Q2 2023 Solo Brands Inc Earnings Call
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Good morning, and welcome to the solar farms incorporated second quarter fiscal 2020, great financial results call.
Lines have been placed on mute during the presentation.
Portion of the call with an opportunity for question and answer if you'd like to ask a question. Please press star followed by one on your telephone keypad I would now like to turn the call LIFO.
Two our highest Bruce Williams. Please go ahead, good morning, everyone and thank you for joining our call to discuss solo brands' second quarter results, which we released this morning can be found on the Investor Relations section of our website at investors got solo brands Dot Com today's call will be hosted by Chief Executive Officer, John Morris Chief financial.
Officer Summit with 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 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 future events and developments and actual results could differ materially from those mentioned.
These risks, including me are soon to be filed quarterly report on Form 10-Q that will be.
Available on the investors portion of our website at investors <unk> solo brands Dot Com you 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 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.
With a period to period comparisons of our core operating results and the results of peer companies reconciliation of these non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our earnings release, which will be available to our investors portion of our website at investors got solo brands.
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Please note that our definition of these measures may differ from similarly, titled metrics presented by other companies. We are unable to provide a reconciliation of non-GAAP adjusted EBITDA margin to net income margin. The most directly comparable GAAP financial measure on a forward looking basis without unreasonable effort because of items that impact us.
GAAP financial measure are not within the company's control.
Or cannot be reasonably predict now I will turn the call over to John .
Bruce and thank you for joining our call to discuss our second quarter results I will begin by reviewing our second quarter performance, then provide an update on our key operational strategies.
<unk> will review, our second quarter results and provide our outlook.
We are pleased with our performance and I am grateful to our team for their dedication and hard work to produce results in this environment against the challenging consumer backdrop, we focused on driving profitable sales, which enabled us to deliver better than expected margins and profitability.
For the quarter, we generated sales of $131 million in line with our expectation and a 170 basis point expansion in EBITDA margin to 19, 1%.
Our results for the quarter demonstrate that we are committed to a disciplined approach to drive strong return on invested capital and free cash flow.
During the quarter, we leaned into the strong momentum we were seeing through our wholesale channel we are rapidly gaining shelf space, while increasing our door count we have built strong relationships with our retail partners and consumers have reacted enthusiastically to the presentation of our brands at stores across the country.
But then the online channel we used our digital marketing lever to strategically pare back our spending as we saw strength in wholesale as.
As we grew into an Omnichannel model, we are focused on elevating our brand positioning and aligning ourselves calendar with our retail partners.
We've also pulled back our use of flash sales year over year, leading to a reduction in the level of planned promotions.
As expected this pullback in promotions and advertising during the quarter led to a moderation in sales trends in our direct channel, but longer term. We believe that this is appropriate to drive consistent messaging and to better reflect the value of our brands. We are increasingly managing our business with an omnichannel approach and given the strong consistent EBITDA margins in both channels we.
And to be disciplined and directing marketing investments that will optimize growth.
To that end, we continue to refine our marketing investments to grow our brand awareness. We know that we are currently gaining exposure to a broader audience through our retail partners and we are leaning into this opportunity by investing in shop in shops and caps bundles at point of sale displays.
We were able to tell a better story and create a stronger connection to our brands.
For example in shield stores, we have created a beautiful and store solos those shopping experience that showcases the depth of our assortment.
Our improved positioning of retail stores provides a seamless customer experience for those shopping our brands at retail or online.
In addition to enhancing our in store presence with our retail partners, we see opportunities to build awareness for our entire platform of brands. We believe that many of our customers do not know all of the brands that are part of the solar brands family, which creates a significant opportunity to increase the number of customers that shop across our brands.
Beginning in the second half of the year, we will be adding marketing and third through our packaging that display all of our distinct brands and offer an incentive to try another brand. We are incredibly excited about the potential for this initiative.
Moving forward, we remain committed to our key priorities investing in product innovation growing our wholesale penetration and building our international business.
Our unrelenting focus on innovation is at the heart of our success. Our team continues to push boundaries and explore new avenues to create compelling products over the last 12 months, we have introduced a flurry of new innovation and we've been pleased with the consumer response with notable callouts of Solas, though of our pie pizza oven Mesa.
And fire pits around <unk> of our everywhere pant at Isle of our switch and it or kayak of our Lake we continue to generate strong customer responses from our most recent innovation looking.
Looking ahead, we're excited about our new product launches planned for the back half of the year and look forward to unveiling the first of several in the third quarter.
We are at the early stages of our wholesale expansion, which is ramping at a faster than expected rate as such we recognized that this channel shift maybe pressure on the top line in our direct channel in the near term, but we believe that our omnichannel strategy will produce a halo effect as our brand recognition grows and customers look to our direct channel to continue their relationship with our <unk>.
In the wholesale channel we are building stronger relationships with our partners. We are now part of the normal planning cycle for many of our key retailers, which is leading to an increase in door count additional shelf space and improved product placement, we recognize the mutual benefits of working closely with our retail partners and we will continue to drive awareness and say.
Across all channels.
Our international business remains a significant opportunity for us today. It is still a relatively small part of our overall business and we are focused on investing in building the infrastructure to position us for long term growth we.
We are taking a measured and methodical approach to our growth in new markets, recognizing the importance of making disciplined marketing choices similar to our domestic business. We are looking at the international business Holistically and our channel agnostic, we are building relationships with retail partners, including Costco, Europe , which we believe will enable us to grow our brand recognition.
More rapidly.
Before I turn the call over to summer I'd like to discuss the current environment consumers continue to be selective in choosing which brands. They shop, our company's focus on customer experience and product innovation is helping us deliver in spite of this environment with a clear mission to deliver good moment and lasting memories, our customers continue to refer us to their friends and come.
For themselves life truly is better around solo brands products and I look forward to our innovation pipeline and continued momentum as we execute through the second half of the year.
And now for the summer.
Thanks, John and good morning, everyone. Today, I will walk you through our second quarter results and then provide our outlook for the remainder of 2023.
Through 2023, our plan is to execute a balanced profitable omnichannel strategy program.
We believe our execution of the plan through the first half of the year has been very successful.
We have leaned into building strategic relationships with key retail partners.
<unk>, our brand tree intentionality on price and promotion and broadening our customer reach through enhanced brand marketing.
We realize this strategy could put some pressure on our online business in the short term, but we remain confident that it will deliver strong financial results for our shareholders in the long term.
During the second quarter, we continued to experience strong sales momentum in our wholesale channel.
Order volume continued throughout the quarter, along with new product placement in key retailers.
As we saw strength from wholesale we've reduced digital marketing spend and our direct to consumer channel.
Continue to focus on generating profitable revenues and delivered $25 million in EBITDA and 19, 1% margin for the second quarter.
Net sales decreased three 7% to $132 9 million compared to $136 million in the prior year period.
Sales were driven by strong demand in the wholesale channel, which were offset by softer trends in our direct to consumer business.
Wholesale net sales increased 57% to $31 3 million for the second quarter compared to $19 9 million in the prior year driven by increased shelf space with our existing partners as well as growth in door count.
Our direct to consumer net sales decreased 14, 2% to $99 7 million for the second quarter compared to $116 1 million in the same period in the prior year Deutsche being less promotional and reducing our overall marketing spend.
Moving to gross margin gross margin rate decreased to 63, 4% compared to 63, 7% in the second quarter of 2022.
Our margin rate was impacted by higher wholesale channel mix year over year, driven by our strong sales at our retailers, which carry a lower gross margin.
However, as noted previously regarding profitability, we are channel agnostic as each channel generate similar contribution margins.
Selling general and administrative expenses for the second quarter decreased to $63 5 million or 48, 5% of net sales as compared to $69 2 million or 59% of net sales in the same period last year.
The variance was driven by $6 $8 million decline in variable costs, partially offset by $1 2 million of higher fixed costs.
The decline in variable costs due to lower marketing and distribution expense.
Our second quarter net income was $11 5 million and net income per diluted share was <unk> 12.
Second quarter adjusted net income was $17 9 million and our adjusted EPS was <unk> 22 per diluted share.
Adjusted EBITDA increased five 6%, a $25 million and adjusted EBITDA margin increased 170 basis points to 19, 1%.
Now turning to the balance sheet at the end of the period, we had $66 million in cash and cash equivalents.
As of June 30, we had $50 million in outstanding borrowings under the revolving credit facility.
And 93 8 million under the term loan agreement.
The borrowing capacity on our revolving credit facility was $350 million as of June 30.
Leaving $300 million of availability.
We have a strong liquidity position and we believe we are able to take advantage of strategic opportunities with the net leverage that remains less than one five times.
In the quarter, we were able to leverage the health of our balance sheet and execute a roughly $28 million a share buyback of $5 6 million class a shares at $5 per share.
Inventory at the end of the second quarter was $113 7 million roughly in line with a year ago.
We are pleased with our continued progress of our inventory management and are well positioned going into the back half of the year.
Turning to our outlook.
We're excited about the pipeline of new products, we have planned for the back half of the year and the continued momentum we are seeing in our wholesale channel.
With more than half of our sales anticipated in the second half of the year and a significant portion in the fourth quarter. There is a lot of business in front of us, but we remain optimistic about our ability to deliver in the near and long term.
As demonstrated in our first half results the focus on driving profitable growth along with continued momentum in wholesale has enabled us to deliver on revenue while seeing strength on EBIT margin.
We reiterate our revenue range of $520 million to $540 million with the most likely outcome at the midpoint of the range of $530 million.
While we are reiterating revenue guidance, we are raising our adjusted EBITDA target from 16 Omaha to 17, 5%.
To 17% to 18% for the full year.
In closing our brands continue to execute at the highest levels dropping new innovation and creating incredible experiences for our customers.
We are incredibly excited about the tremendous amount of growth in front of us.
We will continue to focus on strategically investing for the future, while delivering profitable growth to our shareholders I will now turn the call over to the operator to begin Q&A.
Thank you if you'd like to ask a question. Please press star followed by one on the telephone keypad.
Any reason you'd like to withdraw your question. Please press star on <unk>. Please.
Please remember if you are using a speakerphone pick up your handset before asking your question.
So our first question comes from the line of Jason <unk> of Citi. Your line is now open go ahead.
Good morning, Thanks for slipping me in I, just like to start on the guidance first of all can you just give us a little bit more color on how you're planning the rest of the year I think last quarter, you were talking about cadence of 20%.
In.
Third quarter.
And I can't remember the figure out something ahead and what is it 40% in the fourth quarter, just any evolution in how you're thinking about that and then specifically on the EBITDA margin guidance can you just kind of unpack the.
Upward revision there it looks like it was largely a flow through <unk>, but im curious if theres anything else behind it.
Yes, absolutely great question.
So as we think about the back half of the year. We have stated that roughly 20% in Q3 of roughly 40% in Q4 I did mention in previous quarters that there is going to be some timing dynamic around wholesale depending on if it goes out at the end of Q3 early Q4, just the timing with our relationships.
The retailers so it's going to be I think if you think about 60% or roughly 60% in the back half that's a good estimate.
20% to 40.
<unk> is probably a good estimate but again, it's going to be based on the timing of when we actually ship out it was wholesale orders for the holidays.
So theres a little bit of flexibility there just as we dial in this new kind of landscape of wholesale.
On the EBITDA margins.
Youre exactly right. So we kind of we raised the guidance based on our performance in the first half of the year, we're leaving flexibility in the back half.
Mentioned that our marketing spend is it variable lever that we can leverage and we can throttle it up and throttle. It down you saw it in the first half the strength in wholesale and we throttled back. Some however in the second half we have new product innovation, which we do expect that will probably throttle up marketing spend.
And so that's why we're taking the advantage of just the benefit from that first half and we're revising our guidance up from an EBIT margin standpoint, but with the flexibility to go ahead and lean into marketing spend in the second half.
Got it makes sense and then just in terms of the wholesale expansion great to see the momentum there I'm curious have you started to have your 2020 for shelf planning conversations with retailers and if so how are they going are they are you picking up the additional door Shelton.
In cat space that you were expecting.
Just kind of any color on how that how that should evolve into 2024.
We have started having those conversations.
With our retail partners certainly some are more accelerated than has happened.
Deeper way than others, but overall signs right now are very positive we are seeing the expansion door count better real estate and stores.
Generally across the board, but particularly when we're talking about wholesale expansion just to be.
Morris Moore specific it's chevy's and so also.
Those two brands in particular, which obviously drive the most volume inside of solo brands. So good conversations so far we're seeing really healthy momentum.
The board with our retail partners across those two brands specifically.
Got you I appreciate that color and then if I could just sneak one more in I was hoping you could just give us a refresh on how you are thinking about capital allocation and priorities from here given you clearly repurchased a lot of shares over the last couple of months from some of your sponsors and key stakeholders. So maybe just give us an update on how you're thinking about that.
The rest of the year.
Yeah, absolutely. So as we said kind of going into this year. We believe the focus on free cash flow generation, we expected it to be kind of a over 100% of EBITDA.
We've obviously shown that we can generate a lot of free cash flow.
Going to be very disciplined and strategic about how we use that capital you saw that we did the repurchase in Q2.
We've done the <unk> acquisition, we continue to look at strategic opportunities from an M&A standpoint.
But we want to use our capital to the best of our ability that benefits our shareholders, but those are the two main things and then of course, we're going to pay down our revolving credit line by the end of the year, so between paying off debt not to the term loan, but that our revolving credit line.
M&A opportunities and then what we did on the share buyback in Q2.
Got it I appreciate the color I'll pause there and personal.
Thank you.
So retailers and so Mesa has become a bigger percentage of our mix and it's just a lower price point product.
Got it thank you and then.
And our next question is you recently added tariff lean to your portfolio.
Can you talk about the breakdown of wholesale to DTC revenue and it doesn't have a similar profitability with the other brands in your portfolio as you look to market across brands.
Yeah, absolutely. So it does look similar from a from an overall mix standpoint.
There's there are some some good wholesale business coming through with terrifying, particularly with target.
We're looking to expand that otherwise strong direct to consumer marketplace business coming out of Terreplein from a margin perspective really healthy gross margins flow down through the P&L.
So similar margin profile to what you would expect to see I'll, just remind everyone on the call. It's from a materiality standpoint airplane was quite small compared to the rest of our platform. It's one that we think has a lot of strength behind it and a big market opportunity, particularly amongst the.
Growing self serve customer base as.
As we have the opportunity to take the fire inside as we've talked about our bring smores indoors. That's one that we're really excited to lean into so we think that there's a lot of a lot of.
Market opportunity and market potential for that brand.
Right now, we're very focused on integration and finding those synergies across the audiences as we looked at 24 I think you'll start seeing.
Better momentum in and.
<unk> strength behind that specific brand the terrifying Brian .
Great. Thank you.
Thanks Chi.
Next question comes from the line of Peter Keith Piper Sandler. Your line is now open. Please go ahead.
Hey, Thanks, Good morning, guys and congrats on the improved profitability.
Maybe sticking on that topic I, just want to think about gross margin.
Not only in the back half of the year, but kind of going forward.
The trajectory and potentially to drive gross margin higher.
Could you just walk us through the puts and takes them or maybe around the wholesale gross margin headwind and then how the dynamics of lower freight are also flowing through and should continue to flow through.
Yeah for sure Peter.
So from a gross margin standpoint kind of year to date.
We bought it had about a 150 basis point headwind from kind of the mix shift to wholesale from the direct channel and enough to offset by 50 basis points of what I would say its pricing discipline or just being less promotional and about 75 basis points from freight.
We expected to have the benefit kind of in the second half we started seeing it come through in our Q2 numbers.
I expect it to be more than a 100 to 150 basis points in the back half on but from an overall mix standpoint kind of going in and what we're expecting right now is that our overall mix kind of wholesale the direct to consumer space pretty consistent with the first half, but we should get a little bit additional tailwind from the freight.
We do think from an overall year over year standpoint.
It will be about as promotional as we are we have been in the past.
In the back half on our holiday promotions.
Think pricing will probably stay relatively the same we'll gain some from freight and then overall, we'll still have a little bit of the headwind.
<unk> from the wholesale to or the direct to consumer to wholesale mix shift.
Okay.
Well I guess, we'll work through that in a model that did what I just wanted to think about the DTC.
So is the I guess, the down 2014, and I know there is some product mix within that that's impacting us down 14 kind of the low point of the year.
Just based on your outlook or could be.
DTC you get a little bit worse from here, maybe in the back half.
Thanks Peter.
So basically if you just look at the front half of the year on a blended basis.
The down 2014 in Q2, I think down eight or nine in Q1, but on a blended basis roughly around down 12.
You look at the way, we're thinking about upper back half, it's very similar so again, we've talked about this in the past our quarters tend to ebb and flow with wholesale.
Quarters, one and three being a little bit higher wholesale quarters, two and four being a little bit higher D to C. Just based on the timing and seasonality of the business.
So exactly how that flows through quarter to quarter is as again some of it was talking about this but because we're newer in wholesale and we don't know exactly the timing of a Q3 Q3 to Q4 sell in to some of our retail partners. It could shift slightly but I think if you look at the front half of the year you rolled out to the back half of the year.
How we're thinking about it on a blended basis.
We're anticipating are flowing through our roughly down 12, or so for the back half on the DTC.
Okay. That's very helpful. Thanks, so much guys I appreciate it.
Thanks Keith.
Our next question comes from the line of Philip <unk> of William Blair. Your line open. Please go ahead.
Yeah.
Great. Thank you.
Maybe you could just break down the sales outlook for the second half a bit more for US. How are you guys thinking about product newness, how much does international plan to your expectation and then how should that flow through to margins.
Yeah.
Yes. Thanks for the question so just.
Just quickly on international so still less than 10% of our overall business. It's relatively new last year was our first full year.
Really haven't international markets open and we're continuing to see good momentum there and we're excited about the opportunity.
But as a relative percent of our overall business, it's still less than 10% and we don't anticipate that changing for the back half of this year in terms of products and newness innovation and our overall outlook Summer mentioned this but the back half of this year and there's definitely a lot of strength in the innovation pipeline. So we have.
Even starting this quarter and you'll start seeing healthy momentum and innovation and product Rollouts.
We're going to continue even into the beginning parts in the first half of Q4 as we really look to launch. These products ahead of our Black Friday, cyber Monday and the strike is that period. So in the back half of the year not a lot changes from the front half of the year in terms of what we're seeing split wise by channels split wise.
Bye.
Even even region and the brands within the platform with the exception of solar so having the strength that it does in Q4, but we do anticipate having product innovation really being able to lean in to the newness in some of the new products that we have rolling into the back half of the year those have already been planned into our forecast so all year with Canada.
Planning that so as we talk about having 60% of our revenue in the back half of the year.
That's a healthy mix between the strength in Q4, and the plants back half product innovation that we're rolling out.
Okay, Great and then you mentioned the opportunity for crossover demand can you maybe shed some light on where you are now with that how often do you see your customers shopping multiple brands and then your strategy of including our marketing and third is pretty similar to what you would do for accessories, which you've seen a lot of success with so how quickly do you think you can start to see.
From demand generation related to this initiative. Thank you.
Yeah, we're hopeful that we'll start seeing some of that demand flow through quickly.
But not counting on it certainly not dependent on it. So we'll see how it goes we do think that the timing is really good for the brand to go and explore this I think on our next call. We'll have a lot better data for you around what the response has been like what customers are saying, it's really early for us to tell them we.
Have some.
Very very early positive signals.
But we really don't know at scale at all right now.
By the end of this month, we'll have those marketing inserts in the packages and by the end of the quarter have much better visibility. So looking forward to talking about that on the next call.
Don't want to don't want to preempt it too much yet just because we feel like we still have a lot to learn there.
Thanks Keith.
Our next question comes from the line of Brian Mcnamara.
Hi, Nicole.
Your line is now open. Please go ahead.
Hi, This is Matt <unk> I'm on for Brian Thanks for taking our questions.
I know this is probably not easy question to answer but is there any way to parse out how frozen then direct channel what it looks like in Q2, if you means more marketing spend in the quarter.
Like for instance, you gave up a point or two of EBITDA margin. It looks like the consensus EBIT margin by more than sure that.
Any helpful context for that would be great.
Yeah, we just didn't think about it as much that way and truthfully I think I think there's certainly with room to grow revenue.
Leaned into marketing spend we were operating as we always do in a positive rollout format, meaning every dollar we spend is generating more dollars of revenue that what were spending that being said, especially a solus novum Chubb is again you know our two biggest brands, where we have the most momentum in wholesale with <unk>.
Recognize that we were spending a lot of effort and those partnerships and we were putting a lot of inventory of some of our marquee foundational products. If you think so so lots of fire pits we're being.
At the same time that we're pushing inventory and feeding it into our retail partners to create that foundation. So again, a short term pressure on DTC, we think in the long term you'll start seeing a lot more brand awareness. We know that there are new eyeballs inside of retailers that are getting getting a better idea of our brand and more familiarity with our brand.
And then there will be a time in a season, where we do lean into marketing spend some are just alluded to that as we talk about the back half of the year and some of the flexibility that that variable lever.
Gives us in marketing expense.
Timing will come where we'll be able to lean in and we think it'll be a good time for it. It just wasn't in Q2, so hard to hard to gauge exactly what the impact could have been but we do think it would have been or could have been positive. If we would have but we're looking at the back half of the year and even into 'twenty four and taken a more medium to long term approach.
That's great. Thank you and then secondly, with the enhanced product displays like private plans in shield are there plans to roll this out more broadly or are they more like a pilot or test shape right now thanks.
They have been in pilot test phases.
But are quickly rolling beyond just test stages with many of these retailers shelves is a great example of that where it's expanded quickly beyond just the test public lands is very close to expanding beyond a test and then conversations with other retailers are really starting to expand that chevys in store display.
Has expanded this season had been very successful and is expanding even more broadly they've already they've already indicated to us for 2024. So we're seeing a little bit of a mix between those you know some are still in test phase.
Some are past us phase now and are being rolled out.
Good momentum there, it's not all happening at once but we do expect to have more prominent displays and more doors and have better real estate and stores as we roll to 2024 based on the momentum and the feedback that we're getting right now from retailers.
Great I'll pass it on thank you so much.
Thank you.
So with no additional questions at this time I would like to hand, the conference back over to Joe <unk> for closing remarks.
Great. Thank you so much we appreciate everybody being on the call. We're really looking forward to getting into the back half of the year here. We're excited about the newness and innovation coming and look forward to being with you guys in a few months. So thanks, thanks for attending today.
Ladies and gentlemen, this concludes Shiloh brands incorporated second quarter fiscal 2020 financial results call. Thank you for joining you may now disconnect your lines.
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Highlight brands incorporated second quarter fiscal 2020 financial results call. Thank you for joining you may now disconnect.