Smartbird, Inc (BIRD) Earnings Call Transcript & Summary

We are going to do a little bit of a fireside chat. If anybody has any questions, we will leave a little bit of time for that toward the end. Very interesting time to have you guys, so thanks for coming. We appreciate it. Allbirds reported last week. We've got some big changes, and we wanted to kind of delve into that a little bit as we go.

So wanted to start -- last week, you reported softer fourth quarter sales and cited some missteps that have occurred. Maybe can you just give a little bit of an overview about how the quarter played out, the year-to-date trends and then elaborate on what happened?

Okay. Yes. And let me -- because I think Q4 is an encapsulation of what we kind of laid out as a little bit of context for what's been going on and what we're doing about it, so I know we'll dive into the plan in a little bit. But just to set context, I think it would be helpful. So we started to like in the very first part of Q4, we really started to see that some of the demand signals were a little softer. We knew that the environment for the industry overall was highly promotional, and we expected it to kind of peak around holiday season, which it did. But as we started seeing some of these softening trends, we did a comprehensive evaluation of what we thought was going on, and what we should do to address it. So we actually -- we ended up partnering with BCG and started the work with a deep consumer insight study. And we did that with a couple of thousand to maybe 3,000 consumers and trying to understand exactly what was working well for the brand and what was not resonating with the core consumer, and took a lot of learnings out of that, and then also understood where some of the areas of investment that we've made have been working well and where some just hadn't reached the scale to make those profitable investments at this point. So some of those -- so overall, what we found from the consumer study, which is at the core of all of this change, is that the brand is surprisingly very healthy, and frankly healthier with certain parts of the population than we had expected, particularly related to gender. So we do pretty balanced, about 50-50 between men and women on our SKUs -- by SKU, but we actually found that the resonance with the core consumer who we've been focusing on, this is a person who's between 30 and 40, reasonably balanced but a bigger opportunity with women and spread very evenly across the U.S. from a geographic perspective, quite affluent customer. And if you kind of play that out from core to the adjacent halos, it can ladder up to something that's roughly 1/3 of the population. So a really big addressable with the core consumer being a very strong and healthy one. And the signals that they were giving us was that from the product assortment and how we come to market over the past year, we've put a fairly significant emphasis on adjacent categories next to our core DNA. So those are things like targeting a little bit of a younger consumer that's somewhat in messaging, but also in product and then significantly on performance. We put a lot of muscle behind, say, muscle inventory buy and marketing, muscle behind entering in with a technical running performance messaging to the consumer. And what we found through this study was that the strongest resonance by far is in this active lifestyle category. And so if you think about a spectrum from fashion all the way over here to technical running performance in the mountains over here, like in that middle, a little skewing to the active is the place where we've always been fantastic and where consumers have resonated. And as we went too fast and too much messaging around the technical performance criteria that we've been offering on products that just missed the mark with our consumer. And personally, that's where we emphasized the marketing investment. So those 2 things compounded. And I'd say that coupled with the promotional environment in Q4, unfortunately, things had stabilized by Cyber Monday, and we had a great kind of shopping event that weekend. And then things turned negative in the last 2, 3 weeks of the quarter and then really exacerbated those trends. And so unfortunately, that's where it peaked. So we would have been laying out this plan to change a number of things in the business to make sure we get to profitability very quickly and then get into sustained and really durable profits. But I think those really peaked in Q4, and some of those trends persisted in the first 2 months of the year.

Okay. So the first quarter guidance implies sales down. It sounds like some of the newer releases aren't gaining as much traction. So maybe can you contextualize how well the core is doing at this point?

Sure. Mike, feel free to add in here. But -- so the core is still doing well, but I'll say some of the missteps, and I think we've tried to be extremely transparent and lay out how -- exactly what we're doing here. But some of the investment that we made on the open to buy for inventory on the newer styles that we forced trade-offs inside of the core, and same thing for marketing investment. But when you put those 2 things together, unfortunately, we just didn't capitalize on what is an enormous opportunity on some of the core franchises. And that also includes revitalization of the core, and we can go into -- I'm happy to go into detail on exactly we're doing for product. So some of those unfortunately came at that expense. So the core is outperforming some of the newer styles from a sell-through perspective significantly. And you can see that even on our website, where we're taking some markdown action on some of those newer styles to make sure we can recalibrate the product portfolio and come with a really healthy curated line for consumers. So the core is doing well. The core examples of that are the Dasher that Mike is wearing today, which is kind of right in the sweet spot of that active lifestyle category, the Tree Runner, Wool Runner, the Breezers, our ballet flat for women. So some of those are really right in the sweet spot and doing quite well. And then things like the Flyer and a couple of other products that we invested in are -- just didn't have the resonance, and frankly from a marketing and messaging perspective, we just didn't hit the mark there so making sure we clean that up quickly.

So you mentioned earlier, you announced a strategic transition last week to help get back on track. I wanted to walk through each of these initiatives. First, the priority of focusing on product. Can you talk about the styles you're backing off from, and then also how you plan to bring newness to the market in the core styles?

Yes. So I think I've kind of outlined that like the sweet spot of the consumer is this, I would say, much more millennial than it is Gen Z, as an example, so going after the younger consumer with lower disposable income despite the fact that they may resonate with our brand purpose is not a good target rich environment for us. So what we're really focused on is that consumer in that active lifestyle space. So we're not going to try to win on the most technical running criteria that we possibly can from a performance perspective from that -- for those people. We're focused on delivering great versatility from the edge of go to work to take on a trip and do a workout and go to the conference. So that's really the focus. The things outside of that like significantly the Flyer is the best example that I can give you. So went pretty hard with the integrated marketing plan against that, and it just simply didn't resonate as much because consumers weren't ready to shell out $160 for a technical running performance product from us, given that, that's not the ethos and the core DNA where we came from. So we can slowly edge out into that category, but we have to be much more measured with the investment around inventory and marketing, which is the plan going forward. So how do we then refocus the energy and recalibrate the line? There's a couple of things I'd call out. One is, we have a great arsenal of materials now. So across -- and quite differentiated. Some more basic ones like a canvas top that we can do with organic canvas, but our Tree line, which is a breathable mesh made from eucalyptus fibers, the Wool product is still extremely differentiated. And we've introduced Plant Leather, which is a vegan leather alternative that performs exceptionally well in terms of its functional attributes. So those uppers, we can materialize all of the core franchises really well and then focusing on gender as an example of what we can do with color. We would expect to drive like close to 85% to 90% of our business and volume through what I would call highly wearable color. So these are the cores, neutrals and then embellishments on that with little trim packages. And if we focus on women consumer as an example, there's really smart gender-differentiated approaches we can take to color, trim packages, things like that. So the first easiest change there is to address those things. Those are the shortest lead times. And then as you go out into '24, we can do things around silhouette to really build off of some of these franchises, and also introduce revitalization to these cores. We can't just keep them versus the -- our oldest product is 7 years old now. That's a pretty long run. So giving that some new life and really revitalizing that with updated tooling and a new aesthetic to kind of meet the moment is something that we'll be doing as early as later this year.

Okay. And then how long do you think we'll be in this promotional environment? Like how long do you anticipate it will take to get through some of these styles that aren't resonating?

Yes, Mike, love for you to jump in here, too. But I'd say overall industry still feels a little bit promotional. There's still a lot of inventory out there. Q4 was truly peak. But I think companies are still fleshing out some of the excess buy that they made, anticipating higher demand, but also maybe some misses on colors and styles. So our plan, at least, is to go pretty aggressively ourselves to clear out some of -- and recalibrate the lines that we can take receipts of new goods in the back half that are recalibrated to this more meeting the mark with consumers in a better -- with a better assortment. So we're going to go, particularly with the end-of-life stuff, which will transition our generation to new models and then just some idle colors, which is kind of normal course of business. So for us specifically, the first half of the year, you'll see the most markdown activity from us. I think overall industry, we'd expect to follow that. And from all we can gather, it seems like other competitors in the industry have pulled back significantly on receipts for the back half, which should mean, hopefully, unless something crazy happens with demand again for the overall consumer that we should be in a pretty healthy overall industry environment, and we can start with a recalibrated line really driving the full price sell-through that we've done historically.

Yes. And I think all I'd add, Lorraine, is just remember, like 85% -- we had 85% full-price sell-through in 2022, even with a much more aggressive overall promotional environment and us being a bit more aggressive in Q4 in that environment, which stands like really high within industry and is where the other premium brands typically are. So I think what we're trying to message on the call last week was it's going to be below 85%. We're going to have to move through more of the stuff that Joey just said, but it's still going to land in a good spot. And we really view it as kind of a temporary thing probably hopefully for the first half of '23. But certainly once we get in '24, and we look at what will be the U.S. direct business at that point, you're going to see us like have a whole lot less pressure from having to move through this inventory, a much less pressure on gross margin.

Okay. And then the second initiative involves slowing store growth in the U.S. and continuing to partner with third parties. Can you talk about how you plan to bolster store sales in your existing fleet? And then also walk us through where you sit today with the wholesale business.

Yes, I'll take the first run and feel free to add in, Mike. So overall, and this is part of the deep assessment that we did, kind of looking at what the trends in various stores were. Overall, the real estate portfolio is really healthy. It's a very strong premium real estate portfolio at something like 40 stores in the U.S., so nowhere close to being over-stored. And I think some of the same things that we're describing from the product portfolio are fairly consistent across our channels. So the resonance with the woman coming in the door, not finding the appropriate colors or styles for her is happening in a digital ecosystem and also our brick-and-mortar store channel. And so we see some of these things as a tide that will lift all boats. So product is always going to be at the core of what we do as a company. And as long as we're meeting the market with the consumer, we should see really good economics out of those stores. And that is true in addition to the fact that we have a great halo effect of aided brand awareness being boosted and we drive these omnichannel shoppers, which are the most profitable consumer journey through our company. When you go into a store, low return rates, great experience as represented from industry-leading NPS and then that translates to a second or a third purchase on digital ecosystem, which is a fantastic journey for us. So that like product at the core, that's going to be the most important thing that's going to drive this and integrating our marketing and increased store investment in marketing to drive just traffic into the doors and focus that on those core franchises and the embellishments that we'll make through there. So that's part number two. And then we put a new store team in place, and we're really working towards with a slowdown and focus on new store development, shifting the focus to make sure that we start to approach the underwriting criteria with which we work towards for these 4-wall economics because it's important for these things to stand-alone even though they do create a really positive impact on the overall geography with which they exist. So are you going to add...

Yes, just a couple of things to add there. So if you look at the stores we've opened, about half of them are still within their first year of life. So you do have a bit of a ramp-up curve happening at a volatile time for the business. So I think that factors into it as well. When we look at the expenses in the [indiscernible] from an OpEx perspective, the stores are running incredibly efficiently, like in line with what we expected or below what we expected actually in terms of OpEx. So really, to Joey's point, it's about driving traffic to the store. It's a little bit of a shift of marketing. And then it's about little things we're doing to improve conversion. If you walked into one of our stores like pre-holiday, you would have seen some of this noncore product that didn't quite resonate quite as well and it almost like, if it was your first time in an Allbirds, like what is this? So a little bit of change in the visual merchandising, the way finding, a little bit more emphasis on like selling and closing the customer, things that are normal, I'd say, within retail, and this new retail team we have in place is really doing a good job and we're feeling some of that impact already in driving sales.

And then on the wholesale side, which partners are performing in this backdrop? And can you talk a little more about your strategy on a go-forward basis there?

I think all -- for the most part, all retailers are going through some interesting times, and so we're seeing a lot of changes within some of our partner organizations. But all of them are performing relatively well. And when you click down into the product mix that's resonating the most, again, tide that rises all boats is the core franchise that's really resonating with that consumer, and that's where our sell-through is the strongest. And when we've allowed and allocated a little bit too much inventory when a partner gets excited about The Flyer, for example, then we have some cleanup work to do, which we're pretty much through with that at this point now. But that's generally what's happening. We're only in 100 doors, door count total. And just with the 4 accounts that you just mentioned, obviously, there's multi-thousand doors that we could get into, maybe not all a perfect fit for our consumer, so pretty low penetration. The approach that we're taking with wholesale is -- and OpEx-light great flow-through to the bottom line and really good awareness driver for us. So we think it's a very important part of the future strategy and trying to be methodical and make sure we take a marketplace managed approach, where we just make sure we have clean inventory across the whole system and particularly as we make and work through some of these product assortment changes, we would expect this to be received really well, and we're already seeing positive response from some of the retailers.

Great. So the third initiative involves changing your go-to-market strategy in your international business. We're still early innings, but can you walk us through how you think about this and how this could impact the P&L? Maybe we'll start there.

Yes. So overall -- so starting with contact. So we went in and we focused on about 6 key geographies, that 6 key countries, I would say, that were focus areas for us to put direct operations in the ground and work with a direct retailing model with stores on the ground and a great digital ecosystem and a focused brand marketing investment in each of those regions. And so we made -- a majority of them were in the last 3 years. So we made those investments and COVID happened, FX happened and really quite a different environment than when we made those decisions to go and direct at that time. And so those businesses are positioned exceptionally well. I think our international teams have done a great job of positioning the brand very, very well in those markets, but they are subscale. And given what had happened in FX and just some of the changes in consumer behavior over the course of the last 2 years, we did not make the investment in driving the wholesale business in international. And so when you think about that context now going forward, given that they're subscale, the opportunity to work with partners in some of these regions is a really important one. Essentially, given that we're subscale, the contribution margin like to the overall business will be negative in some of those markets today for us. When you go to a distributor, it almost immediately becomes a positive operating contribution. And while it's at a lower gross margin, it's a very good flow-through to the bottom line. The partner makes the marketing investment on your behalf in the region, so it's a really capital-efficient mechanism to drive towards better brand awareness growth in the region, particularly because many of these great partners will have an embedded wholesale infrastructure and partners that they can then plug our products into. So you couple that with the fact that we can then have a nice sell-in moment where we have our inventory in the third-party warehouses that we operate in these regions, transition over to the distributor, take it off our balance sheet, it becomes a really capital-efficient approach and the go-forward state is profitable brand forward and will still be a really important part of the future growth of the company.

And what about the cash flow needs and how that impacts the cash flow statement?

Yes. So lots of positives from a P&L and a cash flow perspective with the change in go-to-market international if we go that way. So the first one is if you look at the P&L itself, we're going to be spending a lot less on direct marketing in those geographies. I mean, today, the markets where we're still building up our brand awareness, it's a very high marketing as a percent of sales. And so if you look at some of the slowdown of the U.S. business, I think we were spread a little bit thin on our marketing spend last year or so. So we're able to really focus our marketing dollars back on the U.S. The second piece is from an OpEx perspective, we're going to see a pretty significant reduction in OpEx overall tied to this change. So for the total strategic transformation, we're talking about OpEx savings of $15 million to $20 million. That's on top of the $13 million to $15 million of OpEx savings that we put into place in 2022. A big chunk of that is going to come directly from international or back in the U.S., like again, I take my own team eventually, so I'm sure we'll lose an accountant at some point. We probably won't have to backfill that person when we don't have these international geographies. So that's how we see that impact of it. And then from like an inventory and cash perspective, if you think about it, we've opened around 20 stores internationally, and we've put out CapEx to be able to open those stores gone through the ramp-up curve. So no CapEx effectively on the international business. And then from an inventory perspective, we'll barely hold the inventory once we're fully to a distributor model, right? We'll hold it for a day or 2. So it's going to be a lot more efficient, a lot better turnover inventory. So lots of reasons to do this economically for us, and we feel it's going to have a lot of benefit. So these markets are going to go from like the whole company today is EBITDA negative. These markets are EBITDA negative. They're going to go to breakeven or EBITDA positive very quickly once they make that conversion. So it's going to be similar to how we thought about the third-party business in the U.S. So the shape of Allbirds eventually will look a little bit different. You'll have a relatively OpEx- and CapEx-light, EBITDA positive business international distributor partners and third party. And you'll have a U.S. direct business that will also begin profitable over time, but will be a really focused source of growth with a lot of improvement in the middle of the P&L and a lot more efficiency.

Okay. So the last initiative is enhancing the margin structure. International is a big piece of that, but you have highlighted $35 million to $45 million of cost saves. Can you walk through some of the other areas of opportunity on the cost side?

Yes. So the other chunk of that then is on the cost of goods side. So it's about $20 million to $25 million of cost of goods. And really, that's going to come from, the primary change is the switch in our manufacturing partner. So we put some of that stuff in place in 2022. We're really happy with the results that we're seeing so far from that. It doesn't show up in the P&L yet, but it does actually show up in our balance sheet for buying the same number of units or buying them at a lower price point today. So we're going to -- should be fully converted to that manufacturer by Q3 2023. So we're going to have a lot of benefits in that regard. And then a lot of this just like the supply chain, blocking and tackling stuff, building on a lot of the activities that we put into place in 2022 and got the benefits of, as well as a little bit better use of materials, a little bit more on strategic sourcing. And that's going to benefit both segments of the business in the future, right? That international and third-party segment will have improved margins and the direct business will have improved margins as well.

And then you've talked about positive adjusted EBITDA in 2025 as a goal. We've spoken a lot about the cost side of that. What type of sales volume do you need in the direct business to get there? What are you embedding into that goal?

Yes. The simple answer is very modest growth. So with the plan that we're laying out here, those cost savings, just one thing to contextualize for you there, too, the $20 million to $25 million in cost of goods savings is on a volume-neutral basis back to 2022. So you fast forward to 2025, if there's some success in volume from the international markets, and we can reignite growth in 2024 and drive volume there in the U.S., there's much more significant opportunity for flow-through there. So what we're trying to lay out, I think Mike just articulated it really well as he did a 5-second wrap-through the P&L, which was impressive, is make sure that some of the areas where we overinvest is expecting for demand to materialize more quickly, make sure we align the business and the go-to-market really effectively, get the core growth engine of the business humming and start to really reignite growth when we can recalibrate the line, which will be really materially done in the first half of 2024 and should see the benefit of all of these changes that we're making and significant margin expansion over time. So it doesn't take much on the growth side in order to achieve that objective.

Okay. And then in terms of thinking about the longer-term sustained growth, so 2025 is one moment in time and then the years beyond that, do you think about launches within that active lifestyle category specifically? And how much is that a driver in your long-term plan?

Yes. That is -- I mean, essentially almost anything we do will be in that category. And so different players in the industry use different words to categorize the products. So the active lifestyle bucket that we're describing is probably the largest part of the overall footwear market, and it's the one that's growing the most attractively as well, and it's where consumers are headed. So we're really aligned, and it happens to be an affluent really solid customer that we're going after. So we're really aligning it well there. You'd expect to see, in 2024, the most of that will come in, just given the development cycles, we'll need 12 months to develop brand new silhouettes and brand-new styles that are kind of off of the core franchises, like using little adjacencies that are really tied in and the great marketing message that's aligned with that active lifestyle. In 2023, the most that we'll probably be able to impact is revitalizing some of the core, focusing on the gender-differentiated color strategy, offering some like really good seasonal introductions that will resonate well with both genders. And so that's the core focus of what we're doing today. And then again, as I said, that you'll start to see some really important newness, which is going to continue to drive the business, but be it a little closer into that core DNA of what we've been famous for.

Okay. So I want to see if the audience has any questions. Maybe while we ask for those questions, I'll ask you one more. So raise your hand, and a mic will come to you. But while we're doing that, how should we think about the current liquidity profile? And you made the statement, you don't think you need to raise capital. Maybe you could talk about the state of the balance sheet right now.

Yes. I can appreciate looking backwards, how you might come to that conclusion if we were to continue to do things in the exact way that the cash burn has come out in the past 6 quarters. That said, with what we're putting in place here, we have ample liquidity. We ended the year with $167 million on the balance sheet. We have a new letter of intent to extend our asset-backed line with JPMorgan from up to $50 million, with the $50 million accordion to $100 million. So we have a really good well-structured balance sheet with no debt on it, no outstanding debt today. With these plans in place to make sure we capture the savings in a reasonably expedient fashion, the cost structure should be in a good position. The inventory is probably the biggest use of capital in the last 6 quarters. And so as we tighten up the open to buy for the end of the year and make sure we work down the inventory that's in place, as we recalibrate the line, that's a really big cash unlock. And you link that back to the international change. It's a pretty material portion of our inventory that's sitting outside of the U.S. And so as we transition that to distributors, again, a sort of significant generator of cash for the business. So overall, with the plan that we've started to implement here, feel very good about that and have no intention to raise capital at any point in the future and don't expect to need to raise capital at any point.

Yes. And the other factor there, too, Lorraine, is we're slowing down the pace of new store opens. So there's 3 in the U.S., 1 internationally right now. So that was a big source of CapEx in 2022, which is effectively going almost down to 0 in 2023.

Okay. Any questions in the audience?

[Indiscernible] how this and how the inventory change works into passing to the distributors? Like how much in terms of impacting your COGS on your gross margin you have? And also if there's any kind of repurchase agreements that you have with them?

Yes. So it's a little early. So we went through a pretty comprehensive effort to make sure we understood the overall financial impact of making these changes. Did that early part of the year, started to go to market. Fortunately, given how well the brand is positioned in these geographies, there seems to be there's going to be some really good options out there. I can't talk about the deal dynamics for any specific deal. I can say, generally, the way that these work is these distributor partners take your product, typically ex-factory, if you can get them and take it straight from the factory base and they'll take it at a wholesale minus cost. So call it, rough justice, you can say 35% of MSRP is something in that ballpark, 30% to 40% of MSRP is what a distributor will take it in. They'll agree to make a marketing investment of an annual marketing contribution into those markets, and then they'll have the opportunity to take over our leases if we have stores in the market, operate e-commerce and then plug into their embedded wholesale network. So hopefully this -- so that's the overall structure. Typically, duration can be as short as 3 years, as long as 5 years with the opportunity in that relationship and take back the operations directly or re-up it depending on what's needed. In some markets, there's more of a closer-in view, just given if there's a heavy store investment, but we don't expect that to be the case for most of the deals for us. And then on the initial transition, this is one where to be determined exactly how it will shape out. But generally, we'll take out operations from our third-party warehouses. We'll stop operating those and we'll transition all of our inventory into the hands of the distributor. So there'll be a onetime sell-in moment, and then there'll be additional sell-ins for replan as we go. And they'll buy almost on the same cadence that the wholesale partners will buy in. So as we develop this infrastructure, there's a lot of synergy across what we do from a sales meeting cadence and things like that for the product rhythm to go both into the wholesale account and with these distributors in international markets. And once we have that infrastructure in place, we're not going to go too aggressively here because the focus is on the markets that we're in today, but there's a clear opportunity to expand into new geographies that we otherwise would have deprioritized with focusing on our direct operations in international, so places like Latin America, Southeast Asia, Middle East. We've had incredible amounts of demand from distributors over time that we just haven't focused on because we were so focused on the direct operations. So as we build this infrastructure and that rhythm, that's an additional opportunity to drive volume and reach consumers in different parts of the globe.

You've outlined a lot of change, a lot of things changing with the business structure, the model, the product. How confident do you feel like you have the right people in place to really affect this change?

Great question. So we -- when we started to really lay out all the planks of what we needed to execute, first and foremost, we came to the same conclusion, which is there's a bunch of moving pieces. We need to do these exceptionally well. And we hired a Chief Transformation Officer to help us drive that, partner with BCG to make sure we are doing this with an independent third-party set of eyes to make sure we're doing the right things here. And so those 2 -- BCG is not done, but our Chief Transformation Officer is really driving the project management execution of this. So that's a good infrastructure to make sure we just have the right investment. Also made changes across the executive team. One is the expanded role with our executive and Kate Ridley who was our Chief Brand Officer, and we have put her over all of product and brand. She had the same responsibility at adidas and a number of points in her career running adidas Originals as an example. And so that's the core engine that's really essential for us. Our Chief Operating Officer has taken on an expanded scope, and we've eliminated the Chief Commercial, which was a global role and focused in on a regional reporting structure. So the team is in a really healthy shape from the core business operations. Then unfortunately, Mike is transitioning out. But we've got a fantastic CFO coming in on April 24. Her name is Annie Mitchell, and she is -- she most recently was the CFO of North America of Gymshark, and before that CFO of North America for adidas for a long portion of her career. So particularly in this moment where we have slightly elevated inventories that we need to work through, she's worked through those issues from our industry many, many times, much thornier situations than the one Allbirds is in today. So a really good experience to bring to bear and she happened to work alongside Kate as well. So we feel really confident in the executive team, the [cliff] below that has shown fantastic execution. And so I'm very pleased with the team in place and good, really happy that this transition with Mike is so seamless, and he's partnered so well with us on this, and that he has created a team that Annie is going to be able to inherit that's going to be fantastic to partner with you, Lorraine, and make sure that we have all the story tick and ties with the numbers.

Well, great. I think we're out of time, so thank you to both of you for coming, and good luck with the turnaround.

Thanks.