Soho House & Co Inc. Q1 2024 Earnings Call Transcript

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May 10, 2024

There are 7 speakers on the call.

Operator

At this time, I would 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 SOHAS and Co. Q1 financial results. My name is Thomas Allen, I'm the Chief Financial Officer. I'm here 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 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 sohohouseco.com in the News and Events section. Additionally, we have posted our Q1 presentation, which can be found in the News and Events section on our site.

Speaker 1

During the call, we also refer to certain non GAAP financial measures. These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Reconciliations from 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 through the quarter's highlights, then provide an update on progress we've made against our strategic priorities. I'll then hand over to Thomas to talk through the financial performance, give an update on our balance sheet and our guidance before moving on to Q and A. It's been a solid start to 2024 with year on year growth in membership and revenues as we continue to deliver against our strategic priorities. We welcome more than 4,000 members in the quarter, growing to 198,000 SurHouse members overall, a year on year increase of 17%, which leaves us well on track to meet our full year target.

Speaker 2

The vast majority of the growth in the quarter came from the 25 houses that we've opened since 2018. Total Sarah House and Co membership was also up, growing 10% year on year. And our wait list continued to grow, pushing through the 100,000 mark for the first time and ending the quarter at 102,000. That's up from 99,000 in the 4th quarter and a 15% increase year on year, demonstrating the continuing strong appeal of our SORHOUSE membership globally. Total revenues grew 3% year on year to 263,000,000 dollars supported by continued growth in our recurring membership revenues, which were up 20% year on year and 5% up quarter on quarter.

Speaker 2

While overall revenue in the quarter was solid, in house revenues were lower given macro conditions and in line with the commentary and guidance we gave you on our Q4 earnings. However, throughout the quarter, we saw sequentially stronger in house revenue performance and that trend has continued into April, strengthening our confidence in the year ahead. Q1 adjusted EBITDA was ahead of market expectations at $19,300,000 As we move more into our seasonally stronger quarters, we expect EBITDA to be high year over year for the remainder of the year. We continue to control costs well and so I've raised the midpoint of our adjusted EBITDA guidance for the year and reiterated guidance for all other metrics. We've made significant progress against our 2 strategic priorities in the Q1 and we will continue to focus on these areas, growing and enhancing the value of membership and delivering operational excellence to drive profitability and free cash flow, ensuring we deliver the best member experiences at the heart of what we do.

Speaker 2

We are improving service in our houses and we're seeing a positive impact with member satisfaction scores increasing quarter over quarter. We continue to execute on initiatives that make our member experience more personalized. We recently launched event recommendations on our app using reliable member data, which helped drive 6% higher event bookings in the quarter. We are continuing to invest in our existing houses, including carrying out refreshes at houses in London, LA and New York. SIR House is known for our rooftops and pools.

Speaker 2

Our members love to spend the warmer months there, which is why we recently relaunched the rooftop of White City House and we're about to do the same at Sir House Holloway in Los Angeles and Denver House in New York. We've continued to introduce new menus, restaurants, pop ups and wellness facilities that have all been very well received. We recently announced that we're working towards opening a gym within 1 hundred and eighty House in London later this year. Our new openings are going from strength to strength. Sarehouse Portland has had a strong start since we opened in March and we've capitalized on 6 years in the city through our Cities Without Houses membership by already adding more than 1,000 members.

Speaker 2

I'm also really excited about the upcoming opening of SunPower, where we've seen high demand for membership of our first house in South America and follows the strong performance of our other house in Latin America, SOH House Mexico City, which opened last September. Turning to our 2nd strategic priority, operational excellence. As you know, our strategy here is centered on 3 key areas. 1st, leveraging data and member insight to operate and scale efficiently 2nd, expanding in house margins and third, having operational discipline as we grow. We've made further progress over the quarter, again achieving positive cash flow from operating activities.

Speaker 2

Both in house food and beverage margins improved year over year despite continued cost inflation. Over the quarter, we set ourselves to go further in this area by conducting a full review of our beverage range, which we expect to deliver even stronger profitability in the future. As part of improving service and becoming more efficient, we launched a new best in class HR system in the UK that will roll out globally. This will allow managers to spend more time with our members and their teams, whilst also allowing them to better manage their hours. Given the strength of our membership revenue, our house level margins to improve in the quarter.

Speaker 2

Now let me pass over to Thomas to give you more detail on the numbers and our updated guidance.

Speaker 1

Thanks, Andrew. Total revenues for the Q1 grew 3% year on year to $263,000,000 Membership revenues was 20% year on year, while in house and other revenues dropped 5% 6% respectively. House level contribution was up 6% year on year with house level margins up to 25%. Other contribution was flat year on year both on absolute and margin basis. Giving more detail on revenue, year on year revenues were up $8,000,000 driven by the increase in recurring membership revenues, which were 38% of total revenue in the quarter.

Speaker 1

Membership growth and pricing drove a $17,000,000 increase in membership revenues. In house revenues were down $6,000,000 year on year to $110,000,000 while other revenues were $3,000,000 lower at $53,000,000 Like for like in house revenue for the quarter were down mid single digits year on year. We outperformed the market in terms of footfall, but saw lower sales per visit. This was partially driven by a shift away from alcohol sales in the quarter, most notably in January. RevPAR declined 3% in the quarter with occupancy up slightly offset by lower ADR.

Speaker 1

U. S. Leisure RevPAR was estimated to be down approximately 4% in the quarter, so our performance follows that trend. It's also worth noting that our Q1 RevPAR is still up 24% versus the same period in 2019. On other revenues, we saw growth of SOHO Home and SOHO Works year on year, offset by lower sales in our standalone restaurants and townhouses and reduced design development fees.

Speaker 1

Our first quarter adjusted EBITDA was $19,300,000 slightly lower year over year. Higher house level contribution was more than offset by higher run rate G and A expenses, partially driven by our recent upcoming growth in new markets. We expect EBITDA to grow again as revenues accelerate and we move into seasonally higher revenue quarters. Now discussing our balance sheet. We ended the quarter with $145,000,000 of cash and cash equivalents $664,000,000 of net debt.

Speaker 1

We had positive cash flow from operating activities again in the quarter, our 4th quarter in a row and a $20,000,000 improvement from Q1 2023. This was helped by having $6,000,000 of positive working capital. However, our cash position fell $19,000,000 quarter over quarter. 2 key things to point out here. First, this is typically our seasonally lowest quarter in terms of cash flow from operations, and upcoming and upcoming Sao Paulo and Scorpius properties.

Speaker 1

We continue to expect $90,000,000 to $100,000,000 of CapEx this year. We ended the quarter of roughly 5 times net debt to EBITDA, down from approximately 7 times at the end of the Q1 of 2023. Moving to guidance, given good cost controls, we are raising the low end of our EBITDA guidance with a range now at $157,000,000 to $165,000,000 from $155,000,000 to $165,000,000 We last gave guidance roughly 8 weeks ago, so we are reaffirming guidance on the rest of our metrics. I won't run through each of them in detail, but I think it's just worth reiterating the sequential improvement we've seen in in house revenue over the course of the Q1 and into April.

Speaker 2

Thanks, Thomas. Today, we published our 2023 ESG report, which shows the progress SOH House is making in these areas. 2 key highlights I'd like to mention: a unique sustainability measure where we are recycling out of use bed linings to produce paper for our houses. And in terms of social impact, we're proud to have now supported more than 2,000 people through our creative access programs, Soho Menship and Soho Fellowship, which helps remove barriers for creatives from lower social, economic and underrepresented backgrounds. In closing, it's been a solid quarter for the business with strong demand in membership and high growth in membership revenues.

Speaker 2

Meanwhile, our operational excellence initiatives continue to support profitability and adjusted EBITDA was ahead of market expectations. We remain focused on delivering for our members and further driving membership value. We remain as confident as ever in the growth opportunities ahead for the business. I would like to thank all our teams globally and our members for their continued support and loyalty. With that, we will now open up to questions.

Speaker 2

Operator, we can take the first question, please. As a reminder, you can either ask your questions over the phone or submit them over the webcast.

Operator

Thank you. We will now begin the question and answer session. We'll take our first question from Shaun Kelley at Bank of America.

Speaker 3

Hi, good morning everyone. Thank you for taking my questions. Andrew or Thomas, just hoping we could talk a little bit more about the consumer here. For many of us who've covered stocks throughout this earnings season, I feel like we've had a meaningful amount of mixed signals out there. And obviously, you have your own lens and a lot of market specific details.

Speaker 3

So you gave us couple of clues here. It sounded like footfall was up, but spending was down. But obviously, Thomas, you mentioned a couple of times the improvement through the quarter. So you help us break that down just a little further in terms of behavior? And if you were to strip out kind of dry January plus weather, just kind of how would you encapsulate the health of the consumer right now?

Speaker 2

Hi, Sean. So yes, I mean, we're seeing a similar picture to what you've been hearing from other folks. First thing is because we're a membership club, we're pleased to see our members consistently using our houses. So that's why our footfall trends are better than what you've been hearing or seeing across the general markets. That's real positive for us.

Speaker 2

What we've seen is when members come in, they're just spending a little bit less, a little bit more dry January. The good news is that we have definitely been seeing it get better sequentially throughout the year. I don't want to talk about weather. It's all about what we can do with our members. And the trend is improving, especially through March April and into May.

Speaker 2

The good news is that obviously we're protected differently than other folks that we have revenues coming in for membership. So that's why we can still post a total revenue growth for the quarter. But we are more confident than we were when we last talked to you about 8 weeks ago.

Speaker 3

Great. Thanks for that. And then just any geographic differences or call outs we've seen kind of the same. I mean there's been some areas that have been weaker than others, but obviously you have a couple of markets that are particularly important. So just anything in London or any differences in the European consumer versus or the European member versus the American side here, either spending or traffic patterns that are notable?

Speaker 2

The short answer is no. We haven't seen it's all very similar across every single region from Asia to America to Europe to the UK, both at the beginning of the year and what we're seeing substantially getting better. So it's pretty consistent, Sean.

Speaker 3

Thank you very much.

Operator

Next, we'll move to George Kelly at ROTH MKM. MKM.

Speaker 4

Hey, everyone. Thanks for taking my questions. So maybe if I could start with just a kind of follow-up from that first question. I was curious if you could give any more detail for quantification just around the improvement that you saw in in house spending. I don't know if you could contrast what the growth kind of look like in April versus January, that would be helpful.

Speaker 1

Hey, George. Sure. So look, if you think about overall, our growth was down mid single digits, like in the quarter. I'd say January was down high single digits, February was down middle single digits and then March April have improved to down low single digits.

Speaker 4

Okay, thank you. That's helpful. And then second question from me. You referenced these member surveys that you've done. And I'm curious, given the spending weakness that you've seen, I know some of it's out of your control.

Speaker 4

But is there anything that sort of jumps out in the surveys that you're working to address?

Speaker 2

Good question. Not really. I think you're right. It is out of control spending right now. I mean, it's across the whole globe.

Speaker 2

We are continuing to focus on our member improvement plans, which we've referenced time and time again on the earnings calls, which is focusing on improving the member experience in the houses. So none of the surveys are saying anything. They're generally very positive and we're just focused on improving the member experience.

Speaker 4

Okay, understood. I'll hop back in the queue. Thank you.

Operator

We'll take our next question from Sharon Zackfia at William Blair.

Speaker 5

Hi, thanks for taking the question. I'm just curious on the member satisfaction for it, I think you alluded to them improving. Is that a global improvement you're seeing? Or is there any region that you're seeing more pronounced improvement? And if so, what would you attribute that to?

Speaker 2

Yes. So we obviously measure it on a weekly basis globally through our the feedback directly from the app when a member finishes eating with us or drinking with us. You know? So that's a very consistent way of measuring our our performance, especially on atmosphere in the house, service, the food and beverage that we provide. We have seen most markedly an improvement in North America.

Speaker 2

Now if you remember, we changed leadership there 6 months ago, which we talked about in a previous earnings call, and we had a whole heap of improvement initiatives in North America. We are definitely seeing that region perform a lot better. But most importantly, our members are telling us we're doing a better job.

Speaker 5

And Stephen, thanks for that. And then on solo friends, is the continued decline in that membership base? Is that just a deemphasizing of SoHo Friends? Or is there something else we should think about

Speaker 1

there? Sharon, I think you answered your own question there. So it is a de emphasis on Soho Friends. We want to continue to support the people who want to be Soho Friends, but that's something that we used to invest a lot in, we used to have Friends Studios. We found that a better way to run the company was to really focus on the core Soho House member while still providing attractive opportunity with friends and so that's why we're seeing the natural declines there.

Speaker 5

Okay. Thank you.

Operator

We'll go next to Steven Zaccone at Citi.

Speaker 6

Great. Thanks for taking my question. I wanted to ask about the maturity of some of the newer new houses you've opened. It sounds like it's progressing well. Are there still regions or houses where you see opportunity to drive improved house level contribution?

Speaker 6

It'd be helpful to hear you talk through that.

Speaker 2

Hey, great question. So if you think we've opened 25 houses in the past 4 or 5 years, they all continue to progress at the maturation curve, and they all continue to have more opportunity. We're really pleased with some of the newer markets that we've gone into, in particular, Mexico City, in particular Portland, Austin, Nashville. We're super excited about San Paulo. So all of them are performing in line with our expectations.

Speaker 2

And to answer your second part of your question, is there more opportunity? For sure. There's more opportunity to open more houses in North America in existing markets and new and also to grow in other regions.

Speaker 6

Okay. Got it. And then my follow-up question was just on pricing. So how are you thinking about membership pricing over the next couple of years? I think this year you've made a slight modification, right, taking price increases down a bit for existing members.

Speaker 6

Should we expect that's the trend going forward? So like new members are going to probably pay a higher price per year increase and existing members are probably going to continue at this lower level? Thank you.

Speaker 2

Yes. I think I've said this before. We're focused on delivering the best member experience. I feel really good about our pricing is it's the biggest where we find the biggest opportunities around driving efficiencies at the back end. So we're very comfortable with our pricing at the moment.

Speaker 6

Okay. Last one, if I could just squeeze one in. Is there any update at all to the possibility of considering strategic alternatives? It doesn't sound like you've made any comments here, but just curious since there was some comments the last time and there was a letter put out, Just is there anything you can share at this time?

Speaker 1

Thanks, George. So as you know, last fall, the Board set up a special committee of independent members of the Board to assess certain strategic transactions. The company will make an announcement if and when there's something to announce.

Speaker 6

Okay. Thanks very much.

Speaker 1

I call you George O'Steve, sorry.

Operator

And this does conclude today's conference call. We thank you for your participation. You may now disconnect.

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Soho House & Co Inc. Q1 2024
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