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spk03: Hello, everyone, and welcome to today's Solo Brands, Inc. Second Quarter Fiscal 2024 Financial Results Call. My name is Seb, and I'll be the operator for your call today. If you would like to ask a question during the Q&A session, please press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. I will now hand the floor to Bruce Williams to begin the call. Please go ahead.
spk01: Good morning, everyone, and thank you for joining the call to discuss Solo Brands' second 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 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, not 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. 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.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 competence. 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 in the investor portion of our website at investors.solobrands.com. Now, I'd like to turn the call over to Chris.
spk02: Thank you, Bruce, and thank you all for joining us today. I will begin by discussing our second quarter performance and provide an update on our solo brand strategic plan and priorities. Lastly, I will 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 second quarter results as total revenues increased modestly year-over-year for the quarter. By channel, direct-to-consumer declined 0.9% as this channel continues to generate sequential improvement over the prior two quarters. We were particularly pleased with our wholesale results as revenues increased 4.8% despite continued difficult comparisons. In addition, We generated healthy, low double-digit EBITDA margins for the quarter, despite planned investments in people, processes, and capabilities that will provide the foundation that is needed to drive sustainable growth over the long term. While we were pleased with our second quarter results and confident in the long-term growth opportunities for solo brands, we recognize that consumers are facing a number of near-term headwinds and demand for large-ticket consumer durables remains challenging. According to date, we are seeing softer than expected traffic through our direct channel. As such, we believe it is prudent to update our guidance to reflect the current trends. Laura will share with you shortly more color on our full year guidance. Now I would like to give an update on the solo brand strategic plan that we embarked upon shortly after I joined the company that allowed us to evaluate the full potential of our current business. The results of this in-depth strategic analysis confirm my conviction that our brands have significant opportunities to continue to gain market share within their respective categories, and that we have a long runway of growth ahead of us. We have clearly identified several strengths of the company, highlighted by one, we have incredibly strong brands with a passionate, loyal, and high-value customer base. Two, our brands are leaders in the premium segments of their markets with a long-term opportunity to grow into additional categories and expand our TAM. And three, we're building the infrastructure to create a highly scalable model that will drive long-term margins and returns on capital. First, I want to provide a summary of the consumer insight work that will guide our strategic plan and will inform our decisions regarding adjacencies and expansion of our TAM. We conducted the most in-depth consumer segmentation analysis that our company has ever done, speaking to over 2,000 consumers. Within Stowe, Solo Stowe's net promoter score was incredibly high, putting us in the top one percentile in the outdoor goods market and leads in unaided brand awareness compared to our direct competitors. Walking in, I believe that the Solo Stove brand was strong, but frankly, I was pleasantly surprised to see just how strong it truly is. We have a premium customer base as the average household income of our customers is near 200,000, which is two times the outdoor goods market. This consumer insight work will inform our strategic approach to pricing, as well as how to leverage our strong brand characteristics to expand our TAM by entering into near-term adjacent categories. Within Chubbies, we know that we play in a larger but highly fragmented market. However, we are pleased with our share position within our core categories with ample opportunities to grow. Similar to Stowe, we have a premium customer that has a household income of approximately $140,000. That is 1.4 times the menswear market. We believe that we have room for growth as we increase our brand awareness and capitalize on our strong net promoter score for the brand. We believe that executing on our long-term strategic pillars will be a multi-year process. This year, 2024, is about stabilizing the business, particularly in the direct channel in investing in capabilities. At SoloStove, we welcomed in a new Senior Vice President of Direct-to-Consumer eCommerce, who brings a wealth of relevant experience, most recently at Shark Ninja. We're also reinvigorating our product innovation engine by laying the groundwork to build out a multi-year product pipeline that will generate innovation across platforms. In Q2, we welcomed in the new Senior Vice President of Product Development for SoloStove, who also brings a wealth of relevant experience. having spent much time at innovative companies such as Helen of Troy, TTI, and Bosch. In fact, this new leader and I just returned from a very productive trip to Asia with our product development team, looking at new product opportunities. Next, we are enhancing our product development ecosystem, which means that each new product introduction will be supplemented by consumer insight research, robust go-to market marketing, as well as channel distribution strategies. We will have multiple exciting new products in Solo Stove to launch beginning in 2025. In fact, some of these new product introductions will begin to expand our TAM as we innovate into near-adjacent categories outside of our core fire pit and pizza oven categories within Solo Stove. We believe that the investments we are making in people and infrastructure will position us to return to revenue growth, expand our margins, and begin to introduce multiple new product innovations starting in 2025. As part of our strategic plan, we see substantial opportunities to continue to expand our omnichannel distribution. In fact, our consumer research has informed us that about 50% of consumers are purchasing their products in physical stores and not just online. This leads us to believe that our strategy of partnering with the right retailers to expand our overall revenue line is a smart approach. We don't believe this is an either or. We need to expand both our DTC and retail business. Our research supports this, and you will see us continue down this path. A smaller but still important part of reaching consumers where they shop is continuing to selectively open our owned retail footprint within Chubby's. During the second quarter, we opened three new Chubby's stores. At our new Woodlands, Texas location, we experienced our largest grand opening weekend to date. Today, we have 10 Chubby's stores and plan to open an additional two stores by year end. Lastly, as part of our strategic plan, we see opportunities to leverage our scale across our platform to drive EBITDA margin expansion. Specifically, we will leverage our very strong existing fulfillment and procurement capabilities and scale our supply chain network to further reduce delivery and carrying costs. A few operational examples that help support our increasingly higher margins are one, our fulfillment centers are shipping greater than 99% picking accuracy. Two, our procurement team continues to collaborate with our suppliers to drive net productivity offsetting inflationary pressures. And three, our fulfillment team just signed a new contract with a leading packaged goods delivery company that will offer significant improvement in our delivery costs. This leverage will only grow as we expand Solo Stove into categories beyond fire pits and pizza ovens. In summary, despite the more challenging consumer environment, I couldn't be more encouraged with the progress we are making in returning solo brands to stronger performance consistent with the best-in-class outdoor companies. We are building out our capabilities, ushering in incredible new talent, investing in much-needed systems, and adding robust, repeatable processes. We believe the work we are doing to improve our capabilities and performance will pay dividends and drive long-term, sustainable growth. All of this leads me to believe we continue to march down the path to success as we move through our rebuild year of 2024. I will now turn the call over to Laura.
spk05: Thank you, Chris, and good morning, everyone. Today I will walk you through our second quarter results and provide our outlook for the remainder of fiscal 2024. Despite a tough macro backdrop where the consumer continues to face pressures We are highly focused on the areas we can control. We are working to stabilize our business while investing to strengthen our infrastructure. We believe that this ongoing work, as well as executing against our solo brand strategic plan, will position us to drive long-term shareholder value. Turning to our quarterly results. Second quarter sales were 131.6 million, increasing 0.5% compared to a year ago as sales growth in retail offset foster sales trends in our direct consumer channel. In the direct channel, revenues declined 0.9% to 98.8 million in the second quarter, primarily due to lower site traffic. Retail revenues increased 4.8% $32.8 million driven by an increased order volume, which is the result of continued growth with our strategic retail partners. We are particularly pleased that we were able to generate sales growth against a difficult sales comparison of plus 57% during the comparable period last year. Turning to gross margin. Our gross margin decreased 60 basis points to 62.8%, primarily the result of inventory fair value impact from the 2023 acquisitions. Adjusted gross margin, which excludes this impact, was 63.6% flat to last year. Selling general and administrative expenses for the quarter increased to 70.8 million compared to 63.5 million a year ago. As a percentage of sales, SG&A expense increased to 53.8% of sales compared to 48.5% a year ago primarily due to increased distribution expenses related to elevating shipping costs from higher transaction volumes associated with the skew mix to more bundles, higher marketing expenses, increases in professional and information technology investments to support future growth. Second quarter net loss was $4 million, and adjusted net income was $6.1 million, and adjusted EBITDA was $15.5 million. adjusted EBITDA margin was 11.7%. Turning to the balance sheet, at the end of the period, we had $20.1 million in cash and cash equivalents. As of June 30th, we had $75 million in outstanding borrowing under the revolving credit facility and $88.8 million under the term loan agreement. The borrowing capacity on the revolving credit facility was $350 million as of June 30th. leaving $274 million of availability, and our net leverage ratio was 3.3 times. We remain focused on disciplined inventory management and are pleased with the composition of our current inventory level. Inventory at the end of the quarter was $100.8 million, down 11.3% from a year ago. Moving to our outlook. We are pleased with our first half performance and the progress we are making on our turnaround plan. However, the macro environment remains challenging. Our quarter-to-date trends have softened, and while approximately 60% of our business will come in the back half of the year, we believe it is prudent to be cautious in our full-year guidance given our current run rate. As such, we expect fiscal 2024 revenue to be in the range of $470 to $490 million, We now expect adjusted EBITDA margin to be in the range of 9% to 10% as we continue to invest in our capabilities and infrastructure that will lay the foundation for long-term success. Turning to the second half, we expect the third quarter to be our most challenging quarter of the year due to very difficult comparisons in our retail channel and current trends in our direct consumer. As a reminder, we are lapping a one-time trade credit agreement in which we recognize $7.2 million in retail revenues during the third quarter of 2023. We continue to believe the fourth quarter will be our strongest quarter of the year, consistent with our typical seasonal pattern. This expectation is bolstered by our first full-funnel marketing campaign, which begins in August, as well as several small product launches. In closing, while the macro environment remains challenging in the near term, we are focused on our controllables and we are pleased with the continued strength of our brand. We are making progress on our initiatives and are confident we have the strategies in place to position us for long-term growth. With that, I will now turn the call over to the operator to begin the Q&A.
spk03: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, please press star two. Our first question comes from Jason Bender at Citi. Please go ahead.
spk00: Great. Thanks. Good morning, everyone. Chris, just to start, thinking about the risk of a sharper macro turndown in the U.S., which has become more topical in days of late, I was curious if you think you can still drive this new long-term strategic plan in a hard landing scenario, and if so, what really gives you that confidence? And related to that, are there parts of the portfolio in a hard landing scenario either from a brand standpoint or a product standpoint that you see as being more at risk in potentially places where you would need to make more meaningful changes?
spk02: Yeah, so Jason, it's certainly a relevant question, insightful question, and something that we've given an awful lot of thought to in terms of scenario planning. So I will say first, we are in The deepest part of our turnaround and we've guided to a business that is still generating historically high gross margins in the low sixties, which I think puts us in, in the best company within our peer group. And we're still generating EBITDA margins of nine to 10%. And although our leverage ratio has increased a bit, we have an incredible amount of free availability. and a balance sheet that allows us to continue to invest while we generate returns. So the focus of our team on the strategic plan is to, one, create some innovation and excitement to compel consumers to buy products. And some of these new products, Jason, are going to be You know, at price points with features and benefits that will allow people to lean in where we haven't had that newness to date. Part of our consumer research has also shared with us that we have some price setting and some price getting that we feel like is been left on the table, if you will. So a lot of, you know, what we've uncovered in our insight work is not just strategic intents that we want to lean into that we feel like will grow our margins and our top line. But it's also, frankly, just better execution. So although we're seeing down traffic, as an example, on our online direct-to-consumer website, we know that our website needs to be refreshed. It doesn't give the shopper the experience that we need it to be. We know that the marketing campaigns that we've run over the past couple of years hasn't been as effective as they should be. These are all the fixes we're putting in place that would suggest that we don't need just a rosy environment to show improvements. A lot of this is just down to us executing better and growing our business. Now, the other thing that I'll say that the Consumer Insights supported was As I mentioned, we talked over 2,000 consumers. And in that research, it came back and said, hey, your brand is so strong, your net promoter score on a double blind basis puts you in the top 1% of all outdoor products brands. That allows you to expand into near adjacencies. Those near adjacencies that you expand into, consumers suggested that we could and should be the number two, number three players in those categories. What this does is expands our TAM by four to five times. So we've got a much bigger area in which we're playing to grab share than we've had in the past. So listen, we're not predicting big changes in the macro environment, but we are preparing a business and we feel like we've got the tools around us to succeed regardless of the macroeconomic conditions.
spk00: Got it. That's a, that's helpful color in related to that. And also the softer quarter to date trends you're seeing in 3Q. Could you give us an update on the promotional environment? Obviously you've leaned more heavily into bundling, but we've heard from some other companies that the promotional environment in general is increasing. Some retailers are still over inventory to be stocking. So curious what you're seeing one, but two, Given the macro backdrop and the quarter-day trends, how is that informing your decision not only to drive bundling, but also potential pure discounting? And what the depth and breadth of that looks like embedded in your outlook for the second half? Thanks.
spk02: Yeah, so Jason, you can see this in our gross margin lines. You know, we have used bundling to help offset some of the promotions and discounts that maybe you're seeing from others in the space. And so, you know, we've mentioned that the bundling has increased our fulfillment and some of our shipping costs, and we have ways to improve that. But we've, you know, historically been pretty promotional. And I think part of the opportunity for us is to create an environment where we're frankly less promotional and not everyday low, low discounting. So, you know, we have factored in kind of business as usual from a discount and promotional environment, which has been heightened this year. That's all factored into our back half guidance. But I honestly believe that we can improve by offering a better shopping environment by a better value to our consumers in ways that don't necessarily create an erosion to our margin line.
spk00: Got it. Appreciate that detail. I'll pass it on from here. Thanks, Jason.
spk03: Our next question comes from Anna Gleskin from B Reilly. Anna, please go ahead.
spk06: Hey, good morning. Thanks for taking my question. I'd like to touch base on Chubbies. you know, wholesale or distribution gains have been, you know, a big driver of growth over the past few years, I believe. Can you speak to appetite from retailers to take on the brand or expand the brand into more of the store fleet at this point?
spk02: Yeah, so, Anne, as you've heard me in previous earnings calls, I've highlighted the fact that Truby's is one of the most exciting young men's apparel brands in the US today. I continue to believe that. And that's echoed by our key customers. So as you've rightly pointed out, we've grown with door count gains with some of our key retailers. The POS that we've seen from these retailers year to date continues to be strong. And we supplemented that with obviously our direct to consumer efforts, which is really how the brand started. So we really, really like the position that Chubby's is in. It's grown as, you know, first and foremost as a swim trunk brand. We've expanded into shorts and now we're expanding into other categories where we're starting to see some initial success with our key retailers. So You'll see our key retailers like Dick's Sporting Goods being a good example where if you walk into their House of Sports concept, which is a fast-growing concept, we've got a wall of chubbies that is the envy of a lot of other vendors. And we've partnered with them in a very strong way, as we have with other key retailers like Shields and others and some of the specialty retailers that are so important to us. We partnered in a way that we fully expect to continue to grow the Chubby's brand, both through our core assortment as well as through extended assortment, given the initial success we're starting to see.
spk06: Got it. Thanks for that, Chris. And then turning back to SoloStove's helpful color from the consumer insights, as you look at the quarter-to-date performance, are you seeing shifts within the mix are people trading down is or is the lower end underperforming as you know consumers who gravitate toward the premium are naturally less impacted by uh inflation and other consumer headwinds just any color there well it's an interesting question uh anna and the what we're seeing every day is that our average order value or aov
spk02: continues to be strong and it's not reducing which is somewhat counterintuitive given you know what we're seeing in the economy and giving you know your comments about the consumer being pinched and the reason for that is because we're offering value in the bundles so creates a win-win we create some value for our consumers but we're also able to drive a higher average order value that you don't see compress our margins as much as, say, a discounting or promotional environment. So it's something that we want to continue to refresh, to create newness in these bundles as we go forward. And I really anticipate that given some of the newness you'll see from us over the next 12 months, it's only going to enhance our ability to drive value to the consumer through bundling and newness of products. Yeah, no question. I mean, it's a weakening of the environment. We've seen it in July and the beginning of August, but we continue to drive bundles as a way to create value.
spk06: Great. That's amazing.
spk02: Thanks, Yann.
spk03: Our next question is from Ryan Sickdahl from Craig Hallam Capital Group. Please go ahead, Ryan.
spk04: Hey, good morning, guys. I want to start with that survey you did of 2,000 consumers. Were those past buyers or of an existing customers of Solo or I guess were they a random sample of just general people? I guess the reason I ask is from what I can tell is everyone that owns a Solo product pretty unanimously love them. There's a wide audience that doesn't know about it. So that's, I guess, where I'm curious what the sample size was.
spk02: Yeah, Ryan, it's a really good question. So I'll start first by saying our customer service team, our customer experience team has always measured our net promoter score. And that comes in the form of talking to our people who have just literally bought a solo store within the last 60 days. Well, of course, they're going to be happy, most likely. Right. So our net promoter score has always been high. This is the first time we've gone out to a sample of 2,000 consumers across a broad array of demographics. They had no idea who we were. And we talked to existing consumers, lapsed consumers, brand new consumers, and consumers that weren't even, frankly, interested in the category itself. So we call it a double-blind survey, if you will. And the number was over 2,200 consumers. And what came back was a net promoter score that was incredibly high. I knew we had a strong brand when I walked in the door. I just didn't realize how strong our brand is. And that was one of the pleasant surprises coming out of the research, which really informs us that we do have permission as we continue to ask questions in these research discussions. We have permission from consumers to move into near adjacent categories where either one, they already think we're in the category and we're not, or two, said, hey, if you were to get into those categories, we think you ought to be a number two or number three share player. So very, very exciting. And it was done in the best way you possibly could. We hired one of the best consumer research firms to help us make sure that as we gathered the consumer insight, we could really hone into who our core consumer is, who our secondary consumer is, who our tertiary consumer is, where, you know, everything about them so that we have a persona that we know how to develop product against and how to market against that persona.
spk04: Helpful. And for my follow-up question, just curious if you're seeing any new or outsized competition, namely from China, and you see Timu and others out there with kind of knock off very, very cheap product. But how much of that is impacting you guys right now versus just general macro concern as you look at the back half of the year?
spk02: Yeah, right. It's much more macro. I mean, if you walk into all of our retail channels, there's I mean, we are the market, if you will. You know, you go online where you can have an endless aisle. You got some of the marketplaces that will bring in some of the less expensive uh, Chinese product or what have you. And, um, you know, clearly they're getting a small portion of the market, but, you know, frankly, they're expanding the market. They're driving, um, more consumer interest into the market. And I think as people start to find out the differences in the products with online reviews and postings and, and, and product reviews and what have you, I think it almost helps us, um, more than it hurts us, um, given, um, know what we're seeing in the marketplaces but we still predominantly are the market you know we made the market when we introduced the product as solo stove years ago and i think what you'll see from us in 2025 and beyond is we're going to continue to reinvent the market and give consumers a reason to purchase a new fire pit or a new pizza oven or what have you much like golf companies um will give you know, their consumers a reason to go buy a new driver because you can hit it five or 10 yards further. We're going to give our consumers for the first time ever a reason to buy a new fire pit because we're going to create newness in the category, something that we haven't done or frankly needed to date, but we do need as we move forward.
spk03: Thanks, Chris.
spk04: Good luck, guys.
spk02: Thanks, Brian.
spk03: Our next question is from Brian McNamara at Canaccord Genuity. Please go ahead, Brian.
spk07: Good morning. This is Madison Callanan on for Brian. Thanks for taking our questions. I know we already talked about chubbies and wholesale, but do you have any additional color on solo stove and wholesale? Are you losing any partners or partner doors? Or are retailers being hesitant with orders?
spk02: Thanks. Sure. No, we still have a lot of runway in front of us, Madison, and wholesale are what we call our retail channel. So the retail channel has been a lot about partnering with retailers and expanding those doors. But if you think hard about some of the retail channels we're not in today, like all of the homeware or hardware improvement center channel, we're not even in that channel today. So there's channels that we don't participate in. There's doors to some of our key customers that we don't participate in. And so there's a clear runway for continued growth. Now, I mentioned in my prepared remarks that the consumer insight research informed us that about half the market products are purchased in retail stores. So we know we're over indexed. We know we need to continue to expand into the retail format. But again, as I've said before, we don't think this is an either or. We think we can stabilize our D2C business, and you've seen it with the sequential improvements quarter by quarter that we've made. And we think as we move into 2025, we should be able to grow both simultaneously. Now, one of the things that we've made, I've talked a lot about talent, capabilities, processes, systems that we're investing in. You know, one of the areas that we've invested in, frankly, is a retail sales team. We didn't have that because we grew so fast over the last 18 months in retail. We didn't have the support network to sit down with our big retail customers and be planful with the products that we bring in, making sure that we bring in maybe channel specific products to avoid channel conflicts. We tie together sell-through marketing campaigns with those products and those customers. And we're just much more thoughtful and planful. It's hurt us a little bit this year because we didn't have that plan walking into the year. And as soon as I discovered it, we started building against that. So I think what you'll see from us on the retail wholesale side is better plans, better execution. And I think as we move into 2025, even better results.
spk07: All right. That's super helpful. And then, um, any additional color on, um, I know you talked a little bit about like marketing being ineffective, but any color on the new marketing agency or things you're excited about to get DTC sales, you know, stronger outside of the macro.
spk02: Thanks. Sure. Madison. Yeah. So we've, uh, you know, we started to make adjustments to our marketing mix to spend, on a broader set of channels and with a different set of tactics to drive better efficiency of our media spend. I mean, this new approach is enabling us to be more nimble in managing our marketing spend as the external environment continues to be more challenging to navigate. Now, I mentioned the Snoop campaign that we're starting. I mean, this campaign is what I would call a true 360 degree marketing campaign. It will fuel activation plans across different creative communications. It'll feed into our website, our marketplaces, our retail stores. And so there's dramatic differences between this year's approach and last year's approach. So last year we began in kind of that November timeframe. This year we're beginning in August. So August 20th, you'll see us start to feed the top of the tunnel. our funnel rather. And as we start to move into September, our key selling seasons into October, November, you'll see us start to migrate down that funnel and create more of a conversion-focused plan during our key selling season in Q4. So we've made a lot of changes, and you'll start to see this come to fruition here as we move into the fourth quarter. Now, one of the key changes, and I mentioned it before, is Our consumer shopping experience online is not where it needs to be, particularly with our website. We said when I first walked in that we made a choice to change platforms to Salesforce.com, and we're working very, very hard to bring that online next year. Hopefully in the first to second quarter, it'll be fully online. It'll create a much, much easier, much more exciting experience shopping experience for our consumers. So continual improvements in the marketing area. We brought in a cadre of just wonderful people with great talent, great experience that are just starting to come up to speed and they'll be hitting stride as we move through the end of this year. So excited about some of the green shoots that I'm seeing in that area.
spk07: Great. Thanks so much.
spk03: Just a reminder, for any further questions, please press star 1 on your telephone keypad. We have no further questions on the call, so I'll hand the floor back to management.
spk02: Well, thank you, everyone, for attending this morning's call. We appreciate the time. We appreciate the questions. And, of course, we appreciate the continued interest and support. And we'll look forward to talking to you on our next earnings call. Take care.
spk03: This concludes the conference. Thank you all very much for joining.
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