BRC Inc. (NYSE:BRCC) Q1 2023 Earnings Call Transcript

BRC Inc. (NYSE:BRCC) Q1 2023 Earnings Call Transcript May 11, 2023

BRC Inc. reports earnings inline with expectations. Reported EPS is $-0.08 EPS, expectations were $-0.08.

Operator: Greetings. Welcome to the Black Rifle Coffee Company First Quarter 2023 earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Tanner Doss, Vice President of Investor Relations. You may begin.

Tanner Doss: Good afternoon, everyone. Thank you for joining Black Rifle Coffee Company’s conference call to discuss our first quarter 2023 financial results, which we released today and can be found on our website at ir.blackriflcoffee.com. With me on the call today is Evan Hefer, Founder and CEO; Tom Davin, Co-CEO; Greg Iverson, our Chief Financial Officer; Toby Johnson, our Chief Operating Officer. Before we get started, I would like to remind you the company’s safe harbor language, which I’m sure you’re all familiar with. On today’s call, management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.

For a further discussion of risks related to our business, please see our previous filings with the SEC. This call will also contain non-GAAP financial measures such as adjusted EBITDA. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC, and they are also available on our investor website. Now I’d like to turn the call over to Evan Hefer, Founder and CEO of Black Rifle Coffee Company.

Evan Hefer: Thanks Tanner. And good afternoon, everyone. It’s hard to believe that this is our sixth earnings call since we became a public company. As most of you know, with only a decade ago that I was bagging coffee with wife in our garage. At that time, I had a vision to create a business centered on supporting the veteran community with an authenticity that doesn’t exist in other businesses. Over the past eight years, Black Rifle Coffee has evolved from my original vision of a premium direct-to-consumer subscription coffee business into an omnichannel CPG business. And today I am pleased to report that we have met or exceeded our financial expectations in Q1 and we are well positioned for the remainder of the year. While our business model has evolved, I’m most proud of the company’s mission and purpose has remained steadfast.

Our commitment to serving veterans, active duty military, first responders, and their families has stayed constant. Being a mission oriented and purpose driven company has always allowed Black Rifle Coffee to punch above our weight class with regards to attracting and retaining talent. I’ve always tried to surround myself with the best and the brightest team members that are going above and beyond to support Black Rifle’s mission to create value for all of our stakeholders. Last quarter I highlighted our new CHRO, Marty Manning and our new CTO, Chris Clark, both of whom are talented executives with deep business experience who also served our country through active duty military service. Both Marty and Chris are passionate about Black Rifle’s mission and have the skills and experience to help me continue to deliver sustainable growth.

Today, I’m also excited to announce our new Chief Marketing Officer, Chris Mondzelewski. Chris brings over 20 years of consumer marketing, business and leadership experience, most recently serving as the Chief Growth Officer of Mars’ $12B+ Global Pet Care business. More importantly, prior to his business career, Chris served five years in the United States Marine Corps, deploying once to support Operation Desert Freedom. Outside of his own service, Chris has a deep personal connection to the military and law enforcement communities. His wife served in the Navy, his brother and sister-in-law are still in active duty in the Navy. Another brother is a police officer in Pittsburgh, and his daughter serves as an active duty surface warfare officer in the Navy.

Chris’ business background working across multiple sales channels and his commitment to our mission will be instrumental in our marketing and branding efforts. As we optimize our marketing spend to become more of an omnichannel focused business. Chris’ addition to the senior leadership team rounds out a very seasoned executive group that not only can deliver results to our shareholders, but also are driven by our mission to support the veteran active duty and first responder communities. As our leadership team continues to drive results, we continue to use our platform to give back to our loyal and growing community, which has been ingrained in our culture since day one. As I built this business out of my garage, although I didn’t take a paycheck my first year, I was able to donate tens of thousands of dollars back to the veteran community through nonprofits.

As we continue to scale, our commitment to our community has never been stronger and our impact has never been greater. A recent example of our commitment was the two US. Army Blackhawk helicopters that crashed on a training mission outside of Fort Campbell, Kentucky, close to Clarksville, a Tennessee outpost. Over the course of two days, our Clarksville outpost raised over $50,000 for the Screaming Eagles Aviation Association, which will go directly to the families of the nine soldiers who died that day. Here at Black Rifle, we know that no monetary donation can compensate for the loss their families endured, but we wanted to show our support for our brothers and sisters in arms and let everyone know that the community had their back. Another example is our recent donation to the Special Operations Warrior Foundation, which will help fund the preschool program for children of fallen special operations personnel and Medal of Honor recipients.

These donations are used to ensure their education support from preschool through postsecondary education occurs at no cost to the families. This was funded by our commitment to give a portion of our proceeds of every bag of coffee and box of rounds that we sell through the FDM channel. In the short time that we’ve had this channel, we were able to raise over $500,000 for this donation. As you can imagine, I spent over 20 years in the special operations community and I know just how impactful these donations can be to the families to relieve the stress of losing a husband, a father, a wife and a mother. These are just a couple of the recent highlights that are at the core of our mission and continue to build our unique connection with our community.

The larger our brand continues to grow, the larger our impact will be to those who serve. We are constantly working with our partners to donate a portion of our proceeds from the sale of our bag coffee, rounds and our RTD to ensure we continue supporting the veteran, active duty and first responder communities. None of this could have been done without the support of the community and I just wanted to thank everyone who has supported and continues to support through the purchase of our products and supported the brand. My goal has always been to build an enduring brand that will be around for generations. In order to build a sustainable brand, we need to be adaptable. As the world has changed over the past couple years, we knew that we had to adapt to our business model to fit the changing economic landscape.

As the economic backdrop changed over the last 18 months, we’ve adjusted our priorities as well from maximizing growth at all cost to profit and capital efficient growth. We know this might have seemed like a sudden shift in our overall plan, but we knew that the entry into FDM was the right area to focus in the short, medium and long term. To date, this has paid off and we’re excited to share more over the following months from this channel. With that, I want to turn the call over to Tom for additional color into the quarter. Tom?

Tom Davin: Thanks Evan, and good afternoon, everyone. I will start by highlighting details from each channel of our business, including an update on key profitability initiatives. Channel highlights, starting first with our wholesale channel, Q1 of 2023, marked the first quarter in our company’s history that the wholesale channel was the largest revenue driver for the quarter. Wholesale channel is still very early in its trajectory, providing significant revenue growth opportunities for the foreseeable future. Our decision to shift focus to the food, drug and mass or FDM channel was an important step on our path to profitability and a major contributor to BRCC becoming an omnichannel CPG business. As we mentioned on last quarter’s call, in less than seven months from initial discussion, our coffee earned placement on shelves in over 4,400 Walmart stores.

We have quickly grown to become the number one brand of bagged coffee in twelve ounce and smaller sizes. Further, Black Rifle Coffee achieved a 3.8% share of the overall Walmart coffee segment per Nielsen data. Note that this was without any marketing or promotion. I’m excited to share that earlier this week we launched our first promotion with Walmart featuring end caps that show our Medal of Honor Roast, where proceeds from all sales will be donated to the Medal of Honor Museum in Arlington, Texas, as yet another example of how Black Rifle Coffee is working to fulfill its mission to support the veteran community. As mentioned on our last earnings call, we plan to enter one or more new food, drug and mass accounts towards the second half of this year as resets occur in the June to October time frame.

We will share additional details regarding innovation and growth within the FDM channel during our Q2 call in August. Shifting now to Ready-To-Drink, we have been pleased with the continued excitement around our brand in the convenient and grocery channels. Q1 was the first time in our brand’s history that we’ve had availability of our core SKUs as well as limited time offering SKUs for the seasonal load ins. While you’ll see a small jump in our percentage ACV and Ready-To-Drink doors compared to Q4, the additional two core SKUs read in Q1 and the incremental doors from the load in won’t start appearing in the Nielsen data until mid to late May despite the lagging reporting, we continue to outpace the category by seven times in terms of both unit and dollar sales per Nielsen data on a year-to-date basis.

Our RTD investment will allow Black Rifle Coffee to participate in summer promotion activity for the first time ever. Starting in late May, we launched a mission driven campaign during the, 100 days of summer in partnership with the military charity called the Boot Campaign, targeting the bold goal of raising $1 million for veteran health initiatives. This promotion will allow Black Rifle to drive trial and continue taking market share, all while supporting veterans and active duty military members and their families. Overall, this summer is shaping up to be very exciting for our wholesale business. Turning now to our Outpost business. As we announced last month, with the departure of Heath Nielsen, I have assumed direct leadership of the Outpost Division.

This year, there are three main objectives for the retail Outpost business. Number one, continue to enhance the customer experience within our company and franchise locations to drive repeat visits and transaction growth. Number two, develop the leadership capabilities of the Outpost teams in order to nurture a positive results oriented culture at each retail outpost. Number three, refine our new prototype model to further elevate the BRCC experience while value engineering overall builds out costs. We continue to see significant long-term opportunity for this component of our overall growth strategy. For 2023, we continue to plan to open three company owned outposts, one of which has already opened in Waco, Texas in March. Lastly, I want to highlight our Direct-To-Consumer Channel.

We operate the largest branded subscription coffee business in the United States with over 255,000 subscribers. We’ve continued to see a slight decline in subscribers quarter-over-quarter, which aligns with our expectations. As Evan mentioned, bringing Chris Mondzelewski aboard as Chief Marketing Officer provides us with additional firepower to define and execute marketing programs in order to drive growth across all channels of our business, including Direct-To-Consumer. We expect to further optimize marketing spend to meet our high internal return thresholds. While marketing spend is declining as a percentage of revenue, it is generating improved returns. As I highlighted on our Q4 call, we are committed to becoming profitable this year. This will be achieved primarily through three key initiatives that will be executed through the balance of the year.

Initiative number one, continued expansion of our wholesale channel. Number two, price increases. Number three, cost leverage. I am pleased to report that we are on plan with all three of these initiatives through Q1. With our cost leverage initiative being the most visible in the Q1 financials, you’ll begin to see the benefits of the February price increases in Q2, as well as the increased percentage ACV and door growth throughout the wholesale channel. Of course, there is still plenty of work to be done, but we are very satisfied with progress to date. Due to this progress, we are reaffirming our 2023 annual guidance that we provided in March. Greg Iverson will give you more detail. Greg, over to.

Greg Iverson: Thanks Tom, and good afternoon, everyone. Today I will discuss our 2023 first quarter financial results and reaffirm our 2023 full year outlook. Turning first to our financial results for the first quarter, total revenue increased 27% to $83.5 million, compared to $65.8 million in Q1 of last year. The meaningful increase in revenue was driven by our wholesale channel, which continued its impressive growth from the first quarter of 2022, increasing by 82%. Now I will give some additional details on our three sales channels. Beginning with wholesale, revenue increased 82% to $40 million in Q1, compared to $21.9 million during Q1 of last year. The increase was primarily driven by our entry into food, drug and mass as we began selling our bag coffee and rounds in over 4,400 Walmart stores.

We also saw a material increase in our Ready-To-Drink percent ACV, which measures distribution across both convenience, gas and FDM. RTD percent ACV more than doubled to 38.5%, versus 15.5% a year ago. This increase was driven by adding 16,000 incremental doors as well as introducing innovation for the first time in Q1 of 2023. Next, our Direct-To-Consumer revenue decreased by 4% to $36.8 million in Q1 of 2023, compared to $38.3 million in Q1 of last year. This decline was mainly the direct result of decreased digital advertising spend as we continue to prioritize our high growth and high returning wholesale channel. Next, revenue from Outposts increased 21% to $6.7 million in Q1 compared to $5.5 million last year. The main driver was an increase in our company owned store count, which increased to 16 outposts as of Q1, 2023 compared to 9 in Q1 2022.

As Tom mentioned, we opened one store in Waco, Texas, during Q1, bringing our total number of outposts to 27 with 16 company owned and 11 franchise stores. Turning to profitability, our Q1 gross margin was 33%, decreasing approximately 230 basis points from 35.3% in Q1 of last year. The decrease was driven by increases in the cost of coffee and RTD raw materials, which increased as a result of adding capacity at new co-manufacturing locations. The increase in raw materials and increased capacity also led to higher transportation and inventory carrying costs. Additionally, we incurred $1.8 million in expenses related to the startup of new RTD innovation products and co-manufacturers impacting gross margins by 215 basis points. We have taken action across multiple fronts to combat the inflation we have been experiencing.

In addition, as Tom mentioned, we took additional pricing actions in February across our RTD portfolio as well as our DTC channel. Because these pricing actions took place around the middle of Q1, the full impact of these actions will flow through our P&L throughout the remainder of 2023. We also have a number of logistics related efficiencies slated to take place in the back half of the year. As a result, we continue to expect our margins to improve sequentially throughout the year. Turning to our operating expenses as percentage of sales, our operating expenses during Q1 decreased by 575 basis points to 53.6% as compared to last year, as we have begun to drive significant operating leverage across our expense base. I will walk through the drivers of these decreases beginning with marketing and advertising.

For the first quarter of 2023, marketing expenses decreased 12.4% to $7.1 million from $8.2 million in the first quarter of 2022. As a percentage of sales, marketing decreased by 380 basis points to 8.6% compared to the same quarter last year. The decrease in expense was driven by our strategic reductions in lower returning advertising platforms. In addition, our focus on our wholesale channel is driving the leverage and efficiency with our marketing and advertising spend that we have been anticipating. Next, our salaries, wages and benefits increased 23.8% to $19.8 million from $16 million in the first quarter of 2022. Importantly, as a percentage of revenue, it decreased by 60 basis points to 23.7% compared to 24.3% in Q1 of last year, as we again are beginning to see leverage in our operating expenses.

The increase in dollars was due to a year-over-year increase in employee headcount to support our significant revenue growth, as well as $700,000 in severance related to reductions in headcount across the company in Q1. Moving on, our G&A expenses increased 19.3% to $17.8 million, compared to $14.9 million in the first quarter of 2022. As a percentage of revenue, G&A decreased by 135 basis points to 21.3% of revenue compared to 22.6% last year. This increase in dollars was driven by incremental IT infrastructure spending as well as professional services to support the expansion of new and existing sales channels and product lines. As with our marketing and our salaries and wages, we achieved significant leverage in our G&A expense in the quarter.

In addition to the GAAP measures I’ve discussed, adjusted EBITDA is an important profitability measure that we use internally to manage our business. For the first quarter of 2023, adjusted EBITDA was a loss of $5.1 million versus a loss of $6.3 million a year ago. This progress toward profitability was driven by our revenue growth and operating expense leverage, partially offset by lower gross margins. Now I’ll briefly walk through our balance sheet for the first quarter of 2023. We ended Q1 with $26 million of cash on the balance sheet compared to $38.9 million as of December 31. We also had $56.2 million of debt, compared to $49.2 million as of December 31. You will recall that last quarter we discussed an intentional inventory build, which is mostly an RTD.

We built inventory over the past two quarters to support the expansion of our RTD product, including the C store load- in cycle and new product innovation. Also, as Tom mentioned, we are currently launching our 100 days of summer RTD Promo. While the promo will have some negative impact on our Q2 gross margin, we expect it to further drive customer trial and allow us to continue taking market share. At our current RTD inventory levels, we believe we’re well positioned to address demand and now have the flexibility we need to adjust our production schedules as needed for the remainder of the year based on sell-through and door growth. As we convert our RTD inventory into cash over the coming quarters, we expect to see our operating cash flow improve significantly.

Finally, as Tom mentioned, we remain committed to generating positive adjusted EBITDA in 2023, and we are reaffirming our prior financial outlook from our Q4 call. As a reminder, that full year outlook is revenue of $400 million to $440 million, gross margin targets of 36% to 37.5%, and positive adjusted EBITDA of $5 million to $20 million. With that, I will turn the call over to the operator for questions.

Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Sharon Zackfia with William Blair.

Operator: And our next question comes from the line of George Kelly with Ross MKM.

Operator: Our next question comes from the line of Sarang Vora with Telsey Advisory Group.

Operator: Our next question comes from the line of Joe Altobello with Raymond James.

Operator: And our next question comes from the line of Bill Chappell with Truist Securities.

Operator: And our next question comes from the line of Steve Powers with Deutsche Bank.

Tom Davin: Thank you, everyone, for joining the Q1, 2023 conference call today. And thank you also for the support of our mission at Black Rifle Coffee. Have a great afternoon.

Operator: And this concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.