Solo Brands, Inc. (SBDS) Q4 2022 Earnings Report, Transcript and Summary

Hello everyone. And welcome to the Solo Brands' Fourth Quarter Fiscal 2022 Financial Results. My name is Bruno, and I will be operating your call today. [Operator Instructions] I will now hand over to your host, Bruce Williams. Please go ahead.

Good morning, everyone. And thank you for joining the call to discuss Solo Brands fourth quarter 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 management's remarks on this call may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations. These may include without limitation, predictions, expectations, targets or estimates, including regarding our anticipated financial performance, business plans and objectives and future events and developments. And actual results could differ materially from those mentioned. These forward-looking statements also involve substantial risks and uncertainties, some of which may be outside of our control that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties among others are discussed in our filings with the SEC. We encourage you to review these filings for discussion of these risks, including our soon to be filed Annual Report on Form 10-K and will be available on the Investors portion of our website at investors.solobrands.com. You should not place undue reliance on these forward looking statements. These statements are made only as of today and we undertake no obligation to update or revise them for any new information except as required by law. This call will also contain certain non-GAAP financial measures including net income as adjusted, diluted earnings per share as adjusted, gross margin as adjusted, adjusted EBITDA and adjusted EBITDA margin, which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings provide consistency and comparability with our past performance and facilitate period to period comparisons of our core operating results and the results of peer companies. Reconciliation of these non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our earnings release, which will be available to our investors portion of our website, at investors.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 fourth quarter and full year 2020 results as well as our 2023 outlook. To begin, we were incredibly pleased with our fourth quarter results with sales and adjusted EBITDA increasing double digits despite a difficult macro environment. At the beginning of 2022, we shared our investment strategy along with confidence that our business model would allow us to make investments in long-term growth without sacrificing strong profits and positive free cash flow. I'm happy to share that our investments began paying off in the back half of the year and culminated in strong Q4 results. Customer response to our products is not only high during the key selling period we call Cyber 5 or Thanksgiving Day through Cyber Monday, but also continued through the remainder of the holiday selling season. This positive customer response was most evident in the number of shoppers we saw come through our online stores and the rate at which these shoppers converted to customers. When the dust settled on the quarter, we had delivered strong top-line growth, all while generating strong adjusted EBITDA, and solid free cash flow just as we had planned. Overall, our results are a testament to the strength of our business model which allows us to drive growth while reinvesting into the business. Customer relationships have been and will continue to be at the heart of our business. It took us about 10 years to acquire nearly 2 million customers through our website. It took only two years to double that number. The rate at which we are acquiring customers and the direct relationship we maintain with them differentiates our business and creates a competitive moat around it. As our loyal customer base grows so does our moat. But the story doesn't end here. We remain relentlessly focused on delivering an exceptional customer experience and our team finds new ways to wow them frequently, innovating new products, enhancing the online shopping experience and shipping orders the same day they are placed on our websites are just a few ways we surprise and delight our customers regularly. Create good as a core value at Solo Brands, and it turns out, you can create a lot of good by just treating your customers exceptionally well, expect for us to continue obsessing over customer experience simply because it's the right thing to do. But know that focusing on the customer isn't just good for customers. It's good for our team and shareholders too. Solo Brands referral rate is something we are extremely proud of, and is fueled by customer's desire to share with their friends and family the incredible experiences they've had with our company. Innovation is found all around our business. One of the obvious places is in new products. In, 2022, we launched more new products than any other year in our history, and the new products quickly became customer favorites. There are too many to list, but I'll highlight a couple. Last spring we entered the exciting and fast growing portable pizza oven category by launching Pi, an oven that leverages our Signature 360 degree airflow and can cook homemade pizzas in less than two minutes. Customer feedback has been exceptional for Pi and last year as demand peaked in Q4 when we sold out of Pi inventory in December. Mesa, a tabletop fire pit was launched in late summer, and was a response to customers asked me for an outdoor fire pit that can be used in more spaces. This small but mighty solar stove generates the same secondary burn as our whelming larger stoves, but it's even faster and easier to use and cost less than $100. Early data shows that Mesa is attracting more customers faster, while giving us access to backyard patios and yards that may be too small for our popular bonfire fire pit. I hope it is obvious how core new product innovation is to our business, and how important we believe it is to our long-term success. All-in-all Solo Brands launched over 15 new products last year, and we expect them to have a meaningful impact on our business in the future. Another area of innovation of Solo Brands is in our digital and data infrastructure. Last year, we made big improvements in how we ingest, digest and utilize first party and third-party data at Solo Brands. Our investments into data and digital had far reaching impacts on marketing efficiencies and scalability. And because we believe we have barely scratched the surface on potential market penetration, our unique and proprietary digital and data focus has a long runway to find prospects and profitably convert them to new customers. In addition, we are finding new, more efficient ways to get existing customers to come back again and again for additional purchases. 2023 is all about leaning into the things that are working well. And so our priorities for this year are first to continue expanding our data management and infrastructure; second, drive growth internationally; and third, broaden and deepen our wholesale partnerships. Data and digital investments began paying off in the back half of last year, and we expect to continue investing in them this year. Our first party data and our ability to use this data to drive meaningful interactions with customers improves engagement, retention and referral rates. We started seeing strong momentum in our international markets in the second half of Q4 and want to continue pushing profitable growth internationally in 2023. We have significant growth opportunities in our existing countries, and we plan to launch localized e-commerce stores and additional new markets this year. We still believe that in the long-term, our international business has the potential to become the same size as our U.S. business. And our new markets will get us closer to realizing this vision. And finally, expansion with our retail partners is a key area of opportunity in 2023. As we continue to focus on delivering a great customer experience, we want to be where our customers need and want us to be. Disk, Ace, Academy shields, Costco and others have been solid partners. And we are working closely with them to strategically outdoors, expand SKUs and coordinate promotions, where more customers can be exposed to and participate with our company. As I mentioned earlier, because we're early in our story, we believe this shift is stronger alignment with strategic retailers, while significantly accelerate brand exposure and market penetration for Solo Brands. Of course, this will initiate a plan shift mix between DTC and wholesale, but one that we expect to strengthen our business and our profit generating model. We are operating in an interesting environment. On the one hand, we have tremendous wind at our backs. Our investments from last year paid off. We have built a strong foundation on which to stand and we're focused on some exciting new initiatives that we feel confident while only provide additional wind to our sales. On the other hand, the macro environment is uncertain. Inflation remains high, and there's obvious risks to consumer discretionary spending. It's easy to get tossed around with so many conflicting factors, but our business remains on solid footing. We have produced healthy growth, strong profits, positive free cash flow. I'm proud of our team and are resilient and I can honestly say we're excited for the future. The outlook, you will hear from Somer is one that accounts for the uncertainties in the macro environment, we can't predict the future that consumer inflation or interest rates, but we can and will execute our playbook which is long-term and profit oriented. I'm so thankful for our team that is truly the backbone of this company. And now I'll turn the call over to Somer to discuss the financials and our outlook on 2023.

Thanks, John, and good morning, everyone. Today, I will walk you through our fourth quarter and full year results for 2022 and then provide some commentary on our outlook for 2023. Our fourth quarter results came in ahead of our expectations driven by new products, stronger international penetration and continued growth of our core products through both wholesale and direct-to-consumer channels. On our last call, we mentioned that we were seeing a change in consumer behavior from our prior year coming into the quarter, and we revised guidance based on those trends. As the rest of the year unfolded, we were pleased to see consumers revert back to pre-pandemic shopping timing and behavior resulting in strong late-November and December growth. Our brands also gained momentum in the quarter with our retail partners as we nearly doubled ourselves in our wholesale channel. We managed our inventory and cash prudently at the end of the year well positioned for 2023. Diving into the fourth quarter results, net sales increased 11.8% to $197.2 million compared to $176.5 million in the prior year period. Sales were driven by strong demand in the wholesale channel as we continue to increase our market penetration. Net sales for the full year finished at $517.6 million, an increase of 28.2% versus 2021 driven by strong results across all channels. Wholesale net sales increased 196.4% to $36.5 million from the fourth quarter compared to $12.3 million in the prior year as we expanded our presence with retail partners. Our direct-to-consumer net sales decreased 2.1% to $160.8 million for the fourth quarter, compared to $164.2 million in the same period in the prior year. We were pleased with our overall performance, as we were comping over 160% growth from the prior year. As John mentioned meeting our customers where they are through channel expansion remains a part of our long-term growth strategy and for full year 2022 both the direct-to-consumer and wholesale channels grew double digits. Our sales channel mix was approximately 80-20 between direct-to-consumer in wholesale for full year '22 versus 90-10 for 2021 as we expanded our strategic partnerships in the wholesale channel, notably DICK's Sporting Goods, Ace Hardware and Costco. Despite the shift in our sales channel mix, direct-to-consumer net sales continued their high growth pattern, and were up 19.1% for the year compared to the full year 2021. Additionally, wholesale net sales were up 96% from 2021. Moving to gross margin, our gross margin rate was 59.8% for the quarter, compared to 63.3% in the fourth quarter of 2021. Gross margins for the year were 61.5% compared to 64.1% for the full year 2021. Gross margins for both the fourth quarter and the full year were impacted by the gross margin profile of our 2021 acquisition and higher inbound freight. Our gross margin rate was also affected by higher sales through our wholesale channel, which although carries a lower gross margin has similar EBITDA contribution margins. Selling, general and administrative expenses for the fourth quarter increased to $84.7 million or 43% of net sales, as compared to $82.5 million or 46.8% of net sales in the same period last year. The variance was driven by $7.4 million of higher fixed costs partially offset by $5.2 million decrease in variable costs. The fixed costs increase was primarily due to the increased employee related costs related to increased headcount and costs associated with becoming a public company. The variable cost decrease was due to lower marketing expense driven by benefits from our data investments. SG&A for the full year increased to $259 million or 50% of net sales, compared to $159.5 million or 39.5% of net sales in the prior year. The increase for the year included $43.7 million of increases in SG&A, related to businesses acquired in 2021. The remaining increase in SG&A resulted from increased employee related costs, costs associated with becoming a public company, increased marketing expense and investments in long-term strategic initiatives. Our fourth quarter net income was $19.5 million and net income per diluted share was $0.18. Fourth quarter adjusted net income was $29 million and our adjusted EPS was $0.33 per diluted share. Full year 2022 ended with a net loss of $7.6 million, which included roughly $31 million of a non-cash goodwill and intangible impairment charges recognized in Q2 or loss of share of $0.08. Full year adjusted net income was $65 million or adjusted EPS of $1.07 per share. During the quarter and the year, we continue to invest in long-term strategic initiatives in data, product innovation and international expansion and delivered adjusted EBITDA of $38.7 million and adjusted EBITDA margin of 19.6%. Full year adjusted EBITDA was at $7.6 million, or 16.9% of net sales. Now turning to the balance sheet. At the end of the period, we had $23.3 million in cash and cash equivalents. As of December 31, we had $20 million in outstanding borrowings under the revolving credit facility, and $96.3 million under the term loan agreement. The borrowing capacity of the revolving credit facility was $350 million as of December 31, leaving $330 million of availability. We have a strong liquidity position, and we believe we are able to take advantage of strategic opportunities with a net leverage that remains less than 1.5 times. Inventory at the end of 2022 was $133 million, we are pleased with the progress we made on our inventory level during the fourth quarter with a decrease of $32.8 million versus Q3. Inventory increase versus prior year due to growth of the business expansion into international markets and new product launches. Turning to our outlook for 2023. We continue to be incredibly excited about our long-term growth strategy and see tremendous opportunity from both channel and category expansion in our business. However, we are mindful of the current uncertain environment and not immune to the pressures on consumers' discretionary spending. The state of the economy, inflation and consumer spending are creating many unknowns. We have seen softness in consumer spending through our direct to consumer channel entering 2023, which we expect to continue in the near term. However, John mentioned we've seen success with our wholesale partners, and we will continue to lean into those relationships even more in 2023 to continue to broaden our customer reach. Given this backdrop for fiscal 2023, we are forecasting revenue in the range of $520 million to $540 million for the full year. We believe we will be able to drive strong EBITDA margins in 2023 through returns on our data investments, driving marketing efficiency, resulting in a forecasted range of 16.5% to 17.5% for adjusted EBITDA margin. While we are not providing quarterly earnings guidance, we will provide some general comments regarding quarterly cadence. We expect our revenue to come in consistent with prior years due to the seasonality of our portfolio of brands that represents roughly 15% in Q1, 25% for Q2, 20% in Q3, and 40% in Q4. As we continue to seeing strong profitability from our wholesale channel in line with our direct-to-consumer business. We believe that wholesale has the potential to be up to 25% of our total sales by the end of the year. As a reminder, although the overall contribution from our wholesale and D2C channels are similar, wholesale carries a lower gross margin. As we discussed on prior calls, freight will continue to be a headwind for the first half of '23, however, should be a tailwind in the second half. We've noted that 2022 was a year of investment, of which many were initiated in Q2 '22. So when forecasting Q1 and Q2 earnings, we expected increases in SG&A year-over-year from those additions. Our view on forecasted performance anticipates that current macro environment headwinds continue throughout the remainder of the year. Although we feel prepared to face market turbulence in the short term, we will continue to monitor changes in consumer behavior and make the best short and long-term adjustments necessary for sustained growth and profitability. With that said, we remain confident in our long-term growth potential and are eager to continue to deliver strong financial results for our shareholders. Before opening up the call for questions, I'd like to take a moment to thank our team for their hard work and dedication. We appreciate all that you do to make Solo Brands successful. While the micro environment is unpredictable, we remain focused on controlling what we can control and executing our strategic plans to position us for long-term growth. I will now turn the call over to the operator to beginning Q&A.

[Operator Instructions] Our first question is from Randy Konik from Jefferies. Randy, your line is now open. Please go ahead,

Greg. Good morning, everyone. Thanks for taking my questions. I guess first for John, maybe give us some perspective on how you're feeling about the customer, perhaps differences or similarities in terms of their buying behavior or tendency to buy across Solo versus Chubbies at the moment? Just want to get some perspective there.

Yeah, thanks, Randy. And good morning, everybody. Yeah, I think just in general, if we look at behavior of the customer, and we've talked about the number of customers that are purchasing from more than one brand, that's been a metric that we've been paying attention to. I'd say generally speaking, we see the conversion happening both directions. So we see Chubbies customers coming over and becoming Solo customers. We also see Solo wholesale customers converting over and becoming Chubbies customers. That being said, what we found last year, as we invested into the data work that Somer just emphasized on in her call, is that we actually are seeing better gains in focusing our data efforts more around becoming more efficient within the brands themselves. So while we're seeing some crossover and some lift, it just ultimately hasn't been the highest priority, because we've seen better gains, and driving marketing efficiency within the brands and focusing on driving, for instance, a repeat purchase within Solo stove or repeat purchase within Chubbies. So there's been less emphasis than I'd say, maybe we anticipated, we would put be putting on it this time last year around the kind of cross brand shopping, or marketing.

Understood. And when you talk about the customer, just the little more cautious. Are they a little bit more cautious would you say at Solo over Chubbies or Chubbies over Solo? Just clarify that, if there's any --

I think it's -- no really not much, it's been pretty consistent. If I had to lean one way or another, I'd say that the Chubbies consumer seems to be pretty resilient right now. And if we've seen seen kind of one lead out slightly over another, it would be the Chubbies consumer being a little bit stronger than the Solo consumer. But with the launch of Mesa for Solo Stove, and that lower price point, that entry price point, we saw really strong conversion rate with customers being able to come in and participate at a lower price point. AOBs are obviously drastically different between Chubbies and Solo Stove, and we like that new entry level price point for the Mesa product.

Got it. My last question is, going to DICK's Sporting Goods you can clearly see, the winds, you've gotten more floor space, if you will. I've seen more of the Chubbies product, et cetera. So maybe give us some perspective on, I guess using DICK's Sporting Goods as an example of kind of what's changed in the last 12 to 24 months because clearly, they're committing more to your brands in your portfolio. And just give us some thoughts there , and then where do we go from here with that. And just maybe talk about any color they give you around your sell in? I mean, your sell through relative to other brands in your box would be super helpful. Thanks.

Yeah, you got it. Chubbies has done an excellent job, I think historically with the way that they've built the retail partnerships. And what's been great is that the rest of the brands in our portfolio, I've had the opportunity to learn from their efforts. So one of the big changes that you've seen over the last 18 months is Solo Stove and Oru and ISLE, all getting visibility and starting to work closely with the wholesale teams at Chubbies to understand. How they've approached those partnerships. DICK's has been a phenomenal partner to Chubbies and of course, was already a partner to Solo Stove, but just not as deep not as wide as we saw with Chubbies. So what we've been doing is watching what Chubbies has done, and what matters to the retailers and learning from that and then leaning in to those things, especially with Solo Stove. And what that's led to is much better conversations and stronger partnerships and a willingness on DICK's side to broaden the door count and also to most importantly, less than the doors because we already were pretty wide with the doors. But it was really just going deeper in the store getting more footprint like you mentioned, you've seen kind of more product being out there so carrying more SKUs almost a store and store type approach is what we're starting to lean into. And that's consistent not just with DICK's but with other retailers as well. So doing a better job especially for Solo Stove that coordinating promotions at giving earlier visibility to new product launches and things like that has really helped us to build stronger partnerships with retailers that are now saying gosh with this level of visibility and this level of coordination we really want to go deeper and stronger with all the brands.

Super helpful. Thanks, guys.

Thanks, Randy.

[Operator Instructions] Our next question is from Robby Ohmes from Bank of America. Robby, your line is now open. Please go ahead.

Hi. It's Maddie on for Robby. Thanks for taking our question. Just first, what was the key reason for the decline in D2C revenue growth in 4Q? Was it driven by slower new customer acquisition? And how does the D2C channel revenue growth compared to yourself throughout brick-and-mortar retail?

Yeah, thanks, Maddy and good morning. So, we grew -- I think the stat was 196% in wholesale. Certainly there was a shift and just where consumers were buying. So I think that was definitely a driver. I think also, if you look at previous year 2021 Q4, the shopping behavior just happened it came way earlier. So consumers were concerned about being able to get the gifts that they were looking for Christmas. And it's holiday shopping, we were even seeing holiday shopping happening in mid -- early mid-October in 2021. This year, as you heard on our last call, the first part of Q4 look much different than it in 2021, it looked much more like a pre-COVID type buying behavior, where consumers seem to be waiting. The good news is that consumers did show up during the week of Thanksgiving and through the rest of the year. And so we made up a ton of ground, not all of the ground. And the last thing I would just make note of is that Somer called this out, but Q4 of 2021, I think we were lapping something like 130% or something like that 160% year-over-year growth. So we just had a big laugh in addition. So those three factors I'd say the wholesale shift the overall just changing consumer buying behavior and then the year-over-year lap that we were facing. In terms of sell through at the retailers, and I think Randy kind of alluded to this and I didn't address this one. But what we're hearing very positive feedback overall from our retail partners on sell through and that's reflected in they're coming back with replenishment orders. So we're happy with what we're seeing on the wholesale front. It's not just a sell in scenario for us it's definitely sell through and ultimately that's been leading to replenishment order. So far so good on that breath and looking forward to continue to lean in to both D2C and wholesale this year.

Okay, great. Thank you. That's helpful. And our second question, how does your perceived promotional strategy work in an inflationary environment and a time when the consumer is seeking a deal?

Yeah, it's a good question. I think the biggest shift for us is more around the coordination with our retail partners in the way we're thinking about promotions moving forward. We have been, in large part in a great position because, in this inflationary environment, rather than passing cost onto the consumer, we've been able to hold our pricing for the most part. We've actually been slightly less promotional year-over-year in this first quarter. And our focus again, is on customer experience in delivering for the customer. And so in an environment like this, where they're really, really tight and kind of pinching every dollar and making it stretch. We'd like to position we're in from an overall pricing and promotional perspective, because it is allowing more consumers we think, to participate with our brands, and feel like we're in it with them versus, versus gouging them and increasing our pricing. So we're in a good spot in that regard. And again, our marketing profile is allowing us to hold pricing to not increase pricing to the consumer and ultimately still deliver really strong margins, as a business.

Great, thank you. Best of luck going forward.

Thanks.

Our next question is from Ryan Sundby from William Blair. Ryan, your line is now open. Please go ahead.

Hey, guys. Thanks for the question. Can you talk a little more about what you're seeing too far internationally, maybe how that ramp looks across the different markets. Its product mix, similar to what you're seeing here in the U.S. And then as you think about a more even split between domestic and international over time? Is that based on kind of the current markets today? Or would that require further expansion? Thanks.

Yeah, thanks, Ryan. And good morning. It definitely will include more markets than where we currently are. So I'll just kind of address that one really quickly. On the product mix, and just overall strategy, we're very early. Last year was our first full year, having localized sites both in Canada and in Europe, very pleased with what we're seeing out of the gate, certainly a faster ramp up, as you would imagine than call it the first 18 months and when we launched domestically the brand. So overall, we're really pleased. From a SKU mix standpoint, it looks very similar to the U.S., I'd say the one exception internationally is when we launch new products, there's just generally a lag between our international business and our domestic business. So if we launched for instance, Pizza Oven, we launched last spring here in the U.S., and did launch it until mid-fall to late fall in our international market. So you'll then in general see lag with new products, but otherwise, we were carrying the majority of the SKUs. And as I've mentioned in the past, the other maybe note is that Solo Stove is generally in a new market is the lead brand. And then we look to follow on behind Solo Stove with the other brands, just based on size of opportunity. And overall brand awareness.

Got it. Okay. Maybe just following up on Randy's question, John you mentioned deepening penetration with existing customers be more coordinated moving forward. But it does seem like wholesale is a key growth driver next year. So how should we think about having new partners or maybe even more permanent presence and channels like club [ph]?

Yeah, I think all of that is in motion. And it's all at the table right now. We're still early and, the guide that we're putting forth kind of reflects what we have in hand today, but recognizing that I think all of us would agree that we're very under penetrated and under exposed right now from an overall wholesale retail standpoint. There's a lot of opportunity for us to lean in here. And we're exploring all options. So again, whether it's going wider or going deeper so wider meaning more retailers more doors, going deeper meaning more permanent in store and store in store, more prominent displays within retailers, that sort of thing. Those are all things that we're pretty excited to continue to lean into. And our conversations so far with our existing retail partners, suggests that we're moving in the right direction there. And we were to see meaningful movement there. There's definitely stuff to get excited about in the future. In terms of new partners, we're going to continue to be very strategic and very selective with the retail partners that we bring on. There's definitely interest outside of our current base of retailers. And just, it's just important to us that we don't overextend here, or bring on the wrong partners that aren't going to be brand lifting to us. So you can expect us to be disciplined here, we're not just going to go kind of all out all at once, but be strategic and thoughtful about it. And, like I've said before, we really liked the partnership base that we have right now and their willingness so far and our early conversations to go deeper.

Got it. It's good to hear. Thanks.

Our next question is from Peter Keith from Piper Sandler. Peter, your line is now open. Please go ahead.

Good morning. This is Matt Edgar on for Peter. Thanks for taking our question. First off from us, we're just curious on the gross margin what's implied in your outlook? Maybe you can speak to how ocean freight has negatively impacted that line? And how much ocean freight callback you have kind of embedded in the outlook. And then can maybe just speak to the mix the wholesale and kind of the impacts there? Thanks.

Yeah, absolutely. So when I think about gross margins for the year, we are still targeting 60% plus. It will be impacted by the percentage of wholesale mix. I want to continue to note though, that although it puts pressure on gross margin. From an EBITDA standpoint, it has similar contribution as our direct-to-consumer channel. As I mentioned that wholesale can be up to 25% of our overall mix this year. As far as ocean freight, I mentioned, just from where we are from an inventory level. I think it's 100 to 150 basis points still as a headwind in the first half and then you can see that be a tailwind kind of in the second half on gross margin, so we bought 100 to 150 basis points. But overall, we're still targeting 60% plus on gross margin. It may vary by quarter. Just to note, typically, from a wholesale standpoint, Q1 and Q3 are going to be our higher wholesale quarters, because as they stock for the holiday season, so for instance, for the summer season, they're stocking in Q1. For the winter season, they're typically stocking at the end of Q3 early Q4. But overall, again, still targeting a 60% plus for the year.

Great, that's really helpful. Thank you. And second from us we're kind of curious on the cash flow statement and the inventory outlook, given the mix to wholesale and this year. I guess, what's the projected inventory balance by year-end? And are you expecting what maybe if you can provide any details around what you're expecting for cash flow from operations within kind of the guidance outlook? Thanks.

Yeah, we typically haven't given those metrics. We are obviously -- we said in our Q3 call that we expected our inventory levels to come down in Q4 also in Q1. As I expect from an inventory standpoint, as we work through both from a wholesale and from a direct-to-consumer to have about 120 days of inventory on hand going forward. That's our target. So as we look to get to the end of the year, that's what I expect to end of the year is around 120 days of inventory on hand. As far as cash standpoint, obviously with our inventory position, we do believe this will be a healthy cash generating year. We always expect to have free cash flow. This year won't be any different. But where we are starting from an inventory position, I think that this will be a strong cashier as we work through this inventory levels.

Great, thank you. Good luck with the next -- with this year.

Thank you.

Our next question is from Megan Alexander from JPMorgan. Megan, your line is now open. Please go ahead.

Hi, good morning. Thanks for taking my question. Just sort of related follow up on some of the previous question. John, I think it makes a lot of sense that there were clearly differences this holiday season versus last year. But, you talked continued pressure on D2C. It seems like D2C could be down if wholesale is 25%. So maybe how would you take a step back and diagnose the difference in consumer behavior and demand trends that you're seeing in D2C versus wholesale? Is this just, a normalization of COVID trend? Or is there something else you think is going on? And then had your thinking around that long-term penetration of wholesale changed or is '23 just a digestion year for D2C?

Yeah, thanks for the question. So I think first is, what are we seeing and how we're thinking about D2C as an overall, as an overall business this year versus last, I think that we have pegged more as a flat year for D2C. And I think it's a combination of kind of both things that you maybe alluded to. The first is just a normalized post-COVID environment where, obviously consumers to have -- are stuck at home and are now able to make a choice in the way that they're shopping. And so we're seeing normalized behavior there. I think you've coupled that with just the overall macro environment that we've been talking about pretty heavily. And you can hear from other brands as well. And I think that you put those two things together, and you have a year like '23 where expecting a flat an overall flat business on our D2C business. It seems like the right thing to do and the right approach to take. We also do like what we're seeing in wholesale and because of the growth in wholesale, and our wholesale partners bringing new sets of eyeballs. And I think that this is a really important point for us to make is, what we're seeing early with this wholesale surge is that we're it's not -- it's not just that we're shifting from selling online to selling in stores, it's that our retail partners are bringing us new eyeballs, new customers that we hadn't been reaching online. And so we really liked that. And we're going to continue to lean into it for that reason. The second part of your question, I'm skipping my mind now. Could you could you remind me the second part of your question?

Yeah, just should we expect that long-term wholesale penetration to be more like 25% or does it go --

Yeah, that's a good question. Right now, we're saying in '23, just based on the line of sight that we have. That we're, we could see it going up to 25%. I think as we look longer term, it's -- I don't know for sure. I don't know if we should continue to expect it to be 25%. I think what's important to continue to emphasize is that the profit, the overall adjusted EBITDA that we see whether it's coming from wholesale or from D2C is very similar. So as you roll it forward to future years, whether it was 25%, or whether it's 20% from a wholesale perspective. The profit outlook and profit dynamic of the business overall is unchanged. But for right now, I'd say 25% is what we have line of sight to. And I'd say, that's what we're forecasting in the business.

Okay, that's helpful. And then maybe a follow up for Somer. How should we think about getting back to 20% EBITDA margins? Has the timing or components around your thinking changed there at all? It seems like customer acquisition costs have stabilized, you'll get the full freight benefit beyond that wraps into '24. So should we still think about that and 20% and kind of the '24 to '25 time period?

Yes, yeah. I think we're on track. I think you're going see us make the steps. We said it was going to take two to three years. And you're going to see steps in '23 and in '24. But we still have line of sight to the 20% and we do expect that within two to three years. So yeah, I think from the freight easing, from where we're going from a standpoint, even as we get to the back half of the year, as we look at gross margin from a standpoint of raw materials and cost of goods, but also really getting the leverage getting the leverage, you mentioned that marketing spend that hit its peak kind of midyear last year, we've started to see that normalized. But yeah, we see line of sight to 20% and we expect to be back there in two to three years.

Awesome. Thank you very much.

Our next question is from Brian McNamara from Canaccord Genuity. Brian, your line is now open. Please go ahead.

Good morning, guys. Congrats on the strong results. Can you provide some more color on the wholesale strength in Q4? And how should we think about wholesale growth in 2023? If you hit the midpoint of your sales guidance at a 25% proportion of decline implies a pretty significant growth. Are you getting deeper with current partners expanding with new partners, or both? Does Costco play a much bigger role here?

Thanks, Brian. Good morning. Good, good questions. So overall, I'd say that it's more of an emphasis around going deeper with existing partners. Costco is an existing partner. So definitely going deeper with Costco is an exciting opportunity for us. But we're going to continue to be thoughtful and careful in the way that that looks. So is just not certainly not a -- all of our eggs are in a single, a single partner's basket and that includes Costco. So we're forecasting and have line of sight to healthy growth with Costco specifically, as well as with the rest of the partners that we already have in the tail. So excited about the opportunities ahead of us across all wholesale. But yes, we are expecting really nice growth in '23 based on our line of sight right now with our retail partners. And again, I just mentioned, but we'll say again, relatively flat D2C business year-over-year with nice, healthy, healthy growth on the wholesale side, and then some nice growth in international that kind of round out the overall forecast for the business for us.

Great. And then secondly, I mean, clearly, the whole separate motion is a lot higher than many of us had envisioned even one to two years ago. Can you talk about what drove the decision to increase the penetration there further? Is it helping build brand awareness? Is it the similar profitability profile? Is it something else? Thanks.

Yeah, it's really two things. I think I think the first one is as we started leaning in just even in slight ways, this last year, it became very clear as we were doing our data work that we were bringing new sets of eyeballs through our retail partners. And we really liked that. So we liked that we were able to attract a customer base that we weren't reaching with our online D2C business. And then secondly, the financial profile of our wholesale business compared to D2C and especially what's happened overall with the cost of just digital marketing in general, and how that's become basically assumed the same profile from a profit standpoint, has made it easy for us to start leaning into and saying , if we can drive a new customer through wholesale and generate the same level of profits that we do through D2C, then this is definitely something we should be looking at, especially if they're bringing us new sets of eyeballs or new customers that we're not reaching online. So you put those two things together. And I think you've got a pretty, a pretty good strategy, a sound strategy. But, I'd also say that we continue to really believe in and value the relationship directly with the customer. So one of the things that you'll see with us with wholesale that may be differentiated as a very deliberate and intentional strategy that drives a new customer acquisition through a wholesale partner, but still encourages them through a variety of message to come back to our site and make a purchase or a follow on accessory or an additional item that then allows us to have a direct relationship with the customer as well. So we really like our strategy here. I think that there are more abilities than we initially thought. I think we were less excited about wholesale in the past because we were so focused on that customer relationship. And we've learned and work together with our retail partners to find ways to drive customers back to our site that have also given us a lot more comfort. So it's probably all three of those things the ability to drive customers back to our site that the overall profit and the new eyeballs that retailers are bringing to us that are getting us excited and really have caused this this shift between our focus on D2C in our willingness to kind of have a bigger portion of our business comes to wholesale.

Great, best of luck this year.

Thanks, Brian.

[Operator Instructions] Our next question is from Jason Bender [ph] from Citi. Jason, your line is now open. Please go ahead.

Good morning. Thanks for taking the question. John, maybe one for you. Clearly, you've had a ton of innovation and Solo Stove brand this year between Pi, Mesa Tower, you name it. Can you maybe flesh out for us, how these new products during which it sounds like they do really well, versus kind of the core firepits products and kind of unpack, where in the Solo Brands business growth is really coming from?

Yeah, sure, I'll take a shot at that, most definitely. We saw a healthy amount of our overall business come from new products last year. But by far the vast majority of that business, from 2022 what came from our core products. We still believe, from a penetration rate standpoint, we're talking about, particularly at Solo Stove, having reached roughly 2 million customers at Solo Stove and having a market opportunity we think is as well north now with Mesa especially in the Pizza and Pizza Ovens as well north of 84 million households, just domestically not counting our international business. So where we are in terms of our lifecycle and what our addressable market is, we just think there's still tons of room for us to grow overall. But that's particularly Solo Stove, and I'd say that the other brands are continuing to do well. Chubbies had a phenomenal year last year. They're going to continue. Their momentum into 2023, and while there's lots of innovation at Solo Stove specifically as a brand, we saw similar innovation and a decent amount of it across the other brands. And you saw it with Chubbies launching Long's or Pants, a variety of new colors and styles that came out from the Chubbies brand, ISLE, which we've talked about prior calls launched the Switch, which is the paddleboard, that converts to sit down Kayak. And so there's just a lot of opportunities from an innovation standpoint, across all the brands. You'll see more of that this year. And I think I'd reiterate as well something I said in the past about new products, just over a lifecycle of new products or, or launch timeline. But generally, it takes 12 to 14 months or so for us to really realize the ramp up cycle of a new product. And so again, Mesa launched September, we haven't even last a year yet on Pi. So those are going to be continued continual momentous. Products from a growth standpoint for us as we continue to launch the newness of 2023 on top of that. So overall, the core business is solid. And we're continuing to see adopters, and we're very early in our stores. The runway in front of us for our core firepit product is still very strong.

Great, thanks for that color. And then just on the M&A side. The stock obviously, is where it is. And you've talked about that in the past and how you think about that, as a funding source. But given the borrowing capacity you have and you sounded perhaps a little bit more open to exploring acquisitions here. I just wanted an update on, how your thinking has evolved, if at all?

Yeah, I really appreciate the question. First off, I'd say we've continued to have conversations and to keep our eyes peeled. When there's an opportunity, we want it to be in front of us and at least have some optionality for great brands out there. And I think in this environment, we have expected and are expecting and continue to have conversations with great brands that are in a position where they may be looking a little bit harder than maybe they were a year ago. And so we think that there are going to be great opportunities in the coming months or four years, for potential acquisitions that really fit nicely into Solo Brands. And I just reiterate, what Somer was just talking about around cash generation and how we're viewing 2023, particularly with our inventory position, our ability to turn that inventory to cash. You alluded to our credit line or access to cash through our facility. So we're in a strong position, from a liquidity standpoint, a cash position to take advantage of and be opportunistic to acquire potentially great brands. I'd reiterate we're not in a position with where the stock is right now where we considered seizing using stock or equity for acquisition. So just to be super clear, in case there's any question marks around that. But again, our cash position in our overall access to our facility and where we're at from a debt standpoint on the business we think is a really strong place to be in this environment with how many companies are probably going to be available on the market.

Super, thanks so much.

We currently have no further questions. I will now hand over back to John Merris for final remarks. Please go ahead.

Great. Well, thank you all for being with us this morning. And we look forward to completing our Q1 and obviously being back with everyone here in a couple of months to report on first quarter. So thank you all and have a great week.

Ladies and gentleman, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.