Good afternoon and thank you for standing by. Welcome to Grove Collaborative Holdings, Inc.'s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Hosting today's call are Grove's Co-Founder and CEO, Stuart Landesberg; 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 strategies, industry trends and Grove's ability to successfully respond to business risks, may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially. All these statements are based on Grove's view of the world and their business as they see it today. As described in their SEC filings, the underlying facts and assumptions for these statements can change as the world and their business changes. For more information, please refer to the risk factors discussed in their most recent filings with the SEC which are available on Grove's Investor Relations website at investors.grove.co. During today's call, they 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 the earnings release, which is also available on their Investor Relations website. I will now turn the call over to Stuart Landesberg to begin.

Thank you, operator. Hello, everyone, and thank you for joining the call today. I want to start this call with a reminder about why Grove's mission and brand purpose is more important and relevant than ever. Around the world, July was the hottest month on record. Wildfires blazed from Canada to Hawaii. The U.S. Secretary General recently declared that the period of global warming has ended and the era of global boiling has arrived. Our reports from Swiss researchers said that in July, we passed the annual amount of plastic waste that our systems can handle, the implication being that the rest of the year's plastic ends up as pollution in our environment. But change is possible and consumers increasingly demand it. For Grove and for the Grove Co brand, this is an obligation. And this is an opportunity and this is our company's reason for being. Turning now to the second quarter. This quarter was another very strong step in the journey to improve Grove's fundamentals for sustainable, profitable growth. We achieved record net revenue per order of $64.80, beating our previous record in Q4 2022 by $1.40 or 2.2%, while maintaining a strong gross margin of 51.9% comparable to our record in Q1 2023 despite the impact of a $1.1 million inventory reserve charge. Excluding the impact of the reserve charge, our Q2 2023 gross margin would have been 53.6%, which would have been a new record for Grove. These two drivers plus the strategic reduction in advertising spend led to an adjusted EBITDA margin improvement of 570 basis points quarter-over-quarter and 2,270 basis points year-over-year, despite the expected decline in sales due to lower marketing spend throughout the last several quarters. Not only did we meaningfully improve our adjusted EBITDA, but we generated $1.2 million of operating…

Thank you, Stuart. Similar to previous calls, we will provide quarter-over-quarter comparisons in addition to the year-over-year changes. As we believe the sequential comparisons better reflect the strength in the business and the steps we have taken to position ourselves for long-term sustainable and profitable growth. Net revenue in the second quarter was $66.1 million, down 8% from the first quarter of 2023 and 17% year-over-year. Both comparisons continue to be impacted by the strategic decision to reduce advertising spend as the company focuses on achieving profitable growth in 2024. The sequential decline is also impacted by the seasonal increase in advertising spend in the first quarter of 2023, while our sustainability messaging resonates more strongly with consumers. Similarly, total orders were down 11% quarter-over-quarter and 26% year-over-year to 1 million. And active customers were down 9% quarter-over-quarter and 28% year-over-year to 1.1 million on a trailing 12-month basis. DTC net revenue per order was up 5% quarter-over-quarter and 11% year-over-year to $64.8, a record high level surpassing our previous record of $63.4 achieved in Q4 2022. The year-over-year increase was due to net revenue management initiatives, including the launch of the supply chain fee, a higher percentage of existing customer orders compared to new customer orders as well as the introduction of strategic price increases on Grove brands and third-party products. The sequential increase was further benefited by a higher percentage of orders coming from existing customers, and a recovery from a seasonally softer first quarter. Gross margin was down 20 basis points from the first quarter of 2023. But up 280 basis points year-over-year to 51.9%, very close to gross record high in the first quarter of this year. The Q2 2023 gross margin was impacted by a $1.1 million inventory reserve charge. Absent the impact of these…

Thank you, Sergio. I'm truly proud of our accomplishments in our first year as a public company. Our team deserves credit for the rapid progress towards profitable growth and a secure balance sheet. And I have never been more confident in the customer-centric sustainable innovation that lies ahead. The opportunity to meet our customers and collaborating to create and scale a sustainable brand continues to be an important and worthy north star. I could not be more excited to welcome Jeff and Larry, and I could not be more grateful for the work of each of the extraordinary individuals on our Grove team who have driven our results to date and whose efforts ensure our best is still ahead of us. Thank you all for listening to our prepared remarks. We are now happy to answer any questions. Operator, please open the line.

Thank you. [Operator Instructions] Our first question will come from Susan Anderson with Canaccord Genuity.

Hi, good evening. Nice job on the quarter. It's great to see that improvement in profitability. Stu, maybe if you could just kind of walk us through your thought process on why you feel right now is the right time to kind of hand the wand over to someone else to kind of take the company through its next leg of growth and just kind of go over kind of like why now is the right time?

Thanks, Susan, and appreciate the call out for the progress. The team worked really hard and feel really good about the financials this quarter. In terms of why it was the right time. I think there were really two things at play. The first is if you look at our journey from IPO to now, we really moved quite an incredible distance to get the business operating as close to profitability as we did in the second quarter and as we've been able to say we will going forward. And that gives us the opportunity to look ahead and say, gosh, there really is this moment of, I don't want to quite say reset, but opportunity looking into the future and say who -- how can we best prepare ourselves to go through that. And so when we have the opportunity to work with an exceptional leader like Jeff, who has truly a track record of second to none in terms of building customer-centric direct-to-consumer businesses. Is -- that's something that's a massive opportunity for our mission, for our customers, for our shareholders that I think was too good to pass up on. And so always, that is my first thought. And the second is that there's a lot of really great work to be done, both inside the company that Jeff will be leading and outside the company sort of to make sure that we -- our awareness continues to grow, that we continue to have the time to focus and look at M&A in a current environment where there's a lot of really exciting opportunities out there. And so really, the sort of combination of having a strong foundation with the opportunity to bring a truly, truly exceptional leader in Jeff and the opportunity to get some more leverage out in the market from the Executive Chairman role. I think made this an opportunity that was as within the timing really just so right and so exciting. And as a shareholder and fan of the company, I'm really excited for all that comes ahead.

Great. Yes, that sounds like a perfect fit, it seems like. And then maybe if you could just talk about on your advertising spend. The quarter, I think, dropped at about 7% of sales, I think, from 12% last quarter. I guess, is this kind of the new benchmark we should think about for advertising spend as you look forward through the back half of this year and into next year?

No. So we've seen historically that advertising is a bit seasonal with as Sergio mentioned, Q1, new year new you, people really like the sustainability message. We also find that back-to-school and sort of holiday Thanksgiving not holiday Christmas are both very, very strong periods for us. And so with a more efficient advertising mix, we're thinking a lot about how do we line our spend up through the year. So I think in Q4, we'll probably be a bit above the 7%. I don't think we want to give specific guidance on that. But I think for the full year, we'll probably come in a bit above 7%. Sergio, anything you want to add there?

No, Stu, well said and covered. So that's accurate.

Okay. Great. And then I think you mentioned that you guys did raise prices in the quarter. Did you guys say how much that contributed to the growth? I guess I was just looking for kind of like pricing versus volume?

That's on a year-over-year basis, we raised prices. There was almost no price action in the current quarter.

Got it. Okay. And then, I guess, last one for me, just on the wellness shop, sounds like it's going really well. I guess, has it grown at all, to a material piece of the business? And then also, I was curious, are you seeing primarily existing customers kind of adding on to their order? Wellness products or are you also seeing it drive new customers to the site?

So I'll start with the second part of that question. which is really we offer this primarily to our existing customers because that's a really robust base of demand that we can both go to grow the business, but also really learn with to make sure we get the offering to a place where it's first class. So you're right that it's strategic. It's a big driver of net revenue per order. But we're really focused today on offering it to our existing customers. Both to get quick traction and to drive quick learning. And the first part of the question was about the materiality of the sales there. I just want to confirm.

Yes. It sounds really like it's kind of doing well out of the gate. I'm just curious, I guess, is it -- has it gotten to a percent of the business that's not necessarily significant, obviously, but where it's material, I guess, where you could see it kind of moving the new dollars to look forward.

Sergio, do you want to take this one? Okay, I will. So I think from a materiality perspective, it's still mid-single-digits. So it's not driving the overall top line but customers who buy a wellness product tend to have net revenue per order around $80 or even a bit higher, which is obviously materially higher than our overall net revenue per order today. So as we look ahead to net revenue per order growth, we view wellness as one of the places where we can sustainably build on our current basket sizes, deliver more value for our customers. And of course, that incremental dollar of net revenue per order of average order value is quite margin accretive. So we really like that. So it's already having a real effect in terms of driving net revenue per order higher. But in terms of driving overall revenue, I think we're a little early to say. It's a big driver, but hopefully soon.

Yes, sorry, just -- sorry, Susan. Just adding on top of that, I was on mute, and I was starting to answer the question, and then I heard Stu. So basically, the way that we see this is the mix that we have been referring as to the value creation. So this part of the mix is early days still to talk about the long term. But rest assured that changing the mix into these categories is something that will be accretive to the company in the long run. And we are seeing good success at the moment. So we wouldn't call out specifics, but Indeed, we are excited with the opportunity ahead.

Great, thanks so much and good luck, Stu and everything in the future and hopefully you get a little bit of downtime and good luck the rest of the year.

Thanks so much, Susan.

Thank you. [Operator Instructions] Our next question comes from Dana Telsey with Telsey Group.

Hi, good afternoon, everyone, and nice to see the progress. Welcome, Jeff and Stu, Glad you're still very, very much involved. As you think about the expense reduction this quarter, which obviously, advertising expense was significant, but it looks like there was a decline in fulfillment costs also. Does that continue going forward? Or how do you see the buckets of expense transform as we go back to putting in some ad expense nearing the fourth quarter? And then I have a follow-up. Thank you.

Go for it, Sergio.

Thank you, Dana and thank you for the question. So basically, if I understood the spirit of the question is getting a sense on how this is going to translate going forward. I would say that yes, what you saw -- thank you for confirming, what you saw on Q2 in terms of fulfillment costs and reductions. Yes, it's going to continue the trend, has been one that we feel really proud about the efforts that the team have achieved in terms of reducing -- controlling the expense in spite of inflation. And this has to do with jumping into regional carriers across the board that is helping us basically control the cost. So I don't know if that answers your question, but that's part of the principal, why you are seeing it, and we will continue to see this trend.

And will it be at this magnitude of the $2 million or so go forward?

Not at this magnitude because the first chunk is the important one, but we'll -- continue to be savings coming from that for sure.

Got it. And when you think of the path to profitability and getting near breakeven in the third quarter, as you think about next year and just the path of advertising and that path to profitability, how do you think of the advertising spend going forward?

So I think, sure. Yes, I'll start it. It's a great question, Dana. So we've been, first and foremost, focused on advertising efficiency and return on ad spend and LTV to CAC, of course. So if you think about year-over-year where we've come on that. We've seen huge improvements there. And we continue to be focused on making sure not only are we driving a really good return, but we're focused on optimizing down to make sure our advertising spend is more effective. We've said a lot of times that we're targeting, this is not guidance, but just focused on finding the way to profitable growth in 2024. And so would love to see advertising spend at least flat to potentially a little bit up year-over-year in 2024. But we're still building the plan that drives profitable growth in 2024. I think throughout the balance of the year, you can expect that it will continue to be a seasonally -- we will continue to spend seasonally more in Q1 and in sort of end of Q3, beginning of Q4, as I mentioned, for those seasonally strong periods. But I think you're right to say, hey, we're going to be more focused on making sure that we have enough advertising to drive growth as we get to profitability.

Got it. And then can you talk about how the quarter went? Was one month stronger than another? What did you see in terms of the Amazons and some of the new channel. New partnerships like Kroger and Hannaford, was there a difference in sell-through and also your brand and third-party brands in terms of what you're seeing.

So the quarter was fairly balanced and strong throughout. I think we continue to find that if you look at our net revenue per order and our gross margin, those are sequential trends. And so if it's getting better quarter-over-quarter, it's probably also generally getting better month-over-month, not every month better than the last. But in general, sort of those things tend to grow month -- tend to be growing on a sequential basis. And so through the quarter, I think we saw pretty consistent demand. We felt very good about our performance on Prime Day, but we're very early there. So that's still -- it's growing at a great clip, but still very small. And through the quarter, I think, look, we've clearly been driving this business to operate as close to profitability as possible. And so with the gross margin and overall margin improvements that are rolling out sequentially, we do see those improvements rolling in monthly on a sequential basis. I hope that answers the question.

Thank you.

Thank you. There are no additional questions at this time. I'd like to now turn the conference back over to our presenters for any closing remarks.

Thank you. Thanks, everyone, for joining. Again, a huge thank you to the Grove team for exceptional progress this quarter and a huge welcome to Jeff. Excited to see all of the great things this next chapter holds for Grove. Thanks so much, everyone. Do well.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.