Solo Brands, Inc. (NYSE:DTC) Q3 2023 Earnings Call Transcript

Solo Brands, Inc. (NYSE:DTC) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Ladies and gentlemen, hello, and welcome to the Solo Brands Inc. Third Quarter Fiscal 2023 Financial Results. My name is Maxine, and I’ll be coordinating the call today.[Operator Instructions] I will now hand over to Bruce Williams to begin. Bruce, Please go ahead when you are ready.

Bruce Williams: Good morning, everyone, and thank you for joining the call to discuss Solo Brands third quarter results, which we released this morning, and it 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’s 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.

Those 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 files 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. Now I’d like to turn the call over to John.

John Merris: Thank you, Bruce, and thank you for joining the call today to discuss Solo Brands and our third quarter results. I will begin with a review of our third quarter performance and then talk more about our vision and strategy. Somer will then review the financials in more detail and provide our outlook. I am pleased with our third quarter results, which came in ahead of our expectations. We delivered sales of $110 million, an increase of 8% over last year and adjusted EBITDA margins have increased 250 basis points to roughly 14%. Our results were driven by strong sales through our wholesale channel as our brand momentum continues to grow. While we know that consumer wallets are stretched, we are well positioned to navigate an uncertain consumer environment, given the resilience and strength of our financial model.

Solo Brands generates healthy EBITDA margins, has low financial leverage, a balanced omnichannel sales approach and is capital-light leading to strong free cash flow. We are proud to report on the momentum that Solo Brands is gaining with our wholesale partners. For the quarter, our Wholesale revenues increased 114% compared to last year due to strong sell-in with new and existing partners matched with strong sell-through’s. Our sell-through’s have been solid because of the unique value that our brands offer to wholesalers, fueled by our marketing efforts, which help us connect directly with many new customers that are experiencing our brands for the first time. We attribute the success of our wholesale strategy to this. Our customers appreciate and value often, the same consumer who is shopping online today may find themselves in a jam tomorrow as they prepare for a birthday party or a wedding.

We have heard feedback from customers who are thrilled to be able to drive to a store to pick up a Solo Stove right then. Customers want optionality, and we are responding to their needs as part of our ongoing commitment to customer satisfaction. Allow me to remind you of our omnichannel strategy, which we rolled out at the beginning of the year. Our belief was that as we built our Wholesale business, we would inevitably cannibalize some of our online business in the near term. However, we expected that we would be able to drive many of those customers back to our site for the purchase of accessories and other products, and we are seeing that play out successfully. So far this year, we have witnessed a 23% increase in the customer group of first-time customers shopping on our website who are buying a firepit accessory.

We expect that the majority of these are customers buying Solo Stove firepits from retailers and then coming to our website to buy accessories showcasing our ability to build direct relationships with entirely new cohorts of customers. We are making connections with thousands and thousands of new customers who may be exposed to our brand for the first time and this is part of a strategy that will ultimately grow our brand and business over the long run. As an important reminder, from a profitability standpoint, we are channel agnostic because we see similar profitability in wholesale as we do in our online business. As an added benefit of our strategic wholesale partnerships, we are building our brand awareness at an accelerated rate, which we believe will lead to higher sales in both channels over time.

We are excited to work with retail partners who can optimize the in-person experience, allowing customers to interact with our products in new ways. We are accelerating our brand awareness through compelling shop-in-shop and in-store displays that enable us to showcase more of our product lines in a solo brands way and our customers are feeling the love. We have found great success in DICK’S Sporting Goods, Public Lands and Shields, where we have more robust displays and in-person experiences, and this is intentional and in keeping with a larger strategy. It’s part of our DNA to treat our customers just as well in physical stores as we do online. So we are seeing continuity in terms of the way that we connect with our customers. Nevertheless, we believe that we are very under-penetrated at retail and see significant runway to continue growing with our current retail partners through share of shelf and strategic marketing initiatives.

Currently, our enhanced presentation is in only 200 doors, driving increased productivity in those doors. The reality is, is that we are in 7,500 doors in total across Solo Brands. But from a shop-in-shop perspective, we’re only in a fraction of them. We believe there’s still substantial opportunity to build shop-in-shop experiences in many more doors, and we will continue this rollout with our current and future retail partners. To this end, we are excited to begin offering our products with new retailers, including Target this quarter, and we are very happy to report that we have renewed our partnership with REI in a meaningful way. We couldn’t be more thrilled to have the kind of growth we’re having this early in our story. As a brand that still believes we’re in our early days, the impact of this increased growth in retail is remarkable.

First and foremost, it’s underscoring the stunning synchronicity that’s occurring between our on- and off-line channels. We are working within our wholesale channel to protect profitability even while our retail partners are seeing great gains. No matter where we need our customers, the focus is on fostering a deeper connection, which is leading customers back to our websites. Solo Brands obsession with the customer experience has been part of our DNA from the start and we are happy to report that our approach is continuing to blaze trails wherever we go. I dig into this channel shift a little more, we believe that our retail growth places a halo over our entire business, creating a flywheel effect. As I stated, we have noticed a significant increase in customers that are purchasing accessories on our website, who have not purchased a Fire Pit on solostove.com.

Essentially, these would be customers that bought a fire pit out of retail and are coming back to our website to purchase accessories, hence the flywheel. The purchasing patterns of these customers result in the near-term pressure that we are seeing in our direct channel, however, we do believe that over time, this flywheel effect will extend the lifetime value of a retail initiated customer once they are in the Solo ecosystem. What does this all mean for Solo brand? It means we’re well on our path to reaching the omnichannel balance that we talked about earlier this year. We said that we were going to aim for more balance in our channel mix and our retail partners are leaning in to help turn our goals into reality. And while there are near-term headwinds to year-over-year growth for our e-commerce channel in the long term, we continue to expect that the brand exposure our new retail partners bring to the business, will create stability and solidarity for all channels.

I want to emphasize our view that Solo Brands expansion of wholesale relationships is not a diversion from our DTC expertise but part of an integrated channel strategy that allows us to build deeper connections with customers. Turning to product innovation. We are excited about our product launches during the quarter. We continue to be successful introducing Solo branded products where we believe that we have permission to play in the backyard category. Building on the momentum of our Pizza Oven Pi, the most successful new category that we have entered into after fire pits, we launched Pi Prime during the quarter. In addition, we introduced Mesa Torches, which rolled out in September. Mesa Torch brings entertainment, ambiance and backyard comfort via our innovative torches that customers can stake in the ground to enjoy a live fire and long-lasting life source with either a standard or a citronella insect repellent fuel.

While it is still very early, we have been pleased with the results of both of these launches. A year ago, September, we launched Mesa, our tabletop fire pit. We are continuing to see strong demand from Mesa from our retail partners and we believe that we have a long runway for growth with this product. Our focus on continuous innovation, combined with consistent feedback from our customers, enables us to offer new accessories and enhancements to our core products. We will continue to roll out innovation in the upcoming quarter. As part of our efforts to expand the Solo Brands into new capabilities and categories, we recently acquired two unique businesses: TerraFlame and IcyBreeze, both of these are great companies on their own, but we believe that they fit nicely within Solo Stove.

The TerraFlame acquisition allows us to safely bring fire inside and S’mores indoors. This addition also brings a proprietary concrete manufacturing facility giving us a new material and capability to include in our product innovation. While still small, TerraFlame is seeing significant year-over-year growth since joining the Solo family. IcyBreeze is a portable air conditioner and a cooler, which can use at the camp ground, the ballpark, on your boat or just in your backyard. We expect to integrate IcyBreeze into Solo Stove in 2024, and we are excited to add the supply chain, marketing and distribution scale to this extraordinary product as we move into peak selling season next spring and summer. While IcyBreeze is out of season in the winter months, we will introduce a new product innovation around the holidays, which will make IcyBreeze more giftable even out of season.

Innovation is driving greater market penetration by enabling customers in a wide variety of climates to manage home comfort. In colder climates, our products create a whole new living space that customers didn’t have before, fire pits and heaters on the deck. And in warmer climates, we have customers who love to make a nice toasty S’more, even when it’s 100 degrees outside. They can do that now with TerraFlame in their kitchen just as IcyBreeze allows customers to extend their outdoor living space during warm periods of the year, and this kind of value is immeasurable and helpful and expanding market share. So both of these new innovations are opening up opportunities for rethinking the way customers connect with each other around the home.

Solo is committed to making the outdoor living room experience as comfortable as the indoor living experience. and we will continue to look for strategic tuck-in acquisitions that will allow us to extend the Solo Stove brand across backyard and outdoor categories with the ultimate goal of helping customers create good moments and lastly memories. Additionally, we continue to expand our customization offerings. Ahead of the holiday season, we are excited to share. We have signed a new NFL licensing agreement. Customers can now support their favorite team, all while gathering with friends and watching the game or tailgating around our Solo Stove. In closing, we remain committed to a strategy focused on profitability and free cash flow generation.

This strategy allows us to invest in opportunities where we can continue to deliver growth and brand expansion and most importantly, build stronger and more direct connections with customers. At the end of the day, we believe that what’s good for our customer is good for our shareholders. The current environment remains uncertain, dynamic and hard to predict. We are focused on what we can control, which is to deliver the best experiences for great products. We provide a wide range of price points and an offering that meets the needs of our ever-growing customer base. As we look into the all-important fourth quarter, we have a lot of exciting things planned to reach new customers through unique and compelling marketing programs which we believe will stand out from the crowd and drive enthusiasm for our brand.

Before I turn the call over to Somer, I’d like to take a moment to thank her for all she has done for Solo Brands. She’s been a great partner to me and leader of our finance team. We will miss her and wish her all the best. 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 third quarter results and then provide our outlook for the remainder of 2023. We are pleased with our results for the third quarter, delivering year-over-year growth on both the top and bottom line. Our sales growth was driven by strong sales in our Wholesale channel. Our focus on generating profitable growth enabled us to deliver $15 million in EBITDA, a 33% increase over the prior year. Net sales increased 8% to $110.3 million compared to $102.2 million in the prior year period. Sales were driven by strong demand in the wholesale channel, which were partially offset by softer trends in our direct-to-consumer business. Wholesale net sales increased 114.3% to $34 million for the third quarter compared to $15.9 million in the prior year, driven by continued expansion of our wholesale network as well as increased shelf space within our existing partners.

We did experience some benefit in the quarter due to the timing of shipments as we shipped some wholesale orders early in preparation for the holidays. In addition, better partnerships with our retailers has led to a more normal seasonal sell-in cycle, which also impacted the timing of shipments compared to our more replenishment at-once orders that the company experienced last year. Our direct-to-consumer net sales decreased 11.6% to $76.3 million for the third quarter compared to $86.3 million in the same period in the prior year, driven by product mix combined with reduced digital marketing spend. Moving to gross margin. Gross margin decreased to 61.9% compared to 63.3% in the third quarter of 2022. Our margin rate was impacted by higher wholesale channel mix compared to a year ago, slightly offset by lower inbound freight expense, although our wholesale channel carries a lower gross margin than e-commerce both channels generate similar contribution margins.

Selling, general and administrative expenses for the third quarter increased to $61.3 million compared to $59.5 million. However, as a percentage of net sales, SG&A expenses decreased to 55.6% compared to 58.2% in the same period last year. Our third quarter net income was $3.1 million and net income per diluted share was $0.07. Third quarter adjusted net income was $15.2 million, and our adjusted EPS was $0.28 per diluted share. Adjusted EBITDA increased to 33% to $15 million, and adjusted EBITDA margin increased 250 basis points to 13.6%. Now turning to the balance sheet. At the end of the period, we had $16.6 million in cash and cash equivalents. As of September 30, we had $75 million in outstanding borrowings under the Revolving Credit Facility and $92.5 million under the Term Loan Agreement.

The borrowing capacity on the Revolving Credit Facility was $350 million as of September 30, leaving $275 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 of roughly 1.6x. Inventory at the end of the third quarter was $114.1 million, roughly in line with the year ago. We are comfortable with our inventory levels as we move into the holiday season. Turning to our outlook. I am pleased with how we’ve navigated a more difficult environment as demonstrated in our Q3 results. As we move into the fourth quarter, we recognize that the macro environment and consumer spending remains unknown. Nevertheless, we are excited about the pipeline of new products and the unique and compelling marketing plan we plan to rollout in the next few weeks.

With a significant part of our business in front of us, we are optimistic that we can continue to generate revenue and earnings growth. For fiscal 2023, we continue to expect revenue to be in the range of $520 million to $540 million with the most likely outcome at the midpoint of that range of $530 million, which reflects the pressure from the macro environment as well as the timing of shipments that pulled forward some revenue from Q4 into Q3. We also continue to expect to deliver adjusted EBITDA margin of between 17% and 18% for the full year. Before I turn the call over to the operator, I would like to thank the amazing team here at Solo Brands for the time together over the last 1.5 years. I have enjoyed being a part of the evolution and growth of this business, and I’m excited to see what goes in the future.

I will now turn the call over to the operator to begin Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Peter Keith from Piper Sandler. Please go ahead. Your line is now open.

Peter Keith: This is Peter. Good morning, everyone. Thanks for taking my questions. Well, first of all congratulate on the wholesale revenue, which looks great. But I wanted to just pivot, of course, to where the revenue is negative on the DTC side. And seems like it’s kind of trending in line with how you were talking about it last quarter, kind of in that down low double-digit range, and you pulled back on some of the marketing. But what’s really the outlook? And when could we think about DTC starting to pivot to seeing some year-on-year sales growth?

John Merris: Thanks, Peter. Good morning, everyone. That’s something that we’re very focused on. We talked about at the beginning of this year, as we leaned into wholesale, we expected pressure on direct-to-consumer. That has played out very much as we anticipated. And what we talked about, which I’ll reiterate is, I think as we roll into Q2 next year, and we get through — really to our next high season after we’ve anniversaried this lean into wholesale strategy. That’s when we’re expecting for the tailwinds of the brand exposure that wholesale bringing to us to play out in direct-to-consumer. So we’re still seeing an increase year-on-year, year-to-date on order counts online. So Stove is seeing an increase in order counts.

We are driving customers back to our site. It’s just a matter of getting those customers into that life cycle of the rest of the product categories that Solo Stove has to offer. So we do see that playing out. I think it’s the middle of next year and then through the back half of next year that we start seeing that on the DTC front.

Peter Keith: Okay. That sounds good. And then John, you’ve made some public comments around the EBITDA margin approaching 20% by the end of next year. I mean I guess as you stand here today, does that still seem like a reasonable goal? And maybe you or Somer could just help us understand the drivers of the EBITDA margin expansion?

John Merris: Yes, I’ll kick in and then — kick off and then have Somer later on if I miss anything. I think if we were to just continue to operate the business as is, independent of leaning into additional investments, we do see a line of sight to 20% EBITDA margin. I will say that lately, we started seeing opportunities to lean in and make additional investments. As we think about those, and we’re thinking about, obviously, we’re in heavy ’24 planning right now. We think that there may be opportunities in places we want to invest, which may impact getting to 20% next year, but it’s all going to depend on whether or not we decide to lean into those investments and how soon.

Peter Keith: Okay. Thank you very much.

Operator: Thank you. The next question comes from Chasen Bender from Citi. Please go ahead. Your line is now open.

Chasen Bender: Morning. Thanks for taking the question. John, I was hoping to start on the comment about Target. If you could just expand on the expansion there, specifically, is that just TerraFlame — or is that other brands as well? And then maybe just kind of comment on how many stores you’re going in? And is there any load-in expected in the fourth Q?

John Merris: Great, Chasen. Thanks. So the target expansion — so we’ve announced prior that TerraFlame already had a relationship with Target. That does continue, what we’re leaning into here and announcing is actually Solo Stove now launching relationship with Target. So we now will have Solo Stove product as of this quarter, going into roughly 2,000 Target stores for Black Friday, through Cyber Monday type promotion. We’re super excited about that. There is — again, it’s in our guidance and already kind of baked in, but something we’ve been planning on and excited to roll out this quarter. So you will see that product on the shelves the week of Thanksgiving, we’re really excited about that.

Chasen Bender: Got it. And then just more high level. Obviously, you alluded to the fact that the customers continue to come back to your own website after having purchased product retail. But I guess more kind of fundamentally as you continue to expand at retail, both new retailers and door space, expect that you’ll begin to sell a broader range of the product portfolio, including accessories, at retailer? Or will there always be some product you could hold back to be able to move customers from retail back to your own DTC channel and kind of retain that direct-to-customer relationship?

John Merris: Yes. I think that that’s right. The way you just stated that, I think it’s the right way to think about it. In part, it’s strategic on our part, but truthfully, there’s limited shelf space in physical stores. At the end of the day, retailers are looking to carry products that have highest sell-through that are going to help them move volume as well through their stores. So, the reality is that we have found a strategy that’s working really well for retailers. It’s getting popular SKUs on their shelves that are moving. And then it’s leaving some space for customers to come back to our site and to continue to participate with us. So every retailer is a little bit different. The strategy doesn’t look exactly the same across every retailer, and they all carry different lines.

But on an overarching basis, what you said is accurate that we believe that there will always be rumor and may be careful with the word always. But generally, we’re believing that there will be room for some products to be available only on solostove.com or in large part on solostove.com. And that’s the retail partners are carrying — your kind of baseline products that are driving the majority of customers into brand for the first time.

Chasen Bender: Got it. Appreciate the color. I’ll pass it on.

Operator: Thank you. The next question comes from Phillip Blee from William Blair. Please go ahead, Phillip. Your line is now open.

Sabrina Baxamusa: Good morning. This is Sabrina on for Phillip. Thanks for taking my question. could you provide further color on the upcoming marketing initiatives in the fourth quarter and the puts and takes there? Any efficiency on the lower DTC mix?