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

Thanks so much, and welcome, everyone. It's great to have you join us for Laird Superfood's conference call and webcast covering our results from the first quarter of 2024. Joining me today are Jason Vieth, who serves as President and Chief Executive Officer of Laird Superfood, along with our Chief Financial Officer, Anya Hamill. You should all have the earnings release for the first quarter by this point — it was filed today once the market closed, and you can find it in the Investor Relations area of Laird Superfood's site, www.lairdsuperfood.com. Just before we get started, I want to remind everyone that management might share forward-looking statements on this call, made within the framework of federal securities laws. Such statements reflect management's present expectations and beliefs, and they carry risks and uncertainties that might lead actual outcomes to vary materially from what those forward-looking statements describe. For a thorough review of those risks and uncertainties, please look at today's press release as well as our other filings with the SEC. With all that said, I'll hand things over to Jason.

Thanks, Trevor. Good afternoon, and I want to express my sincere appreciation once more to all of you for being here with us. I'm delighted to report today that Laird Superfood's turnaround narrative has now formally returned to being a growth narrative. In Q1, we expanded our company's net sales by a remarkable 22% compared with the equivalent quarter 1 year earlier. Our top-line expansion in that quarter came primarily from our e-commerce division, which posted 33% growth versus the prior-year period even as marketing expenditures fell considerably across both periods. On this quarter's call, Amazon stood out above everything else, posting an amazing 48% growth rate. That came from continued improvements in having products in stock, our marketing working well, and the way we handle inventory. We've kept sharpening how we execute, removing unauthorized sellers of our products, and winning the buy box, which means sales of our brand on Amazon get fulfilled by our own Laird Superfood team. The thing that might surprise people who watch the DTC industry the most is the solid 25% growth in our own DTC business, where we continue to show we can convert viewers into customers, customers into repeat customers, and repeat customers into subscribers. These days, subscription orders make up about half of our DTC business. Lately, our team has been focused on creating a website and e-mail platform. Through it, we're able to share advice and stories about health, wellness, nutrition, and lifestyle with the customers we serve. This gives them a reason to keep coming back to our branded site. Also, by continuing to work with Laird Hamilton and Gabby Reece, his wife, we've been able to generate content that's highly relevant, authentic, and original, which sets our brand apart from competitors. On top of that, our customer service and Net Promoter Scores remain the best in the industry, and our consumers clearly recognize and appreciate how much care we put into their orders — from the moment they interact with our website until the package arrives at their door. Now, on the wholesale side of things: in Q1, net sales went up 10% compared to the same period last year. That's especially notable since we didn't get any lift from raising prices during those 12 months. And here's something even better — for our Laird Superfood brand, retail scanner sales grew a lot faster than our net sales did this quarter. They came in at plus 30% across U.S. food for the 12-week period ending March '24. Since retailer scanner data and our LSF internal sales grew at such different rates, it's clear our two large distribution partners pulled down inventory. So looking forward, we expect this channel to keep performing strongly. In wholesale, Q1 brought growth for us in each category we track, with gains in both dollar terms and units. Coffee and instant latte items were the standout performers, and at retail those two now make up our biggest category. Our club segment continues to do quite well, with sales velocities climbing steadily, which reflects the improved product we have following last year's quality event. Turning to operations, the team continues to post strong results, driven by supply chain work that covers procurement, production and distribution, plus beneficial trade spend. For Q1, gross margin reached 40%, which is a number of points higher than our internal forecast, despite a planned write-down we took on the value of our coconut milk powder. That planned write-down was in fact a good outcome for us, since it came from recognizing that we can now source our biggest commodity ingredient at a much better rate than before. Because our supply chain team is performing at a high level, we have effectively offset a range of cost increases, and right now we expect to keep doing so through 2024. As we said before, Q1 is a strategic investment quarter for us, because the marketing activities we fund early in the year can be leveraged in later quarters. Even so, we managed to lower our year-over-year marketing expense again in Q1, thanks to better execution and more efficient activations. During the quarter, marketing costs came in at just over 20% of net sales, a figure that represents a sharp drop compared with earlier years. Going forward, our medium-term aim is to continue reducing that figure to the low-teens, and ultimately to the high single digits. Even so, because of the opportunities in front of us and a rebound to healthy brand growth in Q1, we feel quite good about the current level. In fact, we are extremely pleased with how the first quarter turned out: we surpassed our own internal plan and are now positioned to exceed the targets we set for 2024. Given all that, I'd say the narrative around Laird Superfood should shift now—it's no longer a fixer-upper, it's a company expanding. We're adding customers through each of our sales channels and getting ready for what comes next as we scale. At this point, I'll hand things to Anya so she can walk through the specifics of what we posted for the first quarter of 2024.

Thanks, Jason, and hello everyone. Over the past 18 months, the work our team has done has reshaped our financial base and set the business up for growth. I'm happy to report that in our first quarter, results came in ahead of our operating plan on each key metric. Net sales rose 22% to $9.9 million in Q1 2024, versus $9.2 million in the same period a year earlier, and were up $700,000 on a sequential basis against Q4 2023. As Jason mentioned, growth in Q1 came from both e-commerce and wholesale. E-commerce sales climbed 33% year-over-year and made up 59% of our total net sales, with our Amazon and DTC platforms posting impressive growth of 48% and 25%, respectively. Amazon's sales growth came from tremendous execution on the platform, where our team improved inventory positions, lifted our buy box win percentage and drove efficient media spend. Growth in our DTC platform during Q1 came from a steady rise in subscribers and repeat orders, higher order value and lower discount rates thanks to a strategic shift in promotional spend. Wholesale net sales rose 10% year-over-year and made up 41% of total net sales, reflecting continued growth in club, velocity improvements and distribution expansion in grocery, plus more efficient promotional spend. Gross margin came in at 40% for the first quarter, a 17-point improvement year-over-year, driven by the ongoing benefit of moving to a third-party co-manufacturing and distribution model and by lapping expenses tied to the product quality event in last year's first quarter. This marks the second consecutive quarter with gross margin of at least 40%, which backs our expectation of sustainably reaching gross margins in or above the upper 30s in the quarters ahead. Operating expense fell $1.1 million in Q1 versus the same period a year ago; this decrease came mainly from lower people costs, lower marketing and a broad strategic reduction in spend. Net loss for Q1 was $1.0 million, which is 75% better than the prior year period, driven by higher net sales and expanded gross margin, along with continued discipline around G&A spending. Against Q4 2023, our Q1 net loss was $1.2 million higher because of stepped-up planned marketing investments and the timing of G&A spend; now turning to the balance sheet. We closed the quarter with $7.3 million of cash and no debt, as we continue to manage our balance sheet conservatively. Our cash burn in Q1 was $400,000, which is clearly much better than our historical burn rate but higher than the last quarter due to stepped-up marketing investment and payout of our company bonus, which had been fully expensed during 2023. The pace at which we're burning through cash keeps getting better, thanks to the discipline we've maintained around operating expenses and working capital — inventory cuts being a big part of that. During Q1, we brought inventory down by $700,000, which works out to 11% versus where it stood at the close of 2023, and we did that while still fueling 22% growth in revenue. On top of that, we've just signed a credit facility agreement giving us access to as much as $2 million in cash, secured by receivables we sell. That adds another source of liquidity whenever we decide to draw on it; our projection remains that we hold sufficient cash to keep operations running at least into 2026 as we keep expanding the business and making operational gains that move us toward breakeven and profitability. Taken together, these outcomes leave us more confident than ever that the strategic initiatives this team has spent the past 18 months putting into place are delivering what we intended. Right now, we're raising the top end of our guidance for the full year 2024. Our net sales expectation is now $38 million to $42 million, amounting to 11 to 22 points of growth over the prior year. Gross margin is now projected at 38% to 41%, which is a 7 to 11-point gain against 2023. With that, I'll hand things back to Jason for any closing remarks.

Anya, thanks to you, and my thanks as well to each of you who has tuned in and stood behind us over these last 2 years. My hope is that you would say we have delivered on the expectations we set out across those quarters; and although reaching these results so far has been deeply gratifying for our LSF team, what lies ahead excites and motivates us even more. That brings our prepared remarks to a close. Operator, the call is now yours to open for questions.

Congrats — it really does sound like the business is moving into that growth chapter. So, I suppose my first question is about getting a handle on the whole Ozempic-type situation, the "food is medicine, food is health" trend, and whether Laird might have a larger part to play in that growth narrative.

Bobby, this is Jason. Appreciate you diving in with us today. Right — that Ozempic phenomenon, the craze sweeping the country, I'd say it mostly doesn't touch us. Why? Because the people who come looking for us genuinely treat food as medicine. That will forever be a niche smaller than the mainstream; even so, we believe it's quite a big niche, and one that keeps expanding. But for sure, it isn't the mainstream approach of eat anything you like, then pop a pill to undo whatever damage you just inflicted on yourself. We're squarely aimed at — or rather, highly attuned to — the shopper headed the other way, the one who says whatever goes into my body ultimately shapes my future destiny, rather than attempting to fix the messes they make. So we do keep an eye on what's happening. It interests us, yet honestly, we remain quite removed from it when it comes to our own products and lineup, since the shoppers drawn to Laird Superfood and to our direct rivals approach this from an entirely different angle.

Yeah, that's fair. I suppose my question was framed too narrowly. What I was really trying to get at is whether consumers are becoming more aware because of all the developments we're beginning to witness in CPG — there may be this food-is-medicine kind of dynamic, where folks are focused on ingredients, and you all are sort of ahead of the curve there, in that perhaps you aren't correcting the errors people make, but you're able to drive health outcomes to a larger extent, reaching a more open audience thanks to these trends fueling more awareness of that link.

Yeah. Bobby, I like that angle. Great question. Honestly, I could go on about it for hours, though not with the eloquence of either Laird or Gabby, who truly have been leading on this for quite a while. It's fascinating. Let me offer an analogy, then use it to expand a bit. When I arrived — my background was in the food business. Not big food, but WhiteWave Foods, which was among the larger companies out front driving the effort to shift how people eat toward better. But I'd say, when I joined — and I'd been at a few other brands afterward, and they joined without truly grasping, to be truthful, without truly grasping Laird Superfood and a few of the guardrails put around us; so when I got here, I said, "Oh, man, we could genuinely make this food taste much better by using natural flavors, for instance. Why aren't natural flavors in there?" And we began heading down a poor road, where we'd make food taste somewhat better; and the truth is, our food tastes the way food ought to taste, and natural flavors aren't truly natural. That's one of the dirty secrets, among many, in the food world, particularly with big food and the poison that, honestly, they've introduced into bodies across decades now. So you're truly striking a nerve with me here. And the truth is — and I'll just share this illustration, natural flavors, they come from a natural product, yet they get chemically extracted in nearly every instance, perhaps every one. And that chemical residue carries over into the food they're added to. You could pull some tomato taste out of it, sure, and the label can say "natural flavor" — but a chemical residue remains, since a chemical was used to derive and extract that taste from the tomato. Laird Hamilton repeated this point to me several times during our early conversations: when you consume these items daily, in tiny amounts — a small dose of a chemical, yet taken repeatedly throughout the day, across many days each week, many weeks each month, many months each year, throughout your life — all at once, 34 years later, your health breaks down, and there's no clear cause. Awareness, comprehension, and recognition of that particular problem with natural flavor are rising, and that's beginning to expand — though even more so, definitely more widely, regarding the other components you see listed on the back of a package and can't make sense of. And that's exactly what we're pushing in our marketing right now. Compare what we do with our Greens against rivals: we make the point that we're a food, not a supplement. Flip our Greens package over, and every ingredient listed is something you know, beginning with fruits and vegetables, just as you'd anticipate — then check competitors, and often that isn't what you find. So we lean on that direct comparison in our marketing. Caution is required, because nobody enjoys being lectured about — actually, they typically don't enjoy being lectured about — their diet and the items they buy; so we handle it in a subtle way. Yet we keep discovering that more and more consumers respond well to it, and more and more of them investigate and study what's in their food. You also notice plenty of podcasters, like Joe Rogan, along with neuroscientists, dietitians, and others, speaking up loudly on these matters; and my sense is we're only at the start of a revolution here, Bobby; that question of yours is excellent. Recognition of the harm people suffer from what they've been eating, plus the secrecy, is definitely greater now. Dig into the research, and the food industry holds countless hidden truths about what goes into your body — truths the public is beginning to uncover.

That's wonderful. I'd like to pose one brief additional question regarding wholesale. It's obvious you've built considerable momentum in e-commerce, and Amazon has truly surged. At what point might the growth baton be handed over to conventional, assuming they operate a traditional grocery channel? I realize you're putting in effort there to broaden distribution and possibly increase your shelf presence, yet I'm wondering when you foresee a possible turning point in that specific channel.

Yes. That's an excellent follow-up question. How we're approaching this — how we've approached it from a strategic standpoint is treating conventional as sort of our final stop, since playing there is genuinely costly. You have to move fast in this market. With so many players competing, smaller businesses clearly face pressure on margins. That's why, during the past two years or so, we've cautiously stepped into that arena. Bobby, you're aware that the natural channel has treated us very well. Shoppers spot us right away and buy, since that channel aligns with the qualities we envision for our product. So your point is spot on. What you're witnessing is huge expansion on Amazon. Our DTC business has delivered a few genuinely strong quarters and has truly — from a strategic standpoint — made that turn thanks to the programs put in place there. Meanwhile, the natural channel continues to perform amazingly for us and is growing at a fast clip. We're aware there's a sizable opportunity in the traditional segment. That said, my estimate is that we need roughly twelve more months before we can truly commit — perhaps not at maximum capacity, but certainly ramping up our efforts there. The reason is that we want to give shoppers time to move in our direction regarding that specific shift you brought up earlier. We'd like a broader group of everyday buyers to start embracing the idea of food functioning as medicine, which you mentioned, and to seek us out for that. So my view is we're about twelve months away from genuinely gaining significant traction within that channel.

Great job on yet another solid quarter; perhaps to kick things off, I remain somewhat unclear when it comes to Amazon. I'd love it if you might elaborate a little regarding what has been fueling expansion in that channel? Also, has having inventory stocked been part of that extremely fast expansion that you reported for 1Q?

Yes. George, nice to hear from you. Yes, we're quite thrilled regarding Amazon; we anticipated robust expansion there. To be honest, our plan assumed roughly 50% of that rate. And we recognized an opening existed within that channel during the first six months of the year tied to the quality situation from a year ago, when we needed to withdraw inventory; and I realize all of you are aware we discussed that subject endlessly last year. So I won't go into that much depth, but ultimately we had to take our inventory out through a gradual withdrawal involving the creamer items, exclusively creamer items. Thus we recognized an opening as we cycled past it this year, yet we are far beyond what we expected on that marketplace during this quarter. What we observed is truly powerful expansion spanning numerous distinct categories. Thus not merely the creamer items that performed very well, but our coffee, our performance mushrooms, our Greens, our bars, all of it is genuinely performing well on Amazon at present. And a few developments occurred. First, we restored inventory to its proper position exactly as you inquired about. Therefore we've accomplished — I'd state our team has accomplished a remarkable job of reselling and managing, particularly given the surging demand since there's somewhat of a delay when replenishing into their micro DCs. The team has accomplished a superb job in that area. Yet they've likewise gone out and regained the buy box for our items where we previously had resellers. You're perpetually battling resellers; it's somewhat of a whack-a-mole game, frankly, since one — you eliminate one and then a different one appears offering your item at a reduced price because they happened to grab 2 or 3 items at their neighborhood grocery during a sale. Thus we've been performing quite well at eliminating that. We've brought on an agency to assist with a portion of that. And we — I'd state that we've simply been running that channel quite effectively from an operations standpoint. And simultaneously, we did put money in, we discovered — we've achieved some genuinely impressive returns from certain advertisements we've developed and the search we've managed to carry out; and therefore, we've experienced truly excellent commercial and operational performance there throughout the last quarter.

That helps. Turning to my second question, I want to ask about the hydration part of your business, which showed strong growth compared with a year ago. My guess is that the Greens product is driving that. Let me know if I'm mistaken. If that's correct, I'm interested in how you intend to keep pushing it — what supports your belief that this product will continue to grow? And how do you plan to keep broadening it? So any details would be welcome.