Q2 2022 Solo Brands Inc Earnings Call
to our ability to deliver innovation that helps new and existing customers make amazing memories with friends and family. Many existing customers wrote us, including Nelda H. from Texas, who said, I love my pizza oven. Great quality, easy to use. Our pizza night with five couples was a huge success, and now everyone wants to order one for themselves. This is my third item to purchase, and I have no regrets. Don't forget to get the
It's equally exciting for us when we hear from brand new customers to sell a brand. John H from California wrote, love the piece of and have not purchased any of the other products but now I'm looking at their fire pits. Both returning and new customers are loving pie which is a solid indicator of the opportunity ahead of us to create millions of passionate loyal customers.
Over 35% of our pie orders are coming from existing customers, which also demonstrates our ability to extend the solo brand into adjacent categories, thereby increasing the lifetime value of our existing customers and creating competitive modes around our business.
Innovation is at the heart of everything we do at Solar Brands.
To that end, we are excited to announce the launch of several new products across SoloStove, Chubbies, and Aisle. The first is SoloStove 2.0, a product that incorporates a removable grate and ash pan in our fire pits.
This product enhancement, which was launched in mid-July, came in response to customer requests to solve the challenge of emptying ash from the fire pits and makes our silica fire pits much easier to use. While it is early, customer feedback has been positive and we're excited to release product enhancements that remind our customers that we're committed to listening to their feedback.
Our plan is to clear through legacy Solostove 1.0 product through our international markets, select wholesale customers, and domestic D2C channel. In addition to Ranger, Bonfire, and Yukon 2.0, Solostove will have several exciting product innovations launching in the back half of the year.
Last week at Chubbies, we launched our Everywhere Pant, or as we like to call them internally, Longs. This long anticipated launch, no pun intended, extends Chubbies' seasonal reach into cooler months and allows us to better appeal to consumers throughout the year. Early feedback has been fantastic. Tyler S. says, as someone that's been a massive fan of Chubbies ever since the brand's launch, there's only been one flaw I've experienced.
It's that I have to store my chubbies away each and every winter. Now with the Everywhere Pant, Chubby's sole flaw has been terminated. I can finally wear my chubbies year round and I've never been more excited.
At IEL, we launched Switch last month, an inflatable stand-up paddleboard that doubles as a kayak, a unique category-differentiated product. We anticipate that this multi-purpose paddleboard will be well received by enthusiasts as well as novices.
As you could probably sense, our product teams have been busy and focused on the quality and quantity of innovation that we are bringing to the market this year. In fact, this year we will launch more new products than ever before in a calendar year.
Turning to our data investments, we continue to focus on leveraging our vast customer database to cross-market our brands and drive efficient marketing spend. Today we have over 3.2 million customers, of which 50,000 have purchased from at least two of our brands. This number has doubled from the start of the year. Leveraging our one-to-one relationship with customers has been instrumental to our growth to date, and we see our data investment as a key component of our future growth as we integrate our brands to drive marketing efficiencies across the platform.
In our wholesale channel, we have been very pleased with the demand for retailers for our products. We have created some exclusive product offerings from SoloStove, including colorways and bundles that will roll out in the second half of the year. And at Chubbies, our increase in brand awareness and strong performance in stores is driving a significant expansion in door counts at a number of national retailers, including two key partners, Dix Sporting Goods and REI. The logistics associated with expanding our footprint would usually put a major strain on our 3PL partners.
Fortunately, as we've transitioned to Chubbies Warehousing and Fulfillment in-house, we gained confidence in our ability to service our retailers in a best-in-class manner, another testament to the differentiated value of V to C and our differentiated model.
We are incredibly excited about our international business. We'll be launching Australia this month, which we believe will add even more momentum to our international growth. Our European rollout is going really well as brand awareness increases.
We are focused on creating authentic messaging that is customized for each country, which requires additional marketing investments on the front end, but the investments are expected to pay off. As I previously said, SoloStows International rollout has paved the way for other brands, and I'm thrilled to share that Oru, Aisle, and Shubbies are now live in Canada and Europe as well. We believe that the investments we are making, especially in marketing, to build our brands in these markets will deliver solid returns for years to come. In terms of strategic acquisitions, we continue to consider a number of compelling opportunities for delivering
we recognize that the macro environment is uncertain and changing quickly. We also recognize that we are at a stage in our business where investing in long-term growth is important.
As a result, in a few moments you will hear from Summer, who will be updating our outlook for fiscal 2022 to reflect both market uncertainties and higher costs, as well as our expectations to continue investing in our long-term growth initiatives.
With that, I will now turn the call over to Summer to review our second quarter results.
Thanks, John , and good morning, everyone. I'm extremely excited to be with you today as the CFO of Tolo Brands.
While I've only been here a short period of time, I have been impressed with the caliber of team and the passion of the entire organization.
Today, I will walk you through our second quarter results and then provide some commentary on our outlook for 2022.
As John mentioned, we had several bright spots this quarter and our focus continues to be on building a robust growth company with a long-term mindset.
For the second quarter, our sales came in ahead of our expectations as the business gained momentum throughout the quarter.
Our growth margins remain healthy as we maintain a consistent level of promotions relative to last year.
As discussed on our previous earnings calls, we increased investments in data, product innovation and international expansion.
While these increased investments put some pressure on our EBITDA margin this quarter, we believe these investments in the long-term growth initiatives are prudent at this stage of our growth cycle and will pay off beginning in 2023.
Net sales increased 53.3% to $136 million compared to $88.7 million in the prior year period.
Sales in the second quarter were boosted by contributions from Q3 2021 acquisition.
and new product launches including solar stove pie and Orru Lake.
We saw an increase in total orders of 112.7 percent, while average order value decreased by 32.1 percent, primarily due to the Chubbs acquisition.
Chubbies has a higher level of total orders, but a lower AOB due to the nature of their product offerings relative to the other brands in our portfolio.
We continue to see strength across our sales channels, especially data seet.
Our direct-to-consumer sales increased 63.2% to $116.1 million, compared to $71.1 million in the same period in the prior year.
Wholesale net sales increased 13.1% to 19.9 million compared to 17.6 million in the prior year.
We are pleased with our multi-channel positioning and our ability to meet our customers where they are, including successfully satisfying demand in the wholesale channel.
Moving to gross profit, gross profit increased 45.2% to 86.7 million. Our gross margin rate was 63.7% compared to 67.3% in the prior year.
Adjusting for the impact of purchase accounting adjustments related to the fair value write-up of our inventory for transactions, adjusted gross profit increased 46.2% to $88.4 million.
Adjusted gross margins came in at 65.0% compared to 68.1% in the prior year with the variance the prior year driven by our higher imbalance rate and logistics expenses, as well as product next summer acquisition.
Selling, general and administrative expenses for the second quarter increased 69.2 million or 50.9% of net sales, as compared to 29.7 million in the same period last year.
The increases in SG&A were primarily due to higher expenses from our acquisitions, which accounted for $17.3 million of the increase.
Additionally, SDNA increased by $8.2 million as a result of equity-based compensation and increased headcount.
There was also a $6.3 million increase in advertising and marketing spend.
As noted by companies across several sectors, digital customer acquisition costs have increased and we have not been immune to this dynamic.
During the quarter, we recorded a goodwill impairment charge of $27.9 million for Aisle.
IEL experience a favorable growth environment during COVID in 2020 and 2021, but has come under pressure in 2022.
However, we've recently hired a new brand president and are seeing positive trends from the business that lead us to believe this brand could begin rebounding over the next 12 months.
As a result of this impairment, second quarter net loss was $19.9 million and net loss per share was $0.19.
Second quarter adjusted net income was $17.3 billion and our adjusted EPS was $0.40.
Adjusted EBITDA was $23.7 million and adjusted EBITDA margin was 17.4%.
Although EVA down margins were lower than expected.
We have confidence that the investments we are making in data and analytics, product innovation and international will provide returns for our shareholders.
As we continue to scale, we expect to gain operating leverage on the cost associated with becoming a public company.
Now turning to the balance sheet.
Balance sheet health will continue to be a major focus of ours in the near and long term.
At the end of the period, we had $26.7 million in cash and cash equivalents.
As of June 30th, we had $57.5 million in outstanding borrowing under the revolving credit facility and $98.1 million under the term loan agreement.
The borrowing capacity on the revolving credit facility was $350 million as of June 30th, leaving $292.5 million of availability.
We believe we are in a position to take advantage of strategic opportunities with a net leverage that remains less than 1.5 times.
Inventory at the end of the second quarter was $128.2 million. The increase is due to a combination of an earlier seasonal inventory yield, international expansion, and new product introduction.
With the concerns around supply chain, our operation and merchandising teams continued to be proactive to ensure consistent supply for our customers.
Turning to our outlook.
While we are encouraged by our current momentum and strong lineup of new product introductions planned for the back half of the year, we recognize that consumers are experiencing a number of pressures, including higher fuel costs.
inflation, and fear of a recession.
In line with the historical seasonality of our products, we expect Q4 to contribute roughly 40% of our overall revenue for the year.
Given such a high concentration of seasonal revenue and market uncertainty,
We are choosing to take a more conservative view on full year guidance.
We expect that we will see mid-20% revenue growth, adjusted gross margins of 60 plus percent, and mid-10% adjusted EBITDA margin for the year.
As I mentioned earlier, I think Solar Brand is in the early innings of our lifecycle and investments in longer term growth initiatives are critical.
The investments in data infrastructure analytics, product innovation, marketing, and international markets will benefit us in the years to come.
Our new guidance reflects the impact of inflation on our cost structure, the incremental spend in marketing to support the launch of new products and international expansion, and the impact of less operating leverage than we originally modeled.
Lastly, I'd like to add that this environment is anything but normal, and we will hold true to our DNA and be nimble and balanced in our decision making.
We are uniquely positioned to have the ability to pivot and adjust a large portion of our expenses as they are variable in nature.
We are able to throttle marketing spend up and down as we see fit, and we will continue to assess market conditions and make the best decisions for the overall long-term health of the business as we progress through the rest of the year.
Before I turn back to John , let me restate that I am excited about the tremendous opportunity at Solar Brands and honored to be a part of the journey.
We have a very healthy business that generates strong evative margins and cash flow with little leverage, which is unique for a growth company where it's greater than 80 percent of revenue is generated through direct consumer channels.
We will continue to be depth and flexible with our cost structure as business conditions warrant while balancing long-term investments that will drive profitability and long-term shareholder value. We will continue to be depth and flexible with our cost structure as business conditions
I will now turn the call back over to John for final thoughts before questions. Before opening the call up for Q&A, I want to take a moment to discuss our business model and how we are thinking about the business in the current environment.
Since inception, the vast majority, more than 80% plus of our businesses come through our digital direct-to-consumer channel. This is differentiated for many companies, but what makes this particularly special is that SoloStoke has been profitable since our first year, all while driving growth as a digital direct-to-consumer brand. Our profitable, cash-flow generating model affords us the opportunity to continue to invest in long-term growth, even softer market conditions.
By generating the majority of our revenue through our direct-to-consumer channel, we not only have strong gross margin rates, but as some are referenced, we have a highly variable cost structure, which we believe enables us to be more flexible in the face of an economic slowdown. Marketing is a large component of our SG&A, and because it is variable in nature, we have a better ability to balance revenue growth and profitability as we enter periods of uncertainty.
Our direct-to-consumer model makes us less dependent on retailers to drive demand because we have invested and continue to invest in customer relationships and a data platform that allows us to communicate directly with our customers to drive conversions.
The benefit of this relationship is made even clearer by our high referral rates and repeat purchases that allow us to leverage product innovation to drive profitable growth.
Lastly, we also have a very low install base and therefore are not dependent on a replacement cycle to drive sales. Our direct channel model, highly variable cost structure, and significant room for organic growth differentiate us from other outdoor companies and other digital direct-to-consumer brands. We are focused on staying nimble and agile even as we continue to grow. At Solo Brands, we think big and act small. Our customers deserve it and our employees desire it. In this environment, a nimble culture wins big because things are changing daily.
We're excited for the future and we thank our shareholders for coming on this journey with us. With that, I'll turn the call over back to the operator to take your questions.
Thank you. As a reminder, it's star 1 on your telephone keypad to ask a question. Our first question comes from Christopher Horvers from JP Morgan. Please go ahead.
Thanks. Good morning, everybody. So my first question is, can you can you help us more on what's changed on the time relative to your prior?
You spoke about momentum in the business, but you also talked about the weighting to the fourth quarter. So are you really changing, is the guide down on the revenue really the expectation around fourth quarter growth? And how are you thinking about the direct channel versus the wholesale channel? Yeah I hope.
Yeah, for sure. Chris, good morning. Thanks for the question. I'll kick it off and Summer will clean up anything behind me.
The change and top line, you were breaking up a little bit, but I believe that the focus is specifically on kind of the top line revenue mix and then the split between quarters.
So, for the back half of the year, what we've done in our guide is basically take the revenue growth that we saw in the front half of the year and then we've extrapolated it out. So, it's very similar on the back half. So, seasonal split doesn't change from historical. So, about 40% of revenue coming in Q4, back half overall being 60 to 63% is what we've talked about in the past. That doesn't change. It's just the front half of the year growth slowed and we've pushed that then forward.
I'd just add that typically what you're going to see in our business is Q1 and Q3 are going to be probably our heaviest on the wholesale side, and then Q2 and Q4 are going to be heaviest on the DTC side, just by the way the seasonality works. But we do still expect an 85-15 split. And then to John's point, just reemphasizing from a guidance, we started out kind of slow in the first quarter. The momentum has continued to build. But in light of everything that we know that's going on with consumers.
We just decided that it was the right move and we chose to take it down and be more conservative.
Understood. And then, hear me now.
Can you hear me? Yeah, yeah, we can hear you. It just, for some reason, like every third or fourth word, we just lose it. So if it's an important word, we may have to have you restate the question. But if it's not an important word, we'll be fine.
So it's really what's changed on the cost side. You know, you're hearing about freight rates come down. You've changed your gross margin outlook. It seems like gross margin is the change to the EBITDA margin. Is that fair? And if so, what's the potential for that?
what's driving the gross market, given that you're seeing freight rates actually recede.
Yeah, so that's not the way we're thinking about it. The growth margins are actually...
low 60s is kind of where we've been. We were 65 this quarter, but that was in Q2. That was a beat on where we expected to be. We continue to sell through inventory. Remember on our bright rates.
We had really favorable freight rates for the year that ended April 30th on our freight contracts And we've been talking about freight rates going up. So we actually saw an improvement in gross margins compared to our expectations Thank you, too But low 60s is kind of where we've been expecting I think 63 ish range or something like that and we're continuing to Feel comfortable in that range So we've said kind of a 60% plus of being north of 60% is where we expect
where the costs are really coming through, which I think Summer talked about in her section was really around a combination of public company costs.
slight increase in investments to what we originally planned on the 20 million that we've talked about to accelerate international new product development in data and integration. And then lastly,
The reality is that over the last couple of years, customer acquisition costs have been artificially low. What companies were planning and thought that they could spend in order to acquire a new customer for the last two years has kind of created an environment where we've all kind of misunderstood how that's gonna flow through when you get into a normalized environment and like we feel like we're in now, where you really understand better what it's going to cost to acquire a new customer. The reality is.
Thanks very much.
Our next question is from Randy Konick from Jefferies. Please go ahead.
Thank you.
Thanks a lot. Can you hear me?
Yeah, we've got you Randy.
Alright, great. Thanks guys. So I guess back on the sales outlook for the mid-20s growth, I know you guide on a full company basis or full portfolio basis. Is there any kind of color you can kind of give us holistically about how you're thinking about the hard good side of your business versus the soft good side of the business? And within that, where do you have more visibility on where the business is performing?
you know on the hard goods versus the soft goods right now within the portfolio? Yeah good question. So obviously we've just talked about an impairment we're taking on Aisle, one of the hard goods businesses inside of the portfolio, but if you were to just remove Aisle from the conversation, Stand Up Paddle Boards is just
What we've seen is that that was a competitive space and not as much product differentiation and IP. In the other hard goods businesses inside of the portfolio with Solostove and Oru, obviously it's a different story. And then you have the Chubbies, the beloved Chubbies brand. So if you just take those three and remove aisle just for sake of the conversation, we're seeing very similar demand trends for both the Chubbies business as well as the other two hard goods businesses. So equal year over year growth.
very similar at least to where the businesses were performing prior to where they're performing now. So again, outside of aisle, we're not seeing anything outsized or abnormal around demand and growth rates across soft goods versus hard goods.
Super helpful. And then I guess Summer, a question for you, what the market is going to be really focused on with a lot of all these companies reporting is the market seeing basically almost every company guide down revenue and EBITDA margin expectations. I guess the market is going to kind of think about from here which companies are going to continue to cut those numbers and which companies have we seen cut enough. So what I want to understand on the EBITDA margin side is
you brought up the idea that a lot of your expenses are variable in nature, particularly around, I believe, marketing. So I just want to kind of get some perspective on how you're thinking about the ability to kind of to meet that kind of new mid-team E-to-GOD margin guidance for the year. Do you have those levers in place and a variability in expense structure to kind of navigate and evolve as you get to the bounce back part of the year?
to kind of meet those new EBITDA margin expectations? Thanks. Yeah, no, absolutely. Great question. Yeah, as we think about the rest of the year, and marketing is a variable lever that we are able to kind of throttle up and down. In the back half, we do have a really robust new product roadmap. We also are continuing to launch in international markets. We do increase our marketing spend when we release new products and also in the international markets.
But as we see the next couple of months unfold, we're going to keep a watchful eye on our ROAS. So that is really the metric that kind of indicates how healthy that marketing spend is. As we see that it has a return and we think that it's the right move for both the new product launches and in international market expansion, we're going to continue to lean into it. But the reason that we also took down our EBITDA margins is we want the flexibility to be able to lean into those new products and international with that increased spend.
but we are going to monitor it and ensure that it's actually a strong investment and then throttle back when we need to.
Got it. Super helpful. Thanks, guys.
Our next question is from Robbie Holmes from Bank of America. Please go ahead.
Hey, good morning. I wanted to follow up on wholesale. You know, I was hoping, John , you could talk about what you're.
seeing there. It's a scaled back revenue outlook for wholesale as well. What do sell-through rates look like with your wholesale partners? Are you still looking to maybe open some new wholesale partners for the solo stove? And then I just had a quick follow-up.
Yeah, absolutely. And thanks for the question, Robbie. Wholesale is – we remain encouraged by wholesale. So you heard me talk about it. We like our model in that we're not dependent on it, but we sure love our wholesale partners, and they've been really good to us. We're continuing to see – I think I mentioned in my portion of the call just a few minutes ago – a pretty significant store count and footprint increase.
that we see happening with the Chubbies business, particularly with Dix and REI, because of some of the brand awareness as well as some of the product innovation that Chubbies has been releasing. Solo Stove, I also mentioned, has released really for this back half of the year, two retail exclusives, both in colorways and in bundles, that we're very excited about, and that's been of high interest to our retail partners. So we are seeing.
Again, retailers are...
Well, you're hearing softness around sell through from a lot of companies right now with retail. The reality is consumers are still buying something and retailers need to carry some products. And I've been saying this, I've been kind of standing on this soapbox for a while. Great brands and great products I think are going to win bigger in this type of environment because retailers are going to have to be more selective and make sure that what they're putting on the shelves is what their consumers actually want. And I think that's the beloved nature of our brand's positions as well.
for a continued strong outlook with retail partners. And so, yes, the guys coming down on a split basis, you know, equally to wholesale as we're bringing it down for D to C, but we are still anticipating good, strong relationships and expansion with our retail partners. Thanks, Bill, and thanks to Edmund.
We're going to continue to have a conservative outlook on this back half of the year just because of where the market is right now and how back-weighted seasonally our revenue is. It just seems like a prudent thing to do to take a conservative look.
And then John , can you just walk me through how the, are you discontinuing Solo Stove 1.0?
in shifting all the product to 2.0 and kind of how is that process going to work and how much of, you know, how much are you going to be discounting Solo Stove 1.0 a lot? Is that going to be on D to C or will the wholesale partners help shift to 2.0? Maybe a little more color on how you see that shift working.
Yeah, great question. So that's right. So the 1.0 is going to slowly sell through and then be gone. And then the only product when you buy a solo-snow fire pit will be the 2.0. So they're not going to be sold in conjunction with each other once 1.0 inventory is depleted. Right now we're in the process of that depletion cycle. So the Ranger fire pit for 1.0 is nearly completely gone already.
Bonfire is close to on its way. We've got a couple of key orders that are coming with some retailers and Bonfire 1.0 will basically be depleted very soon. And then we'll have Yukon, which will be the final one. So the way we see Yukon playing out from a sell-through standpoint or depletion standpoint is international. We're not launching 2.0 internationally until 1.0 is.
discounts to what the 2.0 pricing is at. But again, because of the nature of the cost structure and the cost of goods within those two, actually very similar gross margins, even with the price difference between the two.
Got it. That's really helpful. Thanks so much, John .
Our next question is from Kamil Gadrawala from Credit Suisse. Please go ahead.
Hey guys, good morning
Good morning.
Thank you, Martin John . Can we talk a bit about M&A? And specifically, you have some hard metrics on profitability and a rough idea on what you want to spend from a multiple perspective on companies with positive EBITDA. But we are going through this very different period. Maybe it's due to demand to pull forward from COVID and such where there may be companies that are quite significantly under earning. And so, are you evolving your thinking in terms of…
how you look at targets and what some of those sort of base level criteria is to be something that's interesting to put into your platform.
Yeah, I mean, you know, we think Summer and I both talked a lot about being nimble and, and you know, being willing to adjust and the reality is, is that you're, you're spot on the, the world is changing quickly. The world is changing everywhere, including for, you know, founder owned and operated businesses that have been enjoying a pretty easy environment for the last two years and now are, are, you know, kind of scrambling to figure out what's the new norm. But I think.
You know, if you were to ask me, what is the thing that we are most focused on as it pertains to change compared to what we were thinking about before with M&A? It is just that it's trying to figure out what is the normal baseline for a target. Where should they in a normal environment be performing? And then how are they performing in relation to that norm? And it's pretty challenging, as you can imagine. I mean, shoot.
some of the greatest financiers and forecasters in the world are coming back and telling you that what they thought three months ago has now changed. And so you can imagine these new founder entrepreneurs that are running their businesses and how their ability to forecast. What I can tell you is that we are seeing valuation, value expectations come down from founder entrepreneurs. You know, things are starting to get tighter.
Cash is going to be more difficult to come by and ultimately that's going to that's going to bring down expectations for the sellers in any M&A transaction, but we are Achieving as to what our Nord Author Ferrer version is.
I mean, we've looked at deals even this year that we could have picked up for five, five and a half, six times EBITDA, which for all intents and purposes is pretty remarkable opportunity. And yet, when you're trading at two and a half times on the public markets, you have to question whether or not that's the best use of your cash.
because immediately it's actually an upside down arbitrage. It's like a reverse arbitrage. And so that's, you know, those are some of the things that we're thinking about now that we probably weren't thinking about six to nine months ago that have changed for us, but we are going to be opportunistic. I think in this market, if we get really comfortable with the, again, establishing where a company's norm is, and we can get a favorable valuation on an opportunity that we think really fits well into our model, it's those profit metrics.
Of course, it's not the same profit metric that it used to be, right? We used to be thinking we needed to acquire businesses that were 25%, 30% even the margins.
you know, coming out of the COVID era, just the environment that we're in, you just heard us guys in the team, you know, working our way back to the 20 mark, it's kind of where we want to be long-term from an EBITDA standpoint, you could probably see us targeting things more in that range, but we certainly aren't changing our mindset around going after unprofitable or no EBITDA generation type businesses. That certainly will not be the case.
Okay, great. And I'll just add one.
I'll just add one thing to that, Karel. Sorry about that. The only thing I'd add is, as we look at business as well, what we've seen through the acquisitions that we've done already is that we are really strong at fulfillment and marketing. So the D2C component and the fulfillment side, so the fulfillment by solo, are two of our strengths of the platform. And so when we look at M&A targets, we really assess, hey, can we drive a lot of value here?
And that's also another way that if we see the profitability isn't where we want it to be, those are two things that are two levers that we can move on pretty quickly.
Got it. Great. That's actually a great segue of what I wanted to follow up on, which might be an easy one to answer, which is with the change in the revenue guidance, is there anything we should be aware of as it relates to inventory either on its way to you.
in your facilities or maybe sitting at wholesale.
Yeah, good question, Camille. So the only thing I'll call out, and Summer will probably have more to add here as well, is…
The dynamic of our current inventory position is this transition between 1.0 and 2.0. It's just important to note because generally, you know, as we've ramped up 2.0 because we need to have enough 2.0 to get us through Q4. We just talked about 40% of our revenue coming in the fourth quarter.
So we've been ramping up that inventory to be prepared for Q4, which is something to be aware of. And then secondly, as we've launched international markets, so we're launching Australia, we've been sending inventory in and ramping up inventory for our new fulfillment center in Australia. And so ultimately, there are some inventory growth needs for those two reasons. One, the new products and just overall product development to all the new SKUs. We just talked about launching more products than we ever have this year.
The back half of this year is no exception to that. So those new SKUs, which includes 2.0, the Solace 2.0, and then international markets, has required that we invest in inventory. Of course, it doesn't expire on the shelf, so we talked about this. We're in strong cash position, so we feel really good about the inventory levels. C- Diet Non Charges ItemsPrecise Owner Fischer
That's useful. Thank you.
Our next question is from Peter Case at Piper Santa. Please go ahead.
Hey, this is Matt on for Peter. Thanks for taking our questions. Just a quick one. First on gross margin, I want to make sure I heard you right. I know the guidance for the year is 60% plus, but I think I heard John say it should be in that low 60 to 63% range. Was that in the back half for those quarters or was that for the full year, that 60 to 63? I just want to make sure I don't have the back half too low.
Hey, this is Matt on for Peter. Thanks for taking our questions. Just a quick one. First on gross margin, I want to make sure I heard you right. I know the guidance for the year is 60% plus, but I think I heard John say it should be in that low 60 to 63% range. Was that in the back half for those quarters, or was that for the full year, that 60 to 63? I just want to make sure I don't have the back half too low. That's the first one.
Yeah, so we – right now, we're thinking that the full year will be 60-plus percent. So, we've been running – we ran this quarter at 65 percent. We do believe in the back half of the year we're going to see a little bit of a headwind due to the container cost and the way our contracts worked out, but we still believe it will be above 60 percent and blended to kind of ride in that 60, 63 percent range.
able to lock in and have an average container cost of roughly $8,500 last year. And so even though spot rates have come down, our new contract rates coupled with spot rates where they are right now is actually well above what we paid last year. And so we're feeling a little bit more pressure on freight even with freight rates coming down than other companies that you guys may be following or hearing from. So just so that you can understand why that dynamic exists for us versus others that's more compared to kind of how well it was managed last year.
We're seeing the same freight rates coming down this year benefit. It's just that benefit is still above where we were last year.
Okay, great. That's really helpful. And then just one quick follow-up. Do you all have any updates on patent violations and what you all are doing to mitigate those infringements? Thanks. See you next time.
Yeah, it's a daily, we're following daily and reacting quickly. We've been in the midst of, we've actually, I'm not able to disclose too much quite yet, but we are very close.
on a positive win for us. We're at a verbal stage. We're close to execution on a final agreement on a pending litigation case that we have right now. So things are heading in the right direction. Our IP is holding up well and being recognized in the scenario that I'm talking about now. We believe that this is gonna be a really big and important victory for us as we look forward to potentially additional.
promotional activity to drive sales growth given the forecasted slowdown.
What we've guided to is really what we've expected. So in terms of promotion, we expect to be the same promotional that we have been in historical years. So nothing really changes there. Like I talked about earlier, customer acquisition costs, you know, were artificially low through the pandemic and kind of gave us all sense of where marketing spend would be on a broader basis. In terms of being extra promotional or more promotional, we don't anticipate needing to be more.
You saw the slowdown relative to the COVID bump, but anything else you could say there and outlook for that business?
Yeah, I'll take that one. You know, it is, you know, there were indications that they had really strong strength in 2020 and 2021. You know, we believed that they could continue with that strength. In 2022, they started softening. We've been running soft for several months.
I, you know, at that point, you know, they're down. I won't give the exact numbers, but they're down pretty significantly year over year.
The good news is, and we are seeing positive trends, so we hired a new brand president. He came on in May. We have a new product innovation guy. You saw that we came out with the aisle switch. So we have momentum. We believe that this is gonna take some time, but that the recovery, we're seeing positive signs that this could recover over the next 12 months. But I would say it's probably gonna take about 12 months for it to get back to really probably 19, 20 levels.
Okay, great. That's very helpful. Thanks. I'll pass it on.
Our next question is from Chase and Bender from Citi. Please go ahead.
Great. Good morning. Thanks for taking the question. Just to talk about digital acquisition costs, I get those costs are increasing and that you're watching ROAS, but how has that impacted how you're allocating marketing resources either across brands or at the top of the funnel, if at all? Any comments on that would be helpful.
Yeah, I'll take this one in a couple of different ways. It's a great question. One of the things we talked about on previous calls that I'll reiterate today is that we are, you know, 85% of our business being direct to consumer online gives us, affords us the opportunity to do a lot of testing, and we do, we iterate a lot. And we iterate within digital channels, but we also iterate cross channels. So...
The way this is playing out in terms of customer acquisition costs is it's allowing us to go out and explore new channels and new opportunities and even new types of campaigns and new creatives. So we're constantly iterating as we're watching that ROAS and then looking for a blended ROAS that really fits into our financial model. Go get it.
You're going to see us running, we have an internal correlation regression model we've talked about in the past where we're able to correlate, for instance, spend on Facebook and how that spend is actually impacting the success that we're having on Google. So when we drop Facebook spend, what actually happens to the effectiveness of our Google spend or our TikTok spend or our podcast or our CTV spend? So there's quite a sophistication and…
Some are just kind of alluded to this, but our marketing is one of our two big value propositions when we do M&A, and that's exactly why, because it is differentiated and it is proprietary to the way that we execute. It's all done in-house. For the most part, we execute all of our marketing with our own internal team versus using outside agencies. And so that's a big proponent to us. In terms of top of funnel, the one thing that I'll call out that's really important for everybody to understand is as we're rolling out international markets,
you just have to understand that the initial marketing spin and new markets and frankly for new products as well. So when we're launching a lot of new SKUs, that marketing spin tends to be more top of funnel than bottom of funnel in the beginning. It's very in a new international market, it's very brand building and then for new SKUs, it's very product awareness and education based and so it's not necessarily conversion driven, which is one of the reasons why we've modeled for higher marketing expense.
and a higher customer acquisition cost, just knowing that because we're doing, we're making those investments now for longer term growth, we're going to see a less efficient marketing in the near term. Now we do expect for those to normalize out and get back to not pandemic levels, but pre-pandemic marketing efficiency levels for sure, as those international markets and those new products that were launched and become more mature. So that's kind of how you could expect it. That top of funnel spend will work its way down the funnel.
it'll just take some time. And so we've modeled out conservatively, not expecting for a major return on that spin for the back half of the year and expecting more of that to come in 2023. That's what we've modeled. If some of that were to come to fruition this year, that would obviously create some upside to what we've guided you today.
Got it. Thanks for that. That's a helpful color. And also a good transition to my second question, that being, can you just spend a little bit more time talking about international? It sounds like it's really progressing well, and now you have all your brands in Canada. But maybe just talk a little bit more about what's going on in Europe and the plans for Australia, what brands will be there if it's still a PTC-led strategy, or if you're thinking about bringing it to retail in the immediately. Thanks.
Yeah, our general approach with international markets is D2C first. That's always been our approach. Now we've been running and partnering with international distributors for several years. And so we have small distributors across the globe that really become kind of an entryway or a gateway to a country. So they've been there kind of evangelizing the brand. It's actually how we're deciding which markets to go into next is kind of based on the volume and demand that we're seeing through our...
without getting too specific is we are very happy and international is exceeding our expectations on where we expected to be this quickly. We aren't even a year old in Europe and we just barely are crossing the year mark in Canada for Solastove and the other three brands are all within the last few months just going live in Canada and Europe . So we're very pleased so much so that we're launching Canada or Australia which we've been talking about this quarter.
We've been talking about that for almost a year now, but we actually have moved. We've accelerated another additional international market. We're not going to disclose which one it is on this call. We will on our next call, but we've accelerated an additional international market for the back half of this year just based on the momentum and success that we're seeing in Canada and Europe . So we're very pleased. It's going well. We're looking forward to sharing more. I hope.
I'm expecting that for sure by this time next year, we're giving you guys more specifics around our international business.
Cooper, thanks so much.
We have no further questions on the call so I will hand back to management to conclude.
Great, thank you all for being with us today and for the thoughtful questions. This has been great. We look forward to being with you again in a few months.
That concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.