Solo Brands Inc. Q1 2023 Earnings Call
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Okay.
Hello, everyone and welcome to solar brands first quarter fiscal 2023 financial results.
Mr Bruno and I'll be the operator of today.
During this presentation you can register to ask a question by pressing star followed by one on the telephone keypad.
I'll now hand over to your host Bruce Williams. Please go ahead.
Good morning, everyone and thank you for joining the call to discuss solo brands' first quarter results, which we released this morning and can be found on the Investor Relations section of our website at investors got solo brand's dotcom.
Today's call will be hosted by Chief Executive Officer, John Murray, and Chief Financial Officer Summer Web before we get started I want to remind everyone that management's remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Based on current management expectations.
These may include without limitation predictions expectations targets or estimates, including regarding our anticipated financial performance business plans and objectives.
Actual events and developments and actual results could differ materially from those mentioned.
These forward looking statements also involve substantial risks and uncertainties some of which may be outside of our control that could cause actual results to differ materially from those expressed or implied by such statements.
These risks and uncertainties among others I discussed not filings with the SEC.
We encourage you to review these filings for a discussion of these risks, including our soon to be filed quarterly report on Form 10-Q will be available on the investors portion of our website at investors that solo brand's dotcom.
Should not place undue reliance on these forward looking statements. These statements are made only as of today and we undertake no obligation to update or revise them for any new information, except as required by law.
This call will also contain certain non-GAAP financial measures, including net income as adjusted.
Diluted earnings per share as adjusted gross margin as adjusted adjusted EBITDA and adjusted EBITDA margin, which we believe are useful supplemental measures that assist evaluating our ability to generate earnings provide consistency and comparability with our past performance and facilitate period to period comparisons of our core operating result.
And the results peer companies reconciliation of these non-GAAP measures to the most comparable GAAP measures definitions of these indicators are included in our earnings release, which will be available to our investors a portion of it.
Website at investors got solo brands Dot com.
Now I'll turn the call over to John .
Thank you Bruce and thank you for joining the call to discuss our first quarter results I will begin by reviewing our Q1 performance then provide an update on our key operational strategies.
I will review, our first quarter financial results and provide an update to our outlook.
We're extremely pleased with our performance this quarter. Despite a volatile macro environment, we managed our business prudently and generated solid gross profit and healthy EBITDA margins. These results are a reflection of our disciplined focus on profitable growth and positive free cash flow generation. We are still in the early stages of our story as our household penetration remains low.
And we believe we have significant white space ahead.
As such even in a tougher economic environment, we believe that a renewed focus on customer experience and continued investment in product innovation wholesale penetration in international expansion are good strategic uses of capital that position us for long term growth.
During the first quarter, our sales grew seven 3% to $88 2 million driven by strength in the wholesale channel as we stated during our fourth quarter call. We expected to experience strong momentum during the quarter and we were encouraged to see larger replenishment orders than we expected reflecting earlier sell through at retail even so our first high season.
The year is just kicking off and we will know more about full sell through as we get through the rest of Q2.
Moving on to the direct to consumer or DTC sales were $54 8 million in line with our expectations for the first quarter the.
The strength in our wholesale channel allowed us to be less promotional than the same period in the prior year without negatively impacting overall, new customer acquisition or new products and innovation continue to be a draw for both new and existing customers, which is reflected in our consistently high referral and repeat purchase rates and.
In addition to new products. Our team also continues to delight customers with a differentiated experience and outstanding customer service that reinforces the great experience with customers have with our products and strengthened the referral and repeat purchase behaviors previously mentioned.
Definitely our unique ability to connect with and retain customers allows our business to better navigate through periods when consumers are making trade offs. We.
We delivered significant newness in 2022, and our new products have quickly become fan favorites. However, I want to highlight that our legacy products continues to provide a solid foundation for our company there.
They are the engine that creates a dynamic where strong repeat purchases and high referral rates, we will build on this momentum in 2023 as we execute on the playbook, we laid out last quarter.
Elevate and innovate our products broaden and deepen our wholesale partnerships and grow our business internationally.
Starting with innovation, we are proud of the newness delivered over the past few months and we look to build on this success going forward, we have a history of continuous product innovation focused on delivering high quality products for our customers our deep connection with our customers provides a feedback loop that allows for a shortened product development timeline as such we continue.
To find new ways to innovate and expand our product line and we are excited that we will continue delivering a healthy lineup of new products in the remainder of this year.
Continuous product development, not only helps attract new customers, but it's also easily marketable through our existing customer database, which drives repeat purchases increases lifetime value and lowers our overall customer acquisition costs.
Turning to wholesale the conversations and feedback from our wholesale partners continue to be very positive. Our focus is on growing our market share with our existing partners by expanding into new doors, and increasing shelf space with existing doors.
While the wholesale channel is very exciting we are in the early innings of its growth story to that end, we are disciplined in managing our selling rate by keeping a close eye on our sell throughs as I discussed earlier, our D to C heritage allows for us to have strong engagement with our customers. We are finding that there are great ways to build direct connections with our customers.
Our wholesale channel as well the strongest brands are those that are able to maintain and build upon their connection with their customers by providing a fluid experience and presentation with both a direct and wholesale channels as such we are excited about what our strategic partners are doing to build brand awareness in store or we can establish a direct relationship.
That customer.
We believe that working with our retailers to develop greater brand affinity will lead to stronger sell throughs in increased shelf space and our existing customers all while driving healthy merchandise margins.
And finally, we are also pleased with the performance of our international business and believe we are in the beginning stages in our global expansion. We have invested in local leadership in Europe and are enthusiastic about capitalizing on a significant growth opportunity in the EU.
Additionally, we are exploring new markets, including Asia, and we'll be strategic as we determined the right timing to open. These markets. We continue to believe that our international business can grow to be the size of our domestic business.
We are operating in an uncertain macro environment, where consumers are being selective in their purchases. However, our direct connection to customers combined with strong execution by our team and the three areas mentioned before product innovation channel expansion and international growth create a wide competitive moat around our business and most importantly <unk>.
The foundation for years to come.
<unk> innovating and creating great products that lead to meaningful experiences will win and that is our focus celo brands is centered on a common mission to build a company that has great at facilitating moment that put smiles on faces across the globe are great.
Grateful for our amazing team, which continues to execute at the highest level for each other and for our customers. We will maintain our disciplined approach to financial management, which we believe enables us to generate healthy growth positive free cash flow and strong returns on capital over the long term for our shareholders I will now turn the call over to summer to discuss the financial.
This summer.
Thanks, Sean and good morning, everyone. Today, I will walk you through our first quarter results and then provide our outlook for the remainder of 2023.
We are pleased with our strong start to the year as we continue to execute on our growth strategy and deliver profitable results for our shareholders.
Our first quarter results came in ahead of our expectations driven by strong demand in our wholesale channel.
Can you suggest with new innovation and high referral rate.
The strength in our wholesale channel reflects the increasing demand for our products and then deepening relationships with our retail partners.
During the quarter, we experienced stronger than expected reorder volume from our retail partners as replenishment orders occurred earlier than forecasted.
Our wholesale momentum allowed for us to reduce promotions in our direct to consumer channel, where we saw inconsistent traffic trends.
The more we are pleased by the flow through of our revenue growth to EBITDA and our free cash flow generation during the quarter.
Net sales increased seven 3% to $88 2 million compared to $82 2 million in the prior year period.
Sales were driven by strong demand in our wholesale channel as we continue to increase our market penetration to increase shelf space and higher door counts that existing customer.
Wholesale net sales increased 52, 3% to $33 5 million for the first quarter compared to $22 million in the prior year.
Our direct to consumer net sales decreased nine 1% to $54 8 million for the first quarter compared to $60 2 million in the same period in the prior year as consumer traffic with lighter, but in line with our expectation.
Moving to gross margin, our adjusted gross margin rate increased to 61, 7% compared to 59, 4% in the first quarter 2022.
The improvement was driven by lower promotions, primarily in our direct to consumer channel.
Selling general and administrative expenses for the first quarter decreased to $44 6 million or 56% of net sales as compared to $45 6 million or 55, 5% of net sales in the same period last year.
<unk> was driven by $5 4 million decline in variable costs, partially offset by $4 3 million of higher fixed cost.
The decline in variable costs was due to lower marketing expense driven by benefits from our data investment.
And fixed cost increase was primarily due to higher employee related expenses, including increased head count from investments that were made in Q2 2022.
Our first quarter net income was <unk> 9 million and net income per diluted share was one penny.
First quarter adjusted net income was $10 3 million and our adjusted EPS was 16.
Our diluted share.
We continue to invest in our long term strategic initiatives and data product innovation and international expansion, while delivering adjusted EBITDA of $15 4 million and adjusted EBITDA margin of 17, 4%.
Now turning to the balance sheet at the end of the period, we had $25 7 million in cash and cash equivalents.
As of March 31, we had $15 million of outstanding borrowings under the revolving credit facility and $95 million under the term loan agreement.
The borrowing capacity on our revolving credit facility was $350 million as of March 31, leaving.
Leaving $335 million of availability.
We have a strong liquidity position and we believe we are able to take advantage of strategic opportunities with a net leverage that remains less than one five times.
Inventory at the end of the first quarter was 125 million roughly in line with a year ago.
Turning to our outlook, we are reaffirming our full year guidance of 520 million to $540 million.
In light of the current environment. We are currently forecasting revenue at the midpoint of our range on the EBITDA margin in the range of 16, 5% to 17, 5%.
Let me provide additional color into our forecast for the rest of the year as we lean in the wholesale revenue shifts between quarters may occur based on buying and I'm wondering differences between the channels.
Q1 showed stronger than forecasted because we experienced some pull forward. It forward from our wholesale channel from Q2 into Q1.
We also recognize that the consumer remains selective and their discretionary purchases.
Taking these items into account, while historically, our quarterly revenue breakdowns have been 15%, 25%, 20% and 40%.
Now expect it to look more like roughly 17%, 23%, 20% and 40% as our innovation pipeline is second half weighted.
In summary, I believe we are off to a strong start to 2023 our growth story is just beginning.
To be excited about our long term strategic initiatives and outlook.
We will continue to focus on executing and delivering increased value to our shareholders with an emphasis on healthy growth increased profitability and strong free cash flow.
I will now turn the call over the operator to begin Q&A.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad.
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Our first question comes from Robbie Holmes from Bank of America. Robert Your line is now open. Please go ahead.
Hey, good morning, guys.
Hey, good morning, Rob.
Hey, John .
So my question is kind of multipart, but I was hoping you could talk.
So a little bit more about.
The wholesale business. So one question would be can you give us some color on.
The opening up of Costco is contributing to wholesale strength and how we should see that playing out through the year.
You mentioned that <unk> was less promotional can you give us some color on how your partners in wholesaler being with the solar salt product are they being promotional or are not promotional and then maybe the third part of the question is can you can you guys talk about.
<unk> in how <unk> performance was from a wholesale standpoint versus DTC. Thanks.
Okay.
Thanks, Rob I appreciate the questions.
So let me let me just.
Kind of tried to do this in order of those questions and it kind of sounds like there's maybe three layer together, but they're all very similar so just looking at wholesale holistically.
Again, as we mentioned.
All in and sell through.
Two obviously very different things I know you guys pay a lot of attention to and we are as well we were encouraged to see faster replenishment obviously.
We don't have full line of sight, but we have pretty good line of sight based on the behaviors of what those replenishment orders look like in <unk>.
Say that the early feedback via that behavior that replenishment behavior is positive for wholesale so we're encouraged by that.
Moving to specific retailers.
You talk about Costco, specifically for solar though.
We continue to have great conversations with them I would say.
We're going to continue to be careful with.
And strategic with the Skus, specifically that we looked out there and we're thinking about our wholesale business and a and a full picture.
As we think about Costco specifically so.
We're looking at.
Costco specific bundles Costco specific exclusives on certain skus things like that that don't disrupt the rest of our wholesale business for so on.
On the promotional front I'd say that our retailers are in line with the way the promotional activity that they would have been had in the past.
So if you think about 2022, probably very similar from a promotional standpoint, I think what's changed for us on the retail Bret is that we're more calculated and more planned in advance with our retailers than we've been in the past. So do you think historically, so well so would often be running things on at site that might.
Conflict with what was happening in store I think what youre seeing more of is just leaning into partnerships with our retailers and giving them better line of sight to what we're running around promotional periods.
We can be consistent in what we're running so I think that that's that's.
Its been very favorably received by by our retail partners is something that they are excited to see us.
We need to do in the future.
With regards to Chevy's and <expletive> I'd say this has been a very a very bright spot for the company.
If you've walked through a Dick's sporting goods store in the last couple of months, you've probably seen the mens feature swim wall, which is essentially a big beautiful Chubb is display that has been very successful the feedback from dish has been positive and we're excited and encouraged to see the lean and happening there.
And again part of the replenishment activity that we're talking about that came earlier and bigger than expected.
Through that particular partnership and what's happening with Chevy and part. So excited is kind of across the board for all of that.
But.
We're encouraged overall I'd say and excited for what's to come on the retail front.
It sounds great. Thanks, so much John .
Thanks Robyn.
Okay.
Our next question comes from Randy <unk> from Jefferies. Randy. Your line is now open. Please go ahead.
Yes, Thanks, a lot I guess, John can you just give us some perspective on let's.
Let's see where the consumer is now in terms of are they changing.
What's their buying within the solos.
Our product portfolio as we go through.
Color there if things are changing obviously quite good response to new products.
Like the pizza oven et cetera. So just I just wanted to understand what changes youre seeing around the consumer as it relates specifically more specifically to sort of silver in the product portfolio.
Yes.
Yeah. Thanks, Randy good to hear your voice.
It's been the consumer the state of the consumer overall.
You've heard us talk about it a little bit, but tradeoffs seems to be a little bit of a theme.
We view that more than people that are looking for experiences and how they're how they're spending with us seems to be indicative of people wanting to invest in experiences.
So they may be trading off or something more expensive like a vacation and come into solar stove.
One of our other brands to make purchases, but if you look within some of those specifically.
We talked about at the last couple of calls we were really excited to launch Mesa last year in September .
Tabletop Firepit product that has a price point under 100 Bucks and one of the things that we're really excited about what that does to our over address the overall addressable market. So we feel that we've attracted now.
That have smaller spaces that may not have been able to participate with the larger products and then as we've expanded and you kind of mentioned this with Pi and other products that we've expanded categories within the social brand. We've also seen an ability to attract customers that are coming in necessarily initially through the fire pit.
Ecosystem or category and Thats also been encouraging for us So we are attracting customers.
At a nice rate because of Mesa, we're getting people to come in at a lower price point and then watching those customers again begin to participate in the in the sort of ecosystem and either upgrade or cross sell into other categories.
So over overall encouraged by that but the number of customers coming in looks very consistent and growing.
The average order value within solar so specifically youre seeing come down, but that's mostly driven by again, a new cohort of customers coming in and having a lower price point product in the Mesa to enter in and start start becoming kind of Brent brand fans or Brent favorites.
Super Helpful. And then when you think about the expansion of wholesale have you seen any of this.
No no meaningful benefit yet from may be analyzing shifting certain zip codes, where you have.
Our wholesale prices impacting.
Impacting possibly impacting your business have you started to see that kind of.
The positivity around wholesale driving our brand awareness and thereby driving.
More purchase behavior on the.
Okay visibility around when applied is gonna fall and kind of step, but more importantly, the margin. So they can just unpack that a little bit more on kind of you know how you think about Ah any volatility Ah variability from that plan around margin or top line cause it does feel like there's a little bit more.
Kind of visibility there is we kind of stayed through the rest of the year and we start to build the based on these numbers.
The blend of wholesale to D. C is going to have some impact on gross margins. We still believe that we're gonna be 60 per cent plus the one thing I do want to remind that I mentioned last call is the good news about wholesale or D. T. C is I'll know a little bit of a shift on gross margin, they're consistent on EBITDA Martin.
Then.
So I feel good I still feel good about the 60 per cent plus guidance for the year, obviously, it will fluctuate in quarters as we lean in either to a hotel or to rent direct to consumer typically Q1, and Q3 are gonna be our higher wholesale quarters, and Q2 and Q4 just the season.
<unk>, our business are gonna be higher direct to consumer, but overall again, emphasizing that we should be 60 per cent plus on gross margin.
Making a <unk> EBITDA margins you know obviously, we had a really strong Q1, uhm I'm mentioned, probably several calls ago, because marketing is a variable expense and we have a lot of flexibility to ship that up or ship that down what we saw in two one is the street.
Uhm continue to grow on our retail partners in our wholesale channel, we actually pulled back on marketing spend. So if you think about the 17.4 per cent EBITDA margins that we were able to generate about 400 basis points of that came from the fact that we were able to pull back marketing spent so the flexibility really showed in the first.
[noise] are seeing really strong signs both on the gross margin side and on the EBIT margin standpoint.
Yeah that is chasing good good question, so kind of a another three parter I'll try to kind of do this in order. So remember the traffic is heavily influenced by advertising spend. So you know we we have the ability inside of our agent as we sped to drive traffic to our site.
Nothing that we've been very good at really since the beginning so that someone was just talking about when we take that variable expense down whether whether strategically or because of you know.
What we're seeing from a marketing efficiency standpoint, that's going to have impact on traffic. So we did see inconsistent or or or a drop in traffic on our D. C channel, but when we say in line with expectations is not because we were expecting some massive decline in consumer traffic because of the macro but more because of our own.
In terms of you know, what we're seeing now and and and maybe just good color to add to that as we look into the queue to get just a peek into the early you know the the early part of the front part of Q2 as this is a higher data see quarter, you've heard US talk about this Q1 and Q3 are generally higher.
Wholesale quarters, two two with you for a higher directly consumer quarters from an absolute revenue standpoint. These are these are the types of timeframes, where you'll see enough leaning into that that variable expensive someone was just talking about spending more on marketing and driving more traffic and we've seen that traffic trend reverse.
In terms of our overall outlook or board the channel for the year I think we're we're expecting for D to see just based on the strength of our wholesale and the way you were strategically thinking about balancing our advertising spend we're actually expecting a slight decline in D. C for the year, but still again that that rolls and.
To the guidance for providing it that mid point of the range of 530 million. So if you. If you think about you know summer on our last call talking about the channel split looking like a 70, 525% and you kind of run run the map on that uhm, you'll you'll get to a number that has a slightly down on for you to see.
S. As wholesale continues to strengthen we think this is a really healthy thank for our business, it's allowing us to be more strategic and calculated in our advertising span uhm, which is ultimately helping striped and argue with a physician and our our line of sight into our profitability. So we like where we're at it's in line again with with our.
<unk> the variable nature of of our ability to drive traffic is.
Really important you know overall and and so that love or continues to be a big strength for us as we think about uhm advertising spend I don't know summer you may want to lay around here, a little bit as well so I'll I'll open it up for you to to talk through anything that you have.
Got it Super helpful. <unk>. Thank you for that and then just in the press release, you guys called out lower distribution cause I was hoping you could just unpack that a little bit more and it's the benefit you're getting on outbound distribution, because you're relying more.
<unk> on the spot market vs on the Ocean freight side that we talked about.
Last quarter, where those costs were going to be a headwind for you and then the first half and then moderating and put them to become a tailwind in the second half, which extensively because you're still under contract is your expectation that uhm you don't outbound will continue to be a tailwind for you for the year.
Yeah, So there's probably three components to the so actually inbound ocean <unk> and our cause it's not in our in our distribution cough. So that one everything you just described as accurate, but that's actually in a different part of our our piano, but we are seeing the <unk>.
Half of the year some tailwinds on the on the Ocean bright side, a couple of things just just to remind everybody on US you know because of our inventory position. The majority of the front half of this year outside of new products are already on the books earlier freight costs. So we at higher higher rates.
We imbalance all of that inventory you know last year in in the first part of this year. We actually are just kicking up a new carrier contract for ocean freight and those rates are much more favorable than they've been in the past the spot market is obviously something we continue to use as well. So you can expect uhm tailwinds in the bathtub.
Half of the year with regards to ocean freight, but again, that's that's not something that would show up and distribution costs as much as it will in Cogs in and that's already kind of baked into our overall gross margin expectations on the year on.