Solo Brands delivered third-quarter results ahead of expectations on strong responses to launches across its brands. Sales guidance for the year was slightly lowered due to heightening macroeconomic pressures but guidance for gross margin and EBITDA margin was maintained.
Solo Brands’ four brands include Solo Stove fire pits, stoves, and accessories; Chubbies casual apparel and activewear; Oru Kayak, origami folding kayaks; and ISLE paddleboards, maker of inflatable paddle boards.
“During a quarter with a number of macro headwinds, we executed our strategy and delivered strong results,” said CEO John Merris on a call with analysts. “These results demonstrate the power of our unique business model, our deep connection with our customers and the benefits of our ongoing strategic investments and product innovation.”
Merris highlighted the benefits of gaining first-party customer data from its DTC focus. Solo Brands’ customer list derived from online marketing efforts is now nearly 4 million. Merris said this “creates a larger and larger competitive moat around our business as it continues to grow. Our customers not only love our products after their initial purchase, but they often come back and purchase more from us. In addition, our satisfied customers enjoy telling their friends and family about our products, leading to high referral rates.”
Solo Brands’ Net Promoter Score (NPS) remains consistently high, performing in the 80s.
The DTC model also enables Solo Brands’ team to leverage deep engagement with customers to gain insights into innovation. Merris said, “We continue to make progress executing our strategic initiative; first, innovating and elevating our product offerings; second, building and leveraging our data warehouse to drive conversion and marketing efficiencies; third, expanding our wholesale distribution; and fourth, growing our international business.”
Third-Quarter Revenues Surge 47.1 Percent
In the quarter ended September 30, sales jumped 47.1 percent to $102.2 million. The increase was driven by activity from acquired businesses and improved demand in both the wholesale and direct-to-consumer (DTC) sales channels. DTC revenues climbed 48.6 percent to $86.3 million while wholesale revenues gained 39.7 percent to $15.9 million.
Said Merris, “Both new and existing customers responded to the innovative products we offered this quarter, enabling us to continue to grow our database of clients. And importantly, our sales growth was driven by healthy gross margin of 63.3 percent.”
Gross margin increased 4.2 percent to 63.3 percent due to inventory turns driving recognition of fair value inventory write-ups from acquisition activity in the year-ago quarter, with no comparable impacts in the latest quarter. Adjusted gross margin decreased to 63.3 percent compared to 67.0 year over year, primarily due to the gross margin profile of the acquisitions made in the third quarter of 2021 and higher inbound freight costs.
The company acquired 60 percent of Oru Kayak in May 2021 and the remaining 40 percent in September 2021. ISLE paddleboards was acquired in August 2021. Chubbies was acquired in September 2021.
SG&A expenses doubled to $59.5 million from $28.6 million a year ago. Of the increase, $9.2 million was related to the businesses acquired in the third quarter of 2021, which did not include activity for the full comparative period. The remaining variance was driven by $13.5 million of higher fixed costs and $8.1 million of incremental variable costs. The fixed cost increases were primarily due to investments in long-term strategic initiatives, costs associated with becoming a public company in October 2021, and increased headcount. The variable cost increases were primarily due to marketing and distribution expenses.
Solo Brands’ net loss in the period came to $4 million, or 3 cents a share, with adjusted income coming to $7.6 million, or 15 cents. The company said year-ago comparisons weren’t meaningful or comparable due to the reorganization transactions which occurred in 2021.
Adjusted earnings exclude equity-based awards; costs related to expanded distribution facilities in Texas, Pennsylvania, and the Netherlands; and other non-recurring expenses.
Inventory at the end of the third quarter was $165.8 million, compared to $102.3 million at December 31, 2021. Increases in inventory were driven by preparation for the holiday season, international expansion and new product launches.
Among its products, Solo Stove launched its tabletop firepit, Mesa, that offers 360-degree airflow technology at an attractive price point under $100. Said Merris, “Mesa’s price point is more accessible and its size is adaptable to many more backyards and patios than the lineup of larger Solo Stove firepits. This is not only increasing the TAM (total addressable market) in our direct-to-consumer business but is also creating momentum in our corporate business. Companies can personalize Mesa through etching, which we believe makes for the perfect corporate gift.”
Solo Brands has been pleased with Mesa’s initial results and additional consumables for Mesa have been introduced.
Solo Stove’s new pizza oven, Pi, began to ship in the second quarter and is also seeing a good response. During the quarter, additional accessories, including Pi Stand, were launched. Pi will be rolled out to international markets before the holidays and new consumables lines are also being introduced to leverage Pi’s growth.
Solo Stove also launched Tower, a smokeless, pellet-fueled patio heater, in the current quarter as well as Surround, a table that goes around larger firepits. Additionally, Solo Stove’s colorways program has been extended to new colored options for all firepits. Said Merris, “We have been busy and are enthusiastic about our new launches. We like the launch timing of these products, especially given the increased traffic and conversion that we historically see in November and December at Solo Stove.”
ISLE introduced Switch in Q3 and has faced challenges keeping the item in stock due to strong demand. Said Merris, “As with all our brands, innovation will be a meaningful catalyst through ISLE achieving the potential we saw when we acquired it in 2021. In addition to innovation, we have a strong leadership team in place at ISLE and we feel confident in its future.”
Merris said Solo Brands’ overall growth continues to benefit from purchases across brands. By the end of the third quarter, 57,000 customers have purchased from more than one of the company’s brands.
Marketing efficiencies were also achieved despite the challenging online advertising environment. Merris said, “Our investments in data have been crucial in allowing us to be more precise with our innovation and to achieve a higher probability of success.”
In terms of channel expansion, an agreement was reached with Costco to sell its legacy Solo Stove 1.0 product. Said Merris, “We are excited about this opportunity because we believe it broadens our reach to a new customer demographic.”
Chubbies is gaining momentum in the wholesale channel, having expanded to most doors at Dick’s Sporting Goods in 2023. Internationally, direct relationships are being formed with top retailers, including a new Solo Stove partnership with Canadian Tire.
Merris concluded “In closing, we are incredibly pleased to deliver strong results this quarter in the face of a challenging economic backdrop. While we recognize that the macro environment is dynamic and quickly evolving, we believe that we are positioned with a compelling collection of products and a range of price points to meet our customers where they need us to be. We are not immune to current market conditions, but we are focused on what we can control, which is continuing to innovate and elevate our product offering to grow organically, while at the same time maintaining a disciplined approach to expense management, allowing us to deliver long-term profits and topline growth.”
Full Year 2022 Guidance
Based on the latest macroeconomic trends and overall consumer unpredictability heading into the holiday season, Solo Brands revised its full-year revenue guidance and reaffirmed its previous guidance for adjusted gross margin and adjusted EBITDA margin.
Total revenue is expected to grow 15 percent to 20 percent versus prior guidance of a mid-20 percent range. Adjusted gross margin, as previously guided, is planned to be above 60 percent of total revenue. Adjusted EBITDA margin, as previously guided, is expected to be in the mid-teens as a percentage of total revenue.
Photo courtesy Solo Stove