Solo Brands Is Gaining Traction, A Rally Is Brewing

Solo Brands Outpaces Consensus, Guides Higher 

It was only a few weeks ago that we called out Solo Brands NYSE: DTC as a recent IPO that looked good to buy in December. After perusing the Q3 earnings report that time could be now. The report includes not only stronger-than-expected revenue but better-than-expected guidance and signs of clear traction within the market. In our view, this company is a win-win positioned not only in the outdoors recreation market but also in eCommerce. With both of these segments of retail growing at accelerated rates, we aren’t surprised to see this company doing so well so soon. Considering the strength we’ve seen in other areas of the retail world and the general outlook for Consumer Discretionary spending next year, we won’t be surprised to see Solo Brands beat its own improved guidance and then guide the market higher again. 

Solo Brands Moves Up On Mixed Results 

Solo Brands reported a mixed quarter in regards to the Marketbeat.com consensus estimate but that is about all the bad news we have to give. Aside from that, the company reported $69.4 million in net revenue for a gain of 138.2% over last year and beat the consensus by 200 basis points. The gains were driven by a 120% increase in DTC sales and a 323% increase in wholesale revenue underpinned by the addition of Chubbies and ISLE for the fiscal quarter. 

Moving down the report, the company experienced some margin contraction at the gross level that was expected. The good news is that contraction was less than expected and resulted in adjusted EBITDA growth of 56.7% over last year. Operating margins were also under pressure, shrinking nearly 80% on a GAAP basis due to higher marketing and shipping costs, and left the GAAP earnings at break-even and a nickel shy of expectations. The good news here is that adjusted margins expanded and drove a 40% increase in adjusted net income giving a glimmer of improving profitability. 

The guidance is where the news is actually bullish for the market. The company is expecting FY revenue in a range that implies accelerating sales on a sequential basis and at a rate above the analyst’s consensus. The company is expecting $344 to $353 in net revenue compared to the Marketbeat.com consensus of $323.85 million. 

Cash Down, Inventory Up At Solo Brands 

Supply chain headwinds or not Solo Brands is in a good position for the 4th quarter. The company reported a net decline in its cash position but there is something else to consider and it has bearing on profitability as well. The company reported a build-up in inventory worth nearly $100 million on a YOY basis. That’s more than enough to sustain a full quarter at current demand levels and leave plenty for the next. In our view, this has the company set up not only for strong sales in Q4 but profitability as well. 

The Technical Outlook: Solo Brands May Be Bottoming

Price action in Solo Brands hit fresh lows just before the release of earnings but may have hit bottom at the same time. Price action has since confirmed support below $16 and is beginning to form a base. If price action can hold up these levels we see the stock consolidating and then retracing back to higher levels. If not this stock could be in for a much deeper decline but we don’t see that in our crystal ball.