Stran & Company, Inc. (SWAG) Earnings Call Transcript & Summary

Good morning, and welcome to the Stran & Company First Quarter 2023 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Alexandra Schilt. Alexandra, the floor is yours.

Good morning, and thank you for joining Stran & Company's 2023 First Quarter Financial Results and Business Update Conference Call. On the call with us today are Andy Shape, Chief Executive Officer; and David Browner, our Chief Financial Officer. The company issued a press release today, May 15, 2023, containing its 2023 first quarter financial results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1020. The company's management will now provide prepared remarks reviewing the financial and operational results for the 3 months ended March 31, 2023. Before we get started, we would like to remind everyone that during this conference call, we may make forward-looking statements regarding timing and financial impact of Stran's ability to implement its business plan, expected revenues and future success. These statements involve a number of risks and uncertainties and are based on assumptions involving judgments with respect to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond Stran's control. With that, we will now turn the call over to Andy Shape, Chief Executive Officer. Please go ahead, Andy.

Thank you, [ Allie ], and thanks, everyone, for joining us today as we discuss the meaningful progress made during the first quarter of 2023. As a result of continually executing on our growth strategy, including organic growth and M&A, we reported an approximate 29% increase in revenue to $15.8 million for the first quarter of 2023. Importantly, we also achieved organic growth of approximately 18% over the same period last year. This is notable because many other companies in our industry are contracting given the current market environment and pressure on marketing budgets. We believe the fact we have maintained strong organic growth reflects our increasing market share and the diversification of our customer base across multiple industries, including gaming and health care, which tend to be more steady regardless of the economic environment. I'd also like to note that historically, the first quarter is our slowest quarter in the year given our customers' business cycle and planning budgets are usually still being finalized. However, our increased year-over-year sales for the quarter reflects the increased spending for both existing and new customers. We also achieved 46.5% (sic) [ 45.9% ] increase in gross profit to approximately $4.7 million. Gross margin increased from 26.3% of revenue in the first quarter of 2022 to 29.8% this quarter, reflecting a reduction in our purchasing and freight costs as a percentage of sales. The improved margin can be attributed to greater buying power as we continue to gain scale as well as easing supply chains. We spent much of 2022 focusing on ways to improve our gross margins and believe we are beginning to experience the benefits of those efforts. Although we reported a loss for the quarter, this was due in part to temporary expenses related to the integration of our 3 recent acquisitions. We are also absorbing costs related to the implementation of NetSuite, our ERP system, as well as expenses related to our lead generation program. However, we believe these investments will support our continued growth and will decrease over time. As we continue to grow revenue and leverage our fixed costs, we expect to return to profitability. At the same time, we have maintained a strong balance sheet with over $20 million of cash and investments, allowing us to continue to execute our growth initiatives, including M&A. We believe that our strong cash position, combined with no debt, will provide a competitive advantage as we continue to scale our business organically and through acquisitions. Towards this end, we announced signing a definitive agreement to acquire TR Miller in January, our largest acquisition to date. This is an important milestone as it significantly enhances our operational fulfillment capabilities with their 20,000 square foot distribution and processing center. With their extensive experience standing over 47 years combined with the implementation of our technologies and marketing, we believe we can enhance our business while assisting in the overall growth of Stran. We expect to complete the acquisition during the second quarter and report details appropriately. While discussing M&A, I'm proud to report that we continue to effectively integrate our previous announced acquisitions of Premier NYC, Trend Brand Solutions as well as G.A.P. Promo, all of which we believe will provide important and unique advantages to Stran. In terms of future acquisitions, at the moment, we are focusing on closing and integrating TR Miller. However, given the lead time required to identify and complete due diligence on targets, we continue to actively explore potential M&A opportunities that can be complementary and accretive to our business. In addition, we continue to secure new customers as well as expand existing customer relationships. Specifically, in February, we announced that we were contracted by a multinational direct-selling beauty product company. This customer sought us out to provide effective incentive merchandise to assist in growing our North American loyalty program. We're in the process of launching their e-commerce store now so we can support over their 4 million influencers with the expectation of bolstering their loyalty program. During the quarter, we also witnessed an increase in spending for our existing customers as we continue to deliver on their needs as well as develop creative solutions to address their unique requests of each customer. We also continue to launch new online stores for our customers and now are actively managing over 280 online customer stores. These provide long-term value for our customers as well as easy and simple access to our products. Importantly, we are executing and pursuing growth initiatives that we believe will propel our business and lead to long-term sustainable profitability. These include meeting revenue and profitability goals, which are laid out each year, fully implementing NetSuite, continuous training of new employees to enable consistency and setting and adhering to our annual budget. These are very important to the business and our core aspects to future -- to further our growth. So to wrap up, we developed and executed a business growth strategy, resulting in increased awareness of Stran, a strong customer base and national footprint. We believe these activities we are undertaking will further solidify our leadership position with the promotional products industry, which is now valued at over $25 billion. We also expect that these steps we're taking and investments we are making will result in long-term profitability. We're extremely proud of our progress and look forward to our accomplishments in 2023. At this point, I'd like to turn the call over to our Chief Financial Officer, David Browner, to go over the financials in detail. Please go ahead, David.

Thank you, Andy. Revenue increased 28.7% to approximately $15.8 million for the 3 months ended March 31, 2023, from approximately $12.3 million for the 3 months ended March 31, 2022. The increase was primarily due to higher spending from existing clients as well as business from new customers. Additionally, we benefited from the acquisitions of the G.A.P. Promotions assets in January 2022, the Trend Brand Solutions assets in August of 2022 and the Premier NYC assets in December 2022. Gross profit increased 45.9% to approximately $4.7 million or 29.8% of revenue for the 3 months ended March 31, 2023, from approximately $3.2 million or 26.3% of revenue for the 3 months ended March 31, 2022. The increase in the dollar amount of the gross profit was due to increased sales partially offset by an increase in purchasing costs. Net loss for the 3 months ended March 31, 2023, was approximately $0.7 million compared to a net loss of approximately $0.5 million for the 3 months ended March 31, 2022. The increase was primarily due to an increase -- increased expenses relating to an increase in the lead generation initiative, integration expenses related to the acquisition of the G.A.P. Promotions assets, the Trend Brand Solutions assets, the Premier NYC assets due to our due diligence related to the asset purchase agreement acquisition of TR Miller's assets, the implementation of the ERP system on NetSuite's ERP platform, ongoing expenses related to being a public company and higher purchases in the 3 months ended March 31, 2023. This was partially offset by lower cost of purchases as a percentage of revenue in the 3 months ended March 31, 2023, and organic growth in our business. At March 31, 2023, the company had $20.9 million of cash and investments and no long-term debt. At this point, I'll turn the call back over to Andy.

Thank you, David. To wrap up, we have successfully executed on our growth strategy, which has resulted in a growing national footprint, strong customer base and increased revenue. We remain encouraged by the outlook of the business and look forward to reporting additional meaningful updates throughout the year. I'd like to thank you for joining the call today. At this point, we'd like to open up the call to questions. Operator?

[Operator Instructions] And we have a question this morning coming from Edward Reily from EFI.

It looks like freight costs as a percentage of revenue have come down quite a bit and been trending down over the last few quarters. Wondering if you can maybe talk about what's been driving this down.

Sure. Thanks, Eddie. A couple of things have been driving it down. One, the cost of freight during the pandemic and shortly thereafter, freight costs went up quite a bit significantly, importing goods from China as well as domestic freight went up. But those have normalized. I think the cost of a container at one point during the pandemic was somewhere in the range of, say, $15,000, maybe even $20,000, has gone down to under $5,000. So we've seen a normalization of the freight cost. In addition to that, we're also being -- we're being very cognizant of trying to charge appropriately for freight. So that's one of our goals of getting to profitability is being more aware of our freight, shipping with LTL carriers as opposed to UPS or using -- taking advantage of the U.S. Postal Service and just being more efficient in our freight. So it's a combination of a conscious effort that we're making on our end with rates also coming down. So it's a good combination.

Okay. Got you. And then I know you guys touched on operating expenses a little bit. It looks a little bit higher than I expected. I was wondering if you could maybe quantify some of these nonrecurring costs for me relating to various mergers.