Grove Collaborative Holdings, Inc.

Ladies and gentlemen, and welcome to the Grove Collaborative 2Q22 earnings call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Alexis Tessier. Ma'am, the floor is yours.

Hello, and thank you all for joining us today. With me on today's call are Growth's co-founder and CEO, Stuart Landesberg, and CFO, Sergio Cervantes. Before we get started, I'll quickly cover the forward-looking State Harbor. Some of the statements that we make today are about our future prospects, financial results, business strategy, industry trends, and our ability to successfully respond to business risks may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause our actual results to differ materially. All of these statements are based on our view of the world and our business as we see it today. As described in our SEC filings, the underlying facts and assumptions for these statements can change as the world and our business changes. For more information, please refer to the risk factors discussed in our most recent filings with the SEC, which are available on our investor relations website at investors.grove.co. During today's call, we will also discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in our earnings release and supplemental earnings presentation, which are also available on our investor relations website. With that, I'll turn it over to Stu.

Thank you, Alexis, and good afternoon, everyone. I'm excited to speak to you today after our June listing on our first earnings call at the public company. We will share details on our performance in the second quarter, how our results fit within our shareholder value creation plan, and why we believe Grove is positioned for success as we lead the household products industry to transformational change. For those of you newer to the Grove story, let me first provide background on our company and the mission that got us started. At Grove, our vision is that consumer products can be a positive force for human and environmental health. We operate in a massive industry with almost a $1 trillion investment global TAM for home and personal care products, $180 billion TAM in the U.S. alone. Essentially, all of that commerce is wrapped in single-use plastic today. Simply put, the current plastic and carbon footprint of our industry is not sustainable. In 20 years, products in our industry will look different. Change is inevitable, and Grove is leading that transformation. The home and personal care industries historically have a mixed track record for their impact on human health and a terrible track record for their impact on environmental health. One problem, though, in particular, is the tip of the spear both for our industry and for Grove, plastic. The overwhelming majority of consumers, 84% in the U.S., are concerned about plastic waste. Grove is focused on being the market leader in solving that problem. The opportunity at Grove is to transition the products that we all use each day, hand soap, dish soap, laundry detergent, bath tissue, shampoo, face wash, both to be good for us and for the planet. We are building this company to serve the families of tomorrow as consumer-led action on climate change, and more specifically on plastic, is only accelerating. It has been a journey to get here. I started this business in 2012, initially as a direct-to-consumer company offering a curated portfolio of products from the best third-party natural and sustainable brands in home and personal care. Over time, Grove has built a loyal and engaged user base. We have over 1.5 million active customers today on our DTC platform. We leverage the uniquely rich data set and our consumer relationships, along with clear conviction about a more sustainable future. to create our own truly disruptive set of brands. We've spent the last decade gradually but significantly building authentic brands in home and personal care, and notably our flagship Grove Co. brand is number one in zero-waste home care and really leads that category in awareness, in presence, efficacy, and sustainability. The products we launch under Grove Co., as well as other incubator brands, such as Peach Knot Plastic, Super Bloom, and Good Fur, are not only better for consumer health and the health of the environment, but they're highly efficacious. It's worth pausing for a second on efficacy, perhaps the least glamorous of our design pillars, but essential for long-term customer loyalty. If a product doesn't perform as well or better than current market leaders, Grove Co. will not launch it. Grove products work as well or better than the products consumers are used to today. This, along with our strong brand, drives exceptional customer loyalty. We have always sought to also build a big tent around sustainability. That means we need to target the middle of the bell curve consumer and deliver products that are a good value in addition to being truly innovative and efficacious. That intense focus on efficacy, sustainability, and consumer centricity has allowed us to establish a market-leading position, as I mentioned, in the two trends that we think are most important in zero plastic and sustainable home care. I firmly believe that our innovation roadmap for the coming years is far ahead of the rest of the industry. Our DTC routes not only allow us to make more informed product development decisions, but get to market faster and iterate more quickly than traditional peers. In terms of innovation, We just launched our fall seasonal collection, Natureless. It is super exciting. We have two limited edition scents inspired by fall traditions, Mulled Apple and Spiced Pumpkin. I encourage you to check them out while you can. Both are available on our site, app, as well as Target and Target.com. My personal favorite is Mulled Apple, but I certainly respect that Spiced Pumpkin has a big following. While our business was built on DTC, industry-wide, less than 10% of purchases were of home and personal care products are done through direct to consumer. Over 90% of purchases in our category are made through traditional diversified retail. With this in mind, in 2021, we expanded distribution beyond our own DTC platform into brick and mortar retail for the first time through a partnership with Target. We did this to elevate our brand, drive exposure, increase awareness, and meet consumers where they are. We are extremely pleased with our partnership with Target. They have been true partners, providing visibility and helping to educate consumers on how our products solve an environmental problem without compromising on efficacy. Our success at Target has been an excellent proof point of our strategy, helping build momentum in our retail distribution rollout, which I'll discuss in a minute. But before moving on to performance in the quarter, I'd like to point out that Grove is both a certified B Corp and a public benefit corporation. which enables us to balance the interests of all stakeholders and the environment. This is so much more than just an insignia on a page for us. It is entwined with the DNA of the company and how we think about changing the world and how we think about building a durable, long-term, competitive advantage relative to our peers. We believe that an authentic commitment to our mission is critical in attracting and retaining the best talent in the world, securing the best partnerships, with influencers, celebrities, and other brands, and building deep connections that can last for years with our consumers. I'm extremely grateful to all of the Grove team members for their hard work and dedication over the last decade, and I am a firm believer in the fact that great people are what create great and differentiated companies over time. Now, moving on to our performance in the second quarter. Our results represent the beginnings of our effort to eliminate unprofitable revenue and drive improved margins on a sequential basis in order to be profitable in 2024 in line with our shareholder value creation plan. In total, for the second quarter, revenue was $79.3 million, down 20% year-over-year and 12% compared with 1Q22. Adjusted EBITDA was a loss of $21.1 million, essentially in line with last year's loss of $21.0 million, but a significant and notable improvement from the $39.7 billion loss in the first quarter of 2022. These results trended better than our internal expectations. Based on our performance through the first six months and our outlook for the remainder of the year, we are pleased to raise our full-year guidance for both revenue and adjusted EBITDA margins, despite the macro environment. Sergio will walk through the specifics of guidance in a moment. While the year-over-year comparisons certainly reflect the fact that we are giving back some of the pandemic benefit, we believe that sequential comparisons better represent the trends in the business, as well as the decisive steps we have taken to position ourselves for long-term success, including our strategic decision to pull back on our least profitable advertising spend. Of note, we are pleased that gross margins increased in the quarter, and we continue to drive progress there. In the quarter, 60% of Grove Brand's net revenue came from either zero plastic, reusable, or refillable products, all of which meet the company's Beyond Plastic standards. This is up significantly from 47% in the second quarter of 2021. We also improved on a metric we call plastic intensity, pounds of plastic per $100 in revenue. We believe that we are the first in the industry to report on this metric. Sitewide, plastic intensity improved to 1.07 pounds of plastic per $100 in revenue from 1.34 in 2Q21. Across all Grove brands, plastic intensity improved to 0.87 pounds of plastic per $100 in revenue from from 1.18 into Q21. We hope that by disclosing this metric, we can encourage others to do the same, shining a spotlight on the issue of plastic waste and driving the industry to meaningful change. We have put in place a clear and actionable shareholder value creation plan to drive sustainable growth, expanded profit, and strong shareholder returns over the coming years. Our value creation plan consists of four elements. One, improved marketing efficiency. omni-channel expansion, three, net revenue management, and four, OpEx discipline. I'll touch on each, starting with marketing. Like many businesses similar to ours, we grew up on paid social. And like many others, we've seen material and persistent cost inflation in this channel. We have successfully diversified our advertising spend so that paid social is now only approximately 20% of our mix. We've done that by expanding to a full funnel approach to marketing that leverages our omnichannel presence and our further developing tools to drive unpaid traffic. Beyond this, we have made significant progress on upgrading our marketing stack, which has historically been fairly unsophisticated for the scale of our digital business. This year, we will finish a marketing technology implementation, which will materially improve our ability to segment and target on an individual basis. We expect this upgrade to begin having an impact on customer engagement in the third and fourth quarters, and even more so next year. In addition, we continue to work hard to make it easier for customers to try and to repurchase from Grove. We're doing so by lowering the barriers and improving the customer experience on our direct-to-consumer platform. This includes creating more non-subscription ways to shop Grove, which we believe will lower tax, increase order conversion, and drive higher retention. Lastly, and perhaps most importantly, we're continuing to focus on building our awareness. We launched an exceptional partnership with Drew Barrymore in May, who joined Grove both as an investor and as our sustainability and brand advocate. Together, we launched Grove's first multi-channel brand campaign, Wish Cycling, which focused on debunking the myth that recycling is the solution to the plastic crisis. Since announcing the partnership in May, we have secured media coverage and social posts, garnering hundreds of millions of impressions and engagements today. Switching now to number two, omni-channel expansion. As I mentioned earlier, We are only a little over a year into our strategy of driving omnichannel expansion, and our results at Target are helping us build momentum in this channel. We were the number one launch in hand, dish, and cleaners in 2021. According to May Nielsen data, we also achieved top 10 brand status at Target in hand and dish, including all conventional and national brands, within our first year. Last month, we announced that we more than doubled our product assortment in Target stores and on Target.com with their shelf reset in April. We did this to include a broader selection of scents, room spray concentrates, laundry detergent sheets, and reusable dishcloths. An incredible endorsement of our products and our brand's ability to bring in new customers. In fact, 30% of Groveco shoppers at Target were new to the category, as shown by numerator data. In addition, we added more than 700 doors in the second quarter across three new retailers, Kohl's, Giant Eagle, and Meijer, as previously announced. While still too early to comment on performance, all of the stores have end caps and beautiful merchandising. We continue to have discussions with additional retail partners and expect to grow our points of distribution in 2022 by just over 300% year over year, with opportunity for upside. There is a $250,000 addressable market in the US, and we have about 400 SKUs we can take to retail distribution. This opportunity is enormous. In addition to physical retail, Grove is making strong but early progress on Amazon, where our flywheel is beginning to accelerate off a small base. Teach Not Plastic, our zero-plastic bar format personal care brand, is seeing strength on Amazon, with consumers loving the brand's shampoo, conditioner, and body wash. While still quite small, we've doubled the business in the last six months and are excited to continue to expand our offering and learnings at Amazon. Omnichannel growth is significantly more capital efficient than DTC growth, And we believe the balance of the two will allow us to drive durable top-line growth with material bottom-line expansion. The third element of our value creation plan is systemic net revenue management processes, which are embedded in all functions across all categories. We see material upside to capture here from initiatives including strategic pricing, maximizing the category mix, and enhancing promotional sell-through. Many of these initiatives are already underway, and we look forward to updating you on our progress on future earnings calls. Lastly, we are working to right-size our operating expenses to achieve sustainable and profitable growth. On top of the 17% reduction in force that we implemented at the end of the first quarter, we see opportunities to operate more efficiently across the board while reallocating resources to the highest ROI initiatives. We have a full vendor audit underway and are evaluating ways to reduce fixed expenses like real estate, and have significantly reduced hiring plans for the balance of 2022 and 2023. While we are proud of the progress we are making, we have so much more to do, and we will continue to focus on executing against our shareholder value creation plan while advancing our goal of becoming 100% plastic-free by 2025. We have a clear vision of the growth that emerges on the other side, though, having successfully executed against this value creation plan. It is a disruptive, high-margin brand in a massive town with market leadership and differentiation around long-term sustainability trends. We will still have enormous white space for omni-channel distribution expansion that will allow us to grow at multiple times the industry average, and we will continue to have strong gross margins helping to drive EBITDA profitability inside the forecast periods. And our value creation plan puts the elements of this success in our own hands to the fullest extent possible. We are hungry to continue our execution here every day. Overall, the success of our mission and shareholder value creation at Grove are highly aligned. We are confident and we are driven to continue to drive progress on both fronts. Before I turn the call over to Sergio to take you through our financial results and outlook in more detail, I want to end by saying how excited I am to have him on the team. Sergio joined in April as CFO, brings significant financial executive experience in global consumer products, including 18 years with Unilever and four at Gillette. At Unilever, he was most recently the CFO of Murad for six years, where he successfully implemented operational and financial efficiencies that drove both sales growth and profit impact. He is a huge asset to growth and is already making an impact. Take it away, Sergio.

Thank you, Stuart. I can't believe that it has only been four months since I joined this great company on its critically important mission. What stands out for me is that I am surrounded by truly incredible people that share a common goal of creating solutions to the problems for our health and for our planet caused by plastic consumption globally. Before I get into our results for the second quarter, I want to take a moment to lay out some of the key drivers of the business. In the coming years, we expect to drive revenue by growing our opening channel presence. Historically, we have grown revenue from 105 million in 2018 to over 300 million expected this year, predominantly by driving orders on our DTC platform from both new customers and existing customers, as well as through higher average order value. New customers Orders are primarily a function of how much we are spending on advertising, while customer retention is key for driving existing customer orders. Average order value has risen as we have expanded our product offering, and we have seen a mixed shift into higher value categories over time, from home care to personal care to beauty. As we continue our push into omni-channel distribution and brick-and-mortar retail becomes a larger part of our business, we expect the retail metrics such as door count, points of distribution, and velocities, to name a few, to become a more prominent part of our business performance metrics. On the gross margin front, we have driven material expansion from 35% in 2018 to 49% last year. by increasing our assortment of growth-branded products, which carry a higher gross margin than third-party products, as well as by the shift into higher margin categories I just mentioned. Gross margin is also impacted by the discount rate, which is higher from new customers than for existing customers, as you would imagine. Hopefully, that gives you a sense of how we think about drivers of the business. And now, on to the results. Second quarter net revenue was $79.3 million, down 20% year-over-year and 12% from the first quarter of 2022. Both comparisons are negatively impacted by the strategic reduction in advertising spend to acquire new customers as the company focuses on profitability. In addition, the year-over-year decline was negatively impacted by consumers returning to pre-pandemic shopping patterns. Similarly, total orders and active customers were also impacted by lapping elevated pandemic shopping in our categories last year, coupled with a strategic reduction in advertising spend. Total orders were down 22% year-over-year and 16% quarter-over-quarter to 1.3 million. And active customers were down 10% year-over-year and 5% quarter-over-quarter to 1.56 million. on a trailing 12-month basis. As Stu discussed earlier, we have taken steps to reduce inefficient advertising spend and refocus on profitable growth. Accordingly, we expect to continue to see declines in net revenue driven by decreases in total orders and active customers through the balance of the year before stabilizing in 2023 and returning to growth in 2024. On the flip side, we saw continued positive trends in DPC net revenue per order, which was up 3% year-over-year and 6% quarter-over-quarter to 58.3, driven by continuous strength in existing customer average order value and increased VIP membership revenue per order. Gross margin was down 40 basis points year-over-year and up 190 basis points quarter-over-quarter to 49.1%. The year-over-year decline was driven by increased discounts due to a less favorable environment as the pandemic subsides and an increase in inbound freight costs, partially offset by strong third-party product margins on seasonal SKU performance. The sequential improvement in gross margin rate reflected lower discounts in line with seasonal patterns of the business. Growth brand is a percentage of net revenue continued its long-term trend, increasing 30 basis points year-over-year to 48.2%, but was down 350 basis points quarter-over-quarter on normal seasonality. Advertising expenses fell 21% year-over-year and 45% quarter-over-quarter to $17.9 million, reflecting our decision to reduce our advertising spend and focus on improving improving marketing efficiencies as we strive to balance spending to support increasing brand awareness, optimizing customer acquisition and retention, and driving revenues with our EBITDA objectives long-term. Part of the sequential decline also reflects normal seasonality of the business as January tends to be the largest spend month. SD&A expenses. was up 23% year-over-year and 14% quarter-over-quarter to $57.9 million. The year-over-year increase was predominantly driven by a $14.6 million increase in stock-based compensation due to catch-up of expenses for the company's restricted stock units and certain stock options as a result of meeting the performance testing condition when the company went public, partially offset by a decrease in fulfillment costs or lower order volume. including SBC, SG&A expense in the quarter would have been $39.8 million, or 8% less than the same period last year and 15% less than the first quarter of 2022. The quarter-over-quarter decline was predominantly driven by the reduction in force in March and a decrease in other market expenses, partially upset by costs associated with being a public company and other professionalities. As a percentage of net revenue, SG&A expense would have been 50% compared to 44% in the first quarter last year, and 52% in the first quarter of 2022. Our adjusted EBITDA loss was 21.1 million, essentially in line with the 21 million loss in the second quarter of last year, and significantly smaller than the 39.7 million loss in the first quarter of 2022, despite lower sales. Our adjusted EBITDA margin improved by 1,730 basis points quarter-over-quarter to minus 26.6%, but fell by 540 basis points year-over-year, primarily due to increased SD&A as a percentage of net revenue, higher outbound shipping costs from price increases and short charges, and a slightly lower gross margin rate. Improvement compared to the first quarter of 2022 was driven primarily by the reduction in advertising. Net loss in the quarter was $35.3 million compared to a loss of $28.5 million in the second quarter last year and a loss of $47.4 million in the first quarter of 2022. Turning now to the balance sheet. We finished the quarter with an inventory balance of $53.5 million, which was down $1 million from the year-end balance in 2021, and down $2.7 million from the end of June 2021. Inventory continues to be an area of focus with a goal of managing it down by the end of the year. We ended the quarter with $132 million in cash and equivalents, as well as an additional $12 million capacity available under our debt facilities. This cash number reflects the capital raised in conjunction with our business combination. On June 16, 2022, we completed our business combination with Virgin Group Acquisition Corp. 2, or BG2. The transaction included an $86.5 million investment from an affiliate of the sponsor of BG2 and new and existing growth investment. In addition, we previously announced a $15 million backstop agreement with BG2 and Corvina Holdings Ltd., an affiliate of the sponsor of BG2, pursuant to which Corvina purchased $27.5 million of common stock from growth, which closed on March 31, 2022, and purchased $16.7 million of common stock of the combined company, which closed concurrently with a business combination. Subsequent to the end of the quarter, on July 18, 2022, we entered into a standby equity purchase agreement with an affiliate of York Vial Advisors Global LP, allowing us to sell up to 100 million of shares of Class A common stock at gross request during the 36 months following the execution of the purchase agreement, subject to certain conditions. We will continue to evaluate opportunities to raise additional capital. Now turning to our outlook, factoring in our performance to date, our expectations for the back half of the year and uncertain macro environment, we are raising our full year guidance as Stu mentioned. We believe that the performance of the DTC business will solidify in the second half of the year on the back of more efficient advertising spend and higher average order value for existing customers.

Additionally,

Our guidance reflects the implementation of our value creation plan, which will result in significant improvement in profitability in the back half of the year as compared to the first half. For the 12-month period ending December 31, 2022, we expect net revenue of $302.5 to $312.5 million, up from $300 to $310 million previously. Adjusted EBITDA margin of minus 27.5% to 30.5%, up from minus 29 to 32%. In summary, we're excited to reach this new chapter as a public company as we advance on our incredible journey to realize geoplastic by 2025 while achieving our financial goals. For the benefit of our environment, our planet, partners, and all of our stakeholders. I am pleased with the progress we are making on the Value Creation Plan as we maximize the power of our DTC platform, accelerate our retail expansion, and further improve on our marketing and operating expenses efficiencies to drive growth and achieve profitability in a timely manner. We look forward to reporting improving results in the quarters and years ahead. Operator, we are now ready for questions.

Thank you. The floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Our first question comes from Dana Telsley. Please state your question.

Good afternoon, everyone. As you think about the path to profitability and the expense reductions that are underway, where are you in the cadence of that? And when you think about the buckets, for example, the inefficient ad spend, where is there the most opportunity? And then on the revenue side, with the standard retail that you've entered into, capacity in being able to fulfill orders, and what do you see as the ultimate goal of retail contribution with sales and margins? Thank you.

Thank you, Dana. Thank you for the question. So basically, as we see the path to profitability going forward, our plan is and the plan that we have shared with the markets We feel strongly that we have the capabilities, capacity, and the right mindset and structure to achieve it. So what we are basically cadencing this is for reductions in the second half of 2022 to start kicking in further to what we have done as previously mentioned during the call. So basically, this will kick off in 2022 and accelerate in the second half with a site view of having these basically the run rate that we want to achieve at some point during 2023. That's basically answering the question, where do we see the most benefit coming out of or the most efficiencies coming out of? It's a combination of all the P&L that we have been explaining. But basically, if you were to think in order of priorities, I think OPEC's mid-investment, and gross margin performance. In that order of sequence, I would put it, or ranking, if you will, and that's what we are driving for. I will let Stu answer the second part of the question.

Yeah, thanks, Dana. I appreciate the question. I think Sergio said it well, that it really is a full P&L approach, and I think in terms of the area where we've got sort of the most to go or will drive the biggest impact on a relative basis. It's hard to pin down a little bit because so many are driving double-digit million-dollar changes year over year. Probably the one that I would point to most is continuing to drive stronger and stronger profitability from our core customer base. We see that in lowering the cost to serve, in driving higher average baskets and higher gross margins, which we're hopeful we can continue to drive for the balance of the year and through 23. And success there, of course, will drive really strong bottom line, especially as we seek to operate the business more efficiently.

Thank you.

Again, ladies and gentlemen, if you have a question, please press star one on your telephone keypad at this time. Okay, there are no further questions. I'll turn it back to Sue for closing remarks.

Thank you. Thanks, everyone, for joining. I just want to say how grateful I am to have the opportunity to share the growth story now as a public company and how much conviction I have in our team's ability to continue to lead the way with innovation towards a future where we drive not just a material change for the environment but also material returns for our shareholders over the many, many quarters and years ahead. Thank you much. Look forward to reporting back on future quarters as we continue to make progress.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.