Solo Brands Inc. may need to think about changing its ticker symbol if the business continues to shift as it did in the second quarter. For a company identified by the symbol “DTC” on the NYSE, the conversation for the quarter was interesting as the growth in its wholesale business overshadowed the decline in its direct-to-consumer (DTC) business.
While Solo Brands DTC business overshadowed the wholesale side by a 3:1 margin in revenue volume in the quarter, the trend line was definitely with the wholesale business once again this past quarter as revenues in the segment jumped 57.0 percent to $31.3 million in the second quarter while DTC revenues declined 14.2 percent year-over-year to $99.7 million for the period.
The varied results were driven by a product mix shift, including products and accessories launched in the second half of 2022, increased volume for apparel products and decreased digital marketing spend, but the shift was also due to a new focus for Solo Brands to support retail customers and expand its brand story in-store.
Total second-quarter net sales decreased 3.7 percent to $130.9 million, compared to $136.0 million in the prior-year comparable quarter.
Solo Brands’ wholesale business has been on a growth curve due to brand acquisitions, introducing new products for its core Solo Stove brand and acquiring Pi Oven and Terraflame outdoor furniture. In May, the company acquired Terra Flame to join the portfolio, including Solo Stove, Chubbies, Oru Kayak, and Isle.
“During the quarter, we leaned into the strong momentum we were seeing through our wholesale channel. We are rapidly gaining shelf space while increasing our door count,” shared company CEO John Merris on a conference call with analysts. “We have built strong relationships with our retail partners, and consumers have reacted enthusiastically to the presentation of our brands at stores across the country. Within the online channel, we used our digital marketing lever to strategically pare back our spending as we saw strength in wholesale.”
Company CFO Somer Webb said Solo Stoves’ wholesale growth for the quarter was also driven by increased shelf space with its partners and door count growth.
It was the third straight quarter with a decline in Solo Stoves DTC business, which is interesting for a company that a year ago was touting its technology and in-house capabilities as Merris told attendees at the 2022 ICR Exchange the company was seeking to become the “digitally-native direct-to-consumer lifestyle disruptor” in the outdoor business. Fast forward 18 months, and the story is quite different and perhaps more relevant now.
“As we saw strength from wholesale, we reduced digital marketing spend in our direct-to-consumer channel,” Webb said with respect to the most recent quarter.
But the shift in the DTC business could also be explained by more recent comments from Merris when he outlined Solo Stove Brands’ strategy to shift away from a heavy promotional cadence online.
“As we grew into an omnichannel model, we have focused on elevating our brand positioning and aligning our sales calendar with our retail partners,” Merris explained. “We have also pulled back our use of flash sales year-over-year, leading to a reduction in the level of planned promotions. As expected, this pullback in promotions and advertising during the quarter led to a moderation in sales trends in our direct channel, but longer term, we believe that this is appropriate to drive consistent messaging and to better reflect the value of our brands.”
Solo Brands is clearly making a push with its retail partners to capture a larger pad for its brand family based on the success of the hot in-demand Solo Stove product, but the company has started to step up efforts to cross-merchandise the brands through marketing efforts as well.
“In addition to enhancing our in-store presence with our retail partners, we see opportunities to build awareness for our entire platform of brands,” Merris added. “We believe that many of our customers do not know all of the brands that are part of the Solo Brands family, which creates a significant opportunity to increase the number of customers that shop across our brands.”
Merris added that reorder volume continued throughout the quarter, along with new product placement with key retailers.
“In the wholesale channel, we are building stronger relationships with our partners,” Merris continued. “We are now part of the normal planning cycle for many of our key retailers, which is leading to an increase in door count, additional shelf space and improved product placement. We recognize the mutual benefits of working closely with our retail partners, and we will continue to drive awareness and sales across all channels.”
Merris said that beginning in the second half of the year, the company would add marketing inserts into packaging that displayed all of their brands and offer an incentive to try one. “We are incredibly excited about the potential for this initiative,” he said.
Merris said that its international business remains a significant opportunity for the company and that international remained a “relatively small part” of its overall business, and the company is focused on investing and building the infrastructure to position for long-term growth.
“Similar to our domestic business, we are looking at the international business holistically and are channel agnostic,” he expanded. “We are building relationships with retail partners, including Costco Europe, which we believe will enable us to grow our brand recognition more rapidly.”
Despite the shift to wholesale growth, the company’s gross margin decreased just 30 basis points to 63.4 percent of sales in Q2 from 63.7 percent of sales in the second quarter of 2022.
“Our margin rate was impacted by higher wholesale channel mix year-over-year, driven by our strong sales at our retailers, which carry a lower gross margin,” Webb explained. She noted they are “channel agnostic as each channel generates similar contribution margins.”
SG&A expenses for the second quarter decreased to $63.5 million, or 48.5 percent of net sales, in Q2, compared to $69.2 million, or 50.9 percent of net sales, in the comp period last year. The variance was said to be driven by a $6.8 million decline in variable costs, partially offset by $1.2 million of higher fixed costs. The decline in variable costs was reportedly due to lower marketing and distribution expenses.
Net income was $11.5 million, or 12 cents per share, in the second quarter, compared to a loss of $19.9 million, or a loss of 19 cents a share, in the year-ago period. The 2022 second quarter period included impairment charges of $30.6 million, of which $27.9 million was related to goodwill for the company’s Isle reporting unit and $2.7 million was related to the Isle trademark intangible.
Adjusted net income was $17.9 million, or 22 cents per diluted share, for the second quarter, compared to adjusted net income of $17.3 million, or 40 cents per diluted share, in Q2 last year. Adjusted EBITDA increased 5.6 percent to $25 million, and adjusted EBITDA margin increased 170 basis points to 19.1 percent of sales.
Balance Sheet
Solo Brands had $60.6 million in cash and cash equivalents at quarter-end. As of June 30, Solo had $50 million in outstanding borrowings under a revolving credit facility and $93.8 million under a term loan agreement. The borrowing capacity on the revolving credit facility was $350 million as of June 30, leaving $300 million of availability.
“We have a strong liquidity position, and we believe we are able to take advantage of strategic opportunities with a net leverage that remains less than 1.5x,” Webb explained. “In the quarter, we were able to leverage the health of our balance sheet and execute a roughly $28 million share buyback of 5.6 million Class A shares at $5 per share.”
At the end of the second quarter, inventory was $113.7 million, “roughly in line with a year ago.”
“We are pleased with the continued progress of our inventory management and are well-positioned going into the back half of the year,” said Webb.
Outlook
Webb said Solo Brands was excited about the pipeline of new products planned for the back half of the year and the continued momentum it sees in the wholesale channel.
“With more than half of our sales anticipated in the second half of the year and a significant portion in the fourth quarter, there is a lot of business in front of us, but we remain optimistic about our ability to deliver in the near- and long-term,” she said.
“As demonstrated in our first half results, the focus on driving profitable growth, along with continued momentum in wholesale, has enabled us to deliver on revenue while seeing strength on EBITDA margin,” she continued. “We reiterate a revenue range of $520 million to $540 million, with the most likely outcome at the midpoint of the range of $530 million. While we are reiterating revenue guidance, we are raising our adjusted EBITDA target from a range of 16.5 percent to 17.5 percent to a range of 17 percent to 18 percent for the full year.”
Solo Brands said its full-year 2023 guidance is based on several assumptions subject to change, many of which are outside the company’s control. The company’s expectations may change if actual results vary from these assumptions. There can be no assurance that the company will achieve these results.
Photo courtesy Solo Brands/Oru Kayak
