Earnings Call Transcript - SN Q3 2023

Operator, Operator

Greetings, and welcome to the SharkNinja Third Quarter 2023 Conference Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Arvind Bhatia, Head of Investor Relations. Thank you, sir. You may begin.

Arvind Bhatia, Head of Investor Relations

Good morning, and welcome to SharkNinja's Third Quarter 2023 Earnings Conference Call. Joining me on today's call are Mark Barrocas, SharkNinja's Chief Executive Officer; and Larry Flynn, Interim Chief Financial Officer and Chief Accounting Officer. Mark will begin by providing a business update, and Larry will then provide a review of our financial results and discuss our updated 2023 outlook. After that, we will open the call for your questions. By now, everyone should have access to the earnings release for our third quarter ended September 30, 2023, issued this morning. The press release is accessible on the company's website. And shortly after the conclusion of today's call, our webcast will be archived and available for replay. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. If you refer to SharkNinja's earnings release as well as the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially as a result of these forward-looking statements. Please remember the company undertakes no obligation to update or revise these forward-looking statements in the future. During the call, we will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. Now I will turn the call over to Mark.

Mark Adam Barrocas, CEO

Thanks, Arvind. I really appreciate everyone taking the time to join us this morning. We're excited to report another strong quarter. This is our second one as a public company, and we are optimistic about the rest of the year. Since our listing on the New York Stock Exchange a few months ago, people have been pleasantly surprised by our scale and diversification. We're on track to exceed $4 billion in net sales and achieve close to $700 million in adjusted EBITDA this year. This will make us one of the largest and most profitable companies in our industry. We're also highly diversified. We're now in 31 subcategories. We sell our products in 26 countries. We partner with more than 150 brick-and-mortar and online retailers and have a rapidly growing direct-to-consumer business. The investment community has been asking me what's SharkNinja's secret sauce? I always have to pause before responding because it's not just one thing. It's a combination of so many different things that make us unique and different. Our disruptive innovation engine continues to deliver amazing products at accessible price points. Our marketing and communications approach has created strong consumer demand for our products. Our omnichannel strategy allows us to be channel agnostic. Our products are available wherever our consumers want to shop for them. We have a nimble, efficient, and scalable supply chain that helps us drive industry-leading margins, but it really comes down to the SharkNinja mindset and culture. This is really what differentiates us and it's hard to replicate. Everyone here has a desire to win and to exceed expectations. This approach permeates throughout the company and drives our success. Turning to third quarter results. We grew adjusted net sales by nearly 15%. That's strong double-digit growth and increased our market share across both the Shark and Ninja brands. Adjusted EBITDA grew more than 38%, continuing the strong trend from the second quarter. We delivered more than 300 basis points of adjusted EBITDA margin expansion, including 950 basis points of adjusted gross margin improvement. The team did a great job. Q3 gross margins were ahead of expectations and reflected a few things: continued supply chain tailwinds, cost optimization efforts and a favorable pricing and promotional mix. Earlier this year, we set out a long-term target to get back to pre-COVID gross margin levels of 45%. That's up from 40% in 2022. We're currently on pace to hit that target this year, well ahead of plan. We took a portion of the gross margin upside in the quarter and invested it back in the business. Our awareness in new markets and new categories continues to grow. Q4 is off to a great start. While the macroeconomic environment remains uncertain, we have good visibility for demand through the end of the year. We're raising our full year guidance and now expect adjusted net sales growth of 12.5% to 13.5%, up from 10% to 12% that was previously provided. Adjusted EBITDA is expected to be in the range of $690 million to $705 million or growth of 33% to 36% compared to our prior guidance of $650 million to $680 million. Our team has set us up to be in a great position both this year and as we head into 2024. We believe our 3-pillar growth strategy has enabled us to drive market share, growing share in existing categories, entering new and adjacent categories and international expansion. Our results demonstrate how we remain focused on all 3 growth pillars. Our new and adjacent subcategories have great momentum and have been important contributors to our growth. Subcategories like beauty and outdoor cooking that we launched in the last 12 to 18 months continue to perform well. Shark SpeedStyle and Shark SmoothStyle are 2 new innovative products that recently launched to help expand our beauty portfolio. We partnered with Chris Appleton, celebrity hair stylist to Kim Kardashian and Jennifer Lopez as our Shark Beauty brand ambassador. This is our first beauty partnership. I could have never imagined a few years ago that more than 200 influencers would line up in SoHo, New York during Fashion Week to check out the latest Shark beauty products, but that's exactly what happened. We believe there is this natural synergy between beauty and the right celebrity that works, and we're just getting started. Outdoor cooking continues to deliver strong results and great consumer feedback. The Ninja Woodfire Outdoor Grill, which launched last year, is seeing strong sell-through and satisfaction among consumers, both in North America and Europe. Consumers loved it so much that they told us they wanted something even bigger. Because of the flexibility and speed of our team to adapt, I'm thrilled to share that we recently launched the Ninja Woodfire XL Grill, expanding our offering in this segment. I'm also excited about the new subcategories we have entered in 2023. We launched 4 new subcategories of products in 2023 that have runway for expansion moving forward. In the Ninja brand, we launched our first outdoor woodfire oven, which is performing well. During Q3, we entered the in-home beverage category with our carbonation drink system, the Ninja Thirsti. Consumers now have the ability to dispense a single drink for a wide variety of offerings, making it fun, convenient, and exciting for the entire family. The Thirsti has started to see strong social engagement on TikTok and Instagram. We're pleased with the initial response from consumers and plan to launch the Ninja Thirsti internationally in 2024. On the Shark side, we entered the carpet extractor segment, a large definable market with 2 innovative products, the Shark CarpetXpert and the Shark StainStriker. We believe these products will help consumers maintain and brighten their carpets and give them the power to remove stubborn spills and stains in a way that hasn't been done before. Shark saw a need to help consumers vacuum the unvacuumable, launching our brand-new Shark MessMaster, whether it's glass, pet messes or a day in the workshop, the MessMaster is designed to pick up virtually anything. Shark was already the #1 selling floor care brand in the U.S. in 2022. But with these differentiated products and our built-in equity with floor care consumers, we expect to drive additional market share over time. These are all great examples of how we can get into new categories by staying focused on identifying and solving consumer problems that others either don't see or are unable to solve. We believe we are offering great performance and extraordinary value. This is the hallmark of SharkNinja products. Our innovation continues within existing categories. We recently launched a new series of robotic and cordless vacuums using our proprietary Detect Pro technology. These are smarter, stronger, and more convenient for consumers. In the Home Environment segment, the Shark never changed air purifiers recently launched, which don't require filter replacement for 5 years and are getting strong consumer reviews. In the Ninja brand, we've introduced the Ninja Combi, our next generation of multicookers. And in food prep, we've reinvigorated the blender and kitchen system with improved features and functionality through the launch of Ninja TechPro. These new products keep our offerings fresh and our consumers excited. SharkNinja's strategy is to maintain and grow market share in our existing categories through a relentless focus on new innovation to keep the consumer excited for what's next. International was again the strongest growth driver in Q3 as adjusted net sales were up a staggering 80%. This was driven by continued success in the U.K. and the rest of Europe. In Italy, Spain and Latin America, we're in the early stages of establishing our presence. Those markets all have great potential for growth. We have a large opportunity outside of North America. We're working hard to capitalize on that as we globalize our brand. About 80% of the products that we develop today are for a global consumer. This has been a game changer for us over the last few years. It's helped us to enter new markets using the same playbook that has worked well in the U.S. and U.K. The market opportunity outside the U.S. is large, and we expect International to remain a key growth driver for us. Our 3 pillars of organic growth strategy continue to deliver industry-leading growth. We leverage our disruptive and best-in-class innovation engine, our proven go-to-market strategy, and our agile and scalable supply chain. Our approach to consumer problem-solving and designing products is centered around delivering market-leading performance, multi-functionality, high-quality, and extraordinary value. We're on track to deliver more than 25 new SKUs this year within new and existing categories. We have a clear line of sight to our plan 2024 product lineup, and our 2025 product roadmap is also beginning to take shape. We're attracting world-class engineering and design talent across software, electronics, app, IoT, mechatronics, and other fields. We're growing our talent base in our key R&D centers in Boston, London, and China. But bringing amazing products to the market is not enough. We continue to create demand and drive market share by leveraging our proven go-to-market strategy. During the quarter, we reinvested gross margin dollars into media and advertising to increase awareness within our international markets and to support new category launches. Providing strong media support to our nascent markets and newer categories is a key part of our organic growth strategy. Our newer categories are helping us drive increased shelf space, not only at existing retailers but also at retailers new to us, ranging from beauty retailers to outdoor stores. Our consumer demographics are expanding and reaching new audiences from teenagers that are raving about our hair care products on social media to male consumers who can't wait to show off their cooking skills on our outdoor grills and ovens. On a personal note, my 2 daughters and their friends are big fans of the Shark FlexStyle and now think I'm a cool dad for the very first time. Social media is a major focus of our advertising efforts. We're seeing extraordinary organic user-generated content across TikTok and Instagram grow for both the Shark and Ninja brands. As an example, the Ninja CREAMi is fast approaching 1 billion views on TikTok. Our strength lies in our ability to launch and market products that consumers love. However, today's discussions would not be complete without highlighting our best-in-class supply chain. We believe this is a competitive advantage for us. We're seeing the benefits of many years of investments in our supply chain and the long-standing partnerships we have built with suppliers in Asia. We expect to have great momentum as we head into 2024 by tapping into our in-depth understanding of what consumers want and our engineering expertise. We plan to keep blazing a trail with groundbreaking innovations that are reshaping the industry. Our sights are set on entering into new markets and making our presence felt in every household while driving growth and profitability. Our commitment to innovation and international expansion, backed by our compelling financial profile sets us apart from our competitors. I'm confident we're on the right track to fulfill our mission of positively impacting people's lives every day in every home around the world and to deliver substantial value to our stakeholders. Larry will now walk you through our third quarter financials and updated outlook in more detail. Larry?

Larry Flynn, Interim CFO

Thank you, Mark, and good morning, everyone. I'll start with a review of our third quarter results, followed by an update on our outlook for 2023. As Mark mentioned, our third quarter results were strong. Net sales increased 13% and adjusted net sales, which excludes sales from our divested APAC business, were up 15% to $1.1 billion. We delivered adjusted EBITDA growth of 38% to nearly $209 million, with adjusted EBITDA margins increasing 340 basis points year-over-year. Looking at top line performance by region. Net sales in North America were up over 2% to $797 million, representing 75% of adjusted net sales. Adjusted net sales in International markets were up 80% to $260 million, including the U.K., which was up 65%, continuing the strong trend. In North America, our POS was up high single digits during Q3, according to NPD compared to the 2% growth in shipments. So while destocking is mostly behind us, retailers continue to manage inventory tightly as we head into the holiday period. We have factored this into our full year guidance, which I will speak to momentarily. Next, let me take a minute to provide color on our 4 major product categories. Adjusted net sales in the Cleaning category, which includes vacuums as well as other floor care products such as steam mops and wet and dry cleaning floor products, decreased 9% to $442 million from $486 million. While our shipments in the cleaning category were down, our global POS sales were up slightly according to industry data. Given our POS performance and our recent launch into the extraction category, we expect our fourth quarter growth in shipments in the cleaning category to improve. Adjusted net sales in the Cooking and Beverage category, which includes air fryers, multicookers, outdoor grills, and ovens and carbonation increased a strong 31% to $338 million compared to $258 million in the prior year. This performance was primarily driven by strength in Europe, specifically in the U.K., where we expanded our dominant market position. In terms of Products, we benefited from continued strength in air fryers and outdoor grills and the launch of outdoor ovens and carbonation during the quarter. Our performance in the Food Prep category, which includes blenders, food processors, and ice cream makers, was also very strong. Adjusted net sales in this category increased more than 33% to $209 million compared to $157 million in the prior year. Growth in food prep was driven by continued strong performance of our ice cream makers and blenders, led by the launch of our new portable blenders. And finally, Other, which includes beauty products such as hair dryers and stylers and home environment products such as air purifiers and humidifiers was again our fastest-growing category. Adjusted net sales in this category more than tripled to $67 million, representing 6% of adjusted net sales from $22 million or 2% of adjusted net sales in the prior year. This growth was fueled by the strong performance of our hair care products, including FlexStyle, SpeedStyle, and SmoothStyle. Moving down to gross profit. In the third quarter, GAAP gross profit increased 42% to $487 million or 45.5% of net sales, an expansion of 920 basis points compared to the prior year. Adjusted gross profit increased 43% to $505 million or 47.8% of adjusted net sales, representing expansion of 950 basis points over the prior year. As Mark mentioned, this margin expansion was primarily driven by cost tailwinds, cost optimization efforts, and a favorable pricing and promotional mix. Turning now to operating expenses. During the quarter, R&D expenses increased 12% to $61 million compared to $54 million in Q3 last year. As a percentage of sales, R&D was 5.7% of net sales, flat versus last year. We continue to invest in research and development, primarily in headcount to support new product categories and new market expansion. Sales and marketing expenses increased to $208 million or 19.4% of net sales compared to $133 million or 14.1% of net sales in the year-ago period. This increase was mainly due to our reinvesting of some gross margin dollars back into the business via advertising and personnel to support our new product launches and expansion into new markets as well as fueling healthy top line growth through media versus promotional activity. A portion of the increase in sales and marketing dollars also resulted from increased delivery and distribution costs driven by higher volumes, particularly in our direct-to-consumer business. General and administrative expenses increased to $125 million compared to $47 million in the prior year, primarily due to costs related to the spin-off from JS Global and stock compensation expense associated with new RSU grants. Our GAAP effective tax rate was 75.3% in the third quarter compared to 21.8% in the prior year. This GAAP effective tax rate for Q3 reflects the expected impact of withholding taxes and certain nondeductible costs associated with the separation and distribution from JS Global. GAAP net income for the quarter was $19 million compared to $80 million in the prior year. Adjusted net income was $133 million or $0.95 per share compared to $99 million or $0.71 per share in the prior year, reflecting growth of 34%. Adjusted EBITDA for the quarter increased 38% to $209 million or 19.7% of adjusted net sales compared to $151 million or 16.3% of adjusted net sales in the prior year, reflecting strong margin expansion of 340 basis points in the quarter. Turning to the balance sheet. As of the end of the third quarter, we had cash of $170 million and total debt outstanding of $810 million. As a reminder, in July 2023, we entered into a new domestic credit facility that provides for an $810 million term loan and a $500 million revolving credit facility, which fully replaced our prior term loan and revolving credit agreement. As of the end of Q3, our net leverage ratio was approximately 1.0x. From an inventory perspective, we believe our inventory level and mix are healthy. At the end of the quarter, we had inventories of $792 million, up approximately 15% compared to Q3 2022, in line with our sales growth. Shifting to capital allocation. We are pleased to announce that our Board of Directors approved a special cash dividend of $1.08 per share payable on December 11, 2023, to shareholders of record on December 1. This special dividend reflects management and the board's confidence in the business, the strength of our balance sheet position, and our ability to continue to generate strong free cash flow. With that, let me now turn to our outlook for 2023. Given our strong performance year-to-date and our confidence in sustaining positive momentum through the end of the year, we are raising our fiscal year 2023 guidance. For the full year, we now expect GAAP net sales to increase between 11.5% and 12.5% compared to between 9% and 11% that we expected previously. We expect adjusted net sales to increase between 12.5% and 13.5%, in line with our year-to-date performance and above our prior guidance of between 10% and 12%. We expect adjusted EPS to be in the range of $3.06 to $3.14, compared to the previously provided range of $2.85 to $3.02 and reflects a year-over-year increase of 29% to 32%. Adjusted EBITDA is now expected to be in the range of $690 million to $705 million compared to $650 million to $680 million expected previously and represents year-over-year growth of 33% to 36%. Net interest expense guidance for the full year remains unchanged at approximately $45 million. We now expect a GAAP effective tax rate of approximately 42% to 43%, up from our prior guidance of 35% to 36%. This includes approximately 14 to 15 percentage points of impact related to withholding taxes and nondeductible costs associated with the spin-off from JS Global and certain related party transactions, as well as approximately 3 percentage points of impact related to withholding taxes associated with the Q4 cash dividend. And finally, we continue to expect capital expenditures of $120 million to $140 million for the year. To close, we are excited by our Q3 results as our impressive growth demonstrates the effectiveness of our 3-pillar growth strategy and our ability to continue to strategically reinvest in our business to fuel top and bottom line performance for the long term. We have also improved upon our industry-leading margin profile, and we continue to deliver strong free cash flow.

Mark Adam Barrocas, CEO

Thanks, Larry. 2023 is a testament to our track record of delivering profitable organic growth through high-performance products that address everyday consumer challenges. We've made incredible progress so far, but I'm even more excited looking to the future as we think about the tremendous white space and potential opportunity in front of us. Our current total global addressable market is above $100 billion and continues to grow. As we plan to keep rolling out new innovative products entering new categories, both in and outside the home, and expanding our brand presence worldwide, I believe we're going to see our market share continue to grow. We plan to use consumer insights and our engineering expertise to keep leading the way with game-changing innovations that set the industry standard. That concludes our prepared remarks, and I'll now turn it over to the operator to kick off Q&A.

Operator, Operator

Our first question comes from Brooke Roach with Goldman Sachs.

Brooke Roach, Analyst

Mark, I was hoping you could elaborate on the underlying demand trends you're seeing in the U.S. today for both the category and for SharkNinja. As you look ahead, what signals are you seeing among your key North American wholesale partners, both in terms of sell-in versus sell-through that give you confidence to raise the outlook today?

Mark Adam Barrocas, CEO

Yes. Thanks, Brooke, for the question. So I would say that we feel like we have good momentum as we head into Q4. We've launched a lot of new products in the third quarter, many of which launched toward the end of the third quarter. So we didn't see much of an impact within Q3, but we will as we start to move through Q4 and into the holiday season. That has enabled us to get incremental shelf space in many of our existing retailers. It's also allowed us to be able to enter into new retailers, for example, for our hair care products now in the third quarter just launched into Ulta for the first time. I would say that retailers overall are being very conservative as it relates to inventory in North America. We've seen more desire for just-in-time inventory, taking promotional orders closer to the holiday season. In September, we did see a little bit of destocking pullback on the base business, but not anything that we're overly concerned about. We think it's just some timing challenges. But overall, our business is being driven by higher ASP items, some of the more innovative products, some of the more media-driven products. And we feel that our model of giving the consumer extraordinary value and innovation is really what's going to propel the momentum moving forward.

Operator, Operator

Our next question comes from Randy Konik with Jefferies.

Randal Konik, Analyst

Yes, Mark, it's great to hear about your new role as a cool dad; I'm working on that myself. Regarding the success in the beauty category, how has your perspective on category expansion changed over the years compared to around a decade ago, when the beauty category may not have been a major focus for you? Could you provide some insight into how you and your team view different subcategories, both inside and outside the home, as mentioned in your script? It would be fascinating to learn how your thoughts on this have evolved. Additionally, in terms of international success, particularly in the U.K., could you explain what factors have contributed to that market's particular success and how it might differ from your approach in the United States? How do you plan to take that success from the U.K. and replicate it in other markets, such as Germany, Spain, and others that you referenced in the script?

Mark Adam Barrocas, CEO

Yes, absolutely, Randy. Regarding category expansion, I would categorize it into a few areas. You mentioned beauty, which for us goes beyond just hair care. Our focus on beauty is due to our presence in the bathroom and collaboration with a variety of retail partners, which opens up numerous other categories to introduce innovation and excitement. We believe this potential extends well beyond hair care. In this quarter, we launched the Ninja Thirsti Drink System and our first drinkware products, designed specifically for carbonated beverages, addressing a market need for transporting those drinks. This marks our initial move into the drinkware category. In outdoor cooking, we've progressed from grills to ovens and are reimagining outdoor cooking as a kitchen space rather than merely a grill storage area. There are many cooking possibilities outdoors that aren’t feasible indoors due to smoke or high temperatures. We see further opportunities for brand expansion in this area as we approach 2024. We have an excellent consumer insights team generating numerous ideas, which we are evaluating through our innovation process to identify potential expansion areas where we possess the technology to meet unmet consumer needs. This approach allows us to explore many new categories for the Shark and Ninja brands. Concerning the U.K., many might think of it as an overnight success, but we actually launched there in 2014. It took several years to refine our product and messaging. Currently, while we operate in 31 product categories in North America, we are only in about 18 or 19 in the U.K. We've been experiencing a backlog of expansion opportunities, and as U.K. retailers have seen success with our products, they have provided us with more shelf space and opportunities to introduce new categories. We are seeing an accelerated pipeline for category expansion in the U.K., which is still evolving in Germany and France, where we are in 7 or 8 product categories but see potential for 15 to 17 more relevant categories in the coming years. We intend to apply the same strategy in Continental Europe, focusing on delivering disruptive products that resonate with consumers. Our strong 5-star reviews in Germany and France reflect this. Our significant media investment will help raise brand awareness since we are starting from a low baseline. Additionally, our dominant omnichannel strategy encompasses online, offline, and direct-to-consumer approaches. We believe the strategy we've executed in the U.K. is applicable in the rest of Continental Europe as well.

Operator, Operator

Our next question comes from Phillip Blee with William Blair.

Sabrina Baxamusa, Analyst

This is Sabrina on for Phillip. Given the importance of product newness and its contribution to your top line growth, could you provide some more color on how long the newness lasts? Or what a typical product's time to maturity looks like? And then if there's any variation by category or geography?

Mark Adam Barrocas, CEO

Sure. Sabrina, it's hard to like paint a broad brush on that for everything. I mean we have products that we launched in 2010 that are still on retailer shelves today like our short list away vacuum. I would say that when we launch a product, it phases out across retailers and starts to build. I mean products that we launched in, let's say, Q3 of this year, we won't kind of see full momentum until we get into next year's holiday season. I mean we'll benefit from sales this holiday season, we'll benefit obviously from sales through the first few quarters of next year. But really, we would look at kind of next holiday season to be the first big holiday season where all retailers have the product. We have a large number of search relevance, a large amount of social media awareness on TikTok and Instagram. So I'd say it kind of takes a year to build to that point. And in terms of where do those products stay, look, I mean the business model is about bringing newness constantly. I mean we're going to launch 25 new products this year in existing categories and new categories. We anticipate a similar pipeline of new products for next year. So it's hard to kind of say that there's one measure across each product, but it kind of takes a year for us to really get to the place where the product has strong momentum behind it.

Sabrina Baxamusa, Analyst

Got it. That's helpful. And then just a quick follow-up. Could you provide us with some detail on what your team has been doing to ignite some more crossover demand between the Shark and Ninja brands?

Mark Adam Barrocas, CEO

Yes, sure. I mean, we've really been focused a lot more of that in our direct-to-consumer business globally. Obviously, marketing to our existing file, Shark and Ninja products, I mean we're continuing to see an uptick on our D2C business of consumers buying more than one product within an existing brand or buying products across brand. So that's really the best visibility that we have. It's hard to kind of see that when it gets into the retailer space because most consumers don't register their products with us. But as it relates to direct-to-consumer, I think really through marketing to our existing consumer base is where we're doing the most to try to cross-sell across Shark and Ninja brands.

Operator, Operator

There are no further questions at this time. I would now like to turn the floor back over to Mark Barrocas for closing comments.

Mark Adam Barrocas, CEO

Great. Thanks, everyone, for joining us on our third quarter call. We look forward to speaking with you at upcoming investor events. Meanwhile, please feel free to reach out if you have any additional questions, and have a great day. Thanks.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.