Grove Collaborative Holdings Inc (GROV) 2024 Q1 法說會逐字稿

Good afternoon, and thank you for standing by Welcome to Grove Collaborative Holdings Inc's first-quarter 2024 earnings conference call. (Operator Instructions) Following the speakers' remarks, we will open your lines for your questions.

As a reminder, this conference call is being recorded for hosting today's call, our Grove's CEO, Jeff Yurcisin; 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 Grove's ability to successfully respond to business risks may be considered forward-looking, including statements relating to our intention to increase marketing spend, the addition of products to our Subscribe & Save program, future improvement and first order conversion rates and payback period, our net revenue and adjusted EBITDA margin guidance, sequential revenue growth in the second half of the year and adjusted EBITDA profitability for 2024.

Such statements are based on current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including those factors discussed in our filings with the Securities and Exchange Commission.

All of these statements are based on gross view today and Grove assumed no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

For more information, please refer to the risk factors discussed in grocery, most recent filings with the SEC, which are available on gross Investor Relations website at investors .grove.com.

During today's call, [Grove] will also discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in the earnings release, which is also available on the Investor Relations website.

I would now like to turn the call over to Jeff Yurcisin to begin.

Thank you, operator, and hello, everyone, and thank you for joining the call today. I'm going to share our financial performance for the first quarter of 2024 as well as certain operational updates. This is my third earnings announcement with Grove's CEO. and I remain deeply confident in our incredible team's ability to first deliver incremental ongoing results against our strategy.

Our focus on our core pillars of customer sustainability and profitability guides our decision-making activities and progress. Second, evolve our brand into the destination for conscientious consumers. We've expanded our own brand and third party product assortments significantly in recent years to meet our customers' needs. We will continue to be a trusted destination for conscientious consumers who want the best for their families, their wallets and the planet.

Third, transform growth collaborative. The early results of our strategy represent the beginning of a multiyear transformation of the company, building a new foundation for our company and our brand to expand into a household name for sustainable products.

We know that a significant percentage of shoppers in the United States prioritize sustainability in their purchases, especially as the plastic and climate crises in our society expand rapidly. The opportunity for growth to fill a void in the consumer products and retail industries is remarkable.

And for us to meet that opportunity, we must remain focused on operating a sustainable business to ensure we can continue pursuit of our sustainable mission. This pursuit continues to be guided by our three pillars, customer, sustainability and profitability.

First, I'll begin with our customer pillar where we made significant changes to our customer experience and expanded our product offerings in an effort to make growth more meaningful in the daily lives of our customers.

Last quarter, we shared that we launched an updated experience for new customers, removing gated access and default subscriptions, reducing friction in the first order experience. We also launched a new Subscribe & Save program on individual products to incentivize cart building and repeat orders.

This change represented a significant shift in our business model, but more importantly is the beginning of how we're rebuilding the front end of our business the launch initially reduced first order conversion, but it has since improved and continues to improve as we optimize the experience as conversion and repeat order rates improve, we intend to spend more on advertising to acquire new customers with efficient paybacks.

We also made progress on our third party category expansion initiative. In the first quarter, we expanded our third party assortment by 34% year over year and enrolled 41% of third party products in our subscribers. A program on top of the nearly 100% of gross branded products also enrolled in the program as additional third-party vendors agree to our vendor funding terms, more products will be added to the program over time.

Lastly, this past quarter was a significant one for our flagship owned brand Grove Co. We executed a number of launches, including a Grove co rebrand, leveraging beautiful and sustainable aluminum packaging and new artwork across our portfolio of products.

We also introduced a new ready-to-use assortment of Grove co, hand soap, dish soap and liquid laundry detergent that offers more accessible entry price points for customers by not requiring the purchase of durable dispensers.

This assortment was brought to life through our ongoing retail partnership with Target to develop a product line that stands out on store shelves and conveys sustainability [iDeclare]. We also launched rooted beauty by Grove co facial wipes, our first personal care launch in nearly two years under our new brand strategy as well as new natural origin fragrances across our portfolio including SunPower, fresh Pamela, Wild Mint and Sea Spray.

Finally, we also launched our summer limited edition Connect collection with The Nature Conservancy, celebrating our existing partnership and ongoing conservation efforts in South East Alaska.

Turning to our sustainability pillar, which continues to serve as our foundation mission and points of differentiation, we have driven a number of key initiatives that further drive our industry leadership.

First, I'd like to start with our Earth Month celebration, which took place throughout April, First month is a key milestone for asset growth to celebrate progress on sustainability. While further educating our customers about the work underway to do even more for the planet. During the month, we replaced plastic tape with paper tape to seal individual products within packages. This will be a permanent change going forward.

We also launched a digital campaign titled perfection isn't sustainable. Progress is to celebrate the impact of our customers' shopping with Grove. Second, we are publishing our 2023 annual sustainability report in May, providing a detailed summary of our key commitments, progress and partnerships across important issues relating to growth business, plastic carbon [fore shell] ingredient standards and justice and equity.

Finally, we disclosed our latest plastic intensity metrics in our earnings release this afternoon to continue providing accountability for the pace at which we decoupled our revenue from the use of Flex.

Finally, we turn to our profitability pillar. I'm proud to report that we have continued to maintain positive adjusted EBITDA for the third quarter in a row. Our long-term goal is to generate positive cash flow, but the first step along that journey is positive adjusted EBITDA.

Specifically this past quarter saw us make progress on our facility expenses, including restructuring our San Francisco headquarters lease and announcing the closure of our St. Peters, Missouri fulfillment center to streamline fulfillment operations.

We are taking action to ensure our corporate and fulfillment center footprints align with the size of our current business, but still have room for us to scale. These savings will be reflected in our P&L throughout the coming quarters. These updates across our customers' sustainability and profitability pillars demonstrate the progress that the growth team has made and will continue to make in future quarters.

I'll turn now turn the call over to Sergio to review our financial results in more detail. Sergio, please go ahead.

Thank you, Jeff. Given that the previous call will provide quarter-over-quarter comparisons in addition to the year-over-year changes as we continue to believe the sequential comparisons reflect trends in the recent and provide a measure of effectiveness of the steps we have taken to position ourselves for long-term sustainable and profitable growth.

Starting with the top line, net revenue in the first quarter was [$53.5 million], down 10.5% from the fourth quarter of 2023 and 25.2% year over year. Still ongoing impact of lower advertising continues to impact revenue as we navigated our formation of the first quarter experience and prioritized marketing efficiency.

Advertising as a percentage of revenue was a record low during the quarter. We expect to scale our advertising spend in coming quarters to support revenue growth as we continue to improve our first quarter conversion rate and payback period follow-up orders were down 10.5% quarter-over-quarter and 29.5% year over year to $0.8 million and active customers were down 12.3% quarter over quarter on 35% year over year to $0.8 million. Both total orders and active customers continued to be impacted by lower advertising.

Yes, existing net revenue per order was down 0.8% quarter over quarter, but up 7.5% year over year [66.27%] year over year improvement was driven by a mix shift to existing customer orders as well as an increase in the number of units for existing customer quarter, particularly within health and wellness as we continue to expand our product offering in the category as well as paper input.

Gross margin was up [230] basis points quarter over quarter on [350] basis points year over year to 55.5%. The sequential improvement was mostly due to an increase in the estimated spend of funding allow them to better reflect the sell through of third party inventory.

The year-over-year improvement was further benefited by a reduction of our inventory reserve charges and a decrease in the number of lower-margin first orders as a percentage of total orders, partially offset by a decrease in growth brands speak as a percentage of total revenue brokerage products as a percentage of net revenue was down 150 basis points quarter over quarter and 580 basis points year over year to 43% sequential and year-over-year decline was largely due to the expansion of our third party product offering, especially as it relates to the sales of Wells Fargo, you were first quarter which have historically had more growth branded items on average and the recent transformation of the new customer.

Advertising expense decreased 47.4% quarter over quarter at 76.3% year over year to $2.1 million sequential and year-over-year declines reflect our pullback in advertising spend. Our focus on efficiency as we transformed the first quarter customer experience, an improved first-order conversion rate. We have prioritized improving our first order conversion rate, which has improved and continues to improve as we optimize the customers.

As for new talent, we anticipate increasing advertising spend as a percentage of net revenue over the course of the year, while also improving our execution quarter over quarter and sequential decline, but also due to a reduction in retail specific advertising as we continue to balance growth on profitability.

The product development expense decreased 20.4% quarter over quarter and 14% year over year to $3.6 million. The sequential decline, partially due to a lapping of $0.7 million for classification from SG&A and $0.1 million of restructuring charges in the fourth quarter.

Excluding these items, product development expense was stable quarter over quarter and declined year over year. The year-over-year decline was primarily due to prior year impact of restructuring and a decrease in stock-based compensation.

SG&A expense decreased 23.3% quarter over quarter and 35.3% year over year to $24.6 million quarter-over-quarter. And year-over-year decline is mainly due to lower fulfillment costs from fewer orders, lower First Financial due to reduction in headcount and lower facility costs from a partial quarter.

Impact of them modification are part of our third quarter release year over year decline was further benefited by the reduction in professional service costs. Of note, current quarter SG&A includes a $2.9 million gain from restructuring, primarily the amendment to our headquarters lease compared to Q4 2023, which included a $3.3 million expense from restructuring.

Adjusted EBITDA for the fourth quarter was $1.9 million compared to $0.1 million in the fourth quarter of 2023 and a $6.9 million loss in the first quarter of 2023. Our adjusted EBITDA margin for the fourth quarter was positive 3.5% compared to positive 0.2% in Q4 2023 and negative 9.6% in Q1 2023.

The improvement in adjusted EBITDA continues to demonstrate our hyper focus on improving profitability. However, as Jeff mentioned previously, this improvement is only a milestone in our transformation that is focused on delivering positive cash flow. Net loss in the quarter was $3.4 million compared to a net loss of $9.5 million in the for Q4 of 2023 and $13.1 million loss in the first quarter of 2023.

Turning now to the balance sheet. We ended the quarter with $81.6 million in cash. Cash equivalents and restricted cash, a decrease of $13.3 million from the previous quarter. The decrease is mainly due to the lease termination payment of our headquarters annual bonus incentive payout and interest expense in this period of transformation, we remain extremely focused on cash preservation and targeted efficient returns of cash outflows, such as the lease termination payment based on the rent saving, we expect less than a two year payback period to recover the initial cash outflow.

As it relates to working capital trends, we finished the quarter with an inventory balance of $31.5 million, up $2.7 million from the end of Q4 2023, driven primarily by increased investments in third party inventories.

Fourth, our category expansion initiatives. We have not made any draws on our asset-based loan facility since taking the minimum draw $7.5 million in Q1 2023. Based on current inventory and accounts receivable balances, we have $9.1 million of borrowing capacity available under that facility.

Now turning to our outlook. For the 12-month period ended December 31, 2024 Crystal expect net revenue of $215 million to $225 million an adjusted EBITDA margin of 0% to 1%. Despite the uncertainty around the theme of model transformation and our ability to increase advertising spend over the course of the year, we are maintaining our guidance and continue to be optimistic that the changes towards First Solar experience on the launch of Subscribe & Save were the catalyst for sequential revenue growth in the second half of the year.

We already see an improvement or Q1 conversion rate as expected allowing us to acquire new customers more efficiently, but there is more work to be done.

We also continue to manage our expenses well in the midst of the transformation, including the completion of the headquarters lease modifications and in the first quarter, I look forward to sharing more updates on top of bottom line progress in future quarters.

I would now like to turn the call back over to Jeff for some closing remarks.

Thank you, Sergio. Here these results are just the beginning as we pursue a multiyear transformation for growth. You've heard me speak about how our sustainable mission is needed.

Now more than ever before. Just look at the headlines about our environment and climate, as this is our differentiation, we are committed to building a sustainable business to pursue that mission. Our efforts are focused on building a business that drives shareholder value creation through the generation.

Our first step is sequential revenue growth by the end of the year while being profitable on an adjusted EBITDA basis for the full year, we're really laser-focused on our strategy and are excited to keep implementing our plan to drive results for our shareholders.

With that, we're happy to answer any questions you have. Operator, please open the line for questions.

Thank you. We will now be conducting the question and answer session. (Operator Instructions)

Susan Anderson, Cannacord Genuity.

Hi, good evening. Thanks for taking my questions. So I was wondering just on kind of how we should think about the cadence of sales as we go throughout the year. And I guess, should we think about it sequentially improving, I guess, quarter to quarter in terms of the decline? And then also maybe if you could talk about what the driver of the sales improvement will be as we go throughout the year. Thanks.

Appreciate it, and thank you. But first, I would say we're only guiding towards sequential growth this year, but we believe that we are near a bottoming out of those unusual comps that occurred when we spent so heavily on marketing back in 2022, what we're doing is just staying focused on initiatives around the customer experience.

This opening up the shopping experience to more new customers following our existing customers into wellness, where we're seeing great success and improving the overall experience while browsing and shopping on growth. That's where we're putting our energy.

And so when you start looking at what the revenue impacts are that we are forecasting, we see this sequential growth this year. And more importantly, this will be sustainable growth going forward as we go into 2025.

Great. And then I was wondering if you had any initial reads on the new products that you rolled out in terms of the ones with new packaging at retail and also if you're seeing them at all, bring any new customers into the brand? Thanks.

I appreciate it is very early on some of these new products, but we are quite energized. We're excited about the launch of the Graco re-brand, the new products, the summer limited edition collection. We didn't mention this in our release, but we were awarded an award by the guideline award. It's almost like the Oscars of the design world around packaging within the category of home shopping.

And so what we're seeing right now is anecdotally, we've heard that we've sold out of some targets already. The first week were really quite energized about the from the packaging to the positioning for me, I'm as excited about the underlying product, the efficacy of it and the price and no new guidance that we're giving right now. I'm just really excited about what we're doing and just recognizing it's very early.

Great. That sounds exciting. And then I was wondering if you could maybe talk about gross margin for the remainder of the year and should we think about it for the next few quarters as being consistent to first quarter in terms of the gross margin percent? Or are there any other drivers or impacts we should think about or seasonality there? Thanks.

I appreciate it. So Sergio, do you want to take that?

I can think. So thank you for your question, Susan. In terms of gross margin to bear in mind that Q1 has a couple of say, one four that you shouldn't be thinking of continuing during the following quarters. So apart from that. I will simply say that we obviously do not guide on gross margin going forward.

But the way to think about it is we continue as we have shown over the past 24 months, we continue to put all the efforts and priorities in terms of becoming profitable and gross margin continues to be one of those milestones. So the way to think about it is we continue to put emphasis on gross margin and we will put all the efforts behind increasing it in upcoming quarters.

Okay, great. And then last one for me. Maybe if you could just talk about advertising. I think you had talked about before maybe picking up that advertising in the back half of the year. I guess is that still the plan for this year? And should we I guess, is there any thoughts around that level of advertising and where it should be going forward?

I appreciate that, Susan, I would say right now, we are operating with really strict discipline expecting and demanding strong paybacks from our advertising spend. And so what's happening is, as we've transformed this customer experience as we have opened up the shopping experience and we are unlocking new channels and we're testing and learning.

And what we're seeing is week-over-week improvement since that launch on February 29. And so as those efficiencies continue to improve, we see a world where we can invest with very high confidence on paybacks, and that will lead to a higher advertising percent of revenue spend right now.

I'm not guiding to a specific number there. I will say though, what is most important as we think about this on an incremental level and we will only invest where it makes rational sense to win. We do see that marketing spend increase as a percentage of revenue. I think investors can have confidence that we are treating their cash carefully and we are investing with high expectations of returns.

Okay, great. Thanks so much. Good luck, the rest of the year.

Thnaks, Susan, really appreciate it.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone. Can you just can you talk a little bit about third party brands, what you're seeing there, how it's performing in their differences between brands or what you see and attributes of brands to perform better than others. And on the Grove brand, which I think was 43% of the business this quarter, where does that sell or settle out and how you're thinking about it?

I appreciate the chance to talk a little bit more about product. So first, as the data suggests third party is growing faster, and this is primarily driven because we're able to grow more SKUs and selection faster in that channel. However, I've mentioned this before, we really are not working backwards from an ideal percentage mix. What we are doing is working backwards from customer needs.

So the percent own brand versus third party is truly going to be more of an output metric than input metrics. If investors are worried, I think you could point towards our gross margin continues to improve quarter over quarter and even as third party has taken more share, our focus is presenting the highest performing Planet first products that are wallet friendly, and we'll keep putting them in front of our customers.

If I can put an exclamation mark on one set of products and categories, it would be around the wellness so there was a survey that we did among our customers and 9 out of 10 of our customers trust us more than other retailers on selling them and wellness items.

We've earned that trust by the high standards that we have from an environmental perspective, but also from an ingredient perspective. And so what we've seen this past quarter quarters with a VMS item increased from 8% last year to 13.8% this year.

This is also an increase of 290 basis points quarter over quarter as we continue to add more relevant selection, introduce our customers to great brands and products that are really meeting their needs. And so it is a category that we're energized by and one that we're seeing some strong success and we're just following our customers there.

And then following up on a numbers question on metrics, orders, active customers, AOV, how are you thinking of those progressing as we move through the year 1, how do you think about stabilization to increases? How should those metrics evolve in terms of the cadence?

Yeah. Good question. So I mentioned earlier in the first Q&A with the season that we see some of the natural cohort curves bottoming out in the back half of the year, and we can see a world towards sequential growth. And that's where we are marching towards. When you look at some of the math, revenue per order this quarter was at $66.27 I believe, and it was up 7.5% year over year.

Those type of expectations on revenue per order are reasonable to continue to maintain, and that's what enables the wallet economics to work so that customers are getting a great deal and we're able to pay our bills and deliver the right type of gross margin. So I think what you'll see is more of a stabilization of orders as we get through the back half of the year and a continued year-over-year improvement in revenue per order.

Thank you.

Thank you, Dana.

There are no further questions at this time. I would like to turn the floor back over to Jeff Yurcisin for any closing comments.

Thank you very much. I appreciate your time. I want to thank everyone for joining the call, and I hope you have a great night. Thank you.

And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.