Solo Brands, Inc. (SBDS) Q2 2026 Earnings Report, Transcript and Summary

Good morning everyone. Welcome to the Solo Brands Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Mr. Mark Anderson, Senior Director, Treasurer and Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. We appreciate you joining us for the Solo Brands Conference Call to review the 2026 second quarter results. Joining me on the call today are the company's President and Chief Executive Officer, John Larson, and Chief Financial Officer, Laura Coffey. This call is being webcast and can be accessed through the Investors portion of our website at investors.solobrands.com. Today's conference call will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of any replay or transcript reading date. I would also like to remind you that the statements in today's discussion that are not historical facts, including statements about future financial and operating performance, including guidance, liquidity and cash flows, covenant compliance, business strategy, including product innovation, introduction of new products, cost savings, benefits of technological advances, receipt of tariff refunds, trends in seasonality, transition of order fulfillment activities, and international expansion are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, by their nature, are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied. Please refer to today's earnings press release for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Solo Brands assumes no obligation to publicly update or revise any forward-looking statements except if required by law. Management will refer to non-GAAP measures and reconciliations to the nearest GAAP measures are included at the end of our earnings release. Finally, the earnings release has been furnished to the SEC on Form 8-K. Now, I would like to turn the call over to John Larson.

Thanks, Mark, and thank you all for joining us today. After our prepared remarks, we will open the call for analyst and investor questions. We entered the second quarter with some solid momentum and saw encouraging trends across our portfolio. While sales softened in June, particularly across our DTC channel, retail point-of-sales demand for Chubbies and Watersports, which includes the Oru and ISLE brands, grew year-over-year. Consolidated sales declined by 4.1% compared to the prior year, with the Solo Stove segment sales down 14.7%, Chubbies down 8.6%, and Watersports, though still a relatively small contributor, posted an impressive 59% increase in sales. At Stove, new product launches accounted for nearly half of our DTC channel sales for the second quarter, with Solo Stove's Summit and Steelfire lines winning numerous awards, including Forbes Vetted Best Product Award and Men's Journal's Best Outdoor Griddle Overall recognition. We believe these achievements demonstrate strong customer adoption and reinforce innovation as an important component of future growth. While we are not satisfied with top-line sales performance, we continue to make meaningful progress to advance our profitability and cash generation priorities. This quarter we narrowed our GAAP losses, returned to adjusted profitability, further reduced operating expenses by 25.5% year-over-year, and increased adjusted EBITDA to $13.5 million, representing a strong 15.3% adjusted EBITDA margin. As Laura will discuss in more detail, we generated substantial operating cash flow and fully repaid our revolver balance during the quarter. These results reflect the significant progress we have made in building a leaner, more disciplined company focused on profitable growth, strong cash generation, and attractive returns on invested capital. We recognize the importance of driving top-line growth, and our priorities are clear. Accelerating sustainable growth across our brands, expanding profitability, generating cash, and allocating capital with discipline. We believe our actions over the past year have strengthened the foundation of the business and positioned us to create meaningful, long-term value for our shareholders. With that, I'll turn the call to Laura to review the financials.

Thank you, John, and good morning, everyone. Before turning to second quarter results, I'd like to highlight a few developments during the quarter. First, we began reporting Watersports as a separate operating segment this quarter, reflecting its growth in revenue and profitability. Second, we continue to streamline our distribution operating model. During the quarter, we announced the closure of 2 facilities, a U.S. distribution center and the Oru manufacturing facility in Mexico, which we plan to move to a sourcing model that improves costing. We have also started the planned transition of Oru fulfillment activities to our main Texas distribution facility. We have now reduced our U.S. distribution footprint from 5 facilities in 2025 down to 1 beginning with the fourth quarter. These initiatives, together with personnel and compensation actions implemented earlier this year, contributed to a lower cost structure moving forward and tighter SG&A on a run rate basis until we anniversary these actions next year. Finally, we remain focused on protecting margins as we navigate the evolving tariff environment. During the quarter, gross margins benefited from approximately $2.4 million of out-of-quarter IEEPA tariff refunds recorded as reductions to cost of sales. We received our final $600,000 of refunds in July. Please refer to our Form 10-Q for additional information regarding tariff impacts to the results of operations. Turning to second quarter results, consolidated net sales were $88.5 million, a decline of 4.1% compared to the prior year period. The decrease was driven by lower DTC sales, which was partially offset by strong growth in Watersports retail and continued expansion in our international markets. International sales increased 46% year-over-year to $9.8 million, reflecting the ongoing expansion of our business outside the United States. John will speak to our international strategy and recent progress in more detail shortly. Although Chubbies sales declined 8.6% overall, sales in the Chubbies retail channel increased versus the prior year quarter. Importantly, we continue to narrow our year-over-year sales decline, improving by more than 14 percentage points relative to the first quarter. Second quarter gross margins was 59.9% compared to 61.3% in the prior year period. The decrease primarily reflected channel mix shifts and a raw material inventory write-off associated with the closure of the Mexico manufacturing facility, partially offset by tariff refunds received during the quarter. SG&A expenses were $42.6 million, down 10.6% from the prior year, reflecting our ongoing cost reduction initiatives, including lower distribution costs, reduced employee-related expenses, and disciplined marketing spend, particularly within Solo Stove. Restructuring and impairment charges were $1.9 million compared to $10.3 million in the prior quarter, lower this year as we progress through our transformation. Net interest expense was $7.9 million compared to $6 million in the prior year. We reported a net loss attributable to Solo Brands of $4.4 million compared to a net loss of $13.5 million in the prior year quarter. Adjusted net income attributed to Solo Brands was $3.9 million, compared to essentially break-even adjusted net income in the prior year period. Adjusted EBITDA was $13.5 million, an increase of 28.6% compared to $10.5 million a year ago, reflecting a benefit of our transformation initiatives, disciplined expense management, prior period IEEPA benefit, and the growth in key areas of our business. During the quarter, we generated substantial operating cash flow of more than $36 million. We also paid cash interest and funded the initial term loan amortization of $600,000. We ended the quarter with no outstanding borrowings under our revolver and $35.4 million of cash and cash equivalents. We continue to actively manage inventory and working capital with no material debt maturities until 2028. On June 30th, we remained in compliance with all financial covenants. As we discussed last quarter, we expect to invest approximately $2 million to $3 million in growth capital this year, primarily toward product innovation across our portfolio. At the same time, we remain focused on aligning our cost structure with revenue, driving profitability, generating cash flow, and strengthening long-term earnings power of the business. With that, I'll turn the call back to John.

Thanks, Laura. As we strengthen and diversify our portfolio, we are making targeted investments in our leadership team to support the next phase of growth. We recently added a seasoned Senior Vice President of Sales with significant international experience to help scale our North American and global expansion effort and strengthen commercial execution across regions. In addition, we recently welcomed a Chief Digital Officer to lead our DTC business, strengthen our digital capabilities, deepen consumer engagement, and unlock growth opportunities across our portfolio. As Laura and I discussed, the sales momentum we experienced in spring moderated in June, and those trends continued through July. Our priorities remain unchanged and our strategy to build the top line is centered on 3 key areas: delivering product innovation, investing in our highest return channels and products, and accelerating international expansion. At the same time, we remain hyper-focused on improving the economics of the business. We continue to streamline fulfillment, simplify operations, rationalize assortments around our strongest product categories, and leverage technology and our AI tools to improve productivity, decision-making, and scalability across our organization. Although international expansion remains a compelling opportunity, we also understand it will take some time. Sales lift was encouraging, and we plan to continue pursuing a disciplined market-by-market approach, partnering with experienced distributors and retailers to extend the reach of our brands while maintaining a capital-efficient operating model. Across the portfolio, our international footprint continues to expand, and we look to accelerate that. Solo Stove products are now available across Europe, Canada, and parts of Asia. Chubbies has expanded into markets throughout APAC and South America, and our Watersports business has further established a presence in Asia. While still in the early stages, we remain optimistic about the global appeal and scalability of our brands. Looking ahead to the fall and the holiday season, our product pipeline remains robust. We are introducing new innovative products across the portfolio, including the Infinity Flame Premium Propane Fire Pit with a new upscale design. We are also launching an indoor chiminea fireplace that creates an inviting atmosphere in any room in the house. An exciting new accessory in our stove lineup is our new Chiminea Topper that turns our very popular Summit 19.5 and Bonfire into a stylish outdoor fireplace with increased warmth. Turning to Chubbies, we are testing a new denim line and launching an assortment of new fabrics and styles designed to expand and further engage our highly loyal customer community. This quarter demonstrated the benefits of our increasingly diversified platform. We see contributions from new product introductions, expanding retail partnerships, new international partners and the continued development of our Watersports segment. We have always believed this transformation would be a multi-year effort. While there is more work to do, we believe the foundational changes we have made are strengthening the business. Finally, we look forward to engaging with both existing and prospective investors. Please reach out to our investor relations team if you would like to connect with us. With that, operator, we're ready to take your questions.

[Operator Instructions] And the first question will come from Mitchell Sacks with Grand Slam.

Can you walk me through all the adjustments to gross profit so I get a better understanding of what a what it might have really looked like?

Sure, Mitch. This is Laura Coffey. Thanks for joining this morning. We only had 1 adjustment to our cost of goods sold, so I guess we had -- we had the $2.4 million for the prior period IEEPA benefit. Only about $900,000 of that was for 2025. The rest was for Q1. So about $1.5 million for that. And then we did have a write-off of $1.4 million of raw material inventory for the shutdown of our Mexico operations for our Oru brand.

Okay. So basically just taking the $1.5 million against the $1.4 million, so it really didn't have much of an impact. Would that be correct?

Yes, one was going -- yes, they kind of offset each other, if you think about it that way.

Okay. And then just kind of walk me through a little bit on international, how you're attacking it and in how you view that from a gross margin standpoint and a revenue -- potentially revenue growth standpoint.

Yes, Mitch, John Larson here. Appreciate the question. We've really been underserved in the international market and if you think of our key brands, if you think of both Chubbies and Solo Stove, very much started as domestic companies. And so given where we stand, we think there's substantial opportunity internationally. We've been pushing for the last year. Obviously strong results in the second quarter. I would say that will be a little lumpy as we get key new partners in international markets. India was a very favorable partner that we had for Chubbies in Q2 of this year that led to a lot of our increase year-over-year. On the positive side, we have brought in experts on both the distribution side and the retail channel side internationally for markets in Europe, the U.K., and Asia for Solo Stove. Re-upped our efforts in Asia for the Watersports division and are looking to South America in addition to what we've done in India. And ultimately, we're already talking to some partners in Europe right now. On the positive front, we did sign 3 contracts with those key distributors we've been working on and so are moving into market fairly aggressively. It will take some time, but we really view this as upside or blue ocean for us. As it relates to gross margin and profitability, the beauty of some of those markets is we don't have the same tariff issues we do have in our U.S. domestic market. So from a gross margin perspective, it's very favorable when we ship directly into those markets and that to a large degree can offset the expense you have of using distribution partners to move quickly in those markets. Of note, the key partner we've signed up in Europe and the U.K. and some other ancillary markets, it's Hectic. And they've distributed a number of brands internationally. Most notably, they worked with YETI for an extended amount of time. And so really understand the markets that we're moving into, the categories, the right partners, and we're excited about them accelerating our growth in those markets.

And this will conclude our question and answer session. I would like to turn the conference back over to Mr. John Larson for any closing remarks. Please go ahead.

Thank you everyone for your continuing to follow our company and we look forward to providing our third quarter results and updates on strategic initiatives in a few months. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.