Garmin Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 11 speakers on the call.

Operator

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its Q1 2024 results, which were released this afternoon and can be found on our website at investors. Traeger.com. I'm Nick Backus, Vice President of Investor Relations at Traeger. With me on the call today are Jeremy Andress, our Chief Executive Officer and Don Blossil, our Chief Financial Officer.

Operator

Before we get started, I want to remind everyone that management's remarks on this call may contain forward looking statements that are based on current expectations but are subject to substantial 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 ks for the year ended December 31, 2023, our quarterly report on Form 10 Q for the quarter ended March 31, 2024, once filed and our other SEC filings for a discussion of these factors and uncertainties, which are also available on the Investor Relations portion of our website. You should not take undue reliance on these forward looking statements. We speak only as of today. We undertake no obligation to update or revise them for any new information.

Operator

This call will also contain certain non GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted net income per share and adjusted EBITDA margin, which typically are useful supplemental measures. The most comparable GAAP financial measures and reconciliations of the non GAAP measures contained herein to such GAAP measures are included in our earnings release, which is 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 Andrews, Chief Executive Officer of Traeger.

Speaker 1

Thank you, Nick. Thank you

Speaker 2

for joining our Q1 earnings call. Today, we'll be discussing our Q1 results and will provide an update on our strategic growth pillars before handing the call over to Dom to provide further detail on our quarterly performance. Despite facing a challenging demand backdrop, I am pleased with our execution in the Q1. Sales were $145,000,000 and adjusted EBITDA was $24,000,000 at the high end of our guidance range. Our first quarter results give us confidence in our outlook for the year, and we are reaffirming our prior financial guidance for fiscal 2024.

Speaker 2

As we move through the quarter, we continue to focus on our key strategic imperatives of driving energy to our brand and delighting our consumers with innovative product. The underlying measures of health for our brand remain strong and I continue to believe that Traeger is well positioned to be a long term share gainer in outdoor cooking. Our retail partners continue to be very supportive of the Traeger brand, invest alongside of us into the consumer experience at retail. The Traeger hood, our community of Traeger enthusiasts, continues to be passionate as evidenced by the strong growth in engagement in our social media channels as well as our industry leading NPS score. I believe that our premium positioning and our current efforts will allow the company to disproportionately benefit from an eventual recovery in grill industry demand.

Speaker 2

As we anticipated, the demand environment continued to be soft in the Q1. From a sell through perspective, consumer demand for our grills remained below the prior year. We believe the consumer continues to shift spend away from durable goods like our grills and other product categories over indexed on during the pandemic. In particular, we see greater pressure on higher ASP SKUs. From a sell in perspective, in the Q1, we were comparing against significant load in tied to the launch of 2 new grills in the prior year, which also pressured sales this year.

Speaker 2

We are assuming that consumer demand for grills remains soft for the balance of this year. The Q1 is a seasonally slower period in terms of consumer demand for grills and our peak selling season at retail typically starts with Memorial Day and lasts through the end of the summer. Therefore, we are highly focused on execution as we move into our most important seasonal period in the next several months and we will have greater visibility as we move through the Q2 and key holiday periods. In the Q1, our results continue to benefit from our significant efforts over the last 2 years to enhance profitability and efficiency. Despite lower sales versus the Q1 of last year, adjusted EBITDA grew 11% year over year and our adjusted EBITDA margin grew by 2 50 basis points.

Speaker 2

This growth was driven by 700 basis points of gross margin expansion. I am very pleased with our ability to drive 1st quarter gross margin above 43%, and our Q1 margin represents the highest quarterly gross margin we've reported as a public company. This is our 4th consecutive quarter of gross margin expansion and the significant progress we have made on margins has been driven by both improvements in the cost environment as well as company specific initiatives. We continue to have line of sight into strong gross margin improvement for the fiscal year. Well, at the core of the Traeger story is our long term opportunity to expand our household penetration and market share, in the current challenging demand environment, our ability to drive meaningful improvements in our margins and our adjusted EBITDA speaks to our financial discipline and we expect these improvements will set the company up well for significant growth as demand improves.

Speaker 2

Overall, I am pleased with our ability to deliver 1st quarter results at the higher end of our guidance range. I believe we are well positioned to execute on our plan this year. Let me now review our strategic growth pillars and key wins in these areas. Our first growth pillar is to drive awareness and penetration in the United States. While the Q1 is a seasonally slower period in terms of grill usage, our community was highly engaged with our brand during the quarter and we continue to interact with the Traeger hood and create energy behind our brand during key seasonal events.

Speaker 2

In February, our social post focused on the Super Bowl and we offered up content and recipes for the big game, including our epic take on trash can nachos. We also teamed up with the Dan Patrick Show to demonstrate to viewers how to use their Traeger to create an incredible Super Bowl spread. Overall, we saw strong engagement with our brand during the Super Bowl and had another record year of user generated content posts. We also saw a solid increase in connected cooks on the day. Heading into the pea drilling season this year, we are highly focused on driving execution and position at retail.

Speaker 2

Historically, Traeger has leveraged community and ground level marketing as well as in store selling and merchandising efforts to drive awareness and accelerate conversion. We will continue to utilize these strategies in the coming months and we believe that investments into retail execution and merchandising are some of our highest return activities. This includes our Captain Traeger program. This program is designed for associates that are retail partners who are barbecue enthusiasts and are ready to take their knowledge, training and commitment to the Traeger brand to the next level. Captain Traeger provides retail associates with access to educational trainings, limited edition products and exclusive VIP events and transforms these associates into Traeger evangelists.

Speaker 2

This year, we are investing into the Captain Traeger program through in person and digital training experiences moving into peak grilling season. Next week, on May 18, we will be celebrating our 7th Annual Traeger Day. Traeger Day centers around gathering friends and family, enjoying food cooked on your Traeger and sharing these memories with the Traegerhood via social media. Members of our community have been recording their best cheers to the Traderhood videos and submitting these to us over the last couple of weeks. On May 18, we'll post a reel with the best submissions.

Speaker 2

We'll also run a contest with Traeger Giveaways to encourage our community to post their Traeger Day content on social. The day is a celebration of all things Traeger and is our highest user generated content day of the year. Turning to innovation. Innovation is a key pillar of our long term vision for Traeger, and we remain committed to empowering our capabilities in this area. In the Q1, we completed the build out of our new R and D lab in our corporate headquarters in Salt Lake City.

Speaker 2

The R and D lab is designed to equip the R and D team with tools needed to bring innovation into their physical forms as well as inspire creativity. We believe this new space will greatly enhance our ability to create and will be a driver in our long term mission to disrupt the outdoor cooking industry with innovation. Also on the innovation front, I'd like to mention that Treggor was named one of Fast Company's Most Innovative Companies in 2024. In fact, Treggor was ranked the 6th most innovative company in North America. Fast Company's list highlights businesses that are shaping industry and culture through innovations in a variety of sectors and the annual list is highly anticipated.

Speaker 2

This achievement is a testament to our long standing commitment to innovation and disruption I'm incredibly proud of our team for this well deserved recognition. Our next growth pillar is growing our consumables business. In the Q1, we drove innovation in our pellets business through our partnership with an iconic American brand. In March, we announced the introduction of a limited edition wood pellet in collaboration with Louisville Slugger, the official bat of Major League Baseball. Traeger's limited edition maple pellets are crafted from the same hardwood used to make Louisville Slugger's iconic bats and repurpose wood from the bat manufacturing process to transform into wood pellets for the enjoyment of Traeger users.

Speaker 2

To drive awareness for this launch, we released a series of videos on social featuring our Director of Marketing, Chad Ward, cooking on a Traeger with 13 time MLB All Star Ken Griffey, Jr. As we mentioned on our last earnings call, in February, we relaunched our new branded barbecue sauces across all markets and launched a marketing campaign highlighting our updated offering. With new and improved formulas and easier to use squeeze bottles, we believe our new line is a big upgrade. We have also positioned our revamped sauce line at a more competitive MSRP. We have been pleased with consumer reception of our new sauces and have seen a lift in sell through versus our previous line of sauces.

Speaker 2

Next, I will discuss our 4th pillar, expanding internationally. In Canada, we saw improved sell through at our Big Box and Specialty Grilled channels in the Q1 and we are pleased with the momentum and demand going into the summer. In Europe, our distributors continue to work down excess inventory and we expect that inventory levels will be balanced later this year. In Germany and the U. K, our direct markets in the EU, we are focused on execution at retail going into peak grilling season.

Speaker 2

We recently rolled out a sales training initiative where we gather leading sales associates from our retail partners to educate them on the brand, demo the product and have them meet brand influencers. Similar to our strategy in the U. S, we believe that ground level execution will drive retail conversion in our international markets, where awareness of our brand remains lower than in the United States. On the METR side, we recently launched new distribution at Canadian Tire, one of the leading retailers in Canada. METER also continues to see growth from its partnership with Vorwerk, which is a nice complement to METER's DTC driven revenue base.

Speaker 2

Overall, I am pleased with our ability to execute our plan in the Q1, in particular given the near term market challenges continuing to face our industry. We saw strong growth in gross margins, which has been a key area of focus for our organization for the last 24 months and grew adjusted EBITDA. Going into the peak seasonal period, we are hyper focused on executing against our plan and I remain highly confident in our ability to navigate the current environment while positioning the brand for long term success. And with that, I'll turn the call over to Dom. Dom?

Speaker 2

Thanks, Jeremy, and good afternoon, everyone.

Speaker 1

Today, I will review our Q1 performance and discuss our outlook for fiscal year 2024. 1st quarter revenues declined 5% to $145,000,000 Grille revenues declined 14% to $77,000,000 Grill revenue was impacted by lower sell through at retail and a lower average selling price. Furthermore, in the Q1 of 2024, we were lapping initial load in of 2 new Grille launches in the Q1 of last year, which pressured sell in on a comparative basis. Consumables revenues were $32,000,000 up 7% compared to the Q1 of last year, driven by growth in both our pellet business as well as our food consumables business. While 1st quarter pellet revenues did benefit from a timing shift in the Q2, we are pleased with the growth.

Speaker 1

Accessories revenues increased 7% to $36,000,000 largely driven by increased sales at METRE. Geographically, North American revenues were down 9%, while rest of world revenues were up 31%. Gross profit for the Q1 increased to $63,000,000 from $55,000,000 in the Q1 of 2023. Gross profit margin was 43.2 percent, up 700 basis points versus Q1 of 2023. We are pleased with our Q1 gross margin performance, which benefited from lower costs as well as the margin enhancing initiatives we implemented in the last 2 years.

Speaker 1

The increase in gross margin was primarily driven by: 1, lower freight and logistics costs, which drove 2.90 basis points of margin favorability 2, higher pellet margins driven by our efforts to increase efficiencies at our pellet mills, which drove 170 basis points of margin 3, FX favorability, which positively impacted margins by 90 basis points and 4, other favorable gross margin items worth 150 basis points. Sales and marketing expenses were $22,000,000 compared to $22,000,000 in the Q1 of 2023. During the quarter, decreased demand creation costs were partially offset by increased employee expenses. General and administrative expenses were $32,000,000 compared to $27,000,000 in the Q1 of 2023. The increase in G and A expense was driven by higher stock based compensation expense, higher employee expense and higher occupancy expenses, partially offset by non recurring expenses related to the disposal of pellet mill assets in the comparable period.

Speaker 1

Net loss for the Q1 was $5,000,000 as compared to net loss of $11,000,000 in the Q1 of 2023. Net loss per diluted share was $0.04 compared to a loss of $0.09 in the Q1 of 2023. Adjusted net income for the quarter was $5,000,000 or $0.04 per diluted share as compared to adjusted net income of $1,000,000 or $0.01 per diluted share in the same period of 2023. Adjusted EBITDA was $24,000,000 in the first quarter as compared to $22,000,000 in the same period of 2023. 1st quarter adjusted EBITDA was approximately in line with the high end of our guidance range of $21,000,000 to $24,000,000 Next, I will discuss the balance sheet.

Speaker 1

At the end of the first quarter, cash and cash equivalents totaled $24,000,000 compared to $30,000,000 at the end of the previous fiscal year. We ended the quarter with $404,000,000 of long term debt. At the end of the quarter, the company had drawn down $41,000,000 under its receivable financing agreement, resulting in total net debt of $421,000,000 From a liquidity perspective, we ended the Q1 with total liquidity of $153,000,000 Inventory at the end of the Q1 was $100,000,000 compared to $96,000,000 at the end of the Q4 of 2023 $132,000,000 at the end of the Q1 of 2023. We believe inventories on our balance sheet are appropriately positioned for our current demand outlook. Moving to our outlook for fiscal year 2024.

Speaker 1

We are reiterating our guidance for revenues of $580,000,000 to $605,000,000 and adjusted EBITDA of $62,000,000 to $71,000,000 As previously discussed, we expect our Grille revenues to be pressured by lower sell through as consumer demand for Grille remains below historical levels. Furthermore, we will be lapping the load in at the Ironwood and Flat Rock, and we will be sunsetting several Grille SKUs this year ahead of future product launches, which will also pressure Grille revenues. We expect that 3rd quarter revenues will be our most challenging on a year over year basis. We are also reiterating our outlook for full year gross margins of 39% to 40%, which represents expansion of 210 basis points to 3 10 basis points. We continue to expect that our margin will benefit from lower transportation costs, in particular lower inbound freight rates as well as margin enhancing initiatives, including our pellet mill optimization and our direct import program, partially offset by planned strategic pricing actions to stimulate demand.

Speaker 1

We expect that our Q1 gross margin improvement will be the largest of the year and believe the rate of improvement will moderate going forward. Furthermore, we expect that Q3 gross margin will be negatively impacted by deleverage given the expected pressure on sales and the lower revenue base in the quarter. Overall, while we faced ongoing demand pressure, we delivered 1st quarter results in line with our plan. Despite lower sales, we grew adjusted EBITDA and we have visibility into a 2nd year of meaningful gross margin expansion. We are highly focused on execution as we move into our peak selling season and remain committed to navigating the current environment while positioning for long term growth.

Speaker 1

And with that, I'll turn the call over to the operator for questions. Operator?

Speaker 3

Thank

Speaker 4

Our first question is from Simon Siegel with BMO. Your line is now open.

Speaker 3

Thanks. Hey, guys. Good afternoon. Hope you and your families are doing well. So Dom, what was the sorry if I missed it, but what was the breakdown in Grille revenue declines between units and price?

Speaker 3

And then Jeremy, higher level question on that. Just when thinking about the return to Grille growth domestically when it happens, how do you think about what we're going to see in terms of replenishment versus new customers? And just kind of thinking about maybe if you have any views on replenishment and cycles there? Thanks guys.

Speaker 5

Yes. So the breakdown roughly speaking is there was a greater impact to ASP in kind of the high single digit decline. And then for units, it was somewhat more moderated in kind of the mid single digits

Speaker 6

decline? Simeon, happy to get the second part of the question. First of all, as I mentioned in my remarks, the environment is soft and it's not easy to sort of unpack how much of it is driven by pull forward demand from a pandemic versus a soft consumer. Sentiment is down. Down, consumer financing is expensive and housing transactions are very low and all of these things facilitate grill sales or sell through a retail.

Speaker 6

We spent a fair bit of time thinking about replenishment cycles, talking to consumers, doing the math on grill ownership period. And our general belief is that we should be about to the end of pull forward demand from 2021. And I think as you step back and look at not only this category, but other high ticket discretionary consumer categories, they tend to have some element of cyclicality to it. And so as we see the consumer strength and interest rates start to come down, we believe that is those are catalysts to the beginning of a new cycle. And we believe that replacement should start to replenishment should start to normalize Certainly, in 'twenty five absent meaningful downside, the consumer should be back to a fairly normalized cycle.

Speaker 6

And then the question is, what is the impact on the macro on a consumer choosing to wait to get one more year as they do out of durables. In terms of how we think about new versus replacement, as we lean back into top of funnel investment and we're doing some testing this year, but certainly don't believe that this is an environment where we should be investing meaningfully in top of funnel. We will always think about NPS and engagement and ensure that we can drive our existing consumers to our new products. We believe as we look at our innovation pipeline that the 1st consumer likely to buy is an upgrade from a Traeger owner who bought 5, 6, 7 years ago. But I think we'll start to see the mix increase towards new customers as we invest in new markets where unaided awareness is low and penetration is low.

Speaker 3

That's great. And then just congrats on that gross margin. I mean, you pointed out the highest piece going public. Do you and recognizing the deleverage comment for Q3, but do you think that the supply chain always feels behind us. Do you think that as you look at where you are and you look longer term, not talking about the guide for this year, but you look longer term, are we back to that path towards low to mid-40s?

Speaker 3

Like, is there any externalities we need to still keep in mind? Because I just this was an encouraging number.

Speaker 5

Yes, I would say that it's consistent with what we've addressed around gross margin in previous calls in that there will be sequential benefit from macro over, say, the next couple of years, just given the dynamics of certain decisions we made during the pandemic when pressure was pronounced, locking in some fixed contracts on the impound transportation side as an example of something that will bleed down over the next couple of years. But it is safe to say that macro is working in our favor and that has been an important assist to how we think about the long term sustainability of a gross margin that we believe is appropriate for our business. And so Q1 is a great signal. There's some idiosyncrasies to the year that I think we've sort of spoken to. And I would say that H1 is in particular benefiting from the continued tailwind of inbound transportation and then also the FX component that we addressed on the opening remarks.

Speaker 5

Whereas back half was maybe it's sort of facing less of a benefit from a comp standpoint given the fact that the inbound rates were improving in the back half of last year. So I'd say we're starting to see some stabilization in that realm and I think that that assist has really, I think, driven a different perspective on the where we think we'll be able to take gross margin in the future with continued tailwinds hopefully driving some of that in the out years. But I wouldn't say that we've necessarily reached that mark just yet.

Speaker 3

Perfect. All right. Thanks a lot guys. Best of luck for the rest of

Speaker 7

the year.

Speaker 5

Thank you, Simeon.

Speaker 4

Our next question is from Peter Benedict with Baird. Your line is now open.

Speaker 7

Hi, guys. Good afternoon. Thanks for taking the question. Just on the strategic pricing plans, Dom, that you mentioned kind of at the end there, just curious if you can expand a little bit more on that. Is that around the existing portfolio?

Speaker 7

Is that new innovation that you plan to bring in at different either price points or margin points? Just maybe help us understand a little more what you're referring to there. Thanks. Yes. Hi, Peter.

Speaker 6

This is Jeremy. Happy to answer that. Yes, I'd say a couple of things. One is, as we prepare to launch new products in the future, I think it gives us permission as we get later in lifecycle of existing products that have been in the market for some time to lean into promotion as a lever to ensure that we're in a good channel inventory position as we launch new product next year. So that's sort of thought number 1.

Speaker 6

Number 2, in a challenging macro economy and notably for the category that we play in, we're very thoughtful as we look at what is selling through, what trends we're seeing from a consumer perspective and price sensitivity is certainly one of those. And so we are measured in how we plan promotions. We have planned our we plan our promotions many months in advance, but we feel like this is an environment where we will lean into promotion a little bit more, perhaps not in the number of promotions, but in the level of promotion, we'll be thoughtful to consumer trends and where we think there's value and opportunity to doing more. So this is part of the plan. As we think about guidance, this is inherent in the guidance that we reaffirm today.

Speaker 7

Yes. That makes sense. Is there any Jeremy, is there anything in terms of the timing of the innovation that you have planned for the back half of this year or even for 2025, which sounds like might be

Operator

a bigger innovation year

Speaker 7

that you could adjust that based on the macro? I mean, I'm just trying to get a sense for maybe how the macro is right now relative to kind of your banded expectations and whether it would what would cause you to maybe shift the timing of any of the innovation, if

Speaker 6

there is anything that would make you do that? We don't really think about product launches around macro. Our development pipeline, our objective is to be very consistent in how we invest and when we launch. And so we do it independent of the macro. And I would say from a time of launch, it's driven more by seasonality and by our retailer reset windows.

Speaker 6

This category is one that tends to reset in the Q1 in preparation for the spring summer selling season. So we will stick to that calendar. It's what works best operationally for us. It's what we plan on and for our retailers. But to the extent that we need to be more promotional to ensure that our channel inventory is healthy before we launch new products, Promotion is certainly lever that we can use, especially at the end of life of products.

Speaker 6

I was just going to say, Peter, our innovation plan is many years out. And so it's really hard in a durables business

Speaker 2

to plan innovation around macro cycles.

Speaker 7

Yes. No, I think that makes sense. That makes sense. Just one more for maybe for Dom. Just to clarify in the Q3 gross margin expectation, that you mentioned it would be the softest sales quarter, therefore, some pressure there.

Speaker 7

Do you expect gross margin in the Q3 to be down year over year or just up the least, I guess,

Speaker 2

as we think about the year? Thank you.

Speaker 5

Yes. We're not guiding specifically to quarters from a gross margin standpoint or anything. But what I would say is that the impact should be pronounced. So it will be a deviation from kind of the general run rate we see in the other quarters. And just to add to that, we are reaffirming our gross margin guidance.

Speaker 5

So that's an important comment as you think about modeling and relate into how you treat Q3 given kind of lower sales and the deleverage off of those lower sales.

Speaker 7

Yes. Okay, makes sense. Thanks so much guys. Good luck.

Speaker 6

Thanks Peter.

Speaker 4

Our next question is from Joe Feldman with Telsey Advisory Group. Your line is now open.

Speaker 8

Great. Thanks guys. I wanted to follow-up. When consumers are making purchases, because clearly you are selling quite a few grills still, but are they opting for the better quality grills? Are they spending more?

Speaker 8

Have you seen any change in their behavior? I know it may be subtle, but always curious about that.

Speaker 5

No, we most definitely have seen a change in behavior, where there's been, I would say, a pronounced shift from the volumes that we tended to see increasing above $1,000 to now having that kind of dynamic shift to sub $1,000 and kind of those entry price points that we offer. So that is definitely a trend that we're seeing and reinforced by the point Jeremy made earlier in terms of how we're thinking about promotion to ensure that we are strategically competitive in an environment where consumers are just simply more price sensitive, right? These aren't necessarily systemic changes that we're making per se. We just want to ensure that we remain competitive and we always think about price as a strategic lever within the guardrails that we've defined around how we think about gross margin and ensuring that we're not a brand that's considered to be on promotion, right? So I think within the margins, we have flexibility to lean more aggressively into promo without straying outside of those guardrails.

Speaker 5

But that really isn't an effort to follow these trends, which is certainly specific to trailer as well as specific to, I think, broader kind of categories as you think about pressure on big ticket in relation to where we see kind of the volumes and where we want to capture that benefit. I think at the end of the day, we still believe that there's a consumer that is willing to pay for innovation and quality and we address that across our product line. But at this moment in time, we want to follow that trend and ensure we play more aggressively where the consumers are shopping.

Speaker 8

Got it. That's very helpful. Thank you. And then just another maybe question about sourcing. I was curious, can you remind us the exposure to China and if that if you guys are still making any effort to shift further away from China?

Speaker 8

If I recall, you said you would not, you're kind of happy with where you're sourcing from. I'm just curious because people ask us in relation to potential Trump administration and if tariffs were to increase again. So I was just curious about that. Thanks.

Speaker 6

Yes, Joe. So we do have an active effort underway to diversify sourcing outside of China. We currently manufacture in Vietnam. There are other geographies in Asia where we are actively investigating sourcing options. In some cases, the existing suppliers just taking operations outside of China, Those are active conversations and we do certainly believe in the value diversification always measured against sort of stability and cost within the supply chain.

Speaker 6

But we're also we're very contemplated around what the environment may be to the extent that a new President such as President Trump leans into additional China tariffs and we think about what a contingency plan may be to accelerate movement from China to other sourcing geographies. So that is absolutely top of mind.

Speaker 8

Got it. Thanks guys and good luck with the Q2.

Speaker 6

Thanks Joe.

Speaker 4

Our next question is from Brian McNamara with Canaccord. Your line is now open.

Speaker 9

Hi. This is Madison Callanan on for Brian. We were just curious about retailers' floor space dedicated to the category and whether they remain committed to keeping or increasing floor space for the category? Thanks.

Speaker 6

Madison, yes, we haven't really seen any shift in retailers' point of view on the category, either in season or across seasons. There are certainly a moment handful of years ago where we saw retailers begin to move to year round barbecue sets and also to expansion of floor space. But I would say it feels pretty steady state right now.

Speaker 9

Great. Thank

Speaker 7

you. Thanks.

Speaker 4

Our next question is from Megan Alexander with Morgan Stanley. Your line is now open.

Speaker 10

Hey, thanks very much. Wanted to come back to the sell through. Jeremy, I know you talked about it still being down in the quarter. Is there any way you can quantify maybe just for Grills what that sell through number looked like in relation to your Grills revenue being down that mid teens number? I know you were lapping the sell in of the launch last year.

Speaker 10

So just trying to understand, number 1, what sell through looks like in the quarter? And then just bigger picture, from a units perspective, are you seeing that decline stabilized? Or was your commentary earlier around the macro, does that suggest the declines may get worse? Or are you kind of thinking about the declines have steadily stabilized at this point?

Speaker 5

Yes, I can jump in and answer that. Thanks for the question, Megan. I think to your first question on sell through, I think at the end of the day, it sets sort of a baseline for how we think about our forecast this year. But there are idiosyncratic components to sell in that are building on the declines that we're seeing in sell through, which look more pronounced on a reported basis. And it's exactly what you said, it's the launch comparison, right?

Speaker 5

So comping Flat Rock Ironwood launch in H1 of last year and then the sunsetting of products ahead of a new product launch in 2025 in the back half of the year. So those are sort of layered on top of our baseline forecast, which sort of underpins our general thinking around demand planning. And I think from a reported standpoint, those look in excess of what we're seeing from a sell through standpoint. We don't obviously share sell through information, but I would say that we've talked sort of about the pre pandemic comparison historically, and I would say that that's still holding at a higher watermark. And so that kind of has a better barometer for how we think about the health of sell through where a comp against pull forward through the pandemic is very different than a comp against 2019 where there's a reversion back to pre pandemic levels, which we're not seeing.

Speaker 5

And so our belief is that at the end of the day, we just continue to lab pull forward through the pandemic and then that's augmented and sort of distorted by this picture that's emerged around excess inventories that we had to bleed down and that came at the cost of top line and then this year, these 2 sort of comparisons in first half and second half around the sunsetting and product and then the comp in the first half against the new product launch. So that's really, I think, a kind of a summary of what we're seeing. And I wouldn't necessarily say we're in a position to tell you that things are getting worse or better. I think right now, it's just kind of consistent themes around the sell through side.

Speaker 10

Got it. That's really helpful. And then maybe asking the gross margin question a different way. Again, really impressive. It was above what you did in 1Q 2019 and you did a 43% full year gross margin in 2019.

Speaker 10

Understanding you have the unique dynamics in the second half with the sunsetting of some products. But is there a way to quantify maybe just what the impact that you expect the sunsetting of the products to be, whether it's from a top line or margin basis? I know you've said, I think it's accretive from an EBITDA perspective, but anyway just to contextualize that?

Speaker 5

Yes. So the sunsetting isn't really a it's not really driving margin erosion by replacing old with new. It's more a function of the added pressure on Q3 around the fact that 1, Q3 is always our lowest selling period and 2, your sunsetting product, which is adding additional pressure to volumes in that quarter, which in turn is just driving more pronounced deleverage in the quarter, right? So where we saw some nice expansion in gross margin in Q1, we do expect that to moderate some over the from a run rate standpoint to Q from Q2 to Q4. We're reaffirming our gross margin guide for full year, which means that most of the pressure is coming in Q3 based on the impacts on volume and just how pronounced that deleverage is in relation to the impact on gross margin.

Speaker 10

Okay, understood. That makes sense. Thank you.

Speaker 4

We have no further questions at this time. There are no further questions. So at this time, we'd like to thank you all for your participation and you may now disconnect your line.

Powered by Quartr
Earnings Conference Call
Garmin Q1 2024
00:00 / 00:00