A Look at Solo Brands S-1: The Power of Margins in DTC eComm
Solo Brands filed its S-1 on Oct 4, 2021. The company is a fascinating case study in leveraging the power of the DTC model to drive strong profits.
Using the base of their strong Solo Stove brand and some help from private equity investors, the company rolled up 4 companies in 2021 to become an outdoor enthusiast DTC powerhouse. Their brands now include Solo Stove, Oru Kayaks, Isle (paddleboards) and Chubbies (iconic shorts and clothing).
The thesis is that their customer base has common affinities. But what makes Solo Brands special is their numbers. This is a company that knows how to grow rapidly and make a profit. They have invested that free cashflow into efficiencies and increasing margins and the results are impressive. One secret is their use of data to understand and manage their business.
Fortunately for us, the Solo Brands breaks out their numbers.
Let’s look at the margins to understand why Solo Brands is so impressive.
Note: In the table below, Solo Brands is Solo + Oru + Isle and Chubbies is just Chubbies.
The EBITDA margin jumps off the page. Wow! These guys know how to turn a profit. The gross margin is solid, but the magic really happens in how well Solo can turn that gross profit into free cash. You’ll also notice that Chubbies starts with a higher gross profit margin (71% as compared to 67%) but is not as strong in EBITDA margin (11% lower). I would expect the Solo team to quickly work their efficiencies to crank up that EBITDA margin to their level. Given that they closed the deal with Chubbies only a couple of months ago (Sep 1), they are just getting started.
📈 Solo’s margins just blow away all other DTC brands. The current highest EBITDA Margin in the Bainbridge DTC Index is FIGS at 17% with the media being 3%. Solo’s gross margin is also super strong at 67% which is third to Hims & Hers (74%) and FIGS (72%). Solo is frankly setting a new standard and deserves the ticker DTC.
Efficient Customer Acquisition Team
The S-1 buries a good story by making it hard to break this out. Ad spend rose from $6.5 million in 2019 to $17.8 million in 2020 which is a 174% increase. But they increased Net Sales during that time period by $94 million which is a 235% increase. As a percentage of Net Sales, Ad Spend decreased from 16.3% to 13.3%. This is another testament to their operational prowess.
Expanding to omnichannel is the conventional wisdom in DTC. Surprisingly, Solo bucks that trend. DTC as a percentage of net sales increased between 2019 and 2020, going from 90% to 92%. When you have built as powerful a flywheel as Solo it definitely makes sense to expand your strongest channel to exploit it.
While the S-1 discloses purchase prices for Oru and Isle, it doesn’t break out their financials individually. But it does break out Chubbies separately and it’s clear why Solo liked the company. Solo bought Chubbies on September 1, 2021 for $129.5 million. An awesome win for a fun and dedicated team!
The S-1 once again makes things hard, but at time of acquisition, Chubbies was at least a $100 million run rate company growing at more than 125% a year with a 27% EBITDA margin with EBITDA margin expansion doubling over the previous year.
💰 Taking first 6 months of 2021 and half of 2020 gives $71.9 million of net sales and $16.4 million of EBITDA (23%). This implies a trailing 12 month revenue multiple of 1.8x and trailing 12 month EBITDA multiple of 7.9x off a $129.5 million acquisition.
These multiples compare very favorably (for the acquirer) to the Bainbridge DTC Index of public company multiples of 3.1 median revenue multiple and 19.7 EBITDA multiple. Solo acquired a great company at a great price which gives credence to their strategy of using their platform to make more acquisitions.
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