Traeger, Inc. (NYSE:COOK) Q1 2024 Earnings Call Transcript May 10, 2024
Traeger, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Nick Bacchus: Good afternoon, everyone. Thank you for joining Traeger’s call to discuss its First Quarter 2024 Results, which were released this afternoon and can be found on our website at investors.traeger.com. I’m Nick Bacchus, Vice President of Investor Relations at Traeger. With me on the call today are Jeremy Andrus, our Chief Executive Officer; and Dom Blosil, our Chief Financial Officer. Before we get started, I want to remind everyone that management’s remarks on this call may contain forward-looking statements that are based on current expectations but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. I encourage you to review our annual report on Form 10-K for the year ended December 31, 2023, our quarterly report on Form 10-Q for the quarter ended March 31, 2024, once filed, and our other SEC filings for a discussion of these factors and uncertainties, which are also available on the Investor Relation portion of our website.
You should not take undue reliance on these forward-looking statements, which speak only as of today. We undertake to update or revise them for any new information. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted net income per share, and adjusted EBITDA margin, which we believe are useful supplemental measures. The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein to such GAAP measures are included in our earnings release, which is available on the Investor Relations portion of our website at investors.traeger.com. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies.
Now, I’d like to turn the call over to Jeremy Andrus, chief executive officer of Traeger.
Jeremy Andrus: Thank you, Nick. Thank you for joining our first-quarter earnings call. Today, we’ll be discussing our first quarter results, and we’ll provide an update on our strategic growth pillars before handing the call over to Dom to provide further detail on our quarterly performance. Despite facing a challenging demand backdrop, I’m pleased with our execution in the first quarter. Sales were $145 million, and adjusted EBITDA was $24 million, at the high end of our guidance range. Our first quarter results give us confidence in the outlook for the year, and we are reaffirming our prior financial guidance for fiscal 2024. As we move through the quarter, we continue to focus on our key strategic imperatives of driving energy to our brand and delighting our consumers with innovative product.
The underlying measures of health for our brand remains strong, and I continue to believe that Traeger is well-positioned to be a long-term share gainer in outdoor cooking. Our retail partners continue to be very supportive of the Traeger brand and invest alongside of us into the consumer experience at retail. The Traegerhood, our community of Trader enthusiasts, continues to be passionate as evidenced by the strong growth in engagement in our social media channels as well as our industry-leading NPS score. I believe that our premium positioning and our current efforts will allow the company to disproportionately benefit from an eventual recovery in grill industry demand. As we anticipated, the demand environment continued to be soft in the first quarter.
From a sell-through perspective, consumer demand for grills remained below the prior year. We believe the consumer continues to shift spend away from durable goods like our grills and other product categories they over-indexed on during the pandemic. In particular, we see greater pressure on higher ASP SKUs. From a sell-in perspective, in the first quarter, we were comparing against significant load-in tied to the launch of two new grills in the prior year, which also pressured sales this year. We are assuming that consumer demand for grills remains soft for the balance of this year. The first quarter is a seasonally slower period in terms of consumer demand for grills and our peak selling season at retail typically starts with Memorial Day and lasts through the end of the summer.
Therefore, we are highly focused on execution as we move into our most important seasonal period in the next several months, and we will have greater visibility as we move through the second quarter in key holiday periods. In the first quarter, our results continue to benefit from our significant efforts over the last two years to enhance profitability and efficiency. Despite lower sales versus the first quarter of last year, adjusted EBITDA grew 11% year over year, and our adjusted EBITDA margin grew by 250 basis points. This growth was driven by 700 basis points of gross margin expansion. I am very pleased with our ability to drive first-quarter gross margin above 43% and our Q1 margin represents the highest quarterly gross margin we reported as a public company.
This is our fourth consecutive quarter of gross margin expansion and the significant progress we have made on margins has been driven by both improvements in the cost environment as well as company-specific initiatives. We continue to have line of sight into strong gross margin improvement for the fiscal year. The core of the Traeger story is our long-term opportunity to expand our household penetration and market share. In the current challenging demand environment, our ability to drive meaningful improvements in our margins and our adjusted EBITDA speaks to our financial discipline, and we expect these improvements will set the company up well for significant growth as demand improves. Overall, I am pleased with our ability to deliver first-quarter results at the high end of our guidance range.
I believe we are well-positioned to execute on our plan this year. Let me now review our strategic growth pillars and key wins in these areas. Our first growth pillar was to drive awareness and penetration in the United States. While the first quarter is a seasonally slower period in terms of grill usage, our community was highly engaged with our brand during the quarter, and we continue to interact with the Traegerhood and create energy behind our brand during key seasonal events. In February, our social post focused on the Super Bowl, and we offered up content and recipes for the big game, including our EPIC take on Trash Can Nachos. We also teamed up with Dan Patrick Show to demonstrate to viewers how to use our Traeger to create an incredible Super Bowl spread.
Overall, we saw strong engagement with our brand during the Super Bowl and had another record year of user-generated content post. We also saw a solid increase in connected cooks on the day. Heading into the peak grilling season this year, we are highly focused on driving execution and position at retail. Historically, Traeger has leveraged community and ground-level marketing as well as in-store selling and merchandising efforts to drive awareness and accelerate conversion. We will continue to utilize these strategies in the coming months, and we believe that investments into retail execution and merchandising are some of our highest-return activities. This includes our Captain Traeger program. This program is designed for associates and retail partners or barbecue enthusiasts and are ready to take their knowledge, training, and commitment to the Traeger brand to the next level.
Captain Traeger provides retail associates with access to educational training, limited edition products, and exclusive VIP events. It transforms these associates into Traeger evangelists. This year, we are investing into the Captain Traeger program through in-person and digital training experiences, moving into peak grilling season. Next week, on May 18, we will be celebrating our Seventh Annual Traeger Day. Traeger Day centers around gathering friends and family and joining food cooked on your Traeger and sharing these memories with the Traegerhood via social media. Members of our community have been recording their best shares to the Traegerhood videos and submitting these to us over the last couple of weeks. On May 18, we’ll post a reel with the best submissions.
We’ll also run a contest with Traeger giveaways to encourage our community to post their Traeger Day content on social media. The day is a celebration of all things Traeger and is our highest user-generated content day of the year. Turning to innovation. Innovation is a key pillar of our long-term vision for Traeger, and we remain committed to empowering our capabilities in this area. In the first quarter, we completed the build-out of our new R&D lab in our corporate headquarters in Salt Lake City. The R&D lab is designed to equip the R&D team with tools needed to bring innovation into their physical forms as well as inspire creativity. We believe this new space will greatly enhance our ability to create and will be a driver in our long-term mission to disrupt the outdoor cooking industry with innovation.
Also on the innovation front, I’d like to mention that Traeger was named one of Fast Company’s Most Innovative Companies in 2024. In fact, Traeger was ranked the sixth most innovative company in North America. Fast Company lists highlighted businesses that are shaping industry and culture through innovations in a variety of sectors and the annual list is highly anticipated. This achievement is a testament to our long-standing commitment to innovation and disruption. I’m incredibly proud of our team for this well-deserved recognition. Our next growth pillar is growing our consumables business. In the first quarter, we drove innovation in our pellets business through our partnership with an iconic American brand. In March, we announced the introduction of a limited edition of wood pellet in collaboration with Louisville Slugger, the official bat of Major League Baseball.
Traeger’s limited edition maple pellets are crafted from the same hardwood used to make Louisville Slugger’s iconic bats and repurpose wood from the bat manufacturing process to transform wood pellets for the enjoyment of Traeger users. To drive awareness for this launch, we released a series of videos on social featuring our director of marketing, Chad Ward, cooking on a Traeger with 13-time MLB all-star, Ken Griffey, Jr. As we mentioned on our last earnings call, in February, we relaunched our new branded barbecue sauces across all markets and launched a marketing campaign highlighting our updated offering. With new and improved formulas and easier-to-use squeeze bottles, we believe our new line is a big upgrade. We have also positioned our revamped sauce line at a more competitive MSRP.
We have been pleased with consumer reception of our new sauces and have seen a lift in sell-through versus our previous line of sauces. Next, I will discuss our fourth pillar, expanding internationally. In Canada, we saw improved sell-through at our big box and specialty grill channels in the first quarter, and we are pleased with the momentum and demand going into the summer. In Europe, our distributors continue to work down excess inventory, and we expect that inventory level will be balanced later this year. In Germany and the U.K., our direct markets in the EU, we are focused on execution at retail going into peak grilling season. We recently rolled out a sales training initiative where we gather leading sales associates from our retail partners to educate them on the brand, demo the product, and have them meet brand influencers.
Similar to our strategy in the U.S., we believe that ground-level execution will drive retail conversion in our international markets where awareness of our brand remains lower than in United States. On the MEATER side, we recently launched new distribution at Canadian Tire, one of the leading retailers in Canada. MEATER also continues to see growth from its partnership with Vorwerk, which is a nice complement to MEATER’s DC-driven revenue base. Overall, I am pleased with our ability to execute our plan in the first quarter, in particular, given the near-term market challenges continue to face our industry. We saw strong growth in gross margins, which has been a key area of focus for our organization for the last 24 months, and grew adjusted EBITDA.
Going into the peak seasonal period, we are hyper-focused on executing against our plan and I remain highly confident in our ability to navigate the current environment while positioning the brand for long-term success. And with that, I’ll turn the call over to Dom. Dom?
Dom Blosil: Thanks, Jeremy. Good afternoon, everyone. Today, I will review our first quarter performance and discuss our outlook for fiscal year 2024. First quarter revenue declined 5% to $145 million. Grill revenues declined 14% to $77 million. Grill revenue was impacted by lower sales through a retail and a lower average selling price. Furthermore, in the first quarter of 2024, we were lapping initial loading of two new grill launches in the first quarter of last year, which pressured selling on a comparative basis. Consumables revenues were $32 million, up 7% compared to the first quarter of last year, driven by growth in both our pellet business as well as our food consumables business. While first-quarter pellet revenues did benefit from a timing shift in the second quarter, we are pleased with the growth.
Accessories revenues increased 7% to $36 million, largely driven by increased sales at MEATER. Geographically, North American revenues were down 9%, while Rest of World revenues were up 31%. Gross profit for the quarter increased to $63 million from $55 million in the first quarter of 2023. Gross profit margin was $0.432, up 700 basis points versus first quarter of 2023. We are pleased with our first quarter gross performance, which benefited from lower costs as well as the margin-enhancing initiatives we implemented in the last two years. The increase in gross margin was primarily driven by: one, lower freight and logistics costs, which drove 290 basis points of margin favorability; two, higher pellet margins driven by our efforts to increase efficiency at our pellet mills which drove 170 basis points of margin; three, FX stability, which positively impacted margins by 90 basis points; and four, other favorable gross margin items worth 150 basis points.
Sales and marketing expenses were $22 million compared to $22 million in the first quarter of 2023. During the quarter, increased demand creation costs were partially offset by increased employee expenses. General and administrative expenses were $32 million compared to $27 million in the first quarter of 2023. The increase in G&A expense was driven by higher stock-based compensation expense, higher employee expense, and higher occupancy expenses, partially offset by nonrecurring expenses related to the disposal of pellet mill assets in the comparable period. Net loss for the first quarter was $5 million as compared to a net loss of $11 million in the first quarter of 2023. Net loss per diluted share was $0.04 compared to a loss of $0.09 in the first quarter of 2023.
Adjusted net income for the quarter was $5 million or $0.04 per diluted share as compared to adjusted net income of $1 million or $0.01 per diluted share in the same period of 2023. Adjusted EBITDA was $24 million in the first quarter as compared to $22 million in the same period of 2023. First quarter adjusted EBITDA was approximately in line with the high end of our guidance range of $21 million to $24 million. Next, I will discuss the balance sheet. At the end of the first quarter, cash and cash equivalents totalled $24 million compared to $30 million at the end of the previous fiscal year. We ended the quarter with $404 million of long-term debt. At the end of the quarter, the company had drawn down $41 million under its receivables financing agreement, resulting in total net debt of $421 million.
From a liquidity perspective, we ended the first quarter with total liquidity of $153 million. Inventory at the end of the first quarter was $100 million compared to $96 million at the end of the fourth quarter of 2023 and $132 million at the end of the first quarter of 2023. We believe inventories on our balance sheet are appropriately positioned for our current demand outlook. Moving to our outlook for fiscal year 2024. We are reiterating our guidance for revenues of $580 million to $605 million and adjusted EBITDA of $62 million to $71 million. As previously discussed, we expect our Grill revenues to be pressured by lower sell-through as consumer demand for grills remains below historical levels. Furthermore, we will be lapping the loading of the Ironwood and Flatrock, and we will be sunsetting several grill SKUs this year ahead of future product launches, which will also pressure grill revenues.
We expect that third-quarter revenues will be our most challenging on a year-over-year basis. We are also reiterating our outlook for full-year gross margin of 39% to 40%, which represents expansion of 210 basis points to 310 basis points. We continue to expect that our margin will benefit from lower transportation costs, in particular, lower inbound freight rates as well as margin-enhancing initiatives, including our pellet mill optimization and our direct import program, partially offset by planned strategic pricing actions to stimulate demand. We expect that our first quarter gross margin improvement will be the largest of the year, and believe the rate of improvement will moderate going forward. Furthermore, we expect that third-quarter gross margin will be negatively impacted by deleverage, given the expected pressure on sales and the lower revenue base in the quarter.
Overall, while we faced ongoing demand pressure, we delivered first-quarter results in line with our plan. Despite lower sales, we grew adjusted EBITDA, and we have visibility into a second year of meaningful gross margin expansion. We are highly focused on execution as we move into our peak selling season and remain committed to navigating the current environment, all positioning for long-term growth. And with that, I’ll turn the call over to the operator for questions.
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Q&A Session
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Operator: [Operator instructions] Our first question is from Simeon Siegel with BMO. Your line is now open.
Simeon Siegel: Thanks. Hey, guys. Good afternoon. Hope you and your families are doing well. Dom, what was the — sorry if I missed it, but what was the breakdown in grill revenue declines between units and price? And then Jeremy, higher-level question on that, just when thinking about the return to grow growth domestically when it happens. How do you think about what we’re going to see in terms of replenishment versus new customers? And just kind of thinking about maybe if you have any views on replenishment and cycles there. Thanks, guys.
Dom Blosil: Yeah. So, the breakdown, roughly speaking, is there was a greater impact to ASP and kind of the high single-digit decline. And then for units, it was somewhat more moderated in kind of the single-digits decline.
Jeremy Andrus: Simeon, happy to hit the second part of the question. First of all, as I mentioned in my remarks, the environment is soft, and it’s not easy to sort of unpack how much of it is driven by a pull-forward demand from the pandemic versus a soft consumer sentiment is down. Consumer financing is expensive and housing transactions are very low, and all of these things facilitate grill sales or sell-through retail. We spend a fair bit of time thinking about replenishment cycles, talking to consumers, and doing the math on grill ownership period and our general belief is that we should be about to the end of pull-forward demand from 2021. And then I think as you step back and look at not only this category but other high-ticket discretionary consumer categories, they tend to have some element of cyclicality to it.
And so, as we see the consumer strength and interest rates start to come down, we believe those are catalysts to the beginning of the cycle. And we believe that replacement should start — replenishment should start to normalize, certainly in ’25, absent meaningful downside, and the consumer should be back to a fairly normalized cycle. And then the question is what is the impact on the macro on a consumer choosing to wait to get one more year as they do out of durables? In terms of how we think about new versus replacement, as we lean back into top-of-funnel investment, and we’re doing some testing this year, but certainly don’t believe it’s in an environment where we should be investing meaningfully in top-of-funnel. We will always think about NPS and engagement and ensure that we can drive our existing consumers to our new products.
We believe as we look at our innovation pipeline that the first consumer likely to buy is an upgrade from a Traeger owner who bought five, six, seven years ago. But I think we’ll start to see the mix increase toward new customers as we invest in new markets where unaided awareness is low and penetration is low.
Simeon Siegel: All right. That’s great. And then congrats on that gross margin. I mean, you pointed out the highest — do you — and recognizing your deleverage comment for Q3, but do you think that the supply chain is behind us. Do you think that as you look at where you are and you look longer term, not about the guide for this year, but you look longer term? Are we back to that path toward low to mid-40s? Like is there any externalities we need to still keep in mind because I just — this was an encouraging number.
Dom Blosil: Yeah. I would say that it’s consistent with what we’ve addressed around gross margin in previous calls in that there will be sequential benefit from macro over, say, the next couple of years, just given the dynamics of certain decisions we made during the pandemic when pressure was pronounced, locking in some fixed contracts on the inbound transportation side as an example of something that will bleed down over the next couple of years. But it is safe to say that macro is working in our favor, and that has been an important assist to how we think about the long-term sustainability of a gross margin that we believe is appropriate for our business. And so, Q1 is a great signal, there’s some idiosyncrasies to the year that I think you’ve sort of spoken to.
And I would say that H1 is in particular, benefiting from the continued tailwind of inbound transportation and then also the FX component that we addressed on the opening remains, whereas back half was maybe it’s sort of facing less of a benefit from a comp standpoint given the fact that the inbound rates were improving in the back half of last year. So, I’d say we’re starting to see some stabilization in that realm. And I think that that assist is really I think, driven a different perspective on the long term of gross margin in conjunction with the controllables that we continue to drive. So, positive kind of view on where we are today, where we think we’ll be able to take gross margin in the future with continued tailwinds hopefully driving some of that in the out years.
But I wouldn’t say that we’ve necessarily reached that mark just yet.
Simeon Siegel: Perfect. All right. Thanks a lot, guys. Best of luck for the rest of the year.
Operator: Our next question is from Peter Benedict with Baird. Your line is now open.
Peter Benedict: All right, guys, good afternoon. Thanks for taking the question. Just on the strategic pricing plan, Dom, you mentioned kind of at the end there. Just curious if you can expand a little bit more on that. Is that around the existing portfolio? Is that new innovation that you plan to bring in at different either price point or margin point? Just maybe help us understand a little more what you’re referring to there. Thanks.
