Earnings Transcript for POL - Q1 Fiscal Year 2022

Operator: Good morning, and welcome to the 1847 Goedeker First Quarter 2022 Earnings Call. All participants will be in a listen-only mode. On the call today are Chief Executive Officer, Albert Fouerti and Chief Financial Officer, Maria Johnson. First, please note that various remarks about future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform act of 1995. The company cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated, including the risks described in the company's filings with the SEC. Any forward-looking statements made on this conference call speak only as of today's date of May 16, 2022, and the company assumes no obligation to update any of these forward-looking statements to reflect events or circumstances that occur after today. Second, we had a few special items in our first quarter results which we excluded from our trends for non-GAAP purposes, and we will reference these non-GAAP results in our remarks today. So please see our press release from this morning and our Investor Relations website for more information and our cautionary statement, which cover these topics in more detail. A replay of the conference call will be available on the 1847 Goedeker Investor Relations website this week. At this time, I'll turn the call over to Albert Fouerti for opening comments. Please go ahead, Mr. Fouerti.

Albert Fouerti: Good morning and thank you for joining today's call. I'm excited to discuss our financial results for the first quarter in addition to providing updates on key initiatives that we believe will drive long-term growth and value creation. I will begin by touching on our financials for the quarter, which Maria will discuss in further detail shortly. Despite widespread macroeconomic challenges I am proud of the results our team has delivered at the start of the year. We achieved sales of $152.8 million, representing a more than 23% increase over combined performance sales for Q1 2021, a gross margin of 23.5% and a net income of $5.9 million and adjusted EBITDA of $13.5 million. In the first quarter of 2022, we also continued executing in key initiatives to strengthen our underlying business and its capital structure. The macroeconomic environment does not change the fact that we have tremendous opportunity in the home appliance market. We are going to lean into expertise, technology capabilities and scale to seize this opportunity.

Appliances Connection: The name and ethos we've selected reflect our vision to be more than just a retailer, but to become a home and appliance platform that empowers customers throughout their entire purchasing journey, from inspiration to installation. It is important to note that continuity remains a top priority during this rebrand, as we are keenly aware of the name recognition we carry with our Appliances Connection in particular. This is why our marketing and branding team will be working diligently over the next several months to build brand equity and ensure smooth rollout of our new brand. Second, with respect to our B2B solution offering, as we have previously stated, we had approximately $20 million of new projects in the pipeline at the end of Q1, and we are already seeing some exciting projects in the pipeline for Q2, such as a new $1.2 million project for 859 unit residential building remodel that we have been recently awarded. We are pleased with the early progress we have made and we are working to build on the pipeline throughout the remainder of the year with a similar pace we have seen in Q1. As previously noted, these are longer term projects that may take 6 to 18 months to come to fruition. This said, we expect this pipeline will materialize into significant B2B revenue growth in 2023. Third, we continue to be optimistic about bringing new warehouses online in the right location at the right time when pricing and supply chain becomes more normalized. Tight supply is a factor we must consider as we want to ensure that any new warehouses that we bring online can be stocked with the proper inventory at the right cost. We remain focused on identifying opportunity to expand our fulfillment network, including throughout affordable and targeted M&A. Before handing the call over to Maria, I would like to address our recently announced $140 million credit agreements with Bank of America. We appreciate the overwhelming positive feedback we have received from shareholders and we are glad that you share the excitement for what this strategic capital means for our business. We view this credit agreement as a testament to the strength of our business and its long-term trajectory. We secured this affordable non-dilutive capital to support our key strategic and corporate initiatives, including building out our B2B model through strategic partnership, expanding our fulfillment capabilities and enhancing our technology stack. Additionally, we are well positioned to continue optimizing our capital structure including by executing on our previously announced share repurchase program, and any programs authorized in the future. I will now conclude my initial remarks and turn it over to Maria Johnson to provide an overview of financial performance.

Maria Johnson: Thanks, Albert. Good morning, everybody. Net product sales for the quarter were $152.8 million compared $142.7 million sales for the last quarter, and $123.7 million pro forma sales for the first quarter 2021. Gross profit for the quarter was $35.9 million. And while our gross margin has increased 60 basis points from the last quarter from 22.9% to 23.5% increased freight costs due in part to higher energy costs continued causing some margin compression with Q1 shipping costs approximately 40 basis points higher than we saw throughout 2021 on a pro forma basis. Operating expenses for the quarter were approximately $25.8 million with the largest expense item being personnel costs of $7 million reflecting our investment in top talent, and 0.2 million severance costs, bank and credit card fees of $6.2 million, general and administrative expenses of $5.6 million, reflecting a more normalized level and almost 21% reduction versus Q4 2021, which was impacted by unpaid historical invoices and advertising expense of $4.3 million. Net income for the quarter was $5.9 million or $0.06 per diluted common share, compared to a loss of $3.5 million or $0.57 per diluted common share for the first quarter of 2021. Net income was up 56% versus last quarter. Adjusted EBITDA for the quarter was $13.5 million with a margin of 9% compared to $11.3 million EBITDA with 8% margin last quarter. As evident of the first quarter the company had working capital of $24.9 million and incurred negative cash flow from operations of $3.7 million which reflected $8.2 million of additional investment in inventory during this quarter as we continue facing supply chain challenges. Additionally, the company had cash and cash equivalents of $25.8 million at the end of the quarter, roughly flat to the prior quarter. With respect to our outlook, we are reaffirming our previously articulated full year guidance provided on our fourth quarter earnings call. We forecast high teens to low 20 sales growth for the year compared to 2021 pro forma sales and gross margins and adjusted EBITDA margins relatively flat to our 2021 full year pro forma results, which were 23.3% and 9% respectively. While we continue to face uncertainty caused by sustained supply chain disruptions, significant inflation and geopolitical uncertainties, we hope to refine our outlook over the course of the year if this macroeconomic headwinds ease. Now, I will hand the presentation back to Albert for closing comments. Albert?

Albert Fouerti: Thank you, Maria. As you could see, our sales have continued to build steadily on a year-over-year basis and sequentially. Our margin continued to be impacted by supply chain challenges and other transitory factors. However, as we make progress on our fulfillment network expansion and the supply chain eases we expect the benefits from lower shipping costs, which will help stabilize long-term margins. Additionally, we continue to build inventory to mitigate uncertainties related to the global supply chain, which we expect to help strengthen our ability to fill orders over the quarters to come. I told you in my first call as a CEO, that we are in what I view as our foundation building phase. We have continued to make meaningful progress in our key priorities, which we believe will drive long-term growth for our business. As I highlighted in my opening remarks, I am incredibly proud of the strides our talented team has made in the past quarter, particularly with our rebrand process, building out our B2B solution offering with new partnerships, and identifying opportunities to expand our fulfillment network. I look forward to working with the rest of the refreshed management team as we strive to capture additional market share and drive towards our goal of $1 billion in sales in the next few years. I'll conclude there and at this time, ask the operator to open the call up for any questions.

Operator: Our first question comes from Ryan Meyers from Lake Street Capital Markets. Please go ahead.

Ryan Meyers: Yes, good morning, guys. Thanks for taking my questions. The first one from me, so now that you guys have the $140 million credit agreements shored up and you do have some growth capital, what is at the top of the list as far as growth initiatives go?

Albert Fouerti: Hey, good morning, Ryan. How are you?

Ryan Meyers: Very well, thank you. How are you?

Albert Fouerti: Good, good. Yes, so we have a lot of, as you could imagine that, well we went and we restructured new the debt, so we have a lot of pipeline and the mix from obviously, top of mind is our capital structure, we're going to look at that. Second, we have to build out our inventory in certain locations that we move it around from one warehouse to another warehouse. We have our fulfillment centers that we are going to be improving out around the country. We are looking at building out our B2B offering and solutions. And obviously our ultimate goal is to focus on the business and grow the business as well.

Ryan Meyers: Great, that's helpful, nice to have that done. So you know, I just wondered if you could speak to what the order fulfill rates were during the quarter and if we have seen any sort of improvement there as we have progressed through 2022?

Albert Fouerti: Unfortunately, I mean, it's almost holding steady to what it was in the past, I would say Q4 of 2021. We're looking anywhere from about 63.5%, 63% of fill rate. We're still struggling with the same struggles that we had in the past. Hopefully, we're looking forward to the next Q2 or Q3 to get some type of relief in the supply chain.

Ryan Meyers: Okay, and then when you look at your overall inventory levels right now, how do you stand and do you think inventory is in a good spot where were you guys, do want to get a little bit more aggressive on the distribution centers? Do you think that you'll be able to kind of sufficiently fill these with inventory?

Albert Fouerti: That's really what has been the struggle in, or going out there and opening up to other fulfillment centers. Obviously we want to be able to buy the right inventory at the right costs and out bring in the correct inventory to the correct location, bringing in to New Jersey and distributing back out doesn't really help. What we're trying to do is making sure that our fulfillment centers when we stand them up, we have the correct product with the right cost in these -- in the right locations. We're not bringing in extra inventory. We’re just going to distribute the inventory rather than having everything in New Jersey and trying to distribute it out throughout the country, so we could service our customer much faster which results obviously in better conversion, better shipping costs, and less touches, which hopefully reduces the amount of damages and cancellation costs.

Ryan Meyers: Great, that's helpful. And then last one from me, and you kind of alluded to this a little bit on the call. But can you just sort of talk about what kind of macro environment you guys are baking into the full year guidance and sort of the guidance that you're giving right now or just kind of a continuation of the current environment that we're in right now, and if we see some sort of improvement, whether it's inflation or supply chain or shipping and logistics, we can potentially see some sort of upside to that?

Albert Fouerti: Yes. So we’ve baked in similarly to what we've seen in Q4 and Q3 of 2021 and what has happened in the past, I would say three months, there's been a lot of things going on from the war in Ukraine, inflation, fuel surcharges, so we baked it in and that's why we put in our guidance flat to what we showed in the past 2021, and we were forecasting high teens to low 20s in growth. So we've baked that in and we're baking into what we've seen in the past and what we're seeing right now and the current environment.

Maria Johnson: And just to add to that, hi this is Maria, and I think there is a possibility, obviously, that we might go back and reevaluate our guidance if the economic conditions improve in the future. But at this point, there is just too much uncertainty to make any changes to the guidance.

Ryan Meyers: Great, that’s helpful. Thanks, guys.

Albert Fouerti: Thank you.

Operator: The next question comes from Adam Wilk from Greystone Capital Management. Please go ahead.

Adam Wilk: Hey, good morning. Thanks for taking my questions. Really strong quarter and was happy to see the results, great job. I'm wondering a lot of my questions were asked previously, so that's good. I'm wondering if you can help us break down sort of the mix between volume and pricing on the sales results this quarter?

Albert Fouerti: Sure, so mix between sales, I'm sorry, I just missed the last piece of it, mix between the sales and pricing?

Adam Wilk: Yes, let me ask another way. I'm interested in hearing your commentary regarding pricing versus volume and kind of how you see things, what happened in the quarter and how you see things shaking out for the year?

Albert Fouerti: Yes, so if you're just referring to just pricing, a lot of the price increases that we have seen, they were already priced at and announced early of, I would say early quarter Q4, the end of Q4, and the beginning of the year of Q1. So we haven't seen any new price increases in less than a month, they were already announced in the past. There have been a new price increase that have just been announced and it's starting to roll in, in Q I would say April 1 of 2022. So we haven't seen any new price increases. Some of the manufacturers announced some increases may be coming up in June soon. But it's relatively similar to what -- the pricing is relatively similar to what we had in Q4. So we, again, this uncertainty that's happening in the fuel surcharges have not been taking a major effect yet in the marketplace from a pricing standpoint. We just have to wait and see how the manufacturer will apply. They will apply any type of changes in the next quarter or after.

Adam Wilk: Okay, great, that's helpful, thanks. And then your commentary about guidance somewhat indicates that there may be room to maybe update that or increase full year targets. I know you answered this a little bit a few minutes ago, but I'm interested in hearing maybe your commentary about things on the supply chain side, your expectations for the rest of the year. Some people are maybe causing for things to sort of normalize or ease a little bit in the back half of 2022. Are you kind of seeing the same or is it more business as usual, headwinds might not abate till 2023 any color there would be helpful? Thanks.

Albert Fouerti: So we've been treating it the same way we have seen in the past, 2020, 2021, we are navigating the same type of issues that we had in 2021. We're not seeing any major relief. There are a lot of manufacturers still having back orders, some of them until 2023 or maybe mid-2023. So we're still having a lot of challenges in the supply chain. Some of the product categories may see some type of relief earlier or faster than other categories. We are focused primarily on better and best particular product, not just the core appliances. So we're -- I don't think we're going to see any type of major change in the next quarter. Hopefully, we could see something in Q3 or Q4.

Adam Wilk: Okay, great, that's helpful. And then you answered some questions on this as well. I was really happy to see the new financing press release come through, especially given the lender and the terms, that’s great. And I want to just kind of press a little bit on the capital allocation side. If you take a look sort of across the landscape of your peers, whether that's consumer durables, hardline distributors, e-commerce businesses, the valuation gap is enormous between you guys and many others, despite your really strong execution and ability to basically weather this current environment, supply chain issues, higher input costs, inflation, people are pointing to lessening demand. You've also confirmed full year guidance, margin targets, and really, I mean, don't seem to be slowing down at this point. And so, you might be one of if not the only company selling appliances that's actually growing sales sequentially and year-over-year, despite all this talk of consumer weakness, recession on the horizon, et cetera. So, I know it's early in terms of the merged business. I know, you're still telling the story and sort of making sure investors understand the thesis here. But if this keeps up and you guys continue to execute, you'll be trading at a valuation that implies basically that you're a distressed business, which clearly is not true. So, I guess I'd be interested in just kind of hearing your comments surrounding that, and maybe what steps you're interested in taking to help sort of close that valuation gap. How you feel about your buyback program given the new financing, et cetera and anything would be helpful. Thank you.

Albert Fouerti: Sure. So I’ll just refer back a little bit about the buyback program. I'm not sure if you're aware or not, but we we're in a blackout period. Probably, as you know, from the last announcement that we've made until tomorrow is our first day of open period. But I can't really speculate what other stuff that we have in the pipeline and what we're willing to do. But we totally understand to your point is we are way undervalued and we will do what we have to do on our end and perform. We're going to go focus on the business. We want to make sure that the business is strong, it's healthy, and it's no way at any point in distressed. When since I took office until now, as you could see the strength of our business and the belief from BOA, they went out there and they gave us a $140 million loan. It's a testament to what we're doing and what we're trying to do as a company. And not only just as an appliance company, we are focused on an overall growth. We are a community. We're building out a structure and the foundation that we're going to -- we want to own the appliance business online. We're creating a community for consumers to be able to be inspired and we're going to finish it with an installation that’s probably, I mean, better than anybody else that's out there in the market. That's really our sole focus right now. We're focused on the business. We are focused on the company. We’re focused on the growth of the company and the health of the company.

Adam Wilk: Great. Well, I can appreciate that, great job and thank you for taking my questions. I appreciate it.

Albert Fouerti: Absolutely.

Operator: Our next question comes from Joe Grunfeld, a private investor. Please go ahead.

Unidentified Analyst: Yes, great quarter, guys. To be frank, my questions were fully answered. But I guess one thing I would ask is, the credit facility that Bank of America gave you was the gentleman's point from Greystone earlier, was literally the entire market value of your company, do you think people are now looking at that with a name like you going in there and it's creating somewhat of a buzz? Are you seeing any incoming calls from other boutique shops or anything that are starting to take an interest in your company because again of the disparity that was just mentioned?

Albert Fouerti: Thank you, Joe. Yes absolutely, to your point is Bank of America gave us $140 million credit facility. It’s almost the same amount of money of our market cap, that we all definitely weigh on the value. And we are seeing a lot more boutique shops, and we are seeing a lot more analysts picking up coverage and they're communicating with us a lot more. The story hasn't been out there, it hasn't been told in the past, obviously, what other management has had in the past, I'm not sure if they told the story of what we were all about. To your point is yes, we are seeing more coverage. We are hoping for more coverage and we're doing everything that we can on our end to reach out to the analyst and reach out to a proper coverage to tell the story and put the story out there.

Unidentified Analyst: Thank you much.

Albert Fouerti: Thank you.

Operator: There are no more questions in the queue. This concludes our question-and-answer session and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.