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

Thanks, and good afternoon. I'd like to welcome everyone to the webcast and conference call for Laird Superfood's earnings in the third quarter of 2024. Joining us today are Jason Vieth, who serves as President and Chief Executive Officer of Laird Superfood, and Anya Hamill, our Chief Financial Officer. At this point, all of you ought to be able to access the company's earnings release for the third quarter, which we filed earlier today following the close of the market. You can find it in the Investor Relations area of Laird Superfood's site, www.lairdsuperfood.com. Prior to getting started, I want to remind you that management might present forward-looking statements on this call under federal securities laws; such statements reflect management's present expectations and carry risks and uncertainties that may lead actual results to differ materially from what has been described. For a thorough review of those risks and uncertainties, please look at today's press release along with other documents we have filed with the SEC. With all of that said, I'll hand things over to Jason.

Thanks, Trevor. Good afternoon, everyone. To kick things off, as I always do, I'd like to express my appreciation to each of our investors who keep tracking and backing Laird Superfood, and to extend a warm welcome to those of you who are only now becoming part of this journey. Once again today, I'm delighted to report exceptional performance for our Laird Superfood business; during Q3, net sales climbed a remarkable 28%, which represents our third consecutive quarter of robust double-digit net sales expansion; it's also another quarter in which we posted healthy sales improvement in both e-commerce and wholesale, and in which top-line growth came alongside maintaining, or even boosting, our spend efficiencies in trade promotional and marketing activities alike. Once again, Q3 net sales growth was powered by e-commerce, which rose an exceptional 42% versus the prior year. Amazon sales yet again paved the way, climbing over 132%, fueled by excellent commercial execution and supported by better inventory positions in 2024 along with a robust Prime Day performance. Our DTC platform likewise expanded 10%, despite facing a highly demanding comparison owing to the promotional productivity we delivered twelve months earlier. Essentially every one of our DTC internal metrics was showing green again during Q3, with subscription revenue climbing 19%, average order size rising 8%, and net sales generated through e-mail up 38% for the quarter. In much the same way, our Amazon sales were propelled by significant gains in subscription sales, new customer acquisition, and improvements in capturing the Buy Box for our core products. I'm happy to share as well that net sales from wholesale rose almost 13% year-over-year in Q3. Within the natural channel, according to SPINS, our growth rate for the 12 weeks concluding October 6, 2024, came in at 27%, fueled by double-digit top-line expansion across every product we measure, among them powder creamers, liquid creamers, coffee, and instant lattes. That growth came from a roughly even division between distribution gains and higher sales velocity. In MULO, our expansion was even quicker, reaching 40% across that same 12-week span ending October 6, 2024; and although we stay strategically careful about moving into the conventional grocery channel, I can tell you that before long, additional products of ours will be available in new stores at a number of retailers nationwide, among them Kroger, Albertsons/Safeway, Wegmans, and others. Turning to operations. Our supply chain team keeps doing a strong job of backing our expanding business. Throughout Q3, we lifted our gross margin to 43%, a 12-point gain compared with the third quarter of 2023, and our fourth consecutive quarter reaching a gross margin of at least 40%; that gain came mostly from strategic sourcing of our leading ingredients, an area we'll keep prioritizing through 2025. The hardest thing we had to manage operationally during Q3 — and honestly, all through 2024 — was making sure product stayed on retail shelves and stayed in stock for our e-commerce shoppers. Since we've blown past our growth goals quarter after quarter, our supply chain has spent the whole year perpetually trying to catch up. The team deserves real credit for how well they've balanced ingredient sourcing against manufacturing capacity, basically whacking one mole after another as new problems kept popping up. And even though we did see a few small out-of-stocks at points in 2024, our inventory position remains solid, and we anticipate being fully stocked again in time for the critical Black Friday event and the holiday purchasing period. I'd also like to walk through a few of the strides we've made toward running a more environmentally sustainable operation. Over the last year, we've managed to bring 30% or more post-consumer recycled material into every one of our gusseted creamer pouches, plus our nutrition and protein bars. What's impressive is that we achieved this with no meaningful added expense to the company. This matters a great deal to our team and to the people who buy our products, and right now we're working out further targets and putting together a sustainability program spanning multiple years. A lot of you were along for the ride during the turnaround we carried out across the past couple of years, and I'm happy to report that we've now moved decisively into transforming Laird Superfood into a premium branded, high-growth business with robust gross margin. But instead of just asking you to believe me, let me spend a moment putting some dimensions around that so it really sinks in. So far in 2024, net sales are up by almost 27%. Meanwhile, gross margin has climbed 15.3 points, from 26.4% up to 41.7%, which puts us comfortably ahead of our financial objective of holding gross margin in the high 30s. Our net loss across the 3 quarters of this year has been cut to under $1.5 million — an improvement of close to $9 million compared with the same stretch a year ago. And over the last 12 months, cash actually rose by $776,000, moving from $7.4 million to over $8.2 million as of September 30, 2024. And while Q3 and the full 2024 financial results represent an enormous step up from what Laird Superfood has historically delivered, we're even more enthusiastic about what lies ahead for our brand and our business. As we've mentioned previously, there's still an enormous amount of white space for us to widen distribution and accelerate sales velocity growth in the natural channel, and we've barely scratched the surface when it comes to moving into the conventional grocery channel or the enormous on-premise channel for food consumption. Our confidence hasn't wavered that we can keep growing our e-commerce operation by leaning on content that's relevant and engaging from our founders as well as other influencers in the health, wellness, nutrition and fitness spaces. And with consumers more and more looking for foods that are healthier and more natural, our Laird Superfood portfolio sits perfectly to fuel them along their journey; so with that, I'll hand things over now to Anya so she can walk through our third quarter results in greater detail.

Thanks, Jason, and good afternoon to all of you. As Jason mentioned, throughout Q3 we kept moving forward with the plan we laid out earlier this year — getting the business growing again while also making profitability better. I'm happy to report that our Q3 numbers came in strong across every important measure, extending the momentum from the first half and producing major gains over the same stretch a year ago. Net sales climbed 28% to a record $11.8 million, compared with $9.2 million in the year-ago period, and rose $1.8 million on a sequential basis from Q2 2024. Our e-commerce channel drove the company's expansion, rising 42% versus a year earlier and representing 58% of total net sales. On the Amazon platform, we enjoyed by far the strongest quarter in company history, with impressive growth of 133%, powered by excellent commercial execution and an improved in-stock inventory position. Our direct-to-consumer platform also expanded 10%, fueled by a consistent rise in subscribers and repeat orders, larger order values, and reduced discount rates stemming from a strategic change in promotional spending. Wholesale net sales rose 13% compared with a year ago and made up 42% of total net sales, helped by 36% growth in the retail channel from new distribution and faster velocity, along with more efficient promotional spend. Timing of cross-channel orders partly offset this. Gross margin in Q3 reached 43%, a new high, and expanded 12 points versus last year. This improvement came from supply chain cost-saving efforts, particularly a strategic move toward directly procuring key raw materials, a settlement with a supplier to recover costs previously incurred related to the quality event from 2023, and a reduction in inefficient trade promotion spending. I'm glad to point out that this marks the fourth quarter in a row in which we've delivered gross margins at or above the 40% mark. These results reinforce our expectation of sustainably reaching gross margins of at least the high 30s over upcoming quarters. Operating expenses fell $0.3 million in Q3 relative to Q3 of last year, thanks to lower sales and marketing costs as we make our marketing programs more efficient. Higher general and administrative expenses partly offset this, driven by increased professional fees and stock-based compensation, which is a noncash expense. Operating expenses as a percentage of net sales were 16 points lower than the prior-year quarter, as we concentrate on continuous expense management to strengthen our bottom line. Net loss in Q3 was $0.2 million, which is $2.5 million better than the prior year period. Now to our balance sheet: we closed the quarter with $8.2 million in cash. Also, I'm especially happy to share that we've now posted positive quarterly cash flow for a second consecutive quarter — $374,000 in Q3 — and that brought the total to $495,000 across the first 9 months of the year, a reflection of better performance and careful oversight of our working capital, which declined year-over-year when cash is excluded, while year-to-date revenue growth reached 27%. On top of that, we carry no outstanding debt and don't anticipate any need to tap our line of credit. Our projection remains that available cash is sufficient to support operations as we expand the business and pursue operating improvements that move us toward breakeven and profitability. Broadly speaking, we're confident about the rest of 2024. Continued growth is what we expect across our core business segments, with our attention staying on delivering against our strategic priorities. Given that, we're raising full year guidance for both net sales and gross margin. For the full year 2024, net sales should now land between $43 million and $44 million, equal to 26% to 29% growth versus prior year; gross margin should widen to roughly 41% to 42%, an improvement of 11 to 12 points versus 2023. Turning to 2025, we've decided to place strategic emphasis on growth. With that approach, we anticipate delivering 20% to 25% top-line growth while managing our P&L toward positive cash flow and EBITDA; and with that, I'll hand things back to Jason for any closing remarks.

Thanks, Anya, and I want to express my gratitude once more to each of you who's backing what we're building here at Laird Superfood. The past 4 quarters show just how dramatic a reversal we've achieved, one in which we've both strengthened our balance sheet and brought the company back to growth rates that rank among the best in our sector. Operator, that wraps up what we had prepared, and we're ready now to take your questions.

Great quarter — congratulations. It's good to see such a solid early view for 2025. I'd like to dig a bit deeper into where that expansion will actually come from. Jason, I believe you said during your prepared remarks that we should expect several additional retail doors. You listed some very impressive national accounts that are coming on board. Is that truly going to be the main thing driving your growth? Clearly, so far this year, the online side has carried more of it. I'm curious how you reach that 20%, 25% growth in the coming year, if the mix perhaps shifts somewhat.

Yes. Thanks. Thanks for raising that — it's something we've really been pressing the team on. Here's the honest picture, Alex: our online and e-commerce operations delivered a tremendous year, and that came as a bit of a surprise. We'd cut a significant amount of spending. We understood our marketing approaches were improving, yet how things actually played out over the year honestly surprised us in a good way. What's great about it is that we're seeing a figure — actually a sizable figure — of buyers come back and purchase again, and those returning buyers become subscribers. As a result, we're carrying very durable revenue into the coming year. We remain very confident in our DTC growth potential, and meanwhile Amazon has performed exceptionally, as you noticed. We recognize there's still substantial untapped opportunity on Amazon simply by continuing the strategy we've already implemented. So we believe that e-commerce segment will keep performing strongly. That said, we'd likely anticipate even stronger expansion next year when it comes to wholesale. As I just noted, we brought on several new accounts. And when it comes to the retailers we partner with, we're being quite deliberate and picky. As I believe I said earlier, we've started working with Target in a few categories, and results have been solid. The same holds for the other retailers I brought up. But the truth underneath all that is that our natural channel sales have been performing incredibly well. That's come from a mix of more distribution — much of which we picked up this year — plus improvements in velocity, and as I noted, those two have contributed roughly equally this year. So really, it's a situation where all of it is landing at once. And, uh — excuse me, I'm juggling several things here at once, apologies. That really ties into what Anya was saying about the coming year and the way you should view our business. Growth is where we'll be putting our money. There's enormous opportunity in front of us at this moment, on the e-commerce side as well as among retailers — and the customers and visitors who come into their stores. We have to make certain our promotional pricing stays aggressive, secure as much added display space as we can, and ensure our marketing backs the brand, brings in genuinely new buyers, and taps into our database — which is a really powerful one. As we've said, we've got an amazing database of more than 0.5 million consumers who are extremely loyal to our brand, and we can introduce new products into those channels. So next year, Alex, you're going to see robust growth in every one of these channels; and honestly, you're going to see it show up across every category we compete in; we're winning everywhere. When I check the SPINS report, all of it is green at the moment. Every bit of it is glowing green, and that's how it's been throughout this year; the same holds true for the e-comm platforms at Amazon and DTC. So we're just going to take — we're going to take '25 to reinvest, to grow, and to build this business very cautiously. As you're aware, we've been excellent stewards of marketing dollars, and we keep a close eye on the ROAs and ROIs. But at this moment we're able to spend in an effective way. So we're going to do exactly that, and in our view, you're going to see truly fantastic growth across all of these channels going forward.

That's genuinely useful, Jason. Now, may I ask a quick follow-up? When you consider pushing further into mainstream grocery and big-box retailers, plus the momentum you already have with the natural foods partners you've worked with for a long time, which items are those 2 groups of retailers actually drawn to? As you head toward these bigger, more mainstream chains, are they choosing your main powder creamer SKUs? Or whatever insight you can give on which items are getting traction as you add more doors would be great.

Right. Powder creamers are where we started, and we keep expanding that business, and it keeps performing strongly; however, that segment — that dry shelf — is one that can never match the productivity of liquid creamers; therefore, on sales velocity per point of distribution, liquid creamers come out clearly ahead, yet we're performing well in both. When we assess ourselves and examine what we refer to as quintile performance assessment, in which we review every product sitting on shelf, divide them into 5 quintiles and see where we land, we're almost always in that top quintile, or somewhere among Q1, Q2, perhaps reaching Q3. There are a few laggards, but overall, we sit at the top of these performance metrics we track. So we look quite strong in both. The powder creamers suffered a tough year 2 years back, yet they posted a really strong year this year. And we've seen solid distribution growth along with velocity growth. And we're converting that liquid creamer to a large size, which amounts to a 50% upsizing, a 50% up-pricing. The consumer gets a bit more value. But essentially, it's simply a convenience move, providing more creamer so people don't need to restock as frequently and don't run out at home. And incremental consumption follows whenever you make that change. So we're very enthusiastic about liquid creamer heading into next year. We've landed some excellent distribution wins on that front too; so both of those categories, Alex, look strong; and then — the genuine surprise for me compared with where things stood — when I arrived about 2.5 years ago, the coffee and the instant latte products have simply been on fire this year. They've fueled much of our growth in grocery. They're performing excellently online. And so we'll keep going; we're rolling out new SKUs in both of those new items, in both of those categories. Plus, we're experiencing quite a bit of momentum. We introduced a protein creamer, and it's completely sold out multiple times during this year. It exceeded what we had projected, so now we're producing larger batches of it. We also have a brand-new maca creamer launching — actually, pardon me, it's called Maca Instant Latte, and it's arriving within that instant latte category. On top of that, we've rolled out a few additional coffee items, and we keep adding more functionality, particularly by way of adaptogenic functional mushrooms, and both retailers and shoppers are truly drawn to those SKUs. So my view is that going into next year, those 4 product segments are the ones you'll witness really taking off, along with greens, which has been performing incredibly well throughout this entire year for us.

Great. Let me just begin, and perhaps dig a bit deeper into growth; specifically I'd like to focus on discounts and promotional activity. Based on the prepared remarks regarding putting some of that margin to work, it sounds like this will remain a key emphasis next year. So I'm hoping you can discuss where you're achieving the greatest results, which types of promotions are truly connecting with customers, and simply how you're approaching next year when it comes to discounting and promotional efforts.

I appreciate the question; let me take that one. And after that, Anya, should you feel like giving your voice a good workout, feel free to chime in too. So this is quite fascinating, JP. Twelve months ago, as you likely remember, we spent excessively on the trade line, and we put far too much money into pricing. We sensed the consumer was somewhat unsteady during the prior year, and we were attempting to lure them into buying, particularly first-time buyers and their transactions; what we discovered is that we conceded too much. By doing so, we were essentially surrendering our brand equity too. Therefore we executed a strategic pivot late last year, really during Q4, and we've continued that through this year by doing far less pricing promotion, and the results have been highly effective. As the net sales gains we've posted this year demonstrate, selling at full price has proven much better for us. What that has accomplished is it has truly allowed us to preserve the premium cachet of the brand. Our consumers told us directly that we are a premium brand and that they were taken aback to see us discounted as frequently as we were during the prior year. What we do currently is hold fewer, deeper sales online. So we take advantage of Amazon Prime Days. We take advantage of Black Friday internally on DTC. And then we have one additional major sale within the DTC business. Beyond that, for the most part, we truly don't run many promotions. Virtually none, actually. And that is working extremely well for us because the consumers purchasing Laird right now are genuinely — they believe in the benefits the brand delivers to them, the functionality of the food, and they're prepared to pay at the price it carries without requiring promotion. So we've genuinely stepped back from that pricing promotion, and that carries over into grocery as well; we reduced — goodness, Anya, what did we cut back, roughly 10 points or so of trade throughout the year.

11, yes.