SharkNinja, Inc. (SN) Earnings Call Transcript & Summary

Good afternoon, and welcome to another session of our Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover apparel and accessories and brands here at Goldman Sachs Research. And I'm thrilled to introduce our next session with SharkNinja. Here with me today is Mark Barrocas, CEO; and Larry Flynn, CFO. Welcome, Mark. Welcome, Larry.

Thank you very much for having us.

Thanks for coming today. Mark, given that SharkNinja is a recent public listing, I was wondering if you could kick off the session today with a brief overview of business.

Sure, sure. Well, first off, thanks for having us here. This is our first event, as you said, as a U.S. public company. We really think of SharkNinja as a consumer problem-solving engine. We solve problems that others can't. We see problems that others are unable to. And we go to market under 2 really well-respected brands. The first is the Shark brand, a market leader in cleaning, floor care, home environment and beauty and the Ninja brand, which is the #1 market share brand of kitchen appliances in the United States and has also recently launched into outdoor cooking as well with our Ninja Woodfire grills and ovens. The business operates in 28 different product categories. We sell in 26 different markets around the globe. We -- product -- diversification is something that's really important to us as a business. I mean product category diversification, geographic diversification, customer diversification. We sell to over 150 retail outlets around the globe as well as a robust D2C business and also brand diversification with 2 multibillion-dollar brands being Shark and Ninja.

That's really great. Maybe you could dive a little bit further into how the Shark and the Ninja brands are positioned today and how you think about the key points of differentiation of those brands relative to competitors?

Sure. So we feel that we really bring first and foremost, disruptive product innovation into all the categories that we're in. Today, the business is nearly a $4 billion business. 15 years ago, we were a $200 million business. We've grown 14 out of the last 15 years, and we've grown over the last 15 years at a compounded annual growth rate of 20% a year. From a product innovation side, I mean, we look at ourselves in kind of 4 ways that we think are quite unique. I mean one is speed to market. We bring products to market in as fast as 12 months and just the scale of product development that we bring to market nearly 25 new products a year. The second is kind of market-leading performance and multifunctionality that we deliver to the consumer. Third is high-quality and reliable products. I mean it sounds cliche, but we've really built our business one 5-star review at a time. And fourth is delivering extraordinary value to the consumer. That's something that is really important to us and has helped us both pull opening price consumers up and also attract premium consumers as well. But it's not enough just to have disruptive product innovation. I mean we invest over $320 million a year in media and advertising to create consumer awareness and excitement for our products. That's everything from social media and influencers, a short-form advertising to kind of our legacy form of long-form advertising as well. And we feel like that in itself is not enough just to have innovative products and the ability to create strong consumer demand, it's really putting together a dominant omnichannel strategy, both in brick-and-mortar. We're the most searched brands in our categories on Amazon and the other dot-coms and a strong direct-to-consumer business. And I think when you kind of pull all of those pieces together, we really feel like it's been a winning strategy for us.

You mentioned innovation. And innovation can be a key competitive differentiator when you're in a market that is highly competitive. I'm curious if you can expand a little bit more on your innovation pipeline, how robust is it? How do you identify what areas to innovate in within your product portfolio? And what should we be thinking about balancing those innovation opportunities between the Shark and the Ninja brands or outdoor, home kitchen or cleaning?

Look, I mean, the business continues to reinvent itself. I mean if you look back 15 years ago, I mean, we were Shark, the steam company, and Ninja didn't exist. Ninja was established in 2009. And then we were kind of Ninja the blender company and evolved into Ninja the coffee company and the heated cooking appliance company. I mean we've entered into 10 new product categories just in the last 3 years. So innovation is really the lifeblood of the business. The business comes about innovation through a number of different ways. I mean, the first is -- I think we have a really unique consumer insights model, the ability to be able to mine consumer feedback, both in the home through social media, through reviews and kind of identify real consumer problems that exist, that might not have been apparent to others or even to the consumer sometimes. I mean these are known or unknown consumer problems. And then the second is a team of 750 engineers around the globe that are based in Boston, London and China that are really developing 24/7. When you take any individual product from Shark and Ninja, there's a team of engineers in Boston that works on it. When they go home at night, the CAD passes on to a team in China. They work on it, they pass it along to team in London. And so that rapid innovation cycle is something that I think is really quite unique to the business. And then the third is really looking at where our product development team feels that our brand can expand into, what categories we can expand into? I mean -- if you looked at our business just a few years ago, you wouldn't have seen things like our beauty business. I mean we're the fastest hair care company -- fastest-growing hair care company in the United States. We weren't in the outdoor cooking business. We weren't in the cookware business. And so the business through innovation continues to keep reinventing itself. And fortunately, the consumer and our customers are going on that journey with us.

New category expansion is 1 of your 3 growth pillars. And you mentioned the beauty business there. You mentioned outdoor a few moments ago. I'm curious how do you decide to enter a new category? Where do you think that you have the most permission to enter from the customer today? And what proportion of your forward growth do you anticipate will be coming from these new category expansions?

Yes. So look, I mean, the company has a real demonstrated track record of being able to enter a market. I mean we have never acquired $1 of revenue in the company's history. So everything that we've grown has developed from ourselves entering new categories and growing share into those categories. As I said, the innovation is coming from these consumer insights teams, these engineering teams that are innovating around new ideas and the product development teams. And it really starts with the idea of answering a key question in product development, which is what gives us the right to be in that category. I mean what are we bringing that is unique or differentiated to the consumer that they're not able to get today through either solving some problem that they're unable to solve today, offering them to be able to do something different like, for example, our Ninja CREAMi ice-cream maker, we found that consumers more and more were having problems with allergies and dietary restrictions. And simply just wanted a fun experience in the home. And you take a category like that, when we entered into it, the at-home ice cream business in the United States was a $50 million category. And retailers said to us, well, even if you gain 50% of the market, it's a $25 million opportunity. This year, the Ninja CREAMi will be a $150 million business for us today. So it's not just looking at what the category is, but it's looking at what we believe we can grow that category in terms of size and scale by bringing something really exciting to the consumer.

As you've grown some of these new categories, you've become a market -- a dominant market leader in some of your existing categories. Can you bridge that from maybe the CREAMi or other new categories that you've recently entered. How do you create market category dominance over time? Can you give us a few examples of where you've done that and how you achieve that?

Sure. Look, you're right, Brook. I mean, we are the #1 market share in floor care and cleaning in the United States. We're the #1 market share in kitchen appliances in the United States. We have been able to enter markets starting with kind of 1 core disruptive product in a category. So an example of that, I mean, people have asked us A few years ago, we entered into the cookware business. And the obvious question is, why does the world need another pot and pass? And we looked at the market, and we saw that the largest portion of that market was nonstick cookware and we talked to consumers and said, well, we know -- they notice to us that -- they love their pots and pans on day 1. But as they got to day 180 or day 200, the pan started performing quite different. And they started sticking a lot more, chipping or flaking. So we spent about a year, and we really started to figure out what type of disruptive technology could we develop that would give us the right to be able to enter into that category. And we developed a product that actually after 5 years, doesn't change its performance in terms of sticking, chipping or flaking and we called it the Ninja NeverStick cookware. And we launched that product a few years ago at a $299 price point, which is kind of a premium price point in the cookware space. And we really disrupted that category quite a bit. And we continue to grow share. But as we grew share in that, we started recognizing that we needed to go into different price point areas. And so today, as you look for -- in the market, you can find Ninja NeverStick cookware for as lower price $149 all the way up to $399. And so it allows, as I said, kind of opening price consumers to kind of enter into our brands and our categories, but it also appeals to a premium consumer. And I think what's so interesting about the Shark and Ninja brands is we're not the highest priced products in the market. We're not the lowest priced products in the market, but the available consumer that we engage with our products because of the price points that we're in and because of the value that we're delivering, I think, has been something very compelling and has allowed us to keep gaining share in some of these new categories.

Larry, let's bring you in here. As you think about developing these new categories from the time that you enter the market, such as a beauty or a CREAMi, which is a little bit newer, to maybe the cookware item. How do you think about the margin contribution to the P&L of these new categories? What do they start at? How do they scale over time? And what is the ultimate P&L impact?

Sure Yes. Great question. I think first, it's important to note that we have strong industry-leading margins, both at the gross margin level and at the EBITDA margin level. From a gross margin perspective across all of our categories, we actually see a pretty tight band of where those gross margins are. So fairly consistent across categories. The one exception to that is actually in the beauty category. We do see slightly higher margins -- gross margins in the beauty category. As Mark mentioned, that's the fastest growing or one of the fastest-growing portions of our business. So we do see some kind of gross margin mix benefit there. From an EBITDA dollar perspective, our more mature categories are higher contribution margins for us as we do invest kind of less in sales and marketing, less advertising that we need to kind of support those brands as they gain higher levels of market share. In our newer product categories, the contribution margin is lower at the front end in the early days as we continue to kind of really build the brand and really take market share in those new product categories. And then we see that kind of expand over time as those categories mature.

And Larry, you have grown marketing spend quite a bit this year as you've been investing behind outdoor and beauty. How should we be thinking about marketing spend growth and the right run rate of marketing spend for the business overall?

Yes. So I think in answering that, one of the important things to think about is actually how we've expanded gross margin as well kind of from '22 into 2023. So we've had gross margin expansion of about 330 basis points in the first half of 2023, and we've actually invested some of that back into the business in marketing to support both new products as well as new markets that we've entered into. So expanded EBITDA margins by over 100 basis points in the first half of the year. So it's a place where we think about investing in the business for the long term and ensuring that we're setting those new product categories up for success as we go forward.

Excellent. Let's turn to one of your other pillars of growth, which is market share expansion in your existing product categories. Where do you see the biggest opportunity to grow share in your existing categories? And is there really an opportunity for continued growth in some of your long-standing categories like blenders or vacuums?

Yes. Yes. I mean, look, it's interesting. Today, in the U.S., the average household owns about 2.5 vacuum cleaners. And when we say the vacuum category, we're a market leader in upright vacuums and cordless vacuums and robotic vacuums. But consumer habits are changing. And consumers are moving more to cordless vacuums and we feel like there will be more accessibility into robot vacuums as we continue to move forward. So our innovation, I mean, as I said, we launched nearly 25 new products a year. We're launching lots of products in these existing categories. You take a category, for example, like upright vacuums, we own 40% market share, yet we're the only company in the industry that still advertises in that category. And we continue to keep innovating and find the next consumer problems to put our prior products into retirement before their usable life. And I think we've done that with our innovations like self-cleaning brush roll that doesn't wrap hair, our odor neutralizer technology that was a consumer problem that we found the consumers that own pets, we're finding that their vacuum cleaners were smelling and we had to be able to help them manage with that and deal with that. And so through these areas of innovation, even in these existing businesses where we hold the dominant market share position we're still finding other opportunities for growth and to raise up average sell price.

So let's put all of this category commentary together and wrap a bow on it. As you think about operating against your 4 operating segments: cleaning, cooking, beverage, food prep and other, which includes beauty, how should investors be thinking about the growth contribution from each of those core categories?

Yes. So I want to take a step back and Brook, you mentioned kind of our growth pillars. It's important to note that kind of a number of years ago, we refocused the business around what we call our 3 key organic growth pillars. I mean those are first, gaining share in the existing categories that we're in. We have a demonstrated track record of growing share in these existing categories. Second is expanding into new and adjacent product categories. As I said, we've entered 10 new categories just in the last 3 years. And third is international expansion. Today, we're in 26 markets around the globe. So as you think about the categories that you mentioned there, I mean, I really believe that there's growth potential in all of those. I mean we're innovating across all of those. I mean, I'll give you an example, people said to us will hold on, I mean, in motorized kitchen appliances, you're already #1 market share, where is the opportunity to grow it? And all of a sudden, the CREAMi came about and we kind of enlarge the size of that market. As we think about the cooking business, we just entered into outdoor cooking appliances with our Ninja Woodfire Grill and our Ninja Woodfire Oven. We weren't in the outdoor cooking business last year at this time. We only launched at the end of September in 2022. And by the end of this year, we'll have a $150 million outdoor cooking business. So I think the ability to be able to find new subcategories within those categories that you mentioned is something that's really important to us. Now you also mentioned this category called other, which we've got to come up with a better name for because other for us is our Shark Beauty business. I mean we've got an incredibly fast-growing hair care business in beauty, both in North America as well as in Europe. It also includes our home environment business where we're growing things like air purifications. So there's also lots and lots of additional categories for us to be able to take the Shark and Ninja brands into.

Great. You mentioned your final growth pillar, so let's go there next. International, it's a sizable opportunity for you. You have a big business in the U.K. How do you plan to leverage your learnings in the U.K. market as you build out or enter additional markets? And how do you think about the highest priority list for growth and expansion.

Yes. So look, growth for us in the international markets, it's the same playbook. If you looked at our product road map and lineup maybe 7, 8 years ago, it was more geared towards a U.S. consumer. Today, 80% of the products that we're developing are global products, the Shark FlexStyle will sell in 21 different countries. The Ninja CREAMi will sell in 19 different countries. So the road map is really a global road map for a global consumer, but it's the same playbook. It's disruptive innovation, it's investing significantly in creating consumer demand, and it's driving this dominant omnichannel strategy. We think about the international growth in terms of 2 ways. I mean, 1 is the direct markets that we sell in, markets like the U.K., Germany, France, Spain and Italy. And then we think about distributor markets, markets like the Middle East and Israel and the Nordic countries in Mexico, where we work through a distributor to ultimately get to the end consumer. So for us, I mean, we came out of the second quarter. We grew our international business 80%. Our business is fast approaching $1 billion outside of North America. So there's real scale to that business. We're investing heavily, particularly in Continental Europe, and we really think we've got a consumer base that is loving our products in those markets and giving us as high a 5-star reviews as we're seeing in the U.S.

Let's talk a little bit about your go-to-market strategy. Can you talk a little bit about how big the wholesale business is relative to DTC and how you think about wholesale channel dynamics in the market?

So years ago, we very much took the strategy that we want to be relevant and sell our products where consumers choose to shop for our products. We've never offered any channel exclusivity. We've never offered any customer exclusivity. We are distributed everywhere from Walmart to Sephora and Macy's and Amazon and everyone in between. So we take a very kind of channel-agnostic view of the business and take a very consumer-centric view of the business. Now that being said, our direct-to-consumer business is the fastest-growing portion of our business right now. And I think there are kind of various reasons for that, including our ability to be able to offer the consumer more customization when they come direct to consumer than when they might shop, for example, in a retail store. Look, the wholesale channel, obviously, is continuing to evolve. We've seen destocking at the wholesale channel. I mean, some of that has led to some movement to direct-to-consumer where the consumer is able to make sure that they can find the product available to ship to them. But it's a very -- it's the same model in every market that we sell, with a very channel-agnostic model that really kind of puts the consumer at the center of deciding where they want to purchase our products.

You mentioned destocking. It's been a hot topic in retail recently. Where are we on the destocking basis, particularly for the industry? And how is your sell-in versus sell-through trending maybe by key customer type in U.S. wholesale?

So we started seeing destocking at the end of the second quarter 2022. We really saw that accelerate in Q3, Q4 of last year and even into Q1 of this year. The second quarter this year was the first quarter that we started to see POS match shipments. So we didn't see any restocking, but for the first time, we weren't seeing destocking. We have heard anecdotally from many of our retail partners that they've gone too far and that they've lost sales. I mean, our products are not kind of fashion driven. I mean the life cycle is quite long. I mean we have products and some retailers that are the same products for 10 years. So I think retailers are starting to recognize that -- we have a retailer that at the end of Q2 came out of -- with a 65% in-stock rate. I mean there's no doubt that they're losing business as a result of that, where we should be at kind of 93%, 94%. Where or when that turns around, our forward guidance doesn't assume any restocking through the balance of this year. We'd like to believe though that retailers will see that there really isn't a risk with Shark and Ninja products, and we are driving consumers into the store through our advertising that it's prudent for them to have the products available when the comes in.

We're asking every company at our conference today a few questions on their outlook. So maybe we can pivot to that. First, do you think that the consumer is going to face more headwinds or fewer headwinds next year in comparison to 2023? And how are you thinking about that opportunity for trade up or trade down by income cohort within your business?

Well, look, I mean, first is, I think we've been highly empathetic to what the consumer has been dealing with for the last 18 months. I mean we've worked very hard from a supply chain perspective to hold down costs when we were seeing big cost increases, particularly at the end of '21 and '22. So we're very, very conscious of that. Now that being said, we believe that these are times where Shark and Ninja kind of excel. The consumer is not necessarily looking for the cheapest option. They're looking for the best value. And I think the Shark and Ninja products really deliver the best value to the consumer. And so I think it's our job to continue to give the consumer a reason to purchase, a reason to say, "Hey, I might have walked into Walmart and thought I was going to spend $99 for a product, but Shark or Ninja has a product for $149 and the value of what I'm getting, it just seems so exciting. I'm willing to step up to that". That's what I think we've been very effective at over the course of the last 15 years. And I think we just have to continue to work really hard to make sure the consumers...

That ties in directly to one of the other questions that we're asking all companies, which is how they're thinking about pricing into next year. I think your pricing strategy is very clear. You've explained it a few times today, but as you look into 2024, do you expect to maintain, raise or lower prices next year?

Well, look, I think we have seen some cost tailwinds this year. I mean freight has normalized, commodity pricing is normalized, component shortages have come back to historical levels. And so we feel that kind of by Q4, we will see the full impact flow through of kind of more normalized costs through our P&L, and we'll see our gross margins reflecting that. We would very much hope to kind of keep pricing stable for the consumer on a like-for-like basis. Now that being said, I think through innovation, it's always our job to try to drive up average sale price. And even this year, as a company, as a total company, we're seeing average sale price increase mainly as a result of mix. But I think on a like-for-like basis, we would expect to see pricing about flat.

The last question that we're asking all companies at our conference this year is one on share of wallet. And I think that one is actually particularly relevant for your categories given the pandemic tailwinds that the categories had and then followed by some of the compares that we had to cycle through. As you look into next year, what is the one most important factor to drive higher spending in the core categories that SharkNinja plays in?

So look, I would first say that Shark entered the pandemic as a double-digit growth company. I mean the 11 years prior to COVID, we were a 19% compounded annual growth rate company. And today, when we look at the last 15 years, we're a 20% company. We did see growth in '20 and '21, but even in '22, we grew our business on a constant currency basis. And we've had a very strong first half of this year, growing over 12% in the first half of the year and nearly 20% just in the second quarter. We think from a share of wallet standpoint, look, we are seeing more and more consumers buying multiple products within our brands owning more than 1 Shark or Ninja product. We're seeing consumers buying products across brands, across Shark and Ninja. And I think the same kind of performance, quality, value ethos streams through in every product that we bring to market. And I think if we continue to keep doing that, we'll earn the right and we'll earn the consumers hard earned money with the products that we offer. But I say this to the team all the time, and we talk about this, we have to be very, very cognizant that what we're developing is beyond what the consumer expects. I mean I think that any company in the consumer space today has to go above and beyond.

That makes a lot of sense. Let's tie this all together. There's been a few comments that we've heard from -- on gross margins from new category commentary. You talked a little bit about that when it came to inflation and pricing and costing. But Larry, can you talk a little bit more about the key drivers of gross margin that you see as you look ahead? And how we should be thinking about a sustainable long-term gross profit rate for the business?

Sure. Yes. So our target is really to return to kind of the pre-COVID gross margin levels of 45%, right? So what we saw, I guess, to give some context there, in 2022, adjusted gross margin was at 40%. So a lot of cost headwinds that we had in the business, as Mark mentioned, freight rates, component shortages, driving up component costs and commodities as well were kind of the 3 big headwinds that we faced. We've seen that kind of reverse here in the first half of 2023 with some kind of tailwinds on the gross margin side, expanding gross margin, again, over 300 basis points in the first half. And as Mark said, I think we see that though the pace of that accelerating in the second half as some of those cost pressures kind of really make their way fully through the P&L. So I think good line of sight back to that 45% kind of range, whether it's back half of this year or into next year.

And then on SG&A, can you provide an outlook for the key moving pieces there, both the back half of this year and into next? Where do you expect to see ongoing investments? And what are the opportunities for leverage?

Yes. So I think that comes back to what we talked about before from a marketing perspective, right? So we have really strong expansion at the gross margin level, and we're choosing to invest some of that back into the business in sales and marketing. So we saw kind of marketing spend up a couple of hundred basis points in the first half of the year. I think we expect to see that as we continue to invest into the business in the second half of the year. But our guidance for 2023 from an EBITDA level is about 200 basis points of expansion on the full year, again, first half up about 100 basis points. So it implies kind of strong EBITDA growth in the second half of the year. So it's really all about that sales and marketing side of it. From an R&D perspective and from a G&A perspective, we see a little bit of leverage there, obviously, continuing to invest in R&D kind of over the long term, but at a slightly a slower pace than we see revenue top line growth.

And then understanding that you don't provide long-term targets. Can you help contextualize or frame the opportunity for long-term revenue and operating margin as we think about product innovation and gross margin drivers, SG&A leverage, et cetera?

Yes. So look, as you said, I mean, we haven't provided kind of long-term guidance. I mean, as I said, historically, over the last 15 years, we've grown at a compounded annual growth rate of 20%. We feel that through this 3-pillar growth strategy of gaining share in the existing categories, expanding into new categories, and we think there's many, many new places for the Shark and Ninja brands to expand into and growing internationally. I mean there's a total available market in our space for about $100 billion. I mean our guidance this year puts us at about a $4 billion company. And so it's a very small share in terms of the overall available market size for our products. And as a business, this is a business that keeps reinventing itself and keeps evolving and expanding into new markets. So you could see that total available market opportunity even growing in size over the course of the next couple of years. But we feel like as an investor to really understand those 3 pathways of organic growth is what we're going to be focused on over the next few years.

Great. We've got about a minute left of the session. So Mark, any closing comments or thoughts that you'd like to share with the audience that we haven't yet touched upon.

Look, we just appreciate, Brook, you having us here. And for the folks in the audience, listening to hear our story. I mean, we spun out of a Hong Kong publicly listed company. We think we have a great story to tell. I mean it's a story of scale, a $4 billion business, highly diversified company, strong profitability profile, great cash flow that the business is able to generate, a demonstrated track record of organic growth. As excited as we are about what we've accomplished in the past, we think that we're just getting started in terms of what the business is capable of as we move forward. So we appreciate the...

Great. Well, thank you, Mark. Thank you, Larry, and thank you to all of you in the audience for joining in.