Traeger Inc

NYSE:COOK

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Traeger Third Quarter 2024 Earnings Conference Call. My name is Alex, and I'll be coordinating the call today. [Operator Instructions]. I'll now hand it over to your host, Nick Bacchus, Vice President of Investor Relations. Please go ahead. .

[Nicholas Bacchus, executive]

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its Third Quarter 2024 results, which were released this afternoon and can be found on our website at investors.traeger.com. I'm Nick Bacchus, Vice President of Investor Relations at Traeger.

With me on the call today are Jeremy Andrus, our Chief Executive Officer; and Dom Blosil, our Chief Financial Officer. Before we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and views future events, including, but not limited to, outlook as to revenue results for consumables and accessories categories for the fourth quarter of 2024 and our anticipated full year fiscal 2024 results. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein.

I encourage you to review our annual report on Form 10-K for the year ended December 31, 2023, and our quarterly report on Form 10-Q for the quarter ended September 30, 2024, once filed, and our other filings for a discussion of these factors and uncertainties which are available on the Investor Relations portion of our website.

You should not take undue reliance on these forward-looking statements, which we speak to only as of today. We undertake no obligation to update or revise them for any new information. This call also contains certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income or loss, adjusted net income or loss per share and adjusted EBITDA margin, which we believe are usual supplemental measures.

The most comparable GAAP financial measures and reconciliation of the non-GAAP measures contained herein to such GAAP measures are included in our earnings release, which is available on the Investor Relations portion of website @investors.triger.com. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies.

Now I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger. Jeremy?

[Jeremy Andrus, executive]

Thanks, Nick. Thank you for joining our third quarter 2024 earnings call. I will start by reviewing our third quarter performance I'll then turn the call over to Dom to discuss our financial results and to provide more detail on our 2024 financial guidance. This afternoon, we reported solid third quarter results that exceeded our internal expectations and demonstrate our team's dedication to driving consistent improvements to the business.

Our Third Quarter performance included several important highlights. First, we returned to top line growth in the quarter. with revenue growth of 4%. Critically, this growth driven by a very strong performance in our growth category, which were 32% as compared to the prior year. Second, our profitability improved significantly. Third quarter gross margin expanded by 440 basis points. This improvement in gross margin was driven by both external factors as well as our margin enhancement initiatives, which continue to bear fruit. Expense discipline, along with the strong gross margin improvement translated to adjusted EBITDA of $12 million a significant improvement from last year's $5 million and drove adjusted EBITDA margin expansion of 610 basis points versus the third quarter of last year.

Given our better-than-anticipated third quarter performance, we are leasing our fiscal 2024 financial guidance. We now expect sales of $595 million to $605 million and adjusted EBITDA of [ $28 ] million to $81 million. At the midpoint of the range, we are increasing our adjusted EBITDA guidance by 4% and on top of last quarter's 15% increase in guidance.

This increase in our adjusted EBITDA guidance is being driven by our third quarter performance and our expectation for full year gross margin to be 41.8% to 42.3%, up from our previous 40.5% to 41.5% range. The growth at the grille business in the third quarter reflects strong sell-through at retail during the period.

Our strategy to lead into promotions this year, given the soft industry demand backdrop was successful and the consumer responded favorably to our Labor Day promotion. Given that our retail partners experienced better-than-anticipated sell-through at our peak season, channel inventories coming out of the second quarter we're in a very clean position and the strong consumer demand in the third quarter drove upside and replenishment sales.

I am pleased with the stronger-than-anticipated grills demand in the quarter. Despite this performance, we continue to view the consumer demand backdrop as mix for our category, and we think the consumer remains discerning in their purchasing behavior. While we saw healthy sell-through across our overall grille assortment, we continue to see outperformance in grills that are priced below $1,000, which we believe demonstrates that the consumer remains selective in their spending patterns.

And while we did see a reduction in our Grills ASP partially due to this mix shift as well as our promotional strategy. We are bringing new customers into the traeger hood, and we are gaining market share. We view this favorably as our strong brand loyalty and attachment of adjacent revenue seems like pellets and accessories contributed to a high customer lifetime value.

The strength in our third quarter grill's performance is giving us the confidence to increase our full year outlook for the grille segment. We are now assuming positive low single-digit growth in grills for the year. I am very pleased with our ability to grow our grills revenues in an environment that remains challenging for big ticket and home-related goods purchases.

Our sell-through performance in the third quarter demonstrates that there is a strong and growing appetite for the Traeger brand. As I've discussed on prior calls, our largest opportunity and our first long-term growth pillar is to accelerate brand awareness and penetration in the United States.

I believe that the elements for growth remain in place and that our brand health is stronger than ever. For example, -- our research shows that Traeger's unaided brand awareness as of the third quarter increased by approximately 20% as compared to 2022. The fact awareness of the Traeger brand is meaningfully growing in a challenging industry environment and during a time when we have not been investing aggressively into top of funnel marketing is evidence of the strength of our brand.

The affinity for the brand within the Traeger hood is also evidenced by our industry-leading Net Promoter Score, which remains materially higher than any other outdoor cooking brand. The energy around Traeger is being fueled by our continued investment in community engagement and brand activation. Our social media presence continues to be a strong source of connection with the Traeger hood and our digital content is an important part of the consumer flywheel.

We continue this activation strategy in the third quarter. In August, we kicked off Traeger GameDay. The social campaign features giveaways, contest, recipes and content all focused on engaging the Traegerhood during football season. We also launched Traeger Kitchen in the third quarter. Traeger Kitchen is a weekly YouTube series featuring Pro chefs and Pit masters giving step-by-step tutorials of their favorite recipes cooked on the Traeger. Viewers can get tips, tricks and recipes for cooking on their Traeger from some of the biggest names in outdoor cooking by tuning in. The feedback and reception from the Traeger hood has been fantastic, and we are seeing strong growth in YouTube subscribers since its launch.

Moving on to our accessories business. In the third quarter, the strong growth in our grills business was partially offset by softness in our accessories category, driven by a reduction in revenues at MEATER. As we discussed last quarter, MEATER is seen in pressure on its e-commerce sales, which we believe is largely attributable to a change in its demand creation strategy earlier this year, which proved ineffective.

We are anticipating continued pressure on MEATER in Q3 and sales results ended modestly lower than our expectations. The good news is that the third quarter is meters lowest volume period of the year and we have implemented strategies to drive improvement going forward.

MEATER is a fourth quarter weighted business and ahead of the holiday selling period, the team is focused on reaccelerating prospect marketing to fill the funnel of potential customers. We are increasing our demand creation with a focus on driving conversion at a healthy ROAs in meters peak season. MEATER has also brought innovation to the market with its launch of MeterPro XL, Meters 4 probe solution in September and its recent launch of MEATER Pro Duo, its new 2 probe solution. We believe that Meter's revamp demand creation strategy and recent product innovation will drive improvement in the fourth quarter and into next year.

However, while we expect sequential improvement in the trend, we are planning for a decline in our accessories business in the fourth quarter. Moving on to consumables. Our consumables revenues declined in the third quarter However, this was largely due to a shift in revenue pacing our pellet business.

Underlying demand trends for consumables remained healthy and third quarter sell-through was positive for both pellets and food consumables. We are expecting our consumables category to return to positive growth in the fourth quarter. Driving recurring revenue or consumables offering remains a long-term growth pillar. In the third quarter, we relaunched our Meat Church blend wood pellets, a limited edition pellet in partnership with Pit Master and Trader ambassador, Matt Pittman.

On the food consumables side, we continue to gain distribution and added RUB into Safeway for the first time in September. Overall, I am pleased with our third quarter performance and our team's ability to execute. Thus far in 2024, we have demonstrated our ability to successfully navigate a period of challenging consumer demand in our category and have grown adjusted EBITDA while continuing to invest in our long-term growth pillars. I am grateful for our retail partners with whom we have worked closely to drive a successful year thus far and with whom we are eager to continue to grow.

I also want to thank the entire Traeger team for their hard work and dedication to serving our consumer and driving continued improvements in our business. As I look forward to the rest of this year and into next year and beyond, I continue to be extremely confident and Traeger's positioning and our ability to drive growth. The improvement in sell-through trends over the last 2 quarters is encouraging and has ensured that channel inventories remain healthy and appropriate.

This is great news as our product innovation pipeline is strong and is expected to accelerate into 2025 and beyond.

I'll now turn the call over to Dom to discuss third quarter financial results in more detail. Dom?

[Dominic Blosil, executive]

Thanks, Jeremy, and good afternoon, everyone. Today, I will review our third quarter performance and discuss our updated outlook for fiscal year 2024. The Third quarter revenues grew 4% to $122 million. Grill revenues increased 32% to $75 million. Grill revenue strength was driven by better-than-anticipated sell-through as consumers responded favorably to our promotional offering, and our retail partners replenished inventories following healthy demand in the second quarter. .

During the third quarter, we saw strong volume growth in Grills, which was partially offset by a lower ASP, driven by a mix shift to lower-priced grills, a higher mix of direct import sales in strategic pricing actions. Consumables revenues were $23 million, down 11% to third quarter last year.

Third quarter was negatively impacted by revenue pacing shifts in the quarter. Underlying consumer demand trends in our consumables business remain healthy and sell-through was positive in the third quarter. We expect to see positive revenue growth in consumables in the fourth quarter compared to the prior year. Accessories revenues decreased 31% to $25 million, driven by lower sales at MEATER as well as a decline in Traeger branded accessories.

Geographically, North America revenues were up 10%, while Rest of World revenues were down 40%. Rest of World revenues were pressured by a reduction in sales loan related to a European product partnership with MEATER. Moving on to gross margin, which continues to be a highlight in our profitability improvement story.

Third quarter gross profit increased to $52 million from $45 million in the third quarter of 2023. Gross profit margin was 42.3%, up 440 basis points versus the third quarter of 2023. Our gross margin continues to benefit from both external factors, including lower transportation rates as well as the ongoing internally driven margin optimization efforts.

Third quarter gross margin expansion was driven by: one, lower supply chain costs, which drove 320 basis points of favorability. Two, 110 basis points of favorability related to a onetime credit from a transportation partner; three, warranty favorability of 70 basis points; four, pellet mill efficiency worth 50 basis points and five, other benefits worth 100 basis points. These favorable items were partially offset by dilution of 210 basis points.

Sales and marketing expenses were $26.2 million compared to $25.9 million in the third quarter of 2023. As a percentage of sales, Sales and marketing expenses were down 60 basis points versus the third quarter of last year. General and Administrative expenses were $24 million compared to $25 million in the third quarter of 2023. G&A expenses decreased 130 basis points as a percentage of sales.

I am pleased with our ability to effectively leverage our operating expenses and to maintain financial discipline as our sales returned to positive growth in the quarter. Net loss for the third quarter was $20 million as compared to net loss of $19 million in the third quarter of 2023. Net loss per diluted share was $0.15 compared to a loss of $0.16 in the third quarter of 2023.

Adjusted net loss for the quarter was $7 million or $0.06 per diluted share as compared to an adjusted net loss of $14 million or $0.12 per diluted share in the same period in 2023. Adjusted EBITDA was $12 million in the third quarter as compared to $5 million in the same period of 2023.

Moving on to balance sheet highlights. At the end of the third quarter, cash and cash equivalents totaled $17 million compared to $30 million at the end of the previous fiscal year. We ended the third quarter with $416 million of short- and long-term debt, resulting in total net debt of $399 million. Our liquidity profile remains healthy and we ended the third quarter with total liquidity of $177 million.

Inventory at the end of the third quarter was $105 million compared to $96 million at the end of the fourth quarter of 2023 and $102 million at the end of the third quarter of 2023. We believe that balance sheet inventory levels are appropriate for our current demand outlook.

Furthermore, in channel inventory levels were healthy coming out of the third quarter, given better-than-expected sell-through of Grilles in both the second and third quarters of this year. We are pleased with the health of channel inventory levels and believe our retail partners are well positioned from an inventory perspective as we begin to ship new Grille product in the fourth quarter and into 2025.

Now I'd like to discuss our updated financial outlook for fiscal year 2024. We are increasing the low end of our revenue guidance range and are updating our revenue outlook to $595 million to $605 million. Our revenue guidance reflects our current expectation for positive low single-digit growth in full year Grills revenues, an improvement from our prior guidance for approximately flat Grill revenues. The improved outlook for the Grille category is being partially offset by the expectation for continued pressure in our accessories category, driven by an expected revenue decline at MEATER.

We're expecting our accessories category revenues to decline in the fourth quarter versus the prior year. For adjusted EBITDA, we are raising our full year guidance to a range of $78 million to $81 million, an increase from our prior range of $74 million to $79 million. The improvement is being driven by an increase in our gross margin outlook. We are now assuming full year 2024 gross margin of 41.8% to 42.3% up 490 to 540 basis points versus last year and up from our prior range of 40.5% to 41.5%.

The increase in our gross margin outlook reflects upside in the second half of the year as compared to our prior expectation. We are seeing a larger-than-expected benefit from certain margin components including a higher mix of Grill sales from our direct import program, which carried a higher margin in Grills fulfilled through our domestic logistics infrastructure.

Overall, I am highly encouraged by the progress our organization continues to make. In the third quarter, we returned to positive sales growth led by 32% growth in Grills. We are seeing the benefit of the focus the organization has placed on margin improvement over the last 2 years, and our gross margin is expected to see 515 basis points of expansion this year at the midpoint of our guidance range and an incredible 685 basis points over the last 2 years.

Our strong execution is allowing us to raise our adjusted EBITDA guidance once again. I continue to believe that we are very well positioned as we look to drive long-term shareholder value.

And with that, I'll turn the call over to the operator for any questions. Operator?

[Operator]

[Operator Instructions] Our first question for today comes from Anna Glaessgen of B. Riley. Your line is now open. Please go ahead.

[Anna Glaessgen, analyst]

First, I'd like to touch on the implied guidance for Grilles in the fourth quarter. I believe on the last quarter, you spoke to a sell-in benefit flowing in to 4Q, which was a little bit earlier than the prior expectation for the beginning of 2025. Is that still the case? And really, the angle of my question is trying to understand the shift in growth from 3Q to 4Q. Obviously, we're not pulling forward 40% growth in growth quarter-over-quarter. But just any help there.

[Dominic Blosil, executive]

Yes. Good question. I think directionally speaking, you're right in that we don't expect the strong Q3 Grille growth in to sequentially hold in Q4, we will see that moderate down. I think Q4 is largely in line with our prior view, but we do expect that although moderated in Q4, we expect some marginal growth in Grills. And I think, generally speaking, this is all predicated on the fact that we're really pleased with, obviously, sell-through in Q2 as well as sell-through in Q3 in part driven by our Labor Day promotion. And then just the outside benefit in Q3 related to the replenishment coming out of Q2.. .

[Anna Glaessgen, analyst]

Got it. And then shifting to consumables, Nice to see the positive POS in the quarter. Can you speak to the current competitive landscape in pellet. Are you still seeing the same degree of competitive encroachment from private label or discounting from peers?

[Jeremy Andrus, executive]

Yes. We started seeing competition in pellets, 6 or 7 years ago as Traeger built out the category and there was a greater installed base on with Grills both Traeger and otherwise I don't know that we've seen the landscape shift meaningfully. We talked a couple of years ago about the introduction of a private label pellet into 1 of our larger retailers, and we felt the impact of that. So we see brands come and go. And I don't know that we're seeing the landscape shift meaningfully on pellets.

We tend to believe that in our research would suggest that a trigger owner is loyal to the Traeger brand. One of the things that we attempt to do as we invest in product marketing around pellets is tell a story around the quality of the pellet, how it influences the cooking process and the outcome. I think it's notably important that Traegers vertically integrated around pellets, and we do that in parts so that we can control the process and we tune our drills to our pellets and every pellet is a little bit different.

And so we certainly believe that we're well positioned from a product and a brand perspective. There are low barriers to enter in this category to build a low-quality pullet. There's plenty of sort of mill space that a competitor could lease from a manufacturer, but that's been the case for many years, and we're not meaningfully seeing the landscape shift.

[Operator]

Our next question comes from Megan of Morgan Stanley.

[Megan Christine Alexander, analyst]

I wanted to start a little bit back to maybe Anna's first question just on the Grille sell-through in the category, you did talk about seeing sequential improvement. And you are seeing, I think you talked about positive POS in the second quarter. So think you're implying that you still saw positive POS in the third quarter. But you are, I guess, your comments around the category maybe were a bit subdued, balanced.

I don't want to put words in your mouth, but can you just talk a little bit about how you're thinking about the category? Are you seeing enough to say we've maybe turned the corner? And related to that, how is what you're hearing from the retailers on early ordering for the spring selling season kind of playing into how you're thinking about the category into 2025.

[Jeremy Andrus, executive]

Yes. So first of all, we believe the category is down low single digits, 1.5%, 2% year-to-date and correct we did see positive sell-through in Grills in the third quarter and we're forecasting the drills to be up sort of mid -- low mid-single digits for the year.

So the answer is category we are outperforming the category. We are taking some share. As we step back and think about where we are in sort of the life cycle recovery, I would say, first of all, this is a -- I would characterize this category is very resilient as we look at decades of industry data. We certainly haven't exaggerated move forward to the pandemic. And I think what we're seeing right now is that we're getting beyond that pull forward, and it's colliding a little bit with a consumer -- a weakened consumer who's less focused on high ticket durables, less focused on home goods.

And it's our belief that the category is -- it's found bottom. It's -- we think we found the trough -- and then I think the question is, what is the timing of the trajectory of the recovery. What we know is that just looking at unit sell-through in prior decades and certainly just immediately prior to the pandemic between the trough and a normalized category, there's a lot of growth. What that trajectory will look like, I think, is unclear.

But given that it feels like we found bottom, we're seeing interest rates come down. We believe that will start to motivate more housing transaction, more investment in current homes. And these are some of the catalysts to driving the category. We believe that '25 will be a better year for the category than '24. And certainly, as lower interest rates become more attractive in in housing category like this and we get further from the pandemic, we just see growth in the category. So look, we look at this and the category dynamics the macro and really intersecting with the investments and the initiatives in our business -- and we think this certainly tees up a very successful next 2 to 3 years.

[Megan Christine Alexander, analyst]

That's really helpful. And maybe -- just a follow-up to that for Dom. On the EBITDA side of things, when we do kind of see a normalized recovery in top line, how should we think about maybe incremental margins? I think -- you guys have been really good at controlling the OpEx still leveraging sales and marketing in this quarter, but the gross margins also come in maybe a bit better than your expectations.

So how should we think about when you might look to maybe reinvest some of that upside back into top of funnel marketing? I know you've been pretty candid that you want to wait to do that until there's a meaningful inflection in the category, but could you do that next year, maybe sooner rather than later? Just trying to get a sense of of how to kind of think about the flow-through in a more normalized backdrop? .

[Dominic Blosil, executive]

It's a great question. I mean a lot of it is predicated on signals that we want to lean into from a top line growth standpoint, right? So Jeremy talked about category finding bottom. So timing is certainly important. That said, I mean, I don't know that we think about investing the upside per se so much as we think about our long-term financial model and guardrails that we've defined in order to ensure that when there is a return to top line growth, which in part will want to fuel the fire via increased investment capacity and sort of based on where we want to invest in that increased capacity.

But I don't know that we would lean in beyond what kind of the guardrails dictate around profitability and flow through. So clearly, we would unlock incremental capacity, both in advance of and post kind of this return to growth, which we would invest, but if we wouldn't do it beyond those guardrails to ensure that we're continuing to drive EBITDA expansion.

And certainly, gross margin has performed in line with expectations in relation to the initiatives that we've been focused on as well as the macro that's been beneficial in terms of just the predictability around how that's improve the gross margin picture. However, I do think that those initiatives probably got us ahead of where we thought we would be today, which is great news.

And we probably found a a level that is maybe more manageable as we think about how we plan for the future, continuing to focus on gross margin, but clearly, that OpEx discipline is a second layer, an important component, to how we think about profitability, which ultimately needs to be profitable, sustainable growth, right? That's an important pillar to how we think about the future and 1 that we'll continue to manage both with discipline as well as a focus on ensuring that we're smart about where we're doubling down and/or increasing investments to accelerate growth on top line.

[Operator]

Our next comes from Simeon Siegel of BMO Capital Markets.

[Unknown Analyst]

It's [ Dan Stroller ] is on for Simeon. I wanted to ask a bit on MEATER. The first is if you think you've fully addressed the marketing transition or if you're still working through that, and that's just sort of a bit of a timing lag for sales to inflect? And the second is just in if you've ever given color before on what percent of the trigger Grill owner installed base currently owns a probe.

[Jeremy Andrus, executive]

So first of all, we certainly have been deep into this marketing investment and sort of transition strategy. We are seeing some nominal improvements. It's hard to -- it's hard to call sort of return to sell-through until we get through the fourth quarter. Fourth quarter, we do a meaningful share of business. But we like some of the early signals that we're seeing and some of the investment really was around prospect marketing in an effort to drive fourth quarter performance.

I don't know that it's a flip that gets switched immediately, but I think we're making some progress. In terms of the percentage of the Traeger installed base that owns a MEATER probe, I would say it's small at this point. We currently -- we have -- there is limited integration between the MEATER and the Traeger Grill. That's something that will increase over time. And we -- given that we have -- we've built MEATER as an independent brand while we have found opportunities to collaborate from a brand perspective and co-market, we think there's still a lot of opportunity in front of us. What I can tell you is as we look at the MEATER installed base, a very small percentage of MEATER owners cook on a Traeger. It's sort of low mid-single digits. And so we think there's a real opportunity to cross-pollinate both brands. And that's something that we're focused on. But I would say certainly more opportunity in front of us than progress to date.

[Operator]

Our next question comes from Peter Keith, Piper Sandler.

[Unknown Analyst]

This is Alexia Morgan on for Peter Keith. My first question is on tariffs and China exposure. It seems like most recently, you said that 3/4 of growth and then most of the accessories are manufactured in China. But do you have any update to that? And what are you able to do to mitigate tariff risk?

[Jeremy Andrus, executive]

Yes, definitely a hot topic and 1 that we've started talking about that we've been talking about for a number of years now. So first of all, let me provide just some general information on state of play in terms of where we manufacture and where we may have risk. About 80% of Grills are manufactured in China, about 20% are manufactured in Vietnam.

Currently, Wood Pellet Grill is not included on the import code from -- in terms of tariffs. So although we have exposure to China, tariffs were assessed only on our accessories and not on our Grills. With that said, we have been -- we've been thinking about diversification for some period of time. Again, 20% produced in Vietnam, although we're in the process of adding a very large new manufacturing partner in Vietnam that has the ability to scale meaningfully.

And so the 20% is certainly a backward-looking number and not a forward-looking number based on the capacity that we'll have. If you go beyond Grills, they said accessories, nonmeter accessories are largely manufactured in China. We're currently assessed the tariff on those. MEATER is produced entirely in Taiwan and our consumables are produced here in the U.S. There's a lot of chatter on tariffs right now.

And I think it's going to take a little bit of time to sort out exactly the new administration strategy on tariffs, timing, magnitude of those tariffs. But I would say that we have been building optionality around -- in our sourcing model. We've been diversified, not just in Vietnam. We're looking closely at other manufacturing options in Asia.

We've been working on Mexico as a long-term geography in which to manufacture. And although the U.S. is not a viable manufacturing source given a number of the dynamics of the category. We feel like we have built a fair bit of optionality with the partnerships that we either have in place or they were in the process of building.

And with that optionality, we think we have the ability to react reasonably quickly and reasonably efficiently to how tariffs evolve. And so I think we're well positioned to do the best thing for the business. We won't be reactive. We've been very proactive in this process. And as we understand the shifting landscape, we will make decisions accordingly.

And of course, when tariffs are assessed. And to the extent that they are assessed across geographic sourcing locations, we will work closely with our manufacturers to become more efficient. To figure out how we can share in those tariffs. And pricing is always a lever. And I suspect that an environment where tariffs are broad-based and pervasive that that most brands will also be leading to price to mitigate the downside of those tariffs, and we would look to do the same.

[Unknown Analyst]

Okay. And then I just have 1 more on gross margin. It looks like gross margin expansion continue to look really good. Can you break down the drivers there over the next 12 or so months. And then it looks like full year gross margin guidance implies Q4 gross margin below the first 3 quarters. Do we have that math rate? And if so, what's the cause of that? .

[Dominic Blosil, executive]

Yes, your math is right on Q4 being kind of the lowest quarter of the year. There's a couple of factors to that. One is really a product mix dynamic. Second, we are promotional in Q4 to normal promotional period for Traeger. I mean, those are probably the 2 main factors at play. I would also call out that sequentially from Q3 to Q4, you could explain away some of the sequential decline as you implicitly model Q4 based on a freight credit we received as part of our gross margin task force.

We focus both on future operational efficiencies, but have also been able to uncover some benefits based on the past, and there was a onetime credit that we realized to the tune of 110 basis points in Q3, which obviously won't repeat in Q4. So that does maybe mitigate or offset some of the sequential decline based on how you model Q4.

But I think the main drivers really are just around promotion around holiday as well as some product mix dynamics at play in that quarter specifically. In terms of longer-term view, I mean, obviously, we won't be getting into specifics on how we think about gross margin for next year. We have talked about how we've sort of jumped ahead of initial plans on gross margin progress.

It's really been a phenomenal outcome, and we're really happy with how things have tracked. Clearly, there's been a macro assist that we benefit from, but more so, the team has really dug in and focused on driving initiatives to impact both the short term as well as the long-term view, whether it be incremental expansion and/or just stability in kind of a new level of gross margin for the future. And so where I would provide optimism about the future. Obviously, it's dynamic. And I would say that we're sort of within a realm where we feel comfortable, but aren't ready to speak beyond that in terms of our viewpoint on gross margin next year.

[Operator]

Our next question comes from Peter Benedict of Baird. Your line is now open. Please go ahead. .

[Peter Benedict, analyst]

Just the 210 basis points of gross margin headwind that was kind of within that number. in the quarter. Was that just the promotions? Was that the labor day promotions, having not -- you didn't do them a year ago, you did hit this year. I'm kind of curious if that was the driver there. .

[Dominic Blosil, executive]

That's right. Yes, yes, it's tied to promotional activity, yes. .

[Peter Benedict, analyst]

So as we think about going forward, I mean, the consumers clearly respond to promotions, not just from you, from a lot of companies, if you track, I mean, what's your view on the promotional stance for 4Q? And as you start to bring new innovation in 2025? How do you -- how are you thinking about pricing and promotion on those items? .

[Dominic Blosil, executive]

Yes. I think for Q3, we did run an incremental promotion or Labor Day promotion. So that was new in the quarter. Q4 promotional activity is consistent with past years. It's just kind of our normal holiday promotion plus there's a MEATER element as they're in kind of their peak season. What we're seeing is certainly success with our promotions. It's sort of uncovered the fact that there is pent-up demand, especially at lower price points.

And I think where you see these significant unit volume increases, both at a sell-through level as well as on a reported basis. One could attribute that in large part to sub-1,000 products, both in terms of where we leaned into promotion more so than past years and due to the fact that that's probably where there's pent-up demand.

And certainly, where there's meaningful volume. So I think that's been an interesting learning both in terms of how we think about continuing to unlock market share gains and the sort of growth in kind of peak seasons when we want to spike the spike, and it certainly may inform how we think about the future. And clearly, promotion has been an important lever for the brand, although in a restrained way we won't stray outside of kind of the guardrails that we believe are valuable from a brand standpoint. But clearly, there's an opportunity so long as we can check the box on margin and brand health, et cetera. to continue to use that as a lever to stimulate demand in the right period of time.

[Peter Benedict, analyst]

And then maybe for Jeremy, the brand awareness improvement in the last couple of years, certainly encouraging in an environment where growth in that front of mind for folks. -- maybe were there any regional call-outs there? Anything kind of just of interest to dig behind that number? And then as you think about watching for signs of coming off the bottom here with Grills, is there anything within maybe your heritage markets that might be of no, I think Oregon, I'm thinking Utah, -- are those -- would it make sense for those markets to come out first? Those are the real adopters? I don't know. Just trying to think about what you're looking for in terms of signs that we're starting to come off the bottom, not just bottom .

[Jeremy Andrus, executive]

Yes. We were certainly pleased with that new data point on awareness. And I would say it's really -- it's a testament to 2 things. The first is our consumers are evangelical. They're passionate about the brand and they share. There's no way to stretch a marketing dollar further. There's a more credible way to tell a brand story than to a consumer, share it with the trend. I think the second is that although we have not been leading into top of funnel marketing investments where we invest every day in the brand, puts a brand in front of new consumers in terms of our presence on social media or work with influencers. Our increased investment in points of sale in high-traffic accounts that get seen by consumers.

And so low top of funnel investment, but still a lot of opportunities to be in front of consumers in their everyday lives at retail and on social media. In terms of where we're seeing where we're seeing growth and how we might speculate what that means as we sort of invest more top of funnel and see the category start to grow. I would say the awareness increased are fairly broad-based. They're more noted in markets where our household penetration is lower.

And I think that's just a function of of a small base and an opportunity to get in front of a greater percentage of the consumers who have not seen the brand. We saw a nice uptick in in the Atlanta DMA, where we made some investments in top of funnel as we tested some new marketing strategies. And I would say we're building all of the foundation from a product marketing, brand and sales perspective to really drive growth in the future. And we always have the optionality as we see the category demand begin to recover to really lean into that with top of funnel investments.

And so there are certain things that we do as a baseline to building our brand every day to engaging our consumer base. And then there are other things that we can simply put fuel on the fire as we start to see a consumer more receptive to this category. I would end by saying we've talked about investments that we've made in new product development and in innovation. I'm actually really proud of the team that's helped create the capacity to make these investments in our product team for driving hard to bring new products to market, not only because part of the moat around our business is building a better product experience.

But on the sales and the marketing side, we've gotten so good at launching products that where we're going to spend a dollar in addition to product development isn't launching new products. And we tend to make a dollar to product launch stretch really far in our sales and marketing organization. So I think the investments that we've been making in a very lean resource environment over the last couple of years are going to be very high returning as we bring these new products to market. That's going to happen, whether the category recovers or not. We think it's on its way, but we'll be probably a little bit more reactive to accelerating growth as we see the category more the consumer in this category more focused on replacement

[Operator]

Our next question comes from Joe Feldman of Telsey Advisory Group.

[Joseph Feldman, analyst]

I was hoping you could kind of reconcile something for me. And maybe it's just I misunderstood or -- with regard to the consumables sales, which were down 11%, I guess you guys -- if I heard you correctly, you said sell-through was positive. So can you square that up? Is that mean ASPs way down? Or what's going around here?

[Dominic Blosil, executive]

That's a good question. Yes, I'm happy to clarify. So I think, first and foremost, it's kind of a low point from a volume standpoint for the year. So any kind of timing differences or otherwise, there's just magnification of that sensitivity and really what took place in Q3 was some pacing of orders from a sell-in standpoint, and/or another way to put it from a reported standpoint between Q3, Q4, which will, in turn, benefit the number in Q4.

So there's kind of a disconnect, obviously, between how the brand performed at point of sale from a consumable standpoint, which was up in sell-through relative to what we reported, which is largely a sell-in number that sometimes is subject to pacing, not issues, but pacing changes based on the timing of orders, which, in this case, are landing in Q4, that's really, again, magnified by the fact that we're dealing with kind of a lower base, and therefore, it's kind of magnifying that percentage.

But we do expect to be -- see a return to growth from a reported sell-in standpoint, in Q4. And I would add that kind of the underpinning pinnings of health of consumables all remain intact, right? Attach rates remain kind of consistent with previous levels. the data that we collect, the installed base of connected product all shows consistency and usage across a handful of KPIs that we evaluate. So the health is there, and this is really just a timing function that's kind of happening between Q3 and Q4?. .

[Joseph Feldman, analyst]

Got it. And then maybe just a quick follow-up. Given the strength, and it's sort of been asked in a different way, but how are you guys thinking about inventory for the fourth quarter? And also just thinking further out again to the tariff question that was asked earlier, would you guys consider accelerating inventory to avoid when the actual tariffs potentially come? Because it seems like it's going to be broad-based beyond just China at this point. So I guess, he's not in office yet, but that will be...

[Dominic Blosil, executive]

Yes. Certainly, it's something we'll watch closely. And I think everything is on the table, but obviously, implementation matters and what Jeremy said, I think, is important in terms of timing, products on list, level of tariff, et cetera. And we'll be hyper-focused on this. I think we have a good plan in place to the extent that we need to react both in the short term as well as how we think about long-term mitigation efforts.

In terms of using inventory as a lever. I just don't know that it would ever be sufficient to overcome tariffs and eventually, you're going to have to face the news. So maybe in the short term, it buys you a little bit of time. But I just don't believe that, that will be a lever that we pull.

But everything is on the table, so I never say never, I guess. In terms of Q4 inventory, I mean, I don't know if you want to clarify the question, I think that the broad takeaway is in channel inventory levels remain healthy. Balance sheet inventory levels are healthy in relation to how we forecast demand down to the SKU level as well as how we think about ramp for new product that we're planning to launch and potentially set in Q4 as I think we referenced on the prior call is a tailwind of revenue in that quarter. But outside of that, I mean, inventory is managed well. We have clean working capital and wouldn't see a deviation from that in Q4, if that answers your question. .

[Joseph Feldman, analyst]

Yes. No, I was just trying to get a sense of whether how you're planning it for the quarter. It sounds like it's clean, and you'll manage it to the demand. So that makes sense. .

[Operator]

Our next question comes from Brian McNamara of Canaccord.

[Brian McNamara, analyst]

First off, what is your expectation for the Grill market for 2025? Do you expect it to grow? I remember last year on the Q3 call, you said you expected another down year for Grills. And whether a category grows or not, do you guys expect to grow next year? It seems like you have some tailwinds like new innovation, a potential replacement cycle from early pandemic purchases 5 years ago?

[Jeremy Andrus, executive]

Yes, Brian. So first off, from a category perspective, as I said, we're certainly getting to the end of the pull-forward demand and we think there's some macro catalysts that drive growth in this category in addition to just normalized replacement cycles as consumers invest more in their houses, transact more houses with lower interest rates. And so we think the category is -- we think it's found or finding bottom.

Category is down about 1.5%, 2% year-to-date in that spend the slowest rate of decline over the last 3 years. So we think that speaks positively to where the category is. In terms of forecasted category growth next year, hard to do other than we feel like we're getting on the back side of the pull-forward demand, and we think we're heading towards recovery. We do think that there will be some category some category growth next year, hard to call timing or trajectory of growth.

And look, we've been investing in in things that we believe will drive growth in the future, notably, investments in new product development, as we've been good brand stewards and making investments to continue to keep our community engaged. And so we're certainly not guiding to next year at this point in time, but we feel good about the investments that we're making in the business and feel like we're certainly getting closer to just seeing the resilience of this category getting back to growth.

[Brian McNamara, analyst]

That's helpful. Secondly, I guess, 1 for Dom. Gross margins have been really impressive this year, but freight is moving in the wrong direction. Can you remind us what percent is spot versus contract for you guys? And how do you plan to mitigate that potential risk? .

[Dominic Blosil, executive]

So I guess I'm not fully understanding the risk. I mean, I think what we've seen in the spot market is maybe a little bit more volatility this year. We saw spot prices spike kind of middle of the year around July, and they've kind of come back down. And I think from our standpoint, this continues to be a tailwind, maybe a tailwind that's starting to lessen over time as we lap the more dramatic improvements in the spot market. I'd say that the more obvious tailwind is the fact that we do have a fixed contract rolling off next year.

It was a longer-term contract with rates well above spot. So that will be a tailwind, albeit smaller than what we've seen historically. And I would say that kind of the mix of fixed for spot isn't something that I think we would communicate on this call other than we do enter into fixed contracts on an annual basis.

I think over the last 12, 18 months, we've probably been more naked in terms of the mix between fixed and spot by design, just given the volatility and the fact that there was a growing tailwind that we didn't want to miss out on by locking into high fixed contracts at a greater degree of capacity. So I think we're kind of settling into hopefully a new norm. Like I said, there's a little bit of volatility this year -- but clearly, it's been a tailwind and 1 that I think we're finding a nice predictability and as we begin to plan a gross margin for the next year or 2. And I would just add to the direct import continues to be a nice component of how we think about that picture more broadly between what we procure relative to how we think about leveraging partnerships to get the best pricing and remove touches throughout the supply chain that I think is also a growing -- has been a growing component of mix within the business.

[Operator]

Our next question comes from Phillip Blee of William Blair. .

[Phillip Blee, analyst]

Gains in gross margin are really impressive, and I think your EBITDA guidance assumes about half of that uptick for the full year and gross margin outlook flows through to the bottom line. So can you maybe just talk about what's driving the differential there and then whether those investments could potentially lead to upside on the top line.

[Dominic Blosil, executive]

I don't know that I totally understood your question. Could you restate that? I'm sorry. .

[Phillip Blee, analyst]

Yes. It looks like on your full year, it looks like the gross margin guide was an improvement about 100 basis points and the EBITDA margin guide was about half that -- just kind of wondering where -- what the differential is there, if it's further investments in growth? Or what kind of expenses are in driving that differential margin. .

[Dominic Blosil, executive]

Got it. I got it. Yes. Well, so Q4 is heavily weighted in favor of MEATER revenue. They do about half of their sales in the quarter, and it's very much a direct-to-consumer/digital business. And so we do lean more heavily into investments to drive that growth -- and so really, it's probably more a function of banking the upside in gross margin offset by an increase in operating expenses in the quarter, largely tied to those variable investments around digital marketing and demand creation that's more variable and tied to dot-com and D2C business and mainly for MEATER given the weighting of their seasonality. .

[Phillip Blee, analyst]

That makes a lot of sense. And then you've spoken now over the past couple of quarters about a pipeline for newness next year and some upside there. Can you maybe just give us a little bit more color around the expected timing, what categories you're really focusing on? And then maybe how much of the assortment we should expect to be refreshed. .

[Jeremy Andrus, executive]

Yes. So first of all, as we said on prior as calls, we've really moved to invest more in new product development. And we don't do it to time markets or recovery. We simply believe that it's an important moat around our business. And interestingly, we really began to invest more in '22 and '23 in the lean years so that as we came out of this market recession, in the growth category that we would be positioned to grow. And so I think what that's going to be is there will be more newness, and we will see newness more consistently. We launched an innovation platform in our Timberline Grill in 2022 in the spring. Spring of '23, we launched a model called the Ironwood when we cascade technology from our Timberline down to Ironwood, which sells at $1,800 $2,000.

And our expectation is that -- that process will continue into '25 and into '26. I think 1 of the greatest capabilities that we have been in the process of not only net investing in, but mastering is really thoughtful product strategy, product management and product execution. And that sort of understanding the consumer all the way through engineering, manufacturing and the process of going to market.

And so there's more coming next year. There's more coming the year after. I've got visibility into multiple years of our product pipeline. And 1 of the things that gives me the most confidence is that also offers me a lot of satisfaction is seeing our product and operations teams really step up and have the capability to deliver product on time, on quality and on cost. And so these are capabilities that don't get developed overnight. They take time.

And I would say from the moment that we began to invest more in these capabilities to when we start to see us harvest some of those investments, we're getting close. And I think what's positive is that we will see that capability continue to drive growth in years to come. So it's -- there's a lot of new coming in certainly the next 3 or 4 years in which I have visibility and the focus will be on Grills accessories and consumables.

[Operator]

We will take no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.