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

Thanks, and good afternoon. I'd like to welcome everyone to the earnings conference call and webcast for Laird Superfood's fourth quarter and fiscal year 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, everyone ought to have the earnings release from the company, which we filed today once the market closed. You can find it in the Investor Relations area of Laird Superfood's site, www.lairdsuperfood.com. Prior to getting started, I want to point out that management might offer forward-looking statements on this call as contemplated 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 detailed discussion of those risks and uncertainties, please see today's press release along with other filings with the SEC. With that said, I'll hand things over to Jason.

Thanks, Trevor, and good morning, everyone. I'm delighted to tell you about what was a standout finish to 2024 for Laird Superfood — a year that really highlights how we've become a premium, high-growth brand with solid margins and enormous upside. Across all of 2024, we posted an outstanding 27% increase in top line growth, with net sales hitting $43.3 million, compared with $34.2 million during 2023. During Q4 by itself, net sales climbed to $11.6 million, which is 26% higher than Q4 2023. That pace of expansion isn't merely noteworthy on its own. It leaves the typical consumer goods and food industry figures well behind, since top line growth in those sectors generally stays near 3% to 5% each year based on industry benchmarks. Rather than merely matching the field, we're setting the pace. Just as encouraging is how our profitability metrics have improved. Across the full year, gross margins held at close to 41%. That marks an increase of roughly 11 points compared with the 30.1% we recorded for 2023, and it came from strategic sourcing, a move to a variable cost manufacturing approach, and disciplined management of trade spend. For context, food companies usually average gross margins somewhere in the mid-20s to low 30s, and for many of our most premium peers the figure lands between 25% and 35%. The fact that we can hold onto these margins while expanding at close to 30% shows how strong our business model is and how focused we are strategically on operational efficiency and premium positioning. Two key strategic pillars we laid out on earlier calls have powered this success: fast growth in e-commerce, especially on Amazon; and major progress in broadening our wholesale distribution. Let's begin with e-commerce. During 2024, our e-commerce channel expanded 32% year-over-year, driven by our Amazon platform, which both regained the ground lost from our 2022 quality event and beat our internal expectations by a wide margin. Q4 followed the same pattern, with Amazon turning in its best quarter ever for Laird Superfood, powered by better inventory management, targeted marketing, and rising consumer demand for our plant-based creamers, coffee and hydration products. Amazon now represents over 40% of our e-commerce channel, and we anticipate that share will keep rising in 2025 and beyond. Our direct-to-consumer business likewise posted a healthy gain for the year, supported by a move toward a subscription model, which today makes up close to half of our DTC sales and stands as proof of the loyalty and trust consumers have in our brand. When it comes to wholesale, we've made enormous headway in growing our retail footprint; during Q4, we landed new distribution with major retailers such as Kroger and Safeway Albertsons, adding to earlier and continuing wins with partners including Whole Foods and Sprouts. Wholesale net sales for the full year rose 19% year-over-year, delivering 41% of our total company revenue. This growth shows not only wider reach, but also better dollar sales velocity at existing accounts, thanks to existing promotional strategies and strong consumer pull for our products. Across the 12 weeks that concluded on December 29, our retail sales throughout the MULO universe rose by roughly 35%, and that figure reflected robust expansion in both distribution points and dollar sales velocity. Also in Q4, we managed to kick off the upsizing of our liquid creamer into a 750-milliliter package, a move that matches what the category typically offers and amounts to a 50% volume increase for the product. Simultaneously, we succeeded in enhancing the nutritional benefits as well as the taste profile of the formula we use. I'm happy to share that this transition is wrapping up right now and appears to have unfolded smoothly, with only a minimal number of out of stocks and hardly any surplus inventory of the size being discontinued; previously, I've witnessed similar product transitions derail at far bigger companies possessing significantly more resources. Consequently, I feel tremendous pride in the Laird Superfood team for how it carried out this crucial initiative. Turning to supply chain. I'm happy to share that our business operation delivered a robust quarter and a quite strong year. Even with ongoing commodity pressure affecting coffee, cacao and coconut milk powder, our team proved remarkably resourceful in building and nurturing supplier relationships spanning our ingredients, manufacturing and distribution partners, and we largely succeeded in offsetting the cost impact throughout this period. We've said many times that our aim is to reach a gross margin in the upper 30s, and we closed 2024 at close to 41%, with Q4 landing at close to 39% even with the cost pressures just mentioned. On that note, everyone knows by now that inflation keeps persisting within the food industry. We believe a good number of the recent commodity increases have stemmed from opportunism and trader activity, and we think a correction could arrive in some, or perhaps many, of these costs at some point during 2025 and beyond. We've handled ingredient procurement with great care and are likewise uncovering efficiencies within our operation that offset part of the cost increases. Because of that, our plan is to raise price solely at the moment and only in the event it becomes necessary, since we'd rather preserve our robust volume growth whenever we can. What that means is we might opt to briefly give up gross margin points in exchange for gross margin dollars, so that once some of these costs return to lower levels again, we can possess a larger business featuring a strong gross margin profile. Through this approach, we think we can optimize how large and how profitable our business becomes down the road in order to maximize long-term shareholder value. When a business is expanding as quickly as ours, keeping the supply chain up to speed can prove difficult. That's what has happened to us across recent months, since sales of our creamers and instant latte products have again and again exceeded the sales forecast, thus generating out-of-stock situations affecting several of our most popular SKUs. Had those availability problems not occurred, our estimate is that Q4 net sales would have been higher by over $1 million. While pursuing fixes for these problems, the team managed to locate extra raw material sources as well as backup vendors, and that ought to assist us in lessening upcoming product shortfalls and keeping input costs in check; across recent weeks we've already started returning these items to inventory, and we anticipate leaving these shortages behind shortly after Q1 wraps up. During Q1, sales will feel the effect of these unavailable products, even so we're still tracking toward robust expansion in 2025 and feel confident about where our business is headed overall. At this point, I'll pass things to Anya so she can walk through the quarter's financial specifics along with those for the entire year.

Thanks, Jason, and good afternoon, everybody. I'm happy today to walk you through the financial results we posted for the fourth quarter and for the full year 2024. Following record high net sales during the third quarter, we turned in yet another quarter of top line growth in Q4 that was almost as strong. Net sales rose 26%, reaching $11.6 million, up from $9.2 million during the same period a year earlier. Our wholesale channel paced the company's growth this quarter, climbing 52% year-over-year and representing 42% of our total net sales; distribution expansion in grocery and faster velocity at shelf in both retail and club fueled that growth. E-commerce sales climbed 12% year-over-year and made up 58% of total net sales, with meaningful gains in media efficiency within this channel. Strong sales on Amazon.com powered that growth, extending the momentum from the previous 3 quarters and reflecting outstanding commercial execution. For the full year 2024, net sales rose 27% to $43.3 million, up from $34.2 million in the prior year period, with robust growth posted across every channel. E-commerce sales climbed 32% year-over-year and made up 59% of total net sales. Sales on Amazon.com as well as the DTC platform drove these outstanding results, fueled by growth in subscription revenue and repeat customer purchases along with higher order values. Starting with this reporting period, net sales from the Amazon and DTC platforms will be reported under a combined e-commerce channel, reflecting the fact that this is how we manage our business internally, since we have structured ourselves to be agnostic to consumers shopping on whichever digital platform they prefer. Wholesale sales climbed 19% year-over-year and made up 41% of total net sales, fueled by velocity improvements in retail and distribution expansion in grocery along with more efficient promotional spend. Gross margin for the fourth quarter was 38.6%, compared to 40.4% in the corresponding prior year period. This margin contraction stemmed from increased gross to net sales spend in retail channel tied to prior periods and not tied to fourth quarter activity. Slotting expenses were also higher, driven by new distribution expansion, and added to increased trade spend in the quarter. Sequentially, gross margin contracted 4.4 points versus the third quarter of 2024, owing to the benefit of supplier settlement recognized in the third quarter and higher trade spend in Q4. On a full year basis, gross margin was 40.9%, compared to 30.1% in the corresponding prior year period. That represents 10.7 points expansion, driven by lower raw material costs from a shift to direct procurement of key ingredients, full realization of co-manufacturing model benefit and planned reductions in promotional trade spend. We are confident in our ability to sustainably achieve gross margins at least in the high 30s in the coming quarters. In Q4, our operating expenses came in $1.3 million higher than during the comparable stretch a year earlier. A few things pushed that up: somewhat greater spending on marketing, fees paid to brokers and Amazon tied to larger volumes, plus people-related items like stock-based compensation, which doesn't involve cash. For the fourth quarter, our net loss reached $0.4 million, whereas we had posted net income of $0.1 million during the equivalent period a year ago. Looking at the whole year, net loss came to $1.8 million versus a net loss of $10.2 million a year earlier, an 82% gain that stemmed from growing the top line, expanding gross margin, and bringing operating costs down. Now, on to the balance sheet. We closed the quarter holding $8.5 million of cash with zero debt. It's especially gratifying to share that we've now posted positive quarterly cash flow for a third quarter in a row — $312,000 during Q4, and $807,000 across the entire year — which speaks to better performance and careful stewardship of working capital, which fell versus a year ago when cash is excluded even as revenue rose 27% year to date. Our projection remains that we hold enough cash to keep funding operations while growing the business and making the operating gains that move us toward breakeven and profitability. Beyond that, an asset-backed line of credit sits ready if we ever require it. As we look toward 2025, we anticipate further growth across our main business segments and channels, with our attention staying on carrying out strategic priorities. Given that, we're restating the guidance issued a quarter ago, anticipating net sales growth between 20% and 25% across the whole of 2025, and gross margins staying in the upper 30s even with pressure from commodity costs. I anticipate first quarter net sales growth landing under the full year target, since out of stocks weighed on our creamer business during the early part of the quarter; we're well along in fixing that, and I expect things to fully recover by the close of Q1 or the start of Q2. Later in the year, I anticipate net sales growth picking up speed compared with the full year guidance; we'll aim for adjusted EBITDA to reach breakeven across the full year and put any excess back into further top line growth. We anticipate negative operating cash flow somewhere between $1 million and $2 million as we invest in inventory to support top line growth and keep out of stocks to a minimum. With that, I'll hand things back to Jason for any closing remarks.

Thanks, Anya, and thanks again to everyone who's been part of this ride with us. In a food aisle that's packed with options, Laird Superfood is claiming its own distinct territory through a portfolio of functional ingredients made from whole foods. A 27% jump in sales beats almost every well-known brand in our sector, and a 40% gross margin tops even companies that have been around a long time. On top of that, succeeding in two channels — retail and Amazon — hands us a flexibility plenty of rivals simply don't have. We aren't merely a DTC favorite or a brick-and-mortar leftover. We're flourishing in both arenas and reaching shoppers wherever they like to buy; the past couple of years have been remarkable for our brand and our business, yet we genuinely feel we're only at the beginning. I've never been prouder of our team for everything we've achieved so far, nor more thrilled about our ongoing growth ahead. Operator, that wraps up our prepared comments, and we're ready now to take questions on the call.

You brought up some inventory shortages that you've been contending with recently. Did they have any effect on Q4? Or is this really something that belongs more to Q1? Also, could you walk us through a time line for when you expect this to get sorted out, and tell us precisely what inventory investments you're making during this year to help ease the situation?

Alex, this is Jason. I appreciate the question. This is something we want to be sure we tackle very clearly right here. Yeah, the truth is that last year, as we headed into Q4, I believe quite a few people listening in probably noticed that we began running out of stock on certain products, especially in DTC and occasionally at retail too; and the truth is we began burning through inventory at a rate even quicker than we had anticipated, particularly on the items tied to coconut milk; and so what we did was start deciding where to direct that product. We served our subscribers before any new buyers, and that caused some of our marketing to slow down. And at the same time, we ensured we could keep our core customers supplied as much as we could, which was largely supplied; overall, yeah, we — it probably cost us, by my guess, according to our estimates, roughly close to $1 million in sales on the top line, which cuts both ways. We would have loved to have reported it and captured those sales. But on the other hand, it simply shows the demand. And even with growth of almost 30%, we still had roughly another $1 million that we could have had in stock, so — or rather, that we could have sold had we not been out of stock; and so this ranks as a top priority for us. The truth, though, is you need to keep in mind, unlike many of our competitors who can just toss additional ingredients and chemicals, and so on, into pots and crank out new "food", our food is nothing but a few ingredients. So when we run short on products made from coconut milk powder, we require additional coconut milk powder. And that requires time, it arrives from Asia. So it just creates a bit of a squeeze in your supply chain; we've reached out. We've found a couple of additional suppliers, so our supply is sturdier than it has ever been; we're very — as all of you know, we place a huge emphasis on quality, so those suppliers have been screened extremely thoroughly. They are all direct relationships for us too, and they give us the capacity to genuinely grow our supply from this point, which will pay off well as we're watching demand really accelerate here. We've got — regarding your question, during Q1, there will be some effect. We still anticipate strong growth here. As you noticed in the earnings release, we are holding to our guidance for the year; in spite of a few early challenges, we think we'll see 20% to 25% growth this year. So really, it's what I call a two-edged sword; demand has us excited, and we're able to boost our supply. Working it through the supply chain, getting it over here, putting it in the bags, and getting it onto the shelves simply takes a minute.

Thanks, that's a big help, Jason. Now, moving on to a few of your items that don't contain coconut. I was struck to see that in the coffee segment, beans seem to have climbed around 40% this year, with over 50% growth in Q4. Could you explain what's behind that? It appears you've had considerable success with functional coffees, giving you lots of differentiation in the market. Has that been the main force behind your wholesale expansion? I'm aware you've built a very solid business with coffee beans at several important retailers.

Correct, Alex. What we refer to as our coffee solutions — ground and whole bean coffees, our creamers, and our instant lattes — have all performed exceptionally well across the past 2 years. And we're seeing substantial retailer adoption. For us, coffee has been somewhat surprisingly robust, again in areas where demand has pleasantly exceeded our expectations. We've experienced really strong uptake not just in wholesale but also online, through Amazon and DTC too. So it's a category, clearly, with rising costs that we have — we've been monitoring closely. Up to this point, we purchased much of our coffee, I'd say, from an advantaged position. And we're tracking it carefully and making decisions, I believe, that are quite strong for our P&L; we recently implemented pricing on our coffee. We announced a modest price hike of $1 per bag in online channels and then applied it commensurately to the retail trade. We've staked out a position on price. As I said, we care far more about gross margin dollars than gross margin percentages. And we still very much plan to hold our gross margin in the high 30s, but we're ready to give up a couple of points to capture a couple of dollars in incremental sales. Because keep in mind, compared with what we expected, we have the chance to sell products we hadn't anticipated, generating extra revenue and therefore extra gross profit dollars, which matters greatly to our business and our cash position; so that's how we're running it. I believe we're running it very smartly; we've got eyes on all of these, with trackers we review daily, and we saw some easing in the coffee market lately and are taking advantage of that. And so I think we're positioned really well to keep growing that business. And consumers want it. It's the functional coffee, as you mentioned. It's also the functional lattes, where we incorporate our Performance Mushrooms into those coffees. There's definitely some innovation happening on both of those fronts, with fresh offerings that have been performing strongly, and that whole segment of our business is something we're genuinely thrilled about.

All right. It's really encouraging to learn that you're gaining so much momentum in that area. I definitely share that view — there isn't much else available on the market offering the kind of functional advantages for coffee that your company does; so it's good to see things going well. And thanks for the detailed walkthrough, Jason.