Soho House & Co Inc. (NYSE:SHCO) Q3 2024 Earnings Call Transcript

Soho House & Co Inc. (NYSE:SHCO) Q3 2024 Earnings Call Transcript December 19, 2024

Soho House & Co Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $-0.01.

Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Soho House & Co. Third Quarter 2024 Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session [Operator Instructions]. At this time, I would like to turn the conference over to Thomas Allen, Chief Financial Officer. Please go ahead.

Thomas Allen: Thank you for joining us today to discuss Soho House & Co’s third quarter financial results. My name is Thomas Allen, I’m the Chief Financial Officer. I’m here with Andrew Carnie, our CEO. Today’s discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in our SEC filings. Any forward-looking statements represent our views only as of today. We assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our third quarter earnings release, which can be found at sohohouseco.com in the News and Event section.

Additionally, we have posted our third quarter presentation, which can also be found in the News and Events section on our site. During the call, we also refer to certain non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Reconciliations for the most comparable GAAP measures are available in today’s earnings press release. Now let me hand it over to Andrew.

Andrew Carnie: Thanks, Thomas. And hello, everyone. Before we get into the quarter, I wanted to discuss another press release we published this morning. In July, Yucaipa retained financial advisers to do a strategic review of Soho House & Co to enhance shareholder value as they believe the inherent value of the company is not reflected in its current share price. Earlier this week, the Board of Directors of the company received an offer from a new third party consortium who has spent substantial time and energy understanding the company, including recent internal due diligence and time with management. The group presented an actionable plan with an offer of $9 per share that our Executive Chairman would support, a substantial premium to the current share price.

The offer is conditional on certain significant shareholders, including Yucaipa rolling over their equity interest in the company. As a result, our Board has reformed an independent special committee to evaluate the offer. Remember, our Board and their affiliates own approximately 75% of our common stock. Given that this work is led by independent members of the Board, as management, we are not able to address any questions regarding it on the Q&A. No assurances can be given that the special committee assessment will result in any change in strategy or if a transaction is undertaken. Until there is more clarity, we will also hold off on confirming a date for our Investor Day. Now I’m going to update you on the quarter’s highlights and provide an update on the progress we’ve made against our strategic priorities.

I’ll then hand over to Thomas to talk through financial performance, give an update on our balance sheet and our guidance before moving to Q&A. We continue to deliver against our strategic priorities of growing and enhancing membership and operational excellence to deliver greater profitability. Q3 has been another solid quarter with year-on-year and quarter-on-quarter growth in membership revenues and adjusted EBITDA. Membership demand continues to grow nicely. Membership revenues increased 17% versus the same time last year and 5% versus the last quarter. We welcomed 4,000 Soho House members growing to approximately 208,000 members globally while our waitlist remained at record highs. We now have 27 houses that have opened since 2018 and are still on their ramp-up phase.

Like recent quarters, these houses drove the majority of our membership growth. With really strong growth in houses such as Sao Paulo, Portland, Mexico City, Rome and Paris this quarter, we expect to see a continuation of this proven maturation curve in 2025 and beyond. Total revenues grew 14% year-on-year to $333 million. We again saw a slight sequential improvement in like-for-like in-house trends, driven by improved spend per visit with in-house revenues up 5% year-on-year. We saw like-for-like sales growth in our house in UK, Europe and the rest of the world, while North America was slightly behind. Scorpios, Mykonos had a record breaking season and we opened our second Scorpios in Bodrum. Soho continues to be strong with this quarter’s new collections and our first source book delivering double digit revenue growth in the quarter.

We continue to be excited about the opportunity for Soho. Q3 adjusted EBITDA was $48 million, growing 38% year-on-year but slightly below our expectations. That said, we continue to deliver good growth, leveraging strong membership revenue and our progress on operational excellence. This led to increased adjusted EBITDA margins of approximately 14.5% this quarter despite a choppy revenue environment. Net income was positive in the quarter, up from negative $49 million in the third quarter last year. When it comes to growing and enhancing membership value, we continue to focus on providing our members with the best experience in our houses, which we’ve seen reflected in our continued improving membership satisfaction scores this quarter. We opened Soho Mews House at the end of the quarter in London’s Mayfair area.

Our new house, the 11th in London, has three floors in a cobbled courtyard with an outdoor terrace and a restaurant and club space with a British Grill menu. On the top floor, we are providing our members with live performances in such a great space. So far, we’ve hosted Nick Cave, Jools Holland and Macy Gray among many others. We continue to deliver unique events in our houses. We again hosted Food Festival at Soho Farmhouse and introduced it to our national house this quarter. These types of events are resulting in more members attending our events and increased spend per member at events they attend. As well as opening great new houses and delivering unique events, we’re also continuing to focus on ensuring our members enjoy the best experience in our existing houses, whether that’s through training, our F&D offering, including our new no and low drinks offer or house improvements.

I was recently in LA visiting all our houses and teams and I’m pleased to see our investments in Malibu, Holloway House and West Hollywood are delivering enhanced member experience and also driving revenues. Our focus on operational excellence which leads to greater profit and cash flow continued over the period. We are driving change that both directly benefit our members as well as changes to simplify our business and transform our back-of-house systems. In turn, helping us achieve greater efficiencies, improved service and lowering our costs. This is an important strategic unlock for the business and we have made significant progress over the recent months. While this is having a slight drag on our quarter’s results, it will be a significant tailwind in the long run.

As part of this transformation, we continue to simplify our business and increase our focus on what matters most to members. Since the second quarter and into this period, this has involved restructuring of our corporate offices globally, including removal of roles that were not core to our long term strategy and reflecting our more targeted approach to new housing [revenues]. We have continued to focus on improving cost management through vendor consolidation and also a focus on improving our labor hours within our houses. Together, we’ve seen the initiatives drive positive results over the quarter. We increased food and beverage margins again over the period while our successful accommodations focus helped drive RevPAR up 5% year-over-year.

Q3 house level contribution increased 17% year-on-year with house level margins up approximately 150 basis points despite more new houses having a short term impact on our growth in margins. Now let me pass over to Thomas to give you more detail on our numbers and guidance.

Thomas Allen: Thanks, Andrew. Total revenues for the third quarter grew 14% year-on-year to $333 million, accelerating from 3% growth in the first quarter and 5% growth in the second. Membership revenue rose 17% year-on-year to $107 million while in-house revenues were up 5% and other revenues up 22%. House level contribution was up $9 million or 17% year-on-year with house level margins of approximately 150 basis points to 28% despite the short term impact of new house openings. Other contribution was up $5 million or 24% year-on-year, supported by a strong summer for Scorpios, Mykonos and continued growth in Soho Home sales. Giving more detail on revenues. Year-on-year revenues were up $40 million, driven by increases in recurring membership revenues, in-house and other revenues.

Membership growth and pricing drove a $15 million increase in membership revenues. In-house revenues were up $5 million year-on-year, supported by new house openings while other revenues were $19 million higher, driven by very strong growth in Soho Homes and Scorpios. Like-for-like in-house revenues for the quarter were up slightly year-on-year, an improvement from the approximately flat growth year-on-year we saw in the second quarter. Europe, rest of the world saw the strongest like-for-like growth in the quarter, followed by the UK then the Americas, which was down slightly. Note, we exclude Tel Aviv from our like-for-like calculation. Our third quarter adjusted EBITDA was $48 million, up 38% year-on-year with margins increasing approximately 250 basis points year-over-year.

However, while margins increased year-over-year, they weren’t as strong as we hoped. FX had an approximately 2% or $5 million benefit to revenue but had only approximately 1% or $0.5 million benefit to EBITDA as the pound strengthened significantly in the quarter. While this is helpful, the benefit to EBITDA is smaller than for revenue as our in-house costs are typically in the same currencies as revenue and the greater share of our support costs are in the UK. In addition, as Andrew touched on, we are taking steps to rapidly ensure our back of house performance matches the strength and operational excellence of our front of house. As you know, we have been investing in our finance team, adding additional expertise. We are making investments to try to replace our current finance enterprise resource planning or ERP software with a new industry leading cloud based system, led by our new Chief Transformation Officer who we hired last month.

The investment will overhaul how we manage finance, procurement, reporting and compliance, payments and staffing and more seamlessly connect to our membership and operations. It will allow us to scale more cost effectively, which is important for a company that is in over 20 countries today with plans to enter more in the next few years. As part of our overall investment to improve our back of house, we have also hired consultants to support the company to create a comprehensive plan and assist with the review of our books to make sure the data that will go into the ERP system has been checked over. The consultant costs this quarter were over $1 million. One other thing that came out of this was that we with continued investment in our finance team and the help of consultants found that through manual errors or systems not interfacing properly there were misstatements in our prior period financial statements.

These were from historical costs that have not been expensed or revenues that are not accounted for properly. This includes items previously found to be an error, which should have been deemed in aggregate and not material to address for until now. While correction of these adjustments as out of period corrections would be material in aggregate to the current period, we determined the impacts of these misstatements were not material to the financial statements for all prior periods identified. As a result, we have revised our 2022 through first half 2024 financial statements with the adjusted prior periods and revisions in our earnings release, 8-K and 10-Q with detailed explanations around the misstatements. The largest driver of misstatements came from a review of our North America segment balance sheet work that we have carried out ahead of the ERP.

North America is our largest region and handles over 150,000 sales invoices and over 100,000 vendor payments per year for over 60 corporate entities. This has generally been a manual process, which is therefore more prone to error. We have been investing in this area to remediate these issues. We have been adding other technology fixes that are helping the team until the new ERP system is fully up and running. We replaced our North America Corporate Controller with someone who has a lot of experience in remediation situations like this, and are increasing the size of our accounting team by around 50%. Now discussing our balance sheet. We ended the quarter with $147 million of cash and cash equivalents, $5 million lower than the end of the second quarter and $686 million of net debt.

We repurchased $13 million of shares in the quarter. We ended the quarter at 5 times net debt to adjusted EBITDA, down from 6 times at the end of the third quarter 2023. Moving on to guidance. We continue to see strong momentum in the core drivers of our business. We are reiterating our guidance for reaching over 212,000 Soho House members at end of the year and delivering membership revenue of $410 million to $420 million. However, we are lowering our total revenue guidance to the low end of the previous range to around $1.2 billion from $1.2 billion to $1.25 billion previously to down approximately $25 million from the midpoint. You’ve heard from some other companies exposed to food and beverage spend and accommodation revenue, the demand hasn’t been quite as strong as hoped heading into the end of the year.

While we enjoy the benefit and resilient to membership revenue gives us, we are tempering our expectations for in-house and other revenue. We’ve had a choppy end of the year. In October, in-house revenue saw the weakest month for like-for-like year-over-year growth we’ve seen since the first quarter, down mid-single digits. However, November was much stronger with like-for-like growth roughly flat. We’ve also had some unique factors impact us such a significant flooding that disclosed some of our facilities Soho Farmhouse across October through to December, as well as the recent Malibu fires, which temporarily close that property down. FX has also gone against us as the dollar appreciated significantly post the US elections. It’s worth reiterating here that while we do feel the impact of macro consumer discretionary trends, our membership loyalty and growth, which is the foundation of our business, continue to meet and exceed expectations.

We are also cutting adjusted EBITDA guidance to approximately $140 million from $157 million to $165 million, approximately $21 million below the midpoint of our prior guidance but still approximately 21% higher than our revised 2023 result. 3Q margins did not come in as strong as we had hoped and our revisions lowered first half ’24 by about $1 million. We continue to have costs associated with the ERP, which will weigh on results in the fourth quarter and the timing of restructure that we started in the second quarter and will finish in the fourth has also slightly lagged our prior expectations. $21 million lower EBITDA and $25 million lower sales is not the typical flow through we would expect some lower revenue if it was just business as usual, but we see approximately half of this as well as unique factors that we do not expect to occur going forward.

With that, let me hand back to Andrew.

Andrew Carnie: In closing, 3Q was a solid quarter for the business as we grew performance meaningfully compared to last year. It was also a quarter of continued transformation as we took further steps to simplify and strengthen the business, especially in our back-of-house operations. While this has created a lot of noise, it’s positioning us better for the future. And I believe we’ll continue to see the benefits of the transformation in 2025 and beyond. Finally, as always, I would like to thank our teams globally for their hard work and passion and our members for their continued support and loyalty. With that, we will now open up for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Steven Zaccone at Citigroup.

Steven Zaccone: Congratulations on the offer. Maybe, Thomas, could we just talk through some of the last commentary you gave there about the guidance change. So it sounds like $21 million reduction in EBITDA, approximately half of that we should think is onetime in nature as we think about next year? And then just on the cadence of like-for-like sales. When you talked about some of that weakness in October and then things got better in November, was there notable differences by region, like was it primarily continued weakness in the US underperforming? Any geographical comment would be helpful there.

Thomas Allen: So I’ll start with the first part of the question and then pass it on to Andrew to talk about the recent trends. So as we said in the prepared remarks, we continue to see strong momentum in the core driver of our business, which is membership. However, we are lowering total revenue guidance. You’ve heard from other companies exposed to food and beverage spend and accommodation revenue, the demand hasn’t been quite as strong as hoped heading into the end of the year. We are no different except that we have membership revenue. So we’re tempering our expectations really for in-house and other revenue. We’re also cutting our EBITDA guidance. Our third quarter margins came in slightly below where we expected them to.

We will continue to have costs associated with the finance ERP, which will weigh on results in the fourth quarter and then the timing of the restructure was slightly lagged to our prior expectations. As I said, about half of the guidance change was unique and we do not expect to recur going forward, such as the flooding impact at the Farm, we had about $1 million of revision in the first half, while we’re also investing in the future with the time of restructure, the pre-ERP work and some other financial consulting costs and just other unique items.

Andrew Carnie: Steven, just on the trends. So I think what we said in our prepared remarks, we saw a slowdown in UK and America in October, both impacted by pretty sizable macro events, well documented UK budget that we saw a slowdown in UK, and then on the buildup to American elections, we saw a slowdown. In November, both those regions bounced back. So Europe was pretty consistent and Asia is actually doing okay. So it was mainly UK and USA that we saw the change.

Steven Zaccone: And the last question I had is the opening of Mews House this quarter. Can you just talk a little bit more about the strategy there? You already have Malibu, but when you think about the opening of Mews House, do you see the opportunity to do more of like an elevated tier of houses or elevated tier of membership going forward?

Andrew Carnie: We couldn’t be more happier with Soho Mews House, and I think our members couldn’t be more happy. So it got off to a phenomenal start. We’re providing a more elevated house than what we would normally do, both in the design aesthetic and both the menus, the British Grill menu and then the events that we put on, as I mentioned in my prerecorded remarks our pretty special artists. At the moment, it is — we are looking at New York as a potential Mews House and also, we have Ibiza coming as well in the summer next year, which will be in similar vein. So we’re really happy with how it’s worked. And yes, we are looking at other ways that we can roll our concept out.

Operator: We’ll go next to Shaun Kelley at Bank of America.

Shaun Kelley: Andrew, Thomas, just first on the — I know it’s always difficult to comment on the strategic alternatives piece. But anything you could do to outline kind of one or two areas. One would be just sort of next time line or milestone. When will we know a little bit more, at least on the public side, about kind of what’s occurring here, either is there a time line for the review, is there milestone or additional filings that need to be provided? And two, any — obviously, it’s a third party consortium, but just any clarity or when we might receive a little bit more clarity about who that is or what the financing sources may be?

Thomas Allen: Shaun, I’m going to give you pretty a disappointing answer. As we said in the prepared comments, we’re not going to comment on the offer.

Shaun Kelley: Second question is maybe just digging in a little bit. So here kind of all the — thanks for the bridge and we hear sort of all the different pieces moving together here. But as we think about just like purely fundamentals, we’ve heard more and more about some uptick in the travel world post election, especially here on the Americas side, probably some component of pent-up demand, a little bit of excitement around just sort of probably some certainty moving forward. So have you seen that in your business? Can you talk a little bit about bookings December? Just give us a little color because, again, we parse everything from RevPAR data to a lot of the airline commentary that’s cut out there. Things actually look pretty rosy after the election and appreciate it was a tough October.

Andrew Carnie: So we’ve seen something similar, if you remove all the noise of the one-offs like the Farm and fires at Malibu and all the things that Thomas has mentioned, we’ve seen in the last few weeks an uptick but in more particular, which I think is much more of a positive is Q1. So our Bodrum business in Q1, the bookings we have are now looks very strong in Q1, very strong, which is a great sign of what you’re describing on more of a positivity around 2025.

Operator: We’ll go next to Stephen Grambling at Morgan Stanley.

Stephen Grambling: I’m going to take one more stab on the deals, which I guess without any comment explicitly on anything. I guess is there anything you could maybe provide in terms of compare and contrasting? It sounds like you had a strategic review earlier in the year with a separate offer. So I guess I’m just wondering if there’s any framework that makes looking at this one different or if there’s any takeaways from the original review that you could share?

Thomas Allen: I mean, given the fact that this is really a board decision, we’re going to stick with not commenting on it.

Stephen Grambling: And then I think I heard in this — this has come up a couple of times, but you made a comment that the third quarter like-for-like in North America, I think, was weaker, then it’s been choppy October, November time frame. And I think you touched on this a little bit, maybe I missed it. But just is there — are there specific houses in the third quarter? Like when you put on a broader lens, what do you think has been driving some of that choppy behavior?

Andrew Carnie: We — candidly, we saw it across the board in the run-up to the election in America. And then post election, we’ve seen the more positive bounce back in New York, Central Miami, West Coast lagging a little bit. But it was mainly across the board of what we saw in Q3, which we — and it was only slightly down. But I think to my earlier point, if we look at Q1 in our bedroom business in America, it’s up versus Q1 2023, which is a positive sign.

Stephen Grambling: And one other one I’ll sneak in quickly, just on the cost side. Thomas, I think you said that the accounting team has been increased by something like 50%. You also had a comment that the flow through in the quarter is below what you would normally expect. But I think we’ve seen these kind of ERP processes sometimes take longer than people anticipate. Is the — should we be anticipating that 2025 may still be a bit of an investment year behind some of these initiatives and then we’ll get to more normalized flow through thereafter, even better flow through beyond 2025 because of some of what’s being implemented?

Thomas Allen: So the cost of the ERP and some of the other transformation stuff, yes, will have an impact. But as we talked about in the prepared remarks and as you can see from our financial statements, we took pretty significant severance charges over the past two quarters and we’ve really shifted focus within the company. And so if you look at the size of the severance charges, I mean, it could give you a good sense of the savings that we’re going to make out of other parts of the business to invest in and getting our forecasting and our controls and our core tech operations into a better place.

Andrew Carnie: But just I’ll give a bit more color. On the ERP, yes, it will be a transformation through 2025. And then we see — once that’s done, we would see significant savings like in a phase two of our efficiencies within our teams and efficiencies with running the business. So yes, you will see a better flow through once ERP is in than what you’re seeing today.

Operator: And that concludes today’s question-and-answer session and today’s conference call. We thank you for your participation. You may now disconnect.