SharkNinja, Inc. ($SN)

All right. Good afternoon, everyone. Thanks for joining us today. My name is Philip Blee. I'm the consumer analyst here at William Blair. Before we get started, I want to remind everyone that a full list of disclosures are available at williamblair.com.

With that out of the way, I'm excited to have SharkNinja's CEO, Mark Barrocas, and CFO, Adam Quigley, here with us today. SharkNinja has been one of my favorite names. One of my favorite stories to follow over the past few years. They've defied what's [ otherwise ] been a choppy consumer environment and have consistently driven strong top line growth. And selfishly, I enjoy covering you guys for all the great products. So you recently put up another great quarter. You're doing it while a lot of the categories you play in, maybe aren't operating on full cylinders across the broader industry. Mark, you've been with the company now since 2008. When you take a step back and look at the business today, what do you think are some of the big drivers that has allowed SharkNinja to keep compounding growth. How do you keep that sort of scrappy, small company flexibility that's allowed you to adapt and be so dynamic with consumer changing demand. And then now that you've scaled over $6 billion, how do you keep that going?

Yes. Well, look, I mean, we -- you and I have talked a lot about the company's culture. And if you go to our website, you'll see three culture documents, one is called Success Drivers, the other one is called Leadership Principles, and the third is called Outrageously Extraordinary. And look, I think we built a -- this is not working? Okay. We built what I think is a really fast-paced, innovative culture that has not gotten bogged down as we've grown in size and scale and growing globally. And I think one of the things that I attribute that to is this hack approach that the business takes to problem solving. We've started as a great product innovation problem solver, but I think that's translated into every part of what the company does. And I think it's highly demonstrated by what we did during the tariff situation a year ago and kind of running towards that problem and doing it in a very innovative way. I think it's translated into how we're approaching AI. We've recently run a program called Jailbreak SharkNinja, and we've routinely take this approach of not finding time for innovation, but making time for innovation. And I think as companies get larger and larger, calendars don't match or we'll run it around a planning cycle. Innovation at SharkNinja is every week. Okay, you have a challenge, you have a problem, get a whole bunch of people in a room, call in sick for a couple of days and just solve the problem. And I think so much so that it's gotten to a point where you say, where is so and so, and they say they're sick, and you're like, are they really sick, or are they hacking? Like that's a common thing at SharkNinja. I think our approach to product innovation, I mean, we shut down the whole product development teams every 8 weeks, and we just run hack weeks. And we try to accelerate the pace of innovation in the business to come up with ideas. And so that culture kind of permeates into everything that we do. I would say the last part answer to your question is we meet the consumer where they are. I think there's a lot of companies that kind of say, well, the consumer is going to meet us where we are. We sell everyone. We sell everyone from Walmart to Sephora and everyone in between. We were the #1 brand on TikTok Shop last holiday season. We don't sit here and say that there's like a protected strategy in the business. Our strategy is around positively impacting people's lives every day and every home around the world. And we do that through disruptive product innovation. We do that through viral marketing, and we do that through an omnichannel strategy that meets the consumer where they are. And I think when you run a business that is so led by meeting the consumer where they are, we're not constantly going against the tide. I mean, we're meeting them where the tide is going.

That makes sense. And I want to dive a little bit deeper into that because I think your growth has been so strong. The market share gains have been so significant. One of the most common concerns from investors then is kind of waiting for the other shoe to drop, so to speak. In their defense, there's a lot of consumer product companies out there that maybe have hit a trend, then comping the comp becomes this kind of looming boogeyman out there. There were some concerns of the virality of CREAMi and SLUSHi were going to be that boogeyman, didn't happen. But you've spoken to this desire to grow double digits here in the U.S. this year. How do you get comfort that you can continue to comp that comp and avoid some of the choppiness that maybe has plagued some of your peers?

Listen, in the consumer space, the question is kind of what is your moat, okay, and how compelling is the moat that you have. If I go back in the business in 2008, I mean, 60% of our business came from one product, the Shark Steam mop. We've spent the last 18 years, okay, not the last 3 years as a U.S. public company. I spent the last 18 years leading this company and the overwhelming focus has been around the idea of diversification. We're in 39 different product categories. We sell in 30 different countries around the world. We've built two multibillion-dollar brands from scratch. We sell in 150 retailers around the world. We have a robust direct-to-consumer business. We're the #1 most searched brands on Amazon. We have 8,000 patents. I mean people -- there were investor meetings this morning and people said to us like, "Hey, would you get into the cup business?" Like, I don't think there's a durable place to have a 15-year cup business. I think that the business has to have some IP around it. It has to have some supply chain efficiency strategy around it. It has to have something that makes the business durable and lasting. I mean we became the #1 vacuum brand in 2014. We built that business off of a great patent portfolio. We built that business off of great innovation and technology and kind of having one great consumer experience at a time. And I think when people look at our business, and they talk about like the slushy, it minimizes who we are, and what we do. And quite frankly, it shows kind of a real lack of effort and work that's being put into like understanding our business. I mean go around -- we have the second-most pallets in Costco behind P&G. We're the most searched brands on Amazon in our space. I've met with the CEO of Mercado Libre a couple of weeks ago. And I said to him, "How are you so confident that there is demand for SharkNinja products in Latin America and on your platform?" And he says, "Why? Because in Brazil, there are as many searches for SharkNinja products, and we don't sell your products on our platform as there are products we sell on the platform." So there is a real incredible demand -- global demand generation model that is not easy to replicate. I mean we're going to do this year $100 million in business in the Nordics; in Finland, Sweden and Norway. We have no marketing team right now in that market. All of that is being generated by spillover content that's coming from other markets around the world. So this idea of like can we develop the next hit product. We have 1,300 engineers around the world. We spent 7% of sales on R&D. We have an incredible pipeline of product innovation. People say, "Well, have you gone into all the product categories that you could go into?" We're launching three new product categories this year. There is a tremendous pipeline of new categories for us to enter into. But this is a business that not only creates a category from zero, like we did with skincare, or like what we've done with ice cream -- at-home ice cream making, but it's also a business that you could say before we got into the espresso business, what we heard from people is, "Well, you don't have any coffee legacy." What does coffee legacy mean? Like do we need to be from Italy and be in the coffee business for 50 years? If you develop a disruptive product, if you really understand what the consumer is looking for, if you give the consumer a great value, I mean, here's what's so interesting about the coffee space. We became the #1 espresso brand in the United States -- #1 espresso product in the United States and the U.K. after only 18 months, and we grew the size of the overall business. So the espresso business in the U.S. and the U.K. was flat to down before SharkNinja comes into it. SharkNinja launches the Ninja Luxe Cafe, it grows the business double digits. The rest of the market declines, but the business overall grows because of how much SharkNinja has grown. And when you look at it, that market and everything that brands were advertising was a guy in a suit drinking a shot of espresso. And all of a sudden, SharkNinja comes out, and they start showing a 23-year-old girl making Dubai coffee in the morning, okay? Like using the products as consumers want to use the products, like when you're speaking to somebody and George Clooney is in a suit, and his pinky is out, drinking a shot of espresso, like that's not the way Americans are drinking espresso in the morning, okay? They're doing it the way SharkNinja shows them and the way SharkNinja excites them to be able to do that. And that is something that is really special and compelling. And I find it like minimizing the entire business when it devolves down into what was the slushy selling in last year.

I completely agree. And I think that, that's a great representation of that. And I want to talk a little bit more about the product innovation piece because one of the most consistent takeaways that we always have is that you're always working multiple product cycles ahead, right, not just the next launch, but the next iteration, the next franchise. So can you, I guess, frame what the next 12 to 18 months look like from an innovation standpoint? Where you're maybe most excited because you think innovation can either expand or kind of reshape the category rather than just compete within it. And then any common themes, I guess, for what next-gen products could look like?

Listen, the common theme through every category, people look at our business and they say, like, you sell robots, and you sell outdoor heaters, and you sell coolers, and you sell air fryers, you sell espresso machines and skincare masks and at-home facial devices and hair care products. Well, the common theme through all of it is we identified some consumer problem, and we figured out a way to solve that problem for the consumer, okay? So there is some consumer problem-solving strategy within that. I think as you look at the balance of the year, I think what is so exciting for me is that there is so much work that we're doing to innovate the base business. I mean this business could not be growing at a double-digit pace that it is if we didn't have a really healthy, strong base business, and I think that's something else that investors don't fully understand about our business. I mean, believe it or not, I keep saying this to people, the single largest category in the entire company is upright corded vacuums. I've been asked -- Adam has been asked maybe one time by an investor about the upright corded vacuum cleaner category, okay? Like, we are this year developing a total redesign to the upright vacuum cleaner, okay? We're not talking here about any other -- we're talking about a category whose market is flat to down, but we've got an incredibly innovative idea so much so that we're developing our first new infomercial in 3 years. Yes, we're going to go back on TV, and we're going to do an infomercial. Well, why? Because that category responds really well to that type of advertising, engaging with the consumer. So there's a whole strategy over the course of the next couple of months, which is around innovating our base business. How do we bring innovation -- disruptive innovation into core categories like blenders, like kitchen systems, like upright vacuum cleaners, like corded stick vacs, so that's kind of one whole group of kind of base business strengthening. Now why am I so excited about it? Because last year, we launched a product called the BlendBOSS. And the BlendBOSS was a category called single-serve blenders. Single-serve blenders in 2016 was the second largest category in the entire business. And it got stale, and it ran its course, and it settled in to kind of a nice business, but kind of a low ASP business. We were selling the products mainly for $69, $79. And you add a bit of innovation into the category, you come up with a new type of motor technology that allows the product to be form factored in a very different way. You add color and excitement into it. And we have a category now that's up 30%, and our average sale price on that product is $129. So for very little more product cost, we're getting $40 and $50 more for these products, and we reinvented that category. We're going to do that in blending. We're going to do that in core vacuum cleaners. We've got a lot of great innovation in our cordless vacuum business. But then we're going to launch into two new product categories in the second half of the year. One of them is in the cooking space, a big definable category in the cooking space, the other one is a brand-new category that we've never been in before, that I think is super exciting, our beauty business, we have some great innovation in beauty. We have some great innovation and cleaning that we're coming out with. But look, the product cycles don't always match up. I mean in -- as an example, our cleaning business was a high single-digit growth business last year. In the first quarter of this year, it grew over 20%. So again, it's -- we're playing the portfolio. We're playing this diversified product assortment. And I -- look, I'm -- we're on right now to our 2027 road map, and you're going to see us get into categories next year in '27 that you're going to say, wow, like that was not a category at all that I thought SharkNinja could play in. But it's both categories that we think we can grow the business in and build the business ourselves from scratch and also businesses that have a big definable market presence, and we can go out and get our fair share of that category.

Makes sense. And as the owner of a BlendBOSS, I highly recommend everyone as well. But I want to switch gears to international a little bit because international has been very strong over the past few years. You've been explicit that you see a path to 50-50 mix between the U.S. and non-U.S. markets over time versus 65, 35 currently. There's been some noise as you guys have transitioned from distributor to direct models in major markets. Most of that, I believe, should be in the rearview mirror. Can you just break down how you think about maybe more of a steady growth profile for the international markets going forward?

Yes. Look, 2017, our business -- 2016, our business is primarily North America. And what people said to us was, "Look, Mark, your business is mainly in North America, like is the product really going to translate into other markets in the world?" I mean, German consumers are so different. Japanese consumers are so different. I think the starting point in trying to understand our international business is, do consumers love our products in all of these markets? And as an investor, I would go, and I would look at the online reviews, and I would look at the social media in all these markets. And so as a starting point, consumers love our products, whether they're in Hungary, or whether they're in the Middle East or whether they're in Poland or whether they're in Argentina. So it's like first is, are consumers excited about the products and the answer is yes. The second is, does the marketing demand generation model apply globally? Or does it happen to be something that only applies into certain markets? And the answer is absolutely. I mean, our social media model applies into every one of these markets. I mean we're seeing phenomenal growth right now in Latin America, okay? Big market with heavy social media engagement. We're driving a lot of demand, a lot of excitement, for example, in Latin America. And then the third is, does the omnichannel strategy that you have apply globally. This idea that you're going to sell direct to consumer, you're going to sell Amazon, you're going to sell social commerce, you're going to sell brick-and-mortar. And so it absolutely does. And then lastly, just the supply chain model apply to all these markets. So the fundamental operating model applies and is working in all these markets by virtue of the fact that we're growing at rates that you talk about. Now the challenge that we've had over the course of the last year is that when we launched internationally, in many cases, we launched with distributors. And that was the fastest, easiest way for us to get to a market, but it doesn't allow us to be able to scale the market up and kind of control our own destiny in that market. And so over the last 18 months, we've been moving all of these distributors to direct models. Now in doing that, in some cases, we've had to buy back inventory. We've had to stand up new teams in those markets, do all these different things. So it's created some noise, but we've done that all within the existing P&L, okay? Like, we haven't taken any onetime charges. We haven't done anything related to saying, hey, our growth is going to be muted for the next couple of quarters. We've done that, and we've absorbed everything into our P&L and still delivered growth, and that will be complete by the end of Q2. So by the end of this quarter, we will have kind of a right-sized global model. Now that doesn't mean that we've decided that, for example, we're still going to have distributors in Saudi Arabia and in Kuwait and in Dubai, that we grow that business over the next few years, and we ultimately decide at some point, we want to flip that from a distributor model to a direct model. But for the most part, the key Latin American markets and the key European markets by the end of this quarter, will be selling on a direct basis, direct-to-consumer, pure players, social commerce and brick-and-mortar retailers. And we think that sets us up right now to really start scaling towards this 50% of our business coming from outside of the U.S., which, look, if you do the math on that alone, that is another couple of billion dollars of revenue for the business. And if you believe that the North America business continues to grow at low double digits, which makes that number even harder and harder to get to 50%, that there could be $2.5 billion, $3 billion more revenue just coming from those international markets.

Excellent. And then just building off that a little bit. So you recently replatformed your international direct business. You're just over 6 months then from replatforming your U.S. business. So you can -- just talk a little bit about what the changes in kind of KPIs that you've seen, how that's played into what seems to be maybe a bigger growth opportunity in TikTok Shop as well. And then just maybe some other key unlocks that this begins to offer, whether it's marketing effectiveness or subscription options, loyalty programs, just any of those?

Okay. So there's two pieces that I think are really important in the question that you're asking there. So there was an investor. I was in a meeting with earlier and he said, "I wrote down notes from you last year at this conference, where you said that your DTC site was crappy." And I said, "Yes, that probably sounds like something that I said." And so last October, we replatformed our site with Salesforce in the United States. We've done that now in Europe, and we'll have the entire world up on Salesforce by the end of this quarter. So everything will be on one platform. And why is that important? Because prior to this, in order to buy Shark and Ninja products, you had to go to three different websites. There was Ninja Kitchen, where you bought Ninja product. There was Shark Beauty, where you bought our beauty products and then was Shark Clean, where you bought our home products. This is now replatformed where everything is on the same website, so that's number one. What we've seen in the U.S. is since February, all of our metrics have moved in a really positive direction. Site visits are up, time on the site is up, conversion is up and revenue is up every month since February. We learned a lot from the U.S. transition back the end of last year. By the second month in the U.K., all of our metrics were positive. We're just replatforming Europe. We just went live about two weeks ago. So as we get to the second half of this year, it's now an opportunity for us to optimize that. You talk about not just loyalty programs, but the whole concept of CRM. We couldn't -- if you bought from us previously, we couldn't cross-sell you on the same site. We couldn't chase you. And so there's a whole CRM initiative, and we believe the D2C is going to grow faster than the rest of our business for at least the medium term going forward. I mean, we think it will grow faster than the rest of our business through the balance of this year and into the full year of next year. So we're really excited about that. Now that's not us putting our fingers on the scale and moving consumers to D2C. That's us just simply saying we've gone from what has been a subpar experience for consumers to what we think is now a good experience for consumers, and this is now a great destination to kind of understand our business and our products in a much better way. Now the second part that you're talking about is social commerce. And I think what most people here refer to that as TikTok Shop, but TikTok Shop is an element of social commerce, it's not social commerce. There is social commerce on Meta. There's social commerce on YouTube. There's social commerce on Snapchat. And I believe this is going to be the most disruptive thing in consumer retail over the next 24 months that we've seen in a very, very long time. And people have said, "Wow, I don't know, is social commerce even working in the United States." The numbers and the scaling of it month-over-month is massive. Now you have to keep in mind that it's starting from zero, okay, 15 months ago, but every month sequentially is growing tremendously. This is where consumers are shopping. I mean that might not be where 60-year-old people are shopping, but it is where under 30-year-old people are shopping on a regular basis. I think it's amazing. We had 30 affiliates -- of our top affiliates in our office last week, I met with them. We have people making $600,000, $700,000 this year selling Shark and Ninja products out of their house, out of their house. I mean, we have -- we will have hundreds of affiliates globally that will be selling Shark and Ninja products exclusively, exclusively. Their entire jobs will be selling Shark and Ninja products. I mean they've got lots and lots of products to be able to sell. And the experience now of consumers being on social media and then seeing these affiliates and then being able to shop instantly on it is a completely frictionless way for consumers to buy products. So look, I'm excited about our direct-to-consumer business, but I really think the affiliate piece and the social commerce piece is something that is going to be transformational. And I think that we are right out there on the forefront of driving that channel of distribution.

Great. And those numbers let us know how we can become a SharkNinja affiliate. But -- so I want to dive into everyone's kind of favorite topic gross margin. There's a lot of moving pieces this year. You guys were best-in-class in diversifying your supply chain and really mitigating tariffs much earlier than everybody else. Now there's a lot of concern about rising freight, transportation cost, resin costs. So can you just maybe talk about your exposure there, puts and takes more broadly, how you're thinking about gross margin evolving? And then are you guys targeting maybe a gross margin rate, a specific rate longer term here?

Yes. No, I'm glad you asked. As we look at gross margin, I mean, it's core of everything we do. From the time of product ideas presented in the company, we're looking at gross margins. So it's happening from the very onset of the product to even while it's on the shelf years down the road. As we think about the levers that we have, and I think if you've been following along, we've kind of put this on full display since the tariff impact of April last year, and how we've been able to offset that in a really meaningful way. But there's really three buckets of gross margin for us. There's the sell side, there's the piece of what are we selling it at with the retailers, what are the terms, what are the pricing? What's the promotions? How do we optimize that? As we go from distributor to direct, we have the opportunity to renegotiate with some of our retail partners. We have the opportunity to partner with them in a deeper way that we hadn't been able to do on the distributor front. So there's a lot of sell-side initiatives on that front. There's the buy side initiatives. There's -- as you mentioned, our geographic diversified footprint of supplier base across Southeast Asia. And everything we've done across that platform over the last several years has really put us in the position today to have dual sourcing on all of our SKUs to be able to move inventory, move POs across these factories, be able to negotiate while we're facing tariff challenges, freight challenges, partnering with factories versus just taking a cost increase, right? These are negotiations that are happening live. So that's kind of the buy side, if you will, what we're buying the product at. The third bucket is mix, right? We were talking about affiliates, talking about social commerce, talking about our D2C site, all of those gross margin accretive, all of those higher gross margin channels that we're seeing a more favorable channel mix from where we're selling. The other piece is there's category benefits there. There's category mix benefit that we're capturing today across the beauty channel, in particular, because you do see that one growing at a greater rate than the rest of the business. So it's really those three buckets of gross margin that I think we've been employing over the last several years. It's not necessarily new, but it's a lot of the investments now that we've made from replatforming from geographic expansion in terms of the supply base that we can now reap the benefits of and face the challenges of today.

Excellent. And just quickly because I know we're at time, but I think it's important just touching on capital allocation because of strong free cash flow, very little debt. You recently announced a buyback program this year and started executing against it. Can you maybe just talk us through how you think about capital allocation here, I understand there's also some float dynamics to think about.

Number one, invest in the business. We're our best investment. We've proven that across R&D, sales and marketing. So number one is investing in the organic growth that we're driving. I think what you're seeing from us now is being opportunistic, having flexibility in the balance sheet. 1.5 years ago, we leaned in with inventory. We leveraged the balance sheet to pull inventory in, avoid offset some tariffs on that front. And then I think the share repurchase authorization that we started acting upon in Q1, we're going to continue to act on that as we go through this year, ramping that up as we move along. So again, I think we're looking at all avenues of ensuring that we're returning value to shareholders. But number one is going to be investing in the opportunities in front of us today.

Excellent. Well, Mark, Adam, thank you guys very much. And then we will be doing a breakout in Adler on the second floor right after this. Thank you, guys.

Thank you.