Q1 2022 Traeger Inc Earnings Call
Contain forward looking statements that are based on current expectations, but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein.
We encourage you to review our annual report on Form 10-K for the year ended December 31, 2021, and our other SEC filings for a discussion of these factors and uncertainties, which are also available on the Investor relations portion of our website.
Should not take undue reliance on these forward looking statements, which speak only as of today and we undertake no obligation to update or revise them for any new information.
This call will also contain certain non-GAAP financial measures, which we believe are useful as supplemental measures. The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained here into such GAAP measures are included in our earnings release, which is available on the Investor relations portion of our website at investors that trigger dot com now I would like to turn the.
Call over to Jeremy Anderson, Chief Executive Officer will trigger.
Thank you Nick Thank you for joining our first quarter earnings call today, we will discuss highlights from our first quarter results and share our progress in executing our long term growth strategies.
I will then turn the call over to Don to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance.
The trader team continues to work relentlessly to deliver an incredible experience to our consumers and to drive forward. Our key long term growth initiatives in the first quarter, while we faced several near term headwinds, including continued inflationary pressures and supply chain challenges a highly dynamic consumer backdrop.
And tough year over year comparisons we are pleased with our execution, our first quarter sales of $224 million were down 5% versus prior year with particular softness in our gorilla business with revenues down 16%.
First quarter year over year growth was negatively impacted by lapping a period, where our retail partners were aggressively restocking channel inventory and consumer demand was enhanced by government stimulus.
Looking at first quarter is three year CAGR.
Of 32% and grow revenue CAGR of 27% demonstrates the strong gains at trigger has experienced since 2019.
We're pleased to have exceeded our first quarter guidance, which we provided in March.
<unk>, beating our quarterly guidance, we are maintaining our full year 2022 sales of EBITDA outlook. There are three sub growth factors or touch on as it relates to our reiteration of guidance.
First our beat relative to guidance in the first quarter was largely driven by timing of shipments of grills and was not based on a change in underlying demand relative to our assumptions when we shared our outlook.
Second we remain cautious on the macro environment with continued pressures on the consumer and tightening financial conditions.
As well as a shift in consumer spending away from durables towards services.
Lastly, we are in the beginning of our seasonally strongest selling period with their most important weeks at retail ahead of US. Therefore, it is early in the year to adjust our outlook.
Despite near term headwinds our brand health has never been stronger our consumer continues to increase engagement with trager with connected cooks continuing to grow in the first quarter led by an incredible 55% increase in connected cooks and Super Bowl 2022.
Moreover, our customers continue to tell their friends and family that they love their trager and our NPS score is now at an all time high well above other players in the outdoor cooking category and in line with great consumer brands like Starbucks Airbnb and Netflix.
The excitement and passion around the trigger brand continued to build momentum as we approach our summer selling season in March we launched our new Timberline Grill, which is trailers most innovative product since I've been with the company and is truly a game changer in outdoor cooking.
The launches reception for our consumers our retail partners at outdoor cooking influencers.
Has been incredible and cement trade your status as a disruptive force in the grilling category looked.
Looking forward, we are optimistic about our plans as we head into the summer grilling season.
Smoking, a 15 pound brisket overnight for a block party or using one of our fast and easy dinner recipe ideas per week night meal to be enjoyed outdoors with her family.
Wood pellet grills versatility consistency and ease of use make trade with the Goto grill for the summer.
Similar to last year, we kicked off at the beginning of the season with the promotion this year setting around mother's day was $150 off select grills and $2 off pellets and sauces.
Promotion was a great gift, giving opportunity and directly address consumers looking to buy a trigger grill or consumable ahead of the summer.
On May 14, we will be celebrating our fifth annual trade or day trader day is dedicated to bringing the global trigger community together to cook outdoors and to share Woodside foods with friends and family as they celebrate the start of the grilling season.
<unk> and Influencers share pictures and videos of their meals on social media and can wind prices based on their spread.
We expect significant growth in consumer engagement, especially after two years of virtual trager days.
We remain highly enthusiastic about the enormous upside potential for the <unk> brand and are confident in our growth strategy, having said that as we discussed in March on our fourth quarter earnings call. The near term environment remains highly dynamic we are seeing numerous companies across multiple parts of the consumer set.
Speak to a less favorable backdrop for the consumer with inflation and geopolitical turmoil impacting consumer confidence. Furthermore, as the pandemic subsides. It is becoming evident that the consumer is shifting spend away from durable home related goods towards the leisure and travel which is also negative.
Impacting the grill category.
Our fourth quarter call, we discussed Havent seen a deviation from our forecast and sell through trends at retail in March which coincides with the worsening geopolitical headlines and a sharp rise in prices at the pump.
Since then sell through trends have remained volatile but are trending in line with the expectations. We provided when we gave our 2022 guidance.
It is important to note that it's still very early in the year with our highest volume sales weeks at retail ahead of us in fact in a typical year, we would expect retail sell through volumes between now and labor day to make up nearly 50% of our yearly sell through.
In terms of supply chain dynamics as we have discussed on previous calls given the size and weight of our product triggers, especially sensitive to the cost increases in freight and transportation that many companies are facing today, while we do expect that increased freight costs will normalize to some extent over time our team.
Remains hyper focused on driving costs out of logistics supply chain and manufacturing.
Specifically earlier this year, we formed a gross margin task force led by our Chief supply chain Officer, Jim Hardy to identify and execute on cost savings initiatives across the supply chain.
While it is early in the process. We are encouraged by some initial learnings and wins and we expect to leverage efficiencies driven by this team over the medium to long term.
Critically.
While the team is focused on driving cost savings, we are committed to doing so without compromising the quality of our products or our consumer experience.
Furthermore, given cost increases and the uncertain consumer backdrop.
Managing our expenses to better align the cost structure to the current environment.
This includes reexamining, our investment spend for the year and reducing deferring and re prioritizing certain expenses, we remain committed to fueling our long term growth and continually improving our product and consumer experience. However, we believe that thoughtful cost discipline is appropriate given the highly.
Dynamic backdrop.
I want to shift my discussion to progress on our key strategic growth pillars, accelerating brand awareness and penetration in United States disrupting outdoor cooking through product innovation driving recurring revenue through our consumables business and expanding the trade your brand globally.
<unk> brand awareness and penetration in United States remains our largest single growth driver. It is important to note that while door growth in the U S. As a long term opportunity for trager, increasing penetration of our existing retail footprint is at the core of our growth strategy in the first quarter, we reset roughly 350 <unk>.
Stores at the home depot with an expanded assortment of krager products and improving signage and fixtures Inc. As.
As we have noted these locations have a larger assortment with more than double the number of krager skus and a significantly improved brand presence, which allows these locations to drive more than twice the sales productivity for trader products compared to the average home depot doors.
We will continue to drive future growth and home depot by increasing our product assortment across stores, particularly those with minimal brand presence and sales and by investing in visual merchandising fixtures and retail training.
On the marketing side in the first quarter, we launched a new brand campaign. The trigger Hood tails featured in TV spots and digital launch. The campaign focuses on funny family moments with a trader spin, but I would encourage everyone to watch these entertaining commercials on our Youtube channel.
Going into the summer season, we will focus our media efforts and the social digital and connected TV channels.
Lastly, our DTC business continues to gain momentum and in the first quarter trigger Dotcom U S saw solid growth.
With increases in both returning customer transactions as well as new customer transactions with.
We launched several new products across pellets consumables and apparel in our DTC channel, including need switch a limited edition run of Trager rented joggers.
Perfect dance to where when drilling on a trager consumers love the idea and meet sweat sold out in eight hours.
These types of creative and limited run offerings bring significant energy to the trigger brand.
Our next growth pillars product innovation, the launch of the new Timberline and timber line Excel in March was an enormous occasion in the history of the company our new timber line brings incredible innovation to the market offering consumers, an unparalleled level of consistency convenience and versatility.
Stainless steel installation.
Redesigned heat delivery system allow for hotter temperatures and improves sealing the grille includes the first outdoor certified induction Cooktop, which provides fast television for Saatchi submarine sources, our CRE as well as the proprietary grease and ash CAG system for easy clean up a new Wi Fi enabled <unk>.
Troll are for precision temperature control and two wireless meter probes for easy monitoring of internal temperature among other innovations.
There is nothing else in this space that has all the innovative features that are included in this new timber line.
The excitement around the launch of the new timber line was palpable with $1 2 billion press coverage impressions and $70 million of Influencer gribben impressions in the first week post launch.
The reception of the new Timberland has been fantastic with significant excitement from our retail partners, who have September lying hero moment fixtures in over 1000 doors as well as strong advocacy from Influencers like Sam the cooking Guy that did minute knee church, and how to barbecue rights Montgomery.
Importantly, we expect the innovations introducing this product will power several years of upgrades and newness as technologies and features cascade through the rest of the trigger product assortment.
Shifting to our consumables business, we remain focused on driving recurring revenues through expanded distribution and new product introductions in.
In the first quarter, we added 2200 grocery doors, where trader rubs and sources are being sold led by a rollout of Kroger.
We saw strong growth in our rubs and sauces business in Q1, driven by this increased distribution.
We are also increasing distribution of our pellet business and added 600 additional grocery doors, where pellets are sold.
It is early in our consumables expansion at grocery. However, we are encouraged by early results and continue to believe that the consumer wants to buy a consumables, where they shop every week not just where they are buying their grill.
In addition to distribution growth, we continue to expand their consumables assortment with new innovation.
We launched two new rugs that anything wrong in the perfect for club and two new sources liquid gold and show me the honey.
Moving to our final growth pillar, expanding the trigger brand globally.
Our international business had a strong first quarter with healthy growth, both in Canada and Europe .
The quarter benefited from strong pre book and early season load ins and our team did a great job delivering product on time and in full to our international retailers and distributors in the first quarter, we saw deceleration in sell through.
Our international markets as we believe consumer sentiment and global geographies has been negatively impacted by the war in Ukraine and inflation.
To the U S. We've planned our international business more conservatively for fiscal 'twenty, two based on the macro backdrop.
Would note we have no direct exposure to Russia, or Ukraine, and the European market makes up well below 5% of our total sales. We continue to see a significant long term opportunity to grow the trigger brand globally in summary, the trader team continues to execute on our growth strategy, which we believe will drive meaningful.
Value for our shareholders consumers and retail partners in the first quarter, we launched our most innovative product in the company's history, which we believe sets the stage for a multiyear innovation cycle and puts us significantly ahead of the competition.
Despite facing near term challenges trader continues to be strongly positioned for long term growth as a disruptor in the outdoor cooking sector.
Before I pass to Richard.
I'd like to thank the entire trader team for their hard work and passion in executing on our vision to bring people together to create a more flavorful world and with that I'll turn it over to Don Don.
Thanks, Jeremy and good afternoon, everyone as Jeremy discussed in the first quarter, we faced several headwinds, which negatively impacted our year over year growth rates and margins. These pressures include comparing against the period when sell in materially outpaced sell through as retailers restock low channel inventory in the first quarter of last year.
Lapping stimulus driven retail demand and uncertain consumer environment and continued inflationary pressures on our supply chain.
Despite these headwinds we are pleased with our first quarter execution as we move into our strongest seasonal period.
Near term environment remains highly fluid we are focused on the things that we can control as well as maintaining an appropriate balance of short term and long term investment.
I will start by reviewing our first quarter results and then we'll provide an update on our 2022 outlook.
First quarter revenues declined 5% to $224 million.
Driven primarily by a decline in grill revenues grills.
<unk> revenues declined 16% to $150 million with revenues impacted by lower unit volumes, partially offset by higher average selling prices driven by price increases taken in the second half of 2021 as well as the first quarter of 2022.
First quarter unit volumes were impacted by the anniversary of difficult unit comparisons as retailers are restocking grill inventories in the first quarter last year and sell through benefited from government stimulus.
Consumables revenue declined 3% to $40 million, reflecting the lapping of the strong 72% increase in the first quarter of last year with a decline in our pellet business somewhat offset by growth in our rubs and sauces business.
We note that the decline in first quarter consumables revenues of 3% represents an acceleration from our fourth quarter is 19% consumables decline.
Finally, accessories revenues increased 109% driven by incremental revenue from the acquisition of meter and continued strong growth in trade or accessories.
First quarter revenues beat the high end of our guidance by $12 million. The upside in sales was largely driven by timing of shipments of grilles relative to our plans when we guided in March as we released orders for certain accounts earlier than expected to ensure on time delivery given continued constraints in domestic carrier capacity as well as.
Earlier load in of our new timber line XL to certain accounts.
Geographically in the first quarter, we saw strong growth in Canada and rest of world while growth in the U S was impacted by the aforementioned headwinds we.
We remain highly optimistic about the long term opportunity to grow traders globally. We are however, planning our international business more conservatively. This year, given the grilling macroeconomic pressures that consumers facing in many of our international markets.
Gross profit for the first quarter decreased to $84 million from $101 million last year.
Gross profit margin was 37, 4% down 530 basis points to last year.
Higher inbound freight costs continue to be the largest pressure on our gross margin and contributed 870 basis points of negative margin impact Andrew.
Amortization of intangible assets related to the meter acquisition was also dilutive to margin offsetting these pressures of margin favorability its 370 basis points driven by our pricing actions as well as favorability driven by a higher mix of customer orders fulfilled via our direct import program.
First quarter gross margin was modestly better than our expectations driven by slightly lower inbound freight expense compared to our forecast.
Sales and marketing expenses were $33 million compared to $31 million in the first quarter of last year.
The increase was primarily driven by advertising costs related to meter, which is not a component of the 2021 comparable period.
Increase was also driven by higher equity based compensation expense of $2 million due to the restricted stock units issued under the trade or 2021 incentive Award plan.
General and administrative expenses were $43 million compared to $14 million in the first quarter of last year.
The increase in general and administrative expense was driven primarily by higher equity based compensation expense due to the restricted stock units issued under the trigger 2021 incentive award plan higher personnel related costs and increased professional services.
As a result of these factors net loss for the first quarter was $8 million as compared to net income of $39 million in the first quarter of last year net loss per diluted share was <unk> <unk>.
Compared to net income per diluted share of <unk> 36 in the first quarter of last year. Adjusted net income for the quarter was $20 million or <unk> 17 per diluted share as compared to adjusted net income of $45 million or <unk> 41 per diluted share in the same period last year.
Adjusted EBITDA was $31 million in the first quarter as compared to $64 million in the same period last year.
Now turning to the balance sheet.
At the end of the first quarter cash and cash equivalents totaled $11 million compared to $17 million at the end of the previous fiscal year.
We ended the quarter with $379 million of long term debt. Additionally.
Additionally.
As of the end of the first quarter. The company had drawn down $47 million on its revolving credit facility and $49 million under its receivables financing agreement, resulting in total net debt of $464 million and.
The net leverage ratio of six two.
It's important to note that our first quarter is typically our peak leverage point given elevated working capital needs ahead of our strongest seasonal selling period with that level of historically coming down thereafter.
Inventory at the end of the first quarter was $164 million compared.
Compared to $76 million at the end of the first quarter last year.
As we have discussed previously the increase in inventory was driven by three factors first given supply chain constraints, we have intentionally leaned into inventory to ensure we have adequate supply.
We believe this strategy is the right one given the supply chain environment remains highly fluid as evidenced by recent warehouse in port shutdowns in Shanghai.
Second inventory costs are higher versus last year, driven by increased freight and input costs.
Finally about $18 million of the inventory increase was due to a meter which is not in the comparable inventory base last year.
We remain comfortable with our inventory levels in balance we are closely monitoring the supply chain environment, and we'll be managing our level of safety stock based on how the landscape evolves over the balance of the year.
Turning to our guidance for fiscal year 2022, we are reiterating our full year revenue guidance of $800 million to $850 million and our adjusted EBITDA guidance of 70 million to $80 million.
Given that the upside in first quarter revenues was largely based on timing youre not flowing through the beat to our full year outlook.
More we remain cautious given the uncertain macro environment and its impact on consumer behavior and confidence as well as shifting consumer spending patterns towards services and away from durable and discretionary goods.
We continue to expect grille revenues to be down double digits in the first half of the year with declining grill revenue growth for the full year and sequential improvement in the second half of the year relative to the first half as comparisons normalized.
On our fourth quarter earnings call, we discussed having seen a deviation in sell through in March relative to our forecast.
At that time sell through trends that remain volatile, but are generally in line with the expectations embedded into our guidance.
Jeremy spoke to it's important to note that our business is fairly seasonal with the next 18 weeks of sell through typically representing nearly half of our yearly sales at retail.
They're early in our key selling season, and therefore will be reading and reacting to your sell through trends during the summer.
In terms of gross margin are reiterating our prior guidance for full year gross margins of 30% to 35%.
Despite modestly better than expected first quarter gross margin.
Hi, Qin environment remains highly fluid and we believe it is prudent to maintain our prior margin outlook we.
We continue to expect gross margin first half of 2022 to be higher than the full year.
Next I'd like to give an update on our gross margin drivers, we expect that inbound container rates will continue to attract about $10000 through 2022, which will continue to put pressure on gross margin rates.
We continue to be focused on working to offset these cost pressures as Jeremy mentioned, we have formed a task force, which is charged with evaluating changes in design manufacturing and supply chain processes.
Higher product margins and lower costs.
We are encouraged by the team's initial findings in these areas and expect that we will begin to realize savings in 2023.
In terms of SG&A, we will continue to rightsize our expense structure to help offset near term topline and gross margin headwinds given.
Given the current macro backdrop, we will delay certain investments that had a less quantifiable in your return profile.
And further we'll be nimble in our approach to managing the P&L.
Our focus is to balance investing behind growth, while protecting profitability and acknowledging the uncertain macro environment.
We continue to feel extremely optimistic about triggers long term growth.
It will disrupt the outdoor cooking industry as evidenced by the successful launch of our new product innovation.
Furthermore, I remain highly encouraged by the long term opportunity to gain market share by increasing penetration within the U S.
That we will open the call to questions operator.
Certainly if you would.
To ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one we kindly ask that participants limit themselves to one question with one follow up today before reentering the queue.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
I'll pause here briefly ask questions are registered.
First question is from the line of Simon Siegel with BMO. Please proceed.
Thanks, Hey, guys good.
Good afternoon, so Jeremy maybe it's early but anything you can speak to you on that sales uplift you're seeing with the 350 home depots that get expanded so maybe just getting some color around what you what you're seeing with those and then how are you guys thinking about the sell in versus sell through dynamics for pellets basically how are you thinking about when consumables returned to growth and just.
Help there thank you.
Thanks, Jamie.
Look we track sell through weekly.
And.
We cut it by by customer by door by region and.
No question, we're seeing a lift in those 350 doors.
The way we have.
We've been seeing this.
We haven't seen this for years.
Every time, we grow assortment, we improved merchandising, we see lift in sell through so it's fortunately a fairly predictable formula to drive growth and we are seeing that lift and it will continue to drive our strategy with whom the but one of the things that we talked about.
In addition to increasing the assortment has been the testing and I would say now investment of.
Sort of store in store fixtures within home depot.
We tested.
About 35 stores last year really liked the return that we saw both in terms of lift a lift in sales as well as <unk>.
Return on investment on the investment in those those fixtures that has.
As continue to rollout there are a couple of hundred in market now and we'll be sort of 500 by end of year and Thats our strategy.
That is I think it's marked in home depot.
There was so much traffic and there is such a conversion opportunity, but it is foundational to our brand in terms of building a branded presence in retail and really capturing the opportunity to speak to that.
The foot traffic walking through the retail.
In terms of.
Tom do you want to hit on the yes. The final question, Yes, we have.
So I'll speak in terms of consumables I would say that the first half of this year is a challenging comp.
Across our different categories, Dave where we're seeing nice momentum on the accessories side in addition to <unk>.
Acquired revenue with meter.
As we look ahead I think you start to see some normalizing comp in the back half of the year and we won't go into detail around guidance, but I guess I would say two things first we expect to see some normalization of Av.
Consumer.
Consumption of pellets as we measure attachment in the back half of the year.
We're lapping two years of elevated it Pat just given the dynamics around the pandemic and cooking behaviors consumer shift to a more normal.
World, where some of that discretionary spend as well as their discretionary time is moving of services I think that will continue to put a little bit of pressure on the comps, but again in the back half. We think those will normalize on the food consumable side I think one of the tailwind that we expect to see over the course of the year has just been growing pent.
Penetration within retail and more specifically Kroger in our grocery strategy, which will buoy up our consumables business through through the course of the year.
Great. Thanks, a lot guys best of luck with your head.
Thanks Simeon.
Yes.
Thank you Mr Segal.
The next question is from the line of John Glass with Morgan Stanley . Please proceed.
Okay. Thanks, very much you talked about the still volatile consumer environment generally on trend, but youre reading and going to react to those what does react I mean, I guess in your minds, what levers do you have if you if we start to see slippage again and consumption of grills, whether it's promotional activity or re examining some price points what are the levers.
You think you have to stimulate demand if if needed.
Yes, I mean I think.
Just stepping back like the growth thesis hasn't changed and we still feel.
<unk> highly confident in the business and it's a long term thesis I think the end year dynamic will require a shift in strategy.
Not necessarily a signal for how we'll manage the business long term, but when you think about and something we talked about on our last call we experienced some acceleration.
And unit growth on the grille side.
Ultimately that correlates to the installed base of grills.
The household penetration that we sort of measure on a quarterly basis continuing to reinforce the opportunity.
We'll be lapping some some challenging comps over the course of this year and obviously we're changing.
And your strategy around how we manage the P&L and more specifically within SG&A, which in part requires.
A renewed focus on kind of middle and bottom funnel investments on the demand creation side.
And that's to really ensure that where we make investments we have a high degree of confidence and to the extent that there is excess capacity.
Within the P&L will look to continue to kind of build top of funnel <unk> rebuild top of funnel given some of the acceleration we've seen over the last two years and so ultimately what I would say is in year.
The strategy will be slightly different than longer term and you will be focused more on performance marketing, where we see high kind of one to one conversion.
Price is always something that we evaluate we really configured a fairly sophisticated pricing strategy internally, where we can stimulate based on historical moves based on the price increases we've made how that could in theory impact both demand as well as mix shift across our products and in turn how that.
Impacts profits.
Our products and in turn how that impacts profits are generally and so I'd say that in your lever is really doubling down on how we sort of shift spend to performance marketing as well as.
Where we're seeing highest returns there and then we'll always evaluate price I think we feel pretty good about our price.
How we've configured price this year, but something that we'll continue to look at you know on the last call we spoke to.
Kind of the maybe the more pressure on the consumer sub $1000 versus above where we have probably more any elasticity. So it's something that we'll continue to evaluate its potential as a potential in your lever, but ultimately it's the long term focus that I think will guide our strategy and coming out of some of the.
In your challenges will will sort of re re re reconfigure our top of funnel strategy build that funnel and continue to execute on the formula that we believe works in and ultimately aligns to our growth algorithm long term.
Thank you for that and just a quick follow up you mentioned the timing of shift shipments, which was a benefit to the first quarter was that the what was the amount of that was that just the overage versus your guidance or could you quantify what that timing timing yeah. It's effectively the overage yep. That's right. It's really a shift between Q1 and Q2 and as we said it's it's.
<unk> two.
Orders that were that had shipped ship dates in kind of early Q2 that we chose to move late Q1, there was sort of on the cusp of the two quarters and Thats really in an effort to ensure we are taking advantage of.
Capacity, which is constrained among our carriers as it becomes available that that was the primary driver.
Thank you.
Thank you Mr glass.
The next question is from the line of Peter Keith with Piper Sandler. Please proceed.
Hey, Thanks, good afternoon, everyone.
Understanding theres a lot of business to be done in the next 18 weeks I guess I'm curious.
Just if things don't go well, how you work with retailers on their inventory levels. So if you have some of your big box players with a lot of excess growth.
Is there any markdown risk do enforce map pricing or is it just simply just be you'd stop shipments. So just kind of let the inventory levels bleed down into the holiday season.
Yes, so one of our core principles is not to be promotional and we've been very disciplined to that.
All between kind of two to four promotional periods per year kind of our biggest promotional period, we're not going to deviate from that we think that drive healthy brand long term, which is why our collaborative planning process, which we've configured internally as.
As we work with our retail partners in lock step to ensure that in channel inventory levels don't exceed a certain range that we're uncomfortable with that holds true and so the goal for US is always to ensure that we don't find ourselves in a position, where we're too heavy on inventory and channel in one quarter at the sacral.
<unk> of another now as we look at the data.
That comes out of our collaborative planning process as well as sell through trends and in channel inventory well within.
A band that we're comfortable with but we are heavier than what you see historically and that's in part driven by our retailer strategy, which has also been to lean more into inventory given the fact that over the last few years. They found themselves in some challenging positions with lack of inventory must turns et cetera, and so.
We watch those closely were a bit heavy but were also ahead of our peak selling season and by no means is it a manageable position even if the trend deviates from expectations in Q2, it's still something that we can manage within an appropriate sort of band.
Of weeks on hand within within channel and believe that it's really a.
A specific issue to Q2 2022 versus something that would linger persist.
Okay. That's.
That's helpful.
Maybe pivoting over to freight so.
You did give the comment that you are factoring in container costs running above $10000 for the year.
What are you seeing as of late with with your container costs has there been any near term relief or you're still above that level.
Yes, no near term relief, but but near term stabilization I think where we are building confidence is that the problem isn't becoming worse, it stabilized which leads us to believe that.
<unk> 2023, and beyond we may start to see some building tailwind on the container side, but and this year, we're holding guidance where it is on gross margin because.
We're sort of locked in.
Not contractually, but effectively locked into.
Kind of these elevated rates, which are holding a.
A little bit of volatility from kind of week to week month to month, but we expect that trend to hold through through through full year and to the extent that we see some tailwind to build both of them.
Likely be captured in 2023, so the good news is there there is some stabilization within some of the inflationary pressures in transportation in particular and that at minimum provides for some additional predictability within the year, but nothing that would necessarily.
Lead us to believe that there is incremental benefit to gross margin just based on what we know today.
Okay.
Sounds good thanks, so much and good luck.
Thanks.
Thank you Mr. Keith.
The next question is from the line of Sharon Zackfia with William Blair. Please proceed.
Yeah, Hey, guys. This is Alex on for Sharon just a quick one for me so based on the sell through that you guys are seeing now could.
Could you maybe just quantify any of that any improvements that youre seeing with the sub 1000 category have you seen any anything.
Coming out of that that has improved.
Look I would say from a sell through perspective.
The data points.
Mean mixed as we discussed on the last on the first.
Last earnings call.
And.
We're still early in the season, our sell through is predominantly still in front of us, but no no no clear direction with deviated from what we reported on our last call.
Still within the range of guidance that we've provided.
Okay got it. Thanks, that's helpful I'll pass it on.
Thanks.
Thank you.
The next question is from the line of Ana <unk> with Jefferies. Please proceed.
Hi, good afternoon, thanks for taking our question.
I guess I appreciate the color on that arent attach rate could you give some color on what youre seeing on the right side of the consumables segment in terms of <unk>.
Purchase behavior.
And attach as well.
I would say it's early days, but.
We were feeling really confident in our on our.
Food consumable strategy.
And as we rollout more or product within within grocery and expand kind of those doors.
We think that this is kind of a growing tailwind for the business is a real appetite for kind of food consumables, especially trager branded food consumables. So this is this is an exciting component of our strategy that is beginning beginning to mature from the standpoint of how we believe the strategy.
Should be configured and how we will ultimately execute on that strategy to continue to drive growth, which ultimately is part of our long term growth algorithm and I think we're early days in terms of this strategy in particular.
Makes sense and could you remind us what the average.
It is.
In the grocery channel.
<unk> and <unk>.
Actually yes.
The upside.
Okay.
Yes, we don't we don't we don't have the specific data in front of us but.
I think ultimately this strategy will evolve over time, where we will set probably our most important kind of highest moving skus and then sort of build the strategy from there whether it be adding kind of linear square footage.
Linear fee within retail where it makes sense.
Or updating based on seasonal seasonal offerings things like that so I would say.
<unk> that is.
We've established and that will evolve over time based on how we measure turns within within grocery in particular, and where we see success across the portfolio.
Got it.
Thank you.
The next question is from the line of Carl Mill, Kasbrol Waller with credit Suisse. Please proceed.
Alright, Thanks for having me on is there a way for you guys to kind of normalized sell through versus sell through I think some of what you talked about was you have this difficult comp because retailers were replenishing last year, but on a kind of a sell through or sell through basis are you able to give us some indication on what volumes were doing for growth.
So what do you mean by sell through versus sell through.
Well.
Our income replenishing inventory at retail last year, and Thats part of a difficult comp for.
Are you just curious if you are trying to we're trying to come after that.
Right, so youre comparing sell in versus sell through alright. That's your question, Yes, I'm just trying to clean them. Okay got it got it.
Ultimately I think about it.
Right I would think about it in terms of.
Seasonality within kind of our GAAP financials, right. So Q1 Q2, our largest quarters Q3 tends to be our lowest and then there is an uptick in Q4.
The brand benefits from.
Kind of a fairly.
Consistent.
Seasonal apparel over the course of the year versus maybe Youll see other brands have a massive load in early in the year and then theres seasonality drops fairly consistently so we've seen nice replenishment as well as high usage across the year, which we benefit from.
Q1 is our load in season right. So it's one of our biggest quarters, because we're loading and meaningfully ahead of our peak season, which is Q2 Q2 is equally as a meaningful quarter from a seasonal standpoint and to your point, that's driven mostly by replenishment and so when you think about marrying sell in versus sell through.
<unk> youre not necessarily going to see the same seasonal pattern take shape in Q1, right because we are loading and product, whereas in Q2, we're replenishing what is ultimately higher velocity at point of sale, where youre seeing kind of the peak.
Peak season from a sell through standpoint, as you measure seasonality and that kind of normalizes over the course of the remainder of the year, but ultimately.
50% or so of of sell through typically happens kind of in Q2 during the summer the summer period.
So definitely weighted more heavily to.
For Q2 from a sell through standpoint.
Okay got it.
Ill follow up trying to make sure I got I'm understanding properly.
On the inventory.
Are you able to talk about how much like what your inventory volume looks like because obviously the freight figures have.
Inflated the dollar amount, but how do you feel about the actual.
Units of volume.
At the moment.
Yes, we feel good about our inventory position I mean, we're definitely.
We definitely have higher inventory than what you would typically see historically just given the environment. We've talked in the past about leaning into inventory. There is also a higher cost to purchase inventory given the inflationary pressures, we're facing and obviously capitalizing and the higher cost of transportation.
And I would also add that there is a.
A decent component of of the inventory increase in Q1 based on option the option labs acquisition.
Which added.
<unk>.
A meaningful component of the growth. So as you kind of break down inventory in Q1, you need to account for the.
The meter piece, what we've kind of leaned into or how we built safety stock in excess of what we normally would with kind of account for the second later and as you kind of normalize then the inflationary pressures so those kind of three components.
Really in line with if not slightly better.
On a normalized inventory basis compared to last year from a from a turn standpoint, and so I would say that all in we're feeling pretty good about our inventory position. It's a deliberate strategy, we don't have obsolescence risk.
And to the extent that we.
We see.
Improving macro trends, whether it be reduced risk out of Asia.
To just a more fluid environment as we kind of move product from point a to point b across the value chain will begin to work those inventory levels down by year end. If for some reason that does not happen. Then we think it's prudent to continue to maintain a higher balance of inventory it comes at the.
At the cost of cash and some of our liquidity, but it's the right place to put resources right now in an effort to just navigate the unknown do that throughout the course of the remainder of the year, but at this point.
Our goal is really to begin to work those inventory levels down as we are seeing some stabilization at least within the value chain.
Excellent. Thank you.
Thank you.
The next question is from the line of Joe Feldman with Telsey Advisory Group. Please proceed.
Yeah, Hey, good afternoon, guys. Thanks for taking my questions.
You had mentioned that some of the investment spending you are going to differ some of it and I apologize if I missed but could you share.
What some of those deferments are or maybe the amount of deferments or or both.
Okay.
Okay.
We can't share the amount, but I was just kind of give you.
I'll provide you with our strategy. So first it starts it starts with our core principles and what we're going to protect.
And that's really the growth engine right and that starts with product and R&D. We don't we don't want to sacrifice the long term.
By by cutting too deep into into product development, R&D et cetera that is core to our business long term. It is something that we want to protect and prioritize.
Second marketing and demand creation are critical to the growth thesis as well as.
The long term growth of the business, however, top of funnel and sort of the market itself.
Our corridor strategy long term as we build top of funnel.
Shift to performance based marketing, where theres, just a higher return a higher measurable return and it's a more immediate return we're top of funnel tends to be oriented more towards prospecting. So there's a longer tail to the value of the brand awareness that youre building.
The kind of the second layer I'd say third because we're in our peak season, we're being very cautious in where we invest on the FIC side, and we've really slowed the pace of those investments and if we learn that through.
Throughout the course of Q2, we see nice nice growth.
Either in line with.
Our guidance model or in excess of.
That will set us up nicely in the back half of the year to begin to make decisions on fixed investment or otherwise ahead of 2023.
But until we have better line of sight coming out of Q2 are really kind of hitting pause on a lot of these fixed investments as well as like I said redirecting top of funnel and can kind of middle and bottom funnel.
To ensure that where we're investing is highly predictable and we have real confidence in those investments.
Got it that's helpful. Thank you and then the other one for me I wanted to ask.
Are you seeing anything new from a competitive standpoint.
The other.
Players out there for we are I'm sure. There is the typical memorial day sales and such but anything.
Deeper than you've seen in the past are different than you've seen in the past.
We're not.
I'd say generally not not seen new innovation from a product perspective.
No no visibility into deeper discounting.
Or general shifts and pricing strategy.
Some of the price increases that we've seen over the last 12 months.
Got it thanks, guys. Good luck with this quarter. Thank you.
Yeah.
Thank you.
The next question is from the line of Jim Duffy with Stifel. Please proceed.
Thank you good afternoon.
Questions from me on working capital and cash flow management.
DSO is up meaningfully is that simply a function of the late quarter shipments.
I believe in the past you've used in their facility to factor some of the receivables is that an opportunity from here.
Yeah. So on your first question yes.
<unk> are up.
Our measure of Dsos are up about.
18 call. It 18, Dave over over Q4, but they are actually down as per our measurement year over year ultimately are.
Credibly healthy we have.
Strong a strong landscape of distribution and retail partners with strong balance sheets, and we've never had an issue with on time payment for the ability to collect cash I just want to make sure that thats clear I would say too.
Ah tends to grow understood and Accordingly Avenue, it's certainly a little bit higher than than our growth rate in Q1, but we're comfortable with where the dsos are.
Through Q1, and ultimately yields we expect to see some meaningful cash generation over the course of Q2 and into the Internet.
Part of Q3.
And then on your question.
Sure.
Go ahead.
Oh, you were answering the question go ahead.
So we don't we don't factor receivables, we have in our credit facility and so effectively.
Our receivables.
Our.
That's kind of the borrowing base and it moves based on the growth and or contraction in <unk>.
And that ultimately dictates the availability on our AR facility fluid, it's really kind of like a revolver or asset based.
Facility that we have access to based on that borrowing base and how it evolves over the course of the year. So really it's set up to to support higher working capital needs in peak season, and then we obviously pay that down over the course of the year as they are coming down and it's not.
Lower cost.
And what we have with our revolver and so that's typically what we tend to lean into for working capital.
Okay. Thanks for that clarification.
I wanted to follow up on your comments on inventory management strategies I know you are to seasonal working capital peak here.
The comments make it seem like the strategy is still offense and I'm curious.
<unk> are you doing anything to manage working capital as contingency.
Just in case sales get worse, we're in a dynamic environment and Theres a lot of uncertainty.
Is the.
What I'm curious is if sales fall short.
Does your leverage just furthers, our working capital offset so you can use to bring that down.
Yes, there will be a working capital offsets most definitely.
I mean, we're at a point in the season, where we will begin to reduce our inventory levels.
We'll probably maintain some higher higher component of safety stock, but it won't be to the extent that we've kind of built up inventory levels through Q1. So we are focused on bringing those down and as we learn.
As we sort of watch signals coming out of Asia in particular.
Some for some reason they get worse I still think we're in a position to bleed down inventory, thereby.
Driving.
Cash from working capital from lower working capital.
But we may.
Where right now, we're probably pumping the brakes, a little bit given some growing confidence.
We may be tapping the brakes.
Some reason something gets worse and to the extent that things continue to get better.
Then we will really really.
On bringing those inventory levels down more aggressively by year end.
But either way, we expect that a source of cash throughout the year.
Understood. Thank you.
Yep.
Thank you.
The next question is from the line of Justin <unk> with <unk>.
Baird. Please proceed.
Yeah.
Yeah, Hey, guys. Its Justin Klaver. Thank you for taking the question.
I was hoping to.
Again, an update on your Mexico production facility when that goes live.
And then is how long does it take for that facility to materially change.
Youre sourcing mix for grill.
It's a great question, we will start to.
Have production come off the line in third fourth quarter timeframe.
Looking to in terms of how fast we can scale. It is a function of how quickly we can get to.
Two efficiency from a process perspective.
Our belief is that it.
It will have some nominal impact to 2003 and that we should expect.
A much more meaningful.
Positive impact to the business in 2004 and beyond.
Okay.
Thanks for that Jeremy and then somewhat related you discussed the gross margin task force.
And the early learnings and wins Youre seeing from that initiative.
So I'm trying to understand as we look out over the next few years I mean do you think you guys can get gross margins back to.
2019, 2020 levels in that low 40% range I mean is that reasonable or is the cost environment just change.
So dramatically the past few years, but that's not that's.
Not a reasonable assumption thank you.
Yes, yes.
It's a reasonable assumption independent of the provision side of the business, which is in early days.
But in terms of the core business, which I would include meter in that equation.
Still think that pre pandemic gross margin levels makes sense and that's something that we're targeting.
I would say that we can't really pinpoint whether thats 2000.
2023 rebound or 24 rebound I think it requires.
If you sort of exogenous tailwind as well as the things we're doing internally to execute.
To ensure that we're making progress toward.
On our internal targets on gross margin and the things that we can control really tie back to the gross margin task force as well as just some strategic initiatives that we have in place as we think about.
Gross margin levers one of which is just continuing to drive operational efficiency, which includes removing touches from the supply chain. It's about assortment. So as you think about the.
The the work that Jim and team are doing.
Around design for manufacture ability and things that we can do to unlock.
Greater grade her mom.
Margin either either through how we design the product.
And how it is built for manufacture ability to how we transport that product more efficiently.
Knowing that to a certain extent, we will experience elevated container rates at least above pre pandemic levels. We don't think that those are necessarily going to revert back to pre pandemic levels and so I think that's an important unlock.
Independent of where freight freight where container rates go but we have meaningful levers. In addition to just continuous improvement across kind of sourcing global diversification of our manufacturing base. These are consistent with.
How we've thought about gross margin and kind of how we unlock future expansion, but we also hope.
Would rely to a degree on improving macro trends whether that be in FX, which we're actually seeing currently and could.
Create a nice 2023.
Aylwin.
And hopefully container costs come down.
Somewhat which would also provide for a nice tailwind in the future and so it's really a combination of the controllable and the uncontrollable and what the controllable we have a high degree of confidence the uncontrollable is TBD, but in summary, we do believe we can get back to those pre pandemic levels. It's just a question of when based on the macro environment.
As well as just kind of how the these initiatives internally mature as they do take some time to come together.
Okay.
Great color, thanks for that Dom and best of luck as the rest of the year.
Thanks.
Thank you Scott.
<unk> concludes the question and answer session. So I will turn the call over to Jeremy Andrew <unk> for closing remarks.
Great. Thanks for participating in today's call and for the the robust conversation. We appreciate your trust.
In us we continue to work hard to build a great business.
And have great day. Thanks.
And that concludes today's call. Thank you for your participation you may now disconnect your lines.