Upstart SmileDirectClub (SDC) hopes to find religion on profits sooner than most on Wall Street expected. But reaching that point by the new target date of this year’s fourth quarter will require some major strategic moves that could prove short-term disruptive.
Couple that with a squishy fourth quarter and lingering concerns over an NBC News investigative report into SmileDirectClub’s tooth aligners, and it’s not a surprise to see the stock plunge 24% in early trading Wednesday.
Here’s a look at the company’s fourth quarter 2019 results:
4Q Net Sales: $197 million vs. estimates for $200 million
4Q EPS: loss of 25 cents vs. estimates for loss of 9 cents
FY20 Sales Outlook: $1 billion to $1.1 billion vs. estimates for $1.14 billion
Profit Outlook: EBITDA profitable by the fourth quarter of 2020 (new call out by management)
Smiles for investors?
SmileDirectClub CEO David Katzman has dropped the hammer twice on digital paper over the past two weeks. The latest came (the other via a LinkedIn post slamming the NBC News’ investigative report) Tuesday evening on SmileDirectClub’s earnings release, where he surprised the Street by promising profits.
“As CEO of this business, I am faced with numerous decisions every day, and one important decision that I am making given our club member experience and profitability in Q4, is to control our growth in order to provide the best consumer experience, and reduce our costs to be adjusted EBITDA profitable by Q4 of 2020,” Katzman said. This is a major call out by Katzman — SmileDirectClub has told Yahoo Finance several times in recent months profits could be a few years away as it invests in manufacturing, marketing and stores.
SmileDirectClub CFO Kyle Wailes told Yahoo Finance the cost savings will come from addressing manufacturing inefficiencies, right-sizing the production team, and greater discipline around travel, tech and consulting expenses. Wailes doesn’t anticipate a cut to SmileDirectClub’s large TV marketing budget. The company is about to enter Germany and new products such as toothpaste at 4,000 Walmart stores are performing ahead of plan, Wailes said. Both are top line bullish.
Under normal circumstances, SmileDirectClub would likely be rewarded by investors for the newfound discipline. Remember, the business lost $102 million on an EBITDA basis in 2020 so reaching profits from that point is a big deal. And there is a precedent for the crop of money-losing 2019 IPOs being rewarded by the market for greater control. Uber and Lyft have seen their stock prices rebound post tough IPOs as each have meaningfully pulled forward their profit timelines.
Unfortunately for SmileDirectClub, these aren’t exactly normal times. Rather it’s a period where the Street is perhaps more scrutinizing than the norm on an upstart company. SmileDirectClub did give investors a bit of fuel to ignite the latest selloff.
First, the average aligner gross sales price fell to $1,771 in the fourth quarter from $1,797 a year ago. That likely played a key role in top and bottom lines falling short of consensus forecasts. And secondarily, the full-year sales outlook was below estimates. For some on the Street, that cautiousness could signal the business is being hurt by consumer response to the highly publicized NBC report.
Optics matter on earnings days.
“There is obviously a lot of attention internally around the subject. There is a lot of noise out there today around the business. We have said all along anytime you do something disruptive you expect the status quo to push back on that. We will continue to fight that anti-competitive behavior. In terms of the impact it has had on the business overall, that is not something we are disclosing at this time,” Wailes said when asked if the NBC report has weighed on its outlook.
No decision has been made on whether to pursue legal action against NBC News, Wailes said.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.