Allbirds, Inc. (NASDAQ:BIRD) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Good afternoon, everyone, and welcome the Allbirds Third Quarter 2023 Earnings Call. [Operator Instructions] This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. Now, I’ll turn it over to Christine Greany from The Blueshirt Group. Please go ahead.
Christine Greany: Good afternoon, everyone, and thank you for joining us. With me on the call today are Joey Zwillinger, CEO; and Annie Mitchell, Chief Financial Officer. Before we start, I’d like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our financial outlook, including cash flow and adjusted EBITDA expectations, Q4 guidance targets, impact and duration of external headwinds, simplification initiatives, Strategic Transformation Plan and related planned efforts, go-to-market strategy, planned transitions to a distributor model in certain international markets, anticipated distributor model arrangements, expected profitability, cost savings targets, gross margin estimates, product plans and expectations, third-party partnership strategy, marketing strategy, and other matters referenced in our earnings release issued today.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise any statements to reflect changes that occur after this call. Please refer to our SEC filings, including our quarterly report on Form 10-Q for the quarter ended June 30, 2023, for a more detailed description of the risk factors that may affect our results. Also during this call, we will discuss non-GAAP financial measures that adjust our GAAP results to eliminate the impact of certain items. These non-GAAP items should be used in addition to, and not as a substitute for, any GAAP results.
You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures to the extent reasonably available in today’s earnings release. Now, I’ll turn the call over to Joey to begin the formal remarks.
Joey Zwillinger: Thanks, Christine. Good afternoon, everyone, and welcome. We delivered Q3 results in line with the expectations we provided in August, as well as another quarter of solid progress under our strategic transformation plan. Our flock is executing well across the board, which we believe is setting up Allbirds to achieve sustainable and profitable growth, and in doing so, create durable shareholder value. During the third quarter, we achieved another set of material proof points that are driving the business forward and positioning the company to hit our 2025 targets of positive full-year adjusted EBITDA and positive cash flow. First, we made significant progress against cleaning up inventory, ending the quarter with just under $80 million of inventory on the balance sheet.
That represents a sequential decline of 14% from Q2 and a year-over-year decline of 37%. This is notable given the cautious consumer spending environment and makes us confident that we can effectively clean up the marketplace to enable us to focus on our fresh and innovative new product as we enter 2024 with plans to drive resonance with the consumer through a better product mix and key upgrades to our core franchises. Another critical metric we use to measure our progress during this transformational year is cash. We closed Q3 with $132 million, reflecting minimal operating cash use of $5 million in the quarter, which was required to meet our seasonal working capital needs leading up to holiday. Next, we captured savings from our strategic sourcing efforts, keeping us on track to achieve the upper end of our cost of goods sold savings targets of approximately $20 million to $25 million versus 2022 on a volume-neutral basis.
We also continue to drive towards our $15 million to $20 million G&A savings targets, with notable progress made via our international transitions. While working down inventory, we also kept things fresh for our consumer with the launch of our updated Courier and the Vista Racer. These two models are really the final chapter of product that we had developed pre-transformation. We decided to keep these in the line but [ buy ] them tight and for only a limited time frame to drive freshness in a period where we knew our primary intent would be to work down inventory. The Wool Runner 2 that dropped last week is more aligned with the focus for the next generation of product from Allbirds. This fresh take on our original icon features new innovations and upgrades, including improved comfort, a more durable upper and a streamlined aesthetic.
And the launch is supported by a marketing campaign aimed at connecting with our core consumers in a far more resonant way. We’re thrilled with the step change this represents, and it validates the strategy we have for product, given that after just a few days of selling, the Wool Runner 2 is our highest sales velocity launch of the year. We look forward to bringing more innovation like this to the market in 2024. As we approach another holiday selling season with consumers exercising caution around spending, we are prepared for an early and highly promotional holiday period industry-wide and prioritize getting inventory to a healthy position in early 2024 with an elevated pace of unit sales through 2023. We intend to remain competitive on price with reduced marketing spend.
In fact, Q4 will mark our fourth consecutive quarter of moderated marketing spend, which is expected to be down more than 15% for the full year in ’23 versus 2022. Outside of marquee selling events such as Black Friday, Cyber Monday, our promotions and markdowns generally focus on non-core styles and those we expect to sunset or replace with next-generation versions. This approach has helped us maintain full price brand integrity, and we expect to increase full price selling when we bring new and more innovative product offerings to market next year. Indeed, we’re looking forward to a number of activities in 2024 across product and marketing that we expect will generate momentum with our consumer. Zooming out and taking a look at the shape of the transformation, 2023 has been a year of diagnosing and fixing, most notably our cost structure, inventory position and go-to-market model by region, while also recalibrating our assortment to drive more resonance with our core consumer in ’24 and beyond.
Having done this heavy lifting, we believe we’ll enter 2024 with a strengthened foundation and a right-sized cost structure. This will enable us to allocate resources and effort towards driving growth from our most profitable products and through our most profitable channels and regions, setting us up to improve our bottom line year-over-year. The actions we’re taking now give us confidence that even in a challenging environment, we can achieve our goal of positive adjusted EBITDA and positive cash flow in 2025. Now, I’ll walk through some updates on the four pillars of our transformation plan, starting with product and brand. In Q4, we are continuing to flow in updated and refreshed core assortments. As I noted earlier, the Wool Runner 2, a fresh take on the biggest icon in the history of our brand, just launched last week, and we’ll soon introduce a capsule for her that reflects our new gender differentiated approach and shows how our refocused consumer insights work translates into great product.
In 2024, we’re looking forward to launching more innovative assortments with an emphasis on our core franchises, along with key upgrades to those silhouettes like we did with the Wool Runner 2. As we embarked on our transformation efforts, we knew that product development cycles would limit our ability to drive substantial newness in 2023. So, while we are eager to bring these upgrades to the line in Q4, this is really just a taste of what’s to come in 2024 and beyond. As I touched on earlier, throughout this year, we have deliberately pulled back on marketing spend and remained focused on being as efficient as possible while we transition and clean up our inventory. Our new influencer program is beginning to build with a material portion of our marketing mix, and we are pleased with the early outcomes that drive awareness and consideration, particularly with women.
We believe our upcoming holiday campaign will resonate well, and we expect the newness, color assortment and promotional cadence to deliver results within the guided range for the quarter, enabling us to finish our transitional year with both marketing spend and inventory reducing at a greater rate than sales. Turning to our second pillar, optimizing the U.S. distribution and store profitability. When we developed our transformation plan, this pillar was focused on optimizing our U.S. stores and slowing the pace of openings. We have completed all of the 2023 store openings under the previously committed leases and have no further openings planned. We’ve since widened the aperture to optimize our U.S. distribution more broadly with a continuing focus on improving store profitability.
Q3 in-store traffic remained challenging for the retail industry broadly, and we experienced this as well. Given the consumer headwinds affecting the landscape, we expect this to persist in Q4 and have reflected that in our guidance. Our work in stores across merchandising and marketing, staff training and labor scheduling are beginning to show improvements in store operations, but there is still work to do here. In the digital ecosystem, as we seek to optimize our U.S. distribution, we will be launching on a leading digital marketplace in the coming weeks. We expect this platform to drive an incremental, profitable revenue stream, and we’ll share additional details at launch. Looking at wholesale, this remains a key channel for our future and one that provides us with the opportunity to profitably raise brand awareness, while also providing a unique view into what our consumers truly crave.
Informed by these insights, we are collaborating closely with our partners to ensure that we’re appropriately represented until we have an assortment that we believe will best resonate with consumers. And we expect lower sales from this channel in the second half of this year and into the first half of 2024. We intend to utilize a pull versus a push strategy focusing on sell-through to ensure we’re showing up in the right way before expanding door count. As we bring our new assortments to market through 2024, we anticipate reaccelerating growth in this channel in the second half and are speaking with new potential partners to selectively broaden the number of accounts. Now, on to our third pillar, transitioning our direct go-to-market strategy towards a distributor model in international markets.
This is the most complex activity within our transformation plan and we believe has the potential to move the needle on profitability quickly. We’re incredibly pleased with the progress we’ve made on this front and expect to have additional news soon. During the third quarter, we finalized the previously-announced agreements with third-party distributors in Canada and South Korea, and those regions are now transitioned, including personnel, stores and inventory. Additionally, we recently signed LOIs for two additional important regions with distributors in both Japan and Australia/New Zealand. We are thrilled to be partnering with high-quality organizations that have extensive brand building and distribution capabilities in their respective regions.
The transitions are expected to occur by midyear 2024. Three quarters into this strategy, we’re pleased to have four regions with clear transition pathways towards a profitable and scalable structure. We anticipate selectively opening up distribution in new regions, beginning in the second half of 2024, to further capitalize on this distribution model, which, similar to wholesale, requires no capital investment from us. We expect that this opportunity will not only deliver additional profit to us, but also drive volume expansion to support additional manufacturing cost savings through SKU productivity. At the same time, we believe the distributor model will drive increased brand awareness internationally and provide greater access to both new and existing customers.
As a reminder, initially, the move from direct model to a distributor model will result in a decline in revenue for the impacted regions, but we expect strong flow-through to the bottom line, making this higher-quality revenue. Annie will provide more color around the economic model shortly. Moving to our fourth and final pillar, improving overall gross margins and managing operating expenses. We are firmly on track to achieve our stated goals to capture $20 million to $25 million of COGS savings and $15 million to $20 million of SG&A savings by 2025, as compared to our run rate at the end of 2022. We continue to ramp up shipments from our new manufacturer in Vietnam during Q3 and expect the transition to fully take shape by year-end with P&L benefits beginning in 2024.
We now expect that our work in this area will allow us to deliver the high end of the expected cost of goods savings range by 2025. Additionally, as we continue to work through inventory, bring new products to market and reduce the depth of promotions, we believe this will allow us to move the consumer back towards the full price model, improving gross margin. Entering the final stretch of the year, we are pleased with the progress under each of the four pillars and remain confident that our transformation plan is positioning us to improve capital efficiency and drive profitability. We are fortunate to have an experienced team who has embraced a highly disciplined operational approach. This enabled us to take decisive action in 2023 to lay the groundwork for improved year-over-year profitability in 2024 with a path to our first expected calendar year of positive adjusted EBITDA and cash flow in 2025.
We have significantly improved our inventory position heading into the important holiday selling season. We have excitement building for 2024 product launches. We are well on our way to transforming our international business, and we have institutionalized rigor across the organization. Our path is clear, and after approaching the end of year one of this transformation, we are acting with discipline to drive long-term growth via products, regions and channels that have the greatest potential to deliver elevated levels of profit. We appreciate the support of our analysts and shareholders and believe the progress we are making will compound into strong shareholder returns in the future. Now, over to Annie to walk through specifics on the quarter and commentary on the shape of the remainder of this year.
Annie Mitchell: Thanks, Joey. We’re pleased to report another quarter of operating and financial progress. Q3 results came in within our expected range on the top line, exceeded expectations we provided on the bottom line, and for the third quarter in a row, we delivered solid improvement across our key metrics of inventory, cash and costs. Third quarter revenue of $57.2 million declined 21% versus a year ago and largely reflects our strategic actions to clear through legacy inventory, as well as planned declines in wholesale revenue to ensure we are set up to drive high sell-through with our fresh and updated assortment in 2024. Gross margin came in at 43.5%. That compares to 44.8% a year ago and primarily reflects higher promotional activity as we continue to work down non-core styles and colors, leading up to our new product introductions planned for 2024.
Before we get to next year, we are focused on ensuring that we engage and delight the consumer this holiday season, which means increased promotional activity versus a year ago. Simply put, as you heard from Joey, we intend to be competitive on price. As a result, we anticipate that fourth quarter gross margin will be below 40%. Turning now to expenses, we brought down SG&A, excluding depreciation and stock-based compensation, by $1.8 million or 5% versus a year ago. This came in better than we expected and can be traced to our careful cost control, most notably the ongoing tightening of discretionary expenses. As we talked about last quarter, we continue to expect that Q4 SG&A dollars will be up both on a sequential and a year-over-year basis.
Marketing expenses reflect a planned decline of $2.5 million or 19.6% compared to Q3 2022. Looking at Q4 marketing spend, we continue to expect a modest uptick from Q3 levels as we support the Wool Runner 2 launch and the holiday sales push. In Q3, we incurred $1.2 million in restructuring charges associated with our strategic transformation, an increase of $0.5 million compared to Q3 2022. Taken together, our top line results and careful cost control drove a better-than-expected adjusted EBITDA loss of $19 million in Q3. Moving to the balance sheet and cash flow, I’m pleased to report another quarter of solid progress against two of our key benchmarks. First, I’ll talk about inventory. We ended the quarter with inventory levels down 37% versus a year ago and down 32% from year-end.
The improvement reflects more selective and disciplined buys and our commitment to achieve a healthier composition and clean position by year-end. Indeed, we expect to end the year with inventory levels of approximately $70 million, reflecting a year-over-year decline of approximately 40%. Now, let’s look at cash. At the close of Q3, we had $132 million of cash on the balance sheet. Our aggressive actions to bring down inventory levels and reduce operating expenses allowed us to narrow our operating cash use versus a year ago. Through the third quarter, operating cash use was just $5 million compared to $18 million a year ago. We also delivered significant improvement for the year-to-date period, with operating cash use narrowing to $25 million versus $82 million.
We anticipate that operating cash usage will increase slightly in Q4 compared to Q3 levels. Before turning to guidance, I’d like to share some data points to help you understand the financial implications from our transition to third-party distributors in international markets. Starting at a high level, prior to the transition to a distributor model, Allbirds had a presence in the following six international regions, representing approximately 26% of total revenue for the 9-month period ending September 30: Australia and New Zealand combined; Canada; China; Europe, including both the EU and UK; Japan; and South Korea. During the third quarter, we completed the previously announced transition of our Canadian and South Korean businesses to local distributors in those countries.
This encompasses Allbirds’s eCommerce, bricks and mortar, and wholesale businesses across both regions. The transaction was recorded in Q3 as a non-operating loss on the sale of business totaling $2.3 million and is excluded from adjusted EBITDA in the quarter. Next, after quarter-end, we signed LOIs with the distributors in two additional regions, Japan and Australia/New Zealand. Those transitions are expected to be completed midyear in 2024, as noted in our press release today. The New Zealand agreement is contingent upon the employee consultation process, which is standard in that country. For added perspective, Canada and South Korea combined represented approximately 4% of total company revenue year-to-date in 2023, and Japan and Australia/New Zealand combined represented approximately 8% of total company revenues year-to-date in 2023.
So, very good progress on this strategic pillar three quarters into the transformation, with four regions and approximately 12% of the overall business in transition to a simpler model that we believe is better positioned to grow. Now, we’ll turn to some additional data points that underscore the benefits of the distributor model. First, we’ll be selling products directly to the distributors at a lower price versus our prior direct sale to the consumer at full retail. While this will result in initial impact to revenue, we anticipate that the expertise and local knowledge of our distributors will help drive brand visibility and growth over the coming years. Next, under this model of selling directly to distributors, gross margin will naturally be below both DTC and typical wholesale margins.
Because this model requires lower operating expense, we anticipate strong flow-through from gross profit to the bottom line. As each region transitions, we expect them to be immediately profitable. Turning now to Q4 guidance, our expectations assume a few key factors. One, we are prepared for a cautious consumer and a highly promotional environment this holiday season. We know the consumer will be looking for great products at great price points, and we have a targeted promotional plan to ensure we’re competitive throughout the quarter. Second, it’s important to note that this promotional stance will impact both sales and gross profit. Third, the outlook we’re providing today also reflects a full quarter of revenue under the new pricing model for Canada and South Korea.
This results in a $2.5 million negative impact to revenue in Q4. For the fourth quarter, revenue is expected to be in the range of $66 million to $72 million, representing year-over-year comparisons of negative 22% to negative 15%. Adjusted EBITDA loss is expected to be in the range of negative $26 million to negative $23 million. Given the progress we’re making within all of our strategic pillars, especially the international piece of the transformation, we expect to return to full-year guidance in 2024 on our call in March. We also anticipate that we’ll be positioned to provide increased granularity around top line expectations and the related impact of the international transition to help you most effectively model the business going forward.
Now I’ll ask the operator to open the call for Q&A.
Operator: [Operator Instructions] Our first question comes from Bob Drbul with Guggenheim. Your line is now open.
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Q&A Session
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Bob Drbul: Hi. Good afternoon. I guess, just two quick questions for me. And the first one is just on the inventory side. Can you just expand more in terms of the quality of the inventory, the newness of the inventory? And then, I think the second piece is just love to hear a little bit more about the product changes in women’s and overall what you guys are planning as you think through some of the newness heading into next year.
Annie Mitchell: Bob, thanks for your question on inventory. It’s definitely part of – I’m most excited about in terms of our progress. So, I really appreciate you asking about it. We are absolutely pleased with the progress that we’ve made cleaning the marketplace and moving our inventory composition toward core products. That’s really been the effort this year in 2023 to make sure that we end the year with the right composition. Year-to-date, inventories are down 32%, and we expect to end the year down about 40% year-over-year. With that, we do – by doing all the heavy lifting already this year, we expect to exit the year well positioned to bring in fresh and updated product for 2024. And I know that Joey is excited to talk a little bit about that.
Joey Zwillinger: Yes. Thanks, Bob. So, I think the Wool Runner 2 is probably a great example to start with. I would say, at the high level, we’re looking at moving to a franchise offense, and this is kind of what we’ve been speaking about all year. The core franchises have an opportunity, if we embellish them correctly and merchandise effectively, to really create a lot of brand equity around the silhouette and drive a lot of growth with our existing consumer and I think will resonate just much more strongly with a broader base, given that some of these icons are what we became famous for. So, first and foremost, it’s a focus on core. And I think Wool Runner 2 being the highest sales volume launch that we’ve done this year and even some months prior than that is a really good example of taking that icon and slightly updating it to make sure we deliver amazing quality, durability and communicate the value of what we’re doing with the brand personality that we did through some of the marketing work, it’s going to work better.
And that’s what we saw in this launch, being the best one so far. So, that’s one of the core insights. And I think in that we’ll be trimming out some of the lower productivity SKUs as we focus the effort on our core franchises. And then, as you alluded to in your question, one of the other key insights that we found is that within our target demographic, our target consumer, we do have higher awareness with women than we do with men. And the consideration, on the other hand, is flipped there where our consideration is a bit lower with women. And so, what we do understand is that the brand is beloved by both genders, but in particular, there is stronger resonance currently as you track from ‘have you heard about us’ to ‘are you going to buy the product with men’.
So, that’s the work that we’re doing in terms of sharpening up the product offering both on a color and trim perspective, which you’ll see a little bit of in this quarter, but also in terms of extending some of those core franchises to be a little bit more feminine to resonate more strongly with her. So that’s, overall, the two key aspects I’d draw you to, I’d say, materially going to start in Q2 next year and continue throughout the rest of 2024, and of course, beyond that, too.
Bob Drbul: Thank you. Good luck.
Operator: Thank you. One moment for our next question. Our next question comes from Alex Straton with Morgan Stanley. Your line is now open.
