Solo Brands, Inc. (NYSE:DTC) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Hello, everyone, and welcome to Solo Brands First Quarter Fiscal 2023 Financial Results. My name is Bruno, and I’ll be the operator of today. [Operator Instructions] 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’ first 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, 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 and 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 a discussion of these risks, including our soon-to-be filed quarterly report on Form 10-Q, 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’d like to turn the call over to John.

John Merris: Thank you, Bruce, and thank you for joining the call to discuss our first quarter results. I will begin by reviewing our Q1 performance, then provide an update on our key operational strategies. Somer will review our first quarter financial results and provide an update to our outlook. We are extremely pleased with our performance this quarter. Despite a volatile macro environment, we managed our business prudently and generated solid gross profit and healthy EBITDA margins. These results are a reflection of our disciplined focus on profitable growth and positive free cash flow generation. We are still in the early stages of our story as our household penetration remains low, and we believe we have significant white space ahead.

As such, even in a tougher economic environment, we believe that a renewed focus on customer experience and continued investment into product innovation, wholesale penetration and international expansion are good strategic uses of capital that position us for long-term growth. During the first quarter, our sales grew 7.3% to $88.2 million, driven by strength in the wholesale channel. As we stated during our fourth quarter call, we expected to experience strong momentum during the quarter, and we were encouraged to see larger replenishment orders than we expected, reflecting earlier sell-through at retail. Even so, our first high season of the year is just kicking off, and we will know more about full sell-through as we get through the rest of Q2.

Moving on to the direct-to-consumer. Our D2C sales were $54.8 million, in line with our expectations for the first quarter. The strength in our wholesale channel allowed us to be less promotional than the same period in the prior year without negatively impacting overall new customer acquisition. Our new products and innovation continue to be a draw for both new and existing customers, which is reflected in our consistently high referral and repeat purchase rates. In addition to new products, our team also continues to delight customers with a differentiated experience and outstanding customer service that reinforces the great experience that customers have with our products and strengthen the referral and repeat purchase behaviors previously mentioned.

Said differently, our unique ability to connect with and retain customers allows our business to better navigate through periods when consumers are making trade-offs. We delivered significant newness in 2022, and our new products have quickly become fan favorites. However, I want to highlight that our legacy products continue to provide a solid foundation for our company. They are the engine that creates a dynamic for strong repeat purchases and high referral rates. We will build on this momentum in 2023 as we execute on the playbook we laid out last quarter, elevate and innovate our products, broaden and deepen our wholesale partnerships and grow our business internationally. Starting with innovation. We are proud of the newness delivered over the past few months, and we look to build on this success going forward.

We have a history of continuous product innovation focused on delivering high-quality products for our customers. Our deep connection with our customers provides a feedback loop that allows for a shortened product development time line. As such, we continue to find new ways to innovate and expand our product line, and we are excited that we will continue delivering a healthy lineup of new products in the remainder of this year. Continuous product development not only helps attract new customers, but it is also easily marketable to our existing customer database, which drives repeat purchases, increases lifetime value and lowers our overall customer acquisition costs. Turning to wholesale. The conversations and feedback from our wholesale partners continue to be very positive.

Our focus is on growing our market share with our existing partners by expanding into new doors and increasing shelf space with existing doors. While the wholesale channel is very exciting, we are in the early innings of its growth story. To that end, we are disciplined in managing our sell-in rate by keeping a close eye on our sell-throughs. As I discussed earlier, our D2C heritage allows for us to have strong engagement with our customers. We are finding that there are great ways to build direct connections with our customers in the wholesale channel as well. The strongest brands are those that are able to maintain and build upon their connection with their customers by providing a fluid experience and presentation with both the direct and wholesale channels.

As such, we are excited about what our strategic partners are doing to build brand awareness in store, where we can establish a direct relationship with that customer. We believe that working with our retailers to develop greater brand affinity will lead to stronger sell-throughs and increased shelf space and our existing customers, all while driving healthy merchandise margins. And finally, we are also pleased with the performance of our international business and believe we are in the beginning stages in our global expansion. We have invested in local leadership in Europe and are enthusiastic about capitalizing on the significant growth opportunity in the EU. Additionally, we are exploring new markets, including Asia, and will be strategic as we determine the right timing to open these markets.

We continue to believe that our international business can grow to be the size of our domestic business. We are operating in an uncertain macro environment where consumers are being selective in their purchases. However, our direct connection to customers, combined with strong execution by our team in the 3 areas mentioned before, product innovation, channel expansion and international growth, create a wide competitive moat around our business and most importantly, create a foundation for years to come. Brands that are innovating and creating great products that lead to meaningful experiences will win, and that is our focus. Solo Brands is centered on a common mission to build a company that is great at facilitating moments that put smiles on faces across the globe.

I’m grateful for our amazing team, which continues to execute at the highest levels for each other and for our customers. We will maintain our disciplined approach to financial management, which we believe enables us to generate healthy growth, positive free cash flow and strong returns on capital over the long term for our shareholders. I will now turn the call over to Somer to discuss the financials. Somer?

Somer Webb: Thanks, John, and good morning, everyone. Today, I will walk you through our first quarter results and then provide our outlook for the remainder of 2023. We are pleased with our strong start to the year as we continue to execute on our growth strategy and deliver profitable results for our shareholders. Our first quarter results came in ahead of our expectations, driven by strong demand in our wholesale channel, continued success with new innovation and high referral rates. The strength in our wholesale channel reflects the increasing demand for our products and the deepening relationships with our retail partners. During the quarter, we experienced stronger-than-expected reorder volume from our retail partners as replenishment orders occurred earlier than forecasted.

Our wholesale momentum allowed for us to reduce promotions in our direct-to-consumer channel, where we saw inconsistent traffic trends. Furthermore, we are pleased by the flow-through of our revenue growth to EBITDA and our free cash flow generation during the quarter. Net sales increased 7.3% to $88.2 million compared to $82.2 million in the prior year period. Sales were driven by strong demand in the wholesale channel as we continue to increase our market penetration through increased shelf space and higher door count with existing customers. Wholesale net sales increased 52.3% to $33.5 million for the first quarter compared to $22 million in the prior year. Our direct-to-consumer net sales decreased 9.1% to $54.8 million for the first quarter compared to $60.2 million in the same period in the prior year as consumer traffic was lighter, but in line with our expectation.

Moving to gross margin. Our adjusted gross margin rate increased to 61.7% compared to 59.4% in the first quarter of 2022. The improvement was driven by lower promotions, primarily in our direct-to-consumer channel. Selling, general and administrative expenses for the first quarter decreased to $44.6 million or 50.6% of net sales as compared to $45.6 million or 55.5% of net sales in the same period last year. The variance was driven by $5.4 million decline in variable costs, partially offset by $4.3 million of higher fixed costs. The decline in variable costs was due to lower marketing expense driven by benefits from our data investment. The fixed cost increase was primarily due to higher employee-related expenses, including increased head count from investments that were made in Q2 of 2022.

Our first quarter net income was $0.9 million, and net income per diluted share was $0.01. First quarter adjusted net income was $10.3 million and our adjusted EPS was $0.16 per diluted share. We continue to invest in our long-term strategic initiatives in data, product innovation and international expansion while delivering adjusted EBITDA of $15.4 million and our adjusted EBITDA margin of 17.4%. Now turning to the balance sheet. At the end of the period, we had $25.7 million in cash and cash equivalents. As of March 31, we had $15 million of outstanding borrowings under the revolving credit facility and $95 million under the term loan agreement. The borrowing capacity on the revolving credit facility was $350 million as of March 31, leaving $335 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 1.5x. Inventory at the end of the first quarter was $125 million, roughly in line with the year ago. Turning to our outlook. We are reaffirming our full year guidance of $520 million to $540 million. In light of the current environment, we are currently forecasting revenue at the midpoint of our range and EBITDA margin in the range of 16.5% to 17.5%. Let me provide additional color to our forecast for the rest of the year. As we lean in the wholesale, revenue shifts between quarters may occur based on buying and ordering differences between the channel. Q1 showed stronger than we forecasted because we experienced some pull forward from our wholesale channel from Q2 to Q1.

We also recognize that the consumer remains selective in their discretionary purchases. Taking these items into account, while historically, our quarterly revenue breakdowns have been 15%, 25%, 20% and 40%, we now expect it to look more like roughly 17%, 23%, 20% and 40% as our innovation pipeline is second half weighted. In summary, I believe we are off to a strong start to 2023. Our growth story is just beginning, and I continue to be excited about our long-term strategic initiatives and outlook. We will continue to focus on executing and delivering increased value to our shareholders with an emphasis on healthy growth, increased profitability and strong free cash flow. I will now turn the call over to the operator to begin Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Robby Ohmes from Bank of America.

Operator: Our next question comes from Randy Konik from Jefferies.

Operator: Our next question comes from Chasen Bender from Citi.

Operator: [Operator Instructions] Our next question comes from Peter Keith from Piper Sandler.

Operator: We currently have no further questions. So I would like to hand the call back to the management team for closing remarks. Thank you.

John Merris: Great. Thank you all for being on the call with us today and for the questions. We always enjoy the opportunity to talk about the business. We’re obviously excited to perform in this environment and to continue to stand out from the crowd. So appreciate it. We look forward to being with you guys in a few months, and we’ll be available for follow-ups with some of you. So feel free to reach out through ICR and our IR team.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines. Thank you.