Q3 2023 Traeger Inc Earnings Call
[music].
Hello, everyone and thank you for joining us today welcome to the trigger third quarter fiscal 2023 earnings Conference call. My name is Emily and I'll be coordinating Yoko today. After the presentation, there will be the opportunity for any questions, which you can ask a question star followed by the number one on your telephone keypad.
I will now turn the call over to our highest netback US. Please go ahead. Good afternoon, everyone. Thank you for joining triggers call to discuss its third quarter 2020 results, which were released this afternoon and can be found on our website at investors that trigger dot com, Nick back as Vice President of Investor Relations at triggered with me on the call today are Jeremy Andrew.
<unk>, our Chief Executive Officer, Don Basel, our Chief Financial Officer.
Before we get started I want to remind everyone that management's remarks on this call may contain forward looking statements that are based on current expectations, but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. We encourage you to review our annual report on Form 10-K for the year ended December 31 2022.
The report on Form 10-Q for the quarter ended September 32023, once filed and our other SEC filings for a discussion of these factors and uncertainties, which are also available on the Investor relations portion of our website.
Not take undue reliance on these forward looking statements.
Only as of today, and we undertake no obligation to update or revise them for any new information.
This call also contains certain non-GAAP financial measures, including adjusted EBITDA. Adjusted net income adjusted net income per share adjusted EBITDA margin and adjusted net income margin, which we believe are useful supplemental measures most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained here. It just does GAAP measures are included in our earnings release.
<unk>, which is available on the Investor relations portion of our website at investors that trigger dot com. Please note that our definition of these matters may differ from similarly, titled metrics presented by other companies now.
Now I'd like to turn the call over to Jeremy interest Chief Executive officer of trigger.
Thank you Nick Thank you for joining our third quarter earnings call.
Today, we'll be discussing our third quarter results as well as reviewing our progress on our long term strategic initiatives.
Then turn the call over to Doug to further discuss details on our quarterly financial performance.
To provide an update on our fiscal year 2023 guidance.
I am pleased with our results for the third quarter, which exceeded our internal expectations for third quarter marks our return to year over year top line growth with sales improving 26% versus the third quarter of last year. Moreover, we delivered more than 1000 basis points of gross margin expansion, which combined with.
<unk> discipline drove materially improved EBITDA as compared to the prior year, our near term strategic priorities over the last year has been centered around improving the financial health and profitability of the company to be highly challenging demand environment.
Since the end of the second quarter of 2022, we have taken out in excess of $20 million of expenses from business reduced balance sheet inventories by more than a third driven in channel inventories to targeted levels.
And have stood up a gross margin task force, which has implemented a number of near and long term margin enhancing initiatives. This.
This is in addition to launching two new grills earlier this year.
The team's efforts have resulted in a substantially improved position for the company and our better than expected third quarter results as well as our ability to increase the midpoint of our financial outlook for the year are the direct outcome of these efforts.
In the third quarter, we delivered strong year over year sales growth as our retail partners entered into the quarter with inventories appropriately positioned and as we lap the large declines in volume we experienced in the third quarter last year aligning channel inventories to current demand over the last several quarters allowed for a return to more normalized.
<unk> rates as compared to last year, when retailers were aggressively destocking and lowering inventories the.
The growth in sales in the third quarter translated to a significant improvement in EBITDA, which benefited from expansion of our gross margin as well as continued efficiencies from our cost reduction efforts consumer demand for grills remained soft in the third quarter and sell through was down to the prior year, we believe that the pressures that are in.
Impacted our consumer over the past year, including the shift away from spending on big ticket discretionary goods.
Well as the impact of higher inflation and lower consumer confidence remained firmly in place.
Our sell through trends this year indicate that the consumers often willing to spend when there is a catalyst to purchase a grill, but is less likely to spend when there isn't a catalyst so during seasonally stronger periods holidays and promotional events, we've seen relatively better demand with positive growth in grill sell through.
Certain of these periods.
Whereas in seasonally slower periods in between holidays or promotional events, we have generally seen softer sell through sell.
Sell through on a year to date basis remains largely in line with our plan however volatility in consumer demand persists.
Sell through continues to be lower than last year in the face of a difficult macroeconomic backdrop I am pleased with how the tray. Your team is navigating the environment and executing on our strategic plan.
Given stronger than expected third quarter performance, we are increasing the midpoint of our fiscal year 2023 guidance.
Our updated guidance is for sales of $590 million to $600 million and adjusted EBITDA of $57 million to $59 million.
Compared to the prior range for sales of $585 million to $600 million and.
And EBITDA of $55 to $59 million.
Moving on to our strategic growth pillars in the third quarter, we continue to execute against our long term growth strategy. Let me now review, our strategic pillars and provide an update on each our first growth pillar is accelerating brand awareness and penetration in United States, increasing awareness of the trade your brand is key to drive.
And consumer adoption and household penetration of our brand, which is our largest long term opportunity in the third quarter. We continued to execute against this opportunity with brand building efforts and our social channels as well as our key retail partners.
Just we kicked off the start of the football season with trader game day, the social campaign activity and engages our community over a four week period with challenges content and recipes to ensure our members of the triggers that deliver epic game day barbecues for their friends and family using their trader.
<unk> Gameday content included Los Angeles Chargers quarterback Justin Herbert.
Triggers Chad Ward cooking Justin's victory Brisket recipe.
Backyard kind of timberline XL and.
In the video chat walks through the steps to cooking and amazing brisket and Justin shares insights on his introduction to the trigger Hood.
Traders always run weekly cooking challenges during game day, including a wings in it dips contest with members of the trigger had posting their game day food on social media to win prizes gain by 2023 was a big success and drove energy and awareness to our brand with social participation engagement up a strong 200.
Third, 28% as compared to last year's game day.
Promotion of the trigger brand continues to be driven by our community of users and ambassadors the trader Hood and social media remains an important meeting for our brand evangelists to talk about trigger and to share their experiences and the third quarter, we hit a major milestone and surpassed $2 5 million followers across social channels.
And in the quarter with total followers up more than 20% compared to the prior year. We continued to lead the outdoor grilling industry in social media and have over $1 million more followers than our largest competitor in the grilling category.
Our ability to drive awareness and penetration of the trigger brand is heavily tied to retail execution and the presentation of trader product on retail floors at.
At the home depot, we made meaningful progress on our initiatives to elevate our merchandise in the third quarter in the quarter. We added more than 300 Trager Islands at home depot locations across the country and ended with more than 800 trigger islands.
As a reminder, these islands are elevated fixtures that prominently featured trader grills consumables and accessories and offer a more premium shopping experience.
<unk> locations with a trigger Ireland are meaningfully more productive for our brand versus the chain average.
In the third quarter. The home depot also added flex wall or trader branded experience to an additional 300 locations and relocated Drager base to be more optimally positioned adjacent to our grills and an additional 300 locations.
Together, we expect that these merchandising initiatives will materially improve the visibility and positioning of trigger at the home depot and we have a lot of energy around continuing to rollout these and other enhancements across the home depot store base or.
Our next growth pillar is disrupting outdoor cooking with product innovation and the third quarter under the leadership of our recently hired EVP of engineering, we focused on investing into our product development capabilities and building on the strength of our innovation engine.
This includes adding resources behind their testing and engineering capacity and our sustaining engineering team will look for ways to innovate our product and manufacturing processes to drive efficiency and cost savings.
We're also standing up a new platform R&D team, whose mission is to drive innovation through consumer insights.
Innovation is core to the long term success of <unk> and we are committed to investing in <unk> capabilities in the areas of R&D product development and engineering to ensure that we continue to lead as a disruptor in the outdoor cooking industry.
On the meter side of the house. This week, we launched a transformational next generation of meter product the meter two plus.
The meter two plus marks a significant step forward in smart thermometer technology and its many innovations and upgraded features will allow users to achieve perfect result every time.
The mere two pluses a quick with five internal temperature sensors, and when ambient sensor to detect the core temperature of the meat, reducing human error and pro placement.
It has an impressively high ambient temperature Max of 932 degrees Fahrenheit.
<unk> temperature Max of 221 degrees Fahrenheit significantly higher than other smart thermometers under market, allowing for cooking over the direct heat of an open flame.
Other innovations include enhanced wireless connectivity faster charging and a 100% waterproof design, allowing for deep frying and sous-vide cooking.
The meter team has been hard at work designing the state of the art product since the launch of our original meter in 2015, and we believe this new thermometers game changing.
Initial distribution of the meter two plus will be on <unk> dot com and distribution will brought in next year.
Next I'll provide an update on our consumables business in the third quarter, we achieved slight growth in consumables as compared to the prior year an improvement from the 21% sales decline you saw in the first half of.
2023.
While our consumables revenue continues to be impacted by and large customers launch a private label pellets sell through of pellets. Excluding this customer was up in the third quarter and sales were modestly ahead of our plan for the quarter.
This performance in what remains a challenging demand backdrop demonstrates the recurring revenue nature and resiliency of our pellet business.
Ahead of Thanksgiving, We started shipping our limited edition, Turkey blend pellets in September this artisan a mix of all natural hardwood features maple Hickory and Rosemary to elevate your turkeys flavor, whether its roasted or slow smoked.
This bag also contains our branches to ensure users will cook, a juicy and flavorful bird for their family and friends.
We will be featuring our Turkey blend pellets and our Thanksgiving social campaign, along with tutorials and had a smoker, Turkey on the trigger.
Earlier this year, we discussed our strategic decision to optimize our pellet manufacturing footprint by consolidating a pellet mill portfolio from seven to five.
Our pellet business is starting to see the benefit of these actions by divesting two higher cost mills and increasing capacity at the other mills, we have seen a material improvement in capacity utilization with utilization rates up materially across our mill facilities since earlier this year.
We are pleased with our ability to drive efficiency in our pellet business and continuing to see our vertical integration is a key long term competitive advantage as well as a means to bring the highest quality pellets to our consumers.
On the trigger sauces, and rub side, our food consumables business continues to grow and benefit from increased distribution into the grocery channel.
As we mentioned last quarter, we relaunched our new barbecue SaaS portfolio at Kroger and approximately 2200 Kroger locations cell.
All through following this relaunch has been solid and turns for the soft line at Kroger are up materially overall, our sauces and rubs business continues to be a nice and growing addition to our product lineup and we are pleased with recent performance.
Our final strategic growth pillar is growing the trigger brand internationally.
Similar to the U S. In the third quarter, we saw sequentially improved results in a return to topline growth in many of our international markets, including Canada in Germany in Germany, We had particularly strong results with sales up strong double digits aided by a focused effort on demos and <unk>.
Vince where pitmaster serve up food cooked on trager grills outside retail locations.
We also continue to see healthy sell throughs, and our new timberline and Ironwood grills, which launch in Europe in Canada earlier this year consumer demand in many of our international markets remains challenged as consumers are cautious given the pressures on discretionary spend due to inflation and lower confidence as well as ongoing geopolitical.
Tensions however, we remain confident in our long term strategy to grow trader abroad, and continue to see a large opportunity going forward.
Overall I am pleased with our results for the third quarter.
As demonstrated by our improved outlook for the year, our intense focus on improving <unk> financial position and flexibility over the last year has positioned the company well to navigate a challenging environment.
We are anticipating the likelihood of continued macroeconomic volatility going forward and we'll take a prudent approach to managing the business will also leaning into our long term growth opportunities, which I believe remain extremely robust and with that I'll turn the call over to Don to provide more details on the quarter and our updated.
Outlook.
Thanks, Jeremy and good afternoon, everyone I will begin by reviewing our third quarter results and then comment on our updated fiscal 2023 guidance as well as provide some initial thoughts on 2024 third quarter revenues increased 26% to $118 million grille.
<unk> revenue increased 45% to $57 million grille.
<unk> revenue increased compared to the prior year as volumes benefited from Sterling and recently launched product as we lapped a substantial negative impact on grill volumes as retailers aggressively destock in the third quarter of last year.
Growth in volume was partially offset by lower average selling prices driven by strategic pricing actions.
<unk> revenues were $25 million up 1% from the third quarter of last year.
While our consumables business continued to be impacted by the loss of volume from a customer who introduced private label pellets last year.
Sales of pellets at retail remains resilient and sell through excluding this customer was up to prior year, our fifth consumables business was a contributor to growth in the third quarter driven by strong orders of trigger rubs and sauces consumable sales were ahead of our expectations in the third quarter.
<unk> revenues increased 21% to $36 million driven by growth of meter as well as growth in trigger branded accessories.
Geographically North American revenues were up 24% and rest of world revenues were up 40%.
Gross profit for the third quarter increased to $45 million from $25 million in the third quarter of 2022.
Gross profit margin was 37, 9% up 1120 basis points versus third quarter of 2022.
When adjusting last year's gross margin for restructuring costs.
Gross margin increased by 950 basis points compared to the third quarter of 2022.
The increase in gross margin was primarily driven by one lower supply chain costs, which drove 590 basis points of margin benefit to date, a variability in meters gross margin, which contributed 250 basis points.
170 basis points of favorability related to the lapping of costs associated with last year's restructuring for 70 basis points of favorability due to not having the trigger provisions business in the current period and five FX favorability at 80 basis points.
Offsetting these margin drivers were 40 basis points of negative impact from pricing actions.
Sales and marketing expenses were $26 million.
Compared to $25 million in the third quarter of 2022.
Higher employee costs and stock based compensation expenses were largely offset by a reduction in variable costs.
As a percentage of sales sales and marketing expense declined as we leveraged investments due to the substantial increase in sales in the quarter.
General and administrative expenses were $25 million compared to $70 million in the third quarter of 2022.
The decrease in G&A was largely driven by a decrease in stock based compensation.
While we began to lap some of the cost reductions from restructuring actions implemented last year in the third quarter, we continue to benefit from expense discipline.
Excluding stock based compensation and nonrecurring expenses in each period.
Third quarter operating expenses were up approximately 1% as compared to the third quarter of 2022, despite the 26% sales decrease.
Net loss for the third quarter was $19 million as compared to net loss of $211 million in the third quarter of 2022.
Net loss per diluted share was <unk> 16, compared to a net loss of $1 76 in our third quarter of 2022.
Adjusted net loss for the quarter was $14 million or <unk> 12 per diluted share as compared to adjusted net loss of $74 million were 61 per diluted share in the same period in 2022.
Adjusted EBITDA was $5 million in the third quarter as compared to a loss of $13 million in the same period of 2022.
Adjusted EBITDA margin improved by 1790 basis points.
Driven by gross margin expansion and expense leverage.
Third quarter adjusted EBITDA was ahead of our expectations driven by the outperformance in sales, partially due to the timing of shipments as well as a modestly better than anticipated gross margin.
Let me now review balance sheet highlights.
At the end of the third quarter cash and cash equivalents totaled $11 million compared to $39 million at the end of the previous fiscal year.
Ended the third quarter was $404 million of long term debt.
At the end of the quarter the company had drawn down $25 million under its receivables financing agreement, resulting in total net debt of $418 million.
In terms of liquidity, we ended the quarter with total liquidity of $142 million modestly down from $155 million at the end of the second quarter, but up materially from the $95 million of liquidity that we had at the end of last year.
We continue to feel comfortable with our liquidity position.
Inventory at the end of the third quarter was $102 million.
Compared to $153 million at the end of the fourth quarter of 2022.
We have made significant progress in right sizing our balance sheet inventories, which are down by more than a third from the peak in the first quarter of last year.
Furthermore, in channel inventories remain on target.
Following a period of aggressive retailer destocking in the second half of last year and the first half of 2023 channel inventories are now positioned appropriately for our current demand outlook and retailer replenishment rates have normalized.
Next I'll provide an update on our outlook for fiscal year 2023.
Given better than expected results in the third quarter, we are increasing the midpoint of our guidance range for the year.
The revenue we are updating the full year range to $590 million to $600 million.
We're down eight 5% to 10% as compared to 2022.
This compares to our prior revenue guidance of $585 million to $600 million.
On adjusted EBITDA, we are increasing our guidance range of $57 million to $59 million.
Versus our prior range of $55 million of $59 million.
Also given year to date margin performance, we are increasing the low end of our gross margin guidance range for the fiscal year with the new guidance range of 36, 5% to 37% as compared to the prior range of 36% to 37%.
Recall, we started this year with a guidance range for sales of $560 million to $590 million and EBITDA of $45 million to $55 million I am pleased with our ability to effectively manage the business and increase our outlook and what remains a challenging environment.
Finally, while it is too early to discuss any specific guidance on 2024.
I'd now like to provide some initial high level thoughts as we plan for next year.
As we look at the macroeconomic and consumer environment heading into 2024, we see significant pressures that are well documented iron.
Higher interest rates lower consumer confidence geopolitical headlines and a slowing housing market.
We do not see signs that this shift in consumer spending away from big ticket items will normalize in the near term.
Therefore, we are taking a cautious approach to forecasting consumer demand next year, and we are planning for the grille industry to be down.
While we hope the industry will return to growth. We believe the prudent approach is to plan around a conservative top line scenario to ensure we maintain financial flexibility.
Despite a challenging backdrop, we are successfully executing against our near term strategic priorities.
Over the last four quarters, we have been relentlessly focused on improving the financial positioning of the company, which has resulted in a more efficient cost structure appropriate inventory, both on balance sheet and in channel and a return to sales and EBITDA growth in the third quarter.
As evidenced by our ability to increase the midpoint of our full year guidance, we are managing the business appropriately and balancing near term profitability with long term investment in a dynamic environment.
I remain highly confident that we are well positioned to create significant value for both shareholders and consumers in the long term as we continue to execute against our growth strategy.
I'll now turn the call over to the operator for questions operator.
Thank you could you would like.
To ask a question today. Please do so now by pressing star followed by the number one on just kind of think keypad. If you change your mind I would like to be remains from Nicky. Please press star and then case.
You asked a question please ensure that your device and youll microphone on mute it lately.
Just pause briefly to assembler Q&A roster.
Our first question comes from the line of Peter Benedict with Baird. Please.
Please go ahead your line is open.
Alright, guys. Thanks for taking the question Tom I guess.
Leveraging off the final comments or you have on kind of the view.
Our view of a down down grow market next year.
Is that reflective of maybe how you're seeing these retailers start to order ahead of ahead of next year.
I'm, just curious kind of how they're behaving I know that the.
The inventories are right sized but as the replenishment even.
Still remaining I guess somewhat conservative there and related to that in a down grow market is there still opportunity to continue to migrate that gross margin higher given some of the transportation savings that that you would say that's my first question.
Yeah. Good questions. So with respect to your first question because we're now in this mode of normal replenishment in conjunction with healthy balance sheet inventory levels.
The dynamics are underpinning to how we think about.
<unk> and our forecast is really driven more by.
Kind of the macro environment, getting a better or improving read on the consumer weakness with high ticket items. I think these are the factors that are informing maybe a bit more prudence as we think ahead and it's not necessarily driven by retailer order.
During habits, because those are tracking with replenishment cycles that we would expect and so in terms of sell through visibility, although we're not seeing.
Nice comps year over year I think the themes there are largely consistent with what we've talked about on the last call.
Barring some catalysts that shifts that in one direction or another or replenishment will match that accordingly, as well as kind of the ordering behaviors of our retail partners. So this is really more of a conversation about what we're seeing in the macro the fact that we don't necessarily do things that are improving at this moment in time and therefore.
Want to ensure we reflect that appropriately in our thinking and in Q4, and then certainly as we think about 2024, where you believe prudence is of most importance before.
We react to trends that we simply can't can't measure just yet.
Got it.
Oh, sorry in India.
I was going to answer your question in terms of gross margin, yes, I think that one is sort of disconnected, but at the end of the day, it's a little bit early to start speaking about gross margin in 2004.
But we don't necessarily view gross margin directly connected to.
The <unk> are kind of thinking on on demand and sort of how the category may perform in 'twenty, four which right now we're our current thinking is that it will be down relative to this year.
Got it.
That's helpful. And then my next one is just to clarify on the thank.
Thank you mentioned $2 million EBITDA benefit.
Timing of shipments.
$2 million of EBITDA in the.
<unk> and out of <unk> was there a is there a revenue impact from that or maybe you can just clarify that.
That's really driven that's driven off of the revenue components. So we saw some some orders shift from Q4 into Q3 and the flow through that that falls from that shift is really what's driving the EBITDA.
Pacing as well from Q4 to the benefit in Q3.
Got it alright understood. Thanks, so much.
Yes, just two.
Two questions.
Our next question comes from Simeon Siegel with BMO capital markets. Please go ahead. Your line is open.
Thanks, Hey, guys good afternoon.
Jeremy helpful color on your view on the retail replenishment cycle any help on what Youre thinking about where you are on that.
I guess, the consumer level of replenishment cycle, and then Jeremy Oregon any thoughts on when you would expect asps to normalize I know we had the strategic action now, but how are you thinking about that going forward. Thanks guys.
So.
I mean, good question on the consumer replenishment I mean, this is something that I would say, we spent a fair bit of time.
Thinking about.
Speaking with.
Consumers about.
From a quantitative perspective and sort of thinking about the math behind behind replenishment. The reality is is.
Yes.
That replacement cycle certainly.
Declined during the pandemic as there was pull forward demand and our expectation is that we said it will normalize it is hard to say exactly.
How soon that happens what we're seeing.
Step back and look at just broader big.
Big ticket.
Every everything that we see and hear crossed.
The consumer big ticket categories as well.
Replacement is happening more out of necessity.
And out of upgrade and discretion and we think that trend continues.
Yeah.
In this economy with higher interest rates consumers finance fees.
We think we will catch back up to normalized replacement cycles hard to know based on the data that we see when that will be.
And then I guess in terms of the.
The kind of normalization of.
Asps.
With respect to taking price back on most of our products.
Q what were.
Sure.
It really the right kind of pricing architecture across our portfolio pre pandemic.
I think youll start to see that normalize over the course of next year.
The comparison is more of an apples to apples basis.
But.
At the end.
But at the end of the day I think that.
On the pricing in Asp's standpoint, we're sort of comfortable with.
Where asps are trending.
And this is really just a function of comping pandemic pandemic moves to offset the pressure on gross margin based on those macro.
Factors that we're taking shape and not something that would signal anything different than this is the right pricing strategy for how we think about optimizing mix and volume and correspondingly. We are seeing an uplift in unit volume, which I think is a positive and what you would hope to see as you take some prices.
Back down to what we think are the right levels.
Okay. That's great and then lastly, if I could just throw in maybe can you guys. Just talk about frequency of use how that's changing or if it has at all and then just as we work through the client that you or the customer you're referring to with the pellets. How should we think about the reported relationship between grill and pellet growth going forward. Thank you.
Yes, no no.
No real changes to usage.
One measure of that is both the attach rate that we measure as well as sell through performance for consumables.
Consumables sell through actually Comped slightly positive in Q3.
And you can see that we delivered some outsized growth relative to our internal expectations in Q3 on consumables as well so that continues to be a highly resilient.
<unk> of our business certainly aligned with our thesis and it's proven to be the case, even in a more challenging consumer environment.
And so I would say that generally speaking those those those kpis that we measure around attached are positive and specifically around attachment that's holding to what we view as sort of a pre pandemic normal attach rate.
And nothing really to report there. So so so we're happy with the performance of consumables and how that fits into the broader question around consumer behaviors and usage of our grills.
Perfect sounds great guys. Thanks best of luck for the rest of the year and holiday.
Our next question comes from the line of Peter Keith with Piper Sandler. Please go ahead, Peter Your line is open.
Hi, Thanks, good afternoon, everyone. Thanks for taking the questions.
Just following up on the ASP dynamics, I guess could you address the sell through rates kind of by mix or are you seeing.
The strength at the high end or the low end and then on a related note are you.
It took some pricing at the beginning of the year.
Feel like the pricing is set or could you be opportunistic going into next year to maybe take a little bit more and drive more demand.
Yes, I think on the second question.
We're always open to making adjustments I think right now we feel pretty good about how we've laid out our pricing strategy and some of the adjustments that we've made but.
Always evaluate trends and sensitivities around price versus volume and adjust accordingly as needed, but as it right now we feel pretty good about where we sit.
In terms of that dynamic between kind of let's say above a 1000 below 1000, we've definitely seen a shift below a thousand but the mix has shifted.
Quite a quite a bit down into that.
<unk> thousand dollars price band and I think that in our view makes sense in part because we did take some some some pricing down in those in those products that sit sub 1000, where we see a little bit more sensitivity to price which in.
In turn has driven.
An uplift in volumes and so that's definitely something thats, playing out and has been a slight shift in what we've seen historically at least over the last call. It 12 to 18 months, where there was maybe a little bit more resiliency in the premium prices above $1000 and kind of that mix split was maybe a little bit more even.
And now it's favoring sub 1000.
Okay great.
Maybe I guess, but not unrelated note, but our pricing is a factor. So just trying to think about the puts and takes to the gross margin.
As we enter 2024, just particularly considering the strong gross margin expansion you just saw.
Don maybe you could lay out not quantifying them, but some of the key drivers everything supply chain costs continued to be a benefit FX continued to be a benefit.
It probably helps and then and then pricing or should we think about you guys lapping that.
At some point in early 2024.
Yes, you hit the nail on the head.
I think those are exactly how do we think about it. So you can argue survey our gross margin tasks for strategy and you think about controllable versus uncontrollable.
Controllable in the short term and what we're seeing now is the uncontrollable is working in our favor right. So a meaningful tailwind in inbound transportation.
Actually seen outbound transportation rates not necessarily a kind of a macro dynamic per se, but we pulled some levers to really optimize rates there.
There are some things in the short term that are materializing and I think what's exciting about that is the fact that we're now building confidence that these things are structural and then kind of the medium to longer term initiatives are consistent with what you had mentioned and we've talked about on past calls right. So do we think about strategic sourcing broadly unlocking.
Margin expansion via new product offerings, and continuing to optimize our value chain leaning into direct import is one example of that.
These are things that will continue to execute on that we think will provide incremental benefits or expansion to gross margin, but it's great to see that.
Just a macro has really taken shape this year and I believe as structural and should continue to benefit gross margin over the medium to longer term as we then kind of layer on controllable that you can take a little bit of time to materialize, but.
Kind of building and clarity in.
Certainly confidence that we can action those.
And then to your point, yes.
Some of the.
The initial price dilution via taking.
Taking prices down.
Alright.
One last question I just had for Jeremy.
You've done a good job of highlighting.
Success with home depot.
But where are you with any of your other retail partners are you getting more space in stores are getting downsize at all and what's the thought in terms of potentially bringing on more retail partners in 2024.
So first of all we highlight home depot in part because it's the largest grilled reseller of the world and.
And we're still relatively underpenetrated there so.
Aside from even highlighting home depot I think it speaks to our strategy around penetration of retail in terms of acquiring new additional space merchandising.
Creating the tools at retail both visual and in terms of retail associate education that drive sell through.
And so big opportunity, but I would say home depot is certainly emblematic of our approach to every retail partner.
We.
If you look at.
Sort of.
Our top customers.
There is there are a lot of regional and specialty retailers and we get there a little bit differently to our sales force in the field at.
At a national level of course Ace hardware has been.
A fantastic.
Customer partner and we're having the same conversations there and with real progress in terms of penetration.
East at retail visual merchandising, so we continue to drive retail productivity.
Using the same strategy.
What we've described.
Sure.
I would say in terms of.
Distribution opportunities we can.
Continue to believe that our current footprint has a lot of.
A lot of opportunity to drive growth and penetration.
The areas that.
I might highlight.
Is the grocery channel in terms of consumables.
In an effort to be where our consumers want us to be we've expanded palette distribution, we highlighted some of our successes.
Other consumables rubs and sauces that continues to be an opportunity.
That we chase and then as you look at International Markets, Canada, Europe, Australia.
These are markets, where we are significantly underpenetrated.
From a location perspective and.
And we're seeing progress.
It's I would say it's.
We have been incubating and we're starting to see some successes.
We certainly saw that.
In the third quarter, some some nice growth there but.
There is.
We're not we're not worried by.
Bye bye distribution opportunities.
Still sold and three were three 5% of U S households own grills.
We do always think about.
How do we stay disciplined and yet drive higher penetration, we think that discipline is theres a lasting strategy that really is sustainable over time, and so always looking to fill in the gaps geographically in distribution.
And sort of chasing the opportunities as they are appropriate.
Alright, Thank you very much guys and good luck with the holiday season.
Thank you.
Our next question comes from Jamie Feldman with Telsey Advisory group.
Please go ahead, Sir your line is open.
Great. Thank you very much hi, guys.
A question about <unk>.
Innovation.
You guys are bringing a lot of innovation to the category and it seems pretty rapid and I'm wondering how do you balance that in this market where people the appetite for big ticket discretionary is still not.
Very high as you just described so I'm wondering like how you guys are thinking about that like do you delay some of the innovation like too.
When it's a more conducive environment or.
Just.
Maybe you could share thoughts there.
Yes.
Joe Good question couple of thoughts one is that.
We really believe in leading with great product.
We have a very a very engaged and captive.
Immunity and we find we get a great return by by launching new products, new better experience new innovation.
We have made some meaningful investments.
In our team.
We brought in as we've said.
A new leader over over product.
Brendan joined us six or seven months ago.
And we still believe there is a lot of opportunity for us to get to get better at developing the right products and create this.
<unk> product market fit with our consumers. So I would just leave by saying that as core to our strategy and we think that along with brand and community.
Our great modes for our business.
In terms of the cadence of innovation.
You really have to take a long view and it really takes multiple years to go from concept.
Two product launch and then from product launch to adoption I mean, there there is a long period in which we are really driving our product marketing message to gain.
To gain penetration of those products. So we tend not to think in terms of economic cycles. We believe that if we're consistently launching good product.
If we're consistently.
Disrupting our own product by bringing better.
Better innovation more value to our consumers.
That's the right way to build a consumer brand and so we'll just we will continue independent of macro cycles to bring product to market because if we did if we delay of current generation that will simply delay of future generation.
When when the macro maybe more.
More favorable to high ticket consumer discretionary.
Yes.
I would also just just speaking to.
We launched this week, a new meter product.
The meter or two plus.
And I think it's important for us to just acknowledge that that is another market. That's very large if you look at the U S. For example, there were $20 million need probes sold per year.
Or a small percentage of those.
We have a very very passionate and engaged consumer of meter.
The product, which includes the digital experience and we will continue to innovate there.
The innovation that we launched on Monday.
Boy.
The team started working on that long before I met the team. They started working on that product six or seven years ago and so it took that long to perfect something that is that is technically complicated, but very very simple and elegant to the consumer and so you know.
We bring we bring product to market innovation is not always predictable in terms of cadence we bring in when it's ready.
Okay. That's really helpful. Thank you so much and just a quick follow up.
With regard to cost savings.
You guys have done a lot over the past year.
More room to flex.
The environment remains pretty challenging in 'twenty four.
Yes, there is always room to flex I think that our approach to planning for 2020 for us to start in a very conservative manner.
I think thats, where theres benefit in thinking prudently about what the category is doing and the fact that it may be that we expect it to be down in 2024. So we wanted to ensure that there's cushion to absorb that without having to make dramatic shifts or pivots within our investment strategy and our opex.
And that said to the extent that we see trends emerge that require further cut.
Cuts too to ensure that we protect profitability, especially in light of the fact that we do have.
High leverage on the balance sheet, we have.
Deep insights into where we would manage that and I think that at the end of the day, we're performance managing the P&L monthly so we'll never get caught on our heels and Emma Leila to react to trends and I think building and that conservatism around how we plan Opex will certainly support that.
That's great. Thanks, guys. Good luck with this quarter.
Thanks, Joe.
Our next question comes from Brian Mcnamara with Canaccord Genuity. Please go ahead, Brian Your line is open.
Good afternoon, guys. Thanks for taking the questions.
Another publicly traded.
With the grille business reported earlier today and pushed out an inflection for their grill business another quarter or two so can you provide some color on the competitive dynamics youre seeing.
Even our retailers hesitancy on restocking and some of the recently destock discretionary consumer durables.
Yes, I mean.
Hard to comment on the broader drilling industry, we have some visibility.
Yes.
Inventory levels, but we're very familiar with our inventory levels.
I think we've probably.
We probably got in front of this sooner than our competition.
It benefits no one four channel level inventories to be high and so we were strategic in terms of how we fulfilled how we drove promotions.
And.
I guess I can just speak for trader and say that we're very pleased with our chat a logo channel level inventories they felt.
They have felt really good for quarterly replenishment has been.
As we would expect.
Retail ourselves in unit Replenishes unit.
But I would also just note.
From a balance sheet perspective.
A notable decline in standard level of inventories.
Down more than a third since the beginning of the beginning of the year and we feel like we're in a good steady state relative to where we are seasonally.
Great and then secondly on the macro front can you talk about what youre seeing in terms of elasticity on price points I believe on the Destocking trend started you mentioned pressure in the sub $1000 price point is that still the case or has that moved materially up market.
I think we've certainly offset some of that with the pricing we took back too.
Really our normal pricing strategy pre pandemic and a corresponding uplift in volumes has validated that that said.
Or maybe that's providing some offset too.
The macro and or.
Pressures on consumer.
With respect to high ticket items, we definitely think we're still feeling some of that but at the end of the day I think it's more pressure.
Broadly on.
Comps year over year, and just kind of demand trends and less so around our price points right. So again, we're comfortable with how we've.
Set our price our pricing strategy across the portfolio, we've seen a corresponding uplift in volumes, especially sub $1000 and right now it's more isolated to what we're seeing in macro more than it is how do we think about pricing internally.
Yeah.
Alright, thanks for the color guys I appreciate it best of luck.
Yes, Brian.
Thank you all the questions. We have so this concludes today's call.
You for your participation and you may now disconnect your lines.