Passing on Solo Stove at $250m

TLDR:

What’s your Super Bowl Moment?

Letting Solo Brands @ $250m pass by.

LBAB Community What’s Your Super Bowl Moment?

For the Americans, I know you’re heading to a friend's house to watch the big game (Super bowl in the states today) so I’ll make this shorter than usual.

With everyone and their mother dumping millions into ads today/this weekend, I always think about creating your own Super Bowl moment. A time of year that’s the biggest sales day of the year for you and gets your customers incredibly excited.

It’s hard to remember, but the US didn’t always care about Football. Momentum was built brick by brick over decades. Creating what is now 1 of the largest cultural and commercial moments of the year.

Any brand can do this. Some examples from great brands that created a day that is a moment for their brands.

• Chubbies: July-Ber Monday

• Amazon: Prime Day

It’s always great to jump on the consumer trend and capture Revenue when wallets are out (cough cough holiday), but to build a real, enduring brand, you need to make the raw investment in creating your own genuine moment customers rally around.

It won’t be the biggest event in year 1. It won’t be the easiest or most profitable when you launch. But if you invest over the years, it will pay off down the road when your customers mark it on their calendar every year.

Here’s how I’d construct your ideal brand day. I call it the “Something for Everyone Sale.”

The Something for Everyone Sale is comprised of 3 core pillars:

1. New Products (preferably limited edition colorways) for loyalists.

2. Deep discount to clean out old inventory for the bargain hunters.

3. 1 Challenge/activity to encourage participation even for non-buyers.

This day should be the physical manifestation of your brand, and the 3 pillars should reflect that. Let’s say I run a dog brand, I’d take International Dog day August 26th and launch the entire moment around it, call it something like The Dog Day(s) of Summer. 

I’d spend all of August promoting the event and hyping it up. 

If done well, this will be THE event of late summer for my customers.

• I’d launch new colorways of my top-performing training dog leash that will only drop on The Dog Day of Summer. 

• For our slow-moving inventory, I’d run a healthy discount (Not BFCM good, but something to get tails wagging).

• A 10k Dog Walk challenge so all my customers get into shape before going back to school.

This way, I have a month’s worth of promo content to reach out to my customers, dominate their mind share, and hype them up heading into the biggest sales event of the year.

The reason you want to blend the 3 components together is to build a groundswell. The brand will gain momentum to extract more value out of the same Marketing dollars by building word of mouth excitement from all angles.

Enjoy tonight. Hope the game is good and the ads are better. Now let’s dive into one of the most beloved but hitting-headwinds brands: Solo Brands.

Let’s Examine This Biz

Solo Brands has become the poster child for the $DTC implosion. Even Snoop couldn’t save them. This brand is going to have a tough uphill battle over the next decade, but there is meat left on the bone.

Trading at $2.69/share with a $244m market cap, -85% since Oct ‘21 IPO, this house of Outdoor brands has shed $1.8B in market cap and is facing some serious macro headwinds.

Solo Brands is a portco of “throw in your trunk for a wilderness weekend” brands: Solo Stove, Chubbies, Oru Kayak (foldable Kayaks), and Isle (portable paddle boards).

COVID was VERY good to these brands, but just like everything else in the outdoor/home category, a ton of demand was pulled forward. I’m going to pass on this brand because Chubbies has the only business model I like, but there’s a lot of bones here to get this biz back into the 10-fig valuation game.

Financial Summary

TLDR Analysis: Growth at Too Much Costs

• Every metric is growing faster than Revenue.

• $259m Gross Profits with $317m OPEX = no bueno.

• Razor thin margin model = Profits disappear in a moment

Chalk this up to another brand that overspent looking for growth in an already unprofitable year. COGS +38% YoY + OPEX + 62% YoY is losing in a 2-front war.

While a -146% YoY change in Net Income is painful, only losing -$4.9m in Net Income isn’t bad, but a trend you never want to see. This biz doesn’t live up to the DTC promise of higher profitability brand than retail and is struggling holding on to what got it here, not focusing on what will get it to the next stage.

Let’s Fix This Biz!

I’m not touching this biz with a 10ft pole, but here are my 3 ideas for whoever does:

1) Aggressively move into Wholesale

82% of sales are DTC. I don’t want to take anything away from them here: selling $400m of fire pits, short shorts, kayaks, and paddleboards online is incredibly impressive.

But those products don’t gain efficiency from shipping DTC (other than Chubbies) and they’re not cheap to ship.

I understand launching DTC as a disruption point of differentiation, but the products are too heavy to ship. There’s a reason Outdoor products are traditionally sold in stores. The math on the Supply chain costs for the DTC version of this biz won’t work until it hits 10-11 figure scale.

The heavy DTC mix is especially ludicrous when you think about how much of their customer base has a car (most likely a truck).

Solo brands should be rolling deep with Retail Royalty: Home Depot, REI, Costco. Each of those locations should be slinging Solo’s products like hot dogs at a baseball game through their thousands of doors. And they have the margin structure for it.

Instead of building the required massive infrastructure to ship and store these large, heavy items all across the US, they could leverage the infrastructure these Mass Retailers have already built.

There’s no need to reinvent Noah’s Arc, when you can just hitch a ride.

Building out the Ops infrastructure is admirable, but when OPEX is +67% YoY and GP +23%, you really need to revisit if you’re making the right strategic choices.

Are you a manufacturer or are you a Supply Chain/Logistics biz?

You always need to be wary of your vendors’ pricing, but be honest with yourself… 

Can you actually do it cheaper?

Takeaway: Focus on your expertise. Let others be the expert in their domain.

2) Divest Chubbies. Only live in Outdoor brands.

This seems counterintuitive given how big Chubbies is and how “perfect of a fit” it seems in the product portfolio, but I’m going to challenge the “seems.” 

Does Chubbies actually make sense with the rest of the product mix?

I’m having a tough time believing customers are wearing Chubbies shorts while sitting outside around a Solo Stove, or in an Oru Kayak. Those customers don’t feel like the fun loving, American Flag bathing suit wearing hard partiers who are Chubbies loyalists.

I’m not challenging the overall strategy, just the execution. '

Acquiring an apparel brand makes sense for a heavy-item Outdoor brand, but Chubbies isn’t the right fit here. Solo’s portfolio has more customer overlap with Vessi than it does with Chubbies.

So, how do we fix this?

Temp fate and divest Chubbies. They don’t break Chubbies out from the other acquired brands (Oru & Isle) in the P&L, so it’s hard to know how much we can get for them. 

Since they acquired Chubbies for $100m, I’m guessing with post-acquisition growth we can get a similar valuation. Then, cycle that money back into buying an up-and-coming Outdoor Apparel brand that their customers will wear all the time while using their core products. Which leads to point #3…

Takeaway: Own a customer’s area of life. If new products don’t, it isn’t the right fit.

3) Acquire their way back to growth

Doubling down on home is the counter-intuitive, but right move that will set them up for multi-decade success. Now isn’t the time to hit the panic button, but see where the opportunities close to home are.

Acquisitions are the hardest strategy to execute, but at this scale, there are 2 ways to grow: Organically & Inorganically. And it looks like Solo Brands has tapped out Organic growth.

(For all the digital marketing heads who think this means SEO vs. paid media, in the investing context… 

1. Organic: Growing through existing assets 

2. Inorganic: Growing through acquiring other bizs)

If Snoop can’t restart their sales engine, they need to have an honest conversation with how this biz is going to grow sales, and profitability.

Finding, acquiring, and actually integrating other brands is like continually finding diamonds in the rough. It’s possible but incredibly hard. Demand in Outdoor is going to be down for years to come. They need to find another way to grow.

They are getting slashed by both edges of a double-edged sword: maniacal category-focus + category-wide headwinds. When Outdoor is slow, all of their brands are going to be slow. They’ll need to have the patience to ride the storm out, or get creative.

Since they aren’t private and have quarterly profit targets, patience isn’t a virtue we’ll be exhibiting today.

Solo is building itself to be the Millennial REI. The 1-stop destination for all your outdoor adventure needs. With a streamlined focus, and back on the hunt they’ll need to look for:

• Up & Coming Outdoor trends. What’s the next Solo Stove?

• Outerwear brand

• Footwear brand

• Backyard games

• Outdoor Furniture

Yes, they will be digging further into the Home & Garden demand issues they’re currently facing, but all markets naturally correct over time. More humans will buy and improve their homes. The more Solo owns in that mix, the more successful they’ll be long-term.

Takeaway: Stay true to yourself. Ride out the storms.

Final Thought

We’re going to pass on this brand mostly because I don’t like high AOV 1x purchase products. The CAC:AOV war is too hard to win without a path to consistent repeat purchases. Someone should take this company private for <$300m and let it ride, but it ain’t going to be me.

Solo is an incredible example of a brand that shouldn’t be public. And I’m not just saying that because they have a <$250m market cap @ $500m in Rev. It’s because they went public with $400m in Rev.

These bizs are too small with unrealistic growth expectations to go public, forcing them to chase artificial growth at the expense of profits. Sending the stock into a tailspin when both obviously aren’t met.

We’ve seen the doom loop repeat itself time and again. Overvaluations -> brands chasing growth to justify overvaluations -> profit implosion in the name of growth so many times over the past year, everyone has to have learned their lesson. But still we see brands doing too much.

Early investors need liquidity. At a certain size, there are only so many players who can write checks to acquire $400m Topline brands, but is going public the right move?

Solo brands would be much better off in the private markets where they can grow slower, more profitably, and won’t feel the need to take hail mary swings to boost quarterly profits.

As interest rates go down and valuations normalize, more Mid-Market PE players will re-emerge to rightsize this market, so more of these brands can stay private for longer.

It feels like the storm clouds are breaking and we are finally getting back to how the market should be. While valuations won’t be as insanely high. We’ll return to be able to all financially afford build enduring brands again.

🧠 The Takeaways

We’re passing on Solo Brands because it hasn’t found the right channel or product mix across its portfolio. And now, it has too much public heat on it.

1. Prioritize Retail and stop shipping such heavy objects.

2. Divest Chubbies and find the right product mix for what their audience actually wears.

3. Go back on an acquisition spree to reignite the growth engine.