Grove Collaborative Holdings, Inc.
Q2 2022 Earnings Call Transcript

Published: 12 Aug 2022

[Operator:]

Good day, ladies and gentlemen, and welcome to the Grove Collaborative 2Q 2022 Earnings Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Alexis Tessier. Ma'am, the floor is yours.

[Alexis Tessier:]

Hello, and thank you all for joining us today. With me on today's call are Grove’s, Co-Founder and CEO, Stuart Landesberg; and CFO, Sergio Cervantes. Before we get started, I'll quickly cover the forward-looking Safe Harbor. Some of the statements that we make today are about our future prospects, financial results, business strategies, industry trends and our ability to successfully respond to business risks may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause our actual results to differ materially. All of these statements are based on our view of the world and our business as we see it today. As described in our SEC filings, the underlying facts and assumptions for these statements can change as the world and our business changes. For more information, please refer to the risk factors discussed in our most recent filings with the SEC, which are available on our Investor Relations website at investors.grove.co. During today's call, we 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 our earnings release and supplemental earnings presentation, which are also available on our Investor Relations website. With that, I'll turn it over to Stuart.

[Stuart Landesberg:]

Thank you, Alexis, and good afternoon, everyone. I'm excited to speak to you today after our June listing on our first earnings call as a public company. We will share details on our performance in the second quarter, how our results fit within our shareholder value creation plan, and why we believe Grove is positioned for success as we lead the household products industry to transformational change. For those of you newer to the Grove story, let me first provide background on our company and the mission that got us started. At Grove, our vision is that consumer products can be a positive force for human and environmental health. We operate in a massive industry with almost a $1 trillion global TAM for home and personal care products, a $180 billion TAM in the US alone. Essentially, all of that commerce is wrapped in single-use plastic today. Simply put, the current plastic and carbon footprint of our industry is not sustainable. In 20 years, products in our industry will look different. Change is inevitable, and Grove is leading that transformation. The home and personal care industries historically have a mixed track record for their impact on human health and a terrible track record for their impact on environmental health. One problem though, in particular, is the tip of the spear, both for our industry and for Grove, plastic. The overwhelming majority of consumers, 84% in the US are concerned about plastic waste. Grove is focused on being the market leader in solving that problem. The opportunity at Grove is to transition the products that we all use each day, hand soap, dish soap, laundry detergent, bath tissue, shampoo, face wash, both are good for us and for the planet. We are building this company to serve the families of tomorrow as consumer-led action on climate change and more specifically on plastic is only accelerating. It has been a journey to get here. I started this business in 2012, initially as a direct-to-consumer company offering a curated portfolio of products from the best third-party natural and sustainable brands in home and personal care. Over time, Grove has built a loyal and engaged user base. We have over 1.5 million active customers today on our DTC platform. We’ve leveraged the uniquely rich data set and our consumer relationships, along with clear conviction about a more sustainable future to create our own truly disruptive set of brands. We've spent the last decade gradually, but significantly building authentic brands in home and personal care and notably our flagship Grove Co. brand is number one in zero waste home care and really leads that category in awareness, in presence, efficacy and sustainability. The products we launched under Grove Co., as well as other incubator brands, such as Peach Not Plastic, Superbloom and Good Fur are not only better for consumer health and the health of the environment, but they're highly efficacious. It's worth pausing for a second on efficacy, perhaps the least glamorous of our design pillars, but essential for long-term customer loyalty. If a product doesn't perform as well or better than current market leaders Grove Co., will not launch it. Grove products work as well or better than, the products consumers are used to today. This, along with our strong brand, drives exceptional customer loyalty. We've always sought to also build a big tent around sustainability. That means we need to target the middle of the bell curve consumer, and deliver products that are a good value in addition to being truly innovative and efficacious. That intense focus on efficacy, sustainability and consumer centricity has allowed us to establish a market leading position, as I mentioned, in the two trends that we think are most important in zero plastic and sustainable home care. I firmly believe that our innovation road map for the coming years is far ahead of the rest of the industry. For DTC routes not only allow us to make more informed product development decisions, but get to market faster and iterate more quickly than traditional peers. In terms of innovation, we just launched our Fall seasonal collection Naturelust. It is super exciting. We have two limited edition sets inspired by Fall traditions, Mulled Apple and Spiced Pumpkin. I encourage you to check them out while you can. Both are available on our site, app as well as Target and target.com. My personal favorite is Mulled Apple, but I certainly respect that Spiced Pumpkin has a big following. While our business was built on DTC, industry-wide less than 10% of purchases of home and personal care products are done through direct-to-consumer. Over 90% of purchases in our category are made through traditional diversified retail. With this in mind, in 2021, we expanded distribution beyond our own DTC platform into brick-and-mortar retail for the first time through a partnership with Target. We did this to elevate our brand, drive exposure, increase awareness and meet consumers where they are. We are extremely pleased with our partnership with Target. They have been true partners providing visibility and helping to educate consumers on how our products solve an environmental problem without compromising on efficacy. Our success in Target has been an excellent proof point of our strategy, helping build momentum in our retail distribution rollout, which I'll discuss in a minute. But before moving on to performance in the quarter, I'd like to point out that Grove is both a certified B Corp and a public benefit corporation, which enables us to balance the interest of all stakeholders and the environment. This is so much more than just an insignia on a page for us. It is entwined with the DNA of the company and how we think about changing the world, and how we think about building a durable, long-term competitive advantage relative to our peers. We believe that an authentic commitment to our mission is critical in attracting and retaining the best talent in the world, securing the best partnerships with influencers, celebrities, and other brands and building deep connections that can last for years with our consumers. I'm extremely grateful to all of the Grove team members for their hard work and dedication over the last decade and I am a firm believer in the fact that great people are what create great and differentiated companies over time. Now, moving on to our performance in the second quarter. Our results represent the beginnings of our effort to eliminate unprofitable revenue and drive improved margins on a sequential basis in order to be profitable in 2024, in line with our shareholder value creation plan. In total, for the second quarter, revenue was $79.3 million, down 20% year-over-year and 12% compared to 1Q 2022. Adjusted EBITDA was a loss of $21.1 million, essentially in line with last year's loss of $21.0 million, but a significant and notable improvement from the $39.7 million loss in the first quarter of 2022. These results trended better than our internal expectations. Based on our performance through the first six months and our outlook for the remainder of the year, we are pleased to raise our full year guidance for both revenue and adjusted EBITDA margin despite the macro environment. Sergio will walk through the specifics of guidance in a moment. While the year-over-year comparisons certainly reflects the fact that we are giving back some of the pandemic benefit, we believe the sequential comparisons better represent the trends in the business as well as the decisive steps we have taken to position ourselves for long-term success, including our strategic decision to pull back on our least profitable advertising spend. Of note, we are pleased that gross margins increased in the quarter and we continue to drive progress there. In the quarter, 50% of Grove brands net revenue came from either zero plastic, reusable, or refillable products, all of which meet the company's beyond plastic standard. This is up significantly from 47% in the second quarter of 2021. We also improved on a metric we call plastic intensity, pounds of plastic for $100 in revenue. We believe that we are the first in the industry to report on this metric. Straight-wide, plastic intensity improved to 1.07 pounds of plastic per $100 in revenue from 1.34 in 2Q 2021. Across all Grove brands, plastic intensity improved to 0.87 pounds of plastic per $100 in revenue from $1.18 in 2Q 2021. We hope that by disclosing this metric, we can encourage others to do the same, shining a spotlight on the issue of plastic waste and driving the industry to meaningful change. We have put in place a clear and actionable shareholder value creation plan to drive sustainable growth, expanded profit and strong shareholder returns over the coming years. Our value creation plan consists of four elements

[Sergio Cervantes:]

Thank you, Stuart. I can’t believe that it has only been four months that I enjoy the different company on its critical important mission. What stand up for me is that, I am surrounded by truly incredible people that share a common goal of creating solutions to the problems for our health and for our planet, cut the plastic consumption globally. Before I get into our results for the second quarter, I want to take a moment to layout some of the key drivers of the business. In the coming years, we expect to drive revenue by growing our omnichannel presence. Historically, we have grown revenue from $105 million in 2018 to over $300 million expected this year, predominantly by driving orders on our DTC platform from both new customers and existing customers, as well as through higher average order value. New customers' orders are primarily a function of how much we are spending on advertising, while customer retention is key for driving existing customer orders. Our order value has risen as we have expanded our product offering and we have seen a mix shift into higher value categories overtime from home care to personal care to beauty. As we continue our push into omnichannel distribution and brick and mortar retail becomes a larger part of our business, we expect the retail metrics such as door count, points of distribution and velocities to name a few to become a more prominent part of our business performance metrics. On the gross margin front, we have driven material expansion from 35% in 2018 to 49% last year by increasing our assortment of Grove branded products, which carry a higher gross margin of third-party products, as well as by the shift into higher market categories I just mentioned. Gross margin is also impacted by the discount rate, which is higher from new customers than for existing customers, as you would imagine. Hopefully, that gives you a sense of how we think about drivers of the business. And now on to the results. Second quarter net revenue was $79.3 million down 20% year-over-year and 12% from the first quarter of 2022. Both comparisons are negatively impacted by the strategic reduction in advertising spend to acquire new customers as the company focuses on profitability. In addition, the year-over-year decline was negatively impacted by consumers returning to pre-pandemic shopping patterns. Similarly, total orders and active customers were also impacted by lapping elevated pandemic shopping in our categories last year, coupled with the strategic reduction in advertising spend. Total orders were down 22% year-over-year and 16% quarter-over-quarter, to $1.3 million. And active customers were down 10% year-over-year, and 5% quarter-over-quarter, to $1.56 million on a trailing 12-month basis. As we discussed earlier, we have taken steps to reduce inefficient average pricing spend and refocus on profitable growth. Accordingly, we expect to continue to see declines in net revenue, driven by decreases in total orders and active customers, through the balance of the year before stabilizing in 2023 and returning to growth in 2024. On the flip side, we saw continued positive trends in DTC net revenue per quarter, which was up 3% year-over-year and 6% quarter-over-quarter to 58.3%, driven by continuous strength in existing customer average order value, and increased VIP membership revenue per order. Gross margin was down 40 basis points year-over-year and up 190 basis points quarter-over-quarter to 49.1%. The year-over-year decline was driven by increased discounts due to a less favorable environment as the pandemic subside, and an increase in inbound freight costs, partially offset by strong third-party product margins on seasonal SVU performance. The sequential improvement in gross margin rate reflected lower discounts in line with seasonal patterns of the business. Grove brand as a percentage of net revenue continued its long-term trend, increasing 30 basis points year-over-year to 48.2% in that was down 350 basis points quarter-over-quarter on normal seasonal. Advertising expenses fell 21% year-over-year, and 45% quarter-over-quarter to $17.9 million, reflecting our decision to reduce our advertising spend and focus on improving marketing efficiencies, as we strive to balance spending to support the increasing brand awareness, optimizing customer acquisition and retention, and driving revenues, with our EBITDA objectives long term. Part of the sequential decline also reflects normal seasonality of the business, as January tends to be the largest spend month. SG&A expenses was up 23% year-over-year, and 14% quarter-over-quarter to $57.9 million. The year-over-year increase was predominantly driven by $14.6 million increase in stock-based compensation, due to catch-up of expenses for the company's of retail stock units and certain stock options as a result of meeting the performance vesting condition, when the company went public, partially offset by a decrease in fulfillment costs and lower order volume. Excluding LBT, SG&A expense in the quarter would have been $39.8 million or 8% less than the same period last year and 15% less than the first quarter of 2022. The quarter-over-quarter decline was predominantly driven by the reduction in force in March and a decrease in other marketing expenses, partially offset by costs associated with being a public company and other professional fees. As a percentage of net revenue, SG&A expense would have been 50% compared to 44% in the first quarter last year and 52% in the first quarter of 2022. Our adjusted EBITDA loss was $21.1 million, essentially in line with the $21 million loss in the second quarter of last year and significantly smaller than the $39.7 million loss in the first quarter, despite lower sales. Our adjusted EBITDA margin improved by 1,730 basis points quarter-over-quarter to minus 26.6% but fell by 540 basis points year-over-year, primarily due to increased SG&A as a percentage of net revenue, higher outbound shipping costs from price increases and surcharges and the slightly lower gross market rate. The improvement compared to the first quarter of 2022 was driven primarily by the reduction in advertising. Net loss in the quarter was $35.3 million, compared to a loss of $28.5 million in the second quarter last year and a loss of $47.4 million in the first quarter of 2022. Turning now to the balance sheet. We finished the quarter with an inventory balance of $53.5 million, which was down $1 million from the year-end balance in 2021 and down $2.7 million from the end of June 2021. The Inventory continues to be an area of focus with a goal of managing it down by the end of the year. We ended the quarter with $132 million in cash and equivalents, as well as an additional $12 million capacity available under our debt facilities. This cash number reflects the capital raise in conjunction with our business combination. On June 16, 2022, we completed our business combination with Virgin Group Acquisition Corp. II or VGII. The transaction included an €86 million PIPE investment from affiliate of the sponsor of VGII and new and existing group investments. In addition, we previously announced a $50 million backstop agreement with VGII and Corvina Holdings LTD, an affiliate of the sponsor of VGII, pursuant to which Corvina purchased $27.5 million of common stock from Grove, which closed on March 31, 2022, and purchased $16.7 million of common stock of the combined company, which closed concurrently with the business combination. Subsequent to the end of the quarter, on July 1, 2022, we entered into a Standby Equity Purchase Agreement with an affiliate of Yorkville Advisors Global, LP, allowing us to sell up to 100 million of shares of Class A common stock at Grove’s request during the 36 months following the execution of the purchase agreement, subject to certain conditions. We will continue to evaluate opportunities to raise additional capital. Now turning to our outlook. Factoring in our performance to-date, our expectation for the back half of the year and an uncertain macro environment, we are raising our full year guidance, as Stu mentioned. We believe that the performance of the DTC business will solidify in the second half of the year on the back of more efficient advertising spend and higher average order value for existing customers. Additionally, our guidance reflects the implementation of our value creation plan, which will result in significant improvements in profitability in the back half of the year, as compared to the first half. For the 12-month period ending December 31, 2022, we expect net revenue of $302.5 million to $312.5 million up from $300 million to $310 million previously. Adjusted EBITDA margin of minus 27.5% to 30.5%, up from minus 29% to 32%. In summary, we're excited to reach this new chapter as a public company as we advance on our incredible journey to realize geoplastic by 2025, while achieving our financial costs. For the benefit of our environment, our planet, partners and all of our stakeholders. I am pleased with the progress we are making on the value creation plan we maximize the power of our DTC platform, accelerate our retail expansion and further improvement in our marketing and operating expenses, efficiencies to drive growth and achieve profitability in a timely market. We look forward to reporting improving results in the quarters and years ahead. Operator, we are now ready for questions.

[Operator:]

Thank you. The floor is now open for questions. Our first question comes from Dana Tesley. Please state the question.

[Dana Tesley:]

Hi. good afternoon, everyone. As you think about the cash profitability and the expense reductions that are underway, where are you in the cadence of that and when you think about the buckets, for example, the inefficient ad spend, where is there the most opportunity? And then on the revenue side, with the standard retail that you've entered into, capacity in being able to fulfill orders? And what do you see as the ultimate goal of retail contribution sales and margin. Thank you.

[A – Sergio Cervantes:]

Thank you, Dana. Thank you for the question. So basically, as we see the path to profitability going forward, our plan is and the plan that we have shared with the markets, we feel strongly that we have the capabilities, capacity and the right mindset and structure to achieve it. So what we are basically, cadence in this is for reductions in the second half of 2022 to start kicking further to what we have done, as previously mentioned during the call. So basically, this will kick off in 2022 and accelerate in the second half with the site of view of having these basically the bond rate that we want to achieve at some point during 2023. That's basically -- answering the question, where do we see the most benefit coming out of or the most efficiencies coming out of. It's a combination of all the P&L as we have been explaining. But basically, if you were to think in all the priorities, I think OpEx meet investment and gross margin performance in that order of sequence. I would put it, or ranking, if you will, and that's what we are striving for. I would let Stuart answer the second part of the question.

[Stuart Landesberg:]

Yes. Thanks, Dana. It's -- I appreciate the question. I think Sergio said it well, that it really is a full P&L approach. And I think in terms of the area where we've got sort of the most to go or will drive the biggest impact on a relative basis. It's hard to pin down a little bit, because so many are driving double-digit million dollar changes year-over-year. Probably the one that I would point to most is continuing to drive stronger and stronger profitability from our core customer base. We see that in lowering the cost to serve in driving higher average basket and higher gross margins, which we're hopeful we can continue to drive for the balance of the year and through '23. And success there, of course, will drive really strong bottom line, especially as we seek to operate the business more efficiently.

[Dana Tesley:]

Thank you.

[Operator:]

Okay. There are no further questions. I'll turn it back to Stuart for closing remarks.

[Stuart Landesberg:]

Thank you. Thanks, everyone, for joining. I just want to say, how grateful I am to have the opportunity to share the growth story now as a public company and how much conviction I have in our team's ability to continue to lead the way with innovation towards a future that where we drive, not just a material change for the environment, but also material returns for our shareholders over the many, many quarters and years ahead. Thank you much. Look forward to reporting back on future quarters, as we continue to make progress.

[Operator:]

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.