Q4 2023 Grove Collaborative Holdings Inc Earnings Call

Participants

Jeff Yurcisin; CEO; Grove Collaborative Holdings, Inc.

Sergio Cervantes; CFO; Grove Collaborative Holdings, Inc.

Susan Anderson; Analyst; Canaccord Genuity Group Inc.

Presentation

Operator

Good afternoon and thank you for standing by. Welcome to Grove Collaborative Holdings Inc's fourth quarter and full year 2023 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. Hosting today's call are Grove CEO, Jeff Yurcisin, and CFO, Sergio Cervantes.
Before they begin their prepared remarks, I will review the forward-looking statements Safe Harbor. Some of the statements made today about future prospects, financial results, business strategies, industry trends and growth ability to successfully respond to business risks may be considered forward-looking, including statements regarding the impact of transitioning order volume to other facilities 2024 product launches and category expansion, changes to our customer experience and their impact, including an increase in addressable customer base, improved first order conversion and reintroduction to less active customers.
Our guidance for 2024 net revenue and adjusted EBITDA margin revenue growth in the second half of 2024 while being adjusted EBITDA profitable and our ability to invest in advertising as a higher percentage of revenue. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially.
All these statements are based on growth view of their market and their business as they see today, as described in our SEC filings. The underlying facts and assumptions for these statements can change as the market and their business changes for more information, please refer to the risk factors discussed in our most recent filings with the SEC, which are available on Grove's Investor Relations website at investors. grove.com.
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 the earnings release, which is also available on the Investor Relations website.
I would now like to turn the call over to Jeff your question to begin.

Jeff Yurcisin

Thank you, operator. Hello, everyone, and thank you for joining the call today. I'm excited to be here with you and to share updates about our financial performance for the fourth quarter as well as the full year 2023. I recently passed my six month milestone of growth and continue to be impressed by our team's contributions, dedication to our mission and our incremental results. I remain confident in the strategy that we put into place in November of 2023.
And more importantly, I am deeply excited about our future. We seek to be the most trusted brand for conscientious customers who want to make the right choices for their families and the plan to achieve that, we must deliver profitable growth, and I'm proud of our team's incredible progress over the past few months as we continue to prioritize profitability while putting the customer at the center of all that we do, the creation of a leading sustainable brand is a catalyst for our future growth, which will accomplish by creating and curating the most efficacious and Planet first product, in particular, Q4 2023, with the start of a critical business transformation as we evolve our customer experience, create incentives for customers to build the most wallet and Planet friendly box possible and roll out a robust product pipeline, prioritizing sustainability and convenience as we mark our tenth year as a B Corp.
I'm thrilled with the changes to date and those to come as we continue our laser focus on our three strategic pillars, customer sustainability and profitability I intend to touch on profitability and sustainability first but will dedicate most of my remarks to share how we will drive growth by focusing on improving the customer experience, beginning with our profitability pillar.
I'm incredibly proud of the growth team and their dedication to deliver positive adjusted EBITDA results for the second quarter in a row. Q4 2023 also marked a new record for net revenue per order at $66.83 and positive operating cash flow for the second out of the last three quarters. These serve as additional proof points of our focus on profitability. Our sustainability mission requires that we operate a sustainable business. We've internalized this efforts as we continued our ongoing review of operating costs and took action to improve our margin and increase our operating leverage during the fourth quarter.
We took additional action during the first quarter of 2024 to further reduce our operating expenses. Specifically, we entered into an amendment for our San Francisco headquarters lease, subject to our landlord's lender approval. The amendment terminate our existing lease provides for our lease of the first floor of the building at a lower cost and requires us to pay a $4.8 million termination fee. The amendment will create approximately $5.8 million of cash savings through May 2027, the end of the original lease term.
We also evaluated our fulfillment center ecosystem and made the decision to close our Missouri location to optimize for cost and operational efficiencies. We expect minimal transportation impact for our customers as we transition the order volume to our fully operational, Nevada and Pennsylvania facilities. Our bicoastal to no network still has sufficient capacity for revenue growth for the foreseeable future. These savings will be reflected in the P&L throughout the coming quarters.
With respect to our sustainability pillar, as our foundation mission and point of differentiation. We continue to focus on research and development to create and carry increasingly sustainable products, working with partners and vendors on scalable alternative materials that can help us to transform the consumer products industry. Q4 marked a significant milestone for the company when we announced that we have collected 15 million pounds of single use nature and ocean bound plastics since 2020 through our partnership with classic recovery platforms.
This is the impact of our plastic neutrality commitment through which for every ounce of plastics ship to growth customers, we collect the equivalent amount of plastic pollution through our ongoing partnership with repurpose global. We've also helped to avoid 10.8 million pounds of single-use plastics since 2017, including 1.7 million pounds from 2023 alone by offering a broad assortment of products that contain less plastic compared to other household brand.
We also launched our digital badging system on product that meet grows beyond plastic standards, our customers can now look for three badges on our website, including 100% plastic-free, 95%-plus percent plastic free, and no single use plastic to help them make educated purchasing decisions and reduce their consumption of single-use plastic. These digital badges expand our transparency efforts by sharing the plastic content of our growth brand and third party products while guiding customers to shop with reusable products or products containing little to no single-use plastic, we are providing more information to our customers on our website to make their sustainability journeys easier to navigate and enable progress over perfection on our mission.
The cornerstone of our sustainability mission has been reducing the amount of single-use plastics sold and everyday consumer products. Our key measurement to understand product progress is plastic intensity, which we define as pounds of plastic per $100 of our net revenue. We help other brands and retailers become equally inspired to measure and reduce plastic products plastic throughout their business. Plastic intensity across the entire growth business was 1.07 pound of plastic per $100 in net revenue in the fourth quarter of 2023, an improvement from 1.11 pound in the third quarter of 2023 and 1.08 pound in the fourth quarter of 2022.
For growth brands only across online sales and retail partners, plastic intensity was also 1.07 pound of plastic per $100 in net revenue in the fourth quarter of 2023, an improvement from 1.14 pound in the third quarter of 2023, up from 0.98 pound in the fourth quarter of 2022. Our growth co 100% recycled plastic trash bags were the primary driver of the year-over-year plastic intensity increase for our growth brands.
Finally, with respect to the customer pillar, we want to improve the VIP. experience, two, continued momentum with growth co product innovations three saw accelerated growth within health and wellness and four and most importantly, we began the transformation of our new customer acquisition model. Fourth quarter saw improvements to our website to our product recommendations as well as special pricing for our VIPs. We plan to continue making changes to our site while offering our best customers, our VIPs, exclusive benefits and more value for their loyalty for our growth branded products.
Our team is focused on leading the industry with 50 plus no way ingredients like Paragon, Salix and phosphates that are not included in any of our products. We continue to innovate in both products and with award-winning package. In Q4, we launched our growth code bottle wash Power Packs, a new pod product that removes stains and lingering odors in hard to clean containers serving as an entry point into a niche category with an opportunity for growth.
We have a number of planned launches throughout 2024 that will enable customers an easier entry point into our product platforms with ready to use items at a more accessible price points on many of the shelves in the 7,500 brick-and-mortar locations where growth co products are sold across the country. For our third party brand partners, we intend to offer relevant products that conscientious customer would want. Customers continue to ask us to enter new categories.
For instance, 89% of customers we surveyed in this study would trust growth over other retailers to meet their health and wellness needs. So in the health and wellness category. We established a dedicated health and wellness advisory board composed of medical clinicians and practitioners to help guide the ongoing expansion of the brands and products we sell using the latest research and science between Q4 2022 and Q4 2023, we grew the percentage of orders containing the health and wellness products by more than 75%, showing continued momentum in the category going into 2024.
This is valuable because the higher average retail prices and regimented nature of wellness products translates to a customer lifetime value that is approximately three times higher for a customer that purchases wellness products versus one that does not. We are continuously evaluating our pricing and category offering in health and wellness turning growth into the destination for our customers' wellness needs. We are in the midst of transforming from a sustainable cleaning brand to a trusted household brand to meet more of our conscientious customers' needs.
In Q4, we welcomed the ancient nutrition composite, the Honest Company and which Gardens brands to our collaborative as well as dozens of new products from existing third-party brand partners. We will continue to expand assortment within our core categories and into adjacent ones where we have earned our customers' trust.
In Q4, we also began a journey to remake our customer experience to be more clear customer friendly and focused on our priorities of sustainability and value while also providing more transparency around our subscription process.
During the transition, we have seen and will see lower first order conversion rates. As a result, we spent advertising at a stable percentage of revenue in the fourth quarter when compared to the second and third quarter at the end of February, we launched an updated customer experience for new customers. We adopted an improved approach for the first order experience by removing gated access and default subscriptions and creating incentives for customers to opt into a program to subscribe to individual products for increased savings.
We will also offer discounts for repeat orders and free gifts to incentivize basket building that transformation represents a significant shift in our subscription model. These changes will allow us to better match best practices across e-commerce that I've seen throughout my career and drive growth in new acquisition channels. We are optimistic that the various changes to the overall experience with reduced friction and even more transparency will increase our total addressable market improve first order conversion and reintroduce less active customers to the growth platform.
I'm energized by this transformation, which is the natural output of listening to customers and putting them in the center of all that we do during this transition. We further reduced advertising spend in the first quarter, but we intend to increase our spend as a percentage of revenue throughout the year as we optimize the experience.
Now turning to 2024, you will continue to see us prioritize profitability, but we also expect sequential revenue growth in the second half of the year. We plan to accomplish these results by one expanding product selection, we will follow our customers' needs by building on our demonstrated success and category expansion in the health and wellness space.
Two, we are optimizing our growth model. We will move from the gated first order experience to one that is shopping focus and provides incentives for customers to subscribe to items and build the most Planet friendly and wallet friendly order as possible. We expect this to reactivate and re-energize our 5 million customer base, further increase our total addressable market and appeal to all country and just customers.
Three, we are prioritizing innovation. We will continue to launch new sustainable products to our online platform and 7,500 brick-and-mortar retail locations. For example, we are launching a new ready-to-use product assortment that will enable customers to experience growth co at a lower entry price point than our current durable and concentrate offering.
And lastly, we are doubling down on sustainability, our point of differentiation, this is what connects our team. It's why customers trust us and it's what sets us apart. We are the first plastic neutral retailer in the world, but we aim to do more by further serving our customers through education and new products guided by our Beyond plastic standard. I'm incredibly excited about the strategy that prioritizes our customers and puts our sustainability mission at the forefront of everything we do.
I will now turn the call over to Sergio to review our financial results in more detail, circulars Please go ahead.

Sergio Cervantes

And similar to previous calls, we will provide quarter-over-quarter comparisons in addition to a over year-over-year change. We continue to believe that sequential comparisons reflect trends in the business and provide a measure of effectiveness of the steps we have taken to position ourselves for long-term, sustainable and profitable growth.
Starting with the top line, net revenue in the fourth quarter was $59.9 million, down 3.1% from the third quarter of 2023 and 19.2% year over year. The ongoing impact of our reduced advertising strategy persisted, which optimizes spend to ensure adequate return on investment as we transition our first solar experience and aggressively push toward profitability for the fourth quarter total orders were down 5.8% quarter over quarter and 23.7% year over year to $0.9 million. And active customers were down 9.7% quarter over quarter and 33.2% year over year to $0.9 million. Both total orders and active customers continue to be impacted by lower advertising spend offsetting the decrease in total orders.
DTC net revenue per order was up 2.4% quarter over quarter and 5.4% year over year to $66.83, another record high, surpassing our previous record of $65.24 from last quarter. The sequential and year-over-year improvement was driven by a mix shift to existing customer orders as well as an increase in the number of units for existing customer order as we expanded our product offering and optimize our pricing.
Gross margin was up 60 basis points quarter over quarter and 740 basis points year over year to 54.4% in the fourth quarter. The inventory reserve reduction contributed 130 basis points to gross margin compared to 20 basis points in Q3 2023 and a negative 470 basis points in Q4 2022. The year over year improvement was further driven by a decrease in supply chain costs and a mix shift to existing customers.
When compared to Q3 2023, the inventory reserve reduction was offset by higher product costs due to a seasonality, a higher discount rate and a higher percentage of third-party products. Co-brand products as a percentage of net revenue was down 30 basis points quarter over quarter and 70 basis points year over year to 44.5%. The sequential and year-over-year declines were largely due to a decrease in gold brand products in existing customer orders as we continue to expand our third-party product offering, especially our product selection in the health and wellness category relative to growth brand products.
Our advertising expenses decreased 4% quarter-over-quarter and 43.6% year over year to $3.9 million. The year-over-year declines reflect our pullback in advertising spend and focus on efficiency. While the sequential decline was due to a reduction in retailer specific advertising as we balance growth and profitability in the channel and also balance the efficiency of our DTC advertising. As we began transforming the first orders customer experience. Product development expense increased 27.3% quarter over quarter, but decreased 0.5% year over year to $4.6 million.
The Q4 2023 amount includes the [$0.7 million] year to date reclassification from SG&A and [$0.1 million] of restructuring charge. Excluding the reclassification and restructuring charges. Product development expense was stable quarter over quarter and declined year-over-year. SG&A expense increased 7.9% quarter over quarter for decreased 38% year over year to $32.1 million.
In the current quarter, SG&A includes $3.3 million of restructuring expenses. Stock-based compensation also increased $1.5 million when compared to Q3 due to a one-time true-up recorded in Q3. If you exclude both of these items, Q4 2023 SG&A is lower than the prior quarter, mainly due to lower fulfillment costs from fewer orders came in early. The year-over-year decline is due to lower fulfillment costs from fewer orders, but also lower personnel and professional services costs as we rightsize our cost structure throughout the year.
Adjusted EBITDA for the fourth quarter was positive $0.1 million compared to positive $0.2 million in the third quarter of 2023 and $9.5 million loss in the fourth quarter of 2022. Our adjusted EBITDA margin was 0.2% compared to 0.3% in Q3 2023 and minus 12.9% in Q4 2022 during the second quarter in a row that we delivered positive adjusted EBITDA. We are pleased with this result, demonstrating our ability to manage our cost structure effectively.
Despite the declining revenue, net loss in the quarter was $9.5 million compared to a net loss of $9.8 million in the third quarter of 2023, and $12.7 million loss in the fourth quarter of 2022.
Turning now to the balance sheet. We ended the quarter with $94.9 million in cash, cash equivalents and restricted cash, an increase of $0.2 million from the previous quarter. The increase is mainly due to $1.1 million of operating cash flow offset by $0.5 million of capital expenditure.
As it relates to working capital trends, we finished the quarter with an inventory balance of $28.8 million, down $3.9 million from the end of Q3 2023 as we continue to rightsize our inventory ownership. We did not make any draws on the asset-based loan facility during the fourth quarter after having taken the minimum draw of $7.5 million in Q1 2023. Based on current inventory and accounts receivable balances, we've got $8.1 million of capacity available.
Now turning to our outlook for the 12-month period ending December 31, 2024, we expect net revenue of $215 million to $225 million and adjusted EBITDA margin of 0% to 1%. While our guidance has revenue declining on an annual basis in 2024 compared to 2023. We expect to deliver sequential quarterly revenue growth in the second half of 2024, while also being profitable on an adjusted EBITDA basis for the full year, we further expect the transformation to the customer experience that Jeff described previously allow us to invest in advertising at a higher percentage of revenue starting in the second half of the year when compared to the first half. But I look forward to providing updates on our progress in the coming quarters.
I would now like to turn the call back over to Jeff for some closing remarks.

Jeff Yurcisin

Thank you, Sergio. Having completed my first six months in the role CEO, I have an immense amount of gratitude for our Board of Directors, leadership team and Grove employees for being part of this incredible journey. And because of their guidance, partnership and hard work, we've been able to accomplish an incredible amount in just six months that should make us all proud at growth. We aim to transform our industry and turn consumer products into a force for human and environmental goods.
And when you consider that 89% of ocean plastic is single use plastic and only 5% of plastic is recycled, our mission is more critical. Now than ever and the path to achieve our mission and transform our business relies on our strategy to stay focused on our conscientious customer. We win with our sustainability differentiation and pursue our mission by running a sustainable, profitable growing business. And we're already seeing the results of our transformation underway.
2023 prioritized profitability and saw a number of incredible milestones for our company. We have a plan in place that we believe will make us profitable and growing sequentially by the end of 2022. While I'm excited about results from this quarter. I can say with certainty that this is just the beginning as we look to make a number of changes that will benefit our customers, our shareholders and our planet. We are now happy to answer any questions you have. Operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Susan Anderson, Canaccord Genuity.

Susan Anderson

Hey, good evening. Nice job on the quarter. Great to see that profitability continue to improve. I was wondering so on the 2024 top line guide, maybe if you could just talk about, I guess, the cadence amongst the quarters, it sounds like you expect revenues to increase sequentially as we go throughout the year. I guess should we expect fourth quarter to be up year over year by the time we get there? Or how are you guys thinking about?

Jeff Yurcisin

Thank you, Susan. We said we were going to be profitable and growing in 2024, and we still believe that through all, we are confident in our plan that we have in place. And what you will see is quarter over quarter on an ongoing basis, continued growth in terms of year over year. We are not giving guidance to it, but we're optimistic that the transformation that we were talking about to the core customer experience will be a catalyst for growth and we'll update our revenue guidance accordingly throughout the year. But right now, we are currently guiding towards sequential growth.

Operator

Okay, great. That sounds good. And then maybe if you could just talk a little bit about the mix of sales and longer term, I guess, between third party brand and then your grow brand as you add, I guess, more third party brands your platform as the categories expand, I guess, has changed in terms of your thoughts of where that mix will be? And then just in terms of the categories on the website, you've definitely added a lot of new categories. Is there anything else left that you don't want to expand into? Or should we think about it just adding more brands to those categories.

Jeff Yurcisin

Thank you for the question again, Susan. So I can't emphasize one thing which is in my time in this role, I am not working backwards from an ideal. Our share percentage for growth core products. I want us to go find the best products in the world for this conscientious customers and put them in front of on our core customers. But I'm energized by, though, is we've got some great growth cold product coming on. So even as we add third party selection, I am I believe there is a great opportunity for that Graco product still jump out among jump out and differentiate itself from other product on our or in our store. So we are not giving guidance to it, but I think you will see is the growth product being of a tremendous value and tremendous efficacy.

Susan Anderson

And then maybe if I could just add one last one. Not sure if you could give any color on just how growth performed at wholesale in the quarter? And I guess, are you expecting any additional expansion there at wholesale for the Grove brand in 2024?

Jeff Yurcisin

So we didn't really think incredibly well. I'm proud of the type of product launches that we have. You will see at the end of Q1, early Q2, new product hitting the stores hitting target shelves, you will see 70% more retail doors open in 2024 year over year and so on from our perspective, we are launching the right type of products. We're excited about this growth, Grove bottle wash powerpack. We're excited about the retail door expansion, and we still firmly believe in our strategy of this omnichannel brand where we're meeting our customers where they are.

Operator

(Operator Instructions) Thank you. There are no further questions at this time. I'd like to turn the floor back over CEO, Jeff Yurcisin, for closing comments.

Jeff Yurcisin

Thank you very much for joining us today. And I also want to thank our customers. They are the reason we are in business and we are here to serve them. I appreciate your time this evening and thank you for your support. Have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.