Everyone wants to have a nice smile, and spending the last two years staring at ourselves in virtual meetings has only increased the desire. That's why 15 million people each year across the globe begin the process of straightening their teeth. That's historically meant going to an orthodontist -- or at least a dentist. But one company is trying to disrupt that model.
SmileDirectClub (SDC) was founded in 2014 and had its initial public offering in 2019. Its direct-to-consumer model attempts to deliver teeth straightening by clear aligners at a substantial discount to rival Align Technology (ALGN 0.55%). It's an admirable goal, but so far, by Wall Street's standards, it isn't measuring up.
Image source: Getty Images.
Heading in opposite directions
Since the beginning of the pandemic, the two stocks have gone in opposite directions, and the winner isn't the company with the remote-delivery model. In theory, SmileDirectClub should have benefited from the closure of dental offices since its business is built on connecting with consumers directly through its website. Instead, it's down almost 70% -- nearly the mirror image of Align.
Inflation could be a fly in the ointment
One of the benefits of SmileDirectClub's strategy of providing a lower-cost service is that consumers who don't have a lot of disposable income can afford it. But that strategy seems to be backfiring in the current inflationary environment. Volume is dropping.
Economists say rising costs hurt low-income people the most. And the consumer price index -- a core measure of inflation -- rose 7% in the latest reading, according to the Bureau of Labor Statistics. Management blamed this, in addition to the number of people quitting jobs, as the reason for lower demand. However, the drop in volume is far greater than the one Align Technology is experiencing.
Data source: SmileDirectClub, AlignTechnology. Chart by Author.
A good indicator of customers' economic sensitivity is the percentage who use SmilePay -- the company's payment program. It requires only a $250 deposit and about $90 per month. Almost two-thirds of SmileDirectClub's customers choose SmilePay despite the 18% interest payments. Delinquency rates have been consistently about 9% for a few years.
Given those dynamics, persistent inflation or a recession could make the outlook even darker. That seems to be expected.
Wall Street thinks there's more pain ahead
That economic reality could be why many are betting on the shares to continue falling. The percentage of float -- shares available for public trading -- that are sold short is a whopping 33%. For context, it's around 20% for AMC Entertainment and Gamestop. And just about everyone with a calculator expects those stocks to eventually fall back to their pre-meme stock values.
SDC Percent of Float Short data by YCharts.
Going all-in for growth
Management believes its service is a no-brainer. It's started a marketing campaign to try and attract some of the more affluent customers who typically choose Align.
Its pitch is to ask potential customers why they would pay thousands of dollars more than they have to for straight teeth. The company is also investing in physical locations and has started doing pop-up events at dental offices. It's even introduced whitening strips.
| Location | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Permanent store | 164 | 110 | 49% |
| Pop-up site | 201 | 0 | N/A |
Data source: SmileDirectClub.
The result was a third quarter where management spent 70% of sales on marketing and selling expenses. That's an outrageous number and should have resulted in robust growth. Instead, shareholders watched as aligner volume plunged 25%, compared to the same period last year.
Management has guided for the spend to be up to 90% of revenue for the fourth quarter. That's a recipe for disaster if it doesn't pay off.
The company hasn't shared the economics of its physical-location strategy. It also hasn't gone into detail about how well the pop-up approach is working. But the spending makes it clear that it must be the best chance for success.
Even if it works, it seems to undermine the original business model of going direct to consumers. Making it easier and more affordable to get a great smile is a goal worth rooting for, but the numbers tell a story of a company learning that the best way to do it is one their largest competitor has already figured out.
