Smartbird, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Allbirds third quarter 2022 conference call. All participants have been placed in a listen-only mode. After management's prepared remarks, there will be a question and answer session, at which time instructions will follow. Now I'd like to turn the call over to Katina Methodakis, VP of Investor Relations and Business Development at Allbirds.

Good afternoon, everyone, and thank you for joining us. With me on the call today are Joey Zwillinger and Tim Brown, Allbirds' co-founders and co-CEOs, and Mike Buffano, Allbirds' chief financial officer. Before we start, I'd like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our financial outlook, 2022 and medium-term guidance targets, impact duration of external headwinds, our simplification initiatives, and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise any statements to reflect changes that occur after this call. Please refer to the SEC filings, including our quarterly report on Form 10-Q for the quarter at September 30, 2022, for a more detailed description of the risk factors that may affect our results. Also, during this call, we will discuss non-GAAP financial measures that adjust our GAAP results to eliminate the impact of certain items. These non-GAAP items should be used in addition to, and not as a substitute for, any GAAP results. Unless otherwise noted, we will be speaking to adjusted net revenue, which is a non-GAAP financial measure when referring to net revenue during today's call. During today's call, we will also be referring to our active customers, Active customers are defined as the total number of unique customers who have made at least one purchase in the preceding 12-month period measured from the last date of such period. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures to the extent reasonably available in today's earnings release. Now I'll turn the call over to Joey to begin the formal remarks.

Thank you, Katina, and good afternoon everyone. I'd like to start us off today by taking a moment to commemorate the one-year anniversary of our IPO, which is a critical step in building Allbirds into a defining global brand for this century. And what a year it's been. Despite the external headwinds and uncertainty, it's been a year full of wins, including cutting-edge materials innovations, a deep pipeline of new style introductions, the addition of our new third-party channel, and the launch of our rerun program to enable a circular economy for our products. And through it all, we remain on track to deliver on all commitments from our sustainability principles and objectives framework that we outlined in our S-1, and we continue to lead the conversation on sustainability in the footwear and apparel industries. I could not be more proud of what our brand stands for, the incredibly passionate team and culture we've built, and our fiercely loyal customer base. Needless to say, Tim and I remain tremendously optimistic about the future of Allbirds. Before digging into the quarter, I want to provide a bit of context on the consumer environment as I see it. Back in Q2, thanks to our direct relationship with our customers and sophisticated data platform, we believe we were early to identify changes in demand signals. Our diagnosis of the market is playing out as we expected, and we entered the third quarter prepared for the demand environment. Thanks to these insights, coupled with some great work from our team, I am proud to report that we exceeded our Q3 net revenue and adjusted EBITDA guidance targets, while taking market share and delivering on our sustainability goals. Since we last spoke, we are seeing increased choppiness in the external environment. In addition to worsening FX headwinds and extended COVID lockdowns in certain areas of China, We expect Q4 to be negatively impacted by persistent inflation and high levels of promotional activity, which will impact our U.S. business, along with a weaker consumer backdrop in Europe and worsening FX headwinds. In fact, we are preparing for a scenario in which consumer headwinds worsen in the coming months and as the full impacts of these myriad market dynamics are fully digested by consumers. We've taken this complex operating environment as an opportunity to streamline processes and optimize our cost structure and continue to execute against the simplification initiatives announced during Q2, while also investing in a customer experience that we believe best positions our business for continued growth with meaningful adjusted EBITDA improvement in 2023 and beyond. On the balance sheet, the high quality evergreen nature of our inventory has allowed us to tighten our open to buy. Something we'll continue to do going forward, targeting increased turns to free up working capital and increase margin from lower holding costs. Despite a cautious outlook on consumer demand given the economy, we expect a meaningful increase to inventory turns in 2023 as these initiatives fully take hold. These points validate my belief that the actions we took last quarter were the right things to do at the right time. Looking ahead to holiday season, we expect the external environment to be the most promotional we've experienced since launching the company in 2016. Despite that, we've prepared a great product roadmap alongside the right mix of inventory, and we've coupled that with a strong holiday marketing campaign. Taken together, I feel confident as we head into this all-important season, despite the noisy external environment. And while we are taking a more conservative approach to planning our business, we continue to prudently invest behind our three growth initiatives. One, expanding and energizing our product portfolio. Two, growing our store fleet. And three, scaling our international business. Starting with product, we are incredibly proud of our recent launch of plant leather. a first-of-its-kind innovation, performing similarly to bovine leather but with 100% plastic-free material. This is a key point of differentiation from other leather alternatives. Our first product with plant leather was on a new silhouette called the Pacer, which provides our customers with an elevated sneaker style, expanding the use occasions where consumers can select a pair of Allbirds. We also have good product flow for holiday that we expect our customers to love. Moving to stores, our own retail channel grew net revenue 53% year over year. We opened eight new stores during the quarter, including six in the U.S. It's important to note that nearly half our current store fleet is still in the ramp-up phase, which has historically taken around four quarters to reach revenue maturity. However, that sales ramp is taking longer right now, given the macro headwinds. Our stores remain a powerful acquisition tool. allowing us to gain leverage on marketing spend to lower customer acquisition costs, increase the penetration of valuable omni-channel repeat customers, and are ultimately the best expression of our brand. Our US stores maintain an impressive score for NPS of above 90, which we believe positively correlates to repeat purchase and the health of the Allbirds brand. That said, we continue to be negatively impacted by traffic levels that remain below pre-COVID levels. The slow traffic recovery appears to be consistent across our industry, and though we believe that we will recover the majority of this traffic, the timing of that recovery is unclear given the operating environment. Wrapping up on retail, even in a choppy environment, we continue to see an overall uplift in omnichannel sales in markets with stores, above what we see in e-comm only regions. Turning now to third party, I am happy to report that we are tracking ahead of our expectations with strong early sell-throughs. We are thrilled to have added REI as our most recent retail partner, along with their 20 million plus co-op members. REI's belief in the transformational power of nature and their dedication to climate action aligns perfectly to our goal of making better footwear and apparel products in a better way. I'm also pleased to announce that we will be furthering our partnership with Dick's Sporting Goods beyond the company's public lands banner. In the coming weeks, we will enter DSG's newest House of Sport format, which delivers a fantastic customer experience, in three doors and intend to expand to other DSG core format stores beginning in Q1. We are taking a methodical approach to develop unique and compelling stories for customers with each of our marquee partners. Our center stage activation at Nordstrom was a great example of this, as is the holiday activation that we currently have in REI Flagships. At just over 100 doors, we have a long runway of potential growth ahead of us in third party. Similar to our direct retail strategy, a key tenet of our third party strategy is to use the channel to meet consumers who have not yet heard about our wonderful brand and fantastic products. We believe that our third party footprint is already increasing new customer acquisition and brand awareness. In fact, we have found very little overlap between our direct channel customers and those of our third-party partners, providing a fantastic runway and opportunity for brand discovery. As we noted last quarter, the journey we take to achieve our strategic and financial goals may shift, but the destination looks the same. In a time of significant volatility, we continuously evaluate our channel strategy, to determine the optimal balance between third-party and owned retail stores. As we plan growth across our channels, including digital, stores, and third-party, we will be conscious of and deliberate on the balance between top-line growth, profitability, and importantly, capital efficiency. I look forward to providing more updates on upcoming calls as we continue along our journey and methodically grow the marketplace for our products. Turning quickly to our international business, revenues grew nearly 11% despite an approximate 1,500 basis points year-over-year headwind from FX. Though we remain confident in the long-term demand in our international markets, as we mentioned last quarter, we are primarily focused on five key geographies as we continue to navigate this choppy macro environment, the UK, Germany, Canada, Japan, and China. As an example of this focus at work, we are experiencing strong momentum in the UK, despite the overall environment being challenged in Europe. During Q3, we saw over 20% growth in local currency, driven by solid comps in our established Allbirds stores in London and positive initial response to our new King's Road store. We also opened Selfridges Shop and Shop, which is increasing brand awareness and driving sales. In closing, I am proud of the work we are doing to build Allbirds into a generation-defining brand and remain confident we can simultaneously drive efficiency into the business. Thank you for taking the time to be with us on the call today, and with that, I'll turn it over to Tim.