Solo Brands, Inc. (NYSE:DTC) Q4 2022 Earnings Call Transcript

Solo Brands, Inc. (NYSE:DTC) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Hello everyone. And welcome to the Solo Brands' Fourth Quarter Fiscal 2022 Financial Results. My name is Bruno, and I will be operating your call today. I will now hand over to your host, Bruce Williams. Please go ahead.

Bruce Williams : Good morning, everyone. And thank you for joining the call to discuss Solo Brands fourth 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, John Merris, and Chief Financial Officer Somer Webb. 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 that are 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 and future events and developments.

And 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 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 discussion of these risks, including our soon to be filed Annual Report on Form 10-K 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 companies. 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 to our investors portion of our website, at investors.solobrands.com. Now, I would like to turn the call over to John.

John Merris : Thank you, Bruce. And thank you for joining the call to discuss our fourth quarter and full year 2020 results as well as our 2023 outlook. To begin, we were incredibly pleased with our fourth quarter results with sales and adjusted EBITDA increasing double digits despite a difficult macro environment. At the beginning of 2022, we shared our investment strategy along with confidence that our business model would allow us to make investments in long-term growth without sacrificing strong profits and positive free cash flow. I'm happy to share that our investments began paying off in the back half of the year and culminated in strong Q4 results. Customer response to our products is not only high during the key selling period we call Cyber 5 or Thanksgiving Day through Cyber Monday, but also continued through the remainder of the holiday selling season.

This positive customer response was most evident in the number of shoppers we saw come through our online stores and the rate at which these shoppers converted to customers. When the dust settled on the quarter, we had delivered strong top-line growth, all while generating strong adjusted EBITDA, and solid free cash flow just as we had planned. Overall, our results are a testament to the strength of our business model which allows us to drive growth while reinvesting into the business. Customer relationships have been and will continue to be at the heart of our business. It took us about 10 years to acquire nearly 2 million customers through our website. It took only two years to double that number. The rate at which we are acquiring customers and the direct relationship we maintain with them differentiates our business and creates a competitive moat around it.

As our loyal customer base grows so does our moat. But the story doesn't end here. We remain relentlessly focused on delivering an exceptional customer experience and our team finds new ways to wow them frequently, innovating new products, enhancing the online shopping experience and shipping orders the same day they are placed on our websites are just a few ways we surprise and delight our customers regularly. Create good as a core value at Solo Brands, and it turns out, you can create a lot of good by just treating your customers exceptionally well, expect for us to continue obsessing over customer experience simply because it's the right thing to do. But know that focusing on the customer isn't just good for customers. It's good for our team and shareholders too.

Solo Brands referral rate is something we are extremely proud of, and is fueled by customer's desire to share with their friends and family the incredible experiences they've had with our company. Innovation is found all around our business. One of the obvious places is in new products. In, 2022, we launched more new products than any other year in our history, and the new products quickly became customer favorites. There are too many to list, but I'll highlight a couple. Last spring we entered the exciting and fast growing portable pizza oven category by launching Pi, an oven that leverages our Signature 360 degree airflow and can cook homemade pizzas in less than two minutes. Customer feedback has been exceptional for Pi and last year as demand peaked in Q4 when we sold out of Pi inventory in December.

Mesa, a tabletop fire pit was launched in late summer, and was a response to customers asked me for an outdoor fire pit that can be used in more spaces. This small but mighty solar stove generates the same secondary burn as our whelming larger stoves, but it's even faster and easier to use and cost less than $100. Early data shows that Mesa is attracting more customers faster, while giving us access to backyard patios and yards that may be too small for our popular bonfire fire pit. I hope it is obvious how core new product innovation is to our business, and how important we believe it is to our long-term success. All-in-all Solo Brands launched over 15 new products last year, and we expect them to have a meaningful impact on our business in the future.

Another area of innovation of Solo Brands is in our digital and data infrastructure. Last year, we made big improvements in how we ingest, digest and utilize first party and third-party data at Solo Brands. Our investments into data and digital had far reaching impacts on marketing efficiencies and scalability. And because we believe we have barely scratched the surface on potential market penetration, our unique and proprietary digital and data focus has a long runway to find prospects and profitably convert them to new customers. In addition, we are finding new, more efficient ways to get existing customers to come back again and again for additional purchases. 2023 is all about leaning into the things that are working well. And so our priorities for this year are first to continue expanding our data management and infrastructure; second, drive growth internationally; and third, broaden and deepen our wholesale partnerships.

Data and digital investments began paying off in the back half of last year, and we expect to continue investing in them this year. Our first party data and our ability to use this data to drive meaningful interactions with customers improves engagement, retention and referral rates. We started seeing strong momentum in our international markets in the second half of Q4 and want to continue pushing profitable growth internationally in 2023. We have significant growth opportunities in our existing countries, and we plan to launch localized e-commerce stores and additional new markets this year. We still believe that in the long-term, our international business has the potential to become the same size as our U.S. business. And our new markets will get us closer to realizing this vision.

And finally, expansion with our retail partners is a key area of opportunity in 2023. As we continue to focus on delivering a great customer experience, we want to be where our customers need and want us to be. Disk, Ace, Academy shields, Costco and others have been solid partners. And we are working closely with them to strategically outdoors, expand SKUs and coordinate promotions, where more customers can be exposed to and participate with our company. As I mentioned earlier, because we're early in our story, we believe this shift is stronger alignment with strategic retailers, while significantly accelerate brand exposure and market penetration for Solo Brands. Of course, this will initiate a plan shift mix between DTC and wholesale, but one that we expect to strengthen our business and our profit generating model.

We are operating in an interesting environment. On the one hand, we have tremendous wind at our backs. Our investments from last year paid off. We have built a strong foundation on which to stand and we're focused on some exciting new initiatives that we feel confident while only provide additional wind to our sales. On the other hand, the macro environment is uncertain. Inflation remains high, and there's obvious risks to consumer discretionary spending. It's easy to get tossed around with so many conflicting factors, but our business remains on solid footing. We have produced healthy growth, strong profits, positive free cash flow. I'm proud of our team and are resilient and I can honestly say we're excited for the future. The outlook, you will hear from Somer is one that accounts for the uncertainties in the macro environment, we can't predict the future that consumer inflation or interest rates, but we can and will execute our playbook which is long-term and profit oriented.

I'm so thankful for our team that is truly the backbone of this company. And now I'll turn the call over to Somer to discuss the financials and our outlook on 2023.

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Somer Webb: Thanks, John, and good morning, everyone. Today, I will walk you through our fourth quarter and full year results for 2022 and then provide some commentary on our outlook for 2023. Our fourth quarter results came in ahead of our expectations driven by new products, stronger international penetration and continued growth of our core products through both wholesale and direct-to-consumer channels. On our last call, we mentioned that we were seeing a change in consumer behavior from our prior year coming into the quarter, and we revised guidance based on those trends. As the rest of the year unfolded, we were pleased to see consumers revert back to pre-pandemic shopping timing and behavior resulting in strong late-November and December growth.

Our brands also gained momentum in the quarter with our retail partners as we nearly doubled ourselves in our wholesale channel. We managed our inventory and cash prudently at the end of the year well positioned for 2023. Diving into the fourth quarter results, net sales increased 11.8% to $197.2 million compared to $176.5 million in the prior year period. Sales were driven by strong demand in the wholesale channel as we continue to increase our market penetration. Net sales for the full year finished at $517.6 million, an increase of 28.2% versus 2021 driven by strong results across all channels. Wholesale net sales increased 196.4% to $36.5 million from the fourth quarter compared to $12.3 million in the prior year as we expanded our presence with retail partners.

Our direct-to-consumer net sales decreased 2.1% to $160.8 million for the fourth quarter, compared to $164.2 million in the same period in the prior year. We were pleased with our overall performance, as we were comping over 160% growth from the prior year. As John mentioned meeting our customers where they are through channel expansion remains a part of our long-term growth strategy and for full year 2022 both the direct-to-consumer and wholesale channels grew double digits. Our sales channel mix was approximately 80-20 between direct-to-consumer in wholesale for full year '22 versus 90-10 for 2021 as we expanded our strategic partnerships in the wholesale channel, notably DICK's Sporting Goods, Ace Hardware and Costco. Despite the shift in our sales channel mix, direct-to-consumer net sales continued their high growth pattern, and were up 19.1% for the year compared to the full year 2021.

Additionally, wholesale net sales were up 96% from 2021. Moving to gross margin, our gross margin rate was 59.8% for the quarter, compared to 63.3% in the fourth quarter of 2021. Gross margins for the year were 61.5% compared to 64.1% for the full year 2021. Gross margins for both the fourth quarter and the full year were impacted by the gross margin profile of our 2021 acquisition and higher inbound freight. Our gross margin rate was also affected by higher sales through our wholesale channel, which although carries a lower gross margin has similar EBITDA contribution margins. Selling, general and administrative expenses for the fourth quarter increased to $84.7 million or 43% of net sales, as compared to $82.5 million or 46.8% of net sales in the same period last year.

The variance was driven by $7.4 million of higher fixed costs partially offset by $5.2 million decrease in variable costs. The fixed costs increase was primarily due to the increased employee related costs related to increased headcount and costs associated with becoming a public company. The variable cost decrease was due to lower marketing expense driven by benefits from our data investments. SG&A for the full year increased to $259 million or 50% of net sales, compared to $159.5 million or 39.5% of net sales in the prior year. The increase for the year included $43.7 million of increases in SG&A, related to businesses acquired in 2021. The remaining increase in SG&A resulted from increased employee related costs, costs associated with becoming a public company, increased marketing expense and investments in long-term strategic initiatives.

Our fourth quarter net income was $19.5 million and net income per diluted share was $0.18. Fourth quarter adjusted net income was $29 million and our adjusted EPS was $0.33 per diluted share. Full year 2022 ended with a net loss of $7.6 million, which included roughly $31 million of a non-cash goodwill and intangible impairment charges recognized in Q2 or loss of share of $0.08. Full year adjusted net income was $65 million or adjusted EPS of $1.07 per share. During the quarter and the year, we continue to invest in long-term strategic initiatives in data, product innovation and international expansion and delivered adjusted EBITDA of $38.7 million and adjusted EBITDA margin of 19.6%. Full year adjusted EBITDA was at $7.6 million, or 16.9% of net sales.

Now turning to the balance sheet. At the end of the period, we had $23.3 million in cash and cash equivalents. As of December 31, we had $20 million in outstanding borrowings under the revolving credit facility, and $96.3 million under the term loan agreement. The borrowing capacity of the revolving credit facility was $350 million as of December 31, leaving $330 million of availability. We have a strong liquidity position, and we believe we are able to take advantage of strategic opportunities with a net leverage that remains less than 1.5 times. Inventory at the end of 2022 was $133 million, we are pleased with the progress we made on our inventory level during the fourth quarter with a decrease of $32.8 million versus Q3. Inventory increase versus prior year due to growth of the business expansion into international markets and new product launches.

Turning to our outlook for 2023. We continue to be incredibly excited about our long-term growth strategy and see tremendous opportunity from both channel and category expansion in our business. However, we are mindful of the current uncertain environment and not immune to the pressures on consumers' discretionary spending. The state of the economy, inflation and consumer spending are creating many unknowns. We have seen softness in consumer spending through our direct to consumer channel entering 2023, which we expect to continue in the near term. However, John mentioned we've seen success with our wholesale partners, and we will continue to lean into those relationships even more in 2023 to continue to broaden our customer reach. Given this backdrop for fiscal 2023, we are forecasting revenue in the range of $520 million to $540 million for the full year.

We believe we will be able to drive strong EBITDA margins in 2023 through returns on our data investments, driving marketing efficiency, resulting in a forecasted range of 16.5% to 17.5% for adjusted EBITDA margin. While we are not providing quarterly earnings guidance, we will provide some general comments regarding quarterly cadence. We expect our revenue to come in consistent with prior years due to the seasonality of our portfolio of brands that represents roughly 15% in Q1, 25% for Q2, 20% in Q3, and 40% in Q4. As we continue to seeing strong profitability from our wholesale channel in line with our direct-to-consumer business. We believe that wholesale has the potential to be up to 25% of our total sales by the end of the year. As a reminder, although the overall contribution from our wholesale and D2C channels are similar, wholesale carries a lower gross margin.

As we discussed on prior calls, freight will continue to be a headwind for the first half of '23, however, should be a tailwind in the second half. We've noted that 2022 was a year of investment, of which many were initiated in Q2 '22. So when forecasting Q1 and Q2 earnings, we expected increases in SG&A year-over-year from those additions. Our view on forecasted performance anticipates that current macro environment headwinds continue throughout the remainder of the year. Although we feel prepared to face market turbulence in the short term, we will continue to monitor changes in consumer behavior and make the best short and long-term adjustments necessary for sustained growth and profitability. With that said, we remain confident in our long-term growth potential and are eager to continue to deliver strong financial results for our shareholders.

Before opening up the call for questions, I'd like to take a moment to thank our team for their hard work and dedication. We appreciate all that you do to make Solo Brands successful. While the micro environment is unpredictable, we remain focused on controlling what we can control and executing our strategic plans to position us for long-term growth. I will now turn the call over to the operator to beginning Q&A.

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