Solo Brands, Inc. (SBDS) Q1 2024 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Solo Brands, Inc. First Quarter Fiscal 2024 Financial Results. My name is Emily, and I'll be coordinating your call today.[Operator Instructions]. I will now hand the call over to our host, Bruce Williams. Please go ahead, Bruce.

Good morning, everyone, and thank you for joining the call to discuss Solo Brands first quarter results, which we released this morning and can be found on the Investor Relations section of our website at investors.solabrands.com. Today's call will be hosted by Chief Executive Officer, Chris Metz; and Chief Financial Officer, Laura Coffey. 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, 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 and 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 a discussion of these risks, including our soon to be filed quarterly report on Form 10-Q and will be available on the Investors portion of our website at investors.solabrands.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, 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 investor portion of our website at investors.solabrands.com. Now I'd like to turn the call over to Chris.

Thank you, Bruce, and thank you all for joining us today. I will begin by discussing our first quarter performance and provide an update on our strategic priorities outlined in our last quarterly call. I will then turn the call over to Laura to discuss our financial results in more detail and our outlook for fiscal 2024. We are pleased with our first quarter results, as sales and adjusted EBITDA came in ahead of our expectations. Revenues declined 3.3% for the quarter. By channel, direct-to-consumer declined 6.8% for the quarter, which was a significant sequential improvement from Q4, which declined 21%. Wholesale revenues increased 2.5% despite very difficult comparisons due to a timing shift that we experienced last year. Adjusted EBITDA was better than anticipated, though lower than our expected normalized run rate due to planned investments in people and capabilities in our smallest revenue quarter, which pressured margins. I will discuss in a moment in more detail, our 2 highest focused businesses, Solo Stove and Chubbies but first, let me share an update on our key enterprise-wide strategic priorities. I am pleased with the progress we are making on developing our company-wide strategic plan. We hired a leading firm to help us with this exercise and are about 50% of the way through the work stream. Again, the strategic work will inform where we focus our investments, resources and ultimately, how we regain our footing as a high growth and high profitability company. I like what I see so far, and we'll update you in future calls. On our last call, I talked about fixing our direct-to-consumer or D2C business and returning this channel to growth. Although still way too early, I very much like the progress we saw in Q1. As I mentioned earlier, we went from minus 21% in Q4 versus prior year to minus 6.8% in Q1 versus prior year, certainly not a victory, but a marked improvement. And importantly, we gained momentum as Q1 progressed. On our last call, I also talked about developing a more balanced omnichannel strategy that would not be dilutive to our EBITDA margins. In Q1, we saw a sequential improvement in our D2C performance, and we continue to see growth in our retail channel, which I will discuss more when I talk about the brands in a moment. Now turning to Solo Stove. In our last call, I mentioned that our top 3 priorities are revenue growth, product innovation and talent acquisition. On the revenue front, the changes we are making in our D2C channel are starting to show signs of stabilization with marked improvement in sales year-over-year in Q1 versus our performance in Q4. Led by our new talent, we made tactical changes to our marketing to create a more balanced approach to acquisition versus retention marketing, stabilizing our ROA or return on ad spend, we also believe we were able to capitalize on the new customers we acquired through the Snoop campaign. Importantly, we also continued to see solid momentum in our retail channel, supporting the strategic initiative of creating a balanced omnichannel business. With DICK'S, we saw our door count increase in Q1 from 350 stores to 700 stores. We were also able to capitalize on 100 store tests with Tractor Supply, which resulted in increasing our door count in Q1 from 100 doors to over 1,500 doors. Now it will take time to see significant sales growth from the new doors, but I'm encouraged about the trajectory for our retail channel moving forward. During the last call, I discussed our plans to change marketing agencies. We efficiently entered a new relationship with a world-class marketing agency that has full funnel performance and digital capabilities. I am highly confident this will pay dividends as we move through the balance of this year and beyond. On the talent front, we promoted Mike McGowan to take on the added responsibilities of President of Solo Stove in addition to his role as Chief Growth Officer. We also hired a new sales leader, John Junker, for our growing retail channel. John brings broad experience with our key customers that will enable us to develop deeper, more strategic partnerships with our key customers. Turning to Chubbies. After a record-breaking year in 2023, I am pleased to report that the momentum has continued in Q1. The first quarter marks the beginning of shorts and swim trunk season at retail, and we ran a very successful brand campaign called Trunks for all. Starting in 2024, Chubbies offered swim trunks for all shapes and sizes from people who are newborn to 100 years old, size 6 months to Triplex large. For this campaign, we shipped most of our biggest retail partners the initial floor sets at the end of Q4, so that we were in stores before the critical spring break selling season began. Importantly, for us and our retail partners sell-through exceeded expectations. This is important to see as we enter the height of shorts and trunk season in Q2. As we look forward, we continue to take an omnichannel approach and expect continued growth in D2C retail and our owned retail locations. I'm encouraged by the green shoots we are seeing in the business. While we are very early in our turnaround, our brands are strong and continue to resonate with our customers. This gives us confidence that we have tremendous growth opportunities ahead of us. Our portfolio is supported by a company that is in a strong financial position, generates strong free cash flow with little debt, which allows us to make the necessary investments to position us for long-term sustainable growth. I want to thank our team for working with the sense of urgency as we continue to execute against our turnaround. I will now turn the call over to Laura. Laura?

Thank you, Chris, and good morning, everyone. Today, I will walk you through our first quarter results and provide our outlook for the remainder of fiscal 2024. We are pleased that our first quarter sales came in ahead of our expectations, driven by strong performance in our wholesale channel. The robustness of our wholesale channel underscores the high demand for our products and the strengthening of the relationships we've built with our retail partners. As expected, our EBITDA was impacted by an ineffective marketing spend due to a legacy marketing contract as well as higher distribution costs. As we continue to invest in the business, we also experienced fixed cost increases associated with professional fees and software expense. For the quarter, sales were $85.3 million, a 3.3% decline compared to a year ago. The decline in sales was due to software in our direct-to-consumer channel that was partially offset by the growth in wholesale. In the direct channel, revenue declined to $51 million in the first quarter compared to $54.8 million a year ago, primarily due to less effective marketing, which resulted in lower site traffic during the quarter. Wholesale revenues increased to $34.3 million compared to $33.5 million driven by continued growth with our strategic retail partners. Turning to gross margins. Our gross margins decreased 250 basis points to 59.2% due to sales channel mix shift more to wholesale, which typically has lower gross margins than our direct-to-consumer business. Selling, general and administrative expenses for the quarter increased to $48.4 million compared to $44.6 million a year ago. As a percentage of sales, SG&A expense increased to 56.7% of sales compared to 50.6% a year ago, primarily due to ineffective marketing spend on a legacy marketing contract that we intend to exit later this year, coupled with higher distribution costs as well as higher professional fees and software expenses, all of which was partially offset by lower stock-based compensation expense. First quarter net loss was $6.5 million, adjusted net income was $1.7 million and adjusted EBITDA was $4.3 million. Turning to our balance sheet at the end of the period, we had $15.4 million in cash and cash equivalents. As of March 31, we had $82 million in outstanding borrowings under our revolving credit facility and $90 million under the term loan agreement. The borrowing capacity on our revolving credit facility was $350 million as of March 31, leaving $267 million of availability. Inventory at the end of the quarter was $112.3 million, roughly in line with year-end but down nearly $13 million compared to a year ago. We are pleased with the level and quality of inventory, and we will remain focused on disciplined inventory management as we move throughout the year. Moving to our outlook. For fiscal 2024, we continue to expect revenue to be in the range of $490 million to $510 million. We expect adjusted EBITDA to be in the range of 10% to 12% for the full year as we continue to make necessary investments to support our business for the long term. For color, we continue to expect the revenue cadence for the first half and the second half of the year to be similar to our historical patterns. In summary, I'm excited about how we've kicked off 2024. Our focus remains on developing a robust strategic blueprint for all of our brands. We are committed to assembling the right talent and refining our processes, setting the stage for sustainable long-term growth that enhances value for our shareholders. With that, I will now turn the call over to the operator to begin Q&A.

[Operator Instructions]. Our first question comes from Ryan Sigdhal with Craig-Hallum Capital Group.

Curious what you can see on the promo environment and how you think about that going into the summer, maybe to buy a brand or across the portfolio?

This is Chris, and I'll take that question. The environment is certainly more promotional. We've seen consumers show a bit more discretion with regards to their purchases, knowing that they're more stretched than they have been. That being said, we've reacted, I think, in a very effective manner, which we're seeing in the results of our business so far in Q1, it's continuing into Q2. And it's predominantly through bundling. So we're doing a nice job. Our marketing team is creating bundles that create a win-win, creates a better value for consumers, but it also creates higher AOVs for us, and it's not margin dilutive. We're also doing a better job with what I would call retention marketing, where we're mining our current customer base with more effective promotions and more timely promotions around key holidays like Mother's Day this weekend. And so that's one of the contributions you're seeing from the talent we've brought in, where they're taking the same content that we have because it's still early days and using that content in a more effective, more compelling way. And so that's across all of our brands, but predominantly Solo Stove. Now on the Chubbies side, Chubbies has gone very quietly from on promotion every day of the year to really a half a dozen key promotions that they build their marketing plan around. And they started this last year. It was effective. We continued it into Q1, and it was very effective. Their campaign in Q1 was called Trunks for all. So Rainer and his team at Chubbies got a head of the swimsuit season. So we were ahead of spring break and it worked remarkably well. So we had a big, big load-in in Q4 in our wholesale channel, and we had great POS. So importantly, we're in a good healthy position in that business from an inventory standpoint as we move into the warmer selling season. So I'm happy with the way we're approaching the promotional cadence, you'll see our gross margins are still very strong. I mean, obviously, our Q1 here is typically a stronger wholesale quarter for us versus D2C. And that results in a little bit of compression in our margin line but in keeping with our plan. So you'll see our gross margins, I anticipate continuing to be strong as we move through the next couple of quarters in spite of the promotional cadence that we expect.

Regarding Chubbies so really strong business performance, Eris a nice job, and good to see that. Opening a stand-alone store in the Mall of America that I think brings the total store base to 7. But as you think about that brand, how do you think about stand-alone stores, what kind of store level metrics have you seen on that and expect to see? And then how do you think about balancing direct-to-consumer wholesale with your own stores?

So Chubbies interestingly, we opened our first store about 6 to 7 years ago. And as you say, we're just in the throes of opening our seventh store. So the team has spent a really good amount of time doing what I call proving out the concept. So we've changed our square footage. We've changed our locations and adjacencies. We've changed our merchandising set. We've changed our products that are in the store. We've made a lot of changes over the last 6 years, and we feel like we've dialed into a concept that we think will work. So it gives us what I would call a third leg of the stool. We've got our direct-to-consumer, which has always been very robust. We got wholesale, which is growing very, very nicely. And we've got some key accounts that have really embraced the brand. And now we're adding that third leg of the stool. And there is tremendous upside in our own store strategy. But importantly, we want to put it in locations that are additive. Personally, I've got a lot of experience in opening retail stores. And whenever I've seen it done correctly, it just grows the pie. What it does is it increases your brand awareness and it brings people to places that they typically want to shop because the brand is front of mind. So I would anticipate that our retail wholesale customers are going to grow as a result of this as well. So we're going to continue to strategically add stores to locations that we think create great brand awareness for us. And we're going to stretch into areas that are not just warm climates. You mentioned the Mall of America, great opportunity for us because we're seeing people where our Chubbies apparel all over the country regardless of location. And of course, the upper Midwest gets super-hot in the summer as well, but we just see the affinity for our brand stretch beyond just the Sunbelt and West Coast states.

One quick clarification. Accrued expenses and other liabilities jumped up this quarter sequentially as well as debt, I think, associated with that. But can you clarify what's going on there? And if any of that should reverse?

We did see an increase in those accounts, and we anticipate that we will be bringing that down over the summertime. As we've built up for our direct-to-consumer, our season upon us now, if you think about it, our best season is Q2 and Q4. So we always start to build some of our inventory for those time periods. We're proud that our inventory is down from last year at the same time, sizably by about $13 million, but we anticipate that we're going to continue to work that inventory down to more manageable levels. But that's where you're seeing some of those increases along the way.

[Operator Instructions]. At this time, we have no further questions registered. I'll turn the call back to the management team.

Thank you, operator. And we realize that it's going to take some time to digest the results. And as always, we're here willing and able to answer questions as we move forward. But I just want to reiterate that we're in the early innings of our turnaround. We know that it's going to take time for all that we are doing to fully take root. However, personally, I'm very happy with the progress we are making. We're attracting great people and investing in capabilities. You've seen us through the first quarter and it continues into the second quarter, we stabilized our D2C business, and we're leveraging our strong financial model with high gross margins and strong free cash flow. So we look forward to updating you on our results and our progress next quarter. Thank you.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.