Traeger, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021. Amounts below are in millions unless otherwise stated.
Business context
Traeger designs, sources, sells and supports wood-pellet grills and related consumables and accessories, including MEATER smart thermometers acquired with Apption Labs in July 2021. Sales are primarily through retail, with a direct-to-consumer (DTC) channel and expanding distribution in Canada and Europe.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $223.7 | $235.6 | Down 5.0% |
| Gross profit / margin | $83.6 / 37.4% | $100.6 / 42.7% | Margin down 5.3 percentage points |
| Operating income (loss) | $(3.0) | $47.9 | Down $50.9 |
| Net income (loss) | $(8.4) | $38.9 | Down $47.4 |
| Diluted EPS | $(0.07) | $0.36 | |
| Operating cash flow | $(46.9) | $(26.5) | Cash use increased $20.4 |
| Investing cash flow | $(4.6) | $(5.0) | |
| Financing cash flow | $45.9 | $37.1 |
- Revenue mix: Grills $150.4, down 15.8%; consumables $39.7, down 2.8%; accessories $33.6, up 108.8%, mainly reflecting MEATER sales and demand for Traeger accessories. North America generated $207.3 of revenue; retail sales were $203.2 and DTC sales $20.5.
- Profitability: Gross profit fell 17.0%. Management attributed lower gross margin primarily to higher inbound shipping costs, partly offset by price increases. Operating expenses rose 64.2% to $86.6, including G&A of $42.9 versus $13.6 a year earlier. Higher equity compensation, increased staffing and professional services, and Apption Labs-related expenses contributed to the G&A increase. Equity-based compensation totaled $15.5 versus $1.0.
- Cash and working capital: Cash was $11.1 at March 31, down from $16.7 at year-end 2021. Accounts receivable rose to $163.2 from $92.9 and inventory to $164.1 from $145.0. Operating cash use reflected receivables growth of $70.4 and inventory growth of $19.1, partly offset by higher payables and accrued expenses.
- Debt and liquidity: Balance-sheet notes payable were $417.7 and line-of-credit borrowings were $49.2; the company also had $0.4 of current and $0.6 of long-term capital leases. Term-loan principal was $379.2; revolving-credit borrowings were $47.0. At quarter-end, stated unused capacity was $78.0 on the revolving facility and $16.0 on the receivables facility. The company reported compliance with facility covenants, including a maximum first-lien net leverage ratio of 6.20:1.00.
- Other comprehensive income: A cash-flow hedge contributed $6.6 of other comprehensive income. Traeger entered into a floating-to-fixed interest-rate swap covering $379.2 of term debt, with a 2.08% fixed rate and maturity in February 2026.
Material changes and management outlook
- Revenue declined as lower grill and consumables unit volumes outweighed higher selling prices; accessory growth partly cushioned the decline. Grill pricing increases were taken in the second half of 2021 and early 2022.
- Management said it expects existing cash, facility availability and operating cash flows to fund working capital, planned capital expenditures and debt service for at least the next 12 months. This is subject to factors including revenue growth and profitability, acquisitions, product launches and supply-chain investment.
- Management expects sales and marketing and G&A expense to increase in absolute dollars for the foreseeable future, reflecting growth initiatives, product development and public-company costs. No numerical revenue or earnings guidance is provided in the filing text.
- In April 2022, Traeger paid $12.6 of Apption Labs contingent consideration and borrowed $12.5 under the delayed-draw term loan to help finance the earn-out. Remaining undiscounted contingent consideration for 2022 performance could range from $0 to $27.4.
- Key disclosed risks include dependence on three large U.S. retailers, limited third-party manufacturers and suppliers, transportation and raw-material disruptions, product quality and warranty exposure, competition, discretionary spending and COVID-19 uncertainty. The three largest customers represented 54% of Q1 2022 sales in aggregate; each accounted for 14% to 23%.
- Management stated there were no material changes to previously disclosed risk factors or contractual obligations. It reported no pending legal matter expected to have a material adverse effect and concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether grill volumes and overall demand stabilize after the reported declines, and whether pricing offsets cost pressures.
- Whether inbound freight costs and product mix continue to pressure gross margin.
- Receivables collection, inventory levels and operating cash flow, given the substantial working-capital cash use.
- Available borrowing capacity, covenant headroom, variable-rate debt exposure and the effect of the interest-rate hedge.
- Apption Labs earn-out outcomes and payments, and the extent to which accessory growth can be sustained.
- Concentration risk from major retail customers and reliance on a limited supplier and manufacturing base.