Solo Brands Inc (SBDS) 2021 Q3 法說會逐字稿

Hello and welcome to the Solo Brands, Inc. third-quarter 2021 earnings conference call. My name is Robin and I'll be coordinating your call today. (Operator instructions). I will now hand you over to your host, Bruce Williams from ICR. Bruce, please go ahead.

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, John Merris, and Chief Financial Officer, Sam Simmons.

Before we get started I want to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations. These may include without limitation predictions, expectations, targets or estimates, including regarding our anticipated financial performance, business plans and objectives and future events and developments, and actual 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 in 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 quarterly report on Form 10-Q, which will be filed today, but will be available on the Investor 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 units per share 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 comparison 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 quarterly report, our Form 10-Q and in our earnings release, both of which are available on the Investor portion of our website at investors.solobrands.com. Now I would like to turn the call over to John.

Thank you, Bruce, and thank you, everyone, for joining us for our first earnings call is a public company. I'm excited to be here today to share our story and talk about the tremendous opportunity ahead of us.

First I'd like to say how proud I am of our accomplishments to date and driving extensive growth across the platform, but also acquiring and integrating three exciting brands and moving into a new global headquarters all while launching a successful IPO. Thank you to our hard-working and dedicated team for all the hard work over the last year.

Later Sam will discuss the details of our third-quarter financial performance and provide our outlook for 2021. We are very excited about the continued growth and momentum in our business.

We are very pleased to report strong third-quarter results that were ahead of our expectations as revenue grew 138.3% driven by strength across all our businesses. Adjusted net income increased 39.7% and adjusted EBITDA increased 56.7%.

For those of you who may not be familiar with our Company, Solo Brands is a direct-to-consumer e-commerce platform comprised of four disruptive and rapidly growing lifestyle brands. Our premium authentic lifestyle brands develop innovative products that create good moments that lead to lasting memories for our customers.

We believe that we have an amazing family of brands that are uniquely positioned within their respective categories. The brands on our platform deliver significant and predictable growth and are fundamentally better together than they are apart.

Starting with our largest brand, Solo Stove is a disruptive outdoor lifestyle brand comprised of fire pits, camping stoves, grills and accessories that make lighting fires simple. Our secondary combustion produces a cleaner, hotter burn that creates a roaring yet virtually smokeless flame resulting in a better customer experience around the fire with friends and family. And all this from a portable wood-burning stove that can be enjoyed while camping, at the beach or in the backyard.

We have a culture of innovation as evidenced by over 25 new products being introduced over the last few years. In fact, I'm excited to announce our latest innovation and the pre-sale launch of a new Solo Stove product in a totally new category for us, the Solo Stove Pi.

Pi is a backyard pizza oven which bakes delicious pizza in a way that is easy and offers another way to connect with family and friends, which is what we are all about. We are excited about this new product offering to our customers and believe that we can disrupt this category and continue to be a key player in a growing outdoor lifestyle space.

The continuous product development cycle across our product lines leads to high repurchase rates and drives increasing customer lifetime value. I'm very pleased that we have been able to generate tremendous growth over the last several years with lower customer acquisition costs as 45% of sales are generated through word-of-mouth.

Oru Kayak is a revolutionary brand of origami folding kayaks that can be easily stored and assembled in minutes. The Oru journey started with a transformative idea -- what if a kayak could fold up like a piece of paper. Our team figured out a way to make it a reality. Today we have five different kayak models that fit every major use case and we see a massive opportunity to continue introducing first-time kayakers to the sport.

Simply put, we make the world's best, most innovative kayaks and we are well on our way to being one of the most recognizable kayak brands in the world. We invented this category and we are on a mission to transform how people connect to the outdoors.

ISLE Paddle Boards is one of the standup paddle board brands and it has a history of continuous innovation and evolution. ISLE was founded in 2004, 17 years ago, and was one of the first friends to sell surfboards on the Internet. Today ISLE has evolved to sell both hard and inflatable stand up paddle boards that can fold up into a backpack, making it easier to transport but still maintaining quality and performance. We love that ISLE continues to respect its heritage and Southern California ethos.

Chubbies is our authentic premium casual and activewear brand that was built for the modern man's active lifestyle. Chubbies is not a transactional apparel company but instead a relationship oriented brand that speaks to its customers as friends. The team at Chubbies has a history of pioneering unique digital experiences and continues to grow its community of loyal fans.

Most notably in the last 12 months, Chubbies has developed a social following on TikTok with over 1.6 million people. Like our other brands, Chubbies has also been built on a culture of continuous product innovation and pushing to drive new trends. For example, the shorter inseam trend was started by Chubbies nearly 10 years ago and today is far more conducive to the young man's active lifestyle.

At Solo Brands our e-commerce platform serves as our primary sales channel, generating over 92% of our sales, 84% on our own website, and is a key differentiator in an industry that primarily relies on retail stores. We provide a curated brand experience to our customers and benefit from having direct interactions with them. We excel at providing our customers with a world-class customer experience and we do it better and faster with scale.

Solo Brands has driven tremendous growth and sales, margins and free cash flow given our asset light operating model. We believe what sets us apart is our D2C execution coupled with our brand offerings that leverage operating synergies across our platform. The key attributes of our platform are: one, our direct connection to our community of customers; two, our innovative product development capabilities; and three, our scalable global infrastructure.

Our e-commerce platform provides us the opportunity to have a direct relationship with our customers and we know that our customers are our most impactful brand advocates. As mentioned earlier, word of mouth referrals drove 45% of new customers to Solo Stove through June 30 and it has held through Q3.

We use our strong customer engagement to leverage our vast first party consumer data, to improve our marketing efficiency, increase customer engagement and drive loyalty and repeat purchases. We apply the knowledge and expertise of Solo Stove's marketing team and digital ad and email strategies to our other brands which are utilized to accelerate growth and drive efficiencies.

For example, we have aggregated ad spend to reduce advertising costs and avoid agency fees through our in-house marketing team. In addition, our marketing team is able to monitor our [row ads] in real time with our proprietary correlation regression model.

This gives us a distinct advantage of being able to directly measure our advertising spend and use levers to help drive efficient customer acquisition and conversion without being dependent on third-party marketing and advertising platforms for performance measurement and customer acquisition.

Next I would like to take the opportunity to highlight our product development capabilities. Our innovation feedback loop starts with leveraging our massive consumer data set by increasing customer engagement and improving our marketing efficiency. We take our learnings and incorporate consumer insights into product innovation.

Our customers tell us what they like, what they don't like and what they want us to develop, and we utilize these real-time consumer insights to inform and shorten our product development timeline. As such approximately 18% of Solo Brands revenue was generated from new products launched in 2019 and we have a 36% repeat purchase rate with our customers.

A good recent example of utilizing our real-time consumer insights to inform product innovation is the launch of [Colorways] fire pits. Our customers told us that they wanted more color options beyond the natural stainless steel finish. We worked hard to find a coating that did not melt or flake under the heat of a secondary burn, which burns much hotter than a typical campfire. And we launched our Colorways line just a few weeks ago in Q4. The initial response has been extremely positive.

Furthermore, we are very excited about the innovation that we are developing across our brands to expand within existing categories or launch into new ones. We have built a product development organization and a supply chain that enables us to design, prototype and launch products quickly.

To that end, in addition Solo Stove Pi and Solo Stove Colorways, which I've already mentioned, Oru broadened its assortment by launching a kayak in a black color which quickly sold out. We have some other exciting new products we plan to launch this coming year at Chubbies and ISLE as well. Our product pipeline is strong and we are very excited about continuing to deliver innovation into the marketplace.

The beauty of our brand platform is that it is highly scalable. We have the global infrastructure to support organic growth but also to integrate D2C acquisitions. We have made significant investments in supply chain infrastructure, fulfillment and customer service.

As a result, we have built a powerful D2C e-commerce platform for our existing and for future brands. I am pleased to say that we are truly a plug-and-play platform that has been able to generate significant leverage in marketing and advertising, shipping and fulfillment and human capital.

We believe we have significant runway ahead of us by executing on the following growth strategies. First, accelerate organic growth. We are a D2C first platform and our focus is to protect and accelerate our D2C growth, leveraging our proprietary marketing engine. We have significant room for organic growth within each of our current brands by building brand awareness and acquiring new customers.

We see the total addressable market just for Solo Stove in the United States as 76 million households and Solo Stove has only about 1.5% market penetration of this market. In addition, we see a massive TAM and untapped opportunity to gain increased domestic market penetration in our other brands. Our proprietary consumer insights derived from our customer database enables us to increase our brand reach efficiently and inform our marketing and product decisions.

Second, utilize scale and platform efficiencies. We have made significant investments in our supply chain infrastructure, customer service and digital marketing platform. To that end, we have built a scalable global network of suppliers to support the growth of all our brands. In 2018 we brought our fulfillment in-house, which eliminates the middleman and provides us with greater control over the fulfillment process and allows us to offer the best customer experience possible.

We operate three warehouse facilities throughout the United States, enabling two- to three-day delivery via ground shipping almost anywhere in the domestic United States. As such we have improved shipping times, picking times and lower fulfillment costs. By leveraging our expertise in shipping and fulfillment across the Solo Brands portfolio, we have been able to generate platform efficiencies driving material EBITDA leverage and a better customer experience.

Third, international expansion. We also see tremendous opportunity to expand our brands internationally by replicating our successful domestic D2C model and by growing and leveraging our global infrastructure. In August we launched a Solo Stove website in Canada and have been pleased with our performance thus far. Our Canadian launch is a great example on how we lean on other brands' resources and expertise to accelerate growth in the platform.

Our Oru Kayak brand already had a presence in Canada and we partnered with Oru's community to build awareness about Solo Stove. As a result of Oru's support and Solo Stove's strong brand in the US, we generated more revenue in August 2021 in Canada than we generated in any August in the first six years in the US.

In October we opened a new fulfillment center in Rotterdam, Netherlands to service the European market and launched a European website with targeted advertising directly in four countries and had sales in 20 countries. We will continue to replicate our domestic D2C model across the continent.

Fourth, strategic acquisitions. We are constantly evaluating opportunities to add other disruptive digital D2C and high-growth brands to our platform; however, I cannot emphasize enough that we have significant growth in front of us with our current brands. Nevertheless, we have a clearly defined brand accelerator model and acquisition criteria should we find the right strategic and opportunistic brand partners in the future.

As a reminder, we are looking for enthusiast brands with impressive digital communities and strong emotional connections with the customers. We are a founder friendly acquirer of choice and want to partner with brands who are category creators and who have developed a significant competitive moat in their respective categories.

Fifth and final, channel expansion. While our focus is on driving growth on our D2C platform, we recognize the importance of having a retail presence in order to meet customers where they are. We offer our products in selective retailers because we know that some customers prefer an in person experience.

We see an opportunity to continue to selectively expand in this channel with our strategic partners including REI, Ace and Dick's Sporting Goods and expect that strategic retail could be 15% to 20% of our overall business over the next five years. We also have seven owned retail stores across Chubbies, ISLE and now Solo Brands showroom collectively.

I would also like to highlight our rapidly growing opportunity in corporate sales. We are very excited about this channel as it allows for us to access the large and growing promotional products industry. This channel plays into our strengths because we have the ability to provide unique customizable products that are great for gifting.

Before I close I have two important callouts. We would not be in our position without our amazing world-class team that has expertise across disciplines. I am proud to say that across our brands our people are fueled by a common set of key values that position Solo Brands to continue its category disruption and growth trajectory. Our people are tireless, results oriented, boldly entrepreneurial and bring positivity to our culture and I thank them for their hard work, dedication and enthusiasm.

Second, one aspect of our winning culture that I'm proud of is that we strive to be the good. We aim to be the good by operating with integrity and under stringent ESG targets. To that end, we partner with our suppliers to help them meet and exceed our standards. Furthermore, we contribute to the health of our communities and our planet through our philanthropic partners. As our brands grow we donate more back to the causes that matter to our community and customers.

We think Solo Brands has the opportunity to be the leading direct-to-consumer company in the world. Our collection of brands combined with our focus on delivering best-in-class customer experience positions us to deliver strong results over the long-term. Now with that I'd like to turn the call over to Sam Simmons to discuss our third-quarter results in more detail. Sam?

Thanks, John, and good morning, everyone. Before I begin the review of our third-quarter financial results, I would like to highlight a few points regarding how Solo Brands provides a highly attractive financial profile.

First, as you will see from the numbers, by operating primarily direct to consumer we maintain strong adjusted gross margins well above 60%.

Second, by bringing in house key functions such as supply chain, warehousing and fulfillment and marketing we can drive tremendous operating leverage and spend into incremental growth while maintaining strong profitability.

Third, our direct-to-consumer model allows us to maintain a deep connection with our current and future customers as we collaborate real time with them to identify and develop products that create meaningful moments and lasting memories in their lives.

Altogether this produces a flywheel effect of rapid growth, scalability and robust free cash flow conversion that allows for us to reinvest in product innovation, marketing and extend our brand reach. Given our largely untapped addressable market and the low CapEx requirements for growth, we continue to be excited about the white space and opportunity ahead. With that preamble I am pleased to share with you our third-quarter [momentum] and our outlook for the future at Solo Brands.

We experienced rapid growth during the quarter that exceeded our expectations in revenues and profitability. Please note that total revenues in the quarter include the acquisitions of Chubbies and ISLE, which were acquired in Q3 2021 and are not included in our financial results last year. Net sales increased 138.3% to $69.4 million compared to $29.1 million in the prior year period.

By channel direct-to-consumer sales grew 119.6% to $58.1 million compared to $26.5 million in the same period last year, and wholesale net sales increased 323.4% to $11.4 million compared to $2.7 million last year. Growth was primarily driven by an increase in total orders and average order value, which increased 104.7% and 3.9%, respectively. We believe the increase in the number of orders was primarily due to the positive response from our increased spending on our digital marketing strategy, growing brand awareness and increased demand for outdoor recreation and leisure lifestyle products.

Gross profit increased 97.5% to $41 million. Our gross margin rate was 59.1%. Adjusting for the impact of purchase accounting adjustments related to the fair value write-up of inventory per transaction, adjusted gross profit increased 122.3% to $46.5 million. Adjusted gross margin was 67.0%, in line with our expectations. Gross margin was driven by the strength of our direct-to-consumer platform while managing through higher freight and logistics costs that are impacting many companies to meet demand.

Selling, general and administrative expenses increased to $28.6 million, or 41.2% of net sales as compared to $9.5 million in the same period last year. The increase in SG&A was primarily driven by higher advertising and marketing expense, investments in headcount to support growth and higher outbound shipping costs. One important note is that our D2C model requires less overhead allowing us to increase marketing spend and still drive demand that generates our [coveted] returns.

Other operating expenses were $3.1 million during the quarter due to acquisition-related expenses. As a result of these factors, net income was $2.1 million.

Adjusted EBITDA and adjusted net income are both used by our management team as supplemental measures of our performance for purposes of business making decisions, including managing expenditures and evaluating potential acquisitions. They help to identify additional trends in our financial results that may not be shown solely by period-to-period comparison of net income or income from continuing operations.

To that end, adjusted net income increased 39.7% to $15.8 million; adjusted EBITDA increased 56.7% to $18.2 million; and adjusted EBITDA margin was a healthy 26.2%, in line with expectations.

Now turning to the balance sheet, at the end of the period we had $9.5 million in cash and cash equivalents. In addition, we had $249.0 million in outstanding borrowings under the revolving credit facility and $100 million in outstanding borrowings under the term loan agreement and $30 million under our subordinated debt agreement.

On October 28, 2021, we completed our initial public offering and raised $231 million in net proceeds and used the proceeds to pay down outstanding debt. As of November 30, 2021, we had $32.9 million in outstanding borrowings under the revolving credit facility and $100 million under the term loan agreement. The borrowing capacity on the revolving credit facility was $350 million as of November 30, 2021, leaving $317.1 million of availability.

Inventory at the end of the third quarter was $113.6 million. We are pleased with the efforts our team made across our brands to build up inventory throughout the year to satisfy our growing demand. Despite supply chain imbalances that are impacting many companies, we are well-positioned with the level, mix and quantities of inventory on hand. Accordingly, we are in great shape to provide a best-in-class experience for our customers from order to delivery through the holidays and into next year.

Now turning to our guidance, we are providing guidance based on the visibility that we have today. The holiday selling season has gotten off to a strong start and we are raising our full-year revenue guidance range for 2021 to $344 million to $352 million and raising our adjusted EBITDA range to $107 million to $109 million. We expect fully diluted shares outstanding of 97.8 million as of December 31, 2021.

In conclusion, I am very enthusiastic of our future and our highly disruptive D2C platform. Our long-term growth pillars are sound and we remain confident in our long-term trajectory for growth and profitability. I will now turn the call back over to the operator to take your questions.

(Operator instructions). Robbie Ohmes, Bank of America.

Hey, good morning, guys. Congrats on your first quarter as a public company. I just had a few (multiple speakers). My question is on the nice revenue guidance for the fourth quarter. How much of that versus what we were expecting at the time of the IPO, how much of that is being driven by Solo Stove versus the other brands?

And then also, could you talk about the -- wholesale revenues were a little bit, I think, lower than we were expecting for this quarter. What's the wholesale versus the D2C outlook for the fourth quarter and any thoughts on next year for us?

Happy to jump in here and then Sam can layer on on top. Thanks for the question, Robbie. With regards to -- maybe going in reverse order there, so just speaking to wholesale. As we see wholesale business come in, sometimes it will crossover into another quarter.

So, as we saw the retail relationships that we have gearing up for Q4 and ordering inventory, some of that inventory pushed into Q4. So, that was just a matter of timing from a quarter perspective. So, nothing drastically changing or different in terms of the way that we've thought about the mix from a retail perspective.

Obviously, historically because of the holiday sales season and the strong direct-to-consumer presence, Q4 generally tends to be a higher mix of direct to consumer and a lower mix -- of course we are still in Q4, so not really indicating exactly where it's going to come through.

But just based on our historical -- what we've seen historically from a retail to D2C mix standpoint, generally D2C will have a higher percent because of the holiday sales season in that direct-to-consumer channel that we are driving in Q4.

So, some of that is going to be pulled down slightly from some carryover retail business that we saw from -- carryover from Q3 to Q4. But generally speaking that's how we see it mix out. And again, as Sam mentioned just a few minutes ago, in terms of our future outlook, we're still, over the next three to five years, expecting to see retail kind of trend towards that 15% to 20%.

But that will happen incrementally over that period of time. So, nothing drastically changing into 2022 in terms of the retail or the wholesale to D2C mix. In terms of -- I can't remember what your first question was, Rob.

It was more color on Chubbies, ISLE and Oru -- how sales are for those three versus the Solo Stove.

Yes, absolutely. So, we've talked about this before. We won't be reporting on each of the individual brands, but just anecdotally what we can say is that from a growth perspective all of the brands are showing really good, strong results.

And so incrementally, as we beat, we're finding that the beat is coming in proportionately from each of the brands roughly around where you've seen those proportions historically play out as we've shown them to you. So, none of the brands are necessarily outsized necessarily from a growth -- a year-over-year growth standpoint to deliver these outsized results.

That sounds great. Best of luck with the rest of the holiday.

Great, thanks Robbie.

Thanks, Robbie.

Chris Horvers, JPMorgan.

Thanks. Good morning, guys. So, my first question is there's a lot of questions out there about potential holiday pull forward given that consumers started shopping earlier this year. Is that something that you think that you've seen? And to what extent -- with only a couple a few weeks left here in the quarter, are you baking in the risk that there could have been pull forward?

Yes, it's a good question. What we've tried to do, we talked about this quite a bit, being direct to consumer with as heavy of a mix as we are, we have really good feedback from customers in real-time, which I think is an advantage to D2C and just overall to our strategy.

What we did is listen to what customers are saying and what customers are saying to us, and what you were kind of hearing across the board, is that customers were concerned, based on all the supply chain news, that they were going to have a hard time getting products before the holidays.

So, what a lot of brands did, including our brands, is we basically just pulled our promotional calendar forward and then gave customers that piece of mind that they could get their hands on the products soon enough that there wouldn't be delays, and they'd actually have products under the tree on Christmas or for the holidays. And so, we've seen that play out.

Obviously this is a Q3 earnings call, we don't want to get too far into Q4. But early signs are that demand was higher earlier and we -- again, as Sam mentioned, we really like what we've seen in Q4, which is in large part what's revised our guidance to you guys.

Got it. And then as you look at the fourth quarter, you raised -- you essentially raised the year about $23 million on top line and about $6 million on the EBITDA line. So, that's about a 26% EBITDA margin flow through.

Just thinking about the scale of 4Q from a volume perspective, as well as this being incremental revenues to the original forecast, the question is why wouldn't those -- the quarter itself just be a higher-margin quarter and especially with the D2C mix? And then why wouldn't that revenue flow through at a higher than 26% EBITDA margin rate?

Yes, great question. Essentially there's -- while Q4 we have really good operating leverage which you guys have heard Sam talk about a lot, Q4 is also heavier -- it's all planned, but it is a heavier promotional period. And so, as we outsize performance in Q4, obviously that's going to flow through all the way through to what the EBITDA margin looks like.

And so, you're going to see outsized performance in Q4 ultimately average out to that EBITDA performance for Q4, which is why you see it kind of in that 26% range versus something higher like you might see on an overall yearly blend.

Got it. Awesome. Thanks very much and have a great holiday.

Thanks, Chris. Appreciate it.

Randy Konik, Jefferies.

Yes, thanks a lot and good morning, everybody. So, a couple questions here. I guess first, John, when you are thinking about the long-term in terms of category and product expansion opportunities and philosophy, you talked a little bit about Pi, you gave some perspective on Colorways in the fire pits. Maybe just give us your perspective on just kind of the Company's philosophy on how to think through what products to expand into, categories to expand to.

Yeti, actually what they used to do is talk about it from a portability and usage occasion perspective and how they kind of thought about product expansion or category expansion. So, I'm just curious on how you're thinking about that.

And then, Sam, I think you said in the quarter AOV was up 3.9% and I think Colorways didn't launch until the fourth quarter. So, I'm just curious if there has been nice AOV lift from Colorways. And just generally how we should be thinking about AOV opportunity in the future.

And then lastly, back to John. On international you talked about expansion of a distribution center abroad, already selling in 20 countries, websites in four countries. Just give us even more flavor, anything else you can think about over the next few years that we should be considering around international opportunities going forward. Thanks, guys.

Absolutely. So, in terms of our philosophy around product innovation and even the ongoing discussions that we have around M&A and build versus buy, the categories that we are looking to be in are categories that, first and foremost, allow us to help our customers continue to create good moments and lasting memories. That's a very strong focal point for us.

I think also as just an overall philosophy, we believe in the outdoor category. We believe that people spending time outdoors is what drives a lot of great experiences and good moments and lasting memories. So, we are looking -- whether it's in product development or whether it's an M&A, we are looking for products and innovation that help customers create good moments and lasting memories.

And primarily we're focused in the outdoors and, of course, in products that are allowing us to continue to drive the type of growth, so categories that either are untapped or haven't been innovated that we think have large TAMs and a good profit opportunity for us from a business perspective.

And then internationally I'll just maybe knock both of mine out and then give Sam the mic here to talk through EBITDA and margin stuff. On the international front, we are really pleased, as I mentioned, with kind of the early signs both of what we've seen in Canada and also in Europe. We have not been surprised for -- on the bad side in terms of what we've seen. In fact, we've been pleasantly surprised if anything with demand and the strength of the brand.

What we didn't know going into international was how well-known the Solo brand in particular would be known and recognized as you went over the pond to Europe. Thus far, early signs would suggest that the brand is pretty well-known and, from an overall kickoff point, obviously it's starting off much more rapidly than the way that we kicked off here in the US. And so, we are really happy with early signs.

As we've mentioned previously and in the S-1, we do have plans to continue to expand those localized sites in Europe beyond just the four to several other countries in Europe, and then later next year still have plans to launch Australia. So, everything is intact in terms of our international strategy.

As you guys know, we did not put international revenue into our initial model from a financial standpoint, just didn't want to rely on it. So, everything that we are doing internationally is additive to the way that we've modeled out and guided our future revenue.

(multiple speakers) your question was on AOV or was there another piece to it as well?

In the quarter -- I think in the quarter you said that AOV was I think up 3.9%. And I think you also said John made mentioned that the Colorways on the pits I think launched in fourth quarter. So, I think that's a significant upcharge or higher price point that the consumer is paying for.

So, I'm just curious if it's, A, impacting AOV already significantly or noticeably; and then, beyond Solo Stoves, if you have interesting AOV opportunity whether through higher price products or UPT or units per transaction that are coming through. Just curious there.

Great question. I will speak largely to the historical performance, which is that we have seen increasing AOV historically. And as you mentioned, there's a few different ways that's achieved. One is simply by introducing new products at higher ticket prices and new categories really, as John mentioned, the Solo Stove Pi, which we are really excited about. In addition to that though, we also have accessories that really round out the experience for our customers and are complementary to their lives.

And the combination of both having additional accessories and roasting sticks for the fire pits as well as, as you mentioned, higher priced fire pits that our customers have been requesting that add color -- all of those kind of blend and have continued to improve our AOV as you look at the past couple of quarters. So, for Q4, I don't want to give too much insight there, but will certainly -- that will be noted in our next earnings call. But trends so far have been positive.

I would add as well, Sam -- I think Sam's call out there on accessories is an important one. I would point to the repeat purchase rate of 38%. One of the things that we are finding more and more success with is getting customers to add on additional items on the initial purchase and that metric is helping drive AOV.

And in fact, with so many accessories being launched and access to lower-priced items, it's actually quite impressive that we are watching AOV go up as an overall metric because we are having to offset singular product purchases that are in more of the $50 to $100 range with higher average order values in general by customers taking -- adding a fire pit to purchase and then adding accessories with it. So, we are seeing items per order continue to rise, which is in large part what is driving that AOV.

Very helpful. Thanks, guys.

Sharon Zackfia, William Blair.

Just a question on your gross margin outlook. There have been a lot of pushes and pulls since the time of the IPO. Have you had any material changes to the thought process for the fourth quarter or for 2022?

And then secondarily, given the new variant alongside the low obsolescence of your products, do you plan to kind of continue to have I guess I would call it elevated destock going into 2022 to ensure you have supply?

Yes, so just really quickly on the supply question, I would absolutely say yes, we believe that, again, because of the -- there's really two types of planning that we think about. One is budget planning and one is demand planning. And what we want to make sure is that on the demand planning front that we're prepared for whatever growth rate that the customers are demanding for the product.

Again, you heard the market penetration that we believe we have in the US, just the US alone at Solo Stove at about 1.5%, so very early in the story. Obviously these aren't products that expire on a shelf. We see a big opportunity to continue to carry sufficient inventory to make sure that we can deliver for the customer. So, we're definitely focused on that.

On the gross margin front, we're continuing to watch like everyone else is. I mean, the main drivers for gross margin are your COGS, which are somewhat influenced by the combination of raw materials and your freight expense. And so, those are the things that we're watching closely. We were very conservative in our approach here. We think that we were sufficiently conservative and still feel very good about being able to deliver on the guidance that we put forward that allows us to deliver the financial profit profile that we've laid out.

So, we feel good about our gross margin outlook for 2022. Nothing that we're seeing is suggesting or indicating anything different than the way we were thinking about it several months ago. (multiple speakers).

Yes, just a couple points on the inventory position. I think a key thing to note for us is that the customer experience starts with that first order. So, when a customer places an order and gets confirmation, then it's shipping confirmation.

And those types of experiences really impact -- we will get feedback -- before the product is even delivered the customers are raving about Solo Brands. And that's really important to us so that a customer impression before they even actually use the product, having that be a good first impression is critical.

Obviously once they get the product and use it we think it will -- from there it just elevates where they have an even better experience in real life. They've seen it on social media or wherever else and they are going to use it and it's better when they have the tangible experience.

But having that initial impression be driven by having inventory in stock that we're fulfilling ourselves, getting right out the door two- to three-day ground shipping, placing our facilities closer to our customers so they can have that positive (inaudible) -- that's all very deliberate -- part of our strategy.

And then on the gross margin side, I think John nailed it. Nothing really to add there. We're definitely aware of the pressures. We're not assuming that those are going away. We are assuming the pressures are there as we think about our forecast ahead and what we've kind of outlined.

That's great, thank you very much.

(Operator instructions). Peter Keith, Piper Sandler.

Thank you. Good morning, everyone. Nice first quarter out of the gate. I wanted to hit on marketing and, John, I was hoping you could address how you guys have navigated the Apple IDFA change?

It seems as we've gone along we're getting further away from the change that a lot of D2C companies are seeing increased problems as they get further away from some of that customer data. So, could you talk about how you are navigating it, how your ROAS has evolved and are there any specific problems with any of the four brands?

Yes, great question. Thanks, Peter. Absolutely. So, I think first and foremost what's a good starting point is that we were, again, from a model standpoint, really well-positioned to take this on head-on. And the reason is that we had in-sourced our marketing execution years ago. And what that led to is last fall, a year ago, so well before around the March timeframe is when that change that you just mentioned with Apple happened.

Many months before that we had the foresight of that happening and made the decision to build out an internal correlation regression model leveraging our own first party data. That essentially was intended to allow us to see the effectiveness of our ads outside of the -- without having to rely on the actual platforms like Facebook and Instagram that were heavily impacted in a negative way by that change.

We made that investment with our own set of engineers and built this model and had it tested before the change happened so we could see how our model was performing against the ad platforms and what they were saying. When the change happened in March we were able to continue to lean into our own correlation regression model and see the effectiveness of our ad spend even though platforms like Facebook were flying largely blind and not able to do that.

And so, we in large part have not seen the impact that other brands have seen because we've been able to leverage our own first party data set and in this internal execution to do that. So, we've been able -- and in fact, in some instances, because a lot of people abandoned some of the more common ad platforms because they were flying blind, we actually found those platforms to be even more cost-effective for us because there was less competition because a lot of brands had dropped out. So, that's my first point.

The second one that I would make that our team has done an exceptional job on this year is continuing to diversify and to be on the front end of any sort of innovative advertising -- digital advertising opportunity again with this in-house capability that we have.

And so, what we've done as well is we've spread out and diversified our digital ad spend across an even wider myriad of ad platforms. Those add platforms are performing well, actually performing in many instances above our historical ROAS performance, which is driving very efficient marketing spend.

So, not only do we have the operating leverage that Sam has been talking about, which allows us to continue to drive growth once we cover our fixed expenses, but we also have more levers that we can pull in digital marketing as our team has become more knowledgeable and more experienced and diversified that digital ad approach.

All right, that's great feedback and good overview. Go ahead, Sam.

Yes, I'm just going to layer on. I think one thing to point out just at a high level that I think is pretty darn unique. Given 84% of our businesses are on websites, just that fact alone sets us up to be able to see real time what's happening as we test and move different levers around our digital strategy. That's just not possible for many companies. They are not going to get that throughput of data out the gate when they are moving their marketing strategy or changing tactics.

So, for us just the capability to do that I think is incredibly unique. And then obviously, as John mentioned, we're doing everything we can to leverage it and have our own in-house marketing and all the things you talked about. So, just wanted to point out just the capability I think is pretty unique, which we're obviously doing the most we can to make the most of it.

Okay. And if I can just ask a follow-up, maybe we'll look at Chubbies for example. So, because that's a recent acquisition, you didn't have that period of in-house marketing to build all of the data. Has that brand specifically been able to navigate this or has Chubbies seen any specific problems because of the change?

Yes, good question specifically. Obviously we don't generally isolate brands, but in this instance this is an easy one to cover. Chubbies actually, very similar to Solo Stove, had taken the same approach of insourcing their marketing. And so, while they didn't necessarily have the correlation regression model that we had built, they have a very sophisticated execution internally with their own marketing team. So, they've been able to navigate.

And again as I mentioned earlier, they've built through pivoting to new channels, TikTok as an example, to amass a 1.6 million follower base on TikTok which is right in the wheelhouse -- that demographics is right in the wheelhouse of their customers. So, what they've been able to do is diversify their digital marketing strategy, which has allowed them to continue to maintain the marketing efficiencies that they've seen in the past.

Less by utilizing the Solo Stove approach, which is this correlation regression model, and more by diversifying into new ad channels. And now when you layer those two things together, obviously there's wins on both sides because they are teaching us about the TikTok channel and how to leverage that. And we are giving them visibility into our correlation regression model. So, it's truly a rising tide lifts all ships that they were able to navigate it in their own way leveraging new digital channels.

All right. That's a great overview. Thank so much, guys.

Thanks, Peter.

(Operator instructions). We have no further questions. This therefore concludes our Q&A. I will now hand back over to John for any closing comments.

Yes, great, thank you all for being with us today. We're really looking forward to updating you on our progress on our next earnings call, looking forward to talking through our Q4 and full-year results. So, wish you all a happy holiday season and, again, thank you all for joining us today.

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