Grove Collaborative Holdings, Inc. (NYSE:GROV) Q3 2022 Earnings Conference Call November 10, 2022 5:00 PM ET
Company Participants
Alexis Tessier – Director-Investor Relations
Stuart Landesberg – Co-Founder and Chief Executive Officer
Sergio Cervantes – Chief Financial Officer
Conference Call Participants
Darla Whitlock – Telsey Advisory Group
Operator
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Grove Collaborative Holdings, Inc.’s Third Quarter 2022 Earnings Conference Call. At this time, all lines have been placed on me to prevent any background noise. Following the speakers’ remarks, we will open your lines for your questions. As a reminder, this conference call is being recorded.
I would now like to turn the call over to Alexis Tessier, Director of Investor Relations to begin.
Alexis Tessier
Thank you, operator. Hello, and thank you all for joining us today. With me on today’s call are Grove’s Co-Founder and CEO, Stuart Landesberg; and CFO, Sergio Cervantes.
Before we get started, I’ll quickly cover the forward-looking statements Safe Harbor. Some of the statements that we will make today about our future prospects, financial results, business strategies, industry trends and our ability to successfully respond to business risks may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause our actual results to differ materially. All of these statements are based on our view of the world and our business as we see it today. As described in our SEC filings, the underlying facts and assumptions for these statements can change as the world and our business changes. For more information, please refer to the risk factors discussed in our most recent SEC filings, which are available on our Investor Relations website at investors.grove.co.
During today’s call, we will also discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in our earnings release and supplemental earnings presentation, which are also available on our Investor Relations website.
With that, I’ll turn the call over to Stu.
Stuart Landesberg
Thank you, Alexis. Good afternoon, everyone, and thank you all for joining us. On today’s call, I’ll start with a brief overview of Grove, before reviewing our performance in the third quarter and discussing how our value creation plan is positioning us for success, as we lead the home and personal care industries to transformational change. At Grove, we believe that consumer products can be a positive force for human and environmental health. This thesis is consistent with the long-term trends in our sector and the inevitable transformation of the CPG industry from polluter to sustainability leader.
By creating and curating products that are better for us and for the environment, we are changing the way that the $1 trillion global home and personal care industry operates. The current plastic and carbon footprints of our industry are simply not sustainable. Change is inevitable, and Grove is leading that transformation. The overwhelming majority of consumers, 84% are concerned about plastic waste.
Grove is a core innovator in zero plastic home care, and we are focused on being the market leader in solving the plastic problem our industry faces. We set the goal of being plastic-free by 2025, and aim to bring the entire industry along in our journey. Leveraging the trust from our core position in home care, we’ve also begun to address other categories, like personal care and wellness that impact human health.
When I started the business in 2012, we were a direct-to-consumer company, offering a curated portfolio of products from the best natural and sustainable brands in home and personal care. Over time, we built a loyal and engaged user base, along with a massive and rich data set. We’ve leveraged this unique data, along with our strong relationships with consumers to create our own disruptive, authentic brands of home and personal care products. The products we create, under both our flagship brand, Grove Co, the market leader in zero waste home case, as well as under our incubator brands, Peach not Plastic and Good Fur are built upon three core principles; sustainability, efficacy and consumer centricity, which is a combination of design and price.
The focus on these principles has enabled us to reach that middle of the bell curve consumer, bringing a big trends [ph] to sustainability and establishing our market-leading position in zero plastic and sustainable home care. Our latest limited edition collection, Twilight Wonder celebrates the beauty of holiday traditions, and it is a prime example of how we innovate on all three pillars for consumer-centric, sustainable and truly amazing product quality and driving success. We use limited edition collections like these to elevate the everyday through unique and relevant designs and fragrances, inspired by trends and stories, driving penetration of our brand awareness and overall reinforcing brand life.
Our DTC platform powers our innovation cycle, providing unique data to reform our product innovation, as well as an avenue to quickly test, launch and iterate upon new products. This ensures that when we bring products to retailers for distribution, they are already proven winners. Industry-wide, less than 10% of purchases of home and personal care products are made through the direct-to-consumer channel. With this in mind, we expanded into brick-and-mortar retail for the first time in 2021, through a partnership with Target. This has elevated our brand exposure and driven awareness.
Today, we are in more than 4,000 stores across multiple retailers, up more than 100% year-over-year, and we expect that distribution footprint to grow in future years. We are building momentum in our retail distribution rollout, as we begin to address the channel, which accounts for more than 90% of purchases in our category.
Now moving on to performance in the third quarter. Our results in the quarter reflects our efforts to eliminate unprofitable revenue and drive improved margins, in order to reach our goal of profitable growth in 2024. We are very pleased with our results and progress, which was ahead of our internal expectations. For the third quarter, net revenue was $77.7 million, down 18% year-over-year, but down just 2% compared to 2Q 2022.
Adjusted EBITDA improved to a loss of $9.6 million, from a loss of $31.2 million in the third quarter of last year and a loss of $21.1 million in the second quarter of 2022. These reductions in losses of greater than 50% quarter-over-quarter, reflect the decisive steps we’ve taken to achieve our goal of profitability.
The results reflect strong execution and the valuable and durable customer base we have at Grove. They also give us the confidence to raise our full year 2022 guidance for the second consecutive quarter, which Sergio will detail in a few minutes.
The year-over-year comparison, especially in top line continued to be impacted by the return to normalized buying patterns following elevated pandemic spends in our categories, as well as our strategic decision to pull back on less efficient advertising spend. We believe the sequential comparisons better reflects the trends in the business, as we’ve taken steps to position ourselves for sustainable, profitable growth.
The quarter-over-quarter trends and a 2% drop in revenue with a 50% improvement in adjusted EBITDA losses, speaks to our potential to drive bottom line economics, while maintaining revenue scale. While the macroeconomic environment remains challenging, our third quarter results came in strong relative to expectations, driven by continued marketing efficiencies and lower spend, improvements in the direct-to-consumer net revenue performance and the strides we’ve taken to streamline our operations and lower costs.
During the quarter, we also continued to make progress towards our goal of being plastic-free by 2025. In the third quarter, 63% of Grove brand’s net revenue came from either zero plastic, reusable or refillable products, leading the companies Beyond Plastic standard, up significantly from 46% in the third quarter of 2021. We also improved on plastic intensity or pounds of plastic growing $100 of revenue. We believe we are the first in the industry to report on this statistic.
Sitewide and through our retail partners, plastic intensity improved to 1.03 pounds of plastic per $100 of revenue from 1.33 pounds of plastic per $100 of revenue in 3Q 2021. And across all Grove brands, plastic intensity improved from 0.85 pounds of plastic per $100 in revenue, from $1.14 in 3Q 2021. We continue to believe that by disclosing this metric, we encourage others to do the same and drive the industry away from plastic.
On our last earnings call, we laid out our shareholder value creation plan to drive sustainable growth and expanded profit. I’ll now touch upon each of the four elements and discuss key areas of progress in the quarter.
The first element of our value creation plan is improved marketing efficiency. During the quarter, we continued to achieve efficiencies on lower spend across paid social, TV and the performance partnerships channel, slight persistent media cost inflation, which we expect to continue into 2023. While we are optimistic that a silver lining of a challenged economy may be lowered media costs, we are not yet incorporating that into our forecast. In addition, we continue to roll out and optimize our new marketing stack, which will materially improve our ability to segment and target on an individual basis. We are beginning to see a positive impact for customer engagement, which we expect to accelerate next-gen, as we fine tune our capabilities and as we continue to improve the customer experience on our DTC platform.
Lastly, we leveraged creative featuring Drew Barrymore, our global brand and sustainability advocate, originally launched in the second quarter, which is contributing to improved customer acquisition costs in TV and paid social and furthering brand awareness.
The second element of our value creation plan is omnichannel expansion. During the quarter, we advanced our strategy of expanding distribution into brick-and-mortar retail, where 90% of purchases in our category are made. We recently announced our first drugstore partnership, adding 2,200 CVS doors. In addition, we announced partnerships with Harris Teeter and H-E-B, two regional grocery store chains. There is a 250,000 door addressable market in the U.S., so we are just scratching the surface. We continue to generate strong interest in our brand with retail buyers, and we look forward to announcing additional partnerships as we are able. We remain incredibly excited about this capital-efficient growth channel.
The third element of our value creation plan is net revenue management. We’ve embedded net revenue management processes in all functions across the business and categories. We have begun to test and implement initiatives focused on strategic pricing, optimizing category mix and enhancing promotional sell-through. We see material upside to capture through the successful execution of these initiatives in the coming years. This is particularly critical in an inflationary environment. We are pleased with our gross margins in Q3, and we hope that it will drive sustained gross margin growth over the long-term.
Lastly, we continue to make progress on reducing operating expenses. In August, we executed a company-wide reorganization, which included a reduction in force of approximately 18% of the corporate workforce, allowing us to streamline operations and reallocate resources, to initiatives that best align with our goal of achieving profitability. In addition, our vendor audit resulted in the removal of additional expenses and accelerated our reduction in cash burn. We note that many costs are rising, but we continue to be focused on managing our operating expenses.
We remain confident that successful execution of our value creation plan, along with the long-term trends towards sustainability, will position us for success. Grove is a disruptive high-margin brand, with an enormous TAM, expansive white space for omnichannel distribution expansion, a strong gross margin profile and a clear path toward EBITDA profitability.
That said, the environment does remain challenging. Consumers are facing levels of inflation not seen in decades and are bracing for the difficult environment to continue. The impact is particularly pronounced in the retail segment, where traffic declines industry-wide have impacted inventory levels in the channel, along with replenishment drivers. And the natural category overall is losing share to conventionals. We think the shift will be temporary, but it is worth noting.
While we continue to see category-leading growth year-over-year and have conviction in the long-term trends to natural and sustainable products, we recognize these continue to be headwinds in the retail channel in 2023. The economic environment is also impacting our DTC business, so we feel good about the results we saw in Q2. We have taken steps to offset rising costs, and note this did lead to a modest drop in orders in Q3, especially among customers who typically place smaller and unprofitable or less profitable orders. The impact was in line with our expectations.
On the positive side, we saw exceptional DTC net revenue per order of $60.63 in the quarter, inclusive of shipping and fees, which is an all-time high. Going forward, we plan to double down on the drivers of order value growth by pushing into higher margin and higher dollar category. This will allow us to offer our consumer solutions in more categories that are a positive force for human and environmental health. Approximately 15% of our orders are over $100 per day, and we believe we can drive that number up over time, as we increase cross-category adoption.
Finally, we are also making strategic pivots in our business, as we update our digital footprint to match best-in-class practices and drive better cross-category sales. We are confident that these changes will drive long-term success, but are aware they may take time to learn into and grow to their full potential. While we are cautious going into the next year because of the macro, we believe the long-term headwinds behind sustainability are unchanged, and we remain focused and confident in our goal of profitability in 2024, and double-digit long-term growth.
Before I turn the call over to Sergio, I want to thank all of our employees for everything they do, prioritize our customers, their health and the health of the environment each and every day. We wouldn’t be here without your steadfast dedication to our mission, and I am proud every day to pursue our long-term goals with you.
I’d now like to turn the call over to Sergio, to review our financial results in more detail. Go ahead, Sergio.
Sergio Cervantes
Thank you, Stu. Third quarter net revenue was $77.7 million, down 18% year-over-year and 2% from the second quarter of 2022. Both comparisons were impacted by the strategic decision to reduce advertising spend, as the company focuses on profitability as Stu discussed. Furthermore, the year-over-year decline was also impacted by consumers returning to pre-pandemic shopping patterns. Similarly, total orders were down 26% year-over-year and 6% quarter-over-quarter to $1.2 million, and active customers were down 15% year-over-year and 7% quarter-over-quarter to $1.46 million on a trailing 12-month basis.
Partially offsetting the declines in total orders were continued positive trends in DTC net revenue per order, which was up 7% year-over-year and 4% quarter-over-quarter to $60.63. This increase was driven primarily by continued strength in existing customer average order value, as well as by the impact of the net revenue management initiatives, including the introduction of strategic price increases on Grove brands and third-party products.
Gross margin was down 130 basis points year-over-year and flat quarter-over-quarter at 49.1%. The year-over-year decline was driven by increased product costs, including inbound freight costs and increasing sales from retail sales, which produced lower margins at our DTC channel sales, and higher inventory reserves, partially offset by the impact of the above-mentioned net revenue management initiatives.
Grove brands as a percentage of net revenue declined 120 basis points year-over-year and 130 basis points quarter-over-quarter to 46.9%. The decline was driven by strong third-party seasonal performance, a year-over-year decrease in new customer orders, which tend to include more Grove brand products and a shift in advertising mix into channels with less Grove brands promotion.
Advertising expenses fell 73% year-over-year and 52% quarter-over-quarter to $8.7 million, reflecting our strategic pullback in advertising spend and focus on improving marketing investment efficiency. We did see an improvement in advertising efficiency as a result of this change.
SG&A expense increased less than 1% year-over-year and decreased 20% quarter-over-quarter to $46.3 million. The year-over-year increase was largely driven by a $5.4 million increase in stock-based compensation, largely from charges related to RSUs, from which we started to record related expenses in June 2022, when the performance conditions related to going public was met, as well as $0.7 million in severance payments, resulting from the reorganization in-house. This was largely offset by a decrease in fulfillment costs, driven by lower order volume and lower professional fees and personnel expenses, related to our cost management initiatives.
Excluding a stock-based compensation and severance, SG&A expense in the quarter would have been $36.8 million or 16% less than the same period of last year, and 31% less than the second quarter of 2022. The quarter-over-quarter decline was driven by a decrease in professional fees and a reduction in force in August, partially offset by costs associated with being a public company. As a percentage of net revenue, SG&A expense would have been 47%, compared to 45% in the third quarter last year, and 58% in the second quarter of 2022.
Our adjusted EBITDA loss was $9.6 million, a material improvement from the $31.2 million loss in the third quarter of last year and the $21.1 million loss in the second quarter of 2022, despite lower sales. Our adjusted EBITDA margin improved by 2,040 basis points year-over-year and by 1,420 basis points quarter-over-quarter to minus 12.4%, primarily due to the reduction in advertising spend and reduced operating expenses.
Net income in the quarter was $7.7 million compared to a loss of $37.5 million in the third quarter last year, and a loss of $35.3 million in the second quarter of 2022. Net income in the quarter is inclusive of gains of the remeasurement of derivative liabilities. Excluding the adjustment, net loans would have been $25 million.
Now turning to the balance sheet; we finished the quarter with an inventory balance of $56 million, up $2.6 million from the end of June 2022. We continued to focus on managing inventory down by the end of the year and into 2023. We ended the quarter with $104 million in cash and equivalents, as well as an additional $14.5 million capacity available under our debt facility.
Now turning to our outlook; factoring in our performance to-date and our expectations for the remainder of the year, we are raising our full year guidance as follows; for the 12-month period ending December 31, 2022, we expect net revenue of $313 million to $320 million, up from $302.5 million to $312.5 million previously. Adjusted EBITDA margin of minus 24% to minus 26%, up from minus 27.5% to 30.5% previously. In summary, while the environment is challenging, and we expect current headwinds to continue near term, we remain excited about the long-term opportunity to drive the industry away from plastic, while achieving our financial goals for the benefit of our planet, our partners and all of our stakeholders. I continue to be pleased with the progress we are making on our value creation plan, and believe we are well positioned for profitability and long-term success.
We are now happy to answer any questions you might have. Operator, please open the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Thank you. Our first question is from Darla Whitlock with Telsey Advisory Group. Please proceed with your question.
Darla Whitlock
Hi, great. Thanks for taking my question. Can you speak to the customers that you’ve maintained on Grove DTC platform, and are you able to keep the cohort that you intend to and you try to?
Stuart Landesberg
Hi, Darla, it’s a great question. This is Stu. I’ll take a crack at that. I think it really speaks to the overall ability of the company to maintain scale and drive profitability. I think one of the things we saw in the quarter that we were really pleased about, and this is one of the things that’s led us to raise guidance both this quarter and the last, is the durability of our customer relationships. And specifically, as we’ve been able to drive more dollars of margin per shipment, we’ve been able to do that while maintaining relationships with our best customers.
So overall, we feel really good about the health of our customer base. And then when you drill one level deeper and you look at the cohorts, many of our cohorts have been with us for years now, and those are very, very sticky customers. And we continue to see trends there that are in line with historical, despite challenges in the macro. And so we’re certainly cautious given the macro going forward. But right now, we feel really good that our existing customer cohorts and the cohorts that we’re acquiring health behavior, and it’s materially similar to what we’ve always seen, which gives us a good grasp of the overall P&L as we drive the business to profitability with – and growth in the next several years.
Darla Whitlock
Okay. Great. And sort of along those lines, looking at the decline in total orders and active customers year-over-year, how do those metrics compare to your expectations based on the pulling back on advertising in the quarter?
Stuart Landesberg
So one of the things that Sergio commented on, is that we’ve seen real efficiency in our advertising. And it goes without saying that, when you first acquire a customer, they’re active. And so our marketing budget has a really big impact on active customers. And so the reduction in marketing budget is the biggest driver of the reduction in sort of customer counts and order counts. With that said, we feel really good about the customer quality that we’re bringing in, and we feel good about the efficiency of our marketing spend. And so those have allowed us to drive not just more dollars per order, but a number of orders that we feel really good about relative to plan.
And so this is – this has been one of the big bright spots, is that we’ve been able to improve our profitability so much overall, while still maintaining what I’ll call, the most important orders. Because if you look at the mix of the orders in this quarter compared to a year ago, for example, many fewer orders in this quarter were from first-time customers, a much higher percentage are from loyal customers, which when you sort of get into the cohort analysis, means those orders are more likely to recur in future quarters. So we feel really good about that overall.
Darla Whitlock
Okay. Great. And then one more, if I can. In your prepared remarks, you mentioned higher margin categories and products that you’re going to introduce, can you provide some detail around those and timing, and if you anticipate those to be Grove brand or third party? Thank you.
Stuart Landesberg
So this is an initiative that we’ve looked at over the next several years. I think we find that our brand has been very successful in relating to consumers and making consumers really feel like they’re making the right decision for their homes, from both the human and environmental health perspective. And over time, it’s absolutely our goal to leverage that trust that we’ve built with our consumers, to deliver for them in more categories. And so when we look out at the biggest opportunities in front of us, and we look at sort of the intersection of what are our consumers asking for, where do we know our brands can play, and what is the best financial opportunity from a market size and margin perspective.
So the categories within wellness are very compelling to us. Our overall positioning and job is to create brands, but our competitive advantage in creating brands comes from the data on our direct-to-consumer platform. So as we push into wellness and into other higher-margin categories, our approach is likely to be similar to the approach we’ve taken in Home Care, which is to – Home and Personal Care, which is to build a strong business in direct-to-consumer, leverage that data to create an innovation flywheel that’s faster than anyone else in the industry, and use that flywheel to build true market-leading brands over time.
So this is not a hey I will share X category next quarter, I’m really talking about how do we grow for example, the percent of customers that have $100 shipments year-after-year-after-year and serve our consumers in more and more categories. And we think that’s a really big value creation opportunity over the coming quarters and years and I’m excited to give more color as we make progress.
Operator
Thank you. There are no further questions at this time. I’d like to turn the floor back over to Stuart Landesberg for any closing comments.
Stuart Landesberg
Thanks all for joining. I’ll just say again, I’m quite proud of the way our team has continued to execute against our long-term goal. And I continue to believe today, as much and probably more than ever, that it is necessary and inevitable that our industry transform, to be one that can have not just a less bad impact on the environment, but truly position ourselves to change the industry for the better with products and services that consumers truly love. So thank you all again for your time. I feel grateful for the opportunity to go out and serve this mission every day. Much appreciated.
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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