Q1 2023 Grove Collaborative Holdings Inc Earnings Call
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Good afternoon, and thank you for standing by welcome to Girls Collaborative Holdings, Inc. First quarter 2023 earnings conference call. At this time all lines have been placed on mute to prevent any background noise.
Following the speakers remarks, we will open your lines for your questions.
A minder this conference call is being recorded.
Hosting todays call are group's cofounder and CEO Stuart Landesberg CFO , Sir Joseph on days.
Before they begin their prepared remarks, I will review the forward looking statement Safe Harbor.
Some of the statements made today about future prospects financial results business strategies and industry trends and girls the ability to successfully respond to business risks may be considered forward looking such statements involve a number of risks and uncertainties that could cause actual results to differ materially.
All of these statements are based on gross view of the world and their business as they see it today.
As described in our SEC filings, the underlying facts and assumptions for these statements can change as the world and their business changes for.
For more information please refer to the risk factors discussed in their most recent filings with the SEC, which are available on Grubbs Investor Relations website at investors Dot growth dotcom.
During today's call. They will also discuss certain non-GAAP financial measures reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in the earnings release, which is also available on their investor Relations website.
I will now turn the call over to Stuart Landesberg to begin.
Thank you operator, Hello, everyone and thank you for joining the call today.
I recently read a New York Times article entitled Theres plastic in our flash describing how plastic waste has permeated every part of our bodies and our world.
<unk> brand and our vision is one of the few offering consumers a way to participate in creating a solution.
Those distinct vision to make consumer product a positive force for human and environmental health has never been more important.
Moving to our results.
The first quarter of 2023 was another successful quarter for growth, we achieved a record gross margin of 52, 1% and continued to manage expenses smartly across the P&L, which led to impressive adjusted EBITDA margin improvement of 330 basis points quarter over quarter, and $3 and 420 basis points year over year. Despite.
Sales declining largely as expected with rationalized marketing spend compared to 2022.
Our adjusted EBITDA margin for the first quarter of last year was negative 43, 8% and this quarter was negative nine 6% again that is 3420 basis point improvement in only one year truly exceptional.
The strong adjusted EBITDA results were driven by continued execution of our four part value creation plan, which encompasses improved marketing efficiency Omnichannel expansion net revenue management and operating expense discipline.
On the first point, we achieved strong marketing efficiencies in the quarter on lower spend year over year, despite being up sequentially due to the optimization of marketing mix as we moved away from higher CPA channels.
And into channels with our strongest return on investment media costs in the first quarter were down 50% year over year, a huge win as we march toward profitability. Furthermore, strong performance from unpaid and organic channels drove a 9% sequential increase in those channels in the first quarter.
We made progress in the quarter on our omni channel distribution expansion strategy with the launch of grilled co. Our flagship home care brands on Amazon at select Walmart stores nationwide and then Walmart Dot com retail continues to grow at a nice pace, especially considering the headwinds in the category and we continue to be excited about this capital efficient growth strategy that meets our consumers' ware.
We are eager to announce additional retail partners in the near future.
Net revenue management initiatives focused on strategic pricing and on the optimization of DTC net revenue per order implemented in the back half of 2022 continues to drive results in the quarter.
In Q1, we delivered 12% year over year improvement the D. T C. Net revenue water up to $62. This was a record across Q1 is for growth.
And it is particularly impactful when paired with overall record gross margin.
Lastly, we remain ruthlessly focused on driving margin improvement by maintaining strict expense discipline, we're seeing results across the P&L from inbound freight and procurement initiatives contingent contributing to gross margin gain to optimizing carrier mix and.
And driving down shipping costs. These efforts have enabled us to focus resources on the critical initiatives and deepened our results orientation.
Execution on this value creation plan drove continued improvement in our first quarter financial results adjusted EBITDA loss in the first quarter of 2023 with $6 9 million an improvement from a loss of $9 5 million in the fourth quarter of 2022, and a loss of $39 7 million in the first quarter last year.
This improvement was achieved despite revenue in the first quarter, which was down 3% sequentially and 21% year over year, primarily driven by the 74% strategic reduction in advertising spend in the current quarter versus Q1 2020.
This reflects our strategy of focusing on our most profitable marketing spend and driving profitable growth in 2024 off a durable high margin revenue base.
During the quarter. We also continued to make progress towards our goal of moving beyond classic in the first quarter, 70% of revenue from gross co product came from either zero plastic reusable or refillable and zero waste plastic products meeting the company's beyond classic standard inline with 70% in the fourth quarter of 2022 and down slightly from 71% in the first.
Quarter of last year, we expect this metric to improve as we continue product innovation.
We continue to challenge others to disclose plastic intensity and we believe tracking and disclosure are keys to moving the industry forward and we are delighted to lead the industry on our path away from plastic.
While executing against our value creation plan, we have continued to invest in our business R&D has remained a top priority for investment at our innovation advantage driven by our DTC heritage the largest online community our space rapid iteration and feedback cycles unique access to data and sustainable product development expertise is a durable competitive advantage.
We believe the category will continue to shift towards sustainable products in the years to come and our ability to out innovate will be key to our continued success, we anticipate continuing to invest behind this competitive advantage.
At the same time, we've been investing in improving the user experience for our customers and community on.
On our DTC site.
At the end of March we launched new benefits for our very impactful person VIP program to drive loyalty, among our best customers and to create more VIP the.
The enhanced program offers significantly increased value to consumers in the form of additional VIP gifts throughout the year exclusive VIP bundle and discounts as well its first yes on new product collections and brands on our site along with energized New branch.
All for the same cost of a consumer.
Additional value add features will be rolled out as part of the program over the course of the year, while it's still too early to see an impact on the renewal rate the sentiment from our community has been quite positive on the re launch.
Overall, we are proud of the results we've achieved due to the successful execution of the value creation plan to date.
Looking ahead, we have consistently stated that we will grow and reach profitability at some point in 2024. However, our transformation has been outperforming our expectations. As a result, we are pleased to share that we expect to be approximately breakeven or perhaps slightly profitable on an adjusted EBITDA basis for the third quarter of 2023 well.
Ahead of schedule, while we don't expect to be profitable every quarter from there on due to seasonality and other factors. We do believe this demonstrates how close we are to our stated goal of achieving profitable growth in 'twenty 'twenty for.
This is an important milestone of course towards sustainable profitable growth in our business.
Now that we have made progress on our path to profitability. We are turning our focus to the growth drivers for 'twenty 'twenty four and beyond.
Onto these growth drivers omnichannel distribution, the health and wellness category and M&A.
All of which can build upon this foundation of a stable profitable direct to consumer business.
We've talked a bit already about omnichannel distribution expansion, but I want to underline the scale of the opportunity for those of you who may be newer to our story.
Industry wide U S. H B C is 180 billion less than 10%. That's none of that is done via vertical ecommerce like growth.
We are just getting started in bringing our brand to reach out and then addressing the massive opportunity to move gross co to the channels that 90% of consumer shop.
The second leg of our growth strategy is the recent launch of our health and wellness platform grow wellness, which we announced in March the global wellness market is more than $1 five trillion and growing between five and 10 per cent per year and grow is well positioned to win in this category.
Since <unk> inception, we've worked hard to earn customers trust by Curating and developing products on the basis of efficacy sustainability and consumer Centricity.
Our survey work with customers indicate that 89%.
Of our customers would trust grow over other brands to solve their health and wellness needs.
We are thrilled to be able to meet this asked by offering vetted and personalized wellness plan across a number of health and wellness categories.
Still very very early in our health and wellness journey. However, we are energized by what we've seen so far we saw a record amount of revenue and orders containing wellness skus in the first quarter, a promising sign that our loss. While early has been extremely well received and I look forward to further updates on this in coming quarters.
Lastly, we continue to explore M&A opportunities that can build on our platform and accelerate our business and mission.
By driving scale and shortening our path to profitability, we continue to be quite deliberate about where we invest time and resources, but we are seeing excellent deal flow and continue to believe this is the right environment for a business like ours to be looking opportunistically. We are optimistic that this can be a source of growth for us in the months and years ahead.
2023 is an exciting year for growth.
We plan to drive stability in our business improving our economics following the advertising spend of 2022 building upon the great progress we've made on the profitability front and continuing to lay the groundwork for future growth opportunities in 2024 and beyond.
Before I pass the call over to Sergio I want to thank every person that growth.
And hard to our customers focused on the most critical initiatives to our consumers and to our mission embraced urgency and made hard decisions that are right for our business our purpose and all our stakeholders. It's a privilege to be on this journey with each of you.
I'll go ahead and turn the call over now to Sergio to review our financial results in more detail Sergio. Please go ahead.
Thank you Sue.
Similar to previous goal, we will provide quarter over quarter comparison. So in addition to a year over year changes.
Leave that sequential comparison better reflect the strength in the business and the steps we have taken to position ourselves for sustainable profitable growth.
Net revenue in the first quarter was $71 6 million.
Down 3% from the fourth quarter of 2023 and.
21% year over year.
Both comparisons continue to be impacted by the strategic decision to reduce advertising spend.
As the company focuses on achieving profitable growth in 2024.
Similarly, total orders were down 3% quarter over quarter, and 30% year over year to $1 1 billion.
The customer went down 10% quarter over quarter, and 25% year over year to 1.2 million on a trailing 12 month basis.
<unk> net revenue per order was down 3% from the record timetable achieved in Q4 2022 on higher promotional and some softer performance of <unk> 12.
12% year over year to 61 $64.
The year over year increase was driven primarily by the impact of the net revenue management initiatives, including the introduction of our supply chain fee at the end of the third quarter as previously discussed and implementation of strategic price increases on both growth brands on third party products.
Gross margin was up 510 basis points from the fourth quarter of 2022, and 480 basis points year over year to 52, 1% a record high for us.
Reminder, fourth quarter result was impacted by a decrease in inventory reserve it.
Excluding the impact of inventory reserve gross margin in the fourth quarter.
Who would have been 51, 7%.
The quarter over quarter increase was driven primarily by market improvement and both own brands and third party brands.
Shift to owned brands are going to license any breakthrough.
Personally upset by higher discounts.
Are there any grief.
That's a part of total orders.
Joe Brown as a percentage of net revenue increased.
40 basis points quarter over quarter, and declined 90 basis points year over year to $48 nine.
The sequential increase is due an increase in retail net revenue as a percent of total revenue, whereas yogurt yearly basis due to fewer new customer order which include multiple products.
Advertising expense increased 26% quarter over quarter, following typical seasonal butler unfairly, 74% year over year to $8 7 million.
Flexing hours, but the pullback in advertising spend and focus on improving the marketing investment decisions.
We continue to be pleased with improved reflecting efficiency, we've told people right.
Product development decreased 8% quarter over quarter, and 32% year over year to $4 2 million, primarily due to a decrease in salary and benefit from reductions in head count.
With fewer resources, we've got ruthlessly prioritized to ensure we focus on the highest ROI initiatives that will provide the most value.
SG&A expense decreased 26% quarter over quarter, and 25% year over year to 38.
The quarter over quarter decrease was driven primarily by a $6 4 million increase in stock based compensation.
And the $5 3 million expense recorded in the fourth quarter of 2022 related to operating lease right of use up its Kirk.
Excluding the stock based compensation severance and the right of use asset base.
Jordan.
<unk> expense in the quarter would have been $33 7 million or 4% less in the fourth quarter of 2022 and 20.
28 person who lives in the same period last year.
The quarter over quarter decline was driven primarily by lower consumable costs and other expenses, which is reflective of our strategy of creating operating efficiencies and eliminate any desperate up it's been a focus on profitability.
As a percent of net revenue.
<unk> expense would have been 47, 1% compared to 47, 5% for water.
I'm 51, 1% in the first quarter are going to be quick.
Yeah.
Our adjusted EBITDA loss.
$6 9 million compared to $9 5 million loss in the fourth quarter of 2022.
It wasn't materially compared to the $39 7 million loss in the first quarter of 2022.
Lower sales.
Our adjusted EBITDA margin improved by 330 basis points quarter over quarter.
3000, and 420 basis points year over year to negative nine 6%.
The quarter over quarter improvement was due to improved gross margin and lower <unk>.
By increasing our Berkeley.
Net loss in the quarter was $13 1 million compared to net loss of $12 7 million in the fourth quarter of 2010 people.
Local $47 4 million in the first quarter of 2022.
Turning now to the balance sheet, we finished the quarter with an inventory balance of $40 9 million down $3 2 million from the end of 'twenty to 'twenty two.
While you were continue efforts to improve working capital.
We ended the quarter with 95 million gas gas equivalent.
God.
Down $5 5 million from the previous quarter, primarily from the adjusted EBITDA losses on interest payments.
We are upset by working capital efficiencies, particularly on inventory and seven five minimum on the asset based loan facility.
Note that during the quarter, we also reduced the amount of the Scott by $6 1 million freeing up additional liquidity for operations.
Previously announced in March we closed on an asset based loan facility with 35 million total capacity.
With borrowing capacity that's needed from our inventory and accounts receivable balances there.
They would only for a term of three years and will support our strategic initiatives on working capital needs.
We took the minimum golf seven 5 million during the first water.
Based on current inventory rebalancing, we got $10 2 million of capacity available.
Yep.
Furthermore, assuming a share price of 45.
We have off to a core group one thing you don't get back with you on our standby equity purchase agreement.
Taking into account market conditions, our business priorities, we will evaluate using just kept but could be strategically to supplement our liquidity.
We feel very good about our current liquidity position and our ability to execute our aggressive push to appropriately.
Now turning to our warehouse.
The progress we have made improving operating efficiency using expensive gives us the confidence to increase our adjusted EBITDA margin guidance for fiscal 2023 despite.
Despite continued challenges in the macroeconomic environment. Furthermore, as Stu mentioned.
We expect to be close to breakeven on an adjusted EBITDA basis in the third quarter. This year and we continue to progress toward our stated goal brokerage I won't go there once or twice before.
Note that due to seasonality and the visa.
We do not anticipate our breath, but the profitability to be a great block hour guidance continues to work at losses.
Only 23 to 2023.
But really in our performance to date and our expectations for the remainder of the year, we are offering quarterly guidance.
For the 12 months ending December 31st 2023, we continue to expect net revenue of $260 million to $270 million.
We now expect adjusted EBITDA margin of negative five 5% to negative seven 5% up from negative 9% to negative 11%.
I would like now to turn the call back to Sue for some closing remarks.
Thank you Serge Yeah, we continue to be excited about the opportunities in the balance of 2023 2024 and in the years ahead. We believe the path to profitability is clear our liquidity position is strong and we are laying the groundwork for growth on top of stabilized core business as we see the crises from plastic b, they trained fires or nano.
By sticking their brains and bloodstream our commitment.
Building growth into a large and important company that can lead the industry only grows we are grateful for your support.
Thank you for listening to our prepared remarks, and we're now happy to answer any questions operator.
Operator, please open the line for questions.
Thank you we will.
Now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you. Our first question comes from Susan Anderson with Canaccord Genuity. Please proceed with your question.
Good evening, it's nice to see that improvement in the profitability in the quarter.
I was wondering if maybe you could break out the drivers of the gross margin. This quarter and then also looking throughout the rest of the year should we expect kind of the same level of gross margin.
Hey, Susan Thanks for calling it out and profitability as we said is our is our focus as well as driving top line. So we're really pleased with the results.
In terms of gross margin improvement I'll, let <unk> take that one first.
And then I can speak a little bit to where we're trending in the long term.
Thank you for the question Susan So yeah.
Yeah.
You can imagine driving gross margin is at the center of our company of course that would allow us to have more fuel for growth.
So answering the first the second question would you expect something similar going forward I would say that we are working very hard towards keeping this level of margin and improve on it as much as we can as we move forward in terms of the initiatives that we have that we have been sharing so as you know we have been saying the gross margin.
It's not only compose or improving certain things. It's composed of 13 on several places us up with liebert unbelievers that we have across the P&L. So at this time, we have as we have explained before we have basically make efficiencies in turnover make efficiencies mix in pricing and cost of goods Inc.
Rate et cetera, so all together.
That's allow us to come up with this improvement in margins remember also that mix is important for our categories and we have been also pushing forward the categories that allow us to enhance our margin.
So if I want to sneak the margin I would say that there is no need.
Elements of this discount what do we have done there is an element of supply chain improvements what do we got Pat.
Elements of well of improvement.
And our corporate Buddy.
Partially offset by some of the ongoing cost increases that we've seen the mark.
I hope that helps and we can pick up more details if you will in our next call.
Great. That's really helpful. And then I think you had mentioned that you significantly reduce your CAC in the quarter can you maybe talk about what drove that rejection and maybe if you could give some color around where your CAC that now versus historically.
Sure. So if you look at the last several years of marketing with Grub.
<unk> had the privilege of being able to experiment into a lot of channels and also to build really strong top of funnel awareness one of the things we've seen as Omnichannel has come online and were now in 5000 plus doors across retail is the incremental value of top of funnel marketing is not as well.
And so we've been able to maintain strong awareness and strong bottom of funnel metrics without making the same we're still making big investments in top of funnel or drew Barrymore collaboration for example, it's quite successful, especially in driving awareness.
But we haven't needed to devote the same amount of marketing spend there, which has allowed us to get much more targeted in terms of how we're spending our dollars and how we're driving ROA.
And so outperformance there is one of the things that's allowed us to improve our profitability guidance significantly.
The second piece is that I think we're really honing in on the right messaging and the right channel mix with the right customer type and that's giving us sort of leverage.
As you noted it really is quite an extraordinary reduction.
The reduction in CAC in a relatively short period of time. So we feel feel really good that we're leveraging a bunch of the learnings that we've gotten over the last year and that the Omnichannel business model is allowing us to.
Reduce especially some of the top of funnel spend that can be quite expensive, while maintaining strong brand awareness strong leadership and ultimately strong bottom of funnel and your attention.
Metrics.
Okay.
Okay, Great. That's really helpful. And then maybe just on the wellness platform I guess I'm curious you know what's been the early reads on that have consumer.
On your site than purchasing and then also are you taking any learnings from it.
Potentially you maybe roll out your own wellness offerings.
Yeah. So we've been we rolled out wellness as Hugo said, just gosh, I guess, a month and a half ago and we started to see really good results.
Already that said still too small to move the overall P&L just to get a sense you know in Q1 of 2023 versus Q1 of 2022. The wellness category was up just over 35% year over year, so real growth, but it's off a small base in the mid single digit space.
So a relatively small base, but early signs of adoption are good and I think you know where you're going with that is exactly where we plan to take it.
Our company's competitive advantage is in large part built on leveraging the data from our unique direct to consumer business to understand where we can innovate and where our consumers really want us to innovate and so that is I think a very likely outcome for us in the wellness category over the medium to long term right where a bra.
And if he wants to build the brand there.
I think that we're starting to get data certainly too early to have conviction on what direction, we'll go but.
You're exactly right that that that ball is in motion and over time, we want to be able to take the same innovation cycle that we've used effectively in eliminating plastic and home and personal care to drive market, leading offerings and wellness.
Okay, great and that all sounds really good. Thanks, so much and good luck the rest of the year.
Thank you much.
Okay.
Thank you. Our next question comes from Dana Telsey with Telsey Group. Please proceed with your question.
Hi, good afternoon, everyone and nice to see the progress.
As you think about the reduced AD spend what as you go through this time period, and reaching profitability to breakeven profitability. How do you think about AD spend what is the right number how you got what's the cadence of that spend that youre looking at and then when you mentioned Sergio that the path to long term profitability won't be as.
Straight line, how can you expand on that how should we think about it this year and next year and how you're planning given the revenue targets also thank you.
Thanks, Dana maybe I'll take the first half of that question on <unk>.
And how we think about the right level of marketing spend.
And then surge you all I'll pass the mic over to you for the second part.
Yeah.
From a sort of a right level of marketing perspective.
We don't think about it is sort of hey, what's the right number we really think about what our goal is to drive profitable growth in 2024.
So we're investing not just for the return we're seeing today, but to make sure that we're set up to drive top line growth in a profitable way going forward, but not just in 'twenty four and beyond.
So I think obviously, we've brought down marketing as a percentage of revenue quite significantly in the last 12 months.
And Youll still see big seasonality throughout the year Q1 is always our most efficient quarter from an advertising perspective, So Q1 will always be our highest advertising as a percent of revenue quarter.
In the DTC business and the retail business of course, it's much more rate base.
But as you look sort of towards the future I think it will probably stabilize not at a place wildly different than where we'll end up for 2023, but again within 2023 I would definitely expect that Q1 will have the highest advertising.
Number for the four year.
And really you know, we don't disclose exactly what our LTV to CAC targets are but we do of course invest on a channel by channel basis targeting really strong returns with the clear goal of driving profitable growth in 2024 and of course beyond.
Yeah.
Do you mind repeating the second half of your question for Surjit I'm, Sorry go ahead Roger.
Dana Thank you I I got it so okay.
Yeah. Thanks for the question first of all and for picking up on that specific point, but what we referred to that embedded specific sense is we are not we don't want to leave the the guidance. We believe that we're gonna be appropriate I won't say every single quarter after Q3.
And the reason for that is we're gonna be cooperating around the breakeven point you know that when do you mind, it should be and what our breakeven point anything can happen.
Few dollar so few dollars down so it's difficult to predict exactly where you are going to land.
However, also take into account that we have some seasonality in the business with advertising investment. So that also plays a place.
So some part on these on these numbers I'm for it because we are providing.
So all to say that in the second half for 'twenty to 'twenty three we believe that we're gonna be still negative however, with a positive Q3.
And leading into 2024, we're gonna be hovering around the breakeven and for a full year perspective, our plan is to be profitable altogether. So that's the way to read about it.
Thank you.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Stu Landesberg CEO for closing comments.
Yeah.
Thanks, So much are grateful for the team for a really great quarter of work look forward to getting back to you. All you all as we continue our progress throughout the year. Many thanks.
Thank you this.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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Okay.
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