Grove Collaborative Holdings, Inc. (GROV), a sustainable consumer products company, has disclosed its financial performance for the second quarter of 2024, emphasizing a strategic shift towards profitability, balance sheet fortitude, and customer experience improvements. The company is transitioning its direct-to-consumer business to Shopify (NYSE:SHOP)'s platform, eyeing completion by Q1 2025. Despite a downturn in revenue and orders, Grove reported an uptick in net revenue per order and a positive adjusted EBITDA. The company has also revised its full-year guidance, projecting lower net revenue but a higher adjusted EBITDA margin.
Key Takeaways
- Grove Collaborative is transitioning to Shopify to enhance direct-to-consumer operations, completion expected by Q1 2025.
- Q2 2024 saw a decline in revenue and orders but an increase in net revenue per order.
- The company reported positive adjusted EBITDA and repaid $42 million in term debt, aiming to reduce interest expenses.
- Adjusted EBITDA margin for Q2 stood at 2%, with a cash balance of $82.6 million and $27.8 million in inventory.
- Full-year guidance has been updated to $205 million - $215 million in net revenue, with an adjusted EBITDA margin of 0.5% - 1.5%.
- Grove intends to maintain current advertising spend to assess repeat orders before increasing spending.
Company Outlook
- Grove Collaborative is aiming for sequential revenue growth by Q4 2024.
- The company is committed to a bold transformation to become a destination for sustainable everyday essentials.
- Despite lowering net revenue guidance, the adjusted EBITDA margin guidance has been increased.
Bearish Highlights
- The company experienced a decrease in both revenue and the number of orders in Q2 2024.
Bullish Highlights
- There has been consistent improvement in the new customer experience since its launch.
- Record high average revenue per order has been achieved.
- Expansion in product offerings, particularly in wellness, personal care, and beauty, to boost basket and order sizes.
- Successful partnerships with third-party vendors have contributed to revenue growth and improved gross margins.
Misses
- The company's net revenue projections for the 12-month period ending December 31, 2024, have been lowered.
Q&A Highlights
- The company expressed confidence in their progress and the ongoing transformation.
- Grove plans to maintain advertising spend levels to evaluate the repeat orders of acquired customers before deciding on any increase in spending.
In conclusion, Grove Collaborative Holdings, Inc. is navigating through a period of strategic adjustment, with a focus on enhancing profitability and the customer experience. The transition to Shopify's platform is a significant step in their digital transformation, aimed at driving future revenue growth. The company's leadership remains optimistic about their trajectory, banking on their sustainable product offerings and operational efficiencies to steer them toward their financial goals.
InvestingPro Insights
Grove Collaborative Holdings, Inc. (GROV) has recently shared its financial results, revealing a strategic pivot towards profitability and operational efficiency. Here's how the company's current financial standing aligns with this strategy, as per InvestingPro data and insights:
- Market Capitalization: With a market cap of $51.16 million, Grove is positioned as a small-cap company, which often means it has significant potential for growth but also comes with higher risk and volatility.
- Revenue Trends: The company has experienced a notable revenue decline of 21.49% over the last twelve months as of Q2 2024. This aligns with the company's own report of a downturn in revenue and orders, emphasizing the importance of their strategic shift.
- Stock Performance: Grove's stock has faced considerable challenges, with a 1-week price total return of -12.42% and a 1-month price total return of -22.09%. This performance reflects the market's reaction to recent developments and the company's financial health.
InvestingPro Tips for Grove Collaborative Holdings, Inc. highlight a few critical areas of concern and potential focus for investors:
- The company is rapidly depleting its cash reserves, which could be a red flag for sustainability if not addressed.
- Analysts are predicting a sales decline in the current year, which may be a factor contributing to the company's proactive measures to improve profitability.
For investors seeking a deeper analysis, InvestingPro offers additional tips on Grove Collaborative Holdings, Inc., including insights on valuation multiples, profitability projections, and debt levels. There are 15 more InvestingPro Tips available, which can provide a comprehensive understanding of the company's financial health and future outlook. These tips can be accessed at https://www.investing.com/pro/GROV, offering valuable information for making informed investment decisions.
Full transcript - Grove Collaborative Holdings Inc (GROV) Q2 2024:
Operator: Good afternoon and thank you for standing by. Welcome to Grove Collaborative Holdings, Inc.'s Second Quarter 2024 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Following the speakers' remarks, we will open your line for questions. As a reminder, this conference call is being recorded. Hosting today's call are Grove's CEO, Jeff Yurcisin, and CFO, Sergio Cervantes. Before they begin their prepared remarks, I will review the forward-looking statement, Safe Harbor. Some of the statements made today about future prospects, financial results, business strategy, industry trends, and Grove's ability to successfully respond to business risks may be considered forward-looking, including statements relating to the impacts of their replatforming to Shopify and its projected completion date, sequential revenue growth in the fourth quarter, their plan to increase advertising spend in the fourth quarter, and their net revenue and adjusted EBITDA margin guidance. Such statements are based on current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including those factors discussed in our filings with the Security and Exchange Commission. All of these statements are based on Grove's view today, and Grove assumes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as may be required under applicable security laws. For more information, please refer to the risk factors discussed in Grove's most recent filings with the SEC, which are available on Grove's Investor Relations website at investors.grove.co. During today's call, Grove will also discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided in their earnings release, which is also available on their Investor Relations website. I will now turn the call over to Jeff Yurcisin to begin.
Jeff Yurcisin: Thank you, Operator. Today marks my fourth earnings announcement and nearly my one-year anniversary as CEO. It's a privilege to lead this team and drive a business transformation that sets us apart as the destination for conscientious consumers who want the best for their families, their wallets, and the planet. In the last 12 months, we have transformed the e-commerce experience while also prioritizing profitability. As we reshape our business amidst this turnaround, we have refocused our priorities to be profitability and balance sheet strength, the foundational elements of financial stability, stabilizing revenue, and ultimately driving revenue growth by improving the customer experience, and differentiating ourselves in sustainability, which is why customers shop with us. I'm proud of our work to date. We are delivering on profitability and have strengthened our balance sheet, and the innovations in our customer experience have energized our team. Let's dive into the updates on our four priority pillars. First, profitability. We have delivered positive adjusted EBITDA in four consecutive quarters, positive operating cash flow in three of the last five quarters, which are the first steps in our profitability journey. We continue pursuing vendor and contract negotiations to increase operating leverage. During the quarter, we signed a new lease for our fulfillment center operations in Reno, Nevada, avoiding a significant rent increase in our current facility. We also officially ceased operations in our St. Peters, Missouri, fulfillment center, savings for which will be reflected in our P&L in the coming quarters. Two, balance sheet strength. Subsequent to the end of the quarter, we voluntarily repaid $42 million of term debt, and delayed our term debt principal payments until January of 2026. This reduces our interest expense and is a first step towards reducing our overall debt burden. Three, revenue growth. Revenue growth is the natural output of delivering a great experience that encourages customers to regularly visit, browse, and shop, coupled with identifying efficient advertising channels to consistently engage with and meet them on their shopping journeys. Our customers shop with us because they trust us to curate high-performing, planet-first products. We continue to expand our product selection during the second quarter, increasing the number of third-party brands sold on Grove Co. by 12% compared to the second quarter of 2023. We also continue to expand our subscribe and save program, with 63% of all products now available for customers to subscribe to at a discounted rate, providing customers an incentive to build larger, planet and wallet-friendly boxes. We have earned trust not just in home essentials, but in personal care, health and wellness, and beauty. We see strong internal data linking selection expansion with higher net revenue per order and, ultimately, overall revenue growth. As we become customers' trusted partner to help them on their sustainability journeys, we are giving them even more reasons to shop at Grove. Today, we also announced a major transition for our direct-to-consumer business as we revitalize our technology infrastructure by migrating to Shopify's platform. This replatforming will free up resources and enable Grove to leverage the most scalable, innovative platform in e-commerce and further optimize our customer experience to fuel our future growth. This transition began in July of 2024 and is expected to be completed in the first quarter of 2025. And now we'll turn to our fourth and final pillar, sustainability, which continues to serve as our foundation, mission, and point of differentiation. In May, we published our fifth annual sustainability report, providing comprehensive reporting on our key company commitments, progress, and partnerships, while simultaneously announcing our B Corporation recertification, where we saw our overall score improve from 80.3 to 100.9. We've been a B Corp since June of 2014, a significant milestone that marks Grove joining the 5% of companies that have maintained B Corp certification for more than 10 years. We also disclosed our latest plastic intensity metrics in our earnings release this afternoon to continue providing accountability for the pace at which we decouple our revenue from the use of plastic. These are just a handful of the changes we have made so far, but there is more change coming, and the work is far from done. I remain confident in our ability to deliver incremental ongoing results towards long-term sustainable and profitable growth and evolve our brand to meet the needs of and support our current and future customers. I will now turn the call over to Sergio to review our financial results in more detail. Sergio, please go ahead.
Sergio Cervantes: Thank you, Jeff. Given our two previous calls, we will provide quarter-over-quarter comparisons in addition to the year-over-year changes as we continue to believe the sequential comparisons reflect trends in the business and provide a measure of effectiveness of the steps we have taken to position ourselves for long-term sustainable and profitable growth. Starting with the top line, revenue in the second quarter was $52.1 million, down 2.7% from the first quarter of 2024, and 21.2% year-over-year, resulting from a decline in orders partially offset by an increase in net revenue per order. We are starting to see revenue from repeat customers stabilize, resulting in a smaller sequential revenue decline than in the previous quarter. The strength of our core base is one of our most valuable assets, and it is a significant factor in our confidence that we will be able to drive sequential growth in the fourth quarter. Total orders were down 5.4%, quarter-over-quarter, and 24.9% year-over-year to $0.7 million, and active customers were down 7.8%, quarter-over-quarter, and 34.3% year-over-year to $0.7 million. Both total orders and active customers continue to be impacted by lower advertising spend in 2023 and year-to-date 2024. DTC net revenue per order was up 2.2% quarter-over-quarter and 4.5% year-over-year to $67.73. The sequential and year-over-year improvements are due to an increase in units per order and sales of higher-priced products, including vitamins, minerals, and supplements, as we expand our product offering beyond home and personal care. Gross margin was down 170 basis points quarter-over-quarter, but up 200 basis points year-over-year to 53.9%. The sequential decline was mostly due to a decrease in recognized third-party vendor allowances, from an accounting true-up in the first quarter of 2024, the discontinuation of certain customer fees, and an increase in discounts. Of note, absent accounting adjustment, third-party vendor allowances increased in the second quarter as the company onboards more vendors to the subscribe and save program. The year-over-year improvement is mostly due to the sell-through of previously reserved for inventory and an increase in vendor allowances, offset by a decrease in Grove brand percentage of net revenue. Grove brand products as a percentage of net revenue was down 190 basis points quarter-over-quarter and 390 basis points year-over-year to 41.1%. The sequential and year-over-year declines were largely due to the expansion of our third-party product offering, especially as it relates to the health and wellness category, and the recent transformation of the new customer experience, which no longer utilizes recommended baskets in first orders that included a higher percentage of Grove-branded products. Advertising expense increased 18.8% in the second quarter compared to the first quarter, but decreased 47.6% compared to the second quarter of 2023 to $2.4 million. The sequential increase is primarily due to an increase in retail-specific advertising to support the launch of our new and rebranded Grove Co. products. The year-over-year decline continues to reflect our pullback in advertising spend and focus on efficiency as we transform the first order customer. As we transform our customer experience in the first quarter, we have been disciplined in our deployment of advertising dollars, prioritizing efficiency so that spend has the right cost of acquisition and payback period. To the extent we continue to see improvements, we plan to increase DTC advertising spend in the fourth quarter of this year. Product development expense increased 49.9% quarter-over-quarter and 34.2% year-over-year to $5.4 million. The sequential and year-over-year increases are mostly due to severance and accelerated depreciation cost as a result of our decision to transition our e-commerce platform to Shopify. SG&A expense increased 10.3% quarter-over-quarter, but decreased 22.9% year-over-year to $27.1 million. The quarter-over-quarter increase is primarily due to the $2.9 million gain on restructuring recorded in the first quarter of 2024 that has not recurred, offset by lower fulfillment costs from fewer orders and lower professional fees. The year-over-year decrease is mainly due to the lower fulfillment costs from fewer orders, lower personnel costs due to a decrease in stock-based compensation expense and reductions in headcount and lower professional fees. Adjusted EBITDA for the second quarter was $1.1 million compared to $1.9 million in the first quarter of 2024 and a $2.6 million loss in the second quarter of 2023. Our adjusted EBITDA margin for the second quarter was positive 2% compared to positive 3.5% in the first quarter of 2024 and negative 3.9% in the second quarter of 2023. As Jeff mentioned, we are proud of having delivered positive adjusted EBITDA in each of the last four quarters, demonstrating our commitment to profitability and ultimately positive cash flow. Turning now to the balance sheet. We ended the quarter with $82.6 million in cash, cash equivalents and restricted cash, an increase of $1 million from the previous quarter, mainly due to a reduction in working capital partially offset by net interest expense. We also ended the quarter with an inventory balance of $27.8 million, down $3.6 million quarter over quarter, mainly driven by a reduction in Grove-branded inventory as we continue to improve our inventory ownership position. Lastly, as Jeff also mentioned, subsequent to the end of the quarter, we made a voluntary repayment of $42 million of term debt and delayed the term debt principal payments until January 2026. This pay down will save us at least $6.3 million in interest expense over the next 12 months, reducing our cash burn. More specific details can be found in our Form 8K filed with the SEC on July 19, 2024. Now turning to our outlook. For the 12-month period ending December 31, 2024, we have revised our guidance to be net revenue of $205 million to $215 million, a decrease from $215 million to $225 million. Adjusted EBITDA margin of 0.5% to 1.5%, an increased from 0 to 1%. Our business model transformation has taken longer than anticipated at the beginning of the year, and therefore, we have lowered our revenue guidance to reflect that. Our plan was increasing advertising spend sooner than the fourth quarter. However, we have decided to maintain spend at current levels, giving us more time to evaluate repeat orders of acquired customers, an important part of our advertising efficiency equation. We are less than two quarters into reshaping our e-commerce experience, and we are carefully evaluating these trends to ensure we are delivering the right payback periods. We only plan to increase spend when we have confidence in these metrics to ensure we are growing with a sustainable business model. Despite the lower revenue guidance, we have increased our adjusted EBITDA margin guidance. We continue to maintain strict margin and expense discipline throughout the business and deliver positive cash flow in the second quarter, as well as our fourth consecutive quarter of positive adjusted EBITDA. We believe that reversing the declining revenue trend is of paramount importance, but we are proud and energized by our consistent bottom-line performance. I would now like to turn the call back over to Jeff for some closing remarks.
Jeff Yurcisin: Thank you, Sergio. For the past four quarters, we've reported to our shareholder community that we are pursuing a bold transformation for Grove. Our customers seek a trusted partner to help them on their sustainability journey, and the marketplace is hungry for a leader that can serve these conscientious consumers. Today's results show steady progress toward that goal of being the destination for sustainable everyday essentials, but we clearly have more to do, and I'm confident we can be the industry leader and a platform for those conscientious customers. In my first quarter as CEO, I said we can't chase a sustainable mission without a sustainable business, and that still rings true today. One year later, our business is more sustainable. We have delivered four straight quarters of positive adjusted EBITDA, while also strengthening our balance sheet, and anticipate that consistent, sequential revenue growth is around the corner. I want to reiterate Sergio's comments that we expect to be growing revenue sequentially in Q4, which is the next step in our multi-year transformation to deliver sustainable, profitable growth. There's more work to be done, and I'm excited to share updates in future calls. With that, we're happy to answer any questions you have. Operator, please open the line for questions.
Operator: Thank you, sir. Ladies and gentlemen, at this time, we will be conducting the question-and-answer session. [Operator Instructions]. The first question that we have comes from Susan Anderson.
Alec Legg: Hi, Jeff and Sergio. It's Alec on for Susan today. I was wondering how to think about the top line relative into the second half. I know you said fourth quarter would step up sequentially, but I guess how should we think about third quarter versus second quarter? Thank you.
Jeff Yurcisin: Thank you for the question. In short, we believe we're nearing the bottom of the unusual comps that we had when we spent heavily on marketing back in 2022. So by Q4, we're going to be growing sequentially. But if you were to look at our quarter-over-quarter growth from Q4 to Q1 of this year, we're down 10.5%, and then from Q1 to Q2, we're only down 2.7%. So if you were modeling this out, you will see the flattening of those cohort curves. And we plan on growing sequentially in Q4. I also just want to say that when you think about revenue growth, you can grow with efficient marketing spend or with a superior customer experience, and it's the latter that we have been putting so much energy into the last four months. And then in terms of marketing spend and the efficiency, I think we've probably earned investors' trust that we will not spend inefficiently. And what we are seeing is week over week improvement since we launched our new customer experience on February 29th. So with that, by Q4, we really are planning for sequential revenue growth.
Alec Legg: That's really helpful. And we can see it with the average revenue per order reaching record right now. So just a quick follow-up on that. I guess, is there any white space that you see in addition to wellness that you could continue to add just to help drop higher basket sizes and order sizes?
Jeff Yurcisin: Yeah. I think what you will see when you look at our revenue mix is that 3P remain -- continues to grow faster. It grows faster because we're able to launch more relevant SKUs to our customers faster than we are in our own brand. We're really proud of our own brand product. But when I think about categories, we see it not just in health and wellness. We see it in personal care, we see it in beauty, but what we are finding is our customers trust us. We remain excited that 9 out of 10 of our customers trust us more than other retailers on selling the wellness product, and that type of trust extends to other categories. And so what you will see is we'll keep testing and learning, but we will follow the customer, follow the regular comments that we receive about new products that they are looking for, so that we can be that trusted platform, that trusted destination, a trusted brand for conscientious customers who are trying to make the right decision for their family in the plan.
Alec Legg: Thanks. And then just the last follow-up, kind of around that third-party vendor. So last quarter you talked about a big initiative and getting some of that promo dollars and some support from third-party companies. I guess, how much of that was a contribution to the year-over-year gross margin leverage or any way to conceptualize that? Thank you.
Jeff Yurcisin: I appreciate that, too. Alec Legg, I'm really proud of our third-party partnerships that we have. When you think about how we are partnering with our brands, we're not just launching new brands, but we are partnering with existing brands to offer a better customer experience. So as of now, 63% of revenue offered on Grove is eligible for subscribe and save. And the customer experience is exceptional. We already have competitive fare prices, and all of a sudden we let customers subscribe and build boxes. They could build the most planet-friendly, wallet-friendly box out there. So in terms of the third-party products, we continue to see improvement in the number of unique SKUs sold on our site week over week. We are launching new brands like Nellie's, and Freestyle World, and Fresh Wave, and Caboo. And then from a contra COGS perspective and a gross margin perspective, we see great partnership and continue to make headwind as we partner with these brands to make sure that we are serving these conscientious customers as fairly competitively as possible.
Operator: Ladies and gentlemen, just a final reminder. [Operator Instructions]. There are no further questions. I will now hand the call back to Jeff Yurcisin. Please go ahead, sir.
Jeff Yurcisin: Thank you. I want to thank everyone again for joining our call. I hope you all have a great night. Thank you.
Operator: Thank you. Ladies and gentlemen, that does conclude today's call. Thank you for joining us. You may now disconnect your lines.
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