Ladies and gentlemen, hello, and welcome to the Solo Brands Inc. Third Quarter Fiscal 2023 Financial Results. My name is Maxine, and I'll be coordinating the call today.[Operator Instructions] I will now hand over to Bruce Williams to begin. Bruce, Please go ahead when you are ready.

Good morning, everyone, and thank you for joining the call to discuss Solo Brands third quarter results, which we released this morning, and it can be found on the Investor Relations section of our website at investors.solobrands.com. Today's call will be hosted by Chief Executive Officer, John Merris; and Chief Financial Officer, Somer Webb. 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 Private Securities Litigation Reform Act of 1995, that are based on current management's expectations. These may include, without limitation, predictions, expectations, targets or estimates, including regarding our anticipated financial performance, business plans and objectives, future events and developments, and actual results could differ materially from those mentioned. Those forward-looking statements also involve substantial risks and uncertainties, some of which may be outside of our control and that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties, among others, are discussed in our files with the SEC. We encourage you to review these filings for a discussion of these risks, including our soon to be filed quarterly report on Form 10-Q and will be available on the Investors portion of our website at investors.solobrands.com. Now I'd like to turn the call over to John.

Thank you, Bruce, and thank you for joining the call today to discuss Solo Brands and our third quarter results. I will begin with a review of our third quarter performance and then talk more about our vision and strategy. Somer will then review the financials in more detail and provide our outlook. I am pleased with our third quarter results, which came in ahead of our expectations. We delivered sales of $110 million, an increase of 8% over last year and adjusted EBITDA margins have increased 250 basis points to roughly 14%. Our results were driven by strong sales through our wholesale channel as our brand momentum continues to grow. While we know that consumer wallets are stretched, we are well positioned to navigate an uncertain consumer environment, given the resilience and strength of our financial model. Solo Brands generates healthy EBITDA margins, has low financial leverage, a balanced omnichannel sales approach and is capital-light leading to strong free cash flow. We are proud to report on the momentum that Solo Brands is gaining with our wholesale partners. For the quarter, our Wholesale revenues increased 114% compared to last year due to strong sell-in with new and existing partners matched with strong sell-through's. Our sell-through's have been solid because of the unique value that our brands offer to wholesalers, fueled by our marketing efforts, which help us connect directly with many new customers that are experiencing our brands for the first time. We attribute the success of our wholesale strategy to this. Our customers appreciate and value often, the same consumer who is shopping online today may find themselves in a jam tomorrow as they prepare for a birthday party or a wedding. We have heard feedback from customers who are thrilled to be able to drive to a…

Thanks, John, and good morning, everyone. Today, I will walk you through our third quarter results and then provide our outlook for the remainder of 2023. We are pleased with our results for the third quarter, delivering year-over-year growth on both the top and bottom line. Our sales growth was driven by strong sales in our Wholesale channel. Our focus on generating profitable growth enabled us to deliver $15 million in EBITDA, a 33% increase over the prior year. Net sales increased 8% to $110.3 million compared to $102.2 million in the prior year period. Sales were driven by strong demand in the wholesale channel, which were partially offset by softer trends in our direct-to-consumer business. Wholesale net sales increased 114.3% to $34 million for the third quarter compared to $15.9 million in the prior year, driven by continued expansion of our wholesale network as well as increased shelf space within our existing partners. We did experience some benefit in the quarter due to the timing of shipments as we shipped some wholesale orders early in preparation for the holidays. In addition, better partnerships with our retailers has led to a more normal seasonal sell-in cycle, which also impacted the timing of shipments compared to our more replenishment at-once orders that the company experienced last year. Our direct-to-consumer net sales decreased 11.6% to $76.3 million for the third quarter compared to $86.3 million in the same period in the prior year, driven by product mix combined with reduced digital marketing spend. Moving to gross margin. Gross margin decreased to 61.9% compared to 63.3% in the third quarter of 2022. Our margin rate was impacted by higher wholesale channel mix compared to a year ago, slightly offset by lower inbound freight expense, although our wholesale channel carries a lower gross margin…

[Operator Instructions] Our first question today comes from Peter Keith from Piper Sandler. Please go ahead. Your line is now open.

This is Peter. Good morning, everyone. Thanks for taking my questions. Well, first of all congratulate on the wholesale revenue, which looks great. But I wanted to just pivot, of course, to where the revenue is negative on the DTC side. And seems like it's kind of trending in line with how you were talking about it last quarter, kind of in that down low double-digit range, and you pulled back on some of the marketing. But what's really the outlook? And when could we think about DTC starting to pivot to seeing some year-on-year sales growth?

Thanks, Peter. Good morning, everyone. That's something that we're very focused on. We talked about at the beginning of this year, as we leaned into wholesale, we expected pressure on direct-to-consumer. That has played out very much as we anticipated. And what we talked about, which I'll reiterate is, I think as we roll into Q2 next year, and we get through -- really to our next high season after we've anniversaried this lean into wholesale strategy. That's when we're expecting for the tailwinds of the brand exposure that wholesale bringing to us to play out in direct-to-consumer. So we're still seeing an increase year-on-year, year-to-date on order counts online. So Stove is seeing an increase in order counts. We are driving customers back to our site. It's just a matter of getting those customers into that life cycle of the rest of the product categories that Solo Stove has to offer. So we do see that playing out. I think it's the middle of next year and then through the back half of next year that we start seeing that on the DTC front.

Okay. That sounds good. And then John, you've made some public comments around the EBITDA margin approaching 20% by the end of next year. I mean I guess as you stand here today, does that still seem like a reasonable goal? And maybe you or Somer could just help us understand the drivers of the EBITDA margin expansion?

Yes, I'll kick in and then -- kick off and then have Somer later on if I miss anything. I think if we were to just continue to operate the business as is, independent of leaning into additional investments, we do see a line of sight to 20% EBITDA margin. I will say that lately, we started seeing opportunities to lean in and make additional investments. As we think about those, and we're thinking about, obviously, we're in heavy '24 planning right now. We think that there may be opportunities in places we want to invest, which may impact getting to 20% next year, but it's all going to depend on whether or not we decide to lean into those investments and how soon.

Okay. Thank you very much.

Thank you. The next question comes from Chasen Bender from Citi. Please go ahead. Your line is now open.

Morning. Thanks for taking the question. John, I was hoping to start on the comment about Target. If you could just expand on the expansion there, specifically, is that just TerraFlame -- or is that other brands as well? And then maybe just kind of comment on how many stores you're going in? And is there any load-in expected in the fourth Q?

Great, Chasen. Thanks. So the target expansion -- so we've announced prior that TerraFlame already had a relationship with Target. That does continue, what we're leaning into here and announcing is actually Solo Stove now launching relationship with Target. So we now will have Solo Stove product as of this quarter, going into roughly 2,000 Target stores for Black Friday, through Cyber Monday type promotion. We're super excited about that. There is -- again, it's in our guidance and already kind of baked in, but something we've been planning on and excited to roll out this quarter. So you will see that product on the shelves the week of Thanksgiving, we're really excited about that.

Got it. And then just more high level. Obviously, you alluded to the fact that the customers continue to come back to your own website after having purchased product retail. But I guess more kind of fundamentally as you continue to expand at retail, both new retailers and door space, expect that you'll begin to sell a broader range of the product portfolio, including accessories, at retailer? Or will there always be some product you could hold back to be able to move customers from retail back to your own DTC channel and kind of retain that direct-to-customer relationship?

Yes. I think that that's right. The way you just stated that, I think it's the right way to think about it. In part, it's strategic on our part, but truthfully, there's limited shelf space in physical stores. At the end of the day, retailers are looking to carry products that have highest sell-through that are going to help them move volume as well through their stores. So, the reality is that we have found a strategy that's working really well for retailers. It's getting popular SKUs on their shelves that are moving. And then it's leaving some space for customers to come back to our site and to continue to participate with us. So every retailer is a little bit different. The strategy doesn't look exactly the same across every retailer, and they all carry different lines. But on an overarching basis, what you said is accurate that we believe that there will always be rumor and may be careful with the word always. But generally, we're believing that there will be room for some products to be available only on solostove.com or in large part on solostove.com. And that's the retail partners are carrying -- your kind of baseline products that are driving the majority of customers into brand for the first time.

Got it. Appreciate the color. I’ll pass it on.

Thank you. The next question comes from Phillip Blee from William Blair. Please go ahead, Phillip. Your line is now open.

Good morning. This is Sabrina on for Phillip. Thanks for taking my question. could you provide further color on the upcoming marketing initiatives in the fourth quarter and the puts and takes there? Any efficiency on the lower DTC mix?

Yes, for sure. And just as a reminder, Q4 tends to be the highest DTC mix. So we'll see how it plays out. Obviously, a lot of the quarter is still in front of us and the most important part of the quarter, generally Q4 is where we see the highest direct-to-consumer mix in that channel mix between wholesale and direct-to-consumer. In terms of the marketing initiatives, you may have seen, we actually did a press release. So we have three particularly significant marketing campaigns, two of which we have not released color on yet. One of them is coming up, which is the Macy's Day Parade and overall Macy's Day promotion that we're running. So we're super excited about that, coming in right ahead of our biggest selling day of the year, Black Friday. But here in the next week, you're going to hear and see something significant from us on the marketing front that we're excited about. Again, we haven't launched that yet. And then the following couple of weeks after that, again, another marketing campaign that we're pretty excited about. So we've been saying all year, the back half of the year, particularly Q4 was where you were going to see us taking some of the EBITDA preservation that we had. The discipline that we had exhibited throughout the beginning of the year, the first three quarters, and we were going to lean into investments in Q4 and that is playing out. We've actually gotten our hands on even some the marketing initiatives that we were not initially anticipating, which is allowing us to lean in maybe even a little bit more than we were. So we're very excited about the quarter. We've been in this position before and you guys have heard this that have been following us for the last several years. And this is not an uncommon thing. At the beginning of November, we wish that we can -- we could give pure line of sight to the quarter based on what we've seen, but so much of the quarter is still out in front of us. And those last five weeks of the year are so critical for this quarter for us.

Thank you. That's helpful. And then following up to that, could you provide some color on what your team has been doing to ignite more crossover demand between the portfolio brands?

Yes. We announced last quarter that we were going to be doing inserts in every package across the different brands cross marketing. We have seen slight lift across the brands, not as significant as we had hoped, but we're continuing to introduce the brands to the different cohorts of customers within the individual brands. So that's an ongoing initiative. We'll continue to execute on. Again, it's having slight positive impact, but nothing meaningful enough to really report on.

Got it. Thanks. That’s helpful.

[Operator Instructions] Our next question comes from Ryan Sigdahl from Craig-Hallum Capital Group. Please go ahead, Ryan. Your line is now open.

Good morning. Congrats on all the positive business updates. I want to start with Target. So is this a trial? Or is this an ongoing relationship where you're going to continue to have permanent shelf space beyond the holiday selling season, I guess, dependent on performance, obviously. But is this a trial or permanent?

Yes, it's a bit of a hybrid. You kind of nailed it, right? I mean they are anxious to lean into the relationship. They're excited for what we can do with them going into next year. Obviously, all eyes right now are on this first campaign. And the success of this Q4 campaign that we're running with in is going to be a critical driver to how we think about and look at the 2024 relationship. So it's not being called a test or a trial, but any new relationship is always in test or trial from our perspective. So we're focused on execution right now and excited to see that play out.

And then are you able to share which Solo Stove product you'll be selling or which products you'll be selling? And then 2,000 stores appears to be all their U.S. stores. Is that correct?

I don't know if I can say all of their stores. That was just the number that I heard. So I'll just stick with the 2,000 stores. That's what I'm familiar with. I'm pretty sure it's domestic only, but I'm not 100% sure on that. The product is -- I won't speak to -- it is a Target exclusive. So it's something we're excited about. It is the Mesa product, but it's something unique for Target, that's only going to be found in the Target stores. So you'll have to go check it out on Black Friday to see what it looks like.

Good. Then one question for Somer. Just can you update us on the free cash flow expectations, puts, takes in the quarter, how do you think about the year? And then do you still expect to pay off the revolver debt by year-end?

Yes. Thanks for the question. So as we move into the fourth quarter, the fourth quarter is obviously where we generate a lot of cash. It's our biggest quarter. So we typically going in, we are going to lean into marketing spend. So I'd tell you from what we've guided kind of earlier over EBITDA, it's probably going to be slightly less than EBITDA that would come in from a free cash flow perspective. But still a very healthy cash flow generation. And our expectation is to pay down the revolver or the majority of the revolver by the end of the year. Again, we're seeing the opportunity to lean into marketing spend, and we're going to take advantage of that. But we also -- we expect to pay down the majority of the revolver by the end of the year, if not early in the first year -- or first of 2024.

Great, thanks. Good luck, guys.

[Operator Instructions] Our next question comes from Brian McNamara from Canaccord Genuity. Please go ahead. Your line is now open.

Good morning, guys. Thanks for taking the questions. Somer, we enjoyed working with you, best of luck in your new endeavors. First off, could you provide or give us an idea how much in wholesale sales were pulled forward to Q3 -- to Q3 from Q4, whether qualitatively or quantitatively, if you can?

Sure. We believe roughly $6 million was pulled forward. And on our last call, I mentioned that I thought the timing between Q3 -- tail end of Q3, early Q4, which going to be dependent on when some of the wholesalers are going to want to receive their holiday product. As you can imagine, with the sales starting earlier, we ended up shipping out more products than we expected at the end of Q3 and it was roughly $6 million.

Got it. And then is that -- is the strength driven by more replenishment or more kind of starting out relationships for a better term in terms of your recent wholesale strength?

Sorry, could you say that again, Brian? I missed that.

Yes. So your wholesale -- your recent wholesale strength, is that driven more from replenishment or more from potentially starting new relationships are gaining new shelf space with your current partners?

It's a pretty healthy combination. I mean obviously, this Target kickoff is a meaningful one, but if I had to lean one towards another, I'd say that it's more shelf space, it's bigger relationships with existing partners. We do have, obviously, the Target relationship kicking off. But as we look at the rest of our wholesale partners, it's definitely been them leaning in and either giving us more prominent real estate in the store and more robust displays or just giving us increased shelf space or carrying additional SKUs.

And then just one quick last one. Can you provide a bit more color specifically on your digital marketing strategy for Q4? You say what appears to be a good bit of dry powder year-to-date. Will you lean into digital marketing more in Q4? Or will it continue to be based on the perceived efficacy, less spend even if you kind of potentially sacrifice sales? Thanks.

Yes. Listen, it's always been driven to an extent by the efficacy of those spends, right? If it's not pulling through, we're not just going to spend to spend. We don't approach digital marketing that way at all. So we're going to continue to be disciplined. However, we have preserved EBITDA throughout the year for this quarter. It's a tough consumer environment out there. Today, year-to-date, we're roughly 25% down in digital marketing spend on a year-to-year basis. And this is the quarter where we want to make up a lot of that ground. This is the time where consumers are especially at the spend. And we obviously have a lot of fun initiatives and new products that we're launching in conjunction with the quarter. So we're going to lean in. We're going to continue to watch marketing efficiency. We're not going to spend just the spend, but we are going to lean in and take advantage of this opportunity. We've been prepared for it all year. So that -- I think you're thinking about it the right way, but we're going to lean in.

Great, best of luck guys.

Thanks.

Thank you. That does conclude our Q&A session for today. So I'll hand back over to John for any closing remarks.

Yes. I really appreciate everybody jumping on today. Thanks for the thoughtful questions. We're looking forward to going out and executing this quarter, and obviously, we'll be back in touch when the quarter ends and excited to report on the results of these marketing initiatives and to lean into digital marketing spend. So have a great rest of the quarter, guys, and we'll talk to you soon.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.