Good day, ladies and gentlemen, and welcome to the Grove Collaborative 2Q 2022 Earnings Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Alexis Tessier. Ma'am, the floor is yours..

Hello, and thank you all for joining us today. With me on today's call are Grove’s, Co-Founder and CEO, Stuart Landesberg; and CFO, Sergio Cervantes. Before we get started, I'll quickly cover the forward-looking Safe Harbor.

Some of the statements that we make today are about our future prospects, financial results, business strategies, industry trends and our ability to successfully respond to business risks may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause our actual results to differ materially.

All of these statements are based on our view of the world and our business as we see it today. As described in our SEC filings, the underlying facts and assumptions for these statements can change as the world and our business changes.

For more information, please refer to the risk factors discussed in our most recent filings with the SEC, which are available on our Investor Relations website at investors.grove.co. During today's call, we 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 our earnings release and supplemental earnings presentation, which are also available on our Investor Relations website. With that, I'll turn it over to Stuart..

one, improved marketing efficiency; two, omnichannel expansion; three, net revenue management; and four, OpEx discipline. I'll touch on each, starting with marketing. Like many businesses similar to ours, we grew up on paid social. And like many others, we've seen material and persistent cost inflation in this channel.

We have successfully diversified our advertising spend, so the paid social is now only approximately 20% of our mix. We've done that by expanding to a full funnel approach to marketing that leverages our omnichannel presence and are further developing tools to drive unpaid traffic.

Beyond this, we have made significant progress on upgrading our marketing stack, which has historically been fairly unsophisticated for the scale of our digital business. This year, we will finish the marketing technology implementation, which will materially improve our ability to segment and target on an individual basis.

We expect this upgrade to begin having an impact on customer engagement in the third and fourth quarters and even more so next year. In addition, we continue to work hard to make it easier for customers to try and to repurchase from growth.

We're doing so, by lowering the barriers and improving the customer experience on our direct-to-consumer platform. This includes creating more non-subscription ways to shop growth, which we believe will lower tax, increase order conversion and drive higher retention.

Lastly, and perhaps most importantly, we're continuing to focus on building our awareness. We launched an exceptional partnership with Drew Barrymore in May, who joined Grove both as an Investor and as our Sustainability and Brand Advocate.

Together, we launched Grove's first multi-channel brand campaign, Wish-cycling, which focuses on debunking the myth that recycling is the solution to the plastic prices. Since announcing the partnership in May, we have secured media coverage and social posts, garnering hundreds of millions of impressions and engagements today.

Switching now to number two, omni-channel expansion. As I mentioned earlier, we are only a little over a year into our strategy of driving omni-channel expansion and our results at Target are helping us build momentum in this channel. We were the number one launch in hand edition cleaners in 2021.

According to May, Nielsen data, we also achieved top 10 brand status to Target in hand and dish, including all conventional and national brands within our first year. Last month, we announced that we more than doubled our product assortment in Target stores and on target.com with their shelf reset in April.

We did this to include a broader selection of sense, room spray concentrates, laundry detergents and reusable dish wash. An incredible endorsement of our products and our brand's ability to bring in new customers. In fact, 30% of growth co-shoppers at Target were new to the category, as shown by numerator data.

In addition, we added more than 700 doors in the second quarter across three new retailers, Kohl’s, Giant Eagle and Meijer, as previously announced. While still too early to comment on performance, all of the stores had end caps and beautiful merchandising.

We continue to have discussions with additional retail partners and expect to grow our post distribution in 2022 by just over 300% year-over-year, with opportunity for upside. There is a 250,000 door addressable market in the US, and we have about 400 SKUs we can take to retail distribution. This opportunity is enormous.

In addition to physical retail, Grove is making strong but early progress on Amazon, where Flywheel is beginning to accelerate off a small base. Peach Not Plastic, our zero plastic bar-format personal care brand, is seeing strength on Amazon with consumers loving the brand's shampoo, conditioner and body wash.

While still quite small, we've doubled the business in the last six months and are excited to continue to expand our offering and learnings at Amazon. Omni-channel growth is significantly more capital efficient than DTC growth, and we believe the balance of the two, will allow us to drive durable top line growth with material bottom line extension.

The third element of our value creation plan is systemic net revenue management processes, which are embedded in all functions across all categories. We see material upside to capture here from initiatives, including strategic pricing, maximizing the category mix and enhancing promotional sell-through.

Many of these initiatives are already underway, and we look forward to updating you on our progress on future earnings calls. Lastly, we are working to right-size our operating expenses to achieve sustainable and profitable growth.

On top of the 17% reduction in force that we implemented at the end of the first quarter, we see opportunities to operate more efficiently across the board while reallocating resources to the highest ROI initiatives.

We have a full vendor audit underway and are evaluating ways to reduce fixed expenses like real estate and have significantly reduced hiring plans for the balance of 2022 and 2023. While we are proud of the progress we are making.

We have so much more to do, and we will continue to focus on executing against our shareholder value creation plan, while advancing our goal of becoming 100% plastic free by 2025. We have a clear vision of the growth that emerges on the other side though, having successfully executed against this value creation plan.

It is a disruptive high-margin brand in a massive TAM with market leadership and differentiation around long-term sustainability trends.

We will still have enormous white space for omnichannel distribution expansion that will allow us to grow at multiple times as the industry average and we will continue to have strong gross margins, helping to drive EBITDA profitability inside the forecast period and our value creation plan puts the element of this success in our own hands to the fullest extent possible.

We are hungry to continue our execution here every day. Overall, the success of our mission and shareholder value creation at Grove are highly aligned. We are confident and we are driven to continue to drive progress on both fronts.

Before I turn the call over to Sergio to take you through our financial results and outlook in more detail, I want to end by saying how excited I am to have him on the team. Sergio joined in April, our CFO, brings significant financial executive experience in global consumer products, including 18 years with Unilever and four at Gillette.

At Unilever, he was most recently the CFO of Murad for six years, where he successfully implemented operational and financial efficiencies that drove both sales growth and profit impact. He is a huge asset to Grove and is already making an impact. Take it away, Sergio..

Thank you, Stuart. I can’t believe that it has only been four months that I enjoy the different company on its critical important mission. What stand up for me is that, I am surrounded by truly incredible people that share a common goal of creating solutions to the problems for our health and for our planet, cut the plastic consumption globally.

Before I get into our results for the second quarter, I want to take a moment to layout some of the key drivers of the business. In the coming years, we expect to drive revenue by growing our omnichannel presence.

Historically, we have grown revenue from $105 million in 2018 to over $300 million expected this year, predominantly by driving orders on our DTC platform from both new customers and existing customers, as well as through higher average order value.

New customers' orders are primarily a function of how much we are spending on advertising, while customer retention is key for driving existing customer orders. Our order value has risen as we have expanded our product offering and we have seen a mix shift into higher value categories overtime from home care to personal care to beauty.

As we continue our push into omnichannel distribution and brick and mortar retail becomes a larger part of our business, we expect the retail metrics such as door count, points of distribution and velocities to name a few to become a more prominent part of our business performance metrics.

On the gross margin front, we have driven material expansion from 35% in 2018 to 49% last year by increasing our assortment of Grove branded products, which carry a higher gross margin of third-party products, as well as by the shift into higher market categories I just mentioned.

Gross margin is also impacted by the discount rate, which is higher from new customers than for existing customers, as you would imagine. Hopefully, that gives you a sense of how we think about drivers of the business. And now on to the results. Second quarter net revenue was $79.3 million down 20% year-over-year and 12% from the first quarter of 2022.

Both comparisons are negatively impacted by the strategic reduction in advertising spend to acquire new customers as the company focuses on profitability. In addition, the year-over-year decline was negatively impacted by consumers returning to pre-pandemic shopping patterns.

Similarly, total orders and active customers were also impacted by lapping elevated pandemic shopping in our categories last year, coupled with the strategic reduction in advertising spend. Total orders were down 22% year-over-year and 16% quarter-over-quarter, to $1.3 million.

And active customers were down 10% year-over-year, and 5% quarter-over-quarter, to $1.56 million on a trailing 12-month basis. As we discussed earlier, we have taken steps to reduce inefficient average pricing spend and refocus on profitable growth.

Accordingly, we expect to continue to see declines in net revenue, driven by decreases in total orders and active customers, through the balance of the year before stabilizing in 2023 and returning to growth in 2024.

On the flip side, we saw continued positive trends in DTC net revenue per quarter, which was up 3% year-over-year and 6% quarter-over-quarter to 58.3%, driven by continuous strength in existing customer average order value, and increased VIP membership revenue per order.

Gross margin was down 40 basis points year-over-year and up 190 basis points quarter-over-quarter to 49.1%.

The year-over-year decline was driven by increased discounts due to a less favorable environment as the pandemic subside, and an increase in inbound freight costs, partially offset by strong third-party product margins on seasonal SVU performance.

The sequential improvement in gross margin rate reflected lower discounts in line with seasonal patterns of the business. Grove brand as a percentage of net revenue continued its long-term trend, increasing 30 basis points year-over-year to 48.2% in that was down 350 basis points quarter-over-quarter on normal seasonal.

Advertising expenses fell 21% year-over-year, and 45% quarter-over-quarter to $17.9 million, reflecting our decision to reduce our advertising spend and focus on improving marketing efficiencies, as we strive to balance spending to support the increasing brand awareness, optimizing customer acquisition and retention, and driving revenues, with our EBITDA objectives long term.

Part of the sequential decline also reflects normal seasonality of the business, as January tends to be the largest spend month. SG&A expenses was up 23% year-over-year, and 14% quarter-over-quarter to $57.9 million.

The year-over-year increase was predominantly driven by $14.6 million increase in stock-based compensation, due to catch-up of expenses for the company's of retail stock units and certain stock options as a result of meeting the performance vesting condition, when the company went public, partially offset by a decrease in fulfillment costs and lower order volume.

Excluding LBT, SG&A expense in the quarter would have been $39.8 million or 8% less than the same period last year and 15% less than the first quarter of 2022.

The quarter-over-quarter decline was predominantly driven by the reduction in force in March and a decrease in other marketing expenses, partially offset by costs associated with being a public company and other professional fees.

As a percentage of net revenue, SG&A expense would have been 50% compared to 44% in the first quarter last year and 52% in the first quarter of 2022.

Our adjusted EBITDA loss was $21.1 million, essentially in line with the $21 million loss in the second quarter of last year and significantly smaller than the $39.7 million loss in the first quarter, despite lower sales.

Our adjusted EBITDA margin improved by 1,730 basis points quarter-over-quarter to minus 26.6% but fell by 540 basis points year-over-year, primarily due to increased SG&A as a percentage of net revenue, higher outbound shipping costs from price increases and surcharges and the slightly lower gross market rate.

The improvement compared to the first quarter of 2022 was driven primarily by the reduction in advertising. Net loss in the quarter was $35.3 million, compared to a loss of $28.5 million in the second quarter last year and a loss of $47.4 million in the first quarter of 2022. Turning now to the balance sheet.

We finished the quarter with an inventory balance of $53.5 million, which was down $1 million from the year-end balance in 2021 and down $2.7 million from the end of June 2021. The Inventory continues to be an area of focus with a goal of managing it down by the end of the year.

We ended the quarter with $132 million in cash and equivalents, as well as an additional $12 million capacity available under our debt facilities. This cash number reflects the capital raise in conjunction with our business combination. On June 16, 2022, we completed our business combination with Virgin Group Acquisition Corp. II or VGII.

The transaction included an €86 million PIPE investment from affiliate of the sponsor of VGII and new and existing group investments.

In addition, we previously announced a $50 million backstop agreement with VGII and Corvina Holdings LTD, an affiliate of the sponsor of VGII, pursuant to which Corvina purchased $27.5 million of common stock from Grove, which closed on March 31, 2022, and purchased $16.7 million of common stock of the combined company, which closed concurrently with the business combination.

Subsequent to the end of the quarter, on July 1, 2022, we entered into a Standby Equity Purchase Agreement with an affiliate of Yorkville Advisors Global, LP, allowing us to sell up to 100 million of shares of Class A common stock at Grove’s request during the 36 months following the execution of the purchase agreement, subject to certain conditions.

We will continue to evaluate opportunities to raise additional capital. Now turning to our outlook. Factoring in our performance to-date, our expectation for the back half of the year and an uncertain macro environment, we are raising our full year guidance, as Stu mentioned.

We believe that the performance of the DTC business will solidify in the second half of the year on the back of more efficient advertising spend and higher average order value for existing customers.

Additionally, our guidance reflects the implementation of our value creation plan, which will result in significant improvements in profitability in the back half of the year, as compared to the first half.

For the 12-month period ending December 31, 2022, we expect net revenue of $302.5 million to $312.5 million up from $300 million to $310 million previously. Adjusted EBITDA margin of minus 27.5% to 30.5%, up from minus 29% to 32%.

In summary, we're excited to reach this new chapter as a public company as we advance on our incredible journey to realize geoplastic by 2025, while achieving our financial costs. For the benefit of our environment, our planet, partners and all of our stakeholders.

I am pleased with the progress we are making on the value creation plan we maximize the power of our DTC platform, accelerate our retail expansion and further improvement in our marketing and operating expenses, efficiencies to drive growth and achieve profitability in a timely market.

We look forward to reporting improving results in the quarters and years ahead. Operator, we are now ready for questions..

Thank you. The floor is now open for questions. Our first question comes from Dana Tesley. Please state the question..

Hi. good afternoon, everyone.

As you think about the cash profitability and the expense reductions that are underway, where are you in the cadence of that and when you think about the buckets, for example, the inefficient ad spend, where is there the most opportunity? And then on the revenue side, with the standard retail that you've entered into, capacity in being able to fulfill orders? And what do you see as the ultimate goal of retail contribution sales and margin.

Thank you..

Thank you, Dana. Thank you for the question. So basically, as we see the path to profitability going forward, our plan is and the plan that we have shared with the markets, we feel strongly that we have the capabilities, capacity and the right mindset and structure to achieve it.

So what we are basically, cadence in this is for reductions in the second half of 2022 to start kicking further to what we have done, as previously mentioned during the call.

So basically, this will kick off in 2022 and accelerate in the second half with the site of view of having these basically the bond rate that we want to achieve at some point during 2023. That's basically -- answering the question, where do we see the most benefit coming out of or the most efficiencies coming out of.

It's a combination of all the P&L as we have been explaining. But basically, if you were to think in all the priorities, I think OpEx meet investment and gross margin performance in that order of sequence. I would put it, or ranking, if you will, and that's what we are striving for. I would let Stuart answer the second part of the question..

Yes. Thanks, Dana. It's -- I appreciate the question. I think Sergio said it well, that it really is a full P&L approach. And I think in terms of the area where we've got sort of the most to go or will drive the biggest impact on a relative basis.

It's hard to pin down a little bit, because so many are driving double-digit million dollar changes year-over-year. Probably the one that I would point to most is continuing to drive stronger and stronger profitability from our core customer base.

We see that in lowering the cost to serve in driving higher average basket and higher gross margins, which we're hopeful we can continue to drive for the balance of the year and through '23. And success there, of course, will drive really strong bottom line, especially as we seek to operate the business more efficiently..

Thank you..

Okay. There are no further questions. I'll turn it back to Stuart for closing remarks..

Thank you. Thanks, everyone, for joining.

I just want to say, how grateful I am to have the opportunity to share the growth story now as a public company and how much conviction I have in our team's ability to continue to lead the way with innovation towards a future that where we drive, not just a material change for the environment, but also material returns for our shareholders over the many, many quarters and years ahead.

Thank you much. Look forward to reporting back on future quarters, as we continue to make progress..

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day..