Q1 2022 Allbirds Inc Earnings Call
Thank you for standing by and welcome to the older first quarter 2022 earnings call. At this time, all participants are in a listen only mode.
After the presentation, we will conduct a question and answer session to ask a question. During this session you will need to press star one on your telephone keypad.
You're required any further assistance please press star zero.
I'd now like to hand, the conference over to your Speaker today call Kosygin. Please go ahead.
Good afternoon, everyone and thank you for joining US with me on the call today are jellies, Zoolander, and Tim Brown, <unk> co founders and co Ceos, and Mike Bufano, Albert Chief Financial Officer.
Sure.
Before we start I would like to remind you that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about our financial outlook medium term target timeline for achievement of lifetime sales milestone duration of external headwinds and other matters referenced in our earnings release issued today.
These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise any statements to reflect changes that occur after this call.
Please refer to our SEC filings as well as our earnings release and annual report on Form 10-K for the year ended December 31, 2021 for a more detailed description of the risk factors that may affect our results.
Also during this call we will discuss adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures that adjust our GAAP results to eliminate the impact of certain items.
These non-GAAP items should be used in addition to and not as a substitute for any GAAP results you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's earnings release.
Now I'll turn the call over to Joe to begin the formal remarks.
Thanks, Kyle and good afternoon, everyone. We.
We are pleased to deliver strong first quarter results, which includes a robust net revenue growth of 26% compared to 2021 and 49% versus 2020, along with adjusted EBITDA in line with our expectations.
The top line accelerated on both a one and two year basis as we focused on controlling the controllable against a volatile backdrop.
Macro trends are creating both headwinds and tailwind right now.
Our U S business continues to show strength in both digital and physical retail and as people go back to work demand for our core lifestyle offering is increasing.
As we've mentioned previously we believe our brand is more resident further COVID-19 recedes in the rearview mirror.
At the same time certain international regions have run into demand headwinds towards the end of the first quarter and have extended into Q2, particularly in China and the EU.
The quarter was highlighted by 35% sales growth in our U S business, demonstrating the power of our digital savvy Omnichannel model, which is further buoyed by a post pandemic retail recovery improved pricing and resident new product.
International sales grew 3% in the quarter, reflecting headwinds in consumer spending in the EU due to Russia as invasion of Ukraine and in China due to Covid restrictions.
Coupling the slowdowns in Europe , and China with a strengthening dollar and some of our international markets, most notably in Europe , and Japan. These headwinds created a drag on revenue estimated to be approximately $2 million in the quarter, which would have represented an additional 15% year over year growth in our international business.
As we look at the balance of 2022, we are managing to a more conservative outlook to reflect what we believe are transitory factors affecting our international business.
We believe that the impact of full year revenue will be approximately $15 million to $20 million, which is reflected in the guidance, we're providing today.
More on this from Mike, but in short despite the external pressures that have changed our sales outlook for the year and our international business, we expect to deliver Tom strong top line growth of 21% to 24% in 2022, well within our range of our medium term revenue growth target of 20% to 30%.
Okay.
Underpinning this outlook is our confidence in the purpose driven lifestyle brand and durable operating model, we have built setting us up for decades of strong growth and profitability. Despite these short term factors as a reminder, our three growth pillars are to deliver product innovation grow our store portfolio and scale our international business.
I am going to turn things over to Tim to speak to product innovation and I'll jump back to provide color on the other tip.
Thanks, Joe and Hello to everyone.
Im excited to share with you today, our progress across product brand and sustainability.
On our last earnings call. We told you we were entering 2022 on a trajectory towards what we believe is the most compelling product roadmap in our history.
And we're already starting to see that unfold across our lifestyle and performance portfolios.
There are several highlights thus far in 2022.
First our latest collaboration with Adidas dropped in early April to phenomenal consumer response.
We sold through more than 90% of our inventory.
Three days time.
We're extremely proud of this ultra running shoe.
Which carries a lowest carbon footprint yet.
That includes sustainable performance innovations from human to Todd.
In lifestyle, our core tree franchises have shown great performance hitting into the spring and summer months.
We've also launched a new summer collection headlined by the sugar sweaters and <unk>, two seasonal product offerings that leverage our Switzerland material platform and reinforce our strategy to deliver supernatural comfort.
Sean.
We also continued our strategy to use apparel is a compelling reengagement tactic.
Celebrating a unique material innovations.
Great example of this was our recent extension of our successful switch franchise into a switch Shaw leveraging the same material platform.
We continue to believe that our performance offering with the rollout of the trade desk to the positive consumer response.
And Ah trial run a franchise, we're building heat through bold new colors and limited editions.
And finally, the headline this week is the launch of the tree flat, our food performance shoe and a lot of this performing and most visually bold design yet.
We are currently in the midst of a comprehensive launch in conjunction with that we will get collected run community.
This is happening through run clubs Activations and content anchored in our idea of supernatural comfort and performance.
Designed to perform equally well on a first run on race day or anything in between.
The <unk> has gone through extensive development and testing both in our innovation lab and on the road.
With countless iterations developed to perfect the chute.
The shoe has been road tested by more than 100 runners of the 6000 miles across a wide array of conditions and clients to validate its remarkable performance attributes.
We are incredibly excited about this launch and as our first high performance product expected to meaningfully increase our credibility in this category.
Alright.
What makes the true floor, so special to Swift boat, a first of its kind midsole technology.
The result is a shoe made for runners of all stripes with a highest rebound right at 70%.
Raw materials are usually made from petroleum and Logan into 100% synthetic.
Switzerland, Leverages plant based oils, enabling a 20% reduction in carbon footprint versus petroleum based synthetic alternatives.
<unk> balance sheet Erie, Swift fund, <unk>, or 30% more responsive, 25% lighter and require less energy to manufacture than our existing suite.
A strong testament to <unk> commitment to sustainable innovation and relentless improvement.
While continuing to tap into the design what space a productive design to provide style versatility for even the best runners.
The launch of the Florida is another important step on our journey in the performance category.
As a former professional athlete I know the bar is high and this will take time.
Through our patient innovation engine seems it on the consumer.
When Julian on got together in 2015, we saw an opportunity to create a lifestyle and performance brand that could deliver a powerful combination of comfort and design.
<unk> and our environmental purpose and natural material innovation.
Consumer insight support this today.
The mix of elite runners in the support is declining.
Marathon tons of pooling with the average finished on having slowed by 40 minutes over the last 25 years.
Recreational running full of Joy is on an upswing driven by a new generation of runners who are running to stay healthy rather than to compete.
An increasing number of our core <unk> customers arenas and.
And 29% of those runners up between 18 and 24.
A demographic that index is high on their desire for sustainability.
In short, we believe that <unk> brand ethos and purpose make us uniquely positioned to meet this growing consumer group with App.
As a challenger brand, we are a values driven we.
We are not idly branded and we bring Julie and her reverts to the category.
And we are highly differentiated by a natural material innovation engine that is delivering products like the flat.
A great line for one performance running from last week's launch sums this up.
The Florida is a huge step forward for <unk> and the performance fee.
And they've managed to do it with mostly sustainable materials in a low carbon footprint, which is a feat in itself.
This progress extends beyond the outperformance ambitions to our overall company mission.
Back in 2016 ton magazine named US one of the world's most comfortable shoes.
Since that time, we've continued to deliver innovation and this year time honored us again by named to the prestigious list of the top 100, most influential companies of 2022, specifically, calling out our work in the performance category.
We are energized and excited about what lies ahead and look forward to sharing more in future calls now.
Now I'll turn it back to Joe to cover our remaining two growth drivers of schools in international.
Thanks, Tim.
Start with international where our rate of growth in Q1 was slowed by the macro factors I discussed earlier.
In Europe , Russia's invasion of Ukraine, and our resulting humanitarian crisis has had an indirect influence on our business via the impact of inflation on the psyche of the European consumer and petroleum prices.
Despite this we believe our store and digital model of vertical retailers working there, particularly in our two focus regions in Europe being the UK and Germany.
As I will mention later, we are bolstering this approach through third party partnerships.
In China, Covid restrictions have slowed sales in stores via full shutdowns.
And slowed overall demand in the region. We believe these to be transitory impacts on our business in China, but we are preparing for extended restrictions of varying severity through the remainder of 2022.
We continue to view this scale up of our international business as an important element of our growth algorithm having.
Having invested early in regions like Europe , and Asia. We believe we have established a broad foundation from which to grow as we strive to elevate our brand awareness into our consumer set that is at least as large as the opportunity in the U S.
Now I'll turn to our third growth pillar, the store portfolio and our broader distribution strategy.
Our retail footprint is highly productive and serves as an efficient means to acquire new customers.
Turning new stores drive increased brand awareness and provides a halo effect on the overall business, including an increase in the absolute number and mix of repeat customers, who shop with us both digitally and in stores. This journey tends to produce our most profitable customer our multichannel repeat customer who moved from our company's inception.
Through this past quarter now averages spend of one six times more than those who purchased multiple times in a single channel.
In the first quarter U S retail grew well in excess of 150% year over year and was our biggest driver of growth with the successful opening of four new stores in Q1 highlighted by our flagship in Manhattan Flatiron District, We now have 27 U S locations.
In addition to new store openings, we're seeing performance continued to strengthen in stores opened in 2021 in earlier based on the Q1 performance of these stores and our expectations for the balance of 2022, we continue to have strong conviction in achieving our previously shared pro forma U S. New store target of three <unk>.
5% to $4 5 million and gross sales and low 20% four wall EBITDA margins.
We also saw strength during Q1 in the U S e-commerce, reinforcing the power and durability of our Omnichannel model.
When we zoom out and look at the core elements that underpin our operating and value creation model, we have tremendous confidence that we're set up to win in the coming years.
<unk> does not just distinguished by materials and product innovation that Tim spoke to it but also our modern vertically led omnichannel strategy.
Not aware of any substantial brand that we compete with and has even 50% of its distribution by a vertical model and we sit here today at greater than 99% being conducted in this manner.
With the product assortment, we have now in the exciting pipeline to come. We believe this is an incredible foundation, where we can now layer and select third party distribution.
These additional consumer touch points can be another powerful and profitable element to catalyze additional growth in our vertical retail strategy by increasing brand awareness across our target consumer segment.
We are pleased to share that our first two partnerships are alive as of Q2 was the lando in Europe and with public land a banner of Dick's Sporting goods here in the U S and we are excited to announce additional partnerships too.
Early indicators on sell through are positive with U S. Aided brand awareness in the low double digits. We've used third party is a highly effective way to build awareness and drive credibility, while accelerating top and bottom line growth.
Finally, we're pleased that the early performance of our <unk> platform, which allows us to resell lightly you shoes, often to a different consumer than the ones. We target for our core distribution model. This program also reaffirms our core brand promise of delivering on Circularity. In addition to our innovation work on natural materials.
With the product engine humming this distribution model of the future sets us up to hit a milestone $1 billion in lifetime sales in the second quarter. This is a remarkable accomplishment in just six years.
We are grateful to our flock for their hard work and dedication in getting us to this point.
We are navigating a volatile environment executing well and remain heads down on the growth strategies, Tim and I outlined today with a focus on staying on course against our profitability targets, while building long term shareholder value.
With that Mike will review, the financials and discuss our outlook in greater detail.
Thanks Julien.
Pleased to deliver strong Q1 performance, especially given the external headwinds, which picked up after our last call on February 23rd.
Joey discussed the regions and channels. So I'll just add some color on the other drivers of the 26% net revenue growth in the quarter.
In Q1 orders increased 10% and average order value was up 17%.
This strength is primarily attributable to new product launches and refreshes as well as price increases.
We executed a price increase in March, which we use as an opportunity to establish a pricing structure that signals value to consumers along both materials and use occasions with advanced technologies and our performance products generally commanding a premium.
This is our second price increase in the past several months with effectively no observable impact on overall demand.
We believe our premium brand positioning and product quality enable us to maintain this pricing architecture and that premium brands like Oliver will come out of this period much stronger by taking stock of the current inflationary environment and thoughtfully revising our pricing architectures.
But before wrapping up on pricing I would also like to note that as we've done in the past in Q1, we utilize promotions surgically.
You will continue to see US do this in the future to drive growth and effectively manage inventory.
And 2021 this approach helped us realize 97% full price yield.
Turning now to Q1 gross profit, which was up 26% to $33 million with gross margin at 51, 9% down 10 basis points to last year.
Positive drivers of gross margin were mix shift of physical retail and higher margin products as well as pricing.
These positives were more than offset by the impact of the external headwinds, which intensified as we move through the quarter.
Specifically, we estimate a total of 420 basis points of year over year headwinds spread across three factors.
One macro driven logistics and distribution center cost headwinds were an estimated 350 basis points year over year.
Two unfavorable FX rates had a negative 50 basis point impact year over year, and three a lower mix of sales and our margin accretive international business when compared to Q1 2021 impacted gross margin by approximately 20 basis points year over year.
Moving down the P&L SG&A deleveraged in the quarter as you saw on the release, we have 17 more stores compared to Q1 2021 and opened four stores in the quarter. So store level SG&A and startup costs were the primary drivers here, along with approximately $2 million of public company cost.
<unk>.
On the marketing front in Q1, the combination of increased marketing efficiency and channel mix drove 360 basis points of leverage.
Pulling all of that together Q1, adjusted EBITDA came in within our guidance target range and negative $12 2 million.
Taking a quick look at the balance sheet inventory was up 11% from year end as we continue to navigate the logistics environment and stay ahead of the demand curve.
Breaking that down further industry wide extended lead times as well as higher inbound freight costs have resulted in higher levels of in transit inventory on the balance sheet.
At the close of Q1 in transit was up 15% from year end and accounted for about one third of our total inventory.
I'd like to now share some thoughts on the impact of the external headwinds and how we're thinking about our guidance targets.
Until we have more certainty around the length and severity of the external headwinds we are incorporating a more cautious outlook into our updated 2022 guidance targets, particularly in the second quarter.
We believe this is the prudent approach because we are facing the strongest headwinds in our gross margin accretive international business.
To be transparent about how we define cautious outlook our guidance targets assume that the Ukraine crisis and its ripple effects the impact of Covid restrictions on our China business and unfavorable FX rates all will continue to some degree through the balance of 2022.
We estimate of $15 million to $20 million impact on international net revenue from these external headwinds with about two thirds of that impact due to the Ukraine crisis in China's COVID-19 restrictions and one third due to FX rates.
With that estimated impact taking into account our updated 2022 net revenue guidance target is 335% to $345 million, which is up 21% to 24% versus 2021, including an estimated year over year FX impact on <unk>.
150 to 200 basis points.
Factoring out FX. This target is solidly in the middle of our medium term range of 20% to 30%.
Compared to 2020. This range represents an acceleration on a two year basis to 53% to 57%.
We're also taking a cautious outlook when it comes to gross profit and updating our 2022 guidance target to $170 million to 177 $5 million.
At the midpoint of our net revenue and gross profit targets. This represents a gross margin target of 51, 1%.
Compared to our prior gross margin guidance target there are two factors to unpack here.
One the biggest driver of the change is less demand from our gross margin accretive international business, especially China, which is our highest gross margin market.
Two our prior full year gross margin guidance target factored in an estimated 200 basis points year over year impact of external headwinds on logistics and distribution center costs.
We are now estimating the impact of these external headwinds to be 250 to 300 basis points, driven by FX rates and increased outbound shipping costs due to fuel surcharges, a byproduct of Russia's invasion of Ukraine.
Recall that we estimate the impact of these external headwinds was 200 basis points. In 2021. So we are now looking at a total of $450 to 500 basis points of impact over two year period.
Yes.
Looking at our updated 2022, adjusted EBITDA guidance target of negative 25 to negative $21 million.
I'll just note that we have tightened our balance of year SG&A spending to partially offset the impact of the external headwinds.
In addition recall that the 2022 target includes an estimated $8 million of public company costs.
The impact of the external headwinds is estimated to be most acute in Q2.
Our Q2 net revenue guidance target is 75% to $79 million up 10% to 16% versus Q2 2021, including an estimated year over year FX impact of 225 to 300 basis points.
Compared to 2020 this range represents growth of 48% to 56%.
Our Q2, adjusted EBITDA guidance target is negative <unk> 14 to negative $11 million, including an estimated $2 million of public company costs.
Appreciating that there are a lot of moving parts here, let me add a few more thoughts to help you model out the year with.
Don't necessarily give this color on an ongoing basis, but fields helpful. Given the external environment.
First for the full year U S. Net revenue is targeted to grow in the upper 20% range and acceleration on a one and two year basis.
Second full year International net revenue is targeted to grow mid single digits.
Excluding the impact of FX rate full year International net revenue is targeted to grow in the low teens.
Third in the second half total net revenue growth is targeted to be in the middle of our medium term target range of 20% to 30% driven.
Driven by our strong product pipeline more retail stores and the increased velocity of our omnichannel flywheel in the U S.
In addition, the back half of the year is further augmented by the introduction of sales via our select third party partners and the incremental sales awareness and profitability of this channel provides.
Fourth second half adjusted EBITDA is targeted to be roughly breakeven as we focus on tightly managing cost and responsibly growing the business in 2022 and into the future.
And finally, one last model housekeeping note.
For full year 2022, we anticipate that stock based compensation will be approximately $22 million and that depreciation and amortization will be approximately $18 million.
Okay.
Let me close by reiterating our belief that the external headwinds we're facing right now are largely transitory.
We remain confident in our ability to achieve our medium term targets of 20% to 30% net revenue growth gross margins north of 60% and our direct vertical channels and adjusted EBITDA margins in the mid to high teens.
This confidence is grounded in a few factors.
On the top line, it's the excitement we feel about our new product road map, especially in footwear.
The performance of our U S business, particularly the Omnichannel flywheel is accelerating with the broader U S retail recovery.
Our conviction that our international business will return to its historical growth rates once the external headwinds path and the potential for third party to be a significant lever of EBITDA accretive growth.
When we look at gross margin our track record of improvement gives us confidence in getting to 60% plus gross margin and our direct vertical channels.
We have a clear path to hit this target through a growth in our gross margin accretive retail and international businesses are strong pricing power. The continued introduction of new higher margin products and the easing of at least a portion of the 450 to 500 basis points of logistics cost headwinds we have.
Faced over the past two years.
Finally, we are committed to profitable and responsible growth through a disciplined approach to SG&A balancing the top and bottom lines.
With that let's open things up to Q&A.
Thank you and as a reminder to ask a question simply press star one on your telephone.
Through all of your question press, the pound or hash key.
Your first question is from Matthew Boss with JP Morgan. Please go ahead.
Great. Thanks.
So as we think about the.
The new fiscal year guidance relative to the past and implied second half sales growth an acceleration I think up to the mid twenty's or low <unk> CAGR.
So I guess, what gives you confidence in the second half re acceleration what are the drivers that you think remain in the back half of the year in terms of your confidence as we move forward.
Hey, Matt Thanks for the question, Yeah going back to what we said on the script Theres really a few things there.
One we do have a strong product pipeline some of which is rolling out now and will continue to roll out through the balance of the year. So we feel good about having that tailwind behind us. In addition, we are going to have more stores.
Which is certainly going to help the growth on a year over year basis coming along with more stores than is that increased velocity of the omnichannel flywheel that we're saying and you saw that even show up on our U S business results in Q1, and then lastly, we are going to continue to have a little bit more on the third party side, while it's still a relatively small overall sales volume it does help.
On a year over year basis in the back half of the year.
Great and then maybe just one follow up on the margin front from a promotional or pricing perspective.
You noted that Youll continue.
Continue to utilize promotions.
Are you seeing anything from the competitive backdrop.
Promotional landscape.
Any pushback from your customer base on pricing.
Just any larger picture thoughts on pricing and promotional activity would be helpful.
Yeah, I'll touch on the price piece of that and Joe If you want to add anything on that sort of broader competitive landscape like I would tell him comment on the call that this is now the second price increase we took we took a more modest one last year in August this one was a little bit.
A more substantial we haven't really been able to observe any overall drop off in demand. It's pretty early that went in obviously and by early March.
And I think that just speaks to the power of the brand the quality of the products you know things like the high net promoter score tell you that people really value overall, what youre, giving them. So we're not seeing a ton of pushback in that regard on the price increase again early days, but that's how we're holding that Joanna if there's anything you'd want to add on the broader landscape when it comes to markdown.
Our promo I do think I mean, we've seen some increase in promotional activity across the industry.
And maybe theres, a little bit of impact on our business, but by and large where what we see with when we've used selectively use promotions in the past the customers that we acquire have been fantastic and really match the LTV curve for everything that we've seen from our full price customers and so we do think that it's a really interesting leg.
<unk> as we scale to make sure that we can.
Selectively continue to selectively use them and do it in a way that's brand accretive so we're.
We're really just heads down and focused on our business and making sure we manage our inventory to a really clean position.
And keep using that as a great lever.
That's helpful.
Matt.
Your next question comes from Alex <unk> with Morgan Stanley . Please go ahead.
Hey, guys. Thanks for taking the question I just got a couple for you.
First is on <unk>.
How are you guys talked about the second quarter guidance in the press release. It says that you expect the majority of the kind of downward.
Full year to be in the second quarter can you just walk me through what exactly that means does that mean, what happens or anything in the second quarter that kind of fall off in the back half.
Yes, I think most of that commentary is related to where we're seeing the biggest impact to our business, which is in the international segment and if you look at.
The impact on the invasion in Ukraine, we saw that happen kind of for the bulk of it in March so far and that it continue to extend into April and to today, but we already see signs of that impact on consumer demand receding to a certain degree so I think.
Yes.
Relative to the status of that complex, we do see trends already returning to somewhat of a positive direction.
And in China, the restrictions from Covid I mean people have been in their homes locked up inside for 45 days now and so this is a REIT that's in Shanghai, specifically, obviously, that's starting to extend that to different locations and we've modeled in some impact of that continuing for the remainder of the year, but.
So the severity that we have that we've seen and we think that that's going to be a bulk of that is going to impact in Q2, just because of the timing of when those when those occur and then the last piece out to just the FX rates, who are using the latest forecast we have from all your peers on the banking side and factor that into the guidance that we provided as well.
Alright that makes sense, maybe one more quick one is just on your inventory composition. How are you guys feeling about where it stands.
<unk> impacted by any of the Lockdowns in China or in other regions right now.
So yes, I'll take that this is joey.
The supply chain impact for upstream is.
We continue to navigate this really well and this has been a strength for us over the past year navigating through a really tumultuous environment in Asia in particular with varying degrees of shutdowns, we've effectively moved out all of our footwear.
<unk> from China. So we have really no tier one facilities operating in that country to manufacture footwear.
And so as a result of that we don't see much impact to our supply chain in terms of these recent restrictions in that region.
So most of our production is tablet split between Vietnam, and Korea with care, which are firing really well and the government has responded.
Secondly, in terms of combating COVID-19 and applying much less stringent restrictions there. So really good there. The story is really on the demand side in China.
Upstream perspective, and what's happening what's happening in that conflict.
Great that's super helpful. Thanks, Alex.
Yes, we will talk to you later.
I'm sorry. Your next question comes from Lorraine Hutchinson with Bank of America. Your line is open.
Hey, guys. This is Chris on for Lorraine.
So a couple of quick questions. So it sounds like youre expecting roughly breakeven EBITDA during the back half of this year. So given what you know today do you still remain confident reaching breakeven or better adjusted EBITDA on a full year basis next year and can you just talk through how your partnerships, Switzerland on public plans will contribute to this outlook.
Yes, so just to clarify on your first question, Chris I don't know that we've given in 2023 guidance.
On EBITDA, so I think thats, probably lessen some of the analysts' models in the consensus models I think if you do look at the back half of the year, though getting to breakeven on adjusted EBITDA is a big milestone for us in the back half of 2022.
And I'd say, we'll continue to update investors on the path forward from there I think overall the message you want people to kind of really understand I touched on this a bit in by 2020 guidance is.
Looking at this as a path of responsible growth balancing the top line and the bottom line of the P&L that means when there are still many external headwinds are facing we are being a bit more cautious on some of the spend that we're doing on the SG&A side and we'll continue to balance our cost as want to make sure that message kind of land loud.
Unclear.
In terms of the impact on third party I think Joe.
Joe and I, both touched on this but we really view third party at the profitable marketing channel for US. It should have good flows there as the as the business continues to ramp up.
So I think that both helps the back half story, though the overall impact on the business is pretty small, but as that business accelerates. We do really expect it to have a positive impact on the overall financial profile in 2023 and beyond.
Alright, Thank you guys.
Your next thanks Kurt.
Bob <unk> with Guggenheim Your line is open.
Hi, good afternoon two.
Two questions from me.
First one is can you talk a little bit on sort of brand awareness and any progress that you think youre, making and I think the second one is similar around can you just talk to.
Interest levels in a sustainable fashion sustainable footwear in terms of changes that you're seeing or any data around.
That level in the category would be pretty helpful to us.
Sure.
So yes, I think awareness is not a figure that we would recommend looking at on a month to month or a quarterly basis, but kind of directionally over time, what we're looking to do is increase from low double digits, which we kind of.
Suggested we grew from 22020 to 2021 cut up into low double digit we're continuing to see that trend really positively and this is all about using that flywheel of distribution and then great brand.
Great brand building techniques around partnerships and other campaigns that we're running so it's all about methodically building that with stores with great marketing and as we're doing that we're seeing not only good awareness lift but also good awareness left and the right vector so that means that people think that we're in.
Aligned to what we're positioning the brand around supernatural comfort as well as our leadership position in sustainability.
And so all of Thats, all thats trending really well of course, if you look at specific geographies. There is variance across those and also where you see the highest.
The highest concentration of stores youll see the highest concentration or the highest level of aided awareness and that speaks to that third party strategy, where when we selectively layer in those partnerships not only is that just great topline and bottomline growth because of the great EBITDA flow through but it also just lifts awareness and we expect that to really.
Catalyze better efficiency on our marketing for our direct channel. So that's kind of the overall picture on an awareness and then I would just say I mean, maybe I'll hand, it over to Tim in a minute for for some highlights on what we've done in the past quarter or past few months in terms of brand awareness, but we continue to see that consumer.
Are gravitating towards brands that speak for environmental values, we do not believe that they will buy products just because of that they have to be phenomenal products every bit of our energy is focused on making great products not just sustainable ones, but we do increasingly believe that fantastic products to also have to be sustainable.
And we see that in the consumer data and that trend has continued to.
To grow as we as we built this business frankly faster than we have even expected.
Youll see us double down on marketing campaigns that speak to this and really emphasize that through every every touch point, whether it's in store in third party or on our digital platform.
Yes, I'll just add reinforcing the point the tree floor.
Recent product product release from last week is powered by a sustainable material innovation, but it is better. So I think we've got consumer research is saying, yes sustainability matters, but it's only in service with better product experiences and that's our focus and I think in performance and in the Florida. I think is a great example of us executing that at a very high level.
Alright, Thanks Pavel.
All of that.
Thank you. Your next question comes from Mark <unk> with Baird. Your line is open.
Good afternoon, and thanks for all the details this afternoon.
So.
Points of the revenue guidance.
20 million I think you estimated the impact of international is 15% to 20. So could you just clarify has there been any change to your underlying revenue outlook for the U S.
Seems like you saw some really nice momentum in the quarter I guess Im wondering if youre seeing any signs of that.
The rising energy prices and stock market volatility et cetera impacting demand for the brands domestically.
I'll start on that market and turn it to Joey talk about the consumer debt because the short answer is.
No we haven't seen any sort of drop off an expectation in the U S. We feel really great about that 35% growth that we saw in the US that tells US. This long term thesis is intact. That's what gives us confidence around the medium term targets Youre question on here, we lowered the midpoint by <unk> <unk> like I said in the script, we estimate the impact of <unk> 15 to 20 million.
And we are taking a cautious outlook as we are dealing with jet them like open ended situations here with these external headwinds so that hopefully marries up kind of the model on the math question. There are a few of alternative to Joey to talk a little bit about the consumer landscape in the U S. Just supporting their statements that Mike just made the U S consumer has already.
Taken a little bit of a hit in terms of consumer confidence that we just see and not in our business necessarily but in that in the macro numbers and so when we look at our business internally, we actually see much more tailwind.
See impact from inflation or anything that where we're reading about in the newspapers.
People are coming back to stores, we're seeing that that traffic pick up markedly and that gives us the confidence to kind of reaffirm and restate that we can hit those those near term.
Unit economics that we mentioned.
The formal remarks.
And lastly, I'd say as people get in get out and about and activity picks up as travel picks up we have the product that people want we are this perfect blend of performance comfort versatility in style and we are meeting the moment and that's to the point that I made earlier, the fact that as Covid received in our rearview mirror.
This is we're much better have a choice.
So, whereas COVID-19 restrictions creates some headwinds.
When we come out of it we see just significant tailwind that gives us a lot of confidence in the U S. Consumer today and we've seen this historically in international markets when restrictions get lifted the business picks up significantly and in a sustained fashion.
And that speaks to some of our our confidence despite ongoing restrictions in international markets that we think theres going to be some pick up in the back half.
Thank you and as a follow up.
Product introductions in recent months with the trail.
Two in the apparel, which you spoke to can.
Can you give us some color on new versus repeat customers that are purchasing.
Both new innovations what does that mix look like relative to historical product introductions. Thank you.
Yeah, Mark we don't give that out on a quarterly basis that would just tell you again remember we're only a six year old brand here. So we are still acquiring a bunch of new customers doing that at a very healthy and very profitable clip, but just by the nature of things over time more of our sales are going to continue to come from repeat customers and I think Tim and the team do a really nice job.
On the product side of balancing new products that bring in new customers that launches into some of those new categories. Like you referenced but also bringing exciting news and energy into the core of the product pipeline and that's always our how we think about the balance on the product pipeline.
Best of luck.
Alright, well childhood later mark thanks.
Your next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.
Hi, good afternoon, everyone.
Do you think about the price increases that you've taken so far.
Any additional price increases go through.
For the year.
Or does it differ by category and then secondly, with the new.
Gross margin guide for the year of 51% how much of an international gross margin headwind is still.
Given I believe that the first quarter was only around 20 basis points. Thank you.
Thanks, Dana I'll take the first one and pass over to Mike on margin for pricing by and large with the action that we took in March is what we anticipate for the full year, but that's really an architecture that we set up and if you kind of parse through what we did there there's varying levels of price across materials.
Yeah.
So we are differentiating to the consumer specifically on the quad.
Quality and price value that consumers should expect buy material and then and then similarly on the performance first lifestyle sites. When we add in technical features on our performance product those are going to have an elevated price as we're packing a lot more technology and cost into the bill. So that architecture has now been established as we layer in new.
Products like the Flyer.
We're doing that will fit into that architecture. So some of that impact in that pricing change will flow through new products as well and you can see that the fire at 160 Bucks is the most expensive product that's kind of a core offering that we've ever introduced in the line.
So there is no plan for any further price increase in 2022 and then on your gross margin question. Dana If you go back, though and kind of walk through and unpack the two factors versus our prior gross margin guidance.
Bigger driver here is less demand from international and when I talked about the other external headwinds at Sep was 200 basis points in our prior guidance.
Now, it's 250 to 300 basis points.
Mid point of the gross margin.
Now about 200 basis points lower you can kind of hold in your head that roughly kind of a third of it comes from the stuff. That's on the logistics and distribution center side and the rest of it is coming from the international demand being lower than what we have.
It would've been thinking in the last guidance target.
Got it and then just on the third party distribution.
Cost to get that up and running any way that we should think about how we should think about that and should we expect third party partners to be added this year or is it this year.
Youll hear more from us in the subsequent months.
We are going to be selective and really methodical.
How we grow this and we don't expect a particularly material impact to 2022.
But we do think that that will start to really provide a catalyst.
In and of itself and then also hailing into the direct business starting in 'twenty. Three so these partners that you'll hear us announce in the coming months are really important partners that we're going deep and we think they are all strategic brand building partners for us.
So that is so that's kind of that's the high level and again, Mike touched on earlier that these are just really nice awareness.
Great catalysts for FERC growth and this another consumer touch point.
And in terms of the cost to stand it up look we built this business into multi hundreds of millions of dollars of sales from just the direct channel and we've created a product engine that can support much more than that and so the cost of layer on.
Third party partnership like this is really just a very small sales organization and the operations behind that to make that work. So we've largely laid the groundwork from an infrastructure perspective, whether that'd be finance, our technology and there is just a really thin layer to add and that's why we're quite confident in the flow through to EBITDA is going to be very attractive and provide really.
Nice bottom line growth for us as well.
Thank you alright, Thanks, Dana we will talk in a little bit.
Your next question comes from Jim Duffy with Stifel. Please go ahead.
Thanks, Good afternoon, thanks for taking the question.
I wanted to ask a little bit more about store performance versus 2019, I recognize there's a lot of newness in the store fleet, but can you speak to trends, you're seeing in urban versus more suburban or smaller market locations.
And then specific to the European business was the March pressure that you saw in retail productivity digital or does it really come through in both channels.
Thanks, Jeff.
So on stores there is really a lot of noise to compare all the way back to 2019.
I think we had probably just a handful of stores all in dense urban environments.
At that point and so as I think everyone can attest to now that's in retail the densest urban environments High Street locations have had the slowest recovery in general as a result of COVID-19 restrictions and people's changing locations and behaviors.
And we were we adapted to that pretty quickly. So Gary covered we started signing leases and in.
In lifestyle centers in suburban suburban malls and whatnot. Those are performed really really well and those have proven to be much more resilient regardless of the consumer.
Behaviors of restrictions in the regions and whatnot. So we are continuing to.
We are continuing to focus on those.
Those types of real estate transactions, when we're signing leases and we're seeing quite a bit of positive uplift in those as we as we startup new stores as well, but that said looking at the flat iron launch that we just did about a month ago. It's been a really really fantastic launch for us for a new store and gives us a lot of confidence in the comeback for Manhattan.
Which is I think a really nice bellwether for a lot of urban environments.
If you couple that with our store in Soho, We're just seeing a nice trend and that gives us a lot of confidence to hit on hit on those targets we mentioned.
The euro.
Impact.
Retail our E comm and yes, the mix is really heavily slanted to digital in Europe at the moment and so.
It's hard to parse it out completely there is also <unk>.
Quite a bit of heavy restrictions on some of the stores during periods.
I would say, it's kind of broad based.
An impact of the consumer based on incredibly high gas prices, what that does to the psyche of the consumer and we've seen that really peak and then start to show some resilience against.
Helpful. Thanks, I'll leave it at that.
Thanks, Tim.
Your next question comes from Dylan Carden with William Blair. Please go ahead.
Yes, Thanks, a lot just curious Mike.
Thinking about sort of back half breakeven on the EBITDA level.
A lot here and sort of beyond your control as it relates to international outlook and status quo.
What levers do you have that you feel are within your reach I mean is that a factor of third party acceleration retail maturity.
Marketing leverage more broadly.
I guess what control do you have in your confidence level there.
Yes, I would go back.
The comments I gave about the top line kind of basically getting into the media the middle part of our medium term range of 20% to 30% and the drivers behind that again are the product portfolio we have.
In place there.
Retail, having more retail stores on a year over year basis, that's going to certainly help the increase in the velocity of that Omnichannel flywheel. Although we continue to see and then the fact that third party will certainly kind of help with that as well as we go through the back half of the year. So I think all of that is the biggest thing that kind of gives us factor. It gives us confidence I think then.
Next factor than <unk> is also the fact that like if things were going to accelerate beyond this cautious outlook that we're talking about on this call Iga didn't you hit on a couple of the key ones, especially like if the retail recovery in the U S is an even faster pace more broadly than what we're starting to see now that obviously has a lot of benefits for all of our as you know our model well. So I think we'd have some.
Confidence in that if that got there.
The other thing I would just tell you when we think about you started out with EBITDA breakeven if not solely just a sales growth story for EBITDA breakeven I referenced again in the full year EBITDA guidance, we have trimmed back a little bit on our SG&A spend which I think is the responsible thing to do in an environment like this.
If necessary there is more we would revisit there and it is not a pullback in marketing next feel really good about our marketing efficiency in our marketing spend and what we're doing brand building wise, but I think in our business. Even our size. There are levers we can certainly pull as we balanced that top and bottom line and gets the responsible growth we've talked about.
Understood. Thanks.
Your next question comes from John Kernan with Cowen. Please go ahead.
Excellent good afternoon, everybody. Thanks for taking my question.
Mike maybe you could talk to the flow of inventory as the year goes on it's up 70% year over year was up 80% in the fourth quarter.
<unk> kind of easier how should we think about.
The growth of inventory on the balance sheet.
Yeah, I mean, the big.
The two big X factors there are certainly there.
<unk> time of in transit inventory.
Starting to see that come down a little bit, though obviously the different like news on China on a day to day basis could have some effect on overall ocean shipping pace.
So that's certainly something we're watching really closely and then if that has any impact on the actual like kind of shifting cost itself. I think those are the two big factors I think demand wise clearly, we're going to be in a position, where we're going to continue to sell through the product we have balanced that with the new product launches. So we're not giving sort of formal guidance on what we see.
To happen with inventory over the course of the year, but I think those dynamics I just laid out should we should be in a position where as it laps do get easier to your plant and the inventory side, we should start to see that come down.
Got it next question just a follow up.
On.
The long term gross margin outlook there has been.
Quite a bit of inflation since the IPO theres a lot of product cost inflation.
Collation.
Labor inflation in stores and Dcs I'm, just curious has the amount of inflation change that's changed has it changed the way youre thinking about long term gross margin potential is there anything structural here.
Thank you from achieving the prior gross margin targets that you put out obviously, but I think investors across the sector right now.
Really concerned you look at valuations across the group levels.
Seen in a long time and I think there's there's concerns about the structural margin expansion story across the whole sector. So maybe you can talk to how you are going to offset some of the.
Inflationary headwinds as we go forward.
Yes, I think theres two pieces in there John so.
Part of the question started Youre right I do think there is more inflation than when we were on the road show last summer I also think we've taken more price and like I said earlier in the call being able to pass that through successfully we have a tremendously strong brand that commands the price and great products that people love and come back and repeat for and Thats an advantage a lot.
Others don't have and I think people, who believe in the long term story for all burns anchor it in those beliefs right. The unique position of the brand and the quality of the products.
I think that helps us offset some of that and then to Joey's point.
With which we're launching new products launching in different category at the higher margin, we get from those products I think those are huge factors in all of those so even in my kind of new news from the time of the Roadshow.
The thing again I tried to do a little bit of my many gross margin walk through at the end of the call there, but if we think about the factors that will take us from where we are today in the direct channels to where it will be over time again, the gross growth in the gross margin accretive retail and international businesses. That's a big one the strong pricing power, which I just referenced that's certainly a syndicate.
Factor the introduction of these new higher margin products and then when you look at that overall inflation story versus two years ago. We're announcing 450 to 500 basis points of these logistics cost headwinds over the past two years I've said. This repeatedly we don't have to get all of that back, but we get part of that back over the next few years, that's another big step forward as well in our <unk>.
You hit that 60% plus gross margin.
Got it thanks for all the detail Mike.
Yes, you got it John will talk to later.
Your next question comes from Tom Nick <unk> with Wedbush. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my question.
Mike I guess, some modeling Baidu show.
When we think about the gross margins for the year like how do we kind of think of the quarterly cadence.
During the year.
Historically, you've kind of had this.
I guess head and shoulders kind of thing where you saw seasonal spikes in <unk>.
Q2, and Q3 should we assume that.
You are kind of more like in that.
50, 152% ish range.
For the remainder of the year.
Yes, well first off Tom welcome to the call and welcome to the coverage group. We're happy to have you on looking forward to spending more time with you as we as we go forward.
If you look at what our historical seasonality of gross margin has been to your point I think that's probably a pretty decent indicator, though I would tell you there's certainly pressure.
In Q2 on gross margin, both because I think the external impacts on sales and then some of the ripple effects does having a gross margin are most acute in Q2.
So to your point in the back the back part of the year, we were at 51 nine in Q1.
I think the back part of the year, obviously, it's going to have to be built.
All of that to get to the 51, one in I think it probably looks fairly similar across the.
Three quarters, Q2, Q3 and Q4.
Got it and I think thank.
Thank you very much for the well wishes.
Happy to be aboard.
As far as store growth goes I think last call. You said 16 to 17 stores is that still the plan for this year.
Some of the stuff that you're seeing in India.
The international markets change your.
Desire or willingness to open.
<unk>.
International markets.
So I'll start on the guidance point at 16 to 17 of them that was heavily weighted towards the U S and Joanne I think has.
Beating the drum loud on this call that we're happy with the results we've seen in the U S. Overall in Q1, and we feel good about the balance of the year and certainly feel good about retail so it doesn't change our perspective on 2022 on the store target Joe maybe you want to touch a little bit more on international and the different levers of growth maybe reiterate some of what you shared earlier on the call.
I think we've we've continued to skew very heavily to the U S store portfolio and we will do that for for the foreseeable future. We do have opportunities in different regions and sometimes that does require a different format in terms of a lower cost build out just based on whether the lease structures on a shorter term as it is in China.
Those are three year leases.
Versus versus the five or 10 that we can we can do in Europe versus the 10 plus in the U S with options to extend so it's all about how the lease dynamics play how the halo across Omnichannel impact the go to market strategy in each region and we're trying to be dynamic and be right size for each of the regions that we plan.
Alright comment I think we have time for one more question.
We'll take our final question from Ashley Hogan at Jefferies. Please go ahead.
Hi, good afternoon.
For Ashley Thanks for taking our question.
You've answered most of them just wanted to ask one on international I believe you said that most of the top line impact was due to China versus Europe could.
Could you just confirm that and didn't know if you could quantify anymore.
Yeah first off welcomed Ashley and Blake as well have you on the coverage group happy to have you on the call as well so looking forward to working with you and the team a little bit more going forward just to clarify the comment I made I think we were trying to convey there was that the bulk of the impact was from the combination of <unk>.
And Ukraine, we didn't break out the difference between those two those two factors and the other factor that was the impact of FX.
So that was the other piece I think what I, if I add let me put my own script here just for a second.
We had talked about the fact that.
When we find it.
Yes.
Two thirds of the impact is due to Ukraine crisis, and China's COVID-19 restrictions and one third due to FX rates.
So that was what we had bought we had shared in the re recorded remarks, and we're not breaking out any more between Ukraine and China.
Got it thanks for that and then last one was just on marketing that you've talked about it already but.
Should we expect the ratio as a percentage of sales to stay around 22% for the rest of the year and then I don't know if you could also maybe talk about how much of that in terms of dollars is U S versus international.
Yes, we don't break out the dollar piece on that in U S versus international.
On the leverage point, we have gotten leverage on marketing. The last couple of years certainly did in Q1, we continue to expect to get leverage on the drivers of that leverage our.
Increased marketing efficiency I think our marketing teams have done a phenomenal job of driving.
Marketing efficiency number two the channel mix certainly helps us raising awareness both through our own direct retail channels and then as we ramp up one third party, that's certainly going to drive awareness for us with no incremental marketing spend and then the last piece of it is just the pace of growth overall is going to be the big.
The big driver towards that so we feel good that we'll continue to get.
Get leverage on that line.
Thanks, so much I appreciate it alright, well. Thank you so much everybody.
Thanks, everyone.
In our remarks.
We'll just close out with a.
A couple of comments.
I think we've outlined really clearly that particularly in China as well as in Europe, the world and people in those regions are dealing with some really unfortunate circumstances, whether it be restrictions around COVID-19 or the conflict in Ukraine.
And we feel this internally as well our people in Shanghai are directly affected from this.
And yet we know that these things will pass.
And we focus on what we can control right now we have a beautiful product roadmap, that's coming out and encourage everyone to get their hands on a pair up Flyers on may 17th when we launched <unk> and.
And that's just that's just a good starting point for us and what we have on our roadmap coming forward and I think that coupled with the strong distribution model and the strength. We've shown in the U S gives us a ton of confidence in our long term model and being able to hit all the financial outcomes that we said.
And we pointed to you guys too as well as just in general on the confidence that this is a brand that really stand for something meaningful that resonates with consumers and we're just excited to keep building. This business. So thanks again and look forward to talking with you all in the quarter.
And with that ladies and gentlemen concludes today's conference call. Thank you for participating and you may now disconnect.
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