Grove Collaborative Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 14, 2023

There are 4 speakers on the call.

Operator

Good afternoon and thank you for standing by. Welcome to Grove Collaborative Holdings, Inc. 1st Quarter 2023 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Following the speakers' remarks, we will open your lines for your questions.

Operator

As a reminder, this conference call is being recorded. Hosting today's call are Grove's Co Founder and CEO, Stuart Landesberg and CFO, Sergio Cervantes. Before they begin their prepared remarks, I will review the forward looking statements Safe Harbor. Some of the statements made today about future prospects, financial results, business strategies, industry trends and growth's ability to successfully respond to business risks may be considered forward looking. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Operator

All these statements are based on Groove's view of the world and their business as they see it today. As described in our SEC filings, the underlying facts and assumptions for these statements can change as the world and their business changes. For more information, please refer to the risk factors discussed in their most recent filings with the SEC, which are available on Grove's Investor Relations website at investors. Grove.co. During today's call, they will also discuss certain non GAAP financial measures.

Operator

Reconciliations of these non GAAP items to the most directly comparable GAAP financial measures are provided in their earnings release, which is also available on their Investor Relations website. I will now turn the call over to Stuart Landesberg to begin.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining the call today. I recently read a New York Times article entitled There is Plastic in Our Flesh, describing how plastic waste has permeated every part of our bodies And our world. Grove's brand and our vision is one of the few offerings consumers a way to participate in creating a solution. Grove's distinct vision to make consumer products a positive force for human and environmental health has never been more important.

Speaker 1

Moving to our results. The Q1 of 2023 was another successful quarter for growth. We achieved record gross margins of 52.1% And continued to manage expenses smartly across the P and L, which led to impressive adjusted EBITDA margin improvement, up 3.30 basis points quarter over quarter and 3,420 basis points year over year despite sales declining largely as expected with rationalized marketing spend compared to 2022. Our adjusted EBITDA margin for the Q1 of last year was negative 43.8 percent and this quarter was negative 9.6%. Again, that is a 3,420 basis point improvement in only 1 year, truly exceptional.

Speaker 1

The strong adjusted EBITDA results were driven by continued execution of our 4 part value creation plan, which encompasses improved marketing efficiency, omni channel expansion, net revenue management and operating expense discipline. On the first point, we achieved strong marketing efficiencies in the quarter on lower spend year over year Despite being up sequentially due to the optimization of marketing mix as we moved away from higher CPA channels and into channels with our strongest return on investment. Media cash in the Q1 were down 50% year over year, a huge win as we march toward profitability. Furthermore, strong performance from unpaid and organic channels drove a 9% sequential increase in those channels in the Q1. We made progress in the quarter on our omni channel distribution expansion strategy with the launch of GroveCo, our flagship home care brand on Amazon at select Walmart stores nationwide and on walmart.com.

Speaker 1

Retail continues to grow at a nice pace, especially considering headwinds in the category We continue to be excited about this capital efficient growth strategy that meets our consumers where they are. We are eager to announce additional retail partners in the near future. Net revenue management initiatives focused on strategic pricing and on the optimization of DTC net revenue per order implemented in the back half of twenty twenty two continue to drive results in the quarter. In Q1, we delivered 12% year over year improvement to DTC net revenue order up to $62 This was a record across Q1s for growth, and it is particularly impactful when paired with overall record gross margin. Lastly, we remain ruthlessly focused on driving margin improvement by maintaining strict expense discipline.

Speaker 1

We're seeing results across the P and L From inbound freight and procurement initiatives contributing to gross margin gain to optimizing carrier mix and driving down shipping costs. These efforts have enabled us to focus resources on the most critical initiatives and deepen our results orientation. Execution on this value creation plan drove continued improvement in our Q1 financial results. Adjusted EBITDA loss in the Q1 of 2023 was 6,900,000 an improvement from a loss of $9,500,000 in the Q4 of 2022 and a loss of $39,700,000 in the Q1 last year. This improvement was achieved despite revenue in the Q1, which was down 3% sequentially and 21% year over year, primarily driven by the 74 Strategic reduction in advertising spend in the current quarter versus Q1 2022.

Speaker 1

This reflects our strategy focusing on our most profitable marketing spend and driving profitable growth in 2024 off a durable high margin revenue base. During the quarter, we also continued to make progress towards our goal of moving beyond plastic. In the Q1, 70% of revenue from GrowCo products came from either 0 plastic, reusable or refillable and 0 waste plastic products, meeting the company's beyond plastic standards, in line with 70% in the Q4 of 2022 And down slightly from 71% in the Q1 of last year. We expect this metric to improve as we continue product innovation. We continue to challenge others to disclose plastic intensity as We believe tracking and disclosure are keys to moving the industry forward and we are delighted to lead the industry on a path away from plastic.

Speaker 1

While executing against our value creation plan, we have continued to invest in our business. R and D has remained a top priority for investment as our innovation advantage, driven by our DTC heritage, the largest online community in our space, rapid iteration and feedback cycles, unique access to data and Sustainable product development expertise is a durable competitive advantage. We believe the category will continue to shift towards sustainable products in the years to come. And our ability to out innovate will be key to our continued success. We anticipate continuing to invest behind this competitive advantage.

Speaker 1

At the same time, we've been investing in improving the user experience for our customers and community on our DTC site. At the end of March, we launched new benefits for our very impactful person VIP program to drive loyalty among our best customers and to create more VIP. The enhanced program offers significantly increased value to consumers in the form of additional VIP gifts throughout the year, exclusive VIP bundles and discounts, as well as first steps on new products, collections and brands on our site, along with energized new branding, all for the same cost to the consumer. Additional value add features will be rolled out as a part of the program over the course of the year. And while it is still too early to see an impact on GIP renewal rates, the sentiment from our community has been quite positive on the relaunch.

Speaker 1

Overall, we are proud of the results we have achieved due to the successful execution of the value creation plan to date. Looking ahead, we've consistently stated that we will grow and reach profitability at some point in 2024. However, Our transformation has been outperforming our expectations. As a result, we are pleased to share that we expect to be approximately breakeven or perhaps slightly profitable on an adjusted EBITDA basis for the Q3 of 2023, well ahead of schedule. While we don't expect to be profitable every quarter from there on due to seasonality and other factors, We do believe this demonstrates how close we are to our stated goal of achieving profitable growth in 2024.

Speaker 1

This is an important milestone, of course, towards sustainable, profitable growth in our business. Now that we have made progress on our path to profitability, we are turning our focus to the growth drivers for 2024 and beyond. On to these growth drivers, omni channel distribution, the health and wellness category and M and A, all of which can build upon this foundation of a stable, profitable direct to consumer business. We've talked a bit already about omnichannel distribution But I want to underline the scale of the opportunity for those of you who may be newer to our story. Industry wide, U.

Speaker 1

S. HPC is $180,000,000,000 and less than 10% of that is done via vertical e commerce like growth. We are just getting started in bringing our brand to retail and in addressing the massive opportunity to move GroveCo to the channels that 90% of consumers shop. The second leg of our growth strategy is the recent launch of our health and wellness platform, Grove Wellness, which we announced in March. The global wellness market is more than $1,500,000,000,000 and growing between 5% 10% per year, and Grove is well positioned to win in this category.

Speaker 1

Since Grove's inception, we've worked hard to earn customers' trust by curating and developing products on the basis of efficacy, Sustainability and consumer centricity. Our survey work with customers indicates that 89% of our customers would trust Groove over other brands to solve their health and wellness needs. We are thrilled to be able to meet this task by offering vetted and personalized wellness plan across a number of health and wellness categories. It is still very, very early in our health and wellness journey. However, we are energized by what we've seen so We saw a record amount of revenue and orders containing wellness skews in the Q1, a promising sign that our launch while early has been extremely well received.

Speaker 1

I look forward to further updates on this in coming quarters. Lastly, we continue to explore M and A opportunities that can build on our platform and accelerate our business and mission by driving scale and shortening our path to profitability. We continue to be quite deliberate about where we invest time and resources, but we are seeing excellent deal flow and continue to believe this is the right environment For a business like ours to be looking opportunistically, we are optimistic that this can be a source of growth for us in the months and years ahead. 2023 is an exciting year for growth. We plan to drive stability in our business, improving our economics, Following the advertising spend of 2022, building upon the great progress we've made on the profitability front and continuing to lay the groundwork for future growth opportunities in 2024 and beyond.

Speaker 1

Before I pass the call over to Sergio, I want to thank every person at Grove. You've listened hard to our customers, Focused on the most critical initiative to our consumers and to our mission, embrace urgency and make hard decisions that are right for our business, our purpose and all our stakeholders. It's a privilege to be on this journey with each of you. I'll go ahead and turn the call over now to Sergio to review our financial results in more detail. Sergio, Please go ahead.

Speaker 2

Thank you, Stu. Similar to previous calls, we will provide quarter over quarter comparisons in addition to the year over year changes. As we believe the sequential comparisons better reflect the trends in the business and the steps we have taken to position ourselves for sustainable, Profitable Growth. Net revenue in the Q1 was $71,600,000 down 3% from the Q4 of 2023 and 21% year over year. Both comparisons continue to be impacted by the Strategic decision to reduce advertising spend as the company focuses on achieving profitable growth in 2024.

Speaker 2

Similarly, total orders were down 3% quarter over quarter and 30% year over year to 1,100,000,000 Anaxi customers were down 10% quarter over quarter and 25% year over year to 1,200,000 on a trailing 12 month basis. DTC net revenue per order was down 3% from the record high achieved in Q4 2022 on higher promotions and softer performance of seasonals, but up 12% year over year to $61.64 The year over year increase was driven primarily by the impact of net revenue management initiatives, including the introduction of a supply chain fee at the end of the 3rd quarter as previously discussed and implementation of strategic price increases on both growth brands and 3rd party products. Gross margin was up 510 basis points from the Q4 of 2022 and up 480 basis points year over year to 52.1%, a record high for growth. As a reminder, the 4th quarter result was by an increase in inventory reserve. Excluding the full impact of the inventory reserve, gross margin in the Q4 of 2022 would have been 61.7%.

Speaker 2

The quarter over quarter increase was driven primarily by margin, Improvement in both own brands and third party brands, the mix shift to own brands as well as slight improvement in freight costs, partially offset by higher discount as first orders increased as a percentage of total orders. Job France as a percentage of net revenue increased 3.40 basis points quarter over quarter and declined 2 90 basis points year over year to 48.9%. The sequential increase is due an increase in resale net Revenue as a percentage of total revenue, whereas year over year decrease is due to fewer new customer orders, which includes more growth brand products. Advertising expense increased 26% quarter over quarter following our typical seasonal pattern and fell 74% year over year to $8,700,000 reflecting our strategic pullback in advertising spend I'm focused on improving market and investment decisions. We continue to be pleased with improvement in advertising efficiency resulting from this strategy.

Speaker 2

Product development decreased 8% quarter over quarter and 32% year over year to 4,200,000 primarily due to a decrease in salary and benefits from reductions in headcount. With fewer resources, we have We prioritize to ensure we focus on the highest ROI initiatives that will provide the most value for our customers. SG and A expense decreased 26% quarter over quarter and 25% year over year to 38,000,000 The quarter over quarter decrease was driven primarily by a $6,400,000 decrease in stock based compensation and the $5,300,000 expense recorded in the Q4 of 2022 related to operating lease right of use assets incurred. Excluding stock based compensation, severance and the right of use assets based in Permian, SG and A expense in the quarter Would have been $33,700,000 or 4% less than the Q4 of 2022 and 28% less than the same period last year. The quarter over quarter decline was driven primarily by lower fulfillment costs and other expenses, which is reflective of Our strategy of creating operating efficiency and eliminating less productive spend to focus on profitability.

Speaker 2

As a percent of net revenue, SG and A expense would have been 47.1% compared to 47.5 Our adjusted EBITDA loss improved to $6,900,000 as compared to $9,500,000 loss in the Q4 of 2022 And was a material improvement compared to the $39,700,000 loss in the Q1 of 2022 despite lower sales. Our adjusted EBITDA margin improved by 330 basis points quarter over quarter and by 3,420 basis points year over year to negative 9.6%. The quarter over quarter improvement was due to improved gross margin and lower SG and A, offset by increase in advertising. Net loss in the quarter was $13,100,000 compared to a net loss of $12,700,000 in the Q4 of 2022 and a loss of $47,400,000 in the Q1 of 2022. Turning now to the balance sheet.

Speaker 2

We finished the quarter with an inventory balance of $40,900,000 down $3,200,000 from the end of 2022, fueled by our continued efforts in group working capital. We ended the quarter with $90,500,000 in cash, cash equivalents and restricted cash, down $5,500,000 from the previous quarter, primarily from the adjusted EBITDA losses and interest payments, partially offset by working capital efficiencies, particularly on inventory and $7,500,000 draw on the asset based loan facility. Note that during the quarter, we also reduced the amount of assisted cash by $6,100,000 freeing up additional liquidity for operations. As previously announced, in March, We closed on an asset based loan facility with $35,000,000 total capacity for which borrowing capacity is calculated from our inventory and accounts receivable balances. The loan is for a term of 3 years and will support our strategic initiatives and working capital needs.

Speaker 2

We took the minimum draw of $7,500,000 during the Q1. Based on current inventory and AR balances, We have $10,200,000 of capacity available over the KBL. Furthermore, assuming a share price of $0.45 We have up to $14,300,000 of capacity on our standby equity purchase agreement. Taking into account market Conditions and business priorities, we will evaluate using this capacity strategically to supplement our liquidity. We feel very good about our current liquidity position and our ability to execute our aggressive push to profitability.

Speaker 2

Now turning to our outlook. The progress we have made in improving operating efficiencies and reducing expenses Gives us the confidence to increase our adjusted EBITDA margin guidance for fiscal 2023, despite continued challenges in the macroeconomic environment. Furthermore, as Stu mentioned, we expect to be close to breakeven on an adjusted EBITDA basis in the Q3 of this year and we continue to progress towards Our stated goal of profitable growth in 2024. Note that due to seasonality in the business, We do not anticipate our profitability to be a straight line. Our guidance continues to forecast losses in Q2 2023 and H2 2023.

Speaker 2

Fustering our performance to date and our expectations for the remainder of the year, We are offering the forward looking guidance. For the 12 month period ending December 31, 2023, We continue to expect net revenue of $260,000,000 to $270,000,000 We now expect adjusted EBITDA margin of Negative 5.5 percent to negative 7.5 percent, up from negative 9% to negative 11% previously. I would like now to turn the call back to Stu for some closing remarks.

Speaker 1

Thank you, Sergio. We continue to be excited about the opportunities in the balance of 2023, 2024 and in the years ahead. We believe the path to profitability is clear. Our liquidity position is strong and we are laying the groundwork for growth on top of stabilized core business. As we see the crises from plastic, Be they train fires or nano plastic in our brains and bloodstreams, our commitment to building growth into a large and important company that can lead the industry only grows.

Speaker 1

We are grateful for your support. Thank you for listening to our prepared remarks and we are now happy to answer any questions you have. Operator,

Operator

Thank you. Our first question comes from Susan Anderson with Canaccord Genuity. Please proceed with your question.

Speaker 3

Good evening. It's nice to see the improvement in the profitability in the quarter. I was wondering if maybe you could Break out the drivers of the gross margin this quarter and then also looking throughout the rest of the year, should we expect kind of the same level of gross margin?

Speaker 1

Hey, Susan. Thanks for calling it out. Profitability, as we said, is our focus As well as driving top line, so we're really pleased with the results. In terms of gross margin improvement, I'll let Sergio take that one first. And then I can speak a little bit to where we're trending in the long term.

Speaker 2

Thank you for the question, Susan. So Yes. As you can imagine, driving gross margin is at the center of the company. Of course, that would allow us to have more fuel for growth. So answering first the second question, would you expect something similar going forward?

Speaker 2

I would say that we are working very hard So we're keeping this level of margin and improving it as much as we can as we move forward in terms of the initiatives that we have that we have been sharing. So as you know, we have been saying that gross margin is not only composed of improving certain things, it's Composed of touching on several places of delivery and delivers that we have across the P and L. So in this time, we have as we have As explained before, we have basically make efficiencies in turnover, make efficiencies in mix, in pricing, In cost of goods, in freight, etcetera, etcetera. So altogether, that's allowed us to come with this improvement in margins. Remember also that Mix is important for our categories and we have been also pushing forward the categories that allow us to enhance our margin.

Speaker 2

So if I were to split the margin, I would say that there is an element of less discounts that we have done. There is an element of Supply chain improvements that we have had, there is an element as well of improving mix. And I would say that, that is Partially offset by some of the ongoing cost increases that we see in the market. I hope that helps. And we can pick up more details, if you will, in our next call.

Speaker 3

Great. That's really helpful. And then I think you had mentioned that you significantly reduced your CAC in the quarter. Can you maybe talk about what drove That rejection and maybe if you could give some color around where your cap is at now versus historically?

Speaker 1

Sure. So if you look at the last several years of marketing with growth, we've had the privilege of being able to Into a lot of channels and also to build really strong top of funnel awareness. One of the things we've seen as omni channel has come online and we're now In 5,000 plus doors across retail is the incremental value of top of funnel marketing is not as And so we've been able to maintain strong awareness and strong bottom of funnel metrics without making the same we're still making big investments in top of Our larger Barrymore collaboration, for example, is quite successful, especially in driving awareness. But we haven't needed to devote the same amount of marketing spend there, Which has allowed us to get much more targeted in terms of how we're spending our dollars and how we're driving ROI. And so outperformance there is one of the things that's allowed us to improve our profitability guidance significantly for the year.

Speaker 1

The second piece Is that I think we're really honing in on the right messaging and the right channel mix with the right customer type And that's giving us sort of leverage. As you noted, it really is quite an extraordinary reduction in CAC in a relatively Short period of time. So we feel really good that we're leveraging a bunch of learnings that we've gotten over the last year And that the omni channel business model is allowing us to reduce especially some of the top of funnel spend that can be quite expensive, While maintaining strong brand awareness, strong leadership and ultimately strong bottom of funnel and retention metrics.

Speaker 3

Okay, great. That's really helpful. And then maybe just on the wellness platform, I guess, I'm curious What's been the early reads on that? Have consumers on your site been purchasing? And then Also, are you taking any learnings from it to potentially maybe roll out your own wellness offerings?

Speaker 1

Yes. So we've been we rolled out wellness, as you know, for just, gosh, I guess, 1.5 months ago, and We started to see really good results already. That said, still too small to move the overall P and L. Just to give a sense, In Q1 of 2023 versus Q1 of 2022, the wellness category was up just over 35% year over year. So Real growth, but it's off a small base, mid single digit base.

Speaker 1

So a relatively small base, but early signs of adoption are Good. And I think where you're going with that is exactly where we plan to take it. Our company's Competitive advantage is in large part built on leveraging the data from our unique direct to consumer business to understand where we can innovate And where our consumers really want us to innovate. And so that is, I think, a very likely outcome for us in the wellness category Over the medium to long term, right? We're a brand company.

Speaker 1

We want to build a brand there. And I think that we're starting to get data, certainly too early to have Conviction on what direction we'll go, but you're exactly right that that ball is in motion. And over time, we want to be able to take the same innovation cycle that we've used effectively in eliminating plastic in home and personal care To drive market leading AUGHLIN in wellness.

Speaker 3

Okay, great. That all sounds really good. Thanks so much and good luck the rest of the year.

Speaker 1

Thank you much.

Operator

Thank you. Our next question comes from Dana Telsey with Telsey Group. Please proceed with your question.

Speaker 3

Hi, good afternoon everyone and nice to see the progress. As you think about the reduced ad spend, what as you go through this time period in reaching profitability to breakeven profitability, How do you think about ad spend? What is the right number? How you go what's the cadence of ad spend that you're looking at? And then when you mentioned, Sergio, that the path to long term profitability won't be a straight line.

Speaker 3

How can you expand on that? How should we think about it this year and next year? And how you're planning given the revenue targets also? Thank you.

Speaker 1

Thanks, Dana. Maybe I'll take the first half of that question on how we think about the right level of marketing spend. And then Sergio, I'll Pass the mic over to you for the second part. From a sort of right level of marketing perspective, we don't think about it as What's the right number? We really think about, hey, what our goal is to drive profitable growth in 2024.

Speaker 1

And so we're investing not just For the return we're seeing today, but to make sure that we're set up to drive top line growth in a profitable way going forward, right, not just in 'twenty four and beyond. And so I think, Obviously, we've brought down marketing as a percent of revenue quite significantly in the last 12 months. And you'll Still see big seasonalities throughout the year. Q1 is always our most efficient quarter from an advertising perspective. So Q1 will always be our Highest advertising as a percent of revenue quarter in

Speaker 2

the DTC business.

Speaker 1

In the retail business, of course, it's much more rate based. But as you look sort of towards the future, I think it will probably stabilize not at a place wildly different than where we'll end up for 2023. But again, within 2023, I would definitely expect that Q1 will have the highest advertising number for the year. And really, we don't disclose exactly where our LTV to CAC targets are, but we do, of course, invest on a channel by channel basis, targeting really strong With the clear goal of driving profitable growth in 2024 and of course beyond. Do you mind repeating the second half of

Speaker 2

your question for Sergio? Sorry, go ahead, Sergio. No, I have it. Dana, thank you. I got it.

Speaker 2

Okay. Yes. Thanks for the question, first of all, and for picking up on that specific point. What we refer to that in that specific sense is we are not we don't want to leave the guidance to believe that We are going to be profitable every single quarter after Q3. And the reason for that is we are going to be hovering around the breakeven point.

Speaker 2

You know that when you manage a business at Breakeven point, anything can happen, few dollars up, few dollars down. So it's difficult to predict exactly where you are going to land. However, also take into account that we have some seasonality in the business with advertising investment. So that also plays Some part on these numbers and forecasts that we are providing. So all to say that in the second half of twenty twenty three, We believe that we are going to be still negative, however, with a positive Q3.

Speaker 2

And leading into 2024, we are going to be hovering around the breakeven and for a full year perspective, our plan is to be profitable altogether. So that's the way to read about

Speaker 3

it. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to to Landesberg, CEO for closing comments.

Speaker 1

Thanks so much. Grateful for the team for a really great quarter of work. Look forward to getting back to you all as we continue our progress throughout the year. Many thanks.

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Key Takeaways

  • Record gross margin of 52.1% and a 3,420-basis-point year-over-year improvement in adjusted EBITDA margin to –9.6%.
  • Media spend was cut 50% year-over-year and marketing mix optimized, driving a 9% sequential increase in organic and unpaid channels.
  • Omnichannel expansion accelerated with GroveCo launched on Amazon, in select Walmart stores and on walmart.com, with more retail partners to come.
  • DTC net revenue per order rose 12% year-over-year to a Q1 record of $61.64, powered by strategic pricing, supply-chain fees and revenue management initiatives.
  • The company now expects to reach adjusted EBITDA breakeven in Q3 2023—well ahead of plan—and has raised full-year guidance to –7.5% to –5.5%, while targeting growth through omnichannel, a new wellness platform and M&A.
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Earnings Conference Call
Grove Collaborative Q2 2023
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