SDC - SmileDirectClub: Circling The Drain?

Summary

• Today, we put well-known Busted IPO SmileDirectClub in the spotlight for the first time.
• The company recently announced a significant restructuring but is carrying a large debt load.
• Will management be able to engineer a turnaround or is the company heading for bankruptcy? An investment analysis follows in the paragraphs below.

Peace begins with a smile.. ”? Mother Teresa

Today, we take our first look at SmileDirectClub, Inc. ( SDC ) , which has become a very well-known ' Busted IPO '. With the shares circling the drain, the company announced a significant restructuring last week. Will it be enough to get SmileDirectClub and its stock back on track? An analysis follows in the paragraphs below.

Company Overview

SmileDirectClub is an oral care company based in Nashville, TN. The company offers clear aligner therapy treatment. The company manages the end-to-end process which includes:

[A]Marketing, [B] Aligner manufacturing and fulfillment, [C] Treatment by a doctor and [D] Monitoring through completion of their treatment with a network of approximately 250 licensed orthodontists and general dentists through its teledentistry platform. The company also offers aligners, impression and whitening kits, retainers, and various ancillary oral care products. The stock currently trades at around 50 cents a share and sports an approximate market capitalization of $210 million.

Third Quarter Results:

On November 7th, the company reported third quarter numbers . SmileDirectClub posted a 18 cents a share as revenues shrunk just over 22% on a year-over-year basis to just under $107 million. The company lost 19 cents a share in the second quarter of this year and 23 cents a share in 3Q2021, so there has been some marginal improvement on the earnings front.

Aligner shipments fell 16.5% from the 2Q2022 to 52,367 and the average aligner gross sales price or ASP fell one percent to $1,902. Both top and bottom line numbers beat tepid expectations it should be noted.

Restructuring:

A new CFO was appointed at the company in Mid-December. Five weeks later the company announced a significant restructuring that will see approximately 15% of SmileDirectClub's employee base being let go. Management expects these efforts to product an additional $120 million to $140 million in savings in 2023, excluding transition costs. These one time costs are estimated to be between $12 million to $15 million.

Leadership also believes the company can get to positive cash flow status by the end of this year. However, at the same time SmileDirectClub lowered its FY2023 revenue guidance to a range of $400 million to $450 million. The analyst firm consensus at the time was nearly $480 million.

The company also hopes that the rollout of its SmileMaker platform later this year will be an important driver of improved efficiency, increased sales and lower costs.

Analyst Commentary & Balance Sheet

A half dozen analyst firms including Morgan Stanley and Bank of America have chimed in around SmileDirectClub over the prior six months. All of them have Hold/Sell ratings on the stock. The four most recent analyst firm ratings have price target of a buck a share or below.

Approximately 20% of the stock's outstanding float is currently held short. A beneficial owner sold just over $2.6 million worth of stock in mid-August and a director bought approximately $200,000 of equity last March. Those transactions are the only significant insider activity in this equity over the past year.

The company ended the third quarter with approximately $120 million of cash and marketable securities on its balance sheet against nearly $800 million of long term debt. SmileDirectClub posted a net loss of $70 million in the third quarter and free cash flow was a negative $35 million in the third quarter. This is actually a $29 million improvement from 3Q2021.

Verdict

The current analyst firm consensus sees the company losing 75 cents a share in FY2022 as sales fall just over 20% to $480 million. They project losses of just over 50 cents a share as revenues decline by the mid-teens in FY2023. 2023's estimates do not include the impact from the company's recent restructuring announcement.

It is hard to see how the company does not have to raise additional capital to remain a going concern over the next few quarters. Conditions are likely to be significantly more onerous now that we are no longer in the low/zero interest rate environment the company previously raise funding within. In addition, the average consumer is likely to remain under duress throughout 2023 which will continue to impact sales prospects at SmileDirectClub.

While the restructuring is a good first step, it is way too early to state with any confidence that SmileDirectClub is not marching towards an eventual bankruptcy. Therefore, the call is to remain on the sidelines concern the shares in this deeply ' Busted IPO '.

Sometimes your joy is the source of your smile, but sometimes your smile can be the source of your joy. ”? Thich Nhat Hanh

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