COOK - NYSE

Good afternoon. Thank you for attending the Traeger First Quarter Fiscal 2025 Earnings Conference Call. My name is Matt, and I'll be your moderator for today's call. [Operator Instructions] I'll now like to pass the conference over to our host, Nick Bacchus, with Traeger. Nick, please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its first quarter 2025 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, Treasury and Capital Markets 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 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 of future events, including but not limited to, statements regarding our mitigation efforts to offset the direct impact of tariffs, our implementation of strategic actions to stabilize MEATER sales and profitability, our expectations regarding the impact of our European product partnership with MEATER and the release of updates to our outlook as we better understand macroeconomic dynamics. 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, 2024, 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 net debt, which we believe are useful 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 and our investor presentation, which are available on the Investor Relations portion of our website at investors.traeger.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?

Thank you, Nick. Thank you for joining our first quarter earnings call. Today, I will be discussing our first quarter results, and we'll provide an update on our strategic priorities and our outlook for 2025. I'll then turn the call over to Dom to provide further details on the quarter's results. First quarter results were in line with our expectations. As we discussed on our fourth quarter earnings call, we expected a decline in first quarter sales and adjusted EBITDA. During the quarter, we delivered solid growth in our Grills business, which was offset by a decline in our accessories business, driven by softness in MEATER. This resulted in a 1% decline in revenues versus the first quarter of 2024. Adjusted EBITDA of $23 million was down slightly versus last year's $24 million, largely driven by a decline in MEATER and was in line with our expectations. Let me start by discussing the topic that is likely most front and center for everyone participating on this call, tariffs. The severity and rapidly evolving nature of trade policy, in addition to declining consumer sentiment are contributing to a highly uncertain macroeconomic backdrop. In the face of uncertainty, we are controlling what we can control and are focused on both navigating the near-term environment as well as making progress on our long-term initiatives. It's important to note that over the last several years, our team has faced a variety of macroeconomic shocks, including COVID, the post-pandemic grill industry normalization, the supply chain hyperinflation of late 2021 and 2022. We have proven our ability to navigate challenging environments over time. It is our highest priority to successfully navigate the current macroclimate. Let me provide some context on our exposure to the current tariff landscape as it stands today. The majority of our tariff exposure is tied to our Grill business. As we have disclosed previously, approximately 80% of our Grills were produced in China in fiscal 2024 with the balance of production in Vietnam. Based on current policy, our Grills are subject to a 25% Section 232 steel tariff. Additionally, drill source from China are subject to the 20% IEEPA tariff on all Chinese imports. On the accessories side, the majority of this product is sourced from Taiwan and thus is currently subject to a 10% reciprocal tariff. Finally, our consumables business is largely sourced domestically and, therefore, is not subject to tariffs. Given that we face a meaningful headwind due to tariffs, our team has been tirelessly working on mitigation strategies to offset the impact over the last several months. Many of these mitigation efforts are already actioned while some are still being worked through and others will be actioned as we get a better sense of consumer demand over the next several months. Overall, we believe we can offset a majority of the tariff impact via our mitigation initiatives with the largest unknown factor being consumer demand and behavior going forward. Our mitigation efforts center on several key areas. First, we are finding savings and reducing costs in our supply chain. This includes negotiations with our contract manufacturers and identifying cost opportunities and efficiencies across the supply chain. We are well positioned to drive savings here given our strong relationships with our manufacturing partners. We are also pursuing sourcing diversification. We are assessing plans to migrate production away from China to other geographies where we expect tariffs and overall cost will be lower. While it is too early to discuss any specific targets here, we are fully committed to shifting production away from China and are planning to materially reduce the portion of our production that occurs in China by 2026 while also leaning into the quality of our partners we currently have. Next, in collaboration with our retail partners, we have implemented strategic pricing increases. The analysis that went into a broad-based pricing increase was extensive, and decisions were made on a SKU-by-SKU basis, taking into consideration product features and competitive positioning. Stepping back, while we are always very mindful when adjusting price to the consumer, the incremental expense associated with tariffs require us to increase price. We believe the health of our brand, our premium positioning and the innovation we bring to the market will be assets to Traeger in an inflationary environment. We also believe that many of our outdoor cooking competitors have or will be raising price as many are also significantly exposed to tariffs. Our next mitigation strategy is cost reduction. We are aggressively managing our expense structure given the volatile environment. This includes strategically reducing certain nonessential expenses as well as materially reducing any new hiring activity. Given the broader environment and the uncertainties surrounding the impact of tariffs on the consumer, we believe that expense discipline is prudent, and we will continue to identify additional opportunities to gain efficiency as we move through 2025. This doesn't imply, however, that we are limiting investment into key strategic growth pillars. We will continue to allocate resources to nonnegotiable areas of priority including product development to ensure we are well positioned for growth as the macro environment normalizes. As you have seen in our first quarter earnings press release issued this afternoon, we have withdrawn our prior financial guidance, which did not include the impact of tariffs and are temporarily suspending forward guidance for fiscal 2025. Generally, we seek to provide as much transparency as possible and therefore, have provided financial guidance every quarter since going public in 2021. However, given the lack of visibility into the broader macroeconomic and consumer environment as well as rapidly evolving trade policy, we are not in a position to provide guidance. The exact outcome of policy is a moving target and with consumer sentiment near historic lows and prices set to increase in many product categories, accurately forecasting consumer demand is a challenge. We expect to have greater visibility into consumer demand as we get through our peak season at retail over the next few months. Moreover, we continue to assess an action mitigation efforts with certain of these efforts ongoing. On to first quarter results. In the first quarter, our Grills sales were up 13% versus prior year. From a consumer demand perspective, first quarter tends to be seasonally slower in the outdoor cooking industry. However, we watch sell-through closely to gauge demand as we head into seasonally larger months. We were pleased to see that consumer demand for our grills in the first quarter was positive to prior year. I would also like to note that sell-through of Grills remains healthy into the second quarter, which we view as a positive sign given the difficult macro backdrop. Conversion at retail continues to be aided by our boots on the ground initiatives. This includes our retail sales specialist program. Our team of RSSs were out in the channel in the first quarter, training associates at our retail partners, conducting product demos and helping to drive improvements to merchandising on the floor. Going into the peak-selling season, these activities will continue to accelerate, and we are planning to materially increase the number of selling events and product demos as compared to last year. We also continue to lean into our roadshow program at Costco where our brand ambassador set up product demonstrations in Costco warehouses to educate and sell grills to members on a consignment basis around the country. In Q1, we increased the number of road shows by nearly 50% as compared to prior year. We believe this not only benefits near-term sales, but also is a meaningful driver of brand awareness. Each brand ambassador talks to dozens of potential customers each day, raising awareness of the brand to new consumers. In fact, many of our consumers say the first time they heard about Traeger was in their local Costco in conversations with our brand ambassadors. The first quarter also benefited from the launch of Woodridge, our new wood pellet grill, which we released in January. As we discussed on our last call, this new line brings significant innovation to the market at a more attainable price point. Woodridge is a great example of our product innovation engine at work, and consumer reception has been strong, with demand outperforming our expectations. This is evidenced by the extremely high product reviews the Woodridge series gets from customers. The Woodridge series has an average rating of 4.8 stars looking at our DTC and several retailer websites. This is the highest rating for a product launch we've ever had. Additionally, on the topic of innovation. In early April, we announced the introduction of the Flatrock 2

Thanks, Jeremy, and good afternoon, everyone. Today, I will review our first quarter performance and our strategies to navigate the current dynamic macro environment. First quarter revenues declined 1% to $143 million. Grill revenues increased 13% to $87 million. Grills revenues benefited from sales of our new Woodridge series, positive sell-through at retail as well as some benefit from pacing of shipments out of the second quarter. Consumables revenues were $30 million, down 6% to the first quarter of last year. The decline was due to a reduction in both wood pellet and food consumables partially due to a timing shift and was generally in line with our expectations heading into the quarter. Accessories revenue decreased 27% to $26 million due to continued declines in the MEATER, offset by growth in Traeger branded accessories. It's important to note that while MEATER's core DTC business remained challenged in the first quarter, the year-over-year decline in our accessories category was affected by the lapping of a sales load-in related to a European product partnership with MEATER that benefited the first quarter of 2024. Moving forward, the impact from lapping this partnership will diminish over the balance of the fiscal year 2025. Geographically, North American revenues were up 6%, while Rest of World revenues were down 47%, with rest of world revenues pressured due to MEATER. Gross profit for the first quarter decreased to $59 million from $63 million in the first quarter of 2024. Gross margin was negatively impacted by; one, unfavorable mix shift in grills of 180 basis points; two, increased marketplace investment of 140 basis points; and three, unfavorability related to MEATER of 30 basis points. These negatives were offset by; one, lower warranty expense of 110 basis points; two, supply chain-related improvement of 50 basis points; and three, other benefits of 20 basis points. Sales and marketing expenses were $22.2 million, compared to $21.7 million in the first quarter of 2024. During the quarter, increased employee-related expense was partially offset by decreased demand creation costs. General and administrative expenses decreased to $25 million compared to $32 million in the first quarter of 2024. The decrease in G&A expense was driven by a reduction in stock-based compensation expense primarily related to the earned and vested performance shares in the prior period as well as lower legal costs. Net loss for the first quarter was $1 million compared to a net loss of $5 million in the first quarter of 2024. Net loss per diluted share was $0.01 compared to a loss of $0.04 in the first quarter of 2024. Adjusted net income for the quarter was $7 million or $0.05 per diluted share as compared to adjusted net income of $5 million or $0.04 per diluted share in the same period in 2024. Adjusted EBITDA was $23 million in the first quarter as compared to $24 million in the same period of 2024. Moving on to the balance sheet. At the end of the first quarter, cash and cash equivalents totaled $12 million compared to $15 million at the end of the previous fiscal year. We ended the quarter with $404 million of long-term debt. At the end of the quarter, the company had drawn down $25 million under its receivables financing agreement, resulting in total net debt of $416 million. From a liquidity perspective, we ended the first quarter with total liquidity of $168 million. Inventory at the end of the first quarter was $127 million, compared to $107 million at the end of the fourth quarter of 2024 and $100 million at the end of the first quarter of 2024. Moving on to tariffs. As Jeremy discussed, we have material exposure given our grills and accessories are imported from abroad. For example, a grill that is produced in China is currently subject to a 45% tariff comprised of a 20% IEEPA tariff in a 25% Section 232 tariff. Given our exposure, our organization has been focused on developing and actioning mitigation strategies to protect profitability and to promote balance sheet health. We believe that we can offset a majority of the impact with our mitigation efforts, and I'm confident in our team's ability to navigate the highly volatile environment. We will be extremely nimble in our approach to operating the business this year, and we'll be planning for a variety of outcomes. From a cost perspective, we have implemented measures to drive near-term savings, including a substantial reduction in hiring and the deferral of nonessential expenditures. We are continuing to assess incremental opportunities to reduce costs in fiscal 2025 and beyond. Given the tremendous economic uncertainty related to trade policy and the potential effects that tariffs could have on inflation and consumer sentiment, we are withdrawing our forward guidance for fiscal year 2025. We feel that there are too many unknowns currently to provide a guidance range that we feel confident in. This includes how consumer demand and sentiment change in the face of price increases, the exact outcome of trade policy and the timing and evaluation of our mitigation efforts, which we are continually assessing. As is always the case, but particularly in an uncertain economic environment like we are currently in, prioritizing balance sheet health is of utmost importance. Our tariff mitigation strategies will serve to enhance cash flow and those efforts will also extend to inventory management. We are planning inventory conservatively and have significantly reduced purchase orders until we have a better read on consumer demand and trade policy. Our inventory on hand is sufficient to serve as near-term demand. While we have a leveraged balance sheet, we believe that we have ample liquidity to navigate the current environment. For example, we are currently undrawn on our $125 million revolver and based on our current expectations, we do not anticipate using our revolver this year. Overall, while we are operating in a highly uncertain environment, our team has proven its ability to navigate challenging macro circumstances. With a robust set of mitigation strategies, we believe that we can offset a majority of the tariff headwind. Further, we will continue to assess cost savings opportunities and will take a highly nimble approach to operating the business with the overarching goal of preserving EBITDA, cash flow and balance sheet health. And with that, I'll turn the call over to the operator. Operator?

[Operator Instructions] First question is from the line of Philip Blee with William Blair. Your line is now open.

Hi, this is Sabrina [ph] on for Philip. Thanks for taking our question. Can you provide some color around some of the strategic price increases across your product portfolio and how we can -- how much we can expect this to increase? And then also given the importance of newness, how do you think about new product -- new price points going forward?

Yes, this is Jeremy. I'm happy to take that. So first of all, I would say that this environment, it is not a typical approach to pricing analysis just given that there will be prices going up around us in our category and other categories. To the extent that we were able to -- we were very sophisticated in really understanding elasticity at a product and a price level. And so it certainly wasn't an even price increase across the board. We try to understand where we thought elasticities would fall based on historical sell-through data. And I would say that as a premium brand that's bringing innovation to the market, we certainly thought about where we had permission to move price more -- on some SKUs more than others. We recognize that in opening price points, we're going to see more price sensitivity and we had the ability to go back and look at price increase data from just post pandemic as we saw supply chain -- inflation in the supply chain. So we had some data points there and so feeling good about the decisions we've made. We took price recently but it will take many weeks for the prices to be reset in the market. So we don't have an update there yet. We think it is very likely that competition will also be raising price right around the same time, so we have done our best to anticipate through the analysis that we could. It's a challenging environment given that everything is dynamic, but we have the ability to sort of test and make adjustments as we go. In terms of -- [Indiscernible] I'll just hit the second part in terms of product strategy. Our product strategy is set many years in advance. We are -- it can take as long as 36 months for a complicated product from concept to launch in the market in less complicated products, shorter but any durable. We really don't build our product road map with any intent to react to the environment that we're in. We're trying to create experiences. We invest in innovation. And as we said, in the Woodridge launch, really trying to bring that only innovation but value down to sort of lower mid-price points. So that's our intent. And then if we react to the market and we're opportunistic around pricing and promotion but the product strategy continues in good markets and in bad.

Got it. That's helpful, thank you. And then switching gears, you acquired MEATER back in mid-2021. It's been pressure in the past few quarters. Can you talk about how the team is thinking about that segment and capital allocation going forward?

Yes. I mean, definitely focused on our strategy around how we navigate some of the short-term pain we're feeling on the demand side with MEATER. We still have a point of view that's long term in nature, and the thesis really hasn't changed. I think what has changed is the amount of competition within direct to -- online channels that we believe isn't necessarily the long-term future for MEATER. We believe that the unlock really isn't how we drive road map through the wholesale channels where we have a competitive strength and where there's less competition. So we may see some continued pressure on top line as we navigate and sort of shift the mix from online sales, Amazon, DTC to wholesale accounts, again, where we have a competitive strength in addition to really thinking through how to unlock efficiency and optimize the cost structure really in an effort to centralize the operation and evaluate where there are profitability unlocks so that we can stabilize from a profitability standpoint, reset on how we think about long-term growth and then begin to fuel that engine long-term. So it is going to take on some short-term pain as we navigate some of the short-term realities that we're facing, especially from a competitive landscape standpoint online but believe that this brand has longevity and ultimately, some of the ankle-biter brands may or may not survive the moment because they operate on skinny margins. And one strategy certainly isn't a race to the bottom to try to compete. We believe this brand has long-term sustainable value that we want to protect and so we just really need to balance the short term with the long-term effort as we unlock long-term value with MEATER.

Got it. Thanks guys. I’ll pass the buck.

Thank you for your question. Next question is from the line of Anna Glaessgen with B. Riley. Your line is open.

Hey good afternoon guys. Thanks for taking my questions. I'd like to touch on the retail environment. Have you sensed or has there been a shift in retailer willingness to take on inventory in light of the current uncertainty?

Yes. So it's a good question. I wouldn't say that we have sensed a reluctance of retailers to take on inventory, there has been really a shift from -- in our largest retailers from direct import back to domestic fulfillment. And this is -- it's really a function of the tariff situation and how tariffs are assessed. And so I would say we have found sort of an interim solution to fulfill domestically as we sort of unpack the process of what we call direct import in the case with tariffs, it's defined as for sale where a retailer is able to import directly but pay a tariff at the cost -- at our cost of goods not at their wholesale price. So we're sort of working through it. This thing came so fast that we really chose to focus on having inventory in our retailers on time for the season and we will work -- we'll sort of manage this over time. I think we are one of many, many brands that are figuring out how do we import inventory in a cost-efficient way from a tariff perspective. But now we're not -- we're really not seeing in the consumer -- sorry, retailer behavior change. And we haven't seen consumer demand slowdown at this point.

Great, thanks. And then in the prepared remarks, you noted that inventory on hand is sufficient to serve near-term demand. Wondering if retail stays consistent with where it is today, if you could put a finer point on how long you would be able to fulfill that demand.

Well, I think that was in the context of pre-tariff inventory. I'd say that our inventory on hand may provide some relief in the short term before we start to see the true impact of tariffs take shape within our cost of sales. I think the broader point here is that our inventory position on balance sheet is healthy, say maybe some slightly heavier inventory on the MEATER side. But to piggyback on Jeremy's point, the broader conversation here is really around how we've strategically built our organization and the management of inventory, how we balance supply versus demand, how we partner with our retail -- with our retail partners is really all inputting into an iterative demand plan process that happens on a weekly basis. So that we can make adjustments according to demand signals, which also requires a feedback loop from our retail partners. And so I think the broader point here is that we react in kind to these signals and can adjust our inventory balance accordingly. And in addition to that, I think what we're currently doing is sort of risk adjusting as well based on an unknown future, and we started to pull back on POs from Asia just to ensure that we're not over inventory and create a destocking issue down the road in the event that we sort of missed forecast. And so I'd say that the theme here is prudence and reducing purchase orders will allow us to sort of navigate the short term before we get better signals through our peak selling season, which we then can turn back on to the extent that we start to see either stabilizing sell-through that's meeting or exceeding plan or if it's missing our expectations heading into peak season, we've already sort of course corrected on the amount of inventory that we're bringing in. And that, I think, just wraps around your point, which is the inventory we have on hand allows us to pull back on POs and then react in kind as we measure these demand signals through the -- over the course of Q2.

Great. I’ll step back.

Thank you for your question. Next question is from the line of Peter Benedict with Baird. Your line is now open.

Hi guys, thanks for taking the question. I'm going to go tariffs. There's a lot we don't know but there is a lot we do know. And one, that was helpful that you gave us some perspective on the rate that you're paying, I'm still a little confused. So a product coming in from China, a grill coming in from China gets 45% in total, and that includes Section 232. Is that the way to think about it?

That is correct. And stepping back more broadly, 232 is -- it's assessed on all non-U.S. steel products. It's 25% and it supersedes other tariffs. So 232 is not stacked on top of other tariffs. Except in the case of China, the IEEPA tariffs are stacked on top, the 10% tariff. So it's 45% out of China, 25% out of Vietnam. And then, of course, accessories have various tariffs depending upon where they're coming from.

And obviously, the second layer to that is that doesn't sorry, just -- I mean, I think we spoke to this as well, just obviously adjusting for the mix between Vietnam and China is an important component as you sort of -- as you calculate the potential impact as well as the fact that grills were 54-ish percent of revenue. So making those adjustments is also important, right, to kind of derive an unmitigated exposure here. And then obviously, we have layered on the fact that we have mitigants to offset that.

Yes, absolutely. So a Vietnam grill would be 25% plus the 10% that's everywhere, so 35%. That's the way to think about that in Taiwan, the MEATER stuff probably comes in at...

China is 45%.

So Vietnam is 25%. And the difference -- so the difference is that the reciprocal tariff is not assessed on top of the 232 steel tariff.

Understood. Understood.

Yes, the alternative stack is in China, it's the 2 IEEPA tariffs of 10 and 10. So it's 45% there, 25% on grills outside of China.

Awesome. Very good to know. And then maybe there was no mention of kind of the Walmart pellet rollout. I was curious kind of maybe how that's been going? And then how do you assess if there's any of this demand strength that you've seen of late is kind of pull forward. I mean, a lot of companies we talk to are seeing good trends here in April or saw good trends in April on bigger ticket items. I mean, is there any measure of like, hey, this is what normally would sell through at this time of the year? Was it well above that? Just any perspective you could share on that, Jeremy, that would be great. Thank you.

Yes. So Walmart rolled out late December through January. It's probably -- it was January, early mid-January. And I would say we're excited about partnership. We're selling pellets and rubs in Walmart. And it was really an answer to consumer research that we did that demonstrated there is a Traeger consumer shopping in Walmart, and they wanted to buy their pellets when they grocery shop. And so it was part of our grocery strategy. And I would say we're excited about the partnership, and it's meeting our expectations. In terms of the trends on grills, I mean, boy, it's so hard to know the shoulder season is always volatile, and it tends to be more driven by weather, especially in sort of the months of March and April. And so I would say the trend has been solid. I don't know that there's any way to sort of unpack how much of that is just consumer demand. And we also -- we sort of believe that the further removes we get from the pandemic, the more we'll see a normalization of the replacement cycle, so there could be some of that in there. And there -- we certainly see the broader trend, at least the headlines that brands believe that there is some pull forward just as a result of Americans trying to buy products before prices go up. So we're really hard to unpack, boy, I'll let you know in the quarter.

Fair enough. I appreciate it. Thanks for the color.

Thank you for your question. Next question is from the line of Brian McNamara with Canaccord Genuity. Your line is open.

Hi, good afternoon guys. Thanks for taking the question. Just a clarification on China, that's a great question to follow up on. So China is just 45% in terms of tariffs and the 125% reciprocal does not impact you?

It impacts us a little bit. So let's sort of separate grills and accessories. The grills get hit by the 232 tariff. And so out of China, that means we get two 10% IEEPA tariffs or 20%, and then we get 25% on the grills. Accessories are subject to all of -- to the other tariffs. And so in the case of a cover, for example, sourced out of China. That would have a 145% tariff on it. And so it's -- I'd love to say that there's nuance and it's not quite as simple as I could define, but generally speaking, our accessories, the majority of our accessories have a 10% tariff in part because the majority are sourced outside of China. And so they're subject to a currently the 10% reciprocal tariff. And so the other accessories are sort of -- they bounce around between 10% and 145%. And of course, you can imagine that in an effort to not pay 145% tariffs. We are moving those. Our highest priority is to look at the accessories that drive the most volume and attached to grills that are subject to 145% out of China. And that's just generally our strategy. I mean, we are -- fortunately, the last couple of years, we have been working on developing partnerships outside of China, and we have made progress, and we are definitely accelerating that progress right now.

So can you give us an idea of how much of your COGS are exposed tariffs? I know some folks are just slapping the tariff rate on your total COGS, and I don't think that's obviously not the way to look at it but is there other costs in your cost of goods sold. Can you give us a decent idea there, if possible?

Yes. I mean, we can't -- I don't know that we're in a position to break down the composition of COGS. Safe to say that certainly, product cost is a majority of our COGS. But again, you have to recognize and maybe a proxy for this is just how kind of accessory -- our categories from a revenue standpoint breakdown. When you think about the fact that consumables are all manufactured in the U.S., 80% of our grills are manufactured in China, 20% are in Vietnam. Nick, we talked about the component that is non-China for accessories, right? Can we share that number percentage?

Yes.

So 75% of accessories are manufactured non-China. And then as you sort of extend your math from there, you'd have to make some assumptions around what percentage of COGS is driven by the product and then you can use similar breakdowns to sort of define each one of those buckets, but most definitely, our product cost drives the lion's share of our COGS.

Got it. And then last one for me. Are all of your grills, like all your SKUs produced in both China and Vietnam? Or are there certain SKUs produced in one country or not the other?

It's a good question. We don't have redundant sourcing for all of our SKUs outside of China. I would say for our highest-volume SKUs, we do have redundant sourcing outside of China, and we're focused on building more capacity for those. And where we don't have redundancy out of China, we are laser focused -- at least where there's adequate volume, we're laser-focused on taking those outside of China. We've got multiple suppliers in Vietnam at some phase in sort of development through mass production and they're also -- we've got supplier options outside of China and Vietnam but within Southeast Asia that we are working on.

Thanks a lot guys.

Thank you for your question. Next question is from the line of Simeon Siegel with BMO Capital. Your line is now open.

Hi, this is Dan [ph] on for Simeon. Understandably, you're not providing guidance, but I did want to see if there's anything high level you could speak to in terms of gross margin, maybe ex tariffs, the things we should be aware of in terms of mix shifts or planned promo days? And then on the cost reduction plan, is that all bucketed in SG&A or are there pieces and cuts as well? Thanks.

So to the first question, yes, we just -- we can't really provide any color. We suspended guidance. I think we'll leave it at that. I mean that's just where we are and hopefully, we can provide some updates at a later point. But on your second question, cost reductions, a majority of the cost reductions that we're focused on are around controllable which really is in SG&A, there may be things within -- in cost of sales that we can evaluate but those are likely medium to longer term in nature. When you think about supply chain mitigants, really were focused on tariff sharing with sourcing partners, first sale sourcing diversification. Again, these aren't things that happen as quickly as levers we can pull within SG&A controllables, but we do believe that we have ample room to make adjustments as needed as we build our plan to sort of navigate the future, and there's things that we know today and there may be things that we'll learn tomorrow that will inform an evolving plan. But we do feel that there are ample sort of controllables in place to really support and help navigate the tariff situation in addition to the pricing levers, which we've pulled as well as, as I had mentioned, some of the supply chain/COGS levers that are in works.

Got it, thanks. Maybe just one on marketing. Anything you could share in terms of how you're approaching that this year, even if it's qualitatively, if it's top of funnel or more targeted and then also in light of 1Q demand creation being down? Thanks guys.

Well, I'd say, first off, we came into this year really leading into sales activation activities. So we've talked about investment in retail at the point of sale in visual assortment, education with retail associates cooking demos, we've meaningfully increased the number of Costco roadshows that we do. And that really -- the intent behind the roadshow program is to educate consumers, some of whom will convert in Costco but many of whom will learn about the brand there and purchase elsewhere. And so we continue to lean into the sales activation activities. I would say that we continue to make baseline investments in brand marketing in our community top-of-funnel marketing is a lower priority right now in this uncertain environment. There's no question that we are being like very diligent as we think about OpEx. And so we are monitoring return on activities very carefully, and we're pulling back where we can't see a very clear return in period. We are not spending that money, but I would say a lot less top of funnel and certainly less than we had expected, just given the environment and more focus on in-store retail activation.

In terms of marketing spend for the quarter being down?

Yes, I think it's really connected to Jeremy's comment, which is ensuring that we're prioritizing high returning, more immediate marketing initiatives leaning into kind of the fixed infrastructure that we have in place. I mean, one of the beauties of this brand is just our ability to leverage an influencer to build and continue to protect and kind of grow brand awareness, etcetera. I think that's a lower cost avenue that allows us to hit some top of funnel. And then just a shift to middle lower funnel continues to be a priority. I would note that in the gross margin walk that we shared in my remarks, we talked about some marketplace investments. So there has been a shift as well, and it's really geography-based where we have some programs promotional wise as well as a program with ACE that we're funding, but those dollars came through COGS that will be a component of our marketing strategy in Q2.

Appreciate the color. Thanks a lot guys.