Laird Superfood, Inc. (LSF) Earnings Call Transcript & Summary

Appreciate that, Trevor. Greetings, everyone, and thanks for being with us once more today. What we delivered in Q2 keeps proving that we're effectively capturing spend and steering the company in the direction of profitability. Cash burn reached an all-time low of $1.4 million in Q2, and it keeps slowing down year over year as well as quarter over quarter compared with earlier periods. Our adjusted net loss for Q2 landed nearly 50% beneath the figure from Q2 a year ago, helped along by better gross margins and also pushed down by reduced marketing and G&A spending. That outcome stems from how well we've boosted marketing effectiveness — our ROAS climbed 86% over the last year — plus the slimming down of our organization and other G&A costs. Turning to commerce, the approach we take to grow business and wholesale keeps delivering returns. The natural channel has always suited our brand extremely well. And across the 12 weeks that closed on June 18, 2023, Laird Superfood's expansion in the natural channel hit plus 69%, fueled by a mix of wider distribution plus sizable gains in our dollar sales velocity tied to the rebranding work we described on earlier calls. Throughout Q2, we also placed meaningful investments into the wholesale trade, most of which backed new items and other distribution wins at key customers, though these also covered the continuing charges tied to the product quality event we talked about on our Q1 earnings call. A thrilling assortment of products is arriving on shelves during Q3 of this year, featuring our largest seasonal program ever, and we've got an excellent digital program ready to go and will keep running retail support programs alongside our top customers; beyond that, a set of initiatives is in motion to expand brand awareness further and to keep sales velocity climbing at the shelf. Our direct-to-consumer segment delivered strong performance after we brought the prebiotic daily greens and coconut water hydration platforms back to market. Together, those two product lines helped fill significant gaps within our supplements range, driving 48% growth on a sequential basis versus Q1 in that category. On our DTC channel, the Green items have quickly become a leading seller, and we're pleased with the repeat purchase behavior and feedback we're seeing. June marked the return of our hydration platform, which we believe ranks among the purest hydration options out there, harnessing dried coconut water's benefits and now offered in easy-to-use stick packs with electrolytes included. During Q2, we once again made a conscious decision to cut our DTC media spend, this time by 67%, by getting rid of spending that wasn't productive — the result was an 86% increase in our overall ROAS. Because of the quality event we discussed on our Q1 call, Amazon ended up being out of stock for much longer than we anticipated all through Q2, despite the fact that we were able to quickly get our inventory back in good shape for both DTC and wholesale. The situation with Amazon was far more difficult, because the first thing we had to do was wait for that retailer to move the product out of all of its warehouses across the country, and we couldn't begin rebuilding our inventory until that was finished. What that meant was roughly 12 weeks with zero stock of a large share of our best-selling SKUs; as a matter of fact, only at this point are we restoring our Amazon inventory to complete levels across the country, and by the close of Q3 we anticipate this matter will at last be entirely behind us. The silver lining here is that we managed to reduce marketing spend on that platform in short order, which delivered a favorable return of contribution margin dollars to the P&L. Moving on to operations. Our shift to an asset-light supply chain is now past the 6-month mark, and our satisfaction remains very high with both the partnerships and the outcomes we have realized thus far alongside our co-packing and distribution partners. Our Q2 cost of goods sold did not merely get better by 12 points of gross sales compared with only a year earlier, but we likewise lifted our production capacities to roughly 3x the peak production achieved at our own facility. Simultaneously, we have introduced additional Century and quality assurance checkpoints into our manufacturing processes so that our product maintains the highest quality. Finally, I'm pleased to share an update on how our marketing approach keeps evolving. We've been moving away from digital pay-to-play tactics that deliver low ROI, and instead we're building a more targeted model driven by celebrities and PR. The idea is to leverage Laird Hamilton, plus other health and wellness influencers who share a similar mindset, so we can boost awareness of Laird Superfood and encourage people to try it. With that in mind, we recently announced a significant collaboration involving Shawn Ryan and the Shawn Ryan Show, and we believe this will help us reach a group of potential customers for our products that has mostly been overlooked until now. According to Shawn Line's show, the audience is estimated at 3 million listeners across Spotify and Apple podcast platforms, along with 1.75 million YouTube subscribers and close to 1 million TikTok followers. Our sense is that most of these people previously knew almost nothing about Laird Superfood, and we're thrilled to partner with Mr. Ryan to introduce the health advantages of our products to millions of additional prospective brand actives. We're eager to reveal additional major marketing initiatives soon. At this point, I'll hand the call to Anya for a deeper look at the second quarter results.

Thanks, Jason. In 2023's second quarter, net sales came in at $7.7 million, which was down 11% from $8.7 million during the same period a year earlier. The main factor behind this was weaker sales through e-commerce channels. Because we pulled back significantly on marketing, with DCC specific working media reduced 67% year-over-year and overall marketing spend down 30%, this decline was something we anticipated. We made these marketing reductions deliberately, aiming to eliminate inefficient spending and bring down our customer acquisition costs so we could establish a more sustainable direct-to-consumer business and boost profitability in that channel. On top of that, our Amazon sales took a hit from inventory being out of stock due to the product quality issue we discussed previously that occurred in Q1; we anticipate this out-of-stock situation being completely fixed during the third quarter. Growth in our wholesale channel helped partially offset the e-commerce decline, fueled by distribution gains in retail pricing along with velocity improvements from the new packaging and rebranding campaign we launched earlier this year. During the second quarter, we kept building on the momentum from the first quarter thanks to strategic actions we put in place last year. For a second consecutive quarter, gross margin landed in the mid-20s, with Q2 gross margin hitting 24.3%, which is 120 basis points better sequentially than Q1 and 610 basis points better than the same period a year ago. This year-over-year margin growth comes from our supply chain shifting to an asset-light third-party co-manufacturing and fulfillment model, and it would have been even higher if not for the investments we made in trade promotions to drive incremental awareness and trial in retail stores. I anticipate that the need for this level of support in our retail channel will persist through the third quarter and then diminish as the year goes on, which should let gross margin expansion climb further into the 30%-plus range during the second half of 2023, excluding any one-time extraordinary charges. Operating expenses came to $5.5 million in the second quarter, which is $1 million less than the $6.5 million from the year-ago period. Adjusted operating expenses were down $2.4 million, driven by reduced marketing costs stemming from strategic elimination of inefficient spend, lower people costs, and other general and administrative expenses after restructuring activities in 2022. Net loss as reported was $3.5 million for the second quarter of 2023, which is $1.4 million less than the prior year period. On an adjusted basis, net loss for the second quarter was $3.3 million, roughly $2.8 million less than a year ago. Expanded gross margins, lower marketing, and SG&A spend drove these bottom-line improvements. You can find the detailed reconciliation of non-GAAP adjusted net loss in our earnings release. Now let's turn to our balance sheet and cash flow. We closed the quarter with $10.6 million of cash and no debt, as we continue to manage our balance sheet conservatively. During Q2, our cash burn came to $1.4 million — the smallest figure we've ever posted, and under 50% of the $3.9 million we saw in the same period a year earlier. Because we need working capital to back a step-up in demand across the back half, I expect third-quarter cash burn to rise. Even so, our forecast for cash at year-end remains aligned with our operating plans. Now to our outlook. Even with the gains we've made in the middle of our P&L, promotional trade spend ran higher in Q2, since we put more support behind our wholesale channel, plus inventory out of stocks that weighed on our Amazon performance; we look to clear these matters up in Q3, though we're revising guidance to show net sales between $34 million and $37 million, alongside gross margins of 27% to 29% for the full year 2023, with second-half gross margins above 30%, excluding any one-time extraordinary costs. With that, I'll hand the call back to Jason.

Thank you, Anya. Turnarounds don't follow a straight line, of course, but I'm happy to share that we keep moving forward on the main strategic objectives: making our cost structure better and reducing how quickly we use cash, expanding our brand and wholesale operations, and strengthening what we offer in terms of products. Looking ahead, we'll stay sharply focused on cutting expenses and using less cash. That wraps up what we had prepared. Operator, please go ahead and start taking questions from callers.

Nice work bringing that cash burn down. It seems to provide you with a solid runway, perhaps, but what I'd like to know is what steady-state level of cash burn should we anticipate across the coming 12 months?

I appreciate you asking. During Q2, our cash burn came to $1.4 million, while in Q1 it reached roughly $6 million. The Q1 figure was significantly larger due to the Sisters exit, plus the schedule for collecting account receivables, which amounted to around $1.4 million. That decreased in Q2; therefore, once you adjust for it, the total sits at just under $3 million — essentially a normalized Q2. My expectation is that this will persist within that band yet gradually decline over the back half of the year.

All right, that's helpful. Now I'd like to get a handle on how things work with Amazon — when you're replenishing inventory in that particular channel, does the advantage come to you through sell-in or through sell-through?

Bobby, this is Jason, and I'm happy to address it. Let me add a bit more detail regarding the situation at Amazon. During Q1, a quality issue arose, which everyone is aware of, and because of it we ran out of stock after recalling every item containing the spoiled coconut powder that came in from one of our suppliers. Once we did that pullback, we managed to clear the product from the wholesale channel fairly fast. Looking at UnifinKG specifically, we got all of it out of their warehouses in short order. After that, we went to every retailer that had received shipments and successfully retrieved the goods from them too. Some portion of this is what you're observing — we're still working through the last of those builds right now. Most of it, though, we set aside reserves for during Q1. Over on the DTC side, things are actually simpler since we hold every bit of that inventory ourselves. We just isolate it, then produced the item again and moved it into our own warehouses — and honestly, what happened at Amazon caught us off guard. Our difficulty was this: first we needed every product pulled from Amazon's warehouses. We'd imagined these as a handful of DCs we'd delivered to, but Amazon later pushes that inventory down to what you might call micro DCs — smaller facilities, I'm not sure of the exact term — so that all orders can arrive overnight or inside 24 hours for prime members and so forth. Pulling stock from all those locations proved to be a sluggish undertaking, and you cannot begin replenishing until they've removed everything from every single warehouse, since a number of our SKUs were affected. It dragged on far longer than we'd expected. Nor can you restart restocking before it's all gone. So while those returns were coming in, we had our replenishment order ready but couldn't — we weren't permitted to ship it while any product remained. In the end it became a very drawn-out affair, with us essentially absent for roughly 12 weeks. What followed from that: first, we had no — we were literally unable to supply our top items for close to 3 months, we went dark. The fortunate part is that we saw it coming and could modify our spending to match. So we reduced marketing outlays, and you witnessed that come back around, as we discussed, through the EBITDA and cash gains we received, along with the reduction in our losses. What that does mean, though, is that cohorts need to be rebuilt from scratch. So regarding your sell-through question, we're at last reaching a point where the final portion of that inventory is moving out, and doing so in a way that can be sustained — where sell-through isn't moving so quickly that we end up depleted again, since that has also begun happening because you weren't able to get all the orders lined up quickly enough to match sell-through. Still, we're returning to a good position now. Our expectation is that we'll be fully in stock at some point during Q3; at this moment it's still having some effect on our business, but we've reduced our Amazon media marketing media dollars to match. As a result, we're now at a point where, looking at contribution margin, no harm is being done; however, looking at sales, sadly, we're pushing that off a bit while we wait to be fully back in stock. My belief is that no lasting effects will occur. Amazon operates basically as a pay-to-play model, in which the media you invest will produce the eyeballs and usually the conversion you'd anticipate. Thus we've observed those conversion metrics, let's say, at the level we want them to be. The only issue is we can't spend right now given the out-of-stocks we've experienced. So my expectation is that by the end of Q3 — before Q3 ends — that business will be coming back again.

All right. Excellent; and now, briefly, regarding expansion in the natural channel. You folks experienced solid gains there; I'm curious if you could kind of just refresh our memory on what the ACV stands at for you in that channel, simply as a gauge of how much room remains?