Solo Brands, Inc. (NYSE:DTC) Q3 2024 Earnings Call Transcript

Solo Brands, Inc. (NYSE:DTC) Q3 2024 Earnings Call Transcript November 9, 2024

Operator: Good day, ladies and gentlemen, and welcome to the Solo Brands, Inc., Third Quarter Fiscal 2024 Financial Results Conference Call. At this time, I would like to hand things over to our speakers for today.

Mark Anderson: Good morning, everyone, and thank you for joining the call to discuss Solo Brands’ third 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, Chris Metz; and Chief Financial Officer, Laura Coffey. Before we get started, I wanted 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 and 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.

Actual future 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 in the Investor portion of our website at investors.solobrands.com. Now, I’d like to turn the call over to Chris.

Chris Metz: Thank you, Mark, and thank you all for joining us today. I will begin by discussing our third quarter performance and then update you on our strategic vision for our brands. Next, I’ll highlight how our strong balance sheet and cash flow provide the flexibility to invest in our business, building the foundation for long-term growth. Then I’ll turn the call over to Laura to discuss our financial results in more detail and our outlook for the year. Our third quarter results were in line with our expectations despite a continued challenging macroeconomic backdrop for big ticket consumer durable items. We delivered total revenues of $94.1 million and adjusted EBITDA of $6.5 million. Sales in our direct-to-consumer channel declined 16%, as the lack of product newness and unseasonably warmer weather impacted traffic during the quarter.

Q&A Session

However, we continue to see strong momentum and excitement from our retail partners. Sales in our retail segment increased 10% excluding a onetime barter agreement of $7.2 million in 2023 that we did not anniversary. Despite the top line challenges, I am pleased that our brands remain strong, with leading market share positions and healthy gross margins. Our customers continue to exhibit a strong affinity and loyalty for our brands. As we move into our largest volume quarter of the year, our fourth quarter, we are encouraged by early sales trends. While, we recognize the majority of the season in front of us, we feel good about how we are positioned and our reaffirming our full year guidance. When I arrived at Solo, my strategic imperative was to clean up the business and put us on a path to return to growth.

We identified five key priorities that would return us to our winning ways. Our first key priority for 2024 was to develop a comprehensive strategic plan. We embarked on new strategic plan, and are now focused on executing against that plan in order to remove obstacles and friction and lay the foundation to enable long-term sustainable growth. As such, we are focused and driven to transform the company that will be built on new product innovation, getting closer to our customers through integrated full-funnel marketing campaigns, optimizing our channel distribution and implementing operating discipline across the organization. A part of this was evaluating the performance of the portfolio, and determining which brands to invest in, where to allocate our capital, and fixing our baseline systems and processes.

While it has been a heavy lift, I am pleased with the progress our teams have made in a relatively short period of time. Our second key priority was to recruit a talented team and build our capabilities. We now have an entirely new leadership team in place, and the next level down comes with, been there, done that experience. Additionally, we have jettisoned poor performing partners and agencies and have replaced them with industry-leading firms, which we expect will contribute significantly to our brand marketing and product innovation, leading us to a return in growth in 2025. I’m confident we now have the right team and partners in place to execute our strategic plan. Our third key priority is to develop an innovative new product pipeline.

We know that innovation is important to our customers, and we have a few small launches planned for the fourth quarter. We recently rolled out Surround Lite, a portable version of our successful Surround accessory that was introduced last year. In addition, we have also rolled out a new cookout kit that transforms your firepit into a grill or griddle and enables you to cookout on the go, whether it’s tailgating at the football game or having a portable grill for picnics. We’re proud of our partnership with the NFL to introduce Solo Stove and Chubbies NFL branded products. At Solo Stove, our firepits and the new Surround Lite offer the ability to customize with an NFL logo of your favorite team. At Chubbies, we rolled out the Chubbies unique spin to NFL team logo to apparel.

We began with a 12 team rollout, and the initial customer response has been fantastic. In fact, we sold out our initial shipment of product within the first 48 hours of launching online. We will be rolling out NFL by Chubbies logo to apparel to all 32 teams over the coming quarters. Our retail partners have told us that they love our brands and want more innovation from Solo and we are taking a much more strategic, and in some cases, collaborative approach to the product development with our retail partners that we believe will be well received in the marketplace. As we look into 2025, we’re actively filling our product development and pipeline with new and exciting products that will enhance and expand our core. We also plan to enter into three new near adjacent categories that will significantly expand our TAM.

When I started earlier this year, we began a thorough consumer research study to inform us of this opportunity. We surveyed 1000s of our customers, and we believe they have given us permission to enter into these new categories with products that will be very innovative with unique features. Our fourth key priority is to develop a more comprehensive and balanced omni-channel strategy. We continue to see strong momentum in our retail channel. Moving forward, we are in discussions with and plan to open up new doors with several key retailers. In fact, we have 130 store test with a significant national retailer for Solo Stove that will begin in Q4. We’re also bringing a much more strategic go-to-market approach to our retail partners. We have brought in talent to build out our retail organization that can go after opportunities by retail segment such as marketplaces like Amazon, to club channel and big box specialty, which should help maximize our opportunities of retail.

We are underpenetrated in this channel, and believe we have a long runway of growth ahead of us. I’m pleased that retailers are valuing our partnership, which is bringing newness and excitement to their product assortment. As I stated previously, our consumer research has informed us that about 50% of shoppers look to purchase their products in store. As such, we are under penetrated in retail today and this is a key reason for building out a more robust retail go-to-market capability. While we want to be selective with the retailers we partner with, we want a balanced omni-channel approach that allows for consumers to shop when, where and how they want. And our last key priority this year is to stabilize our DTC channel. Within DTC, we continue to experience challenges due to our lack of product newness, our overreliance on performance marketing spend, a suboptimal web experience, and some cannibalization due to our growth of retail.

We’re actively putting the pieces in place to stabilize and eventually return our DTC business back to growth, led by product innovation and a new website. Next year, we will completely relaunch our Solo website in conjunction with a world-class Salesforce platform that will have more capabilities for us to showcase our products in a different way to curate a better shopping experience and enable us to deliver more relevant content to our consumers. As we execute against our strategic plan to be a leader in the outdoor entertainment segment, we will continue to lead with innovation. We have raised the standards of product quality that reflect the brand attributes of Solo Brands. Having said that, we made the decision this quarter to wind down our IcyBreeze reporting unit.

While we believe in the market opportunity for outdoor portable cooling, the new products launched under IcyBreeze this year did not meet our standards. Therefore, we have decided to move quickly and decisively to take a non-cash charge to write-down the inventory and related goodwill and intangible assets this quarter. While we are disappointed with our performance and execution of IcyBreeze, we still own the patents and plan to relaunch cooling products under the Solo umbrella brand, starting in 2025. During the quarter, we also took additional aggressive and decisive measures to address factors that were hindering our growth, including a charge for terminating our contract with an underperforming legacy marketing arrangement. Laura will take you through the specifics of the write-downs and charges, but we made a lot of progress over the past nine months, and as a result of these actions, are in a much better position as we move into next year.

Next I would like to discuss our decision to consolidate ISLE Paddle Boards and Oru Kayaks into a new water sports division. While developing our strategic plan, we came to the conclusion that consolidating the divisions will realize synergies and results in a more profitable water sports platform than keeping them as two standalone businesses. While category growth has been soft over the last few years post COVID, we’re beginning to see signs of growth. Product innovation has been key, and we’re gaining good traction with our new Tommy Bahama branded paddle boards in our Oru fishing kit kayaks that are selling out. We believe that under this reorganization, we have the right team in place to drive long-term growth and profitability in this division.

Moving on to marketing. Our focus in Q4 is bringing more balance between top-of-funnel brand building and bottom-of-funnel conversion. Our Snoop campaign this year is a representation of a full-funnel marketing approach that has been great for increasing brand awareness, but also driving a call to action. You’re seeing a continuation of this marketing balance with our partnership with the New York Islanders, which started in Q4, and we expect to realize additional benefits throughout next year. Although Q4 is a heavily promotional time of year for us, a focus of remaking our marketing strategy is to be less reliant on promotions and performance marketing, and rather than leaning into full-funnel brand building. As a reminder, we’re just getting started on our new marketing strategies, but we’re excited about all of the new initiatives that we have coming in 2025.

This year has been a heavy lift to clean up the business, and this quarter, we had to take write-downs to shore up our foundation. I’m excited about our progress and look forward to entering 2025 with momentum and a stronger foundation. The organization is working hard behind the scenes, implementing our strategy work around product, marketing, distribution and talent. We’re developing a long-term strategic product roadmap, implementing new marketing strategies that will be more balanced, and we’re working closely with our retail partners to open up new doors and gain share of shelf. We believe that our strategic initiatives around product and marketing will help stabilize and grow our DTC business. Our strong balance sheet and healthy gross margins, give us the ability to reinvest in the business to position us for growth in 2025 and beyond.

This effort to transform the business and our culture could not be possible without the hard work of the people within this organization, and the contributions from the talent and capabilities that we’re bringing on board. I will now turn the call over to Laura. Laura?

Laura Coffey: Thank you, Chris, and good morning, everyone. Today, I’ll walk you through our third quarter results and provide you an outlook for the remainder of fiscal 2024. During the quarter, we made significant progress on our strategic initiatives. As a part of this effort, we took several onetime charges primarily related to cleaning up our business this quarter. We’re confident that the actions taken position the company for improved profitability in 2025 and beyond. Turning to our quarterly results. Third quarter sales were $94.1 million, decreasing 14.7% compared to a year ago as sales growth was impacted by a lack of product newness and continued macroeconomic challenges that have put pressure on discretionary spending for big ticket consumer durable.

In the direct channel, revenues declined 15.5% to $64.5 million in the third quarter, primarily due to lower site traffic that we have experienced throughout the year. Retail revenues were $29.7 million, decreasing 12.7%. Last year’s retail sales of $34 million included a onetime barter agreement of $7.2 million that we did not anniversary this year. Excluding this onetime barter agreement, sales in our retail segment increased to 10%. Turning to gross profit. Our gross profit was $39.3 million for the quarter compared to $68.3 million a year ago. Gross margin was 41.8% for the quarter compared to 61.9% a year ago. During the quarter, we took an $18.7 million write-down of inventory and related purchase orders charge related to the wind down of our IcyBreeze reporting unit as a part of our restructuring, contract termination and impairment activity.

Adjusted gross profit, which excludes these charges, decreased 14.8% to $58.3 million and adjusted gross margin was 61.9% compared to 62% a year ago. Selling, general and administrative expenses for the quarter increased to $61.1 million compared to $57 million a year ago. As a percentage of sales, SG&A expense increased to 64.9% of sales, compared to 51.7% a year ago. The increase in SG&A expense was primarily due to a change in fair value of contingent consideration related to certain of our 2023 acquisitions. This was offset by reduced distribution costs associated with the decline in revenue and a reduction in certain employee-related benefits, such as performance bonus expense. During the quarter, we recognized $83.6 million in onetime charges associated with restructuring, contract termination and impairment charges.

Approximately $43 million is related to the impairment charges as a result of the wind down of the IcyBreeze’s reporting unit and impaired marketing credit associated with an underperforming legacy marketing contract. We also recorded a $25 million goodwill impairment charge at our Stove reporting unit due to the sustained decline in the share price. There were approximately $15 million of contract termination charges, primarily related to charges to exit the legacy marketing contract, and nearly $1 million of restructuring charges. Of these charges, approximately $74 million are non-cash. Third quarter net loss was $111.5 million. Adjusted net income was $1.4 million, and adjusted EBITDA was $6.5 million. Adjusted EBITDA margin was 6.9%. Turning to the balance sheet.

At the end of the period, we had $12.5 million in cash and cash equivalents. As of September 30, we have $75 million in outstanding borrowing under the revolving credit facility and $87.5 million under the term loan agreement. The borrowing capacity on the revolving credit facility was $350 million as of September 30, leaving $274.4 million of availability, and we are in compliance with all of our debt covenants. We continue to be disciplined with our inventory, and are pleased with the composition of our current inventory levels. Inventory at the end of the quarter was $106.8 million, down 6.4% from a year ago. Moving to our outlook. We are reaffirming our fiscal 2024 outlook. We continue to expect fiscal 2024 revenues to be in the range of $470 million to $490 million.

We also expect adjusted EBITDA margin to be in the range of 9% to 10%, as we make the necessary investment to position the company for long-term growth. In closing, we have embarked on a new strategic plan and are now focused on executing it to remove obstacles and establish a foundation for long-term sustainable success. As such, we are focused and driven to transform the company that will be built on innovation, getting closer to our customers through integrated full-funnel marketing campaign, optimizing our channel distribution network, and implementing operating discipline across the organization. While it has been a heavy lift, we’re pleased with the progress the teams have made in a relatively short period of time. Now with that, I will turn the call over to the operator to begin Q&A.

Operator: [Operator Instructions] We’ll go first to Anna Glaessgen, B. Riley.

Anna Glaessgen: Hi guys. Anna Glaessgen. Thanks for taking my questions. I guess, I’d like to start thinking through the balance of DTC and wholesale through the end of the year and as we start framing up 2025 expectations. I fully appreciate your commentary, Chris, around wanting to fine-tune DTC, and I understand the — or the website relaunch in 2025. But how should we be thinking about kind of the key milestones to get to DTC inflection and a rough time line to get there?

Chris Metz: So Anna, it’s a really good question. It’s something that, as you might imagine, started back when I first walked in the door as we laid out our strategic plan. And much of our strategic plan is focused on how do we simultaneously continue to lean into the growth that we’re seeing at retail while we also stabilize our DTC channel. And so all of our research has been informed by deep, deep consumer market research where we literally talk to 5,000 to 10,000 different consumers across all of our brands, but over 5,000 on the Stove brand in particular. And so what they told us was that, 50% of the market is shopping at retail. So we know the importance of this channel, and we’re building out capabilities against this channel as evidenced by the growth that you see, and we think it will only accelerate into 2025.

We’ve just now signed a deal with a large national chain that we’re going to — is going to represent the brand really, really well. We’ve got 130 store tests that we’ll be rolling out here in Q4. And we think we’re going to expand further with strategic customers in this channel in 2025. Now DTC, we know what the anecdote is for DTC. First and foremost, we have to develop a new product innovation pipeline that increases the interest and increases the excitement of our user base. As we mentioned a call ago, our Net Promoter Score is in the top one percentile of all outdoor brands with the Solo brand. So we know consumers are looking for more from us. When we move into near adjacencies like we did with the Pizza Oven, inside of three years we’ve gone from zero share to number two in the marketplace.

So we know as we increase our innovation and we’re able to feed it through an effective pipeline with our website, we know it will be effective. So a lot of efforts over the past nine, 10 months is setting up not just the product innovation pipeline, but also the new website that we’ll be bringing on stream in the early part of 2025. This will give us UX, UI capabilities that will allow us to story tell in a really, really rich manner with new content and new products and be able to curate a consumer shopping experience that has — that will remove much of the friction and time to transact online today. So we can see the traffic that we generate online, the sessions that we’re generating online, and we can see the friction before our consumers transact.

So we know where the problem areas lie, and we’re fixing them as quickly as we can. So when you all think of the cadence of next year, you should see an acceleration of our retail business. I think you should look to a stabilization of our DTC business in the first half, and we would hope this would return to more normalized DTC growth in the second half as we have a new platform online, as we have innovation online. And as frankly, we’ve got the impact from the capabilities and the talent that we’ve been recruiting in over the past nine months. I didn’t even mention that and probably should have started with that, that the talent that we’re bringing in is incredible world-class talent. From my leadership team to the next level down, we’ve got been there, done that talent with folks that really understand how to build a highly coveted brand consumer durables products company.

So we like the progress. We know we’re still in the early innings of our turnaround, but everything we’re doing is pointing to a recovery here as we move into 2025.

Anna Glaessgen: Great. And thanks for all that detail. Chris, I guess, I’d like to follow up on your last line of commentary there about the talent. I think when we spoke last quarter, you referenced oversight or the extent of — or the size of the department that’s overseeing wholesale needed to be expanded. Where are we in terms of your satisfaction with the team that’s in charge or I should say, retail and overseeing retail partnerships?

Chris Metz: Anna, another great question because it’s such an important growth channel for us. So I’ve been calling on retail wholesale for the 35 years of my career. I was with Bernie Marcus and Arthur Blank back when Home Depot started, and we’re rolling out stores back in the late ’80s and early ’90s. And so understanding the capabilities there is paramount. And when I walked in the door here, we had one person running the entire sales organization, one person. And so what we’ve done is we brought in a head of sales who has worked for me previously, understands multichannel retail selling environment. And he’s now gradually built up a national account manager team. So now we’ve got three national account managers calling on different areas of distribution, so we’re building those partnerships, we’re building the framework to be able to not only get into these stores, but importantly, be able to merchandise the stores properly.

And then in parallel with that, this gentleman, John has hired analytics to help us analyze how much we should be selling, how much the sell-through is, how do we replenish at a point-of-sale rate to — that matches. And so we’re building the capability really, really quickly. And you see it in our numbers. I mean, we’re not only selling into retail and growing, but importantly, we’re selling through. And a lot of the work internally here from new products and merchandising and everything else will only enhance the shopping experience that, frankly, as I walk through retail with our key partners, we can be doing better. We can be showcasing and curating our product and storytelling at — in the showroom floors of our retailers in a better way.

So I’m excited with where we’re at and the progress we’ve made. But more importantly, I’m encouraged by where we’re headed with this team.

Anna Glaessgen: Great, thanks. That’s it for me.

Chris Metz: Okay. Thanks Anna.

Operator: [Operator Instructions] We’ll go to Ryan Sigdahl, Craig-Hallum.

Matthew Raab: Good morning, guys. This is Matthew Raab on for Ryan. Just want to kind of circle back to the trends into Q4. It seems to be encouraging. It kind of sounds like wholesale is driving that strength with 140-some doors opening up. Just kind of talk more about what the trends you are seeing maybe on promo intensity. Are you continuing to see bundle strength into the next quarter?

Chris Metz: Yes. So Matthew, first of all, I’ll jump back to kind of the close of Q3. So the trends we saw towards the end of Q3 were, frankly, a little bit discouraging for us, right. Where September, typically the start of our — the height of our season after Labor Day, it was a warm fall. And so it affected the interest in the category and it affected the sell-through as we closed down Q3. Now as we moved into Q4, we start seeing more seasonal weather. We start getting into really the heights of our period. So we’re seeing increased traffic. We’re seeing increased interest in the category, and this is both online and at retail. So there’s no question that the most important time of the year for us is the next 60 days. And so we are focused on this season, and we certainly like the start to Q4 that we’ve seen so far, but we recognize it’s still early days.

Matthew Raab: And then I guess sort of with that on the Snoop ad that came out, it was in August, it was certainly blunt, pun intended. Any metrics you’re willing to share on maybe the sales uplift, viewership, impressions, conversion, just anything there?

Chris Metz: Yes. So we’re — again, we’re encouraged by what we’re seeing from Snoop. I mean, we saw the viral interest that it created last year. But as I’ve alluded to in previous calls, we didn’t really have a full-funnel attack against the Snoop media and impressions that were being built. This year, we’ve got a much more thoughtful approach built by our marketing team and we just really started leaning into it. So you’ll see Snoop — if you haven’t seen him already, you’ll see him in a variety of different places, all very thoughtfully done against the personas and user groups that we know are strong followers of our brand. And so the early days of what we’re seeing so far is we’re seeing an increase in traffic. We’re seeing our AOVs increase.

And we’re also seeing stronger ROAs as we start to convert people with the spend that we’re spending. So we’re encouraged. And again, I’ll hold off by saying we really like our setup for the next 60 days, but it’s a big 60 days for us. And so we got all hands on deck ready to deliver the Q4 and the guidance that we’ve given.

Matthew Raab: Okay, got it. That’s it for me. Thank you

Operator: And everyone, at this time, there are no further questions. I’ll hand the conference back to our speakers for any additional or closing remarks. Actually, we did just get a question. It’s from Anna Glaessgen, B. Riley.

Anna Glaessgen: Hi guys. Just figured I’d hop back in here. I wanted to touch on the comments about kind of refining the promotional strategy. As I opened the website today on Solo Stove, all the firepits were at full price, which is a bit of a shift from the legacy approach. Can you talk about maybe the consumer reception to this more full price selling approach as well as potential impacts to gross margin as we contemplate lower promotionality in the go-forward period?

Chris Metz: Well, Anna, it’s a good question, and thanks for noticing that. One of the issues that we’ve uncovered since the day I walked in the door is that we’ve just been too reliant on performance marketing. And it’s no secret that performance marketing has only increased the cost per transaction. And with a brand like ours, we want to be less promotional long-term. We want to be less on sale every day. And so that is a big concerted effort of ours. But it doesn’t happen overnight. It’s quarters and potentially years in the making. So what you’re going to see from us over the next 60 days is we’re going to be much more promotional. And we’re going to make them special promotions curated towards the personas that we know are attracted to our brand.

So don’t take what you’re seeing right now as an indication of anything other than one. We do want to be less promotional during periods of time where interest isn’t as heightened as it will be during other times of the year. So as we start to move through November here, you’ll see us get more promotional. So as we get to Black Friday and Cyber Monday in that really, really important time of year, you’re going to see us be very promotional. We anticipate, given the pinch that we’ve seen in the consumer pulling back on high ticket items that are discretionary like ours, we know we’re going to have to be more promotional. So that’s built into our gross margin guidance that we’ve given for the full year. And so we like the setup that we’ve got to be as promotional as we need to do — as we need to be to drive sales.

Anna Glaessgen: And just one more for me. Could you touch on how Chubbies performed in the quarter and an update on how big that is to the business today?

Chris Metz: Yes. So we’re very pleased with the performance of Chubbies. Chubbies is a mature team. It’s — in many respects, it has some of the muscles built that we’re building in Stove in a smaller way, right, because Stove is still a much bigger platform. But Chubbies continues to grow. It continues to expand its product assortment. It continues to generate interest with leagues like the NFL, which has just been fantastic. I mean, so owning the weekender is a critical piece for the Chubbies team. And so they’re selling well online. They’re selling well through retail. And so we see a lot of growth ahead for this Chubbies brand and couldn’t be more excited about building that dual platform approach where we’ve got an apparel platform and we got a hard goods platform with our Stove business and our fishing platform.

And so we have discovered some synergies between the platforms as it relates to distribution and fulfillment and some of our corporate G&A. And so getting closer to that business, I couldn’t honestly be more excited about the prospects of that business for us.

Anna Glaessgen: Thanks guys. Best for luck.

Chris Metz: Okay. Thanks Anna.

Operator: And everyone, there are no further questions.

Chris Metz: All righty. Well, listen, I’ll close down by saying thank you for everybody’s attention and continued support. And we’ve got a big next couple of months ahead of us, and we’re poised to deliver. So thank you.

Operator: Ladies and gentlemen, that does conclude today’s conference. We would like to thank you all for your participation. You may now disconnect.