The company's Bowflex machines carry several patents and have therefore been difficult for competitors to duplicate, he said.

The Bowflex machines accounted for 82 percent of the company's sales in 1999, he said, and he projected that they will account for only 75 percent in 2000 as the company rolls out new Nautilus retail products and continues to strengthen its sales of Nautilus products to fitness centers.

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