Grove Collaborative Holdings, Inc.

Good afternoon and thank you for standing by. Welcome to Grove Collaborative Holdings, Inc.' 's first quarter 2023 earnings conference call. At this time, all lines have been placed on mute to prevent any background noise. Following the speaker's remarks, we will open your lines for your questions. As a reminder, this conference call is being recorded. Hosting today's call are Grove's co-founder and CEO, Stuart Landesberg, and CFO, Sergio Cervantes. Before they begin their prepared remarks, I will review the forward-looking statement, Safe Harbor. Some of the statements made today about future prospects, financial results, business strategies, industry trends, and Grove's ability to successfully respond to business risks may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially. All these statements are based on Grove's view of the world and their business as they see it today. As described in their SEC filings, the underlying facts and assumptions for these statements can change as the world and their business changes. For more information, please refer to the risk factors discussed in their most recent filings with the SEC, which are available on Grove's Investor Relations website at investors.grove.co. During today's call, they 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 their earnings release, which is also available on their investor relations website. I will now turn the call over to Stuart Landesberg to begin.

Thank you, operator. Hello, everyone, and thank you for joining the call today. I recently read a New York Times article entitled, There is Plastic in Our Flesh, describing how plastic waste has permeated every part of our bodies and our worlds. Grove's brand and our vision is one of the few offering consumers a way to participate in creating a solution. Grove's distinct vision to make consumer products a positive force for human and environmental health has never been more important. Moving to our results. The first quarter of 2023 was another successful quarter for Grove. We achieved record gross margins of 52.1%. and continued to manage expenses smartly across the P&L, which led to impressive adjusted EBITDA margin improvement of 330 basis points quarter over quarter and 3,420 basis points year over year, despite sales declining largely as expected with rationalized marketing spend compared to 2022. Our adjusted EBITDA margin for the first quarter of last year was negative 43.8%. And this quarter was negative 9.6%. Again, that is a 3,420 basis point improvement in only one year. Truly exceptional. The strong adjusted EBITDA results were driven by continued execution of our four-part value creation plan, which encompasses improved marketing efficiency, omni-channel expansion, net revenue management, and operating expense discipline. On the first point. We achieved strong marketing efficiencies in the quarter on lower spend year over year, despite being up sequentially due to the optimization of marketing mix as we moved away from higher CPA channels and into channels with their strongest return on investment. Media cash in the first quarter were down 50% year over year, a huge win as we marched toward profitability. Furthermore, strong performance from unpaid and organic channels to over 9% sequential increase in those channels in the first quarter. We made progress in the quarter on our omni-channel distribution expansion strategy with the launch of GroveCo, our flagship home care brand, on Amazon, at select Walmart stores nationwide, and on Walmart.com. Retail continues to grow at a nice pace, especially considering headwinds in the category, and we continue to be excited about this capital-efficient growth strategy that meets our consumers where they are. We are eager to announce additional retail partners in the near future. Net revenue management initiatives focused on strategic pricing and on the optimization of DTC net revenue per order implemented in the back half of 2022 continue to drive results in the quarter. In Q1, we delivered 12% year over year improvement to DTC net revenue order up to $62. This was a record across Q1s for growth. And it is particularly impactful when paired with overall record gross margin. Lastly, We remain ruthlessly focused on driving margin improvement by maintaining strict expense discipline. We're seeing results across the P&L, from inbound freight and procurement initiatives contributing to gross margin gains to optimizing carrier mix and driving down shipping costs. These efforts have enabled us to focus resources on the most critical initiatives and deepen our results orientation. Execution on this value creation plan drove continued improvement in our first quarter financial results. Adjusted EBITDA loss in the first quarter of 2023 was $6.9 million, an improvement from a loss of $9.5 million in the fourth quarter of 2022 and a loss of $39.7 million in the first quarter last year. This improvement was achieved despite revenue in the first quarter, which was down 3% sequentially and 21% year-over-year, primarily driven by the 74% strategic reduction in advertising spend in the current quarter versus Q1 2022. This reflects our strategy of focusing on our most profitable marketing spend and driving profitable growth in 2024 off a durable, high margin revenue base. During the quarter, we also continued to make progress towards our goal of moving beyond plastic. In the first quarter, 70% of revenue from growth code products came from either zero plastic, reusable or refillable and zero waste plastic products, meeting the company's beyond plastic standard, in line with 70% in the fourth quarter of 2022 and down slightly from 71% in the first quarter of last year. We expect this metric to improve as we continue product innovation. We continue to challenge others to disclose plastic intensity as we believe tracking and disclosure are keys to moving the industry forward, and we are delighted to lead the industry on a path away from plastic. While executing against our value creation plan, we have continued to invest in our business. R&D has remained a top priority for investment as our innovation advantage, driven by our DTC heritage, the largest online community in our space, Rapid iteration and feedback cycles, unique access to data, and sustainable product development expertise is a durable competitive advantage. We believe the category will continue to shift towards sustainable products in the years to come, and our ability to out-innovate will be key to our continued success. We anticipate continuing to invest behind this competitive advantage. At the same time, we've been investing in improving the user experience for our customers and community on our DTC site. At the end of March, we launched new benefits for our very impactful person VIP program to drive loyalty among our best customers and to create more VIPs. The enhanced program offers significantly increased value to consumers in the form of additional VIP gifts throughout the year, exclusive VIP bundles and discounts, as well as first dibs on new products, collections, and brands on our site, along with energized new branding, all for the same cost to the consumer. Additional value-add features will be rolled out as a part of the program over the course of the year. And while it's still too early to see an impact on GIP renewal rate, the sentiment from our community has been quite positive on the relaunch. Overall, we are proud of the results we've achieved due to the successful execution of the value creation plan to date. Looking ahead, we've consistently stated that we will grow and reach profitability at some point in 2024. However, our transformation has been outperforming our expectations. As a result, we are pleased to share that we expect to be approximately breakeven or perhaps slightly profitable on an adjusted EBITDA basis for the third quarter of 2023, well ahead of schedule. While we don't expect to be profitable every quarter from there on due to seasonality and other factors, we do believe this demonstrates how close we are to our stated goal of achieving profitable growth in 2024. This is an important milestone, of course, towards sustainable, profitable growth in our business. Now that we have made progress on our path to profitability, we are turning our focus to the growth drivers for 2024 and beyond. On to these growth drivers, omnichannel distribution, the health and wellness category, and M&S, all of which can build upon this foundation of a stable, profitable, direct-to-consumer business. We've talked a bit already about omnichannel distribution expansion, but I want to underline the scale of the opportunity for those of you who may be newer to our story. Industry-wide, U.S. HPC is $180 billion, And less than 10% of that is done via vertical e-commerce like Grove. We are just getting started in bringing our brand to retail and in addressing the massive opportunity to move GroveCo to the channels that 90% of consumers shop. The second leg of our growth strategy is the recent launch of our health and wellness platform, Grove Wellness, which we announced in March. The global wellness market is more than 1.5 trillion and growing between five and 10% per year. And Grove is well positioned to win in this category. Since Grove's inception, we've worked hard to earn customers' trust by curating and developing products on the basis of efficacy, sustainability, and consumer centricity. Our survey work with customers indicates that 89% of our customers would trust Grove over other brands to solve their health and wellness needs. We are thrilled to be able to meet this ask by offering vetted and personalized wellness plans across a number of health and wellness categories. It is still very, very early in our health and wellness journey. However, we are energized by what we've seen so far. We saw a record amount of revenue and orders containing wellness views in the first quarter, a promising sign that our launch, while early, has been extremely well received. I look forward to further updates on this in coming quarters. Lastly, we continue to explore M&A opportunities that can build on our platform and accelerate our business and mission by driving scale and shortening our path to profitability. We continue to be quite deliberate about where we invest time and resources, but we are seeing excellent deal flow and continue to believe this is the right environment for a business like ours to be looking opportunistically. We are optimistic that this can be a source of growth for us in the months and years ahead. 2023 is an exciting year for growth. We plan to drive stability in our business, improving our economics following the advertising spend of 2022, building upon the great progress we've made on the profitability front, and continuing to lay the groundwork for future growth opportunities in 2024 and beyond. Before I pass the call over to Sergio, I want to thank every person at Grow. You've listened hard to our customers, focused on the most critical initiative to our consumers and to our mission, embraced urgency, and made hard decisions that are right for our business, our purpose, and all our stakeholders. It's a privilege to be on this journey with each of you. I'll go ahead and turn the call over now to Sergio to review our financial results in more detail. Sergio, please go ahead.

Thank you, Sue. Similar to previous calls, we will provide quarter-over-quarter comparisons in addition to the year-over-year changes, as we believe that sequential comparisons better reflect the trends in the business and the steps we have taken to position ourselves for sustainable, profitable growth. Net revenue in the first quarter was $71.6 million, down 3% from the fourth quarter of 2023, and 21% year-over-year. Both comparisons continue to be impacted by the strategic decision to reduce advertising spend as the company focuses on achieving profitable growth in 2024. Similarly, total orders were down 3% quarter-over-quarter and 30% year-over-year to $1.1 billion. And active customers were down 10% quarter-over-quarter and 25% year-over-year to $1.2 million on a trailing 12-month basis. DTC net revenue per order was down 3% from the record high level achieved in Q4 2022 on higher promotions and softer performance of seasonals, but up 12% year-over-year to $61.64. The year-over-year increase was driven primarily by the impacts of net revenue management initiatives, including the introduction of a supply chain fee at the end of the third quarter, as previously discussed, and implementation of strategic price increases on both growth brands and third-party products. Growth margin was up 510 basis points from the fourth quarter of 2022 and up 480 basis points year-over-year to 52.1%, a record high for growth. As a reminder, the fourth quarter result was impacted by an increase in inventory reserve Excluding the full impact of the inventory reserve, gross margin in the fourth quarter of 2022 would have been 51.7%. The quarter-over-quarter increase was driven primarily by margin, improvement in both own brands and third-party brands, the mixed shift to own brands, as well as slight improvement in price costs, partially offset by higher discounts as first orders increased as a percentage of total orders. Growth France as a percentage of net revenue increased 340 basis points quarter over quarter and declined 290 basis points year over year to 48.9. The sequential increase is due to an increase in resale net revenue as a percentage of total revenue, whereas year over year decrease is due to fewer new customer orders, which includes more growth brand products. Advertising expense increased 26% quarter-over-quarter following our typical seasonal pattern and fell 74% year-over-year to $8.7 million, reflecting our strategic pullback in advertising spend and focus on improving marketing investment decisions. We continue to be pleased with improvements in advertising efficiency resulting from this strategy. Product development decreased 8% quarter-over-quarter and 32% year-over-year to $4.2 million, primarily due to a decrease in salary and benefits from reductions in headcount. With fewer resources, we have ruthlessly prioritized to ensure we focus on the highest ROI initiatives that will provide the most value for our customers. SD&A expense decreased 26% quarter-over-quarter and 25% year-over-year to $38 million. The quarter-over-quarter decrease was driven primarily by a $6.4 million decrease in stock-based compensation and the $5.3 million expense recorded in the fourth quarter of 2022 related to operating lease right-of-use assets in permanent. Excluding the stock-based compensation, severance, and the right-of-use assets based in permanent, SD&A expense in the quarter would have been $33.7 million, or 4% less than the fourth quarter of 2022, and 28% less than the same period last year. The quarter-over-quarter decline was driven primarily by lower fulfillment costs and other expenses, which is reflective of our strategy of creating operating efficiency and eliminating less productive expense to focus on profitability. As a percent of net revenue, SD&A expense would have been 47.1% compared to 47.5% in the fourth quarter of 2022, and 51.1% in the first quarter of 2022. Our adjusted EBITDA loss improved to 6.9 million as compared to 9.5 million loss in the fourth quarter of 2022, and was a material improvement compared to the 39.7 million loss in the first quarter of 2022, despite lower sales. Our adjusted EBITDA margin improved by 330 basis points quarter over quarter, and by 3,420 basis points year-over-year to negative 9.6%. The quarter-over-quarter improvement was due to improved gross margin and lower CNA, offset by increasing advert time. Net loss in the quarter was 13.1 million, compared to net loss of 12.7 million in the fourth quarter of 2022, 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 $40.9 million, down $3.2 million from the end of 2022, fueled by our continued efforts to improve working capital. We ended the quarter with $90.5 million in cash, cash equivalents and restricted cash, down $5.5 million from the previous quarter, primarily from the adjusted interest and interest payments, partially offset by working capital deficiencies, particularly on inventory, and 7.5 minimum draw on the asset-based loan facility. Note that during the quarter, we also reduced the amount of cash by 6.1 million, freeing up additional liquidity for operations. As previously announced, in March, we closed on an asset-based loan facility with 35 million total capacity, for which borrowing capacity is calculated from our inventory and accounts receivable balances. The loan is for a term of three years and will support our strategic initiatives and working capital needs. We took the minimum draw of $7.5 million during the first quarter. Based on current inventory and AR balances, we have $10.2 million of capacity available under the AVL. Furthermore, assuming a share price of 45 cents, We have up to 14.3 million of capacity on our standby equity purchase agreement. Taking into account market conditions and business priorities, we will evaluate using this capacity strategically to supplement our liquidity. We feel very good about our current liquidity position and our ability to execute our aggressive push to profitability. Now turning to our outlets. The progress we have made in improving operating efficiencies and reducing expenses gives us the confidence to increase our adjusted EBITDA margin guidance for fiscal 2023, despite continued challenges in the macroeconomic environment. Furthermore, as Stu mentioned, we expect to be close to break even on an adjusted EBITDA basis in the third quarter of this year, and we continue to progress towards our stated goal of profitable growth in 2024. that due to seasonality in the business, we do not anticipate our passive profitability to be a straight line. Our guidance continues to forecast losses in Q2 2023 and H2 2023. Factoring in our performance today and our expectations for the remainder of the year, we are offering the following guidance. For the 12-month period ending December 31, 2023, We continue to expect net revenue of $260 to $270 million. We now expect the adjusted EBITDA margin of negative 5.5% to negative 7.5% up from negative 9% to negative 11% previously. I would like now to turn the call back to Sue for some closing remarks.