Allbirds, Inc. (NASDAQ:BIRD) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Good afternoon, everybody, and welcome the Allbirds Third Quarter 2023 Earnings Call. [Operator Instructions] This convention name is being recorded and might not be reproduced in complete or partly with out written permission from the corporate. Now, I’ll flip it over to Christine Greany from The Blueshirt Group. Please go forward.
Christine Greany: Good afternoon, everybody, and thanks for becoming a member of us. With me on the decision right this moment are Joey Zwillinger, CEO; and Annie Mitchell, Chief Financial Officer. Before we begin, I’d prefer to remind you that we’ll make sure statements right this moment which are forward-looking throughout the that means of the federal securities legal guidelines, together with statements about our monetary outlook, together with money move and adjusted EBITDA expectations, This autumn steering targets, influence and period of exterior headwinds, simplification initiatives, Strategic Transformation Plan and associated deliberate efforts, go-to-market technique, deliberate transitions to a distributor mannequin in sure worldwide markets, anticipated distributor mannequin preparations, anticipated profitability, cost financial savings targets, gross margin estimates, product plans and expectations, third-party partnership technique, advertising technique, and different issues referenced in our earnings launch issued right this moment.
These forward-looking statements contain a lot of dangers and uncertainties that would trigger precise outcomes to vary materially. Please additionally observe that these forward-looking statements mirror our opinions solely as of the date of this name, and we undertake no obligation to revise any statements to mirror adjustments that happen after this name. Please seek advice from our SEC filings, together with our quarterly report on Form 10-Q for the quarter ended June 30, 2023, for a extra detailed description of the chance elements which will have an effect on our outcomes. Also throughout this name, we’ll talk about non-GAAP monetary measures that alter our GAAP outcomes to remove the influence of sure objects. These non-GAAP objects must be used along with, and never as an alternative to, any GAAP outcomes.
You will discover further info relating to these non-GAAP monetary measures and a reconciliation of those non-GAAP measures to their most instantly comparable GAAP measures to the extent fairly available in right this moment’s earnings launch. Now, I’ll flip the decision over to Joey to begin the formal remarks.
Joey Zwillinger: Thanks, Christine. Good afternoon, everybody, and welcome. We delivered Q3 outcomes in step with the expectations we offered in August, in addition to one other quarter of strong progress underneath our strategic transformation plan. Our flock is executing nicely throughout the board, which we imagine is organising Allbirds to attain sustainable and worthwhile development, and in doing so, create sturdy shareholder worth. During the third quarter, we achieved one other set of fabric proof factors which are driving the business ahead and positioning the corporate to hit our 2025 targets of optimistic full-year adjusted EBITDA and optimistic money move. First, we made vital progress in opposition to cleansing up stock, ending the quarter with slightly below $80 million of stock on the stability sheet.
That represents a sequential decline of 14% from Q2 and a year-over-year decline of 37%. This is notable given the cautious client spending atmosphere and makes us assured that we will successfully clear up {the marketplace} to allow us to give attention to our recent and revolutionary new product as we enter 2024 with plans to drive resonance with the patron by means of a greater product combine and key upgrades to our core franchises. Another vital metric we use to measure our progress throughout this transformational 12 months is money. We closed Q3 with $132 million, reflecting minimal working money use of $5 million within the quarter, which was required to fulfill our seasonal working capital wants main as much as vacation. Next, we captured financial savings from our strategic sourcing efforts, protecting us on observe to attain the higher finish of our cost of products bought financial savings targets of roughly $20 million to $25 million versus 2022 on a volume-neutral foundation.
We additionally proceed to drive in direction of our $15 million to $20 million G&A financial savings targets, with notable progress made through our worldwide transitions. While working down stock, we additionally stored issues recent for our client with the launch of our up to date Courier and the Vista Racer. These two fashions are actually the ultimate chapter of product that we had developed pre-transformation. We determined to maintain these within the line however [ buy ] them tight and for less than a restricted time-frame to drive freshness in a interval the place we knew our major intent can be to work down stock. The Wool Runner 2 that dropped final week is extra aligned with the main target for the subsequent era of product from Allbirds. This recent tackle our unique icon options new improvements and upgrades, together with improved consolation, a extra sturdy higher and a streamlined aesthetic.
And the launch is supported by a advertising marketing campaign geared toward connecting with our core shoppers in a much more resonant manner. We’re thrilled with the step change this represents, and it validates the technique now we have for product, provided that after only a few days of promoting, the Wool Runner 2 is our highest gross sales velocity launch of the 12 months. We sit up for bringing extra innovation like this to the market in 2024. As we strategy one other vacation promoting season with shoppers exercising warning round spending, we’re ready for an early and extremely promotional vacation interval industry-wide and prioritize getting stock to a wholesome position in early 2024 with an elevated tempo of unit gross sales by means of 2023. We intend to stay aggressive on worth with decreased advertising spend.
In reality, This autumn will mark our fourth consecutive quarter of moderated advertising spend, which is anticipated to be down greater than 15% for the total 12 months in ’23 versus 2022. Outside of marquee promoting occasions akin to Black Friday, Cyber Monday, our promotions and markdowns typically give attention to non-core kinds and people we anticipate to sundown or substitute with next-generation variations. This strategy has helped us keep full worth model integrity, and we anticipate to extend full worth promoting once we convey new and extra revolutionary product choices to market subsequent 12 months. Indeed, we’re trying ahead to a lot of actions in 2024 throughout product and advertising that we anticipate will generate momentum with our client. Zooming out and looking on the form of the transformation, 2023 has been a 12 months of diagnosing and fixing, most notably our cost construction, stock position and go-to-market mannequin by area, whereas additionally recalibrating our assortment to drive extra resonance with our core client in ’24 and past.
Having carried out this heavy lifting, we imagine we’ll enter 2024 with a strengthened basis and a right-sized cost construction. This will allow us to allocate sources and energy in direction of driving development from our most worthwhile merchandise and thru our most worthwhile channels and areas, setting us as much as enhance our backside line year-over-year. The actions we’re taking now give us confidence that even in a difficult atmosphere, we will obtain our aim of optimistic adjusted EBITDA and optimistic money move in 2025. Now, I’ll walk by means of some updates on the 4 pillars of our transformation plan, beginning with product and model. In This autumn, we’re persevering with to move in up to date and refreshed core assortments. As I famous earlier, the Wool Runner 2, a recent tackle the largest icon within the historical past of our model, simply launched final week, and we’ll quickly introduce a capsule for her that displays our new gender differentiated strategy and reveals how our refocused client insights work interprets into nice product.
In 2024, we’re trying ahead to launching extra revolutionary assortments with an emphasis on our core franchises, together with key upgrades to these silhouettes like we did with the Wool Runner 2. As we launched into our transformation efforts, we knew that product growth cycles would restrict our capacity to drive substantial newness in 2023. So, whereas we’re wanting to convey these upgrades to the road in This autumn, that is actually only a style of what is to come back in 2024 and past. As I touched on earlier, all through this 12 months, now we have intentionally pulled again on advertising spend and remained targeted on being as environment friendly as doable whereas we transition and clear up our stock. Our new influencer program is starting to build with a fabric portion of our advertising combine, and we’re happy with the early outcomes that drive consciousness and consideration, notably with girls.
We imagine our upcoming vacation marketing campaign will resonate nicely, and we anticipate the novelty, colour assortment and promotional cadence to ship outcomes throughout the guided vary for the quarter, enabling us to complete our transitional 12 months with each advertising spend and stock lowering at a larger price than gross sales. Turning to our second pillar, optimizing the U.S. distribution and retailer profitability. When we developed our transformation plan, this pillar was targeted on optimizing our U.S. shops and slowing the tempo of openings. We have accomplished all the 2023 retailer openings underneath the beforehand dedicated leases and haven’t any additional openings deliberate. We’ve since widened the aperture to optimize our U.S. distribution extra broadly with a unbroken give attention to bettering retailer profitability.
Q3 in-store site visitors remained difficult for the retail {industry} broadly, and we skilled this as nicely. Given the patron headwinds affecting the panorama, we anticipate this to persist in This autumn and have mirrored that in our steering. Our work in shops throughout merchandising and advertising, employees coaching and labor scheduling are starting to point out enhancements in retailer operations, however there may be nonetheless work to do right here. In the digital ecosystem, as we search to optimize our U.S. distribution, we shall be launching on a number one digital market within the coming weeks. We anticipate this platform to drive an incremental, worthwhile income stream, and we’ll share further particulars at launch. Looking at wholesale, this stays a key channel for our future and one that gives us with the chance to profitably elevate model consciousness, whereas additionally offering a singular view into what our shoppers actually crave.
Informed by these insights, we’re collaborating carefully with our companions to make sure that we’re appropriately represented till now we have an assortment that we imagine will greatest resonate with shoppers. And we anticipate decrease gross sales from this channel within the second half of this 12 months and into the primary half of 2024. We intend to make the most of a pull versus a push technique specializing in sell-through to make sure we’re displaying up in the suitable manner earlier than increasing door depend. As we convey our new assortments to market by means of 2024, we anticipate reaccelerating development on this channel within the second half and are talking with new potential companions to selectively broaden the variety of accounts. Now, on to our third pillar, transitioning our direct go-to-market technique in direction of a distributor mannequin in worldwide markets.
This is essentially the most advanced exercise inside our transformation plan and we imagine has the potential to maneuver the needle on profitability rapidly. We’re extremely happy with the progress we have made on this entrance and anticipate to have further information quickly. During the third quarter, we finalized the previously-announced agreements with third-party distributors in Canada and South Korea, and people areas at the moment are transitioned, together with personnel, shops and stock. Additionally, we not too long ago signed LOIs for 2 further essential areas with distributors in each Japan and Australia/New Zealand. We are thrilled to be partnering with high-quality organizations which have in depth model building and distribution capabilities of their respective areas.
The transitions are anticipated to happen by midyear 2024. Three quarters into this technique, we’re happy to have 4 areas with clear transition pathways in direction of a worthwhile and scalable construction. We anticipate selectively opening up distribution in new areas, starting within the second half of 2024, to additional capitalize on this distribution mannequin, which, just like wholesale, requires no capital funding from us. We anticipate that this chance is not going to solely ship further revenue to us, but in addition drive quantity enlargement to help further manufacturing cost financial savings by means of SKU productiveness. At the identical time, we imagine the distributor mannequin will drive elevated model consciousness internationally and supply larger access to each new and current clients.
As a reminder, initially, the transfer from direct mannequin to a distributor mannequin will lead to a decline in income for the impacted areas, however we anticipate sturdy flow-through to the underside line, making this higher-quality income. Annie will present extra colour across the financial mannequin shortly. Moving to our fourth and closing pillar, bettering general gross margins and managing working bills. We are firmly on observe to attain our said targets to seize $20 million to $25 million of COGS financial savings and $15 million to $20 million of SG&A financial savings by 2025, as in comparison with our run price on the finish of 2022. We proceed to ramp up shipments from our new producer in Vietnam throughout Q3 and anticipate the transition to completely take form by year-end with P&L advantages starting in 2024.
We now anticipate that our work on this space will enable us to ship the excessive finish of the anticipated cost of products financial savings vary by 2025. Additionally, as we proceed to work by means of stock, convey new merchandise to market and cut back the depth of promotions, we imagine this can enable us to maneuver the patron again in direction of the total worth mannequin, bettering gross margin. Entering the ultimate stretch of the 12 months, we’re happy with the progress underneath every of the 4 pillars and stay assured that our transformation plan is positioning us to enhance capital effectivity and drive profitability. We are lucky to have an skilled group who has embraced a extremely disciplined operational strategy. This enabled us to take decisive motion in 2023 to put the groundwork for improved year-over-year profitability in 2024 with a path to our first anticipated calendar 12 months of optimistic adjusted EBITDA and money move in 2025.
We have considerably improved our stock position heading into the essential vacation promoting season. We have pleasure building for 2024 product launches. We are nicely on our option to reworking our worldwide business, and now we have institutionalized rigor throughout the organization. Our path is obvious, and after approaching the top of 12 months one in all this transformation, we’re performing with self-discipline to drive long-term development through merchandise, areas and channels which have the best potential to ship elevated ranges of revenue. We respect the help of our analysts and shareholders and imagine the progress we’re making will compound into sturdy shareholder returns sooner or later. Now, over to Annie to walk by means of specifics on the quarter and commentary on the form of the rest of this 12 months.
Annie Mitchell: Thanks, Joey. We’re happy to report one other quarter of working and monetary progress. Q3 outcomes got here in inside our anticipated vary on the highest line, exceeded expectations we offered on the underside line, and for the third quarter in a row, we delivered strong enchancment throughout our key metrics of stock, money and prices. Third quarter income of $57.2 million declined 21% versus a 12 months in the past and largely displays our strategic actions to clear by means of legacy stock, in addition to deliberate declines in wholesale income to make sure we’re set as much as drive excessive sell-through with our recent and up to date assortment in 2024. Gross margin got here in at 43.5%. That compares to 44.8% a 12 months in the past and primarily displays increased promotional exercise as we proceed to work down non-core kinds and colours, main as much as our new product introductions deliberate for 2024.
Before we get to subsequent 12 months, we’re targeted on guaranteeing that we have interaction and delight the patron this vacation season, which suggests elevated promotional exercise versus a 12 months in the past. Simply put, as you heard from Joey, we intend to be aggressive on worth. As a consequence, we anticipate that fourth quarter gross margin shall be beneath 40%. Turning now to bills, we introduced down SG&A, excluding depreciation and stock-based compensation, by $1.8 million or 5% versus a 12 months in the past. This got here in higher than we anticipated and might be traced to our cautious cost management, most notably the continued tightening of discretionary bills. As we talked about final quarter, we proceed to anticipate that This autumn SG&A {dollars} shall be up each on a sequential and a year-over-year foundation.
Marketing bills mirror a deliberate decline of $2.5 million or 19.6% in comparison with Q3 2022. Looking at This autumn advertising spend, we proceed to anticipate a modest uptick from Q3 ranges as we help the Wool Runner 2 launch and the vacation gross sales push. In Q3, we incurred $1.2 million in restructuring expenses related to our strategic transformation, a rise of $0.5 million in comparison with Q3 2022. Taken collectively, our high line outcomes and cautious cost management drove a better-than-expected adjusted EBITDA lack of $19 million in Q3. Moving to the stability sheet and money move, I’m happy to report one other quarter of strong progress in opposition to two of our key benchmarks. First, I’ll discuss stock. We ended the quarter with stock ranges down 37% versus a 12 months in the past and down 32% from year-end.
The enchancment displays extra selective and disciplined buys and our dedication to attain a more healthy composition and clear position by year-end. Indeed, we anticipate to finish the 12 months with stock ranges of roughly $70 million, reflecting a year-over-year decline of roughly 40%. Now, let us take a look at money. At the shut of Q3, we had $132 million of money on the stability sheet. Our aggressive actions to convey down stock ranges and cut back working bills allowed us to slender our working money use versus a 12 months in the past. Through the third quarter, working money use was simply $5 million in comparison with $18 million a 12 months in the past. We additionally delivered vital enchancment for the year-to-date interval, with working money use narrowing to $25 million versus $82 million.
We anticipate that working money utilization will enhance barely in This autumn in comparison with Q3 ranges. Before turning to steering, I’d prefer to share some knowledge factors that will help you perceive the monetary implications from our transition to third-party distributors in worldwide markets. Starting at a excessive stage, previous to the transition to a distributor mannequin, Allbirds had a presence within the following six worldwide areas, representing roughly 26% of whole income for the 9-month interval ending September 30: Australia and New Zealand mixed; Canada; China; Europe, together with each the EU and UK; Japan; and South Korea. During the third quarter, we accomplished the beforehand introduced transition of our Canadian and South Korean businesses to native distributors in these nations.
This encompasses Allbirds’s eCommerce, bricks and mortar, and wholesale businesses throughout each areas. The transaction was recorded in Q3 as a non-operating loss on the sale of business totaling $2.3 million and is excluded from adjusted EBITDA within the quarter. Next, after quarter-end, we signed LOIs with the distributors in two further areas, Japan and Australia/New Zealand. Those transitions are anticipated to be accomplished midyear in 2024, as famous in our press launch right this moment. The New Zealand settlement is contingent upon the worker session course of, which is commonplace in that nation. For added perspective, Canada and South Korea mixed represented roughly 4% of whole firm income year-to-date in 2023, and Japan and Australia/New Zealand mixed represented roughly 8% of whole firm revenues year-to-date in 2023.
So, excellent progress on this strategic pillar three quarters into the transformation, with 4 areas and roughly 12% of the general business in transition to a less complicated mannequin that we imagine is healthier positioned to develop. Now, we’ll flip to some further knowledge factors that underscore the advantages of the distributor mannequin. First, we’ll be promoting merchandise on to the distributors at a lower cost versus our prior direct sale to the patron at full retail. While this can lead to preliminary influence to income, we anticipate that the experience and native information of our distributors will assist drive model visibility and development over the approaching years. Next, underneath this mannequin of promoting on to distributors, gross margin will naturally be beneath each DTC and typical wholesale margins.
Because this mannequin requires decrease working expense, we anticipate sturdy flow-through from gross revenue to the underside line. As every area transitions, we anticipate them to be instantly worthwhile. Turning now to This autumn steering, our expectations assume just a few key elements. One, we’re ready for a cautious client and a extremely promotional atmosphere this vacation season. We know the patron shall be in search of nice merchandise at nice worth factors, and now we have a focused promotional plan to make sure we’re aggressive all through the quarter. Second, it is essential to notice that this promotional stance will influence each gross sales and gross revenue. Third, the outlook we’re offering right this moment additionally displays a full quarter of income underneath the brand new pricing mannequin for Canada and South Korea.
This leads to a $2.5 million unfavorable influence to income in This autumn. For the fourth quarter, income is anticipated to be within the vary of $66 million to $72 million, representing year-over-year comparisons of unfavorable 22% to unfavorable 15%. Adjusted EBITDA loss is anticipated to be within the vary of unfavorable $26 million to unfavorable $23 million. Given the progress we’re making inside all of our strategic pillars, particularly the worldwide piece of the transformation, we anticipate to return to full-year steering in 2024 on our name in March. We additionally anticipate that we’ll be positioned to offer elevated granularity round high line expectations and the associated influence of the worldwide transition that will help you most successfully mannequin the business going ahead.
Now I’ll ask the operator to open the decision for Q&A.
Operator: [Operator Instructions] Our first query comes from Bob Drbul with Guggenheim. Your line is now open.
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