Allbirds Inc

NASDAQ:BIRD

Earnings Call Analysis

Strong Margin Improvement and Strategic Shift to Drive Future Growth

The company delivered a solid Q2 performance with revenue of $52 million and a 25% year-over-year improvement in adjusted EBITDA. Despite lower unit sales, gross margin increased to 50.5% due to better inventory management, lower freight costs, and reduced promotional activity. The company anticipates gross margins in the mid-40s for the second half. With ongoing U.S. store closures and a shift to an international distributor model, full-year revenue is expected between $190-$210 million. Guidance for Q3 includes revenue of $40-$43 million and an adjusted EBITDA loss of $19-$16 million. Plans for 2025 focus on product innovation, enhanced marketing, and customer experience improvements to return to top-line growth.

Navigating Through Transition: A Stronger Foundation

In the latest earnings call, Allbirds described their progression over the past 18 months as being in line with their strategic transformation plan. The company had effectively closed 14 underperforming U.S. stores to create a smaller, more profitable retail footprint. Additionally, they successfully transitioned to a distributor model in five international regions to enhance growth and efficiency. This foundational change is aimed at preparing the company for long-term success and profitability, marking a significant shift in their business operations.

Mixed Financial Results with Strong Margin Improvements

For Q2, Allbirds reported net revenue of $52 million, which fell below expectations due mainly to lower unit sales, compounded by a necessary transition to their new distributor model and planned retail closures. Despite this, they achieved gross margin expansion, climbing to 50.5%, a substantial improvement of 770 basis points year-over-year. The company expects gross margins in the mid-40s for Q3 and Q4 given ongoing adjustments. There's an ongoing commitment to return to full-price selling, improving product margins and operational efficiency.

Guidance for Future Performance

Looking ahead, Allbirds provided updated revenue guidance for the full year. They expect net revenue in the range of $190 million to $210 million, reflecting a 100 basis point increase in gross margin estimates, which now is projected between 43% and 46%. The anticipated impact from retail store closures has decreased to $25-$30 million due to quicker lease exits, showcasing positive operational adjustments. Adjusted EBITDA losses for the full year are now expected between $75 million and $63 million, a slight improvement from prior estimates.

A Focus on Product Differentiation and Brand Narrative

Allbirds is preparing for an aggressive product launch strategy, with over ten new products planned for the second half of 2025, including updated designs that emphasize quality, comfort, and sustainability. The rebranding efforts will be articulated through a new narrative, 'Allbirds by Nature,' aimed at deepening consumer engagement. This strategic focus will enhance branding and product awareness and reinforces their commitment to maintaining full-price sales, which is pivotal for future profitability.

Marketing Investments and Future Growth Potential

In terms of financial strategy, Allbirds plans to ramp up marketing spends in the second half of 2024, following a 6% decrease in Q2. While there's a projected reduction in total marketing support year-over-year during the latter half of 2024, they foresee an increase in their U.S. spending. This is aligned with their transition to distributors which eliminates regional marketing costs, anticipated to create significant savings. Overall, the company is setting the stage to reignite growth, aiming for a steady climb back up in revenues into 2025.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Allbirds' Second Quarter 2024 Conference Call. [Operator Instructions]

Now I would like to turn the call over to Christine Greany of The Blueshirt Group.

[Christine Greany]

Good afternoon, everyone, and thank you for joining us. With me on the call today are Joe Vernachio, CEO; and Annie Mitchell, CFO.

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, 2024 full year and Q3 guidance targets, impact and duration of external headwinds, strategic transformation plan and related planned efforts, go-to-market strategy, transitions to a distributor model in certain international markets, anticipated distributor model arrangements, expected profitability, cost savings targets, gross margin estimates, product plan time lines and expectations, marketing strategy and investment, product and brand 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 March 31, 2024, 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 Joe to begin the formal remarks.

[Joe Vernachio, executive]

Hello, everyone, and thanks for joining us today. We are pleased to report another quarter of strong execution and performance in line with our expectations. Our Q2 results reflect continuing progress both operationally and financially as we set the business on a path to return to top line growth in 2025. We are on a trajectory to reignite our product and brand. But before we talk about this next chapter, let's take a look at what we've accomplished over the past 18 months.

Since the announcement of our strategic transformation plan, we have reset the business, establishing the foundation for the next phase of Allbirds' journey. Importantly, we have demonstrated our ability to formulate a plan and then execute and deliver on that plan. I'd like to provide a quick recap of our actions since March of 2023.

Starting with retail stores. We have closed 14 underperforming U.S. locations to bias towards a smaller physical footprint that better serves our footwear product strategy and advances our goal to build a profitable retail fleet. Next is international. We have successfully transitioned to a distributor model in the 5 targeted regions where we were previously selling direct. We also opened 4 new regions where we have the opportunity to partner with leading distributors and leverage our strong brand affinity. We believe this distributor model positions us to achieve profitable and scalable growth internationally.

Looking at cost of goods. Our shift to a new factory along with material optimizations is enabling us to capture significant COGS savings, driving longer-term gross margin expansion. We're also generating OpEx savings. We have rebuilt the wireframe of the company, and we're operating with greater overall efficiency. We believe this positions us to drive long-term profitability as we scale.

And turning to our balance sheet. We cut our inventory by more than half and drove improvement in working capital in 2023 versus prior year. We entered 2024 in a very healthy position, and we're carefully managing inventory going forward.

Against that backdrop, we are now prioritizing 3 main focus areas: Making Great Product, Telling Compelling Stories and Providing Customers with an Engaging Shopping Experience. Creating great product is paramount to our long-term success. Getting the product engine ignited has been amongst my highest priorities since taking over the product reins last November. After bringing in a new Chief Design Officer in December, we built a road map to evolve our go-forward product and brand strategy.

The first critical step was to edit the line to more closely reflect our evolving strategy. As a result, we have limited the number of recent product introductions to just a few launches, all of which have performed well thus far and demonstrates our customer is asking for newness from Allbirds. The Wool Runner 2, Tree Runner Go and Canvas Piper have all met with positive consumer response. Up next is the launch of our Tree Glider in just a few weeks.

We then set out to inject newness as quickly as possible. Using our existing tooling, we swiftly introduced new colors and materials into the product line, which is allowing us to infuse freshness into our offering for the second half of '24 and the first half of 2025. You'll first see this reflected in the fall when we plan to introduce corduroy as well as more rugged versions of our water-resistant collection.

Looking ahead to our Fall '25 and Spring '26 collections, we are creating these product lines from the ground up with an elevated design and product architecture that emphasizes Allbirds' lifestyle brand positioning. We are in the intensive phase of designing and developing a robust line of products that will begin to launch in the second half of next year.

We are very motivated by the progress we are seeing with each sample that arrives from our development center. We have more than 10 new product launches planned across these 2 seasons. The collections will not only enhance our product range, but also reinforce our dedication to quality, comfort, style and sustainability.

In preparation for our new product launches in mid-2025, we will be telling compelling marketing stories, utilizing a new brand narrative called Allbirds by Nature. This narrative celebrates the duality of the word nature, connecting our design philosophy inspired by the natural world while also encouraging people to embrace their innate and unique human nature.

Allbirds by Nature will enable us to inspire and engage the consumer with a wide range of topics from product benefits to universal human experiences. For example, Breathable By Nature, will highlight our use of natural and recycled materials and knit constructions that offer exceptional breathability. Comfortable by Nature will showcase the comfort of our shoes while also encouraging people to feel comfortable in their own skin.

To amplify this narrative, we are prioritizing increased marketing investment starting in the second half of the year, with the phased ramp-up planned to continue throughout 2025. More on this from Annie shortly. Our efforts will be centered around driving awareness through an upper funnel strategy that tells the Allbirds brand and product story in a fresh, engaging and consistent manner. Specifically, our initiatives are designed to convey our brand message and product attributes through the lenses of rational, emotional and cultural connections. By incorporating these elements, we are creating a richer, more engaging narrative that resonates with the values and aspirations of the Allbirds consumer.

As we bring fresh updated product to the market and amplify our marketing, Providing Customers with an Engaging Shopping Experience is our other key priority. We are enhancing the in-store consumer journey, starting with an improved assortment presentation, wayfinding and floor displays. In 2025, we plan to take further steps to enhance the consumer experience by making both our stores and websites easier and more enjoyable to shop. You'll hear much more about this in the quarters to come.

As we embark on the next phase of our journey, our track record of execution over the past 18 months gives us confidence in our ability to advance our 3 main focus areas of Making Great Product, Telling Compelling Stories and Providing Customers with an Engaging Shopping Experience. We have bolstered our organization with key hires and internal promotions, creating a team that is coalesced around a clear path forward. We're continuing to operate with urgency and remain committed to building shareholder value over the long term. We appreciate your support and look forward to keeping you updated on our progress.

Now I'll turn the call over to Annie to discuss the financials.

[Annie Mitchell, executive]

Thanks, Joe, and good afternoon, everyone. We are pleased to deliver another quarter of performance within or exceeding our expectations, reflecting consistent execution by our team. Net revenue came in within our guidance range, and adjusted EBITDA exceeded the expectations we outlined last quarter. Notably, we delivered another quarter of gross margin expansion and a 25% year-over-year improvement in adjusted EBITDA.

Q2 revenue totaled $52 million. The results are primarily attributable to lower unit sales, partially offset by higher ASPs within our direct business. The return to full price selling is a critical component of our long-term strategy. However, it is creating a near-term headwind to sales. Additionally, revenue was impacted by our international distributor transition and planned retail store closures.

While the transition to a distributor model and the closure of retail doors are reducing our top line and the associated gross profit dollars, these actions are done with intention, as they support our cost management and efficiency efforts and are offset by savings in marketing and SG&A, which I will discuss in a moment.

Second quarter gross margin improved to 50.5%, up 360 basis points sequentially and 770 basis points versus the prior year. The year-over-year expansion is attributable to the continued benefit from a healthier inventory position, lower freight costs and lower promotional activity in the direct business as well as COGS savings captured from our factory shift and materials innovation.

Year-over-year improvement in gross margin is expected to continue in the second half of 2024, although not at the same magnitude that we've seen year-to-date. We continue to expect Q3 and Q4 gross margin to be in the mid-40s, reflecting the combination of retail store closures, transition to international distributors and planned promotional activity around the holidays.

Looking at SG&A, our teams did great work controlling costs in the quarter. SG&A dollars, excluding stock-based compensation and depreciation and amortization, totaled $28 million, down 22% versus the prior year. The decrease can primarily be traced to lower personnel expenses and occupancy costs. This was partially offset by costs associated with our retail store closures, as planned. During the quarter, we closed 10 U.S. stores, followed by 1 additional closure subsequent to quarter end. This brings us to 14 stores year-to-date, putting us at the high end of our plan to close 10 to 15 U.S. stores in 2024. And we continue to evaluate opportunities to optimize our retail fleet. In connection with these store closures, plus 1 internationally, we incurred onetime cash charges of $3 million in Q2.

Q2 marketing spend totaled $12 million, down 6% year-over-year. As Joe mentioned, in the second half of 2024, we plan to increase our marketing investment to begin driving awareness through top of funnel spend and the lead up to our 2025 product introductions. While total marketing dollars are expected to be down on a year-over-year basis in Q3 and Q4, we anticipate that our U.S. spend will be up. Recall that under our new distributor model, in-region marketing costs effectively go to 0 following the transition. With 5 regions now transitioned to distributors, the year-over-year savings are expected to more than offset the investments we're planning to make in our remaining direct markets: the U.S., U.K. and EU.

Now turning to the balance sheet and cash flow. The company is in strong financial condition with a solid balance sheet. Inventories at the end of Q2 remained healthy, totaling $53 million. That's down 43% (sic) [ 42% ] year-over-year and down 7% from the end of 2023.

We closed the second quarter with $87 million of cash and cash equivalents and no outstanding borrowings under our $50 million revolver. Operating cash use was $16 million. That's down sequentially from Q1, reflecting our seasonal working capital cadence and up versus the prior year when inventory was a material source of cash due to our cleanup efforts throughout 2023.

Our 3 focus areas of Making Great Product, Telling Compelling Stories and Providing Customers with an Engaging Shopping Experience, combined with other strategic actions we are taking this year are positioning the business to return to top line growth in 2025 and set us up to deliver profitability in future years.

A foundational step in our plan to restore growth is the return to full price selling. We are committed to this model following a promotional 2023 and pleased to see the benefits begin to manifest, which is reflected in our year-to-date gross margin expansion.

Looking at other key initiatives. As I just noted, we've taken swift action related to our U.S. retail fleet. And on the international front, we continue to partner with distributors in new regions with Benelux and Scandinavia signed this quarter. We have transitioned the majority of our existing regions to a distributor model.

During the second quarter, we completed transitions in Japan and Australasia. And last week, we announced the transition of China, an important region for our brand. We're pleased to be working with leading distributors who have both regional and industry expertise to help us extend our brand reach and position us to achieve profitable and scalable growth internationally.

Moving to guidance. We are reiterating our full year sales outlook, and based on performance year-to-date, we are increasing our gross margin range by 100 basis points and bringing up the bottom end of our adjusted EBITDA range by $3 million.

Full year net revenue is expected to be in the range of $190 million to $210 million. The full year impact from our retail store closures and international transition is now expected to be in the range of $25 million to $30 million versus our prior expectation of $32 million to $37 million. Let me unpack that for you.

The impact from retail is higher than anticipated due to the speed at which we've been able to exit leases. The impact from international transition is lower than expected due to the timing of this year's transition, combined with slightly higher initial orders from our distributors.

By geographical market, full year 2024 U.S. net revenue is expected to be in the range of $150 million to $165 million and includes approximately $10 million to $12 million of impact resulting from our U.S. store closures. Full year international net revenue is expected to be between $40 million and $45 million and includes approximately $15 million to $18 million of impact resulting from our transition to a distributor model in certain international markets.

Gross margin is now expected to be in the range of 43% to 46%, up from prior guidance of 42% to 45%. Key drivers include reduced promotional intensity compared to 2023, lower inbound and outbound freight and initial savings from our factory shift to Vietnam and materials innovation.

Full year adjusted EBITDA loss is now expected to be in the range of $75 million to $63 million, which compares to prior guidance for a loss of $78 million to $63 million. While there are a number of dynamics at play on the top line, we remained focused on improving the bottom line, and you can see the results of that this year.

Turning now to Q3 guidance. Third quarter net revenue is expected to be between $40 million and $43 million. This comprises U.S. revenue in the range of $33 million to $35 million and international revenue in the range of $7 million to $8 million. Q3 adjusted EBITDA loss is expected to be between $19 million and $16 million. We're pleased with our first half performance and proud of the way our teams are executing as we enter the next phase of our journey.

With that, I'll ask the operator to open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Janine Stichter with BTIG.

[Ethan Saghi, analyst]

You got Ethan Saghi on for Janine tonight. Just a couple for me. First, just was wondering if you could give a little more color on freight, what you're currently seeing there with spot rates? And just how you're incorporating that into the gross margin guide?

[Annie Mitchell, executive]

Ethan, yes, your question is timely. Similar to others in the industry, freight is a pressure point, but we've considered that in our plans, and we're actively managing this and don't view it as a significant headwind for us.

[Ethan Saghi, analyst]

Got it. That's helpful. And then just last one for me. Just are you seeing any differences in how some of your newer launches are resonating with customers in the U.S. versus international markets?

[Joe Vernachio, executive]

Yes. Ethan, nice to speak with you. Yes, we are actually seeing strong response to our new launches in all of our markets. Specifically in the United States, the last 3 launches have met with very, very strong response. They've actually been our strongest launches over the last 2 years. And internationally, we saw momentum as we were transitioning to the new distributors. So we were able to hand them a momentum that was moving in a fantastic direction, and they were very pleased with that. And they've continued that. The transitions have moved quite swiftly and efficiently. And they've just stepped basically right into the path that we left for them.

[Operator]

Our next question comes from the line of Alex Straton with Morgan Stanley.

[Alexandra Straton, analyst]

One for Joe, one for Annie here. Joe, maybe on the positive consumer response you're seeing, you mentioned that a few times or a strong response. Can you just walk me through, like what KPIs are telling you that? And then just bigger picture, how should we think about how that back half of '25, those launches are going to be different, just strategically?

[Joe Vernachio, executive]

Sure. Yes. So the -- I mean let me zoom out a little bit and then give some context to it all. So -- and where these new products fit into our strategy and our go-forward path towards growth. I think it's just really important to first pause on just what we've done to reset the foundation of the business. The work we've done in stores, international, our COGS savings, our OpEx work and the inventory reduction, any one of these in isolation would have been a major accomplishment. But putting all these together in the time that we've done and getting the results that we're getting, I think just bodes very strongly to how well the team is coalesced around the task at hand and the urgency that we are proceeding with.

So then layered on top of that now, we have to do these 3 things, right? We've got to get the product ignited. We've got to get it moving through the pipeline. So part of that is design, which is the most important part of products, right? All the energy in product comes through design. I have this saying that I use with the team. And that is if a brand is an orange, design is the juice. And if you've ever had an orange with no juice, it's not very good, right? So we are spending a lot of time and energy and momentum in creating that juice that we are going to be using to then apply to a product line and a product offering.

And you asked specifically like what's different about it. I think what's different about it is that we are focused on being who we are. We are a lifestyle footwear brand, and there is so much opportunity and so much breadth and dimension that we can give to that across seasons, across gender and across use occasions that we have even begun to take this brand where its potential is going.

So while we might have one item of a particular model in the line, we will have a collection of those products in the line going forward. And so we've edited the line to make sure we don't feed the near term with products that will go out of the line soon so that we don't end up with inventory problems, and we are working as swiftly as we can to get all of these new products and these new designs that are on brand out into the pipeline, and that's going to be coming in the middle part of next year.

Along with that, we'll be layering on top of that, all the marketing that we'll be adding to the business. And all of that is what engages consumers and gets people excited. At the end of the day, it's about the stuff. It's about the shoe. And the KPIs, I think you asked specifically around the KPIs, one of the things that we're really focused on is the new customers, the NCA that's coming in with those new products and the messaging.

Paramount to the new products, we have to get new customers into our business. And so we're really focused on that performance. And then, of course, we're doing all these new products at full price. So there's no discounting associated with it. So making sure that we stay at full price on all these new products is really, really important. So all of this combined, we feel really positive about where we're headed. We think we're just at the very, very beginning of the process.

[Alexandra Straton, analyst]

That's great. Super comprehensive. Annie, maybe one for you. Just thinking through the near-term top line trend, I don't think you have much of an improvement built in for the third quarter. So just wondering kind of -- is that what you're seeing quarter-to-date? And then just on the third quarter and full year guidance, it seems to imply a pretty big improvement in the top line in the fourth quarter. So can you just walk me through what creates that big inflection, your confidence there?

[Annie Mitchell, executive]

Alex, thanks very much for the question. So when we're looking at Q3, this guide has us relatively similar to where we were in Q1 and Q2 being down about in high 20s -- in Q2 specifically, the impact of the transitions for retail international were worth about 4 points for us. However, when we go into Q3, those become bigger impacts. The doors that we closed in Q2 might have been partially through the quarter. We transition Japan and Australia near the end of the quarter. We've since transited China. So as a result, that sort of 4 point impact from Q2, actually grows to be closer to 10 to 15 points.

And so when we actually look at our same or like-for-like business underneath, it's more like we're down in the mid-teens versus the mid-20s. So there is some improvement in the underlying business. It's just not as obvious because of these transition topics and the impacts they're having on the top line.

When we look at Q4, it's going to be quite similar in that sense to Q3, where we'll have more of the full impact of all of these transitions. And so we don't necessarily need to have a huge uptick, but we do know that as we're comping over last year, we were quite promotional. We'll have a few more products coming. Joe gave a nice overview in terms of the philosophy behind our product. We're excited and shortly this month, we're actually going to have our next big launch, and that will also carry us into Q4 as well.

[Operator]

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Joe Vernachio for closing remarks.

[Joe Vernachio, executive]

Thank you, everyone, for joining today. We really appreciate your continued support of Allbirds. We look forward to speaking with you again next quarter.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.