Traeger, Inc. (COOK) Q1 2022 Earnings Call Transcript

Traeger, Inc. (COOK 0.96%)
Q1 2022 Earnings Call
May 11, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. Thank you attending today's Traeger first quarter fiscal 2022 earnings conference call. My name is Hannah, and I will be your moderator for today' call. [Operator instructions] I would now like to pass the conference over to our host Nick Bacchus, vice president of investor relations of Traeger.

Please go ahead.

Nick Bacchus -- Vice President, Investor Relations

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its first quarter 2022 results which releases afternoon and can be found on our website at investors.traeger.com. I'm Nick Bacchus, vice president of investor relations at Traeger. With me on the call today are Jeremy Andrus, our chief executive officer; and Dom Blosil, our chief financial officer.

Before we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements that are based on current expectations but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. We encourage you to review our annual report on 10-K for the year ended December 31, 2021 and our other SEC filings for a discussion of these factors and uncertainties which are also available on the investor relations portion of our website. You should not take undue reliance on these forward-looking statements. We speak only as of today and we undertake no obligation to update or revise them for any new information.

This call will also contain certain non-GAAP financial measures which we believe are useful supplemental measures. The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein to such GAAP measures are included in our earnings release which is available on the investor relations portion of our website at investors.traegerr.com. Now, I'd like to turn the call over to Jeremy Andrus, chief executive officer of Traeger.

Jeremy Andrus -- Chief Executive Officer

Thank you, Nick. Thank you for joining our first quarter earnings call. Today, we will discuss highlights from our first quarter results, and share progress in executing their long term growth strategies. I will then turn the call over to Dom to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance.

The Traeger team continues to work relentlessly to deliver an incredible experience to our consumers and to drive forward our key long term growth initiatives. In the first quarter, while we face several near term headwinds, including continued inflationary pressures and supply chain challenges, a highly dynamic consumer backdrop, and tough year-over-year comparisons. We are pleased with our execution. Our first quarter sales of $224 million were down 5% versus prior year with particular softness in our growth business with revenues down 16%.

First quarter year-over-year growth was negatively impacted by a period where our retail partners were aggressively restocking channel inventory, and consumer demand was enhanced by government stimulus. Looking at first quarter's three-year CAGR of 32% and grows revenue CAGR of 27% demonstrates the strong gains that Traeger has experienced since 2019. We are pleased to have exceeded our first quarter guidance, which we provide in March. Despite beating our quarterly guidance, we are maintaining our full year 2022 sales and EBITDA outlook.

There are three central factors I will touch on as it relates to our reiteration of guidance. First, our beat relative to guidance in the first quarter was largely driven by timing of shipments of grills and was not based on a change in underlying demand relative to our assumptions when we shared our outlook. Second, we remain cautious on the macro environment with continued pressures on the consumer and tightening financial conditions, as well as a shift in consumer spending away from durables toward services. Lastly, we are in the beginning of our seasonally strongest selling period, with our most important weeks at retail ahead of us, therefore, it is early in the year to adjust our outlook.

Despite near term headwinds, our brand health has never been stronger. Our consumer continues to increase engagement with Traeger with connected cooks continuing to grow in the first quarter, led by an incredible 55% increase in connected cooks on Super Bowl 2022. Moreover, our customers continue to tell their friends and family that they love their Traeger and our NPS score is now at an all time high well above other players in the outdoor cooking category, and in line with great consumer brands like Starbucks, Airbnb and Netflix. The excitement and passion around the Traeger brand, continue to build momentum as we approach our summer selling season.

In March we launched our new Timberline drill, which is Traeger most innovative product since I've been with the company and it's truly a game changer in outdoor cooking. The launches reception for our consumers or retail partners at outdoor cooking influencers has been incredible and cements Traeger status as a disruptive force in the grilling category. Looking forward, we are optimistic about our plans as we head into the summer grilling season. Whether smoking a 15 pound brisket overnight for a block party, or using one of our fast and easy dinner recipe ideas for weeknight meal to be enjoyed outdoors with a family or wood pellet grills versatility, consistency, and ease of use made Traeger go to grill for the summer.

Similar to last year, we kicked off the beginning of the season with the promotion this year selling around Mother's Day with $150 off select grills and $2 off pellets and sauces. The promotion was a great gift giving opportunity and directly addressed consumers looking to buy a Traeger grill or consumable ahead of the summer. On May 14, we will be celebrating our fifth annual Traeger day. Traeger day is dedicated to bringing the global Traeger community together to cook outdoors and to share woodfire foods with friends and family as they celebrate the start of the grilling season.

Consumers and influencers share pictures and videos of their meals on social media and can win prizes based on their spread. We expect significant growth in consumer engagement especially after two years of virtual Traeger days. We remain highly enthusiastic about the enormous upside potential for the Traeger brand and are confident in our growth strategy. Having said that as we discussed in March on our fourth quarter earnings call, the near term environment remains highly dynamic.

We are seeing numerous companies across multiple parts of the consumer sector speak to a less favorable backdrop for the consumer with inflation and geopolitical turmoil impacting consumer confidence. Furthermore, as a pandemic subsides, it is becoming evident that the consumer is shifting spent away from durable, home related goods toward leisure and travel, which is also negatively impacting the grill category. On our fourth quarter call, we discussed having seen a deviation from our forecasts and sell through trends at retail in March which coincided with worsening geopolitical headlines and a sharp rise in prices at the pump. Since then, sell through trends have remained volatile, but are trending in line with the expectations we provided when we gave our 2022 guidance.

It is important to note that it's still very early in the year with our highest volume sales weeks at retail ahead of us. In fact, in a typical year, we would expect retail sell through volumes between now and Labor Day to make up nearly 50% of our yearly sell through. In terms of supply chain dynamics, as we have discussed on previous calls, given the size and weight of our product Traeger is especially sensitive to the cost increases in freight and transportation that many companies are facing today. While we do expect that increased freight costs will normalize to some extent over time, our team remains hyper focused on driving costs out of logistics, supply chain and manufacturing.

Specifically, earlier this year, we formed the gross margin task force led by our chief supply chain officer Jim Hardy to identify and execute on cost savings initiatives across the supply chain. While it is early in the process, we are encouraged by some initial learnings and wins. And we expect to leverage efficiencies driven by this team over the medium to long term. Critically while the team is focused on driving cost savings, we are committed to doing so without compromising the quality of our products or our consumer experience.

Furthermore, given cost increases and the uncertain consumer backdrop, we're managing expenses to better align the cost structure to the current environment. This includes reexamining our investment spend for the year and reducing deferring and reprioritizing certain expenses. We remain committed to fueling our long term growth and continually improving our product and consumer experience. However, we believe that thoughtful cost discipline is appropriate given the highly dynamic backdrop.

I want to shift my discussion to progress on our key strategic growth pillars, accelerating brand awareness and penetration in the United States, disrupting outdoor cooking through product innovation, driving recurring revenue through our consumables business and expanding the Traeger brand globally. Increasing brand awareness and penetration in the United States remains our largest single growth driver. It is important to note that outdoor growth in the U.S. is a long term opportunity for Traeger increasing penetration or existing retail footprint is at the core of our growth strategy.

In the first quarter we reset roughly 350 stores at the Home Depot with an expanded assortment of Traeger products and improving signage and fixturing. As we have noted these locations having larger assortment, with more than doubled the number of Traeger skews and a significantly improved brand presence, which allows these locations to drive more than twice the sales productivity for Traeger products compared to the average home depot door. We're continuing to drive future growth in Home Depot by increasing the product assortment across stores, particularly those with minimal brand presence and sales and by investing in visual merchandising fixtures and retail training. On the marketing side in the first quarter, we launched a new brand campaign to Traeger Wood Tales featured in TV spots and digital ads.

That campaign focuses on funny family moments with a Traeger spin. But I would encourage everyone to watch these entertaining commercials on our YouTube channel. Going into the summer season we will focus our media efforts in the social, digital and connected TV channels. Lastly, our DTC business continues to gain momentum.

And in the first quarter Traeger.com U.S. saw solid growth with increases in both returning customer transactions, as well as new customer transactions. We launched several new products that trust pallets, consumables, and apparel in our DTC channel including meats watch a limited edition run of Traeger branded joggers that are the perfect chance to wear when grilling out of Traeger. Our consumers love the idea and need SWAG sold out in eight hours.

These types of creative and limited run offerings bring significant energy to the Traeger brand. Our next growth pillar is product innovation. The launch of the new Timberline and Timberline Excel in March was an enormous occasion in the history of the company. Our new Timberline brings incredible innovation to the market, offering consumers an unparalleled level of consistency, convenience and versatility.

Full stainless steel insulation and a redesigned heat delivery system allow for hotter temperatures and improve searing. The grill includes the first outdoor certified induction cook top which provides fast heating for sauteing, simmering sauces or searing, as well as a proprietary grease and ash keg system for easy cleanup. A new WiFi enabled controller for precision temperature control, and two wireless meter probes for easy monitoring of internal temperature, among other innovations. There is nothing else in this space that has all the innovative features that are included in this new Timberline.

The excitement around the launch of the new Timberline was palpable with 1.2 billion press coverage impressions and 70 million influencer driven impressions in the first week post launch. The reception of the new Timberline has been fantastic, with significant excitement from our retail partners who have sent Timberline moment fixtures in over 1000 doors, as well as strong advocacy from influencers like Sam, the cooking guy, last ten minute new church and how to barbecue rights. Importantly, we expect the innovations introduced in this product will power several years of upgrades and newness as technologies and features cascade through the rest of the Traeger product assortment. Shifting to our consumables business, we remain focused on driving recurring revenues through expanded distribution and new product introductions.

In the first quarter, we added 2,200 grocery doors were Traeger rubs and sauces are being sold led by our rollout at Kroger. We saw strong growth in our rubs and sauces business in Q1 driven by this increased distribution. We are also increasing distribution or pellet business and added 600 additional grocery doors where pellets are sold. It is early in our consumables expansion at grocery.

However, we are encouraged by early results and continue to believe that the consumer wants to buy consumables where they shop every week, not just where they're buying their grill. In addition to distribution growth, we continue to expand our consumables assortment new innovation. In February we launched two new rubs, anything rub and the Perfect pork rub and two new sauces, Liquid Gold and Show Me the Honey. Moving to our final growth pillar, expanding the Traeger brand globally, our international business had a strong first quarter with healthy growth both in Canada and Europe.

The quarter benefited from strong pre-book in early season loadings. And our team did a great job delivering product on time and in full to our international retailers and distributors. In the first quarter we saw deceleration sell through in our international markets, as we believe consumer sentiment and global geographies has been negatively impacted by the war in Ukraine and inflation. Similar to the U.S.

we found our international business more conservatively for fiscal '22. Based on a macro backdrop, we would know we have no direct exposure to Russia or Ukraine. And the European market makes up well below 5% of our total sales. We continue to see a significant long term opportunity to grow the Traeger brand globally.

In summary, the Traeger team continues to execute on our growth strategy, which we believe will drive meaningful value for our shareholders, consumers and retail partners. In the first quarter, we launched our most innovative product in the company's history, which we believe sets the stage for a multiyear innovation cycle and puts us significantly ahead of the competition. Despite facing near term challenges Traeger continues to be strongly positioned for long term growth as a disruptor in the outdoor cooking sector. Before I pass it over to Dom, I'd like to thank the entire Traeger team for their hard work and passion and executing on our vision to bring people together to create a more flavorful world.

And with that, I'll turn it over to Dom. Dom?

Dom Blosil -- Chief Financial Officer

Thanks Jeremy and good afternoon everyone. As Jeremy discussed in the first quarter, we faced several headwinds which negatively impacted our year-over-year growth rates and margins. These pressures include comparing against the period when sell and materially outpaced sell through as retailers restock the load channel inventories in the first quarter of last year lapping stimulus driven retail demand and uncertain consumer environment and continued inflationary pressures on our supply chains. Despite these headwinds, we are pleased with our first quarter execution as we move into our strongest seasonal period.

While the near term environment remains highly fluid, we are focused on the things that we can control, as well as maintaining an appropriate balance of short term and long term investment. I will start by reviewing our first quarter results, and then we'll provide an update on our 2022 outlook. First quarter revenues declined 5% to $224 million driven primarily by a decline in grill revenues. Grills revenue declined 16% to $150 million, with revenues impacted by lower unit volumes partially offset by higher average selling prices, driven by price increases taken in the second half of 2021, as well as the first quarter of 2022.

First quarter unit volumes were impacted by the anniversary of difficult unit comparisons as retailers were restocking grill inventories in the first quarter last year, and sell through benefited from government stimulus. Consumables revenue declined 3% to $40 million, reflecting the lapping of the strong 72% increase in the first quarter of last year. With a decline in our pellet business somewhat offset by growth in our rubs and sauces business. We note that the decline in first quarter consumables revenues of 3% represents acceleration from our fourth quarter's 19% consumables decline.

Finally, accessories revenues increased 109% driven by incremental revenue from the acquisition of MEATER and continued strong growth and Traeger accessories. First quarter revenues beat the high end of our guidance by $12 million. The upside in sales was largely driven by timing of shipments of grills relative to our plans and be guided in March, as we released orders for certain accounts earlier than expected to ensure on time delivery given continued constraints and domestic carrier capacity, as well as earlier loading of our new Timberline XL to certain accounts. Geographically in the first quarter, we saw strong growth in Canada and rest of world while growth in the U.S.

was impacted by the aforementioned headwinds. We remain highly optimistic about the long term opportunity to grow triggered globally. We are however, planning our international business more conservatively this year given the growing macroeconomic pressures that consumers facing in many of our international markets. Gross profits for the first quarter decreased to $84 million from $101 million last year.

Gross profit margin was 37.4%, down 530 basis points to last year. Higher inbound freight costs continue to be the largest pressure on our gross margin and contributed 870 basis points of negative margin impact. Amortization of intangible assets related to the MEATER acquisition was also diluted in March and offsetting these pressures as margin favorability of 370 basis points driven by our pricing actions, as well as favorability, driven by a higher mix of customer orders fulfilled via our direct import program. First quarter gross margin was modestly better than our expectations driven by slightly lower inbound freight expense compared to our forecast.

Sales and marketing expenses were $33 million, compared to $31 million in the first quarter of last year. The increase was primarily driven by advertising costs related to MEATER which is not a component of the 2021 comparable period. The increase was also driven by higher equity based compensation expense of $2 million due to the restricted stock units issued under the Traeger 2021 instead of the ward plan. General and administrative expenses were $43 million, compared to $14 million in the first quarter of last year.

The increase in general and administrative expense was driven primarily by higher equity based compensation expense due to the restricted stock units issued under the Traeger 2021 incentive award plan, higher personnel related costs and increased professional services. As a result of these factors, net loss for the first quarter was $8 million, as compared to net income of $39 million in the first quarter of last year. Net loss per diluted share was $0.07, compared to net income per diluted share of $0.36 in the first quarter of last year. Adjusted net income for the quarter was $20 million or $0.17 per diluted share, as compared to adjusted net income of $45 million or $0.41 cents per diluted share in the same period last year.

Adjusted EBITDA was $31 million in the first quarter, as compared to $64 million in the same period last year. Now turning to the balance sheet, at the end of the first quarter cash and cash equivalents total $11 million, compared to $17 million at the end of the previous fiscal year. We ended the quarter with $379 million of long term debt. Additionally, as of the end of the first quarter, the company had drawn down $47 million on its revolving credit facility and $49 million under its receivable financing agreement, resulting in total net debt of $464 million.

And net leverage ratio of 6.2. It's important to note that our first quarter is typically our peak leverage point, given elevated working capital needs ahead of our strongest seasonal selling period with that level of historically coming down there after. Inventory at the end of the first quarter was $164 million, compared to $76 million at the end of the first quarter last year. As we have discussed previously, the increase in inventory was driven by three factors.

First, given supply chain constraints. We have intentionally leaned into inventory to ensure we have adequate supply. We believe this strategy is the right one given the supply chain environment remains highly fluid, as evidenced by recent warehouse imports shut down to Shanghai. Second, inventory costs are higher versus last year driven by increased freight and input costs.

Finally, about $18 million of the inventory increase was due to MEATER, which is not in the comparable inventory base last year. We remain comfortable with our inventory levels. We are closely monitoring the supply chain environment. And we'll be managing our level of safety stock based on how the landscape evolves over the balance of the year.

Turning to our guidance for fiscal year 2022, we are reiterating our full year revenue guidance of $800 million to $850 million in our adjusted EBITDA guidance of $70 million to $80 million. Even at the upside in first quarter revenues was largely based on timing, we're not falling through the beat to our full year outlook. Furthermore, we remain cautious given the uncertain macro environment and its impact on consumer behavior and competence. As well as shifting consumer spending patterns toward services and away from durable and discretionary goods.

We continue to expect grill revenues to be down double digits in the first half of the year. With declining grill revenue growth for the full year and sequential improvement in the second half of the year relative to the first half as comparisons normalized. On our fourth quarter earnings call we discussed having seen a deviation and sell through in March relative to our forecast, since that time sell through trends that remain volatile, but are generally in line with the expectations embedded into our guidance. As Jeremy spoke to it's important to note that our business is fairly seasonal with the next 18 weeks of sell through typically representing nearly half of our yearly sales at retail.

We're early in our key selling season, and therefore we'll be reading and reacting to sell through trends during the summer. In terms of gross margin, we are reiterating our prior guidance for full year gross margins of 34% to 35%. Despite modestly better than expected first quarter gross margin, the supply chain environment remains highly fluid and we believe it is prudent to maintain our prior margin outlook. We continue to expect gross margin the first half of 2022 to be higher than the full year.

Next, I'd like to give an update on our gross margin drivers. We expect that inbound container rates will continue to attract above $10,000 to 2022, which will continue to put pressure on gross margin rates. We continue to be focused on working to offset these cost pressures. As Jeremy mentioned, we have formed a task force which is charged with evaluating changes in design, manufacturing and supply chain processes to drive higher product margins and lower costs.

We are encouraged by the team's initial findings in these areas, and expect that we will begin to realize savings in 2023. In terms of SG&A we will continue to right size our expense structure to help offset near term top line and gross margin headwinds. Given the current macro backdrop, we will delay certain investments that have been less quantifiable in near return profile and further will be nimble in our approach to managing the P&L. Our focus is to balance investing behind growth while protecting profitability and acknowledging the uncertain macro environment.

We continue to feel extremely optimistic about Traeger's long term growth as we disrupt the outdoor cooking industry as evidenced by the successful launch of our new product innovation. Furthermore, I remain high encouraged by the long term opportunity to gain market share by increasing penetration within the US. And with that, we will open the call to questions. Operator?

Questions & Answers:

Operator

[Operator instructions] The first question is from the line of Simeon Siegel with BMO. Please proceed.

Simeon Siegel -- BMO Capital Markets -- Analyst

Thanks. Hey, guys. Hope you're having a good afternoon. So Jeremy, maybe it's early, but anything you can speak to on that sales uplift you're seeing with the 350 Home Depots that get expanded.

So maybe just giving some color around what you're seeing with those? And then how are you guys thinking about the sell-in versus sell-through dynamics for pellets? Basically, how are you thinking about when consumables should return to growth? And just any help there? Thank you.

Jeremy Andrus -- Chief Executive Officer

Hey, Simeon. So look, we track sell through weekly. And, we cut by customer, by door, by region and no question we're seeing a lift in those 350 doors in by the way we've I mean, we've been seeing this. We've been seeing this for years.

I mean, every time we grow assortment, we improve merchandising, we see the lift and sell through. So it's fortunately a fairly predictable formula to drive growth. And we are seeing that lift and it will continue to drive our strategy with Home Depot. One of the things that we talked about, in addition to increasing assortment has been the testing and I would say now investment of sort of store in store fixtures within Home Depot.

We tested about 35 stores last year, really liked the return that we saw, both in terms of lift in sales, as well as return on investment in those fixtures. That has continued to rollout there are a couple of 100 in market now and will be sort of 500 by end of year. And that's our strategy. I mean that is I think it's marked in Home Depot because there's so much traffic and there's such a conversion opportunity.

But it's foundational to our brand in terms of building a branded presence in retail and really capturing the opportunity to speak to the foot traffic walk into the retail. In terms of -- Dom, do you want to hit on the follow up question?

Dom Blosil -- Chief Financial Officer

Yes, we have-I'll speak in terms of consumables, I would say that the first half of this year is a challenging comp across our different categories, say where we're seeing nice momentum on the accessory side, in addition to the acquired revenue with MEATER. As we look ahead, I think you start to see some normalizing comps from the back half of the year. And we won't go into detail around guidance. But I guess I would say two things.

First, we expect to see some normalization of consumer or consumption of pellets, as we measure attachment in the back half of the year. We are lapping two years of elevated a patch, just given the dynamics around the pandemic and cooking behaviors, as consumers shift to a more normal world where some of that discretionary spend, as well as their discretionary time is moving to services. We think that will continue to put a little bit of pressure on the comps. But again, in the back half, we think those will normalize.

On the food consumable side, I think one of the tailwind that we expect to see over the course of the year is just the growing penetration within retail and more specifically Traeger and our grocery strategy, which will be our consumable business through the course of the year.

Simeon Siegel -- BMO Capital Markets -- Analyst

Great. Thanks a lot, guys.

Dom Blosil -- Chief Financial Officer

Thanks, Simeon.

Operator

Thank you, Mr. Siegel. The next question is from the line of John Glass with Morgan Stanley. Please proceed.

John Glass -- Morgan Stanley -- Analyst

Thanks very much. You talked about the still volatile consumer environment generally on trend, but you're reading in going to react to those what is react mean? I guess in your minds, what levers do you have if we start to see slippage again, in consumption of grills whether it's promotional activity or reexamining some price points, what are the levers you think you have to stimulate demand if needed?

Jeremy Andrus -- Chief Executive Officer

Yeah. I mean, I think I'll just stepping back, like the growth thesis hasn't changed, we still fee highly confident in the thesis. And it's a long term thesis, I think the in-year dynamic will require a shift in strategy. That's not necessarily a signal for how we'll manage the business long term.

But when you think about and something we talked about, on the last call we experienced some acceleration in unit growth on the grill side. And ultimately, that correlates the installed base of grills. The household penetration that we sort of measure on a quarterly basis continues to reinforce the opportunity. We'll be lapping some challenging comps over the course of this year.

And obviously, we're changing in your strategy around how we manage the P&L and more specifically within SG&A, which in part requires a renewed focus on kind of middle and bottom funnel investments on the demand creation side. And that's to really ensure that where we make investments, we have a high degree of confidence. And to the extent that there's excess capacity within the P&L, we'll look to continue to kind of build top of funnel and/or rebuild top of funnel given some of the acceleration we've seen over the last two years. And so ultimately, what I would say is in year, the strategy will be slightly different than longer term.

And you will be focused more on performance marketing, where we see high kind of one-to-one conversion. Price is always something that we evaluate. We really configured a fairly sophisticated pricing strategy internally, where we can simulate based on historical moves, based on the price increases we've made how that could, in theory, impact both demand, as well as mix shift across our products and then, in turn, how that impacts the profits -- products and in turn, how that impacts profit generally. And so I'd say the in-year lever is really doubling down on how we sort of shift spend to performance marketing, as well as where we're seeing highest returns there.

And then we'll always evaluate price. I think we feel pretty good about our price, how we've configured price this year but something that we'll continue to look at. On the last call, we spoke to kind of the -- maybe the more pressure on the consumers of $1,000 versus above where we have probably more inelasticity. So it's something that we'll continue to evaluate as a potential in-year lever.

But ultimately, it's the long-term focus that I think will guide our strategy coming out of some of the in-year challenges, we'll sort of reconfigure our top-of-funnel strategy, build that funnel and continue to execute on the formula that we believe works and ultimately aligns to our growth algorithm long term.

John Glass -- Morgan Stanley -- Analyst

Thank you for that. And just a quick follow-up. You mentioned a timing of shipments, which was a benefit to the first quarter. Was that the -- what was the amount of that? Was that just the overage versus your guidance? Or could you quantify what that timing --

Jeremy Andrus -- Chief Executive Officer

Yeah. It's effectively the overage. Yup, that's right. It's really a shift between Q1 and Q2.

And as we said, it's tied to orders that were -- that had ship dates in kind of early Q2 that we chose to move late Q1. They were sort of on the cusp of the two quarters. And that's really an effort to ensure we're taking advantage of capacity, which is constrained among our carriers as it becomes available. That was the primary driver.

John Glass -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you, Mr. Glass. The next question is from the line of Peter Keith with Piper Sandler. Please proceed.

Peter Keith -- Piper Sandler -- Analyst

Hey, thanks. Good afternoon, everyone. So understanding there's a lot of business to be done in the next 18 weeks. I guess I'm curious just if things don't go well, how you work with retailers on their inventory levels.

So if you have some of your big box players with a lot of excess grills, is there any markdown risk? Do you enforce MAP pricing? Or is it just simply just you'd stop shipments to just kind of let the inventory levels bleed down into the holiday season?

Jeremy Andrus -- Chief Executive Officer

Yes. So one of our core principles is not to be promotional, right? And we've been very disciplined to that and it's evolved between kind of two to four promotional periods per year kind of our biggest promotional periods. We're not going to deviate from that. We think that drives healthy brand long term.

which is why our collaborative planning process, which we've configured internally as we work with our retail partners in lockstep to ensure that in-channel inventory levels don't exceed a certain range that we're uncomfortable with, that holds true. And so the goal for us is always to ensure that we don't find ourselves in a position where we're too heavy on inventory in-channel and one quarter at the sacrifice of another. Now as we look at the data that comes out of our collaborative planning process, as well as sell-through trends and in-channel inventory, we're within a band that we're comfortable with. But we are heavier than what you see historically.

And that's in part driven by our retailer strategy, which has also been to lean more into inventory given the fact that over the last two years, they found themselves in some challenging positions with lack of inventory, missed turns, etc. And so we watch this closely. We're a bit heavy, but we're also ahead of our peak selling season. And by no means is it a manageable position.

Even if the trend deviates from expectations in Q2, it's still something that we can manage within an appropriate sort of band of weeks on hand within channel and believe that it's really a specific issue to 2022 versus something that would linger or persist.

Peter Keith -- Piper Sandler -- Analyst

OK. That's helpful. Maybe pivoting over to freight. So you did give the comment that you're factoring in container costs running above $10,000 for the year.

What are you seeing as of late with your container costs? Has there been any near-term relief? Or are you still above that level?

Jeremy Andrus -- Chief Executive Officer

Yeah. No near-term relief but near-term stabilization. I think where we're building confidence is that the problem isn't becoming worse. It's stabilized, which leads us to believe that 2023 and beyond, we may start to see some building tailwinds on the container side.

But in this year, we're holding guidance where it is on gross margin because, one, we're sort of locked in, not contractually but effectively locked into kind of these elevated rates, which are holding a little bit of volatility from kind of week-to-week, month-to-month. But we expect the trend to hold through full year. And to the extent that we see some tailwinds build, those will likely be captured in 2023. So the good news is there's some stabilization within some of these inflationary pressures in transportation, in particular.

And that, at minimum, provides for some additional predictability within the year but nothing that would necessarily lead us to believe that there's incremental benefit to gross margin just based on what we know today.

Peter Keith -- Piper Sandler -- Analyst

OK. Sounds good. Thank you so much, and good luck.

Jeremy Andrus -- Chief Executive Officer

Thanks.

Operator

Thank you, Mr. Keith. The next question is from the line of Sharon Zackfia with William Blair. Please proceed.

Unknown speaker

Yeah. Hey, guys. This is Alex on for Sharon. Just a quick one for me.

So based on the sell-through that you guys are seeing now, could you maybe just qualify any of that? Any improvements that you're seeing with the sub-1,000 category? Have you seen anything coming out of that that's improved?

Jeremy Andrus -- Chief Executive Officer

Look, I would say from a sell-through perspective, the data points remain mixed as we discussed on the last -- on the first -- on the last earnings call. And we're still early in the season. Our sell-through is predominantly still in front of us but no clear direction that's deviated from what we reported on the last call, still within the range of guidance that we've provided.

Unknown speaker

OK. Got it. Thanks. That's helpful.

I'll pass it on.

Jeremy Andrus -- Chief Executive Officer

Thanks.

Operator

Thank you. The next question is from the line of Anna Glaessgen with Jefferies. Please proceed.

Anna Glaessgen -- Jefferies -- Analyst

Hi, good afternoon. Thanks for taking our questions. I appreciate the color on the pellets attach rate. Could you give us some color on what you're seeing on the rubs and sauces side of the consumables segment in terms of repurchase behavior and attach as well?

Jeremy Andrus -- Chief Executive Officer

I mean I would say it's early days, but we're feeling really confident in our food consumable strategy. And as we roll out more product within grocery and expand kind of those doors, we think that this is kind of a growing tailwind for the business. There's a real appetite for kind of food consumables, especially Traeger branded food consumables. So this is an exciting component of our strategy that is beginning to mature from the standpoint of how we believe the strategy should be configured and how we will ultimately execute on that strategy to continue to drive growth, which ultimately is part of kind of our long-term growth algorithm.

And I think we're early days in terms of this strategy in particular.

Anna Glaessgen -- Jefferies -- Analyst

Makes sense. And could you remind us what the average SKU count is in the grocery channel, the door and potentially where that we could see upside?

Jeremy Andrus -- Chief Executive Officer

Yeah. We don't have the specific data in front of us. But I think ultimately, the strategy will evolve over time, where we'll set probably our most important kind of highest moving SKUs and then sort of build the strategy from there, whether it be adding kind of linear square -- linear feet within retail where it makes sense or updating based on seasonal offerings, things like that. So I would say the core set is established.

And that will evolve over time based on how we measure turns within grocery, in particular, and where we see success across the portfolio.

Anna Glaessgen -- Jefferies -- Analyst

Got it. Thanks.

Operator

Thank you. The next question is from the line of Kaumil Gajrawala with Credit Suisse. Please proceed.

Kaumil Gajrawala -- Credit Suisse -- Analyst

Hi, thanks for having me on. Is there a way for you guys to kind of normalize sell-through versus sell-through? I think some of what you talked about was you had this difficult comp because retailers were replenishing last year. But on a kind of a sell-through or sell-through basis, are you able to give us an indication on what volumes are doing for grills?

Dom Blosil -- Chief Financial Officer

So what do you mean by sell-through versus sell-through?

Kaumil Gajrawala -- Credit Suisse -- Analyst

It sounds like I mean, in replenishing inventory at retail last year, and that's part of the difficult comp for this year --

Jeremy Andrus -- Chief Executive Officer

Are you trying to compare -- Right. So you're comparing sell-in versus sell-through. Is that right? That's your question?

Kaumil Gajrawala -- Credit Suisse -- Analyst

Yeah. I'm just trying to clean them.

Jeremy Andrus -- Chief Executive Officer

OK. Got it. I mean ultimately, I think -- I would think about it in terms of seasonality within kind of our GAAP financials, right? So Q1, Q2 are our largest quarters. Q3 tends to be our lowest and then there's an uptick in Q4.

This brand benefits from nice -- kind of a fairly consistent seasonal curve over the course of the year versus -- or maybe you see other brands have a massive load in early in the year and then their seasonality drops fairly consistently. So we see nice replenishment, as well as high usage across the year, which we benefit from. But Q1 is our load-in season, right? So it's one of our biggest quarters because we're loading in meaningfully ahead of our peak season, which is Q2. Q2 is equally is a meaningful quarter from a seasonal standpoint.

And to your point, that's driven mostly by replenishment. And so when you think about marrying sell-in versus sell-through, you're not necessarily going to see the same seasonal pattern, take shape in Q1, right, because we're loading in product. Whereas in Q2, we're replenishing what is ultimately higher velocity at point of sale, where you're seeing kind of the peak season from a sell-through standpoint, as you measure seasonality. And that kind of normalizes over the course of the remainder of the year.

But ultimately, 50% or so of sell-through typically happens kind of in Q2 during those summer periods. So definitely weighted more heavily to Q2 from a sell-through standpoint.

Kaumil Gajrawala -- Credit Suisse -- Analyst

OK. Got it. Maybe I'll follow-up, trying to just make sure I got understanding properly. On inventory, are you able to talk about how much -- like what your inventory volume looks like? Because obviously, the freight figures have inflated the dollar amount.

But how do you feel about the actual units or volume of inventory at the moment?

Jeremy Andrus -- Chief Executive Officer

Yeah. We feel good about our inventory position. I mean we're definitely -- we definitely have higher inventory than what you would typically see historically just given the environment we've talked in the past about leaning into inventory. There's also a higher cost to purchase inventory given the inflationary pressures we're facing and obviously capitalizing in the higher cost of transportation.

I would also add that there's a decent component of the inventory increase in Q1 based on the Apption Labs acquisition, which added a meaningful component to the growth. So as you kind of break down inventory in Q1, you need to account for the MEATER piece. What we've kind of leaned into or how we've built safety stock in excess of what we normally would, would kind of account for the second later. And as you kind of normalize then the inflationary pressures or those kind of three components, we're really in line with, if not slightly better on a normalized inventory basis compared to last year from a turn standpoint.

And so I'd say that all in, we're feeling pretty good about our inventory position. It's a deliberate strategy. We don't have obsolescence risk. And to the extent that we see improving macro trends, whether it be reduced risk out of Asia to just a more fluid environment as we kind of move product from point A to point B across the value chain.

We'll begin to work those inventory levels down by year-end. If for some reason, that does not happen, then we think it's prudent to continue to maintain a higher balance of inventory. It comes at the cost of cash and some of our liquidity, but it's the right place to put resources right now in an effort to just navigate the unknowns throughout the course of the remainder of the year. But at this point, our goal is really to begin to work those inventory levels down as we are seeing some stabilization at least within the value chain.

Kaumil Gajrawala -- Credit Suisse -- Analyst

Excellent. Thank you.

Operator

Thank you. The next question is from the line of Joe Feldman with Telsey Advisory Group. Please proceed.

Joe Feldman -- Telsey Advisory Group

Yeah. Hey, good afternoon guys. Thanks for taking our questions. You had mentioned that with some of the investment spending you're going to defer some of it.

And I apologize if I missed, but could you share what some of those deferments are or maybe the amount of deferments or both, if you could.

Jeremy Andrus -- Chief Executive Officer

Right. We're not moving -- we can't share the amount. But I'll just kind of give you -- I'll provide you with our strategy. So first, it starts with our core principles and what we're going to protect.

And that's really the growth it generate. And that starts with this product in R&D. We don't want to sacrifice the long term by cutting too deep into product development, R&D, etc. That's core to our business long term, and that's something that we want to protect and prioritize.

I'd say, second, marketing and demand creation are critical to the growth thesis, as well as the long-term growth of the business. However, top of funnel and sort of the market [Inaudible] that are core to our strategy long term as we build top of funnel will shift to performance-based marketing, where there's just a higher return, a higher measurable return. And it's a more immediate return where top of funnel tends to be oriented more toward prospecting. So it's a longer tail to the value of the brand awareness that you're building.

So that's the kind of the second layer. I'd say third because we're in our peak season, we're being very cautious in where we invest on the fixed side. And we've really slowed the pace of those investments. And if we learn that throughout the course of Q2, we see nice growth either in line with our guidance model or in excess of that will set us up nicely in the back half of the year to begin to make decisions on fixed investment or otherwise ahead of 2023.

But until we have better line of sight coming out of Q2, we're really kind of hitting pause on a lot of these fixed investments, as well as, like I said, redirecting top of funnel into kind of middle and bottom funnel to ensure that where we're investing is highly predictable. And we have real confidence in those investments.

Joe Feldman -- Telsey Advisory Group

Got it. No, that's helpful. Thank you. And then the other one for me, I wanted to ask, are you seeing anything new from a competitive standpoint with some of the other players out there? We are -- I'm sure there's the typical Memorial Day sales and such.

But anything deeper than you've seen in the past or different than you've seen in the past?

Jeremy Andrus -- Chief Executive Officer

We're not -- I'd say, generally not seeing new innovation from a product perspective and no visibility into deeper discounting or general shifts in pricing strategy other than some of the price increases that we've seen over the last 12 months.

Joe Feldman -- Telsey Advisory Group

Got it. Thanks, guys. Good luck with this quarter. Thank you.

Operator

Thank you. The next question is from the line of Jim Duffy with Stifel, please proceed.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you. Good afternoon. A few questions for me on working capital and cash flow management. Dom, DSO is up meaningfully.

Is that simply a function of the late quarter shipments? And then I believe in the past, you have used in AR facility to factor some of the receivables. Is that an opportunity from here?

Dom Blosil -- Chief Financial Officer

Yeah. So on your first question, yes, DSOs are up. Our measure of DSOs are up about 18, call it, 18 days over Q4 but they're actually down as per our measurements year over year. Ultimately, our AR is incredibly healthy.

We have a strong landscape of distribution and retail partners with strong balance sheets. And we've never had an issue with on-time payments where the ability to collect cash. I just want to make sure that that's clear. I'd say, too, AR tends to grow in accordance with revenue.

It's certainly a little bit higher than our growth rate in Q1. But we're comfortable with where the DSOs are through Q1. And ultimately, we expect to see some meaningful cash generation over the course of Q2 and in the part of Q3. And on your question –-

Jim Duffy -- Stifel Financial Corp. -- Analyst

Am I mistaken --

Dom Blosil -- Chief Financial Officer

Go ahead.

Jim Duffy -- Stifel Financial Corp. -- Analyst

You were answering the question. Go ahead.

Dom Blosil -- Chief Financial Officer

Yeah. So we don't factor receivables. We have an AR credit facility. And so effectively, our receivables sets kind of the borrowing base.

And it moves based on the growth and/or contraction in AR. And that ultimately dictates the availability on our AR facility. So it's really kind of like the revolver or an asset-based facility that we have access to based on that borrowing base and how it evolves over the course of the year. So really, it will set up to support higher working capital needs in peak season.

And then we obviously pay that down over the course of the year as AR comes down. And it's lower cost debt than what we have with our revolver. And so that's typically what we tend to let lean into for working capital.

Jim Duffy -- Stifel Financial Corp. -- Analyst

OK. thanks for that clarification. And then I wanted to follow up on your comments on inventory management strategies. I know you were at a seasonal working capital peak here.

The comments make it seem like the strategy is still all fans. And I'm curious, are you doing anything to manage working capital as contingency just in case sales get worse? We're in a dynamic environment, and there's a lot of uncertainty. Is the -- what I'm curious is, if sales fall short, does your leverage just long further or working capital offsets that you can use to bring that down?

Jeremy Andrus -- Chief Executive Officer

Yeah. Yes. They're all working capital offset, most definitely. I mean we're at a point in the season where we will begin to reduce our inventory levels.

We'll probably maintain some higher component of safety stock. But it won't be to the extent that we've kind of built up inventory levels through Q1. So we are focused on bringing those down. And as we learn -- as we sort of watch signals coming out of Asia in particular, if for some reason they get worse, I still think we're in a position to bleed down inventory, thereby driving cash from working -- from lower working capital.

But we may -- we're -- right now, we're probably pumping the brakes a little bit given some growing confidence. We may be tapping the brakes if for some reason, something gets worse. And to the extent that things continue to get better, then we'll really focus on bringing those inventory levels down more aggressively by year-end. But either way, we expect that to be a source of cash throughout the year.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Understood. Thank you.

Operator

Thank you. The next question is from the line of Justin Kleber with Baird. Please proceed.

Justin Kleber -- Baird -- Analyst

Yeah. Hey, guys, its Justin Kleber, thank you for taking the questions. I was hoping to get an update on your Mexico production facility, when that goes live. And then how long does it take for that facility to materially change your sourcing mix for grills?

Jeremy Andrus -- Chief Executive Officer

It's a great question. We'll start to have production come off the line in third, fourth quarter time frame. Look, in terms of how fast we can scale it, it's a function of how quickly we can get to efficiency from a process perspective. Our belief is that it will have some nominal impact to '23 and that we should expect a much more meaningful positive impact to the business in '24 and beyond.

Justin Kleber -- Baird -- Analyst

OK. Thanks for that Jeremy. And then somewhat related, you discussed the gross margin task force and the early learnings and wins you're seeing from that initiative. I'm trying to understand, as we look out over the next few years, I mean, do you think you guys can get gross margins like back to the 2019, 2020 levels in that low 40% range? I mean is that reasonable? Or has the cost environment just changed so dramatically the past few years that that's not a reasonable assumption? Thank you.

Dom Blosil -- Chief Financial Officer

Yup. Yes. No, it's a reasonable assumption, independent of the provisions out of the business, which is in early days. But in terms of the core business, which I would include MEATER in that equation.

We still think that pre-pandemic gross margin levels make sense and that's something that we're targeting. I would say that we can't really pinpoint whether that's a '23 rebound or '24 rebound. I think it requires a few sort of exogenous tailwinds, as well as the things we're doing internally to execute to ensure that we're making progress toward our internal targets on gross margin. And the things that we can control really tie back to the gross margin task force, as well as just some strategic initiatives that we have in place as we think about gross margin levers, one of which is just continuing to drive operational efficiencies, which includes removing touches from the supply chain.

It's about assortment. So as you think about the work that Jim and team are doing around design for manufacturability and things that we can do to unlock greater margin, either through how we design the product and how it's built for manufacturability to how we transport that product more efficiently, knowing that to a certain extent, we will experience elevated container rates, at least above prepandemic levels. We don't think that those are necessarily going to revert back to pre-pandemic levels. And so I think those -- that's an important unlock independent of where freight where container rates go.

But we have meaningful levers in addition to just continuous improvement across kind of sourcing, global diversification of our manufacturing base. These are consistent with how we thought about gross margin and kind of how we unlock future expansion. But we also hope -- would rely to a degree on improving macro trends, whether that be in FX, which we're actually seeing currently and could create a nice 2023 tailwind. And hopefully, container costs come down somewhat, which would also provide for a nice tailwind in the future.

And so it's really a combination of the controllables and the uncontrollables. And with the controllables, we have a high degree of confidence, the uncontrollables TBD. But in summary, we do believe we can get back to those pre-pandemic levels. It's just a question of when, based on the macro environment, as well as just kind of how these initiatives internally mature as they do take some time to come together.

Justin Kleber -- Baird -- Analyst

OK. great color. Thanks for that, Dom. And best of luck, guys, for the rest of the year.

Operator

Thank you. That concludes the question-and-answer session. So I will turn the call over to Jeremy Andrus for closing remarks.

Jeremy Andrus -- Chief Executive Officer

Great. Thanks for participating in today's call and for the robust conversation. We appreciate your trust in us. We continue to work hard to build a great business and have a great day.

Thanks.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Nick Bacchus -- Vice President, Investor Relations

Jeremy Andrus -- Chief Executive Officer

Dom Blosil -- Chief Financial Officer

Simeon Siegel -- BMO Capital Markets -- Analyst

John Glass -- Morgan Stanley -- Analyst

Peter Keith -- Piper Sandler -- Analyst

Unknown speaker

Anna Glaessgen -- Jefferies -- Analyst

Kaumil Gajrawala -- Credit Suisse -- Analyst

Joe Feldman -- Telsey Advisory Group

Jim Duffy -- Stifel Financial Corp. -- Analyst

Justin Kleber -- Baird -- Analyst

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