Traeger, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Traeger designs, sources, sells and supports wood-pellet grills, pellets, accessories and related products through retail and direct-to-consumer channels. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $171.5 | $200.3 | $324.7 | $424.0 |
| Gross profit / margin | $63.3 / 36.9% | $73.4 / 36.7% | $118.8 / 36.6% | $156.1 / 36.8% |
| Operating loss | $(27.6) | $(120.7) | $(30.9) | $(124.2) |
| Net loss | $(30.2) | $(133.1) | $(41.1) | $(142.1) |
| Basic and diluted loss per share | $(0.25) | $(1.13) | $(0.33) | $(1.20) |
Q2 revenue fell 14.4% year over year; first-half revenue fell 23.4%. Grill revenue declined 20.9% in Q2 and 31.8% for the first half, while consumables declined 17.1% and 20.6%, respectively. Accessories grew 7.4% in Q2 and 3.7% for the first half, helped by MEATER products. Retail sales were $135.2 million in Q2 and $268.0 million for the first half; direct-to-consumer sales were $36.3 million and $56.7 million, respectively.
Q2 gross margin edged up 0.2 percentage points, primarily from freight and foreign-exchange favorability, partly offset by increased dilution. First-half gross margin declined 0.2 points, as lower average selling prices and increased dilution outweighed those benefits. Sales and marketing expense declined 33.6% in Q2 and 35.0% for the first half. General and administrative expense rose 66.6% in Q2 and 9.6% for the first half.
Cash flow, debt and liquidity
- For the six months, operating activities provided $25.9 million, compared with $30.1 million used in 2022. Inventory reductions contributed $55.7 million; the $41.0 million increase in accounts receivable was a cash use.
- Investing activities used $6.6 million, including $8.9 million of capital expenditures, partly offset by $2.5 million in asset-sale proceeds. Financing activities used $56.3 million, including net credit-facility repayments of $43.7 million and $12.2 million of acquisition-related contingent consideration payments.
- Cash and cash equivalents were $14.5 million at June 30, versus $39.1 million at December 31, 2022; restricted cash was zero. The company reported $125.0 million of revolver capacity and $15.2 million of additional receivables-facility capacity. It had drawn $40.0 million under the receivables facility and nothing under the revolver.
- First Lien Term Loan principal outstanding was $403.9 million. The balance sheet reported $396.7 million of notes payable, net of current portion, plus $0.3 million current portion; the line of credit was $40.0 million. The term loan matures in June 2028; the receivables facility is scheduled to terminate in June 2024.
- Management said cash, facility availability and anticipated operating cash flows should meet working-capital and operating needs for at least 12 months. The company reported compliance with applicable credit-facility covenants at quarter-end.
Changes, outlook and key risks
- Management attributed weaker revenue to lower grill and consumables volumes and selling prices, amid inflationary pressure and slower consumer demand. It warned that persistent macroeconomic and supply-chain pressures could further reduce revenue and margins in the remainder of 2023.
- Q2 general and administrative expense included elevated stock-based compensation: $33.0 million total for the quarter, including $27.5 million recognized following cancellation of unearned CEO and IPO performance share units. No goodwill impairment was recorded in 2023, compared with a $111.5 million non-cash impairment in 2022.
- The interest-rate swap was dedesignated as a cash-flow hedge in January 2023 after a change in the term-loan interest reset period. Amounts previously in accumulated other comprehensive income are being amortized into interest expense; swap gains contributed to the improvement in other income/expense. The company also reported a material weakness related to accounting for derivatives and hedges, and restated its Q1 2023 unaudited financial statements for an omitted comprehensive-income adjustment. Management’s remediation work was not yet complete at June 30.
- Sales concentration is significant: three large U.S. retailers represented 48% of Q2 revenue and 51% of first-half revenue. Traeger also relies on a limited number of third-party manufacturers and suppliers. Management identified no pending litigation expected to materially affect the company.
- No numerical revenue or earnings guidance was provided. Management expects sales and marketing expense to decrease in the short term and potentially increase over the longer term as it pursues growth.
Important facts for investors to verify
- Whether demand, grill and consumables volumes, and selling prices stabilize, and whether accessory growth can continue.
- Whether operating cash generation persists as receivables, inventory and retailer payment patterns change; confirm borrowing availability and facility terms, particularly the receivables facility’s June 2024 termination.
- Progress in remediating the material weakness, and whether the Q1 restatement or subsequent hedge accounting creates further reporting adjustments.
- The size and timing of remaining Apption Labs contingent consideration: the filing reports $13.1 million carrying value and $15.0 million undiscounted potential payments, expected during the first half of 2024.
- Whether elevated stock-based compensation and debt interest costs affect future reported losses and liquidity.