Grove Collaborative Holdings, Inc. Q4 FY2024 Earnings Call

Good afternoon, and thank you for standing by. Welcome to Grove Collaborative Holdings, Inc's Fourth Quarter and Full Year 2024. As a reminder, this conference call is being recorded. Hosting today's call are Grove's CEO, Jeff Yurcisin, and interim CFO, Tom Siragusa. Before they begin the prepared remarks, I will review the forward-looking statements, safe harbor. Some of the statements made today about future prospects, financial results, business strategies, and industry trends may be considered forward-looking. These statements are based on Grove's view today and are subject to a number of risks and uncertainties that could cause actual results to differ materially including potential disruptions relating to the implementation of Shopify, competition, and those factors discussed in their filings with the Securities and Exchange Commission. For more information, please refer to the risk factors discussed in Grove's most recent filings with the SEC. During today's call, Grove 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 their earnings release. I would now like to turn the call over to Jeff Yurcisin to begin.

Thank you, operator. 2024 was a transformative year for Grove and we entered 2025 with strong momentum driven by our focus on profitability, balance sheet strength, and revenue growth. For the first time since early 2022, we achieved sequential revenue growth, an encouraging milestone in our journey toward long-term sustainable growth. Additionally, we maintained positive operating cash flow, reinforcing our commitment to deploying capital efficiently as we grow. Our strategic approach is yielding promising results, and we're optimistic about our trajectory as we start the year. With this progress, I wanted to discuss changes to our leadership team. This past quarter, we announced that our Chief Financial Officer, Sergio Cervantes, and Chief Technology Officer and Co-Founder, Chris Clark, were moving on from Grove. These leaders helped build this company, drive our turnaround, and played a key role in the progress and success that we report today. We recently appointed Tom Siragusa, who is our VP of Finance, as Interim CFO while we partner with our Board to identify the right candidate to drive our future growth. With our transition to Shopify, we do not plan to search for a new Chief Technology Officer as the platform provides a robust managed infrastructure that eliminates the need for extensive in-house technical oversight in the long term. We are in the middle of the Shopify transition as we speak, and as expected, we are navigating early-stage challenges related to platform performance and customer experience, which our teams are actively addressing. Now let's dive into our four priority pillars for the fourth quarter. We have been undergoing a multiyear turnaround effort, and we believe we are now in the late stages of successfully completing that transformation. The financial pillars guiding this turnaround have been balance sheet strength, sustainable profitability, and revenue growth. The fourth pillar, environmental and human health, remains our foundational mission and key differentiator. In the fourth quarter of 2024, we achieved our first pillar, balance sheet strength, by fully eliminating the $72 million in term debt, significantly improving our financial position and reducing future interest expense. Following the $42 million voluntary prepayment in the third quarter, we prepaid the remaining $30 million of our term debt facility using proceeds from the Volition investment and cash on hand. As a result, our only remaining debt is $7.5 million outstanding under our asset-based loan facility. We will continue to strategically manage our liquidity to preserve our strengthened balance sheet while positioning the company for long-term success. The second pillar, sustainable profitability, was also realized in 2024 by delivering full year positive adjusted EBITDA for the first time in the company's history. We expect to build on this momentum in 2025 by delivering a second year of positive adjusted EBITDA, further reinforcing the financial stability we have worked hard to achieve. Additionally, we generated $0.3 million in positive operating cash flow in the fourth quarter, making this our third consecutive quarter of positive operating cash flow. Our focus on these two pillars was by design, as they represent the critical financial foundation of our business. With that foundation now firmly in place, we're shifting our primary focus to the third pillar, revenue growth. During this turnaround process, we experienced ten consecutive quarters of sequential revenue decline, leading to the natural question: When will the decline stop? As noted already, we're pleased to share that this trend reversed in the fourth quarter of 2024, marking our first sequential quarterly revenue increase in three years, a significant milestone for our company. While the first quarter of 2025 is expected to be lower than the fourth quarter of 2024 due to seasonality, in addition to navigating the Shopify transition, we expect progression throughout the rest of the year. This will culminate in a return to year-over-year revenue growth by the fourth quarter of 2025, also supported by revenue contributions from our recent acquisitions of Grab Green and 8Greens, as well as the continued revenue stabilization of our most tenured and largest customer cohorts. I'd like to spend a bit more time diving deeper into our revenue growth strategy. In 2024, we transformed our online experience, shifting from a gated model with default subscriptions to a more flexible incentive-driven approach. By introducing options such as Subscribe & Save, we empowered customers with greater ease and autonomy, enhancing exploration and discovery. At the same time, we aggressively expanded our third-party category offerings, increasing the number of third-party brands sold on our e-commerce platform by 30% compared to the fourth quarter of 2023. This growth reflects our commitment to listening to our customers, curating, vetting products, and expanding our platform's offerings. Building on this momentum in 2025, we expect to continue aggressively expanding third-party products on our platform and focus on high-potential areas such as clean beauty, personal care, kitchen, baby, and wellness. Simultaneously, we plan to optimize our Grove Co portfolio by accelerating innovation as an exclusive brand to our platform, ensuring our direct-to-consumer offerings are better aligned with evolving consumer demands. Additionally, as we transition to Shopify's e-commerce platform, we expect to unlock efficiencies and capabilities that were previously limited by our custom-built platform. We also intend to explore additional acquisition opportunities that we expect to be accretive to our financial results similar to those we've recently announced. As highlighted in two separate press releases, in the first quarter of 2025, we announced two strategic acquisitions: Grab Green, a pioneer in eco-friendly high-performance cleaning products, and 8Greens, a leading wellness brand known for its nutrient-rich effervescent tablets, gummies, and more. The acquisition of Grab Green reinforces our mission to make consumer products a force for environmental and human health while strengthening our leadership in home cleaning. Grab Green has been a top-performing brand in both sales and market share, driven by its beloved laundry and specialty cleaning products that complement Grove's existing portfolio of sustainable home essentials. With the purchase of 8Greens, Grove expands into the high-priority wellness category with a first-party offering. This acquisition enhances Grove’s ability to provide customers with high-quality wellness solutions while aligning with its renewed emphasis on wellness as a strategic focus. Both Grab Green and 8Greens align with our values and commitment to sustainability, innovation, and personal health, and we're excited to integrate these brands into the Grove family. We believe acquisitions can enhance our competitive positioning and drive long-term value creation for our shareholders. As we continue evaluating potential acquisitions, we will remain disciplined in our approach, seeking brands that align with our values and contribute positively to our financial results. We remain confident in the significant market opportunity ahead, with an estimated 57 million conscientious consumers seeking a trusted resource for their purchasing decisions. By positioning ourselves as a trusted partner in our customers' environmental and human health journeys, we draw a contrast to mass e-commerce and traditional retailers, positioning us well to capture and grow within this expanding market. Lastly, pillar number four: environmental and human health. We're proud to continue our industry leadership in moving consumer products beyond plastic as we curate a selection that prioritizes environmental health. However, as noted last quarter, we are also expanding our focus to human health. Through content and guided recommendations, we aim to build on the trust we've established in environmental sustainability by integrating human health education throughout our platform. We know that our customers, regardless of the category, want the best product, defined as formulas with natural, non-toxic ingredients, packaged with minimal environmental impact. We're the only retailer vetting every brand and product in our assortment against high standards; we have a right to win where others do not. Based on our expanded focus, we're updating our tagline from 'Bill Beyond Plastic,' which has championed our environmental sustainability strategy, to 'Your Home Healthier.' We believe this better captures our differentiation and helps define our brand based on what customers are looking for: a healthier home. By the end of 2025, we expect to have completed the financial turnaround that we've been working toward for multiple years. Our balance sheet will remain strong. We will have demonstrated two consecutive years of full-year adjusted EBITDA profitability, and we will have returned to consistent revenue growth. From this strength and position, we believe Grove will be poised to create substantial value as we execute on our expanded mission, creating and curating the best products that prioritize both human and environmental health.

Thank you, Jeff. I share your enthusiasm for the progress we've made in reshaping Grove, and I'm eager to continue strengthening its financial foundation. As in previous calls, I will provide both quarter-over-quarter and year-over-year comparisons as we believe sequential comparisons reflect business trends and measure the effectiveness of our strategic initiatives. Starting with the top line, revenue for the fourth quarter was $49.5 million, up 2.5% from the third quarter, but down 17.4% year-over-year. The sequential increase was driven by higher repeat orders and increased first orders due to incremental advertising spend as we invested in growth. The increase was also due to higher retail revenue, following the estimated brick-and-mortar markdowns recorded in the third quarter. While the brick-and-mortar markdowns contributed to the sequential growth, it's worth highlighting that revenue would have grown in the fourth quarter without it. The year-over-year decline reflects fewer repeat orders, which continue to be impacted by lower advertising spend throughout 2024. As Jeff mentioned, this marks our first quarter of sequential revenue growth since 2022, an encouraging sign of stabilization. While we don't expect sequential revenue growth every quarter in 2025, this milestone underscores the progress of our turnaround strategy. Despite active customers declining 3.1% quarter-over-quarter to 688,000 and 25.2% year-over-year, total orders were 717,000, up 1.3% sequentially but down 17% year-over-year. Similar to revenue, the sequential increase in orders marks the first time since the first quarter of 2022 that total orders increased quarter-over-quarter. DTC net revenue per order was $66.94, down 0.1% from the third quarter and flat year-over-year. The slight sequential decline was due to increased promotional activity, mostly offset by a higher average number of units per order. Year-over-year, the metric remains stable, as the elimination of certain customer fees was offset by an increase in the average number of units per order. Our gross margin was 52.4%, down 60 basis points from the third quarter, primarily due to increased promotional activity, partially offset by the sell-through of previously reserved inventory. Year-over-year gross margin declined by 200 basis points, also impacted by the elimination of certain customer fees and a higher percentage of third-party product revenue. Grove brand products, as a percentage of net revenue, were 40.1%, up 160 basis points from the third quarter but down 470 basis points year-over-year. The sequential increase was due to higher seasonal discounting and promotions on Grove brand products, while the year-over-year decline reflects continued third-party expansion. As previously mentioned, we plan to stop sharing this metric after this quarter, given our focus on our direct-to-consumer business and on order economics, whether the product is from third-party or our own brands. Advertising expense totaled $3 million in the fourth quarter, up 4.7% quarter-over-quarter but down 24.3% year-over-year. The sequential increase was primarily driven by higher spend on existing customers aligning with our strategy to encourage repeat orders earlier in the customer journey, enabled by our expanded assortment. Additionally, we increased DTC-specific advertising on new customers, capitalizing on improving first-order conversion rates. These increases were partially offset by a decrease in brick-and-mortar specific advertising. On a year-over-year basis, advertising expense remained lower. As we progress through our transformation, we remain disciplined in our advertising approach, balancing revenue growth with profitability and focusing investments on the channels that deliver the highest return on investment. Product development expense was $4.6 million, down 4.4% quarter-over-quarter but up 0.8% year-over-year. The sequential decline is due to reductions in personnel expenses, while the year-over-year increase is due to accelerated depreciation costs, driven by our decision to transition our homegrown e-commerce platform to Shopify technology. SG&A expense was $26.7 million, up 8.1% quarter-over-quarter but down 16.6% year-over-year. The quarter-over-quarter increase was primarily driven by a $1.6 million restructuring charge and higher fulfillment costs due to increased orders. The year-over-year decline reflects lower fulfillment costs from fewer orders and savings mainly from reductions to personnel, facility, professional fees, and technology costs as we right-size our cost structure for our current scale. Adjusted EBITDA was negative $1.6 million or a negative 3.3% margin compared to breakeven in the third quarter and $0.1 million or 0.2% margin in the fourth quarter of 2023. However, despite negative adjusted EBITDA in the fourth quarter, operating cash flow was positive $0.3 million, marking our third consecutive quarter of positive operating cash flow. In the fourth quarter, we used a targeted discounting approach to move through aged inventory. While this negatively impacted our adjusted EBITDA in the quarter, it was a deliberate strategy to move through our inventory position heading into 2025. Turning now to the balance sheet. We ended the quarter with $24.3 million in cash, cash equivalents, and restricted cash, down from $55.6 million in the third quarter. The approximately $31 million reduction primarily reflects our recent voluntary prepayment of term debt. We also ended the quarter with an inventory balance of $19.4 million, down $5.2 million quarter-over-quarter, mainly driven by reduced Grove brand inventory as we optimize our inventory ownership. Before we discuss our outlook, we want to take a moment to address the impact of tariffs on our business. Our projections take into account the current tariff environment regarding our product sourcing from China, Mexico, and Canada. Given the evolving nature of trade policies, we are actively monitoring the situation and working closely with our international partners to assess potential risks and opportunities. Our priority is to ensure a stable supply chain while exploring strategic alternatives to mitigate any potential cost impacts. We remain committed to adapting swiftly and effectively as new developments arise. Now turning to our outlook. For the 12-month period ending December 31, 2025, we are providing the following guidance. For revenue, first quarter revenue is expected to be the lowest revenue quarter in 2025, including the negative revenue impact of the Shopify transition. Revenue is expected to improve through the second and third quarters, leading to year-over-year growth in the low single-digit percentage range in the fourth quarter, and full-year 2025 revenue is expected to be approximately flat to down mid-single-digit percentage year-over-year. Adjusted EBITDA is expected to be breakeven to positive low single-digit millions. Our outlook includes the revenue and adjusted EBITDA contributions from our most recent acquisitions. We recognize that our full year revenue guidance for 2025 does not reflect year-over-year growth. This is primarily due to two key factors: first, our run rate revenue in the fourth quarter of 2024 was lower than where we started 2024, and second, our strategic decision to exit Grove Co products from brick-and-mortar retail while applying top-line pressure is expected to strengthen our bottom line and allow us to keep our focus on our direct-to-consumer offering. We expect to have fully wound down our brick-and-mortar business by the end of the first half of 2025.

Thank you, Tom. I'm incredibly proud of the work we're doing at Grove and the progress we're making each day, not only as a business but as a trusted brand and meaningful partner to our customers. We spent a lot of time in recent months getting to know them better and understand who they are, what they care about, and what they need. We've been reaffirmed by the research that we're on the right path, but the work remains far from done. In the past year, and even the past quarter, we've seen green shoots in our business, which are a direct result of our discipline and following our strategy. We also benefit from being a company founded on a mission and purpose to transform the products consumers use every day into a force for environmental and human health. This mission resonates with our customers and the broader conscientious consumer that we aim to serve, a mission that we reaffirm and that is now more important than ever. With that, we're happy to answer any questions you have. Operator, please open the line for questions.

Thank you. It looks like there are no further questions at this time. I would like to turn the floor back to management for closing remarks.

Alec on for Susan. Nice job on just the whole year and getting the revenues to return to sequential growth. So I guess just to start in the fourth quarter, you noted that there were higher repeat order rates. And maybe you talked a little bit about some of the underlying drivers like more targeted marketing. But is there anything more that helped drive that higher repeat order rate or is it also the cohort curve flattening? Just like any details there?

Thank you, Alec. In short, this is just the continued result of our improvement on the core customer experience. The first thing that I would call out would be the increase in third-party assortment. It just gives customers more reasons to shop. When there was less assortment, it was harder for a customer to find enough items to build a box in the frequency they are doing now. We are still continuing to drive improvement in orders per active customer, and we see this as a natural output of the improvement in third-party selection and the overall shopping experience. In Q4, we also aggressively moved through some inventory and offered good discounts on Grove Co products. You also saw that as an output in our operating cash flow for the quarter.

Thanks. And then just on the third-party assortment, are you able to talk about the pipeline for 2025, whether it be the number of brands or just the categories you're focused on?

Yes. Thank you so much. So a few thoughts here. Even though we're expanding assortment, I want to emphasize that we're not trying to be the everything store. We want to focus on having the highest standards for product quality. We're moving across into new categories, and we've been talking about wellness for a while. The acquisition we just announced today of 8Greens shows that we will have our own brand in the wellness space. That gives us an opportunity to reach more of our consumers. You're going to see real focus on human health, not just vitamins, minerals, and supplements, but how you think about human health across all categories. One of our investors uses this phrase: a non-toxic marketplace. It's about building a trusted destination with a wide range of quality products. You will see us continue pushing into kitchen and home, baby, and pet. We see opportunities for customers searching for good products for their families and the planet.

Yes, I think that makes sense. You mentioned moving away from the messaging of just being beyond plastic and focusing more on human health. Is there a thought on branding or marketing campaigns this year to push that message further?

Very much so. When you think about this company, we are not going backward on our stance as a leader in sustainability and being plastic neutral. I'm really proud of our efforts there. But as we mentioned in past calls, customers trust us to help them find the right products in other areas. So you're going to see more consistent messaging around human health. I'm excited about the content we're generating on our blog. Once we are on the other side of the Shopify transition, you will see our ability to lean into content, education, storytelling, and a more guided shopping experience consistent with the theme of human health. Your home healthier will be reflected in marketing that spans from upper funnel to bottom funnel types of marketing. So it will be a shift in how we position the brand to our consumers, but it will remain consistent with the new assortment that we are adding.

Just last question on the financials. Are you able to provide some color on the moving parts in the P&L this year? Specifically, how are you thinking about gross margins and various operating expense buckets like advertising? Can you also quantify the impact of Shopify in the first quarter? Thank you.

Great. I'm actually going to hand this to Tom. Tom, do you want to take it?

Sure. Yes, Alec. Thanks for the question. We don't give specific guidance as it relates to some of those line items. But I think from a higher level, I can provide some context. In 2025, there will be both accretive and dilutive impacts to our gross margin. We're exiting brick-and-mortar, which has been historically more dilutive. We had the benefit of the inventory reserve release in 2024, which won't be of the same magnitude in 2025, but the two acquisitions we recently announced are accretive to our gross margin. While we don't expect further specific guidance, there will be movements in both directions. We've done a good job managing our expenses over the last 24 months, and we don't expect to grow our expenses until we see consistent revenue growth. We will remain disciplined in managing our expenses. Regarding advertising, we focus more on the paybacks and the returns on those investments. We're guiding to full-year positive adjusted EBITDA. As we progress through our strategy over the year, we will actively manage costs and find the right channels to spend effectively.

Thank you, Tom. That’s very helpful. Thank you. I'll turn it back, and I'm excited to see everything unfold the rest of the year.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.