Smartbird, Inc.

Good afternoon, everyone, and welcome to the Allbirds third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. Now, I'll turn it over to Christine Greeny from the Blue Shirt Group. Please go ahead.

Good afternoon, everyone, and thank you for joining us. With me on the call today are Joey Willinger, CEO, and Annie Mitchell, 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, including cash flow and adjusted EBITDA expectations. Q4 guidance targets, impact and duration of external headwinds, simplification initiatives, strategic transformation plan, and related planned efforts, go-to-market strategy, planned transitions to a distributor model in certain international markets, anticipated distributor model arrangements, expected profitability, cost savings targets, gross margin estimates, product plans and expectations, third party partnership strategy, marketing strategy, 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 our SEC filings, including our quarterly report on Form 10-Q for the quarter ended June 30, 2023, 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. You will find additional information regarding these non-GAAP financial measures under 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.

Thanks, Christine. Good afternoon, everyone, and welcome. We delivered Q3 results in line with the expectations we provided in August, as well as another quarter of solid progress under our strategic transformation plan. Our flock is executing well across the board, which we believe is setting up Allbirds to achieve sustainable and profitable growth, and in doing so, create durable shareholder value. During the third quarter, we achieved another set of material proof points that are driving the business forward and positioning the company to hit our 2025 targets, of positive full-year adjusted EBITDA and positive cash flow. First, we made significant progress against cleaning up inventory, ending the quarter with just under $80 million of inventory on the balance sheet. That represents a sequential decline of 14% from Q2 and a year-over-year decline of 37%. This is notable given the cautious consumer spending environment and makes us confident that we can effectively clean up the marketplace to enable us to focus on our fresh and innovative new product as we enter 2024 with plans to drive resonance with the consumer through a better product mix and key upgrades to our core franchises. Another critical metric we use to measure our progress during this transformational year is cash. We closed Q3 with $132 million, reflecting minimal operating cash use of $5 million in the quarter. which was required to meet our seasonal working capital needs leading up to holiday. Next, we captured savings from our strategic sourcing efforts, keeping us on track to achieve the upper end of our cost of goods sold savings targets of approximately 20 to 25 million versus 2022 on a volume neutral basis. We also continued to drive towards our 15 to 20 million GNA savings targets with notable progress made via our international transitions. While working down inventory, we also kept things fresh for our consumer with the launch of our updated Courier and the Vista Racer. These two models are really the final chapter of product that we had developed pre-transformation. We decided to keep these in the line, but buy them tight and for only a limited timeframe to drive freshness in a period where we knew our primary intent would be to work down inventory. The Wool Runner 2 that dropped last week is more aligned with the focus for the next generation of product from Allbirds. This fresh take on our original icon features new innovations and upgrades, including improved comfort, a more durable upper, and a streamlined aesthetic. And the launch is supported by a marketing campaign aimed at connecting with our core consumers in a far more resonant way. We're thrilled with the step change this represents, and it validates the strategy we have for product, given that after just a few days of selling, the Wool Runner 2 is our highest sales velocity launch of the year. We look forward to bringing more innovation like this to the market in 2024. As we approach another holiday selling season with consumers exercising caution around spending, we have prepared for an early and highly promotional holiday period industry-wide. In prioritizing getting inventory to a healthy position in early 2024 with an elevated pace of unit sales through 2023, we intend to remain competitive on price with reduced marketing spend. In fact, Q4 will mark our fourth consecutive quarter of moderated marketing spend, which is expected to be down more than 15% for the full year in 23 versus 2022. Outside of marquee selling events such as Black Friday, Cyber Monday, our promotions and markdowns generally focus on non-core styles and those we expect to sunset or replace with next-generation versions. This approach has helped us maintain full price brand integrity, and we expect to increase full price selling when we bring new and more innovative product offerings to market next year. Indeed, we're looking forward to a number of activities in 2024 across product and marketing that we expect will generate momentum with our consumer. Zooming out and taking a look at the shape of the transformation, 2023 has been a year of diagnosing and fixing. Most notably, our cost structure, inventory position, and go-to-market model by region, while also recalibrating our assortment to drive more resonance with our core consumer in 24 and beyond. Having done this heavy lifting, we believe we'll enter 2024 with a strengthened foundation and a right-sized cost structure. This will enable us to allocate resources and effort towards driving growth from our most profitable products and through our most profitable channels and regions. setting us up to improve our bottom line year over year. The actions we're taking now give us confidence that even in a challenging environment, we can achieve our goal of positive adjusted EBITDA and positive cash flow in 2025. Now I'll walk through some updates on the four pillars of our transformation plan, starting with product and brand. In Q4, we are continuing to flow in updated and refreshed core assortments. As I noted earlier, the Wool Runner 2, a fresh take on the biggest icon in the history of our brand, just launched last week, and we'll soon introduce a capsule for her that reflects our new gender-differentiated approach and shows how our refocused consumer insights work translates into great product. In 2024, we're looking forward to launching more innovative assortments with an emphasis on our core franchises, along with key upgrades to those silhouettes like we did with the Wool Runner 2. As we embarked on our transformation efforts, we knew that product development cycles would limit our ability to drive substantial newness in 2023. So while we are eager to bring these upgrades to the line in Q4, this is really just a taste of what's to come in 2024 and beyond. As I touched on earlier, throughout this year, we have deliberately pulled back on marketing spend and remain focused on being as efficient as possible while we transition and clean up our inventory. Our new influencer program is beginning to build with a material portion of our marketing mix, and we are pleased with the early outcomes to drive awareness and consideration, particularly with women. We believe our upcoming holiday campaign will resonate well, and we expect the newness, color assortment, and promotional cadence to deliver results within the guided range for the quarter, enabling us to finish our transitional year with both marketing spend and inventory reducing at a greater rate than sales. Turning to our second pillar, optimizing U.S. distribution and store profitability, when we developed our transformation plan, this pillar was focused on optimizing our U.S. stores and slowing the pace of openings. We have completed all of the 2023 store openings under the previously committed leases and have no further openings planned. We've since widened the aperture to optimize our U.S. distribution more broadly with a continuing focus on improving store profitability. Q3 in-store traffic remained challenging for the retail industry broadly, and we experienced this as well. Given the consumer headwinds affecting the landscape, we expect this to persist in Q4 and have reflected that in our guidance. Our work in stores across merchandising and marketing, staff training, and labor scheduling are beginning to show improvements in store operations, but there is still work to do here. In the digital ecosystem, as we seek to optimize our U.S. distribution, we will be launching on a leading digital marketplace in the coming weeks. We expect this platform to drive an incremental, profitable revenue stream, and we'll share additional details at launch. Looking at wholesale, this remains a key channel for our future and one that provides us with the opportunity to profitably raise brand awareness, while also providing a unique view into what our consumers truly crave. Informed by these insights, we are collaborating closely with our partners to ensure that we're appropriately represented until we have an assortment that we believe will best resonate with consumers, and we expect lower sales from this channel in the second half of this year and into the first half of 2024. We intend to utilize a pull versus a push strategy, focusing on sell-through to ensure we're showing up in the right way before expanding door counts. As we bring our new assortments to market through 2024, we anticipate re-accelerating growth in this channel in the second half and are speaking with new potential partners to selectively broaden the number of accounts. Now onto our third pillar, transitioning our direct go-to-market strategy towards a distributor model in international markets. This is the most complex activity within our transformation plan and we believe has the potential to move the needle on profitability quickly. We're incredibly pleased with the progress we've made on this front and expect to have additional news soon. During the third quarter, we finalized the previously announced agreements with third-party distributors in Canada and South Korea, and those regions are now transitioned, including personnel, stores, and inventory. Additionally, we recently signed LOIs for two additional important regions with distributors in both Japan and Australia and New Zealand. We are thrilled to be partnering with high quality organizations that have extensive brand building and distribution capabilities in their respective regions. The transitions are expected to occur by mid-year 2024. Three quarters into this strategy, we're pleased to have four regions with clear transition pathways towards a profitable and scalable structure. We anticipate selectively opening up distribution in new regions beginning in the second half of 2024 to further capitalize on this distribution model, which, similar to wholesale, requires no capital investment from us. We expect that this opportunity will not only deliver additional profit to us, but also drive volume expansion to support additional manufacturing cost savings through SKU productivity. At the same time, we believe the distributor model will drive increased brand awareness internationally and provide greater access to both new and existing customers. As a reminder, initially the move from direct model to a distributor model will result in a decline in revenue for the impacted regions, but we expect strong flow through to the bottom line, making this higher quality revenue. And it will provide more color around the economic model shortly. Moving to our fourth and final pillar, improving overall gross margins and managing operating expenses. We are firmly on track to achieve our stated goals to capture 20 to 25 million of COG savings and 15 to 20 million of SG&A savings by 2025 as compared to our run rate at the end of 2022. We continue to ramp up shipments from our new manufacturer in Vietnam. during Q3 and expect the transition to fully take shape by year end, with P&L benefits beginning in 2024. We now expect that our work in this area will allow us to deliver the high end of the expected cost of goods savings range by 2025. Additionally, as we continue to work through inventories, bring new products to market, and reduce the depth of promotions, we believe this will allow us to move the consumer back towards a full price model, improving gross margin. Entering the final stretch of the year, we are pleased with the progress under each of the four pillars and remain confident that our transformation plan is positioning us to improve capital efficiency and drive profitability. We are fortunate to have an experienced team who has embraced a highly disciplined operational approach. This enabled us to take decisive action in 2023 to lay the groundwork for improved year-over-year profitability in 2024, with a path to our first expected calendar year of positive adjusted EBITDA and cash flow in 2025. We have significantly improved our inventory position heading into the important holiday selling season. We have excitement building for 2024 product launches. We are well on our way to transforming our international business, and we have institutionalized rigor across the organization. Our path is clear, and after approaching the end of year one of this transformation, We are acting with discipline to drive long-term growth via products, regions, and channels that have the greatest potential to deliver elevated levels of profit. We appreciate the support of our analysts and shareholders and believe the progress we are making will compound into strong shareholder returns in the future. Now, over to Annie to walk through specifics on the quarter and commentary on the shape of the remainder of this year.