DTC - Solo Brands: Just Getting Warmed Up

2023-12-07 13:02:08 ET

Summary

• Solo Brands is a premium outdoor lifestyle and apparel company focused on owning the backyard.
• Despite a significant drop in stock price since its IPO, the company has been posting strong numbers this year as the wholesale business has significantly grown.
• Solo Brands has partnerships with well-known companies like Costco, DICK'S Sporting Goods and Target as the company hopes to attract new customers.

I am an outdoor enthusiast, constantly in the backyard with my friends and family. To me, it’s hard to beat sitting around a fire, socializing and making smores with your kids.

There is one company focused on creating such experiences, and their goal is to “own the backyard.”

The company’s stock is down more than 70% since their IPO in 2021, however the company has been posting good numbers as of late and is up over 40% YTD.

That company is Solo Brands (DTC) and I believe this micro-cap has the potential to be a winner for long-term investors. Let’s dig into details!

The Company

Solo Brands, Inc. is a premium outdoor lifestyle and apparel company. The company’s largest brand is Solo Stove. In 2011, two brothers Jeff and Spencer Jan created the “Solo Stove”. For those unfamiliar with Solo Stove, it’s a smokeless fire pit. Consumers can enjoy the fun of sitting outdoors and socializing with family and friends without getting a mouthful of smoke.

In 2018 , the brothers brought in John Merris to lead the company. Merris has held the position of President and CEO since that time and led the company public in fall 2021.

The other significant brands for the company are Chubbies, an apparel brand which focuses on shorts and swimwear, Oru Kayak, and ISLE paddleboards.

In 2023, Solo Brands acquired two additional companies , TerraFlame and IcyBreeze. Similar to Solo Stove, TerraFlame makes fire pits, fire bowls, and fireplaces. IcyBreeze makes portable air conditioners.

As the company’s ticker symbol indicates, Solo Brands has been focused on their direct-to-consumer sales. As disclosed on the company’s last 10K filing , DTC sales accounted for over 81% of the company’s sales in 2022.

However, Solo Brands rolled out their omnichannel strategy this year and the results seem to be paying off as the wholesale business has grown significantly in 2023.

Moat and Opportunity

I think Solo Brands is comparable to YETI Holdings (YETI). YETI’s products such as their coolers and tumblers are viewed as innovative, premium products. I think the same can be said about Solo Stoves. Researching outdoor fire pits, Solo Stoves comes up extremely frequently and in some cases their products were viewed as the best in the market. Also, the company recently successful fended off Duraflame for selling imitation products, which Merris mentioned on a recent webcast . A sign the company is in a superior position and likely with this win will prevent future imitation products.

I think by creating partnerships with well-known companies like Solo Brands has been doing in 2023, they will continue to attract new customers. Some of Solo Brands current partners include Costco (COST), DICK’S Sporting Goods (DKS), and Shields. On the company’s Q3 2023 earnings call , Merris also mentioned a partnership with Target (TGT). Merris stated roughly 2,000 Target stores will have Solo Stove products in time for Black Friday shopping.

Additionally, in a Piper Sandler Growth Frontiers Conference which was conducted a few months ago, Merris noted internationally sales were less than 10% of total sales for Solo Brands. Merris’s goal is to get this number up, so internationally sales will be closer to 30% to 50% in three to five years. To compare, YETI’s international sales are roughly 14% of total sales. So this goal sounds a little aggressive. Merris stated the company is seeing positive results in Canada and the U.K. so far and believes Germany could be a promising story in the near future.

From a product perspective, I think the company has a long runway. Solo brands recently induced new products such as pizza ovens and backyard torches, which seem like excellent additions to the brand’s growing product offerings. On that Piper Sandler call, Merris stated productive innovative is key for the organization, as their objective is have 20% of revenue for the year come from new products. If Solo Brands follows in the footsteps of YETI, I think this absolutely achievable. If you review my prior article , you can see YETI’s product expansion over the years, which is a roadmap Solo Brands can follow to achieve similar success in my opinion.

Management

As mentioned above, John Merris has been the company’s President and CEO since 2018. Prior to Solo Brands Merris worked at Clarus Glassboards LLC.

Somer Webb was the company’s CFO. Webb stepped down in late October and had held the position at Solo Brands a little over a year. The company is still searching for a new CFO. I am always cautious when a member of senior leadership leaves suddenly. However, Webb does have an extensive list of companies she’d work for in her career.

I looked on Glassdoor to see what employees had to say about both Solo Brands and Merris as the company’s CEO, but the reviews were very limited.

Financials

For the third quarter 2023, Solo Brands brought in revenue of roughly $110 million, which is an increase of nearly 8% compared to Q3 2022. Direct-to-consumer sales accounted for approximately $76 million, which is a decrease of nearly 12% compared to prior year third quarter. However, as noted above, the company has been focusing on wholesale sales recently which increased by over 114% compared to Q2 2023. Wholesale sales for this quarter were $34 million, far greater than $16 million in the prior year third quarter.

The company’s balance sheet has enough current assets to cover their current liabilities. However, as you can see below the company has a decent amount of goodwill which I don’t particularly like:

Goodwill due to M&A can often lead to impairment charges hitting the Income Statement. In the prior year the company had a $30 million impairment charge as you can see below:

Given some of these prior acquisitions are somewhat questionable in my opinion, I could easily see future impairment charges hitting the Income Statement, ultimately hurting the profitability and earnings per share.

Risks

One aspect of Solo Brands I struggle with is brand identity. I think some of the company’s prior acquisitions don’t seem to align with the vision of “owning the backyard.” Merris touched on this briefly on that Piper Sandler webcast, stating future M&A targets would be more focused. I’m glad to hear Merris state this, and I believe the TerraFlame acquisition makes a lot of sense.

However, as I mentioned above, acquisitions can create goodwill, which in turn can create impairment charges. One notable example of late is the terrible Teladoc/Livongo acquisition, which resulted in Teladoc overpaying for Livongo and subsequently have huge impairment charges hit their Income Statement.

The hasty CFO exit gives me pause as well. A short tenure and a quick exit often mean there could potentially be underlying issues with the company, in my view. However, Webb does have an extensive working history, and maybe she's found an opportunity she preferred elsewhere.

Valuation

As you can see from the below valuation metrics from Seeking Alpha, the overall value grade for Solo Brands is a “A-":

As you can see in the metrics above, Solo Brands is viewed as favorable compared to many of the sector median values. Given it's profitable, I think Price/Earnings ratio is a good metric to view this company. The forward P/E ratio of 12.36 is below the median of 16.35 and given the company's growth prospects domestically and internationally this seems as an attractive entry point for investors as I believe revenue and earnings per share can continue to grow.

Conclusion

I think this is a micro-cap stock with huge potential. Solo Brands has premium, innovative products which consumers love. If Solo Brands can follow in the footsteps of YETI and continue creating stellar products and focus on “owning the backyard” I think they will be successful.

At these levels, I think long-term investors can certainly initiate a position or add to their existing position in this company.

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