Q3 2024 Grove Collaborative Holdings Inc Earnings Call
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Speaker Change: Good afternoon and thank you for standing by. Welcome to Grove Collaborative Holdings Inc. third quarter 2024 earnings conference call. At this time, all lines have been placed on mute to prevent any background noise.
Speaker Change: Following the speaker's remarks, we'll open your lines for questions. As a reminder, this conference is being recorded.
Speaker Change: Hosting today's call are Grove CEO Jeff Yurcisin and CFO Sergio Cervantes.
Before they begin their prepared remarks,
I'll review the forward-looking statement, Safe Harbor.
Speaker Change: Some of the statements made today about future prospects, financial results, business strategies, industry trends, and Grove's ability to successfully respond to business risks
Speaker Change: may be considered forward-looking, including statements relating to plans to exit the retail channel.
Speaker Change: Delivering higher returns by focusing its investments in DTC, sequential revenue growth in the fourth quarter, repayment of remaining amounts outstanding under their term debt facility, and their net revenue, and adjusted EBITDA margin guidance.
Speaker Change: Such statements are based on current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including those factors discussed in the filings with the Securities and Exchange Commission.
Speaker Change: For more information, please refer to the risk factors discussed in Grove's most recent filings with the SEC.
which are available on Groves Investor Relations website at investors.groves.co
Speaker Change: During today's call, Grove will discuss certain non-GAAP financial measures. Reconciliation of these non-GAAP items to the most directly comparable GAAP financial measures are provided in their earnings release, which is also available on their Investor Relations website.
Speaker Change: I would now like to turn the call over to Jeff Yurcisin to begin.
Thank you, operator.
Jeff Yurcisin: I'm excited to share progress and updates with you all today on the turnaround underway at growth.
Jeff Yurcisin: I've now had the privilege of leading this remarkable team for over a full calendar year and continue to be proud of the work we're doing to not only build the destination for our conscientious customers, but to also serve as the trusted brand that prioritizes both environmental
and Human Health.
We are still laser focused on operating a sustainable business.
and Pursuit of our Sustainable Mission.
Jeff Yurcisin: And we're making essential progress on our priorities of fostering revenue growth, driving profitability, strengthening our balance sheet, and highlighting our differentiation as the retailer that creates and curates products that are good for you and good for the planet.
Starting with pillar number one, profitability.
Jeff Yurcisin: This quarter saw us break even on adjusted EBITDA with four previous consecutive quarters of positive adjusted EBITDA, demonstrating our commitment to profitability in spite of a revenue decline.
Jeff Yurcisin: We also achieved positive operating cash flow again this quarter, marking the fourth quarter we have done so out of the last six.
Jeff Yurcisin: Contributing to the positive operating cash flow, we reduced our inventory position from $27.8 million at the end of Q2 2024 to $24.5 million at the end of Q3 2024, further right-sizing our ownership for the current scale of our business.
Jeff Yurcisin: And lastly, we continue to optimize operating expenses by maintaining strict expense discipline.
including relocating our Fulfillment Center operations in Reno, Nevada
Jeff Yurcisin: which is now fully up and running and helped us to avoid a significant rent increase in our previous facility.
Jeff Yurcisin: We're continuing to identify other areas to increase operating leverage in our ongoing transformation.
Our second pillar is balance sheet strength.
Jeff Yurcisin: This quarter, we announced an additional $15 million investment from Volition Capital on top of the $10 million they invested in August of 2023. The transaction was led by Volition's managing partner, Larry Cheng, who also sits on our board of directors.
Jeff Yurcisin: We plan to pay off the remaining $30 million of our outstanding term debt facility using proceeds from the investment, which follows the $42 million voluntary payment we made during the third quarter.
Jeff Yurcisin: After paying off the term debt, our only debt remaining would be 7.5 million dollars under our asset-based loan facility, enabling a cleaner balance sheet going into 2025.
The third pillar is revenue growth.
Jeff Yurcisin: We view revenue growth as the natural output of delivering a great shopping experience.
This is our top priority going forward.
Jeff Yurcisin: As a retailer, the company we keep speaks volumes about who we are.
Jeff Yurcisin: Our customers shop with us because they trust us to curate those cutting-edge brands and products that have high quality, non-toxic ingredients and sustainable packaging to support both the environmental and human health.
Jeff Yurcisin: Our selection expansion continued in the third quarter, with the number of third-party brands sold on our e-commerce platform increasing by 18.3% compared to the third quarter of 2023. We also expanded our Subscribe and Save program, with 67% of all products we offer now opted in for customers to subscribe to and unlock a discount.
Jeff Yurcisin: We're continuing to listen to our customers to meet their needs, bringing on the brands and products they want across every category.
Jeff Yurcisin: Furthermore, based on the cumulative changes made, overall progress underway, and strong momentum going into the end of the year, we continue to project sequential revenue growth in the fourth quarter of 2024, which would be a first for the company since the first quarter of 2022.
And lastly, pillar number four, sustainability.
Jeff Yurcisin: This continues to serve as our foundation, mission, and point of differentiation.
Jeff Yurcisin: This past quarter, we made the decision to expand our definition of sustainability to better encompass environmental and human health in how we talk about growth, our value proposition, and the needs of our customers.
Jeff Yurcisin: We aim to have a louder voice in these discussions as we build our sustainable brand and serve our customers who are concerned about both sides of sustainability. We will speak more to this in future calls.
Jeff Yurcisin: During the quarter, we also launched the Beyond Plastic Impact Tracker, an exclusive new tool that helps customers better understand their individual impact by shopping with Grove.
Jeff Yurcisin: The amount of plastic avoided and recovered is now disclosed in each customer order and over the lifetime of their Grove orders since 2020.
Jeff Yurcisin: The Grove community has avoided and recovered 24.5 million pounds of plastic, the equivalent of over 808 million standard water bottles since 2020.
Jeff Yurcisin: We also disclosed our latest plastic intensity metrics in our earnings release this afternoon to continue providing accountability for the pace at which we decouple our revenue from the use of plastic.
Transitioning to another strategic update.
Jeff Yurcisin: We have begun the process of exiting our Grove Co. branded products from brick-and-mortar retail locations nationwide by early 2025.
Jeff Yurcisin: We first entered brick-and-mortar stores in April of 2021 to make our mission-driven GroveCo products more accessible to consumers, but after three and a half years in this channel, it constitutes less than 4% of our business and has been consistently unprofitable.
Jeff Yurcisin: We believe that we can deliver higher returns by focusing our investment in our D2C channels.
Jeff Yurcisin: We're incredibly grateful to our retail partners for the opportunity to test and learn with them. But we believe we can best serve the 57 million conscientious consumers online. We've learned that these consumers are different from the brick and mortar customers.
Jeff Yurcisin: with a higher household income and who seek a premium curated selection and experience.
Jeff Yurcisin: We believe this D2C customer segment is healthy and growing and gives us ample runway for growth into the future, while also playing a meaningful role in our customers' lives.
Lastly, before I turn it over to Serhiu.
Speaker Change: As noted in our press release today, we've reduced our revenue guidance for the second time this year.
Speaker Change: Looking back at 2024, we were too optimistic in light of the changes we made to our e-commerce experience throughout the year.
Brick-and-mortar retail has also underperformed expectations.
Speaker Change: While we continue to be excited about and proud of the progress we have made and where we are headed, we slightly reduced our revenue expectations for the rest of this year based on current trends.
Speaker Change: Again, we still expect sequential revenue growth in the fourth quarter, but at a lower baseline than we originally anticipated. And we remain focused on achieving sustainable, profitable, sustainable growth.
Growth as our ultimate goal.
Speaker Change: Since I joined in August of 23, we have gone through each function of the business to optimize what we're doing to make impactful and strategic changes to set Grove up for ongoing success.
Speaker Change: We have implemented many critical updates and are excited to start seeing the results of these changes.
Speaker Change: Our cumulative progress excites me for everything to come in both the near term and long term.
Speaker Change: I will now turn the call over to Sergio to review our financial results in more detail. Sergio, please go ahead.
Sergio Cervantes: Thank you, Jeff. I'm also happy to see the progress we have achieved in the transformation of growth so far.
Sergio Cervantes: Similar to previous goals, I will provide quarter-over-quarter comparisons in addition to the year-over-year changes as we continue to believe that sequential comparisons reflect the trends
Sergio Cervantes: in the business and provide a measure of the effectiveness of the steps we have taken to help position ourselves for long-term sustainable and profitable revenue growth.
Sergio Cervantes: Starting with the top line, net revenue was $48.3 million in the third quarter.
down 7.3% from the second quarter of 2024.
and down 21.8% year-over-year.
Sergio Cervantes: mainly due to fewer repeat orders and lower advertisement spend throughout 2024 compared to prior years.
Sergio Cervantes: This decline was also impacted by a $0.8 million markdown to brick-and-mortar retail revenue.
Sergio Cervantes: However, as we look toward the fourth quarter, we are encouraged by the gradual stabilization of revenue from repeat customers, which is a significant factor in our continued confidence that we will see sequential revenue growth.
Total orders were 0.7 million in Q3.
Sergio Cervantes: down 3.3% quarter-over-quarter and 22.8% year-over-year, while active customers were also 0.7 billion, down 4.8% quarter-over-quarter and 30.4% year-over-year.
Sergio Cervantes: both of which were influenced by reduced advertising spend relative to prior periods.
Sergio Cervantes: However, the sequential decline has slowed as our customer base stabilizes in the aggregate, and advertising spend has increased to support our initiatives.
Sergio Cervantes: As a reminder, we define active customers as those customers who have placed an order in the last 12 months.
Sergio Cervantes: DTC net revenue per order was 67.02 in Q3, down 1% from Q2, but up 2.7% year-over-year.
E-sequential decline was driven by a higher percentage of first-holders.
which have lower average net revenue per order.
Sergio Cervantes: The year-over-year improvements reflect an increase in the average number of units per order, particularly of third-party products.
as well as favorable product mix and strategic price increases.
Sergio Cervantes: Gross margin was 53%, down 80 basis points from the second quarter of 2024, mainly due to the retail markdowns mentioned earlier.
Sergio Cervantes: Year-over-year gross margin decreased by 80 basis points as well due to the elimination of customer fees and lower product margins as a higher proportion of revenue shifted toward third-party products.
Sergio Cervantes: Growth from products as a percentage of net revenue decreased to 38.5%.
Sergio Cervantes: Down 260 basis points quarter over quarter, and 630 basis points year over year, mainly due to the expansion of third-party products offerings.
which is a key part of our growth strategy.
Sergio Cervantes: As we increase our emphasis on expanding third-party assortment, we plan to stop sharing this metric after the fourth quarter of 2024, as it is no longer a critical input to our growth and strategy moving forward.
Sergio Cervantes: Advertising expenses increased 15.6% in the 3rd quarter compared to the 2nd quarter but decreased 30.6% compared to the 3rd quarter of 2023 to $2.8 million.
Sergio Cervantes: The sequential increase is mainly due to an increase in TTC-specific advertising, as we invest more in the channel due to improving first-order conversion rates, offset by a decline in brick-and-mortar retail advertising.
Sergio Cervantes: Although advertising is still lower year-over-year, as we remain disciplined and scale spend efficiently.
Sergio Cervantes: Product development expense decreased 11.7% quarter over quarter, but increased 34.2% year over year to $4.8 million.
Sergio Cervantes: The sequential decline is due to severance costs recorded in the second quarter.
Sergio Cervantes: All were driven by our decision to transition our homegrown e-commerce platform to Shopify technology.
Sergio Cervantes: SDNA expense decreased 8.8% quarter-over-quarter and 16.7% year-over-year to $24.7 million.
Sergio Cervantes: The quarter-over-quarter decline is mainly due to the $2.2 million restructuring charge incurring the prior quarter, lower fulfillment costs from fewer orders, and lower stock-based compensation expenses.
The year-over-year decline is driven by lower fulfillment costs.
Sergio Cervantes: Also from fewer orders and savings, mainly from reductions to personnel, facility, professional fees, and technology costs.
Sergio Cervantes: The sequential year-over-year decline was partially offset by $1.2 million of costs associated with the moving of the company's Reno Fulfillment Center in the current quarter to a lower-cost facility.
Sergio Cervantes: Adjusted EBITDA was breakeven this quarter compared to $1.1 million in the second quarter of 2024 and $0.2 million in Q3 2023.
Sergio Cervantes: In spite of the revenue headwinds, we maintain strict expense discipline across the organization.
Sergio Cervantes: Lastly, operating cash flow was $0.8 million, marking our fourth quarter positive operating cash flow in the last six quarters.
Sergio Cervantes: In addition to extensive discipline, we continue to make progress in improving our working capital, particularly reducing our inventory, which has been a source of cash for the last several quarters.
Turning now to the banner sheet.
Sergio Cervantes: We ended the quarter with $55.6 million in cash, cash equivalents and restricted cash.
down from 82.6 million in Q2.
Sergio Cervantes: The $27 million decrease reflects our recent $42 million voluntary prepayment of term debt.
Sergio Cervantes: forfeit offset by a $15 million investment from police and capital which enabled us to pay off the remaining term debt.
Sergio Cervantes: We also ended the quarter with an inventory balance of $24.5 million, down $3.3 million, quarter of a quarter, mainly driven by a reduction in crop branded inventory as we continue to improve our inventory ownership position.
Now turn it to our Outlook.
Sergio Cervantes: But we are revising our net revenue guidance and now expect 2024 net revenue to be in the range of $200 to $205 million, a change from $205 to $215 million guidance we gave previously.
We continue to prioritize strict margin and expense discipline.
underscoring our commitment to a sustainable and profitable growth model.
Sergio Cervantes: We are excited by the stabilization in our aggregated customer base and we look forward to driving sequential revenue growth in the fourth quarter of this year as we continue our transformation into 2025 and beyond.
Speaker Change: I would now like to turn the call back over to Jeff for some closing remarks.
Thank you, Sarahfield.
I've worked in e-commerce for over two decades.
Speaker Change: and it excites me to know that Grove is getting back to the fundamentals of direct-to-consumer.
Speaker Change: Centering our customer in everything we do. Building a brand that is meaningful in their everyday life. And reaching them through channels that are strategic and efficient.
Speaker Change: We want to create that emotional connection and loyalty so that we truly matter in their life.
Speaker Change: which comes from understanding their needs and meeting those needs not from being an omni-channel company.
We've made fantastic progress.
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With that, we're happy to answer any questions you have.
Operator, please open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment, please, while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Susan Anderson with Canon Core Genuity. Please proceed.
Speaker Change: Hi, good afternoon. Alec on for Susan. Just a question on the digital transformations announced last quarter. I guess any update there? Is it still on track? And then with the transition over to Shopify, have you seen any uplift with the digital tools that they offer?
Speaker Change: why we are still guiding towards sequential growth. And sequential growth for us is really significant.
It implies that
Speaker Change: Profitable and year-over-year growth is around the corner. That is clearly our ultimate goal. So what we've seen is with this transformation, our cohorts are stabilizing and we're starting to get the right type of economics on advertising that you will see us continue to lean into advertising when it makes sense.
Speaker Change: This could create a fluctuation in quarterly EBITDA going forward, but again, the long-term focus is profitable growth.
Speaker Change: The second part of your question is Shopify. We announced a Shopify migration, but we don't expect to be fully on the platform until early Q1.
Speaker Change: We are really excited about what that will enable, but right now what we're trying to do is to make sure that as we transition to Shopify, we maintain a customer experience that really resonates with the loyal customers who have been visiting Grove.
and shopping with us over the years.
Speaker Change: Got it. And I think you mentioned four quarters for sequential growth and I think the guidance kind of gives some leeway there. I guess what are the puts and takes that need to happen to get that sequential growth in four quarter? What needs to work and what could be some potential headwinds?
Speaker Change: If you were to dig into the numbers, Alec, you'll see that the brick and mortar
It's been a real headwind.
Speaker Change: It was a headwind if you look at our quarter over quarter growth, even in Q3, where we believe the quarter over quarter decline was pushed by about 300 to 330 basis points of pressure from the brick and mortar channel.
Speaker Change: The same type of pressure could exist in Q4 in terms of
Speaker Change: Brick-and-mortar not fully hitting the expectations that we had when we set this out but they're going to be offset by a D2C business that is
Speaker Change: we believe in that is working. We transformed this business, obviously, a little over six months ago.
Speaker Change: We now have a new acquisition model, a new offering to our customers.
Speaker Change: As one of our board members describes it, we have a new scene where we can have a specific offering serving our customer segment that is differentiated from everyone else.
Speaker Change: Got it. And then just to follow up on the accidental brick and mortar.
Speaker Change: I don't know if you're able to say, but you have a timeline. I think you said early 2025 of when you...
Jeff Yurcisin
Speaker Change: The 330 bits were more of a quarter over quarter, year over year growth impact, less on the gross margin line. I think the idea that we are struggling on brick and mortar shelves and still guiding towards sequential growth is the real signal and the exclamation mark that I would make.
Speaker Change: When we start talking about 2025, we'll give more clear guidance in our next earnings call, but we really do want to emphasize that profitable growth is our ultimate goal.
Speaker Change: And so, if you were to think about the brick and mortar channel, if we really are growing in 2025, then our D to C business has to be strong enough to offset any brick and mortar type of losses and or we may find the right type of acquisition targets.
Speaker Change: and you know, plan at first type of products that are natural and environmentally friendly. We think we're differentiated from almost everyone else in the space and we believe this can serve as a real platform going forward. So, you know, we always kind of talk about M&A being on the table.
In terms of brick-and-mortar, we expect to be able to...
Speaker Change: Be growing and profitable and is it the ultimate goal and to do that we would have to offset the brick-and-mortar with D2C.
Speaker Change: That's really helpful. And then one quick one, and then one kind of...
Speaker Change: question heading into the holiday about the health of the consumer, but the quick hit, just a silly one. Will you still be selling on Amazon? And then the follow-up is, I guess, the health of the consumer heading into the holiday. Your DTC platform is pretty interesting in that you get a lot of first-party data so you can see if consumers are trading up, trading down, what their habits are. Have you seen any consumers trading down to lower cost items?
Speaker Change: Great question. On Amazon, we don't see the brick-and-mortar strategy impacting our Amazon strategy going forward.
for speaking today.
Speaker Change: an AOV, offset the supply chain fee that we removed from every order with an increase in AOV. What that signals is that our customers are actually moving up.
Speaker Change: And I think the other big emphasis that I would highlight would be when you look at our D2C customer, it is a woman who has a household income of $150,000 plus.
Speaker Change: And so that customer is different a bit than the customer on, you know, that shopping brick-and-mortar shelves.
Speaker Change: And so we just are quite confident that we can meet that customer, that she has the disposable income, that she cares about, you know, product that is good for her family and for the planet, and we think we're going to be the right ones to serve her and enable that.
Thanks, Jeff. Really helpful. I'll turn it back.
Thanks, Alec.
Speaker Change: Thank you. There are no further questions at this time. I'd like to pass the call back over to Jeff for any closing remarks.
Jeff Yurcisin: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: This is a work of fiction. Any resemblance to actual persons, living or dead, is entirely coincidental.
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