Solo Brands, Inc. (SBDS) Q2 2022 Earnings Report, Transcript and Summary

Hello everyone and welcome to Solo Brands, Inc. Second Quarter Fiscal 2022 Financial Results Call. My name is [Seb] and I will be the operator on the call today. [Operator Instructions] We will now hand the floor over to Bruce Williams to begin.

Thank you, operator. Good morning everyone and thank you for joining the call to discuss Solo Brands' second quarter 2022 results, which we released this morning and can be found on the Investor Relations section of our website at investors.solobrands.com. Today's call will be hosted by Chief Executive Officer, John Merris; and Chief Financial Officer, Somer Webb. Before we get started, I want to remind everyone that statements made on this call and the earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, anticipated financial performance, and our goals and strategies. These forward looking statements now involve substantial risks and uncertainties, some of which may be outside of our control, and that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include those describing the company's earnings release, and other filings with the SEC speak only as of today's date. In addition, our discussion today includes references to certain supplemental non-GAAP financial measures, including net income as adjusted, diluted earnings per share as adjusted, adjusted gross profit, adjusted gross margin, adjusted EBITDA and adjusted EBITDA margin, which should be considered in addition to and not as a substitute for our GAAP results. We use these non-GAAP measures in evaluating our ability to generate earnings, provide consistency and comparability with our past performance and facilitate period-to-period comparison of our core operating results. Reconciliation of these non-GAAP measures to the most comparable GAAP measures and definitions of the referenced non-GAAP measures are included in our earnings release and our filings with the SEC, which are available on the Investors portion of our website @investors.solobrands.com. Now, I would like to turn the call over to John.

Thank you, Bruce, and thank you for joining the call to discuss our second quarter 2022 results. I'd like to begin by welcoming Somer Webb. She joined us in May as our CFO and I'm grateful for the partnership that she and I have created in such a short time. Today I'll be sharing a quick summary of our Q2 results followed by an update on our strategic initiatives. I will then turn the call to Somer for a more detailed update on our financial performance. Following Somer's update, I will wrap up with additional comments on the current market and how we feel about our ability to operate in this environment. Our second quarter results reflect improving sales trends as we move into our seasonally stronger months of May and June driven by a direct to consumer channel. During the second quarter total revenue grew 53% to $136 million compared to $88.7 million in the prior year alongside healthy gross margin. I want to thank our operations, sales and marketing teams who did a great job managing supply chain and promotions to deliver such strong gross margins all while generating solid top line growth. Our direct to consumer sales increased 63.2% to $116 million compared to $71.1 million in the prior year with sales strengthening as the quarter progress. Sales in our wholesale channel increased 13.1% to 20 million compared to $17.7 million in the prior year, although our international business still makes up a small percentage of our overall business, we were pleased with the increased consumer demand we experienced in this channel and believe there is meaningful international growth ahead. We are also happy to share that our key retention and acquisition metrics remain healthy with referral rates and repeat purchase rates both above 40%. And our average net promoter score across all brands is 82. We remain focused on executing our strategic priority to deliver an exceptional customer experience through our four key investment areas. First, innovating and elevating our product offerings. Second, building and leveraging our data warehouse to drive conversion and marketing efficiencies. Third, expanding our wholesale distribution and fourth growing our international business. Let's start with innovation. We're excited about the response to the new products introduced so far this year and are thrilled about what we have planned for the back half of the year. We've continued to see momentum from products launched earlier this year, including our new Pizza Oven Pi which began to ship in Q2. The feedback on Pi has been fantastic and a great testament to our ability to deliver innovation that helps new and existing customers make amazing memories with friends and family. Many existing customers wrote us including Nelda H from Texas, who said I love my pizza oven. Great quality, easy to use. Our pizza night with five couples was a huge success. And now everyone wants to order one for themselves. This is my third item to purchase and I have no regrets. So lots of rocks. It's equally exciting for us when we hear from brand new customers to sell a brand. John H from California wrote loves pizza oven and have not purchased any of the other products. But now I'm looking at their Firepits. Both returning and new customers are loving Pi which is a solid indicator of the opportunity ahead of us to create millions of passionate loyal customers. Over 35% of our Pi orders are coming from existing customers, which also demonstrates our ability to extend the celebration into adjacent categories, thereby increasing the lifetime value of our existing customers and creating competitive moats around our business. Innovation is at the heart of everything we do at Solo Brand. To that end, we are excited to announce the launch of several new products across Solo Stove, Chubbies, and ISLE. The first is Solo Stove 2.0 a product that incorporates a removable grade and ash pan in our firepits. This product enhancement, which was launched in mid July, came in response to customer requests to solve the challenge of emptying cash from the firepits and makes our Solo Stove firepits much easier to use. While it's early customer feedback has been positive and we're excited to release product enhancements that remind our customers that we're committed to listening to their feedback. Our plan is declare through legacy Solo Stove 1.0 product through our international markets select wholesale customers and domestic B2C channel in addition to Ranger bonfire and Yukon 2.0 Solo Stove will have several exciting product innovations, launching in the back half of the year. Last week at Chubbies we launched are everywhere pant or as we like to call them internally longs this long anticipated launch, no pun intended extend Chubbies seasonal reach into cooler months and allows us to better appeal to consumers throughout the year. Early feedback has been fantastic. Tyler S says, as someone that's been a massive fan of Chubbies ever since the brand's launch, there's only been one flaw of experience. It's that I have to store my Chubbies away each and every winter. Now with the everywhere pant. Chubbies soul flaw has been terminated. I can finally wear my Chubbies year round and I've never been more excited. At ISLE we launched switch last month and inflatable stand up paddleboard that doubles as a kayak a unique category differentiated product. We anticipate that this multipurpose paddle board will be well received by enthusiast as well as novices. As you could probably sense our product teams have been busy and focused on the quality and quantity of innovation that we're bringing to the market this year. In fact, this year, we will launch more new products than ever before in a calendar year. Turning to our data investments, we continue to focus on leveraging our best customer database to cross market our brands and drive efficient marketing spend. Today we have over 3.2 million customers of which 50,000 have purchased from at least two of our brands. This number has doubled from the start of the year. Leveraging our one to one relationship with customers has been instrumental to our growth today. And we see our data investment as a key component of our future growth as we integrate our brands to drive marketing efficiencies across the platform. In our wholesale channel, we have been very pleased with the demand for retailers for our products. We have created some exclusive product offerings from Solo Stove including colorways and bundles that will roll out in the second half of the year, and at Chubbies are increasing brand awareness and strong performance in stores is driving a significant expansion in door counts and a number of national retailers, including two key partners Dick's Sporting Goods and REI, the logistics associated with expanding our footprint would usually put a major strain on our three PL partners. Fortunately, as we've transitioned Chubbies warehousing and fulfillment in house, we gained confidence in our ability to service our retailers and best in class manner. Another testament to the differentiated value of B2C and our differentiated model. We are incredibly excited about our international business. We'll be launching Australia this month, which we believe will add even more momentum to our international growth. Our European rollout is going really well as brand awareness increases. We are focused on creating authentic messaging that is customized for each country, which requires additional marketing investments on the front end, but the investments are expected to pay off. As I previously said, Solo Stove international rollout has paved the way for other brands. And I'm thrilled to share that Oru, ISLE and Chubbies are now live in Canada and Europe as well. We believe that the investments we are making especially in marketing to build our brands in these markets will deliver solid returns for years to come. In terms of strategic acquisitions, we continue to consider a number of compelling opportunities. We're mindful of the uncertain economic environment and recognize the importance of being highly selected and patient. In closing, I'm thrilled about the product launches we have planned for the back half of the year. We've listened to our customers and I'm grateful for and proud of our product teams who have worked tirelessly to make this happen. Their exceptional efforts and dedication are representative of our entire team and our Solo Brands mission to create good moments and lasting memories for our customers. While we are optimistic about our future, we recognize that the macro environment is uncertain and changing quickly. We also recognize that we are at a stage in our business where investing in long term growth is important. As a result, in a few moments, you will hear from Somer who will be updating our outlook for fiscal 2022 to reflect both market uncertainties in higher costs as well as our expectations to continue investing in our long term growth initiatives. With that, I will now turn the call over to Somer to review our second quarter results.

Thanks, John. Good morning, everyone. I'm extremely excited to be with you today as the CFO of Solo Brands. While I've only been here a short period of time, I've been impressed with the caliber of team and the passion of the entire organization. Today, I will walk you through our second quarter results, and then provide some commentary on our outlook for 2022. As John mentioned, we had several bright spots this quarter, and our focus continues to be on building a robust growth company with a long term mindset. For the second quarter, our sales came in ahead of our expectations as a business gain momentum throughout the quarter. Our gross margins remain healthy as we maintained a consistent level of promotions relative to last year. As discussed on our previous earnings calls, we increased investments in data, product innovation and international expansion. While these increased investments put some pressure on our EBITDA margin this quarter we believe these investments in the long term growth initiatives are prudent at this stage of our growth cycle and will pay off beginning in 2023. Net sales increased 53.3% to $136 million, compared to $88.7 million in the prior year period. Sales in the second quarter were boosted by contribution from Q3, 2021 acquisition, and new product launches including Solo Stove Pi and Oru Lake. We saw an increase in total orders of 112.7% while average order value decreased by 32.1%, primarily due to the Chubbies acquisition. Chubbies has a higher level of total orders, but a lower AOB due to the nature of their product offerings relative to the other brands in our portfolio. We continue to see strength across our sales channels, especially B2C, our direct to consumer sales increased 63.2% to $116.1 million compared to $71.1 million in the same period in the prior year. Wholesale net sales increased 13.1% to $19.9 million compared to $17.6 million in the prior year. We are pleased with our multi channel positioning and our ability to meet our customers where they are including successfully satisfying demand in wholesale channel. Moving to gross profit. Gross profit increased 45.2% to $86.7 million. Our gross margin rate was 63.7% compared to 67.3% in the prior year. Adjusting for the impact of purchase accounting adjustments related to the fair value write up of our inventory for transactions, adjusted gross profit increased 46.2% to $88.4 million. Adjusted gross margin came in at 65.0% compared to 68.1% in the prior year with the variance to prior year, driven by our higher inbound rate and logistics expenses, as well as product mix from our acquisitions. Selling, general and administrative expenses for the second quarter increased $69.2 million or 50.9% of net sales as compared to $29.7 million in the same period last year. The increases in SG&A were primarily due to higher expenses from our acquisitions, which accounted for $17.3 million of the increase. Additionally, SG&A increased by $8.2 million as a result of equity based compensation and increased headcount. There was also a $6.3 million increase in advertising and marketing spend. As noted by companies across several sectors, digital customer acquisition costs have increased and we have not been immune to this dynamic. During the quarter, we recorded a goodwill impairment charge of $ million for ISLE, ISLE experience that favorable growth environment during COVID in 2020 and 2021, but it's coming under pressure in 2022. However, we've recently hired a new brand president and are seeing positive trends from the business that lead us to believe this brand can begin rebounding over the next 12 months. As a result of this impairment, second quarter net loss was $19.9 million and net loss per share was $0.19. Second quarter adjusted net income was $17.3 billion and our adjusted EPS was $0.40. Adjusted EBITA was $23.7 million and adjusted EBITA margin was 17.4%. although EBITDA margins were lower than expected, we have confidence that the investments we're making in data and analytics, product innovation and international will provide returns for our shareholders. As we continue to scale we expect to gain operating leverage on the costs associated with becoming a public company. Now turning to the balance sheet. Balance sheet health will continue to be a major focus of ours in the near and long term. At the end of the period, we had $26.7 million in cash and cash equivalents. As of June 30, we had $57.5 million in outstanding borrowings under the revolving credit facility, and $98.1 million under the term loan agreement. The borrowing capacity on the revolving credit facility was $350 million as of June 30 leaving $292.5 million of availability. We believe we are in a position to take advantage of strategic opportunities, with a net leverage that remains less than 1.5 times. Inventory at the end of the second quarter was $128.2 million. The increase is due to a combination of an earlier seasonal inventory [wealth] international expansion and new product introductions. With the concerns around supply chain our operation and merchandising teams continue to be proactive to ensure consistent supply for our customers. Turning to our outputs. While we are encouraged by our current momentum and strong lineup of new product introductions planned for the back half of the year, we recognize that consumers are experiencing a number of pressures, including higher fuel costs, inflation and fear of a recession. In line with the historical seasonality of our products, we expect Q4 to contribute roughly 40% of our overall revenue for the year. Given such a high concentration of seasonal revenue and market uncertainties, we are choosing to take a more conservative view on full year guidance. We expect that we will see mid 20% revenue growth, adjusted gross margins is 60 plus percent and [18%] adjusted EBITDA margin for the year. As I mentioned earlier, I think Solo Brands is in the early innings of our lifecycle and investments and longer term growth initiatives are critical. The investments in data infrastructure analytics, product innovation, marketing and international markets will benefit us in the years to come. Our new guidance reflects the impact of inflation on our cost structure, the incremental spend in marketing to support the launch of new products and international expansion and the impact of less operating leverage than we originally modeled. Lastly, I'd like to add that this environment is anything but normal. And we will hold true to our DNA and be nimble and balanced in our decision making. We are uniquely positioned to have the ability to pivot and adjust a large portion of our expenses as they are variable in nature. We are able to throttle marketing spend up and down as we see fit. And we will continue to assess market conditions and make the best decisions for the overall long term health of the business as we progress through the rest of the year. Before I turn back to John, let me restate that I am excited about the tremendous opportunity at Solo Brands and honored to be a part of the journey. We have a very healthy business that generates strong EBITDA margins and cash flow with little leverage, which is unique for a growth company where it's greater than 80% of revenues generated through direct consumer channel. We will continue to be depth and flexible with our cost structure as business conditions warrant while balancing long term investments that will drive profitability and long term shareholder value. I will now turn the call back over to John for final thoughts before questions.

Before opening the call up for Q&A I wanted to take a moment to discuss our business model and how we are thinking about the business in the current environment. Since inception, the vast majority more than 80% plus of our businesses come through our digital direct to consumer channel. This is differentiated from many companies, but what makes us particularly special is that Solo stuff has been profitable since our first year, all while driving growth as a digital direct to consumer brand. Our profitable cash flow generating model affords us the opportunity to continue to invest in long term growth even softer market conditions. By generating the majority of our revenue through our direct to consumer channel, we not only have strong gross margin rates, but as Somer are referenced, we have a highly variable cost structure, which we believe enables us to be more flexible in the face of an economic slowdown. Marketing is a large component of our SG&A and because it is variable in nature, we have a better ability to balance revenue growth and profitability as we enter periods of uncertainty. Our direct to consumer model makes us less dependent on retailers to drive demand because we have invested and continue to invest in customer relationships and a data platform that allows us to communicate directly with our customers to drive conversions. The benefit of this relationship is made even clearer by our high referral rates and repeat purchases that allow us to leverage product innovation to drive profitable growth. Lastly, we also have a very low install base and therefore are not dependent on a replacement cycle to drive sales. Our direct channel model highly variable cost structure and significant room for organic growth differentiate us from other outdoor companies and other digital direct to consumer brands. We are focused on staying nimble and agile even as we continue to grow. As Solo Brands we think big and small. Our customers deserve it and our employees desire it. And this environment and nimble culture wins big because these are changing daily. We're excited for the future and we thank our shareholders for coming on this journey with us. With that, I'll turn the call over back to the operator to take your questions.

Thank you. [Operator Instructions] And our first question comes from Chris Horvers from JP Morgan. Please go ahead.

Thanks. Good morning, everybody. So my first question is, can you help us more on what's changed on the line relative to your prior [Technical Difficulty] you spoke about momentum in the business. But you also talked about the waiting to the fourth quarter. So you really changing is sort of the guide down on the revenue, really the experts in around fourth quarter growth? And how are you thinking about the direct channel versus the wholesale channel?

Yes. For sure. Chris. Good morning. Thanks for the question. I'll kick it off and Somer will clean up anything behind me. So the change in topline -- you were breaking up a little bit, but I believe that the focus is specifically on kind of the top line revenue mix, and then the split between quarters. For the back half of the year, what we've done in our guide, is basically take the revenue growth that we saw on the front half of the year, and then we've extrapolated it out. So it's very similar on the back half. So seasonal split doesn't change from historical. So about 40% of revenue coming in Q4 back half overall being 60% to 63% is what we've talked about in the past, that doesn't change. It's just the front half of the year growth slowed. And we've pushed that them forward through the rest of the year. And then, in terms of the I think the second part of your question was wholesale versus B2C and that split continues to remain in that this quarter for Q2 it was roughly 85/15. We continue to kind of work towards what we think is going to be a healthy split of 80/20.

Got it.

Yes. The other thing I would just add that typically what you're going to see in our business is Q1 and Q3 are going to be probably our heaviest on the wholesale side. And then Q2 and Q4 are going to be heaviest on the B2C side, just find a way that seasonality works. But we do still expect an 85/15 split. And then to John's point, just reemphasizing from a guidance. We started out kind of slow in the first quarter, the momentum has continued to build. But in light of everything that we know that's going on with consumers. We just decided that it was the right move and we chose to take it down and be more conservative.

Understood. And then can you hear me now? Can you hear me?

Yes, we can hear you. It's just for some reason, like every third or fourth word, we just lose it. And so if it's an important word, we may have to have you restate the question. But unimportant word will be fine.

So it's really what's changed on the cost side you're hearing about freight rates come down. You've changed your gross margin outlook pretty, it seems like gross margin is the change to the EBITDA margin. Is that fair? And if so, what's driving the growth margin given that you're seeing freight rates actually recede?

Yes, so that's not the way we're thinking about it. So gross margins are actually low 60s is kind of where we've been. We were 65 this quarter, but that was in Q2. That was a beat on where we expect it to be. We continue to sell through inventory. Remember, on our freight rates, we had really favorable freight rates for the year that ended April 30, on our freight contracts and we've been talking about freight rates going up. So we actually saw an improvement in gross margins compared to our expectations in Q2 but low 60s is kind of where we've been expecting, I think, 63-ish range or something like that and we're continuing to feel comfortable in that range. So we've said kind of a 60% plus of being north of 60%, is where we expect, where the costs are really coming through, which I think Somer talked about, in her section was you really around a combination of public company costs, slight increase in investments to what we originally planned on the $20 million that we've talked about to accelerate international new product development and then integration. And then lastly, the reality is that over the last couple of years, customer acquisition costs have been artificially low. What companies were planning and thought that they could spend in order to acquire a new customer for the last two years, has kind of created an environment where we've all kind of missed, understood how that's going to flow through when you get into a normalized environment, like we feel like we're in now, where you really understand better what it's going to cost to acquire a new customer. The reality is that what it's going to cost you is more which means that marketing spend is going to go up and so we're seeing is about 15% to 20% closer to 20% increase costs to acquire a new customer and that's really where you're seeing the EBITDA decline is a combination of public company costs, slight increases to the original $20 million of investment in long term growth initiatives we talked about and marketing.

Thanks very much.

Our next question is from Randy Konik from Jefferies. Please go ahead.

Yes, thanks a lot. Can you hear me?

Yes, we've got your Randy.

Alright, great. Thanks, guys. So I guess back on the sales outlook for the mid 20s. I know you've got on a full company basis or full portfolio basis. Is there any kind of color you can kind of give us holistically about how you're thinking about the hard goods side of your business versus the soft goods side of the business and within that where do you have more visibility on where the business is performing on the hard goods versus the soft goods right now within the portfolio?

Yes. Good question. So obviously, we've just talked about an impairment, we're taking ISLE one of the hard goods businesses inside of the portfolio. But if you were to just remove a ISLE from the conversation stand up paddleboards is just what we've seen is that was a competitive space and not as much product differentiation IT. And the other hard good businesses inside of the portfolio with Solo Stove, REI, obviously, it's a different story. And then you have the Chubbies, the beloved Chubbies brand. So if you just take those three and remove ISLE just for sake of the conversation, we're seeing very similar demand trends for both the Chubbies business as well as the other two hard good businesses. So equal year-over-year growth, very similar, at least to where the businesses were performing prior to where they are performing now. So again, outside of ISLE we're not seeing anything outside or abnormal around demand and growth rates across soft goods versus hard goods.

Super helpful. And then I guess Somer question for you. What the markets going to be really focused on with a lot of holding companies reporting, is the market seeing basically almost every company guide down revenue and EBITDA margin expectations? I guess the markets going to kind of think about from here which numbers, which companies are going to continue to cut those numbers in which companies have we seen the cut enough? So what I want to understand on the EBITDA margin side, is you brought up the idea that a lot of your expenses are variable in nature, particularly around marketing. So just wanted to kind of get some perspective on how you're thinking about the ability to kind of to meet that kind of new mid teen EBITDA margin guidance for the year do you have those levers in place and variability and expense structure to kind of navigate and evolve as you get to the balance back part of the year to kind of meet those EBITDA margin, new EBITDA margin expectations? Thanks.

Yes, no, absolutely great question. Yes, as we think about the rest of the year, and marketing is a variable lever, that we are able to kind of throw up and down. In the back half, we do have a really robust new product roadmap. We also are continuing to launch in international markets. We do increase our marketing spend when we release new products, and also in international markets. But as we see, the next couple of months unfold, we're going to keep a watchful eye on our [REI]. So that is really the metric that kind of indicates how healthy that marketing spend is, as we see that it has a return. And we think that it's the right move for both the new product launches and international market expansion, we're going to continue to lean into it. But the reason that we also took down our EBITDA margins is we want the flexibility to be able to lean into those new products and international with that increased spend, but we are going to monitor it and ensure that it's actually a strong investment, and in throttle back when we need to.

Got it. Super helpful. Thanks, guys.

Our next question is from Robbie Ohmes from Bank of America. Please go ahead.

Hey, good morning. I wanted to follow up on wholesale. [Somer] and John, you can talk about what you're seeing there. It's a scaled back revenue outlook for wholesale as well. What do sell through rates look like with your wholesale partners? Are you still looking to maybe open some new wholesale partners for the Solo Stove? And then I just had a quick follow up.

Yes, absolutely. And thanks. Thanks for the question, Robbie. Wholesale is, we remain encouraged by wholesale. So you heard me talk about it, we like our model, and that we're not dependent on it. But we sure love our wholesale partners, and they've been really good to us. We're continuing to see, I think I mentioned in my portion of the call just a few minutes ago, a pretty significant store count and footprint increase that we see happening with the Chubbies business, particularly with the exit REI because of some of the brand awareness as well as some of the product innovation that Chubbies has been releasing. Solo Stove. I also mentioned is has released really for this back half of the year to retail exclusives, both in colorways and in bundles that we're very excited about. And that's been of high interest to our retail partner. So we are seeing, again retailers are well you're hearing softness around sell through from a lot of companies right now with retail. The reality is consumers are still buying something, and retailers need to carry some products. And I've been saying this, I've been kind of standing on the soapbox for a while. Great brands, and great products, I think are going to win bigger in this type of environment, because retailers are going to have to be more selective, and make sure that what they're putting on the shelves is what their consumers actually want. And I think that the beloved nature of our brands positions us well, for a continued strong outlook with retail partners. And so yes, the guy is coming down on a split basis equally to wholesale, as we're bringing it down for B2C. But we are still anticipating good strong relationships and expansion with our retail partners, we're just we're going to continue to have a conservative outlook on the back half of the year just because of where the market is right now. And how back weighted seasonally our revenue is there's just, it just seems like a prudent thing to do to take a conservative look.

And then John, can you just walk me through are you discontinuing Solo Stove 1.0 in shifting all the product to 2.0? And kind of how is that process going to work? And how much are you going to be discounting Solo Stove 1.0 a lot. Is that going to be on B2C? Or will the wholesale partners help shift to 2.0? Maybe a little more color on how you see that shift working?

Yes, great question. So that's right. So 1.0 is going to slowly sell through and then be gone. And then the only product when you buy a Solo Stove Firepit will be the 2.0 so they're not going to be sold in conjunction with each other once 1.0 inventory is depleted. Right now we're in the process of that depletion cycle. So the range for Firepit for 1.0 is nearly completely gone already. Bonfire is close to on its way. We've got a couple of you know key orders that are coming with some retailers and Bonfire 1.0 will basically be depleted very soon, and then we'll have Yukon, which will be the final one. So the way we see Yukon playing out from a sell through standpoint or depletion standpoint, is international we're not launching 2.0 internationally until 1.0 is completely out. So that's one of the strategies. And then the second one has really been to lean on our wholesale retail partners who have been pretty excited and keen to take that product in and sell it in store. So we have up to now when we've launched 2.0 and still had 1.0 put a price difference between the two. So 1.0 is selling for a slight discount to what the 2.0 pricing is at. But again, because of the nature of the cost structure and the cost of goods within those two actually very similar gross margins even what's the price difference between the two.

Got it. That's really helpful. Thanks so much, John.

Our next question is from Kaumil Gajrawala from Credit Suisse. Please go ahead.

Hey, guys, good morning.

Good morning Kaumil.

Good morning John. Could you talk a bit about M&A and specifically you have some hard metrics on profitability and have a rough idea on what you want to spend from a multiple perspective on companies with positive EBITDA but we are going through this very different period, maybe it's due to demand to pull forward from COVID and such where there may be companies that are quite significantly under earning. And so are you evolving your thinking in terms of how you look at targets and what some of those sort of base level of criteria is to be something it's interesting to put into your platform?

Yes. I mean Somer and I both talked a lot about being nimble and being willing to adjust and the reality is, is that you're spot on. The world is changing quickly. The world is changing everywhere, including for founder owned and operated businesses that have been enjoying a pretty easy environment for the last two years, and now are kind of scrambling to figure out what's the new norm. And I think if you were to ask me, what is the thing that we are most focused on, as it pertains to change compared to what we were thinking about before with M&A it is just that it's trying to figure out what is the normal baseline for a target. Where should they in a normal environment be performing? And then how are they performing in relation to that norm. And it's pretty challenging, as you can imagine, I mean, shoot some of the greatest financiers and forecasters in the world are coming back and telling you that what they thought three months ago has now changed. And so you can imagine, these new founder entrepreneurs that are running their businesses, and how their ability to forecast. What I can tell you is that we are seeing valuation, value expectations come down from founder entrepreneurs. Things are starting to get tighter. Cash is going to be more difficult to come by, and ultimately, that's going to bring down expectations for the sellers in any M&A transaction. But we are, honestly I mean we've looked at deals even this year, that we could have picked up for 5, 5.5, 6 times, EBITDA which for all intensive purposes is pretty remarkable opportunity. And yet when you're trading at 2.5 times, on the public markets, you have to question whether or not that's the best use of your cash. Because immediately, it's actually an upside down arbitrage. It's like a reverse arbitrage. And so that's those are some of the things that we're thinking about now that maybe we probably weren't thinking about six to nine months ago, and that have changed for us. But we are going to be opportunistic. I think in this market, if we get really comfortable with again, establishing where a company's norm is, and we can get a favorable valuation on an opportunity that we think really fits well into our model heads up those profit metrics. Of course is not the same profit metric that it used to be right. We used to be thinking we needed to acquire businesses that were 25%, 30% EBITDA margins coming out of the COVID era and just the environment that we're in, you just heard us guide to mid teens working our way back to the 20 mark is kind of where we want to be long term from an EBITDA standpoint. You could probably see us targeting things more in that range. But we certainly are changing our mindset around going after unprofitable or no-EBITDA generation type businesses. That certainly will not be the case.

Okay, great.

I will just add thing to that. Sorry about that. The only thing I'd add is on as we look at business as well, what we've seen through the acquisitions that we've done already, is that we are really strong at fulfillment and marketing. So the B2C component and the fulfillment side to the fulfillment by Solo are two of our strengths of the platform. And so when we look at M&A targets, we really assess hey, can we drive a lot of value here. And that's also another way that if we see the profitability isn't where we want it to be those are two things that are two levers that we can move on pretty quickly.

Got it. Great. That's actually a great segue on what I wanted to follow up on which might be an easy one to answer, which is, with the change in the revenue guidance, is there anything we should be aware of as it relates to inventory either on its way to you, in your facilities or maybe sitting at wholesale?

Yes. Good question Kaumil. So the only the only thing I'll call out Somer will probably have more to add here as well, is the dynamic of our current inventory position is this transition between 1.0 and 2.0. It's just important to note, because generally as we've ramped up to 2.0 because we need to have enough to point out to get us through Q4 we just talked about 40% of our revenue coming in the fourth quarter. So we've been ramping up that inventory to be prepared for Q4 which is something to be aware of. And then secondly, as we've launched international markets. So we're launching Australia, we've been sending inventory in and ramping up inventory for our new fulfillment center in Australia. And so ultimately, there are some inventory growth needs in for those two reasons. One, the new products and just overall product developments, all the new skews, we just talked about launching more products than we ever have this year. The back half of this year is no exception to that. So those new skews, which includes 2.0, the Solo Stove 2.0 and then international markets has required that we invest in inventory. Of course it doesn't expire on the shelves, we talked about this, we're in strong cash position. So we feel really good about the inventory levels.

Thanks. It's useful. Thank you.

Our next question is from [indiscernible] from Piper Sandler. Please go ahead.

Hey, this is Matt on for Peter, thanks for taking our questions. Just a quick one. First, on gross margin, I want to make sure I heard you right. I know the guidance for the year is 60% plus, but think I heard John say should be in that low 60% to 63% range. Was that in the backup for those quarters? Or was that for the full year that 60 to 63? Just want to make sure I'm not I don't have the backup too low? That's the first one.

Yes. So we right now we're thinking that the full year will be 60 plus percent. So we've been running. We ran this quarter at 65%. We do believe in the back half of the year, we're going to see a little bit of a headwind due to the container costs and the way our contracts worked out. But we still believe that we'll be above 60% and blended to kind of ride in that 60%, 63% range for the full year.

Okay.

Just to provide a little bit of color on the freight, just so that it jives with what you guys are understanding here and from other companies. A lot of companies are telling you that freight rates have come down for their business. Just as a reminder, because of the nature of how well we managed our break contracts last year, we were able to lock in and have an average container cost of roughly $8,500 last year. And so even though spot rates have come down, our new contract rates coupled with spot rates, where they are right now is actually well above what we paid last year. And so we're feeling a little bit more pressure on freight, even with freight rates coming down than other companies that you guys maybe following or hearing from so. Just so that you can understand why that dynamic exists for us versus others is more compared to cut of how well it was managed last year. We're seeing the same freight rates coming down this year benefit. It's just that benefit is still above where we were last year.

Okay, great. That's really helpful. And then just one quick follow up. You all have any updates on patent violations and what you all are doing to mitigate those infringements? Thanks.

Yes. It's a daily, we're following daily. And reacting quickly. We've been in the midst of we've actually, I'm not able to disclose too much quite yet. But we are very close on a positive win for us. We're at a verbal stage, we're close to execution on a final agreement on a pending litigation case that we have right now. So things are heading in the right direction. Our IP is holding up well and being recognized in this scenario that I'm talking about now. We believe that this is going to be a really big and important victory for us as we look forward to potentially additional knock offs and competitors in the future with relation to our IP.

Okay, great. Thanks, guys.

Our next question is from Sharon Zackfia from William Blair. Please go ahead.

Hey, guys, this is Alexandre on for Sharon. Just a quick one on the lower revenue outlook. Do you guys see any need for increased promotional activity to drive sales growth, given the forecast and slowdown?

What we've guided to is really what we expected. So in terms of promotion, we expect to be the same promotional that we have been in historical year. So nothing really changes there. Like I talked about earlier. Customer acquisition costs were artificially low through the pandemic, and kind of gave us all sense of where marketing spend would be on a broader basis. But in terms of being extra promotion or more promotional, we don't anticipate needing to be more promotional. In fact, with the new products that we have rolling out in the back half of the year, we have so much good to talk about. We're feeling pretty good about our back half position in relation to our promotional strategy.

Okay, great. Thanks on that. And then just one other one. Could you touch a little bit more on any color you could give with the impairment charges at ISLE understanding that you saw the slowdown relative to the COVID bump. But anything else you could say there and outlook for that business?

Yes. I will take that one. There were indications that they had really strong strength in 2020 and 2021. We believed that they could continue with that strength in 2022. They started softening. They've been running soft for several months. At that point they're down, I won't get the exact numbers, but they're down pretty significantly year-over-year. The good news is, and we are seeing positive trend, so we hired a new brand president. He came on in May. We have a new product innovation guy, you saw that we came out with ISLE switch. So we have momentum. We believe that this is going to take some time, but that the recovery we're seeing positive signs that this could recover over the next 12 months. But I would say it's probably going to take about 12 months for it to get back to really probably 19, 20 levels.

Okay, great. It's very helpful. Thanks. I'll pass it on.

Our next question is from Jason [indiscernible] from Citi. Please go ahead.

Great. Good morning. Thanks for taking the question. Just to talk about digital acquisition costs. I get those costs are increasing and that you're watching [indiscernible] but how has that impacted how you're allocating marketing resources either across brands or at the top of the funnel if at all? Any comments on that would be helpful.

Yes, I'll take this one in a couple of different ways. It's a great question. One of the things we've talked about on previous calls that I'll reiterate today is that we are -- 85% of our business, being direct to consumer online, gives us, affords us the opportunity to do a lot of testing and we do. We iterate a lot and we iterate within digital channels, but we also iterate cross channel. So the way this is playing out in terms of customer acquisition costs is it's allowing us to go out and explore new channels, and new opportunities and even new types of campaigns and new creative. So we're constantly iterating as we're watching that [indiscernible] and then looking for a blended [indiscernible] that really fit into our financial model. So you're going to see us running, we have an internal correlation regression model we've talked about in the past, where we're able to correlate, for instance, spend on Facebook, and how that spend is actually impacting the success that we're having on Google. So when we drop Facebook spend, what actually happens to the effectiveness of our Google spend, or our TikTok spend, or our podcast or CTV spend. So there's quite a sophistication, and Somer just kind of alluded to this, but our marketing is one of our two big value propositions when we do M&A and that's exactly why because it is differentiated and it is proprietary to the way that we execute. It's all done in house. For the most part, we execute all of our marketing with our own internal team versus using outside agencies. And so that's a big proponent to us. In terms of top of funnel, the one thing that I'll call out that's really important for everybody to understand is, as we're rolling out international markets, you just have to understand that the initial marketing spin and new markets, and frankly, for new products, as well so when we're launching a lot of new skews, that marketing spin tends to be more top of funnel than bottom of funnel in the beginning. It's very, in a new international market, it's very brand building. And in for new skews, it's very product awareness, and education based. And so it's not necessarily conversion driven, which is one of the reasons why we've modeled for higher marketing expense and a higher customer acquisition costs, just knowing that because we're doing, we're making those investments now for longer term growth, we're going to see a less efficient marketing in the near term. Now, we do expect for those to normalize out and get back to not pandemic levels, but pre-pandemic marketing efficiency levels, for sure, as those international markets and those new products that we're launching become more mature. So that's kind of how you could expect it, that top of funnel spend will work its way down the funnel, it'll just take some time. And so we've modeled out conservatively, not expecting for a major return on that spend for the back half of the year and expecting more of that to come in 2023. That's what we've modeled. If some of that word have come to fruition this year, that would obviously create some upside to what we've got to do today.

Got it. Thanks for that. That's helpful color. And also a good transition to my second question that being can you just spend a little bit more time talking about international? It sounds like it's really progressing well. And now you have all your frames in Canada, but maybe to talk a little bit more about what's going on in Europe and plan for Australia? What brands would be there if it's still a B2C lead strategy? Or if you're thinking about bringing into retail in the immediacy? Thanks.

Yes. Our general approach with international markets is B2C first, that's always been our approach. Now, we've been running and partnering with international distributors for several years. And so we have small distributors across the globe that really become kind of an entry, an entryway or a gateway to a country. So they've been they're kind of evangelizing the brand. It's actually how we're deciding which markets to go into next. It's kind of based on the volume and demand that we're seeing through our international distributors. But it is a B2C first approach. That's certainly how we're thinking about it. And I guess in terms of color on what we've seen I've said in the past, our hope is to get international to a predictable and stable enough place that we actually start providing more specific color on our international performance. We are very happy. I will say this without getting too specific, is we are very happy and international is exceeding our expectations and where we expect it to be this quickly. We aren't even a year old in Europe and we just barely are crossing the year mark in Canada for Solo Stove and the other three brands are all within the last few months just going live in Canada and Europe. So we're very pleased so much so that we're launching Canada or Australia, which we've been talking about this quarter we've been talking about that for almost a year now. But we actually have moved. We've accelerated another additional international market. We're not going to disclose which one it is on this call. We will on our next call. But we've accelerated an additional international market for the back half of this year, just based on the momentum and success that we're seeing in Canada and Europe. So we're very pleased. It's going well. We're looking forward to sharing more and I hope and I'm expecting that for sure by this time next year we're giving you guys more specifics around our international business.

Super. Thanks so much.

There are no further questions on the call. So I will hand back to management to conclude.

Great, thank you all for being with us today and for the thoughtful questions. This has been great. We look forward to being with you again in a few months.

This concludes today's conference call. Thank you very much for joining. You may now disconnect your lines.