Second-quarter net revenue at the Bay Area B Corp. increased 15.1 percent to $78.2 million on net losses of $29.4 million, but amid cutting its full-year guidance for the second time this year, company stock plunged 13 percent in after-hours trading on Monday.
In a Nutshell: Allbirds’ cost-saving measures, which the company calls “simplification initiatives,” are expected to generate annualized selling, general and administrative (SG&A) expense savings of $13 million to $15 million beginning in 2023, as well as “significant” cost of revenue savings in future years. Including the job cuts, which encompass 8 percent of the company’s global corporate workforce, the measures are designed to streamline corporate operating structure, and reduce carbon and supply chain costs.
To conduct the corporate streamlining, Allbirds says it is dramatically slowing the pace of corporate new hires and backfills for departing employees and reducing corporate office space to reflect a new hybrid working environment.
The B Corp also plans to reduce logistics costs in the U.S. by transitioning to automated distribution centers and a dedicated returns processor. Additionally, the company is taking steps to optimize inventory, and accelerate the scaling of its manufacturing base to reduce product carbon footprints and product costs over time.
“The transition to automated DCs and a dedicated returns processor will provide greater cost predictability in the second half of 2022 and should begin to positively impact adjusted gross margin as soon as 2023,” Allbirds chief financial officer Mike Bufano said. “The more rapid scaling of our manufacturing network should begin to meaningfully reduce product costs by late 2023. Taken together, we believe these initiatives can keep us on track to achieve our medium-term target of 60 percent plus gross margin in our direct business and make up some of the ground we lost to the Covid-related headwinds in 2021 and 2022.”
As part of these initiatives, Allbirds expect to incur non-recurring costs of $18 million to $24 million.
The Adidas collaborator continues to expand its physical footprint, opening five stores in the U.S. during the quarter and two more internationally, bringing total stores to 46 as of June 30. During the quarter, U.S. store sales increased nearly 120 percent year over year. In addition to wholesale partnerships with Nordstrom, Zalando and Public Lands, Allbirds products are now available in Midwestern sporting goods chain Scheels.
Allbirds co-founder and co-CEO Joey Zwillinger said that third-party distribution expansion is a “profitable” marketing vehicle for its direct channel, with incremental top and bottom-line growth over the medium term.
“In our view, Allbirds should pursue more partnerships to expand its distribution and bolster brand awareness,” GlobalData managing director Neil Saunders wrote in a research note. “This cannot come from the build out of its own stores alone, as the expense of creating a massive store network is not justified by the returns and comes with a very significant dose of financial risk.”
Inventories totaled $122.3 million in the second quarter, an increase of 14.4 percent compared to $106.8 million at the end of 2021 and an increase of 3.2 percent compared to March 31, 2022. The increase is attributable to a combination of higher in-transit inventory as a result of extended lead times from the ongoing supply chain disruptions as well as the impact of higher inbound freight costs.
“This is good inventory, primarily core evergreen footwear,” Bufano said. “In this dynamic demand environment, we will buy tighter on core footwear for the next few quarters, enabling us to make calculated buys on new footwear styles. This tighter buying approach when coupled with our selected promotional strategy is expected to lead to lower inventory levels and improved turns.”
Gross margin was 36.1 percent, plummeting from the 56.1 percent margin rate in the second quarter. Allbirds attributes the 20-percentage-point drop primarily to an $11.6 million write-down of end-of-life apparel inventory, higher distribution center and logistics costs, a lower mix of international sales, and unfavorable foreign exchange rates, partially offset by favorable mix shift to physical retail and higher margin products, as well as improved pricing.
When excluding the inventory write-down, adjusted gross margin was 51 percent compared to 56.1 percent in 2021.
Allbirds’ significantly downgraded its guidance from its past outlook, cutting the prior revenue range of $335 million to $345 million to a new range of $305 million to $315 million, representing growth in the range of 10 percent to 14 percent.
Once targeting gross profit of $170 million to $177.5 million with a midpoint gross margin of 51.1 percent, the San Francisco-based company now expects gross profit to come in between $150 million and $157.5 million with a midpoint gross margin of 49.6 percent.
While anticipated adjusted EBITDA initially totaled $25 million to negative $21 million, Allbirds widened the loss range to between $42.5 million to $37.5 million.
The firm’s carbon footprint reduction target of 6 percent against its 2021 baseline for its top 10 products remains intact.
The updated guidance “shows that Allbirds is a lot less optimistic about its prospects due to the deteriorating external environment,” Saunders said. “The slowdown really emanated from the international business where a multitude of factors— falling consumer confidence in Europe, a dramatic lockdown-induced fall in demand in China, and unfavorable exchange rates—meant that growth came in flat. This is disappointing but is not entirely [unexpected] given Allbirds signaled many of these issues during its last update.”
For the third quarter, Allbirds expects adjusted net revenue of $65 million to $70 million, representing 4 percent to 12 percent growth versus the third quarter of fiscal 2021. The footwear company forecasts an adjusted EBITDA loss of $17.5 million to $15.5 million.
The company ended the quarter with $207.3 million of cash and cash equivalents and $40 million available under its revolving credit agreement.
Net Revenue: Net revenue increased 15.1 percent to $78.2 million compared to $67.9 million in the second quarter of 2021, and increased 55 percent compared to 2020.
Net revenue in the U.S. grew 21.3 percent to $59.3 million, compared to the $48.8 million generated a year ago.
International net revenue was flat at $18.9 million compared to the $19.1 million generated in the second quarter of 2021, as the business was negatively impacted by external headwinds, including Covid-19 restrictions in China, the crisis in Ukraine, and unfavorable foreign exchange rates that had an estimated 945 bps negative impact.
Net Earnings: Allbirds saw a net loss of $29.4 million, or 20 cents per basic and diluted share, compared to a $7.6 million loss in the second quarter of 2021.
The footwear seller saw an adjusted net loss of $18.1 million, or 12 cents per basic and diluted share, extending from the $7.6 million adjusted loss a year ago.
Adjusted EBITDA in the second quarter of 2022 was a loss of $9.2 million compared to earnings of $1.1 million in the 2021 quarter.
CEO’s Take: “Apparel at the moment is about 10 percent of the business,” Allbirds co-founder and co-CEO Tim Brown said. “We don’t see that materially changing. The innovation and product focus remains vastly on footwear. We’ve got some really exciting sort of stuff coming with the new material platform in the next short period of time, a new lifestyle franchise that we’re really, really excited about. But apparel has got a really important role to play. We know that consumers want from us socks, underwear, classic T-shirts, all articulations of our supernatural comfort. And part of the strategy there is to focus on that, shifting from a lineup of Gen-1 apparel that was less than half evergreen to the vast majority of evergreen.”