Better Choice Company Inc. (BTTR) on Q1 2022 Results - Earnings Call Transcript
Operator: Goo day. And welcome to the Better Choice Company, Inc. First Quarter 2022 Earnings Call. All participants will be in listen-only mode. . Please note this event is being recorded. I would now like to turn the conference over to Rob Sauermann, Executive Vice President of Strategy. Please go ahead.
Robert Sauermann: Thank you, operator. Welcome everyone to Better Choice's first quarter earnings conference call. This morning, we issued our Q1 2022 financial results press release and posted our updated earnings presentation under the IR section of our website, which we will be discussing later today. I'm joined by Scott Lerner, our CEO; Sharla Cook, our CFO; and Donald Young, our Executive Vice President of Sales. Before we begin, please remember that, during the course of this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs, and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued on Thursday, March 12, 2022, for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that, on today's call, management will refer to certain non-GAAP financial measures such as gross revenue, EBITDA, and adjusted EBITDA. Although, the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation, or as a substitute for, the financial information presented in accordance with GAAP. Please refer to our press release and presentation issued on May 12, 2022 for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, let me hand it over to Scott.
Scott Lerner: On our Q4 earnings call in late March, we focused on the steps we had taken in 2021 to deliver growth in 2022, with a focus on building a best-in-class team, creating an industry-leading innovation pipeline and developing a go-to-market approach, anchored by leading channel partnerships. We also noted that you would start to see this foundational work drive increased sales growth beginning in the first quarter of 2022. With that said, I'm excited to report that our internal expectations are now becoming a reality. In the first quarter of 2022, we generated a record $19.7 million of gross sales, representing sequential growth of 45% relative to Q4 2021 and $3.8 million more than the previous quarterly record set in Q3 2021. Our business is firing on all cylinders, as roughly $2.5 million of this growth can be attributed to initial Halo Elevate orders placed by Petco and Pet Supplies Plus, with the remaining $3.6 million driven by more than doubling of international sales relative to Q4 and continued growth in ecommerce. After taking into account trade spend and other discounts, this translates to $17 million of net sales growth or 57% growth relative to Q1 2021. However, we aren't only focused on the top line. Although input costs have generally risen in consumer goods over the course of the last quarter, our team has been laser focused on gross margin improvement. As a result, we were able to improve gross margin to 28% in Q1, up from 25% in Q4, without any benefit from price increases. In addition, we took a number of key actions that we believe will help us realize continued gross margin improvement, which we'll discuss in more detail later on this call. This includes the communication of meaningful price increases to our domestic and international customers in January, which became effective in April and will start to have an impact beginning in Q2. I would view Q1 as a success in any environment. But given the number of macroeconomic challenges and inflationary cost pressures that we have faced, I'm incredibly proud of what our team has been able to accomplish. Not only is this evidence that our win-from-anywhere culture is working, but I also think it serves as validation that we're building something special at Better Choice. We have created a strong foundation for continued growth by rallying around the broader Halo brand umbrella. Our international business is growing rapidly. And we have already launched in over 1,500 pet specialty stores, including Petco and Pet Supplies Plus. Our ecommerce and DTC platforms give us a significant online recurring revenue base. The launch of Halo Elevate this year is only the beginning. And we have paired an exciting three-year innovation pipeline with our asset-light model to focus on growth across a variety of different types of consumable pet products. Our business is rooted in the Halo brand, where we plan to leverage our global omnichannel strategy to achieve rapid growth and exceed $100 million of gross sales by 2023. Our target is the millennial pet parent who can purchase our Halo products wherever, whenever and however they choose. This is how the new breed of consumers shops, and it doesn't matter if they are in the United States, Asia or any other part of the world. One day they might be on a Petco, the next day on Chewy, and the next day browsing our website. So, we really have to have a strong presence in our four main channels, pet specialty, ecommerce, direct-to-consumer and international to drive customer loyalty. On the flip side, our omnichannel strategy turns every consumer touchpoint into a dynamic opportunity to connect, convert and retain customers with a consistent and immersive brand experience, which we believe is a key to increasing the lifetime value of our customers. This strategy also lets us develop and sell channel-specific products designed to maximize conversion and gross margin to avoid channel conflict. One of the issues you'll find in pet category, if you try to play in every channel at once, is that you see a lot of pricing competition. It can really affect both the brand as well as the retailer. So we're avoiding that and looking to launch products built to succeed in specific channels to prevent margin erosion across our portfolio. For example, Halo Elevate is sold exclusively within the pet specialty channel. While you won't find Elevate on Chewy or Amazon, Halo Holistic will continue to drive growth on these third-party ecommerce sites, while might maintaining an existing foothold in pet specialty, particularly in the cat category. Our new DTC site, which just launched last month, carries all of our products, including a complete suite of freeze dried raw offerings that we've historically sold under the TruDog brand. Today our international sales are driven by Halo Holistic, but we were excited to begin to introduce Halo Elevate to new geographies later this year. When we look at the pet food category more broadly, I do think it's important for investors to remember that the Halo brand is built for a new generation of pet parents. Over the last five years, we've seen a tremendous shift in our industry, as millennials have become the largest cohort of pet parents in the United States. This transition has been accelerated by COVID-19. And for a growing pet food company focused on a new consumer acquisition, it's incredibly important that our brand voice resonates with these younger consumers. Our goal is to talk to pet parents about their pet's health, the same way that human food and beverage brands do with concise and transparent messaging, focused on the day-to-day realities of what it means to be a pet parent, and all the concerns that come with that. Given so much of our excitement this year is tied to the Halo Elevate launch, our new marketing campaign will go live in June. If you've been paying close attention to Halo's social and digital channels, you might have noticed that we've already made a number of changes across our platforms to tie into this strategy. With that in mind, I'd like to hand it over to Donald to talk a little bit more about how the Elevate launch is going. Donald?
Donald Young : Thanks, Scott. As you can see in our investor presentation, the launch of Halo Elevate is in full swing, and the purple packaging really stands out on shelf. This month, we launched our dry kibble and canned wet offerings in more than 1,500 stores, driven by our core anchor partnerships at Pet Supplies Plus and Petco. In Q1, this translated to $2.5 million of gross sales, with more initial orders expected over the course of Q2. At Pet Supplies Plus, we completed our April launch in more than 600 stores as a preferred brand. We have secured five feet of shelf space. And we're very excited about the initial feedback that we've heard from PSBP corporate, as well as individual franchise owners. In May, we were featured on their front store encamp, with a strong promotional offer. We've picked a great partner in Pet Supplies Plus. Pet Supplies Plus' model of franchise and corporate-owned stores drives significant new store openings each year. This allows us to have a built-in growth device for Halo Elevate. At Petco, we are featured on their seasonal wall in 900 stores beginning in May, and we moved to the permanent dog aisle as a best choice brand in more than 1,000 locations beginning in July 2022. As a reminder, approximately 600 of these locations are allocated 8 feet of shelf space, and the remainder allocated 4 feet of shelf space. Our total footprint at Petco represents more than two-thirds of the total Petco store locations. And we're confident if we're able to demonstrate a successful launch, we'll have the opportunity to increase both the total number of doors at Petco as well as the amount of shelf space in the future. Now is an interesting time to be launching a new food as the number of pet food brands in our competitive set are experiencing significant out-of-stock challenges. That said, were once again standing out. As a result of some of our strategic decisions we made months ago, we're able to achieve 100% fill rate for Halo Elevate across all of our dry and wet SKUs. Given pet food is a need, and not a want, we believe this gives us incremental firepower for store associates to want to recommend a brand that they know will be in stock at a time when pet parents are forced to switch foods more frequently than normal. In light of these supply chain dynamics, we have made a strategic decision to focus our sales efforts more aggressively on Petco and Pet Supplies Plus, relative to a smaller independent pet store. We'll continue to leverage our relationships with Philips to help drive independent distribution in launch year one, where we're going to focus on the highest quality partners and the best performing stores to drive sales growth and margin rather than just the store count. As you can imagine, this will generate a significant higher number of sales in a store like the one shown on slide 6 of the investor presentation relative to a standard 2 to 4 foot set. Halo Elevate is built to succeed in pet specialty. We are combining sales tactics that I perfected over the last 30 years in the industry, with a new augmented reality experience right on the back of our bag. I'll touch on this AR technology a bit later, but within the last two months, we've added five new sales team members to support our launch. Like some of the additions that we made last year, these are individuals that I've worked with previously and that I know we'll be able to hit the ground running. Our goal remains, by the end of our first launch year, June 2023, we will be generating a little over $200 in sales per store per week. With any new product launch, there's a significant growth over quarter ramp that occurs as consumers trial new product, marketing efforts begin to take effect and the in-store education of retail associates starts to pay off. In the first year, we'll also run special promotions to incentivize consumer trial with the goal of attracting high value, long term purchasers of our products. At the end of the day, there are five key factors that I think gives us the highest chance to be successful. Number one, Halo Elevate delivers best-in-class nutrition for pet parents. Number two, we can guarantee to the retailers, store associates and pet parents that if they switch to our food, it will be in stock. Number three, our award-winning packaging stands out on shelf and it speaks to pet parents like a premium human food or beverage brand. Number four, our sales team is a known quantity that doesn't require significant time to get up to speed. Our augmented reality experience gets store associates excited and gives them a tool to compare Halo Elevate against other competitive brands. Rather than explaining augmented reality experience, if you're listening today, I'll let you try it out for yourself. If you scan the QR code in the top right corner of slide 7 in our investor deck with your smartphone's camera, you'll be taken to the Halo landing page. Once you accept the prompts, take a spot in your room, tap on the screen to activate the AR experience. If you'd like to compare brands, click on the Elevate difference and select compare brands. If you talk to a store associate, there is no other brand out there that offers them a tool like this to be successful. And I think it's a great example of how progressive we are in our marketing, packaging and use of technology, all with the goal of driving awareness to our brand and customer loyalty. With that, I'll turn it back to Scott.
Scott Lerner : Thanks, Donald. As you can see, we've made dramatic improvements to our online presence to coincide with our pet specialty launch. And I'm very excited that our new direct-to-consumer site, halopets.com is officially live. I'd recommend you check out some of the new social and digital content now available on the Better Choice and Halo website. Our new look and feel on social media has a lot of great information as our launch progresses this year. In addition, I'd also encourage you to visit your local pet specialty store to see Halo Elevate on shelf and hear directly from a store associate about the brand we are building. If you're interested in visiting an in-store location, I'd highly recommend that you use the store locator and filter by product type you're looking for on our website. Shifting gears a bit. Now that our marketing innovation team has handed over the keys to Halo Elevate to Donald, we are now focusing on the Halo and Holistic and TruDog rebrands, which we anticipate will launch in the second half of 2022. As you can see, our new packaging design is much more consistent with the new Halo Elevate packaging on shelf and Halo master brand look and feel on our website. Strategically, we believe that this will allow our master brand focused marketing dollars to benefit every single product we sell going forward, as well as aligning the quality of our packaging, the high quality products that we already sell today. With regards to timeline, Halo Holistic is estimated to be in production in the third quarter, and we anticipate launching in the fourth quarter on domestic ecommerce platforms and our own DTC site. In addition, the gradual phase out of TruDog and the phase in of Halo freeze dried raw is estimated to occur over the second half of 2022. We anticipate that both of these additions to our expanding line of pet specialty products will provide minimal disruption to the existing subscriber base and will be seamlessly transitioned into the Halo brand. With that, I now would like to turn the call over to Rob to discuss our international channel in more detail.
Robert Sauermann: Thanks, Scott. The international channel is a key growth driver for us and continues to exceed expectations. First quarter 2022 sales were $7 million, approximately 3 times first quarter sales from a year ago and represents the largest quarter ever for international. Sequentially, this represents a 77% increase over fourth quarter 2021 international sales and puts us well on track to exceed our contracted volume in 2022. Although we saw strong performance in all our core international markets, China was by far our highest growth geography, and we made $5.7 million of sales into that market in Q1 alone. As we discussed in our Q4 call, growth in the Chinese market was driven by our ability to secure additional orders following Halo's strong performance during Singles Day or 11/11, the largest online shopping event in the world. And consumer purchases of Halo products during this period increased more than fourfold driven by significant new customer acquisition. And we anticipate that we will continue to see strong growth internationally throughout 2022. Although there has been significant global uncertainty in recent months, we've been able to deliver our record international sales in core geographies and constantly work with our distribution partners to mitigate potential risk. With that in mind, we believe we are closer to building a 25 plus million dollar annual recurring sales platform sooner than we may have anticipated the same time last year. In addition to the strong dry kibble business we have built in Asia, which makes up the vast majority of the $100 million in aggregate contracted minimum sales, from point 2021 to 2025, we are focused on incremental expansion opportunities. These include the future launch of Halal Elevate cat, a product with a higher percentage of animal protein relative to Holistic, and expansion into the Mexican and Australian markets. With regards to gross margin, we have a strong pathway to significant international margin expansion in the second half of 2022, which I'll let Sharla touch on in more detail in her section. Sharla?
Sharla Cook: Thanks, Rob. In the first quarter of 2022, we delivered record net sales of $17 million, representing an increase of $6 million or 55% compared to Q4 2021, while simultaneously improving gross margin to 28% from 25% in the same period. Net sales came in above internal expectations due to higher-than-expected gross sales, combined with lower trade spend, driven by channel mix and the timing of promotional spend in the pet specialty channel. Q1 net sales also included $2.4 million of initial stocking orders for Halo Elevate and $3 million of incremental international sales relative to Q4 2021. Gross margin for the first quarter of 2022 was 28%, an improvement of over 2 percentage points from Q4 2021. Gross margin for the quarter also reflects a higher-than-normal inventory allowance as we evaluate reserves for finished goods and packaging, ahead of the TruDog rebrand and Holistic relaunch. Adjusting for this impact, Q1 gross margin would have been 29%, or about 3.5 percentage points better than Q4. During the first quarter, we saw significant improvement in our fill rates as production levels begin to normalize. However, we are still navigating through out-of-stocks, primarily within our Holistic wet portfolio as the industry continues to be impacted by supply shortages and labor constraints. We estimate the impact of out-of-stocks to Q1 gross sales to be $1.5 to $2 million, primarily felt within our ecommerce channel. On the plus side, we anticipate that we will return to near normal levels on Holistic wet by the end of Q2 2022. Fill rates for Elevate were 100% as we realize the benefit of proactive measures taken last year to ensure production capacity. We continue to take significant steps to increase our long-term gross margin in 2022 and beyond, noting that we anticipate domestic gross margin expansion in the first half of 2022 and significant potential upside to international gross margin in the second half of 2022. During the first quarter of this year, we completed the transition of our domestic's dry kibble production to a new co-manufacturer and have seen double-digit margin improvement on those SKUs. We are also on track to receive approval from the Chinese Ministry of Agriculture at this new facility, which will enable us to transition the manufacturing of dry kibble bound for China by the end of Q2 and realize the same margin benefits. Additionally, we have implemented two price increases, one in Q3 of last year and one at the beginning of April, as we execute our margin improvement initiatives and ensure we are aligned with the premium and super premium categories. While the macroeconomic environment has remained volatile and could impact costs in the future, we expect to see improving margins as we progress through the year and realize the benefits of pricing, cost optimization, innovation and new co-man partnerships. Additionally, we launched Halo Elevate, which was formulated and priced with an understanding that we were entering an inflationary macroenvironment. In aggregate, these actions taken in Q1 allowed us to expand our domestic gross margin from 28% in Q4 2021 to 33% in Q1 of 2022. With regards to our international business, we anticipate that the key drivers of gross margin improvement in the second half of 2022 will be the implementation of a 10% price increase in April of 2022 and the transition of our international dry kibble manufacturing bound for China in June of 2022. Given the importance of these two events, we've provided an illustrative range of the potential impacts and increased international gross margin in Q1 would have had on Better Choice's consolidated gross margin. As you can see, a 5% to 15% improvement in international margin, even without any potential improvements to domestic gross margin, has a significant positive margin impact. Turning to our balance sheet, we ended the first quarter with $23.4 million in cash and cash equivalents and restricted cash as compared to $28.9 million in Q4 of 2021, as we, like our competition. navigate a challenging macro environment. The strength of our balance sheet has proven to be a significant advantage and one of our keys to success. In Q1, we strategically utilized our strong cash position to build inventory to support the Halo Elevate launch, which allowed our sales team to guarantee the 100% product fill rate that has been a challenge for the rest of the industry, while locking in Q1 2022 production costs for sales that may be made later in the year. In addition, we were able to secure ingredients and realize a 1.5% margin benefit by prepaying our international production, enabling us to ship over 40 40-foot shipping containers of product to Asia in March of 2022. Naturally, these changes are reflected in our accounts receivable and inventory balances, both of which increased materially following a record month of sales in March. In total, this represented a $5.4 million increase in net working capital. As we look to the remainder of the year, we expect that our working capital position will fluctuate as we collect cash from outstanding receivables, and return to more normalized inventory levels in the back half of 2022. We may also use our strong cash position to take advantage of opportunities to increase margin through higher order quantities and possible inventory builds ahead of price increases that may or may not arise. Net loss for the first quarter was $4 million, After adjusting for non-cash and non-recurring charges, adjusted EBITDA for the first quarter was negative $2 million, which is consistent with our prior estimates for quarterly cash burn. This figure reflects the inflationary impacts that we just discussed, along with incremental investment in our international business to support its exponential growth, an increase in marketing costs to support the Elevate launch and our overall brand positioning across a variety of platforms, including the addition of new team members to support growth. As we've previously discussed, adjusted EBITDA is generally a good proxy for quarterly cash burn from operations since the majority of the adjustments made are non-cash. Although we are not looking to provide guidance at this time, we anticipate that our cash burn will be meaningfully reduced over time as we realize continued gross margin improvements and operating leverage. Based on where we sit today, we are comfortable knowing that we have ample liquidity to support growth growing going forward. As referenced, we've also provided a detailed reconciliation of Q1 EBITDA and adjusted EBITDA. With that, I will turn it back over to Scott.
Scott Lerner : Thank you, Sharla. And thank you again to everyone that has joined our earnings call today. As I hope you can tell, we are all incredibly excited for what is shaping up to be a breakout year in 2022 for the new and improved Halo brand. As I mentioned at the beginning of our call today, our goal remains $100 million of gross sales by 2023, and we are laser focused on gross margin improvement as we drive towards profitability in the medium term. In addition, we feel strongly that our current cash balances are more than sufficient to support the growth that we have planned. And I am confident that we have the team, strategy and partnerships to get us there. Now I'd like to open up the call for questions. Operator, please.
Operator: . Our first question comes from Michael Baker with D.A. Davidson.
Michael Baker: Good quarter. A couple of things. A couple of points that you talked about that I wanted to follow up on. There's a lot there. But, one, did you say that 2Q reorders for Halo Elevate were ahead of plan. And so, can you give us some detail on that? And then, Scott, at one point you said exceed $100 million by 2023. That sounded more bullish than in the past to me, but then right at the end there you said $100 million, not exceed $100 million. So, can you clarify that? To me, they both sound like things are going better than expected and that's sort of what I'm getting at. But can you sort of flesh that out a little bit?
Scott Lerner: Donald, do you want to take the Elevate question?
Donald Young: I just want to make sure I understand the question correctly. You're just again, Michael, asking again about Q2 projection?
Michael Baker: Yeah, I thought you said something about 2Q reorders were better than expected. If that's not what you said, you can just talk about what you're seeing in terms of anyone reordering the product after the initial launch. This is relative to the Elevate at Pet Supply Plus and Petco.
Donald Young: There's no doubt, from on our Q1, we had a fantastic Q1, as you saw the results that Scott has. Our orders are definitely ahead of forecasts on Q2. What we're seeing again is the reorders. The seasonal wall for Petco now was set, it's been very successful for it, even 11 days into it. And again, what we've already seen, reorders as we get ready to get on shelf space as well, looks again like a very strong quarter for us.
Scott Lerner: In reference to the second question, Mike, our ongoing target still remains at that $100 million mark. I think the team is extremely bullish on the opportunity based on the continued feedback we've gotten from retailers and now, to be frank, with consumers, now that the product is out on shelf in Petco PSP and some independent pet food stores. Specifically Halo Elevate, we're getting tremendous feedback, and converting customers on a daily basis. So, as we look at opportunities, both domestically and also internationally, we think the numbers that we have in the models are well within reach. And that's what we're working towards.
Michael Baker: Two more follow-ups. The 100% fill rate for the Halo Elevate product, do you have visibility into how long that can last? At some point, is your demand going to outstrip your supply? It seems to me as if you just did a great job getting in front of the launch. But now as the launch progresses, I just want to make sure you have the capacity. And then one more, there was a timing difference between net sales and gross sales, which to me, I think benefited net sales relative to gross sales. Does that reverse at some point?
Scott Lerner: I'll let Sharla touch on your second question in a minute. But in terms of our supply chain, as we've discussed in the past, we've spent the last 12 months really refining and improving our supply chain footprint to prepare ourselves for not only the launch of Halo Elevate, but the supportive of all our brands and all our channels. And with our moves around from a co-manufacturing perspective, we have more than a month's capacity going forward. Our partner on the dry kibble side is doubling capacity in July. So we don't foresee any issues in terms of maintaining those high level of fill rates with Halo Elevate. And then, we see some optimism in terms of capacity opening up for our wet business over the summer and into Q3, Q4. So, overall, we feel really good about our ability to supply our customers. And back to when we went and IPO-ed and raised the $40 million for this business, that was also to support the growth plan of Halo. And with that, making sure we have inventory to sell. So, our ability to have cash on hand to purchased inventory, and then our partnerships with our co-manufacturers to make sure that we have capacity, really has put us in a great position going forward because we know Donald and his team is going to sell and Ryan and the marketing group is going to kick in a lot of momentum here over the summer. We wanted to make sure we had product and we feel confident about that. So, I'll turn it over to Sharla. Maybe you can answer the net sales question.
Sharla Cook: You're right on the observation there. Really what you're seeing is international being a higher percentage of total sales in Q1. But also, with the pet specialty launch, the trade and promotional spend that hit there is really going to ramp throughout the year. So, as we do the fill orders, that promotional spend isn't going to hit exactly at the same time. So I wouldn't say it's going to reverse, but I think you'll see throughout the year, Q2 could trend possibly higher net as a percent of growth and then Q3 and Q4 get back to kind of what we've seen historically. But just noting that trade spend within pet specialty itself could be a little bit lumpy through the first quarters of the launch as that in-store promotion ramps.
Michael Baker: Our next question comes from JP Roland with ROTH Capital Partners.
Unidentified Participant: I just kind of wanted to talk about maybe breaking down COGS a little bit. And I'm just curious to know, kind of what is your guys' thinking around the components that are – I know you talked about price increase and the co-manufacturing. But outside of that, kind of what are the biggest headwinds there that you see and has that trended better or worse kind of since quarter-end? Secondly, just about pricing, how are you thinking about it relative to competitors? Is there still room for further price takes if you see elevated costs? Have you taken everything you can? Any clarity there would be great.
Scott Lerner: Yeah, 100%. The way I look at it, those two questions are very much interlinked. Our real benefit with BTTR is the team that we have in place, the experience within the industry and the expertise. And because of that, we've really been able to navigate the macroeconomic environment in terms of commodity cost increases and whatnot. So, as we look at our business, obviously, we see increases in certain areas. And we've been really responsive, not only in terms of our ability to increase price in spots to maintain margin, but also to improve our formulations, both from a performance perspective and cost basis. So, we're not really in the game of predicting what's going to happen in the future. We're in the game of protecting our margins, and making sure that we craft a path to profitability in the fastest way possible. So, with that being said, because we're playing in the super premium segment of the market, there's a lot less price elasticity. So, we have the ability to maneuver pricing around a little bit more than if we were in the value segment. We do see there's an opportunity in certain spots, again, to potentially take price, and make sure that we're more strategically aligned with our competitive set from a pricing perspective. As you might know, many of our competitors are taking price currently. And so, we want to make sure that we just are in line with the competitive set from a brand perspective. So, overall, that is something that we spend a lot of time on, daily basis. It's not only thinking about the current, but also the future and, really, that's our expertise, I'd say, is looking out into the future and saying, hey, where do we want to be from a price perspective and hedge our bets there. So, that's the game we're playing. And I think we've already represented that in the gross margin growth we've received in Q1 versus Q4. And we hope to increase that over time.
Unidentified Participant: Just one quick follow-up. Kind of in terms of Petco, I think – and correct me if I heard incorrectly – I think it was about two-thirds of total Petco stores. Kind of as you go through the Halo Elevate launch, what do you need to see? And perhaps, what are you looking at in order to kind of go back to Petco and say here's what we've proven out and we'd like kind of that last one-third of stores. And I'd be curious kind of, what's the timeline on when you might have that data to really renegotiate that store count?
Scott Lerner: I'll chime in real quick and then I'd love to pass it on Donald for his thoughts. But the real key thing here to remember is that we're in two-thirds of the most productive stores within their store list, if you will. So, we're really focused on driving the volume through the best stores in their chain. But I'll turn it over to Donald to kind of expound on that.
Donald Young: JP, the reality for Petco is, as they start to look at store sales, that's what we looked at and that's how we forecast, its turns per store per week per store. Right now, we've already exceeded. And again, it's early. But, again, of our 39 SKUs that we have in there, directionally, you have some SKUS that are right on target, you have some that we've already doubled their forecasts. Right now, they've been very happy with the launch. Going forward, the process, you're really looking at the end of Q4, when you sit down with Petco, you evaluate, you do your joint business plan with them, review with them, and then they start making their space plans for next year. Again, we're very excited again already, what we're looking at, what the partnership is allowing us to do, again being the best choice brand. It's very, very rare for Petco to bring a new manufacturer in and give that type of trust and confidence in what you're delivering to them. So, again, we're very excited. I look a little bit like what we're already seeing from Petco shoppers. And that's really at the end of the day, when talk about their store associates and also what pet parents are saying about the brand. This week alone, as we make our sales call, we had one of the Petco associates talk to us that they were already extremely excited when they heard about the unique five pillars of Elevate, what we stand for, how the performance is unique and different. Again, our pre and probiotic levels, the highest in the industry. So, what we always thought we would do is generate that store-by-store activation. And right now we're very excited where we stand and where we're going forward.
Operator: Our next question comes from James McIlree with Dawson James.
James McIlree: I was hoping you could comment a little bit about the impact you're seeing or how you're mitigating the lockdowns in China and your ability to serve that market. I was pleasantly surprised with your strength there. I'm just wondering how are you going to manage that going forward.
Scott Lerner: Rob, why don't you take that one?
Robert Sauermann: What I would note is that, like in the US, pet food, it's a core product that is sold. So, it's one of those that impacted a little bit less by the lockdowns. What I think is really important is that our partners over there are doing a phenomenal job of importing product, getting it into our distribution centers and getting it sold to consumers. We're seeing really strong end consumer demand in China through our partnership there. But I'd also add that we have kind of the added benefit of our partners taking ownership of that product in the United States. So, we're not responsible for shipping the product over, we're not responsible for managing those port dynamics. And that's a real benefit for us as we think about sales. So, continued growth in those markets, regardless of COVID. And we're in the right place.
James McIlree: Sharla, you talked about inventory reserves. And I'm wondering how much of the existing inventory would be subject to further inventory reserves as you transition to Holistic and away from TruDog? Is there a big inventory amount that's associated with the old products?
Sharla Cook: I would say kind of going forward, we've really taken the bulk of that now. We, as part of our transition strategy, have looked at all of our SKUs, the runouts on those and really kind of planned accordingly to time transition, to time runout of inventory, so that we take the most minimal impacts to inventory allowance as possible. So, kind of from an accounting standpoint, right, we have to kind of take that as we see it. But I'm not expecting significant incremental allowance for the remainder of the year. We'll continue to evaluate that each quarter as we look at the stocks and the runout from the sales on that older product. But I'm not expecting that to significantly impact the rest of the year.
Operator: Our next question is a follow-up from Michael Baker with D.A. Davidson.
Michael Baker: Not sure if you want to go into this level of detail, but a lot of moving parts on the gross margin between domestic first half plans and international second half and the inventory allowance, etc. Can you just help us frame what's the proper expectations for gross margins for the year? Last year, you came in at 33.4%, which was down about 400 basis points. With all those moving parts, would 2022 be in line with 2021, better or worse, et cetera. And then, as part of that question, last call, you had talked about planning on being EBITDA positive in 2023, with some of the changes in the cost environment, et cetera. Is that still a reasonable expectation?
Sharla Cook: And we've kind of mentioned this on past calls. But this is the way I kind of see 2022 playing out. And if you go back to 2021 and look at our gross margin through the year, the Q1 through Q4, you kind of see these declines throughout the year. You're going to see the opposite of, the inverse of that in 2022. So, we improved a couple points that would have been over 3 points in Q1 without the inventory reserve. That's what you're going to see throughout the remainder of the year, is these couple point increases. I think, for a full-year basis, I think 2021 is generally a good index as we ramp back up, and definitely expect to get back over 30%, in that 30% to 35% range. So, I kind of look at it, like I said, the inverse of last year is what you'll see this year. And then, on your question on EBITDA positivity, that's still our expectation, is that by mid-year of next year, we're cash flow positive, EBITDA positive, and that we're – we're moving on the path to profitability now and the timing of expectations isn't – have not changed.
Michael Baker: I'm just following up on that. When you say EBITDA positive by mid next year, does that mean on a trailing 12-month basis or more like either the second quarter or third quarter for that particular quarter EBITDA will be positive?
Sharla Cook: Correct, the latter. Mid-year, we'll start to hit positivity. So, on a trailing 12 months, you're going to still see some of the burn from the prior 12 months, but we'll start ramping that EBITDA positivity in mid-year.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Lerner for any closing remarks.
Scott Lerner: Thank you. Thank you to all that have joined us this morning. As you can see from the earnings call, my team as well as myself are extremely excited about what we've done to date in Q1 of 2022. And we couldn't be even more excited about our progress into the rest of this year. When we went and IPO-ed on the New York Stock Exchange last year, we set out a roadmap of certain things we needed to tackle in order to build the business for success. And I'm really pleased to say we've nailed all those. We welcome any other questions as we move forward into the year and really appreciate your support. Thank you very much.
Operator: The conference is now concluded. Thank you for attending today's presentation. You might now disconnect.
