Wood-pellet grill maker Traeger (COOK 3.69%) will report financial results for the second quarter of 2022 on Aug. 10 after the market closes. The company didn't give specific Q2 guidance, but there's good reason to suspect results might come up short of expectations. Competitor Weber (WEBR) already issued a warning that Traeger investors should be aware of too.
The timing of a potential problem couldn't be worse. For Traeger, the second quarter is arguably its most important. Here's why.
What's so special about Q2 for Traeger?
According to Traeger management, around half of its sell-through happens in the second quarter. Hopefully that statement grabbed your attention. Now, here's more context about what it means for investors.
Traeger has three revenue segments: grills, accessories, and consumables. The most important segment is grills, at 69% of 2021 revenue. And whereas some of the company's products are purchased steadily throughout the year, there's a grill-buying season. Roughly half of Traeger's grill sales occur in Q2.
Traeger does have a small direct-to-consumer business at roughly 10% of revenue. However, a whopping 82% of revenue comes from items stocked at major retailers like Home Depot. And like many comparable businesses, Traeger recognizes revenue at the time that it stocks Home Depot's shelves.
In other words, in most cases, Traeger recognizes revenue before someone buys a grill -- this is the difference between revenue and sell-through. Keep this in mind.
Traeger competitor Weber says people aren't buying grills as much this year. On July 25, it gave investors preliminary results for its fiscal third quarter (which corresponds with Traeger's Q2) showing a roughly 21% year-over-year drop in revenue. And this was despite Weber's best efforts to improve consumer sell-through by slashing prices in stores.
Because items aren't selling in stores, new inventory for Weber is piling up. At the end of Q2, the company's inventory was up nearly 44% over the previous six months. Logically, you build inventory before anticipated sell-through so that stores can be restocked. But if items don't sell through, replacement inventory sits.
Weber, a company with a 70-year history, didn't expect consumer demand to plummet as fast and as hard as it did. At the end of its fiscal first quarter, it was predicting 6% to 8% year-over-year revenue growth in fiscal 2022. Three months later, it revised full-year guidance to as much as a 17% drop. But with preliminary Q3 results, it's now thrown out guidance altogether.
To summarize, Weber is an experienced company in the grilling space and expected relatively strong demand in 2022. It began building up inventory accordingly. But demand has evaporated so fast that all bets are off. If Weber's problem is a broad consumer trend, Traeger investors could be in for a rude awakening when it reports Q2 results.
Is Traeger a stock to buy now?
I believe the most likely scenario for Traeger is that stores are stocked but consumers aren't buying as many grills as expected. And this is peak grill-buying season. Therefore, shelves will stay stocked and Traeger wont be able to restock stores to recognize new revenue.
This puts Traeger's management in a tough spot. For 2022, the company was guiding for just a 10% margin at best for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Non-adjusted profitability measures would likely be worse. In short, there's little room to offer promotional pricing and move inventory.
For the record, Q1 revenue was only down 5% year over year for Traeger. But volume was down far more. The company made up the difference by raising prices on its grills. If Q2 volume drops even more and it's forced to lower prices, that would be a really bad combo.
However, Traeger may need to do everything necessary to move inventory. For perspective, inventories are rising for many premium brands, including Peloton Interactive. But Peloton benefits from not having a rapid product cycles. It can stop manufacturing and patiently wait for consumers to buy what it has -- its exercise products won't be outdated. And once products sell, assets on the balance sheet convert to cash flow.
By contrast, Traeger's four lines of grills are updated regularly. Its latest Timberline model was just released in March. When new grills come out, consumers are going to be less inclined to buy old models without a discount. With grill-buying season waning, it's a problem to solve fast.
I do like Traeger's brand and its ability to try new things in order to develop new revenue streams. Therefore, I could see myself owning Traeger stock at some point. That said, I believe the company is facing serious headwinds in 2022 and I'll be staying on the sidelines for now.