Traeger CEO explains why supply chain issues are particularly 'bad news for Traeger'
Traeger CEO Jeremy Andrus outlines the supply chain issues the grill manufacturer is facing as it seeks to invest in its inventory and North American manufacturing to protect revenues.
Video Transcript
- 'Tis the season for a barbecue turkey, or so hopes grill maker Traeger. Let's check in with Traeger CEO Jeremy Andrus, following the company's earnings earlier in the week. Jeremy, always good to see you here.
Unlike a lot of grill makers, and you made this point on the earnings call, Thanksgiving is a pretty big moment for Traeger. What are you seeing from the consumer as we head towards turkey day?
JEREMY ANDRUS: I'll tell you the first time that I cooked a turkey on a Traeger, and my dad did his traditional side by side in the oven. Nobody ate his turkey. Cooking a turkey on a Traeger is one of the best kept secrets.
And it's actually in the Traeger hood, it is the second busiest cooking day of the year. And we see that through the connected cook cycles. But the busiest is always Traeger Day, in the middle of May, which is a national holiday. But Traeger really shines around the holidays, at Thanksgiving heading into Christmas. It's a good moment. People get excited to cook on their Traeger. And they're not just doing a turkey. They're doing the sides. They're doing full meals, and that's a lot of fun.
- Traeger's pushed in some price increases, because of the inflation you're seeing in the supply chain. Have consumers balked at all?
JEREMY ANDRUS: They haven't. You know, we obsessively monitor sell through. Selling is nice, but sell through is an indication of how consumers react. We track it every week. We're able to see more than 60% of our sell through early every week, from the prior week and the weekend. And the reality is that sell through has remained very robust.
- It's Julie here. I was looking at the profit margin for you guys last quarter, 33.5%, which is more than 10 percentage points below where it was the prior year. And obviously, we've been seeing costs go up for everybody. You guys, I remember talking to you, had been raising prices a bit. I guess that's not been enough to mitigate that increase in costs for you all.
JEREMY ANDRUS: Well, I would say a couple of things. Number one, we had a substantial price increase on October 1st. So that is not yet reflected in financial statements that we've released.
But I would also say, in terms of the hit to margin, the bad news for Traeger is that our inventory is big and heavy. And if you look at the cost to transport product from Asia to the US, it's really high right now. And so, we have made some substantial price increases. We feel good about how the consumer is responding. Good brands are able to take price. And look, as supply chain costs come down to earth, and they will, this world will right size itself at some point, in time, there will be meaningful flow through from the price increases.
So a bit of a painful moment in terms of the macro. And everyone is affected to some extent. But I think given the size of our inventory and the number of units that you can put in a container, we're just disproportionately impacted. And there's nothing that we can do to control that cost, although there are lots of things that we're doing to drive long term gross margin improvements, and to respond as thoughtfully as we can to the current environment.
- Jeremy, do you have grills stuck at the ports right now?
JEREMY ANDRUS: You know, there are always grills stuck at the ports. And you know, it's just not efficient moving product right now. I would say we're in a good inventory position. We really decided, given this environment where things are so unpredictable, to really invest in more inventory, so that we're able to protect top line as a brand. Servicing the consumer and driving market share and brand momentum is incredibly important.
And so, we've invested in inventory, but not just in the US. We've also created temporary warehousing next to each one of our manufacturing facilities in Asia, so that we can build inventories, continue to produce at high utilization rates in our factory, and then as we're able to get shipping capacity at reasonable rates, whatever that means these days, we bring it over.
And so, we're trying to really first and foremost, protect revenue and protect our consumer and the brand experience. But we're trying to be as thoughtful and methodical as we can be, in terms of how we move inventory, where we store it, how we produce it, and just trying to optimize cost to the extent that we can.
- And Jeremy, have you guys tried to sort of shift around within Asia, your manufacturing capacity? And what are your plans? I think that you guys have plans to bring some capacity, what, back to the US? Or how are you thinking about where you can best deploy that?
JEREMY ANDRUS: Yeah, this is something that we started to think about before China became a challenge from a tariff perspective. Fortunately, it's not hit our business meaningfully. But we produce in Vietnam. We've been working on North American manufacturing. So sometime middle of next year, we will begin mass production in Mexico.
We also think that, candidly, the US is an opportunity, and we're exploring that. We feel like high volume, high automation will give us an opportunity to produce product close to home. It will allow us to not be so beholden to some of the transportation, not only costs, but bottlenecks. And you know, in having inventory close to home allows us to service our customer better, reduces lead times.
So you know, I'll say that when you have these moments in business, great teams rise to the occasion. And they find ways to innovate, not only to solve near-term needs, but to innovate longer term. And of course, I wish this weren't going on. But it is. And we've got an incredible team. We're responding to this very thoughtfully. And I'm confident that we're going to come out the other side a much better business.
And of course, the piece that I think is so important, not just building a strong commercial organization long term. But we've got a brand that's very well positioned in the industry. Next to any competitive offering, Traeger absolutely dominates from a consumer experience perspective.
And that's what we've got to protect. We've got to make sure that experience that our consumer has, that a Traeger owner has, is always the best possible cooking experience. And so, I think if you look at the growth in our business, in the third quarter we grew 12% year over year.
It's a little bit misleading, because look, a lot happened in the third quarter last year, given the pandemic and sort of shifting inventory and seasonality. But if you look at the two year stack, Traeger grew by 110%. That's massive.
And so, the thesis behind this business has always been healthy brand, well positioned in the industry, driving household penetration. And we feel good about that. I mean, look, Traeger is 3% penetrated into US households that own grills. And some of our markets, our heritage markets, were 16% penetrated and growing quickly. So we feel good about where we are. Tough supply chain environment, but we're slogging through it and we're going to be better because of it.
- Jeremy, about 30 seconds left in this one. I think a lot of folks in the street, that I talked to, at least, are surprised to see the stock trading below the IPO price. I mean, they love your brand. In 2022, are you back to growing your margins, you think?
JEREMY ANDRUS: The answer is yes. I mean, we've passed along a price increase. There's a lot of optimization that we're focused on. Of course, we've got to be responsible stewards of capital. We'll get a little bit lean from an SG&A perspective and make sure that we're making the right investments in our business that are well prioritized. But we're going to grow top line. And I think we've got some good initiatives in place that will allow us to grow margins, certainly from where we are today.
- All right, we'll leave it there. Traeger CEO, Jeremy Andrus, always good to see you. Have a happy Thanksgiving.
