CarParts.com Q1 2023 Earnings Call Transcript

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May 12, 2023

There are 7 speakers on the call.

Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the SoHo House and Company Incorporated First Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the Conference over to Thomas Allen, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you for joining us today to discuss Soho House and Co. Q1 financial results. My name is Thomas Allen and I'm the Chief Financial Officer. I'm here this morning with Andrew Carney, our CEO. Today's discussion contains forward looking statements that represent our beliefs or expectations about future events.

Speaker 1

All forward looking statements involve risks and uncertainties that could cause the actual results To differ materially from the forward looking statements, some of the factors that may cause such differences are described in our SEC filings. Any forward looking statements represent our views only as of today and we assume no obligation to update any forward looking statements if our views change. By now, you should have access to our Q1 earnings release, which can be found at soulhouseco.com in the News and Events section. Additionally, we have posted our Q1 presentation, which can also be found in the News and Events section on our site. During the call, we also refer to certain non GAAP financial measures.

Speaker 1

These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from Reconciliation to the most comparable GAAP measures are available in today's earnings press release. Now let me hand it over to Andrew.

Speaker 2

Thanks, Thomas, and hello, everyone. I'm going to start by talking you through our Q1 highlights and provide an update on our progress we've made against our 2 strategic I'll then hand over to Thomas to talk through the financial performance, give an update on our 2023 guidance and progress we've made on our balance sheet Before finishing with our ESG

Speaker 3

initiatives. We've had

Speaker 2

a strong start to the year. In the Q1, SIR House membership hit a new high 169,000 members, a year on year increase of 29% and a 4% rise quarter on quarter, leaving us on track Our full year target of more than 190,000 members. Total SOH House and Co memberships grew 38% year on year and 5% quarter on quarter, 9,000, a nice growth quarter on quarter of approximately 3,000. We continue our focus on operational excellencies, Which led to profits beating expectations, delivering adjusted EBITDA for the Q1 of $20,000,000 up $18,000,000 year on year. Today, we are raising our full year EBITDA guidance to reflect the results of the initiatives we have implemented across the company.

Speaker 2

Total revenues grew 33% year on year to $255,000,000 underpinned by continued growth in recurring membership revenues, up 42% year on year and 8% quarter on quarter. You remember we said last quarter that Q1 is typically the slowest quarter seasonally, So our Q1 performance leaves us firmly on track to deliver our total revenue guidance of the year of €1,100,000,000 to €1,200,000,000

Speaker 3

Now let me give you

Speaker 2

an update on the progress we're making against our 2 strategic priorities. 1st, growing enhancing the value of membership and second, Creating unique clubs with great atmospheres and members is at the heart of everything we do. Based off member feedback, we are focused on improving our food offerings, service standards and house events. We've introduced seasonal menus across all our houses. Our house regulars are now updated every 3 months with approximately 5 to 6 new dishes based on high quality seasonal ingredients.

Speaker 2

Our houses have become more local with their food offerings to provide increased choice for our Every House members who visit multiple times. We've added more healthy offerings at breakfast, including new yogurt pots, superfood bowls, smoothies, and pressed juice shots. And we've introduced pop ups and more themed dining nights, Such as one night only foodie events and regular slots such as Taco Tuesdays. Our service standards are being improved through increased training, And all our management within the houses are incentivized to improve service for members, which is leading to improved staff retention. Finally, to make it easier for members to discover all of this, we will communicate changes more regularly and have added new menus on the app and improved the UX experience.

Speaker 2

The teams are highly engaged and are clearly starting to deliver better results. We continue to focus on improving food service throughout the rest of this year. Outside our core Sohuhaus proposition, we continue to see strong growth in our Friends membership, which helped grow our other memberships by 69% year on year to more than 69,000 members. And finally, our new house opening program continued with the new SOH House in Bangkok this February. Located in the vibrant Circumwitt neighborhood, the house features a 12 meter pool and outdoor terrace in a really lovely tropical setting.

Speaker 2

We have seen great demand for this new house and it's outperforming our initial membership intake goals. We continue to target 5 to 7 houses this with the remaining earnings to take place in the second half of the year. Turning to our second strategic priority, operational excellence. Our strategy is centered around 3 key areas: 1st, leveraging data and member insight to operate and scale efficiently 2nd, expanding our in house margins and third, having operational discipline as we grow. In the Q1, our teams control wages well.

Speaker 2

Wages as a percent of revenues improved by 400 basis points Versus Q1 2022 300 basis points versus Q1 2019. F and B margins continue to be strong, Increasing by 190 basis points versus Q1 2019, despite us rolling out a lot of new menu items, which I referenced earlier. Our G and A expenses came in better than expected through the changes that we made in how we operate the business. We've continued to focus on driving higher occupancy in ADR, Leading to RevPAR increasing 25% year over year at our like for like properties and 28% versus the Q1 of 2019. We have a long runway in front of us, and we're making good progress.

Speaker 2

We're confident that this will help us generate stronger, more consistent earnings going forward. Now let me pass you to Thomas to give you more detail on the numbers and our guidance.

Speaker 1

Thanks, Andrew. Total revenue for the Q1 grew 33% year on year $255,000,000 or 45 percent on a constant currency basis. Membership, in house and other revenues rose 42%, thirty 2 And 23% year on year respectively or 54%, 44% and 34% on a constant currency basis. House level contribution increased 57% year on year with house level margins up 3 points to 24%. Other contribution was up 76% With the margin climbing 4 points to 13%.

Speaker 1

Giving more details on revenue, we saw continued strong revenue growth year over year increasing revenue by $63,000,000 with 3 key drivers. Membership growth and pricing drove a $24,500,000 increase in membership revenues. Strong trading in our houses, especially in the UK, led to a $28,000,000 increase in in house revenues and other revenues were up $10,000,000 Driven in part by an approximately 60% increase in sales at Soho Home. Our first quarter adjusted EBITDA was $20,000,000 up $18,000,000 year on year as we benefited from the profitability initiatives we've been talking about for the past two quarters and continued membership and revenue growth. Our adjusted EBITDA for the quarter also be consensus of $17,000,000 Now discussing our balance sheet.

Speaker 1

We have made great progress on improving our balance sheet over the past few months. You may remember in November, we extended our revolving credit facility, This week, we refinanced our Miami mortgage. We were able to secure the mortgage at a rate of approximately 7%, approximately 60 basis points higher than the prior property mortgage loan, This is coming due in February 2024 and we last refinanced in 2019. This is despite the Fed funds rate rising approximately 2 50 basis points over that time period, Current extremely tough credit market conditions following the recent bank failures and us increasing the size of the loan from $117,000,000 $140,000,000 This highlights how credit markets see our properties as more attractive investments today than before. It also means that we have no major maturities until 2027.

Speaker 1

Moving to guidance for 2023, We continue to expect total SOHO House members of more than 190,000 at year end, at least 17% higher compared to the end of 2022. We are reiterating our guidance of total membership revenues of $355,000,000 to $365,000,000 and total revenues of $1,100,000,000 to $1,200,000,000 As a reminder, the 33% revenue growth we achieved in the Q1 benefited from a more favorable year over year comp due to Omicron impacting in the Q1 of 2022. The midpoint of our revenue guidance implies approximately 15% growth for the next three quarters, which should be relatively consistent across the 3 quarters. On adjusted EBITDA, our strong start to the year is leading us to increase our 2023 adjusted EBITDA target range by $2,000,000 $122,000,000 to $132,000,000 So we're encouraged by our performance year to date and believe we're well placed for the coming months to deliver on our plans for 2023. With that, I'll pass it back to Andrew to discuss some of our ESG progress, then give some concluding remarks before we go into Q and A.

Speaker 2

Thanks, Thomas. Today, we published our 2022 ESG report, which provides detail on the work we're doing on sustainability, Social responsibility and governance. Highlights include our focus on data collection is helping us progress towards our 2,030 environmental goals. We're now reporting on Scope 1 and 2 carbon emissions globally as well as food and non food waste in a large proportion of our portfolio. We're also making a voluntary disclosure in line with the task force on climate related financial disclosures, TCFD, allowing us to understand and manage the risks And opportunities of climate change in our business better.

Speaker 2

We've also conducted an ESG materiality assessment To better understand what our members and employees care about and help guide our house foundation strategy, we've had another strong year on social impact With more than 1200 young people from underrepresented backgrounds now supported through our creative access programs, Soho Menship And fellowship and the launch of our global charity, the Sarah House Foundation. So to conclude, we've had a great start to the year, Delivering further member and revenue growth underpinned by a strong and growing waitlist. Our operational excellence initiatives are bearing fruit, and adjusted EBITDA was ahead of expectations for the 2nd quarter in a row, leading us to increase our profit guidance for the full year. I would like to thank all our teams for their hard work and dedication in all the regions that we operate in. We remain focused on delivering for our members and driving further membership value, and we're more confident than ever in the growth opportunities ahead for this business, Which will result in SIR House generating positive free cash flow this year.

Speaker 2

With that, we will now open to questions. Operator, we can take the first question please. And as a reminder, you can either ask your questions over the phone or submit them via the webcast.

Operator

Our first question will come from the line of Shaun Kelley with Bank of America. Please go ahead.

Speaker 4

Hi, good morning everyone. Thank you for taking my question. Andrew, Thomas, I was wondering if you could just talk a little bit about Member spending trends kind of across the quarter, maybe a little bit about the exit rate, what you saw in March and so far into the second quarter. Are things holding steady? How is the kind of behavior out there?

Speaker 4

And maybe a little commentary on RevPAR bookings as well.

Speaker 1

Thanks, Sean. So when we look at our life for like in house revenue growth for the quarter, It increased about mid teens. That's slightly lower than the about 20% that we saw in the 4th quarter. There was a bit of a timing impact there. So the day of the week that New Year's hit in January impacted the very beginning of the year And then the rest of the quarter was closer to high teens similar to the Q4.

Speaker 1

When we think about the split of that, We continue to see really strong trends in visitation and spend per visitor Has been lagging visitation. We think that there could be some macro impact on the consumer, Generally, it feels like it's holding steady. One of the key things to highlight, which kind of which is great for us is because we have our membership business Versus traditional restaurants and hotels, we add members every quarter. So that definitely could Offset any kind of decline in consumer spending. The other key thing that just is important to highlight is that When we look at some of the properties that we put large initiatives and efforts into last year, we gave you examples of Greek Street and 70 16th Street and 180 Strand that we introduced new initiatives there.

Speaker 1

We really bucked the trend there and saw a really strong growth in spend per visitor. And so our internal initiatives can continue to drive that higher.

Speaker 4

That's great. Thank you for the color. And then maybe as a follow-up, any geographic call out, Thomas, relative to that? Yes. Maybe that spending weakness, was it particularly tied into Europe or the UK, seasonality, anything in

Speaker 3

the U. S, just kind

Speaker 4

of trying to get that

Speaker 3

Hi, Sean. To give you a

Speaker 2

little bit of color, we would say UK is our strongest market, followed by Europe. Europe has If anything, it takes us by surprise of how strong it's come back and we're looking forward to a very good summer in Europe. Both UK and Europe benefited from a lot of the initiatives that we laid out back on our Q4 earnings call. We got ahead of it quicker in those regions. North America is slightly behind and that's more around we're rolling out a lot of the new menu changes, a lot of the service standard Improvements, a lot of the local menus, that's all happening this month.

Speaker 2

So what we're expecting is that North America will Jump up a little bit because of the great reaction we saw from our members across U. K. And Europe. And Asia remained steady, obviously, massively up Versus last year because we were broadly closed in Hong Kong. And our Bangkok house has got off to a, I would say a very, very good start.

Speaker 2

We're super pleased with the team in Bangkok. We've got some fabulous members, and we've actually exceeded our Internal plans around Bangkok, so we feel good in Asia.

Speaker 4

Thank you. And sorry to hog the ball a little bit, but just maybe last question would be, Just give us the latest on Hong Kong, both sort of plans on the reopening, how it's going, and is the walker and what maybe the year over year Impact of that house was because I believe it was pretty material, just given its size.

Speaker 1

Yes, Sean. So we continue to see Hong Kong improve Quarter over quarter between total membership, visitation and overall performance. 1Q EBITDA came in higher than internal budgets. We now have over 3,000 members there. And so we're seeing progression.

Speaker 1

Yes. We're not giving individual property performance though, but we're definitely seeing improved performance.

Speaker 2

Yes. The key for Hong Kong is obviously the profits and Revenues are up significantly because we were closed with COVID. There's no restrictions. We're now back doing member intakes. We had a great Art Basel event recently In March, we showcased SOH House to a lot more potential members, and we got a good influx of applications through that.

Speaker 2

We've got a great team there. So we're pretty we're feeling pretty good about Hong Kong.

Speaker 4

Thank you so much.

Operator

Your next question will come from the line of George Kelly with Roth MKM. Please go ahead.

Speaker 5

Hey, everyone. Thanks for taking my questions. So first one on curious about margin. I was wondering this year there's such a year over year improvement And your EBITDA margin, my sense is there was kind of a lot of low hanging fruit there and you took member pricing. I was curious if you could talk a bit more just Like what's the remaining if you look past this year, what's the kind of remaining margin opportunity?

Speaker 5

And I'm Sure, it will slow from what you're doing this year, the margin expansion, but is there a lot of opportunity left?

Speaker 1

So thanks, George. So when you think about our business model, we continue to see really strong growth in membership revenues. It's driven by A mix of increasing number of members and increasing pricing, that should be very high flow through. And so to your point, this year, we're guiding to a significant margin expansion. Last year, we put up 6% EBITDA margins.

Speaker 1

This year we're guiding to about 11%. But as we think through the next few years, we expect to continue to grow margins as you see the benefit Of that very high flow through membership revenue.

Speaker 5

Okay. And I may ask this, do you have any kind of medium term margin targets?

Speaker 1

So around the IPO, we talked about getting to around 15% EBITDA margins over the medium to long term. And then we think that there's an opportunity to keep on working beyond that.

Speaker 5

Okay, great. And then last question for me is on your balance sheet. So I saw the and you talked to, I think, the Miami Refinancing. Is there I know your maturities now are what 2027 or something for the significant ones. Is there anything else to do between now and then?

Speaker 5

Any Other goals for this year on your balance sheet? And that's all I had. Thank you.

Speaker 1

Thanks, George. So look, we wanted to get to a good place on our balance sheet when I got to the company. We had a revolving Facility there was going to end and then we had this Miami mortgage that was coming due in February 2024. And so the 2 we extended that revolving credit facility and now we've extended the mortgage out to 2,033. We wanted to have a conservative position.

Speaker 1

We don't know where the macro environment is going to be. We like to be conservative and have significant cash on the balance sheet. And so I would say Our main priorities have been head. I mean just to stress, right, after this raise, We should have about $180,000,000 of cash on the balance sheet and undrawn about $90,000,000 revolver. And you made the point we expect to turn Free cash flow positive this year and we'll have no major maturities until 2027.

Operator

Our next question will come from the line of Steven Zaccone with Citi. Please go ahead.

Speaker 3

Great. Good morning, everyone. Thanks for taking my question. I wanted to follow-up on the commentary you had, Thomas, about member visitation and spending Lagging a bit. Could you just expand upon that?

Speaker 3

Is that in certain regions that you're kind of seeing that activity? And hand in hand with that, some of the U. K. Strength that you've seen, could you just talk about the feedback to some of the food and beverage Offering changes, like what you've heard from members?

Speaker 2

Hi, Stephen. Good to hear from you. So I'll take that. I'll start on that one. So we've seen a big a really nice increase in footfall.

Speaker 2

We've got a lot of new members. The new members historically use our houses more often when they join. So what Thomas was kind of saying is that we have seen our visitations go up a lot of our houses, which is a great thing. The spend is kind of static. It's not one region that stands out on a lower spend.

Speaker 2

It's Kind of in line with where it was. One of our big goals is to increase that spend. So we want to actually increase member spend and actually hold Footfall. We don't necessarily need more footfall in our houses. So that's why we're doing a lot of work, which I spoke about On our food offerings, our beverage offerings, our events, making the houses more local, especially in the bigger cities that we operate in, like New York and LA and London.

Speaker 2

And what we've seen where we've made good progress is in those Houses that we've done pretty significant changes, we have seen member spend go up. And that is the plan that we're that's what we're focused on across All our houses, so I would say that London feels good. We're now very much focused on New York and LA. Because what happens is if you have Different menus in different houses based on the local member demographic, we see increased spend, but also we See members visiting the houses more because they get a different offering. So that's what we're very focused on.

Speaker 2

So when we as we progress Our initiatives, we'll be talking quite a bit more about member spend as we go forward because it's probably in our top five things that we're focused on as a company right now.

Speaker 1

Yes. And let me just follow-up with that is, I don't want people to interpret in my comments that we've seen a degradation in the spend per visit. We saw a strengthening of it in the Q4. We put on a lot of events in the Q4. In general, There was just a lot of activity going on around our properties.

Speaker 1

It wasn't Quite as strong as the Q4. When I look at the past 3 weeks, things have gone back to more similar to Q4 level. I think it's too early to try and read into any kind of macro trends. These things are volatile and there's not a significant deviation Around the trend that we had been seeing.

Speaker 3

Okay. Thanks for that clarification. It's helpful. If we just shift to the expense side, So it sounds like G and A came in better than expected. How should we think about the trajectory of that line for the balance of the year like Dollars or ability to continue to drive leverage, just help us think through that.

Speaker 1

Hi, Steve. So, yes, In the Q1, we knew that it was a seasonally slower quarter. And so we really held back on all expenses around the company. We really push the teams on travel, on new hirings, as we want to watch the macro environment. Given the macro environment has Stayed pretty good.

Speaker 1

As we open more houses and businesses seasonally ramp up in 2Q to 4Q, Yes, so should G and A. So I would expect G and A to be higher in the next few quarters as it was this past quarter. But just remember as a percentage of revenue, we definitely expect it to be down this year versus last year.

Speaker 3

Okay, great. And then just the last clarification is, on free cash flow positive this year, is there a certain quarter That you'd expect to reach that milestone.

Speaker 1

Yes. So Steve, similar to what we've talked in the past about how Seasonally EBITDA generally gets better through the year. The summer months benefit from more of our Outdoor spaces being utilized, the 4th quarter benefits from a lot of events. Yes. Our Soho Home business does really well in the Q4.

Speaker 1

I would say that I would think free cash flow should generally follow that path. But we said last quarter and we reiterated this quarter, we expect to be free cash flow for the year, but we haven't committed to a specific quarter.

Speaker 3

Okay, fair enough. Thanks guys. Best of luck.

Operator

Your next question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Speaker 6

So I was hoping you could touch on the decision to merge a Soho Home into Soho Friends. And if that results in any Kind of uptick in what the prior SOHO members would be paying now that they're in the SOHO Friends program.

Speaker 2

Hi, Sharon. Good question. So if you think back to last year, we had a membership called, SOHOME Plus, Which was just on SOHO Home. And what we realized quickly realized is those SOHO Home Plus Members were highly valuable, and we wanted to simplify our membership. So we decided to roll it in To Soho Friends because if you think about our best selling category in Soho Home is bedrooms Because we're really good at bedrooms in SIR House and basically the Friends membership is they can go and stay in our houses and stay in our bedrooms.

Speaker 2

So it seemed logical to merge them. And what we've seen is our Soho Friends members are now the highest Spending in the highest value members in SOHO Home. They equate for a really high percentage of our business. They're really engaged. And now they can travel and stay in our houses.

Speaker 2

So it was just a logical move that's actually benefited us and benefited the Soho Friends member.

Speaker 6

Thanks for that. And then just a question on the house members. Are you seeing Any change in membership joins for younger members or visitation or Spend patterns among that demographic?

Speaker 2

No, we're not seeing much change. We're still very, very focused on adding new young members through our under 27 program, Which continues to be strong across all our regions and our other members through all the ages and demographics Continuing to behave just like they have. So we haven't really seen any change in what we normally see within our membership.

Operator

Great. Thank you. And we have no further questions at this time. I'll turn the call back over for closing remarks.

Speaker 1

Just like to say thank you everyone for joining the call. If you have any follow-up questions, please reach out. Look forward to talking to you next quarter.

Operator

Ladies and gentlemen, that does conclude today's call. Thank you all for joining. You may now disconnect.

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