Allbirds, Inc. (NASDAQ:BIRD) This fall 2023 Earnings Call Transcript March 12, 2024
Allbirds, Inc. beats earnings expectations. Reported EPS is $-0.18, expectations have been $-0.23. Allbirds, Inc. isn’t one of many 30 hottest shares amongst hedge funds on the finish of the third quarter (see the details here).
Operator: Good day and thanks for standing by. Welcome to the Allbirds Fourth Quarter 2023 Earnings Conference Call. At this time, all members are in a listen-only mode. After the speaker’s presentation, there can be a question-and-answer session. [Operator Instructions] Please be suggested that at the moment’s convention is being recorded. I might now like handy the convention over to your first speaker at the moment, Christine Greany with The Blueshirt Group. Please begin.
Christine Greany: Good afternoon, everybody, and thanks for becoming a member of us. With me on the decision at the moment are Joey Zwillinger, CEO; Joe Vernachio, COO; and Annie Mitchell, CFO. Before we begin, I’d wish to remind you that we are going to make sure statements at the moment which might be forward-looking throughout the that means of the federal securities legal guidelines, together with statements about our monetary outlook, together with money movement and adjusted EBITDA expectations, 2024 steering targets, influence and period of exterior headwinds, 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 plan timelines and expectations, third-party partnership technique, advertising technique, and different issues referenced in our earnings launch issued at the moment.
These forward-looking statements contain quite a lot of dangers and uncertainties that might trigger precise outcomes to vary materially. Please additionally notice 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 modifications that happen after this name. Please check with our SEC filings, together with our quarterly report on Form 10-Q for the quarter ended September thirtieth, 2023, for a extra detailed description of the danger components which will have an effect on our outcomes. Also throughout this name, we are going to focus on non-GAAP monetary measures that modify our GAAP outcomes to remove the influence of sure gadgets. These non-GAAP gadgets ought to 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 straight comparable GAAP measures to the extent moderately available in at the moment’s earnings launch. With that, I’ll flip the decision over to Joey to begin the formal remarks.
Joseph Zwillinger: Thanks, Christine, and welcome, everybody. We concluded 2023 with This fall outcomes on the larger finish of our expectations, marking the fourth consecutive quarter of assembly or exceeding our steering with robust execution in direction of reshaping the business below our strategic transformation plan. This being my final earnings name on the helm of Allbirds. It is a giant second for me each professionally and personally. I’m extremely happy with what Tim and I helped create over the past 9 years. I’m additionally extremely happy with the renewed basis we have established by means of our transformation work over the previous yr, not least of which being the unbelievable administration crew now we have recruited to guide this subsequent chapter of revitalization and development.
Zooming out for a second, I need to remind everybody about our larger degree alternative. Allbirds makes sneakers which might be timeless and versatile in model and revolutionary within the nature-derived supplies we use. The mix of our distinctive strategy to design and supplies creates a extremely differentiated providing, one which our client feels instantly once they slip on our sneakers. The client we goal, a gaggle referred to as the Changemakers, represents roughly 20 million folks within the US when making use of the sharpest definition. And after we embrace carefully adjoining demographic teams, this group grows to roughly 68 million folks. Only about 5% of that 68 million goal have bought our merchandise since our inception. And with a per capita common of eight pairs of sneakers per yr, the untapped potential of this group constitutes an amazing market alternative for Allbirds within the US alone.
Judged by our client evaluations and NPS, we all know that individuals who strive our merchandise love them. The problem we’re tackling now could be to lift consciousness of the model and compel this group to purchase with supply of nice product and storytelling. I’ll get again to merchandise and advertising in a second as that is probably the most important facet of our transformation to revitalize momentum behind the model this yr. However, earlier than we might deliver our refreshed product line to market as we anticipate to begin in earnest later this yr and make investments behind these introductions with breakthrough advertising, we needed to clear up our business. In only one years’ time, now we have essentially modified and strengthened our underlying working mannequin, touching all crucial features of the business, together with our retailer portfolio, worldwide market, manufacturing effectivity and cost construction.
And we closed out 2023 with our stock in a clear and wholesome position by way of each composition and absolute quantity of completed items throughout all channels. This new basis permits us to drive sturdy revenue as we develop within the years forward. I’ll offer you a fast overview of what our flock delivered within the first yr of our transformation. First and foremost, we cleaned up stock, clearing by means of underperforming legacy merchandise and decreasing our stock ranges by 51% year-over-year. As a end result, we entered 2024 with a wholesome mixture of core franchise items and the flexibility to lean into the recent product innovation coming later this yr. Relatedly, we considerably improved our price of full yr working money use and ended the yr in a robust money position, offering us with the monetary flexibility to proceed executing our strategic transformation plan and now put money into worthwhile development.
The third space of success is cost self-discipline. We delivered cost of products and SG&A financial savings in comparison with our run price on the finish of 2022, holding us on monitor to attain the 2025 cost discount targets we had beforehand communicated. Fourth, we secured pathways for 4 of our worldwide areas to transition to a extra worthwhile go-to-market technique through distributors. Canada and South Korea transitioned in Q3, whereas Japan and Australia and New Zealand are anticipated to transition later this yr. The last facet of enhancing the working mannequin is expounded to our work to stability and optimize the US market. Related to that, now we have signed or anticipate signing agreements to shut 10 to fifteen underperforming shops within the US. All of that are anticipated to shut throughout calendar 2024.
While the groundwork for worthwhile development is now laid, there can be short-term income influence in 2024 because of these transformative actions. Between retailer closures and the shift to a extra capital-efficient go-to-market technique within the worldwide areas, our steering for the yr contemplates between $32 million to $37 million of income influence in 2024. Annie will walk by means of the implications of those actions intimately. The essential takeaway is that we’re doing what’s proper for the business, and this a part of our journey is in service of driving long-term worthwhile development effectively into the longer term. Stores stay a extremely efficient approach to meet new clients and drive omni-channel buying and omni-channel buying is probably the most worthwhile client journey we will generate with their lifetime values far surpassing single channel repeat clients.
As we deal with renewing model momentum and driving sustained development within the US, we’re leaning into our best shops in key cities the place we need to win. The wholesale channel additionally represents an essential car for Allbirds, one that may assist us build consciousness for the model whereas additional balancing {the marketplace}. We have all the time envisioned wholesale as a big portion of our long-term channel combine and proceed to see that sooner or later, providing a serious development issue for us which we anticipate to drive strong contribution margin and elevated consciousness, all coinciding with our goal to introduce customers to a refreshed product line round our icons. For our worldwide areas, I need to acknowledge that this is among the extra complicated features of our transformation plan and to that finish, Annie will present an in depth walkthrough on the economics of those transitions and the associated P&L influence.
We have secured partnerships in 4 key areas with further areas in course of. This was a major job and one which the crew affected shortly whereas prioritizing a premium model presentation to customers in these areas. The distributor mannequin carries a number of advantages together with improved profitability, stock effectivity, diminished complexity in our US headquarters, and enhance working capital. In the early phases of the transition, there’s a short-term headwind to development, however the profit is larger high quality income will get higher movement by means of to the underside line. Going ahead, we anticipate to generate roughly 20% contribution margin within the transition and new worldwide areas by means of this mannequin. With the potential constructed to successfully serve distributors in worldwide markets, we are actually pursuing alternatives to enter new areas, together with Southeast Asia, the Gulf Coast international locations, and to localize in key regional marketplaces throughout continental Europe.
We anticipate to share information of those development alternatives within the close to future. In the UK, we anticipate to keep up our direct distribution mannequin as we see huge alternative to win in London, which we view as a strategically essential marketplace for different areas and the place now we have made vital curiosity. We can even add wholesale within the UK to drive new development. With the heavy lifting of final yr full and a clear stock backdrop, our groups have amplified their deal with driving long-term worthwhile development. The most important facet and the ultimate step in our transformation is to revive model momentum and reignite high line development. The path to take action is thru supply of a relentless movement of compelling merchandise coupled with resonant tales geared toward Changemakers.
With our strategy to innovation, leveraging a franchise offense with elaborations and distortions to our icons. We intend to drive newness whereas sustaining high-skew productiveness. Given we began this transformation at first of 2023 and have typical lead occasions of 15 to 18 months from idea to client. We are on monitor to begin delivering this refreshed product line in late Q2 of this yr. Our first check of this technique was with the discharge of the Wool Runner 2 this previous November, which was our most profitable launch in over a yr. And whereas simply an preliminary check with comparatively minor aesthetic changes, the success of this product has given us clear indication of how we will differentiate from others in our class and ship merchandise that our client will come again for time and time once more.
You’ll see our first main innovation of 2024 round an icon in April after we plan to launch the Tree Runner Go. We will observe that with further improvements particularly designed to handle our alternative with girls Changemakers in Q3. In conjunction with the brand new life injected into the product line, you must also anticipate investments into model advertising later this yr geared toward rising consciousness. The focus of those investments can be to introduce new customers to the model, and drive full value gross sales as they progress by means of the funnel, with mid and longer-term influence extending into 2025. Our aided consciousness is estimated to be simply 15% within the US, illustrating the large alternative to showcase our beloved merchandise to new customers. In assist of this effort, now we have considerably elevated the horsepower on the artistic aspect of our business.
In December, we appointed Kelly Olmstead as our Chief Marketing Officer, in addition to Adrian Nyman as our Chief Design Officer. Both of those people deliver unbelievable monitor information and a long time of expertise in footwear and attire. Adrian helped ship an enhanced artistic imaginative and prescient by means of his work as an advisor final fall, and since becoming a member of as our Chief Design Officer, has accelerated our work in direction of a cohesive strategy to our franchise offense. Kelly is refining the messaging to match the elevated product providing, and bolstering efforts with a digital-first influencer program to build consciousness and relevancy. With this very good design and advertising management in place forward of our upcoming product cycle, we’re desirous to create the renewed client pleasure and margin growth that we anticipate on the horizon from these leaders.
Annie has been profitable in driving the working and monetary self-discipline now we have demonstrated by means of her function as our CFO since becoming a member of early final yr. And, lastly, I’ll discuss Joe Vernachio, who as our COO performed an integral function within the success of the primary yr of our transformation efforts. Along with another longer-term crew members, now we have assembled the most effective govt crew within the historical past of the corporate. With a world-class crew in place, I’m proud handy over the reins to Joe to be our subsequent Chief Executive Officer. Joe and I’ve developed a robust partnership over the previous three years, as I steadily elevated the scope of his accountability. Not solely is he an distinctive retail operator, however I discovered that Joe’s urge for food and talent to drive constructive outcomes has elevated with every growth to his function.
He is a product govt at coronary heart, however a human-centered chief who pragmatically focuses on driving outcomes for the corporate and its shareholders. I’m thrilled to welcome Joe as our subsequent CEO, and as a member of our Board of Directors, the place I’ll sit alongside him and proceed to assist him in rebuilding momentum behind the Allbirds model. Joe, congratulations. I’ll now go it over to you to share a bit about your background and your preliminary priorities.
Joe Vernachio: Thank you, Joey. I’m excited and honored to be getting into this function and look ahead to attending to know our analysts and buyers within the upcoming quarters. This transition marks a excessive level in my profession, which started in 1987 at Patagonia. It was throughout these early years that I developed a ardour for creating distinctive merchandise. I honed my abilities in product improvement, operations, and merchandising over a long time working with a number of iconic manufacturers comparable to Nike, Calvin Klein, and The North Face and orchestrated the turnaround at Mountain Hardwear. I joined Allbirds practically three years in the past, attracted by its potential to turn out to be an enduring, iconic model led by its way of life positioning, dedication to sustainability, and inherent client worth.
Since June of 2021, I’ve had the pleasure of working aspect by aspect with Joey. Initially, I used to be tasked with establishing operational excellence throughout varied capabilities, together with distribution, stock, and manufacturing whereas main our world business actions in digital, shops, and wholesale. As a key participant in our operational transformation, I’ve been in a position to apply my turnaround expertise to our stock discount, worldwide transitions, and retail optimization. Most lately, I took cost of our product engine, the place I put in Adrian as our Chief Design Officer. Together, we’re building a world class design crew. As the yr progresses, we look ahead to sharing extra about our imaginative and prescient for the 2025 product line. As I step into the CEO function, I’m happy that now we have structured the business to ship worthwhile development within the years forward.
Consistent with the important thing pillars below our strategic transformation plan, within the close to time period, I can be prioritizing these 4 areas. Number one is product, guaranteeing now we have a gentle movement of compelling product that resonates with the patron is paramount to my technique. We imagine a mixture of specializing in our iconic footwear and incorporating seasonal collections is a recipe for delivering extra of what our clients love most about Allbirds. Number two is model messaging that delivers a transparent, related narrative at each the model and product degree that ends in elevated client consciousness. Third is creating a sturdy US market. This consists of rising full priced gross sales in our digital channel, optimizing our owned retail efficiency, and steadily rising our wholesale channel with key companions comparable to REI, Nordstrom, and Dick’s Sporting Goods.
We imagine there may be super development alternative within the wholesale channel for our model. Fourth is increasing our worldwide business, primarily by means of distributors. Partnering with these in-region consultants will help us prolong our attain and drive higher model consciousness in each present and new geographies over time. As you may inform, my priorities are about driving development. We have considerably improved our business mannequin and diminished our cost construction over the previous yr and now it is time to regain momentum with our buyer and position the model to return to development in 2025. As we flip to this subsequent chapter, we’re lucky to have unbelievable folks throughout the organization who’re passionate concerning the model, devoted to our goal, and dedicated to successful.
Now, I’ll go the decision to Annie to debate the financials and our outlook for 2024.
Annie Mitchell: Thanks Joe, and good afternoon everybody. We’re happy to report our fourth consecutive quarter of each operational and monetary progress. Our This fall outcomes got here in on the excessive finish of our guided vary on the highest line and forward of our expectations on the adjusted EBITDA line. We additionally delivered vital progress throughout stock and money, with stock diminished by half versus a yr in the past and working money use down each sequentially and year-over-year. Fourth quarter income of $72 million declined 14.5%, reflective of our actions to proceed clearing by means of non-core product, and diminished advertising investments. Gross margin got here in at 38.0% in comparison with 43.1% a yr in the past. This was in step with our expectations and was inclusive of our deliberate promotional exercise, which allowed us to finish the yr in a wholesome stock position.
The influence of promotions greater than offset cost of products financial savings ensuing from decrease outbound freight. Looking at bills, SG&A {dollars}, excluding stock-based compensation and depreciation and amortization, got here in higher than we anticipated on each a sequential and year-over-year foundation. This displays decrease personnel expense, in addition to ongoing cost self-discipline. In 2024, we anticipate SG&A {dollars} to be down year-over-year, as we understand the complete yr influence from earlier workforce reductions, and seize partial yr financial savings associated to 2024 retailer closures and worldwide transitions. Turning now to This fall advertising expense, we have been up sequentially from Q3 in {dollars}, which was in step with our plans to extend spend in assist of the vacation promoting season, in addition to our Wool Runner 2 launch.
Looking at 2024, we anticipate advertising spend to be down, largely related to our worldwide transitions, with deliberate incremental investments within the US within the again half. Moving to the stability sheet and money movement, we delivered one other strong quarter of progress on stock and money and ended the yr in robust monetary situation. Year-end inventories totaled $58 million. That’s down 51% versus a yr in the past and displays the cleanup of non-core colours and kinds which allowed us to enter 2024 with wholesome ranges and composition. Our progress on decreasing inventories, coupled with strict management over bills, enabled us to slender our This fall working money use to $4.7 million versus $8.4 million a yr in the past. On a full yr foundation, working money use was $30 million down considerably from $91 million in 2022.
We closed the yr with $130 million of money and money equivalents and no excellent borrowings below our $50 million revolver, offering us with the runway and monetary flexibility to execute our strategic transformation plan. After a yr wherein we transformed a major quantity of stock into money, we anticipate that working money use will naturally enhance in 2024 in comparison with 2023. We’re happy with our robust execution in 2023. We did the exhausting work, achieved our targets and put us on the trail to rightsizing our cost construction. Importantly, we’re monitoring to the COGS and SG&A financial savings targets we laid out a yr in the past. As a reminder, our 2025 targets embrace $20 million to $25 million of cost of products financial savings on a quantity impartial foundation to 2022, and $15 million to $20 million of SG&A financial savings on an annualized foundation, as in comparison with our run price on the finish of 2022.
As you heard earlier within the name, we’re taking actions this yr designed to position the business to return to high line development in 2025 and set us as much as ship profitability in future years. Now I’ll walk you thru the monetary influence of two key initiatives. First, we’re optimizing our US retailer portfolio by means of the exit of sure underperforming leases. We are centered on four-wall EBITDA profitability and anticipate {that a} leaner portfolio will allow us to enhance fleet profitability, working capital and stock. Following a rigorous fleet overview, we’re planning to shut 10 to fifteen shops in 2024, representing as much as one-third of the portfolio. In conjunction with the closures, we anticipate to incur one-time money prices to settle these leases, largely within the first half of the yr.
Turning now to our worldwide go-to-market technique. One of our goals at the moment is to coach our analysts and buyers on the modeling implications and associated P&L influence ensuing from our transitions to a distributor mannequin within the majority of our worldwide markets. Conceptually, one of the best ways to consider every line merchandise is as follows. Starting with web gross sales. From a excessive degree perspective, we’re changing direct gross sales to the patron with gross sales to the distributors at a lower cost much like a wholesale mannequin. Following a big, preliminary stock purchase as a part of an asset buy settlement, volumes stay low for the primary quarter or so after which begin building within the subsequent quarter. While the distributors will purchase from us every quarter, we anticipate quantity purchases in Q2 and This fall can be proportionately larger because of seasonality.
The margin and revenue profile can also be much like a wholesale mannequin in that gross margin is decrease than our direct business, and SG&A and advertising expense is minimal. We anticipate that gross margin can be roughly 15 to twenty share factors under complete firm margin, and in-region SG&A and advertising prices will cut back to a nominal quantity. Taken collectively, this represents in-region financial savings of roughly $14 million on an annualized foundation. Additionally, our in-region CapEx can be de minimus. For added context, we are going to leverage world artistic investments on the company degree and preserve restricted operational prices inside our headquarters which can be included in complete firm SG&A. From a backside line perspective, regardless of decrease gross margins, with minimal overhead in these areas, they’re anticipated to be instantly worthwhile and carry a median contribution margin of roughly 20%.
Additionally, from a working capital perspective, the brand new mannequin is predicted to unlock stock efficiencies and drive enchancment in working capital. To additional help along with your understanding of our worldwide transitions and progress in opposition to our strategic transformation, on the conclusion of this name we can be posting supplemental supplies to our investor relations web site below quarterly outcomes. The monetary steering we’re offering at the moment displays a full yr of operations below the brand new distributor mannequin for 2 areas, Canada and South Korea, and roughly half-year contributions for different areas transitioning or anticipated to transition this yr. To help along with your modeling efforts, throughout this primary yr of transition, we’re additionally offering a income outlook for every of the US and the worldwide geographies.
For the complete yr in 2024, income is predicted to be within the vary of $190 million to $210 million. This displays a headwind of $32 million $37 million associated to our strategic actions to shut US shops and transition our worldwide markets to a extra worthwhile distributor mannequin. Stepping again and searching on the underlying business excluding these two near-term headwinds, we imagine the stock clean-up in 2023 will allow us to return to extra full value promoting in 2024. We imagine that is the correct strategy for the model, however we acknowledge there could also be a pure lag for the patron after responding to our promotional messages and provides final yr. To that finish, the low finish of our income steering displays traits down within the mid-teens. The excessive finish of our information displays gross sales down mid-singles, which assumes a modest enchancment in client response to our new merchandise and storytelling within the second half of the yr.
Taking a take a look at income by geographical market. Full yr US income is predicted to be $150 million $165 million and consists of roughly $7 million to $9 million of influence ensuing from our anticipated US retailer closures. Full yr worldwide income is predicted to be $40 million $45 million and consists of roughly $25 million to $28 million of influence ensuing from our anticipated transitions to a distributor mannequin in worldwide markets. Gross margin is predicted to be within the vary of 42% to 45% and displays a number of key components. Reduced promotional depth in comparison with 2023. Lower inbound and outbound freight and preliminary financial savings from our manufacturing unit shift to Vietnam and materials improvements. These advantages are anticipated to be partially offset by decrease gross revenue from worldwide areas which have transitioned or are deliberate to transition to a distributor mannequin in 2024 Full yr adjusted EBITDA loss is predicted to be within the vary of $78 million to $63 million.
Turning to Q1 steering. First quarter income is predicted to be within the vary of $37 million to $42 million. That consists of US income steering of $28 million to $31 million and worldwide income steering of $9 million to $11 million. Adjusted EBITDA loss is predicted to be within the vary of $27 million to $23 million. As a reminder, in the course of the first quarter we can be working with two of our worldwide areas already transitioned to the distributor mannequin, Canada and South Korea. For added perspective as you concentrate on building your full yr fashions, we anticipate high line traits to stay pretty constant for the primary three quarters of the yr, with seasonally-driven enchancment in This fall. There are quite a lot of components driving the anticipated trendline, together with.
The transition of not less than 4 worldwide areas, retailer closures, robust comparisons to promotional exercise in 2023 and client response to new product introductions, in addition to advertising investments we intend to make within the second half of the yr. Looking additional forward, reaching adjusted EBITDA profitability and constructive money movement on a full yr foundation stays our north star, however the timing to get there might take longer than anticipated. We imagine the actions we’re taking this yr will position the business to return to high line development in 2025 and really feel assured that our transformation work is enabling us to build the working mannequin wanted to drive worthwhile development in future years. We admire your time this afternoon and look ahead to reporting to you on our progress all through 2024.
Now I’ll ask the operator to open the decision to questions.
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