Solo Brands cooked on 2023 guidance cut. Is it a bargain or trap?

January 17, 2024 at 07:00 AM EST

Outdoor and lifestyle products maker Solo Brands Inc. (NASDAQ: DTC) has grown a cultlike following under its many brands. The consumer discretionary sector company initially started by offering an ultralight and portable camp stove called the Solo Stove Lite, which could boil water in less than 10 minutes using leaves and twigs as a fuel source. The company grew a grassroots following consisting of superfans who yearned for more stoves to take with them on day hikes and car camping trips.

A viral sensation

The company became the viral success of Solo Stove models like the Titan and Campfire and eventually Bonfire, its iconic portable, stainless steel and virtually smokeless fire pits garnering rave reviews and a cultlike following.

The company also added brands embracing the outdoor lifestyle through its direct-to-consumer (DTC) platform. Revenues have surged from just under $40 million in 2019 to over $500 million in 2021, driven by the pandemic as more consumers embrace the outdoor lifestyle.

Bargain or value trap?

The company went public in October 2021, reaching a peak of $23.39 per share. Then normalization kicked in, causing shares to fall to a low of $3.40 before staging a rally in 2023 back up to $8.86. On January 8, 2024, Solo Brands lowered its full-year 2023 guidance, causing shares to collapse by tanking shares by more than 40% in the following days, hitting new all-time lows.

Could this be a bargain opportunity for a profitable company trading 3.7x forward earnings with a market cap falling below its annual sales or a value trap? Does a 10% revenue guidance cut justify a 40% haircut in its stock price?

Solid Q3 2023 earnings beat

On November 12, 2023, Solo Brands reported its Q3 2023 earnings report.

The company reported EPS of 28 cents, beating analyst estimates by seven cents. Net income rose 176.7% to $3.1 million. Adjusted EBITDA rose 33% to $15 million. Revenues rose 8% to $110.32 million, beating estimates by $6.71 million. Wholesale revenues climbed 114% year-over-year (YoY) to $34 million.

DTC revenues fell 11.6% to $76.2 million. Gross margins fell 1.4% to 61.9% due to a mix shift to wholesale. EBITDA margins improved 250 bps to 14%. The company closed the quarter with $16.6 million in cash and cash equivalents.

CEO insights

Solo Brands CEO John Merris noted strong sales through its wholesale channel, including DICK’s Sport Goods Inc. (NYSE: DKS), Shields and Public Lands, indicating the growing momentum of its brands despite the uncertain consumer environment.

He underscored the benefits of its wholesale channel, "We have heard feedback from customers who are thrilled to be able to drive to a store to pick up a Solo Stove right then. Customers want optionality, and we are responding to their needs as part of our ongoing commitment to customer satisfaction." He anticipated that through its omnichannel strategy, expanding into the wholesale channel would "cannibalize" some of its online business in the near term.

But expects many of those wholesale customers to go back to its website to purchase accessories and other products. It also allows new customers to discover Solo Brands at wholesale locations. This was evidenced by the 23% increase in first-time customers shopping on the website. He expects most new customers to purchase Solo Store firepits at a retail location and visit the website to buy accessories.

Lowered guidance, new CEO appointment

On January 8, 2024, Solo Brands lowered its fiscal full year 2023 revenue guidance to $490 million to $500 million, down from $520 million to $540 million versus $530.57 million consensus analyst estimates. Adjusted EBITDA margin should land between 14% and 15%, down from earlier guidance of 17% to 18% from higher marketing costs.

The company also appoints a new CEO and President Christopher Metz effective January 15, 2024. Mertz was most recently the CEO of Vista Outdoor Inc. (NYSE: VSTO), which makes outdoor recreation and shooting sports products.

Analyst downgrades

The guidance cut prompted several analysts to cut their ratings as well. Craig Hallum cuts its rating to a "hold" from "buy" with a $5 price target.

Piper Sandler cut its rating to "neutral" from "overweight." William Blair cut its rating to "market perform." Jeffries downgrades to a "hold" from "buy" with a $4 price target from $12. Citigroup cut its rating to a Neutral from Buy with a $4 price target from $10.

Solo Brands analyst ratings and price targets are at MarketBeat. Look at the Solo Brands peers and competitor stocks with the MarketBeat stock screener.

Solo Brands chart

Ascending triangle breakdown to death cross

The daily candlestick chart for MBLY had an ascending triangle pattern entering the year. As the distance between the upper flat-top trendline at $44.28 narrowed with its ascending trendline nearing the apex and an inevitable break, MBLY issued its 2024 guidance cut, sending shares down 24%.

The gap fill channel formed between $39.34 and $30.94. This gap down is also causing a potential Death Cross pattern as the daily 50-period moving average at $39.63 starts to cross back down through the 200-period moving average at $39.46. The daily relative strength index (RSI) collapsed through the oversold 30-band to stall at the 21-band. Pullback support levels are at $28.19, $27.41, $26.17 and $24.85.

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