Snap One Tempers 2nd Half View, Says Supply Chain is Improving

The company is acting to manage expenses to deliver against EBITDA goals “even if sales trend towards the lower end of our guidance range,” Heyman said. That doesn’t mean a hiring freeze, he said in Q&A. “We’re continuing to hire; we’re just being more disciplined about the hiring we’re doing and in specific functions.”

In Q2, net sales grew 17.2% to $296.9 million; net loss widened to $1.3 million from $1.1 million in the year-ago quarter, the company said. Chief Financial Officer Mike Carlet credited sales growth to 2021 and 2022 price increases. Price always factors into long-term planning, “but it’s more significant this year than in the past,” he said. Demand and volume were up slightly year on year in the first half, “with pricing being the more significant impact on our growth.”

The company tempered expectations on demand and volume for the second half, despite still having solid volume growth, Carlet said, voicing cautious optimism. The forecast through year-end “assumes we continue to hold the pricing actions that we’ve taken,” which have been “well received by the market and are sustaining.” The company expects volume will be plus or minus flat for the rest of the year, as it tries to figure out “what the heck’s going to happen with the economy,” he said.

Snap One isn’t planning additional price increases but will “react accordingly” if necessary to be competitive, Carlet said. “We feel good about the margin trends that we’re on and preserving our margins,” he said, “both for ourselves and our integrator partners,” he said. Integrators “remain busy and carry healthy backlogs of work,” despite economic uncertainty, said Heyman. Only a small percentage of them “carry any meaningful inventory,” he said, saying less “backlog for them means future revenues for Snap One.” Robust Wi-Fi networks, surveillance and security “are must-haves for home and business owners.”

If residential trends sour, integrators can fall back on commercial work, Heyman said. Integrators can “flex their own capacity” when they sense market softness. To support that side of the business, Snap One hired a leader dedicated to the commercial and security markets. Heyman cited the company’s Multi-Display Manager product, designed for sports bars, restaurants and hotels, calling it “continued progress” in the commercial segment.

In the current quarter, Snap One completed the acquisition of Clare Controls, whose hybrid automation and security system addresses the “attractive market opportunity between commonly available security systems and luxury level whole home control systems,” Heyman said. Snap has been the distributor for the Clare product line since 2019; it can now “convert a third-party brand to a higher-margin proprietary product,” he said.

Free cash flow in Q2 totaled minus $26 million in the six months ended July 1 vs. minus $9 million in the year-ago quarter, due to investments to protect against supply chain uncertainty, said Carlet. That included a “significant increase in inventory,” which grew by $64 million since the end of 2021, he said. Proactive measures to support integrators with inventory and strategic product categories such as control and networking “have enabled us to drive market share,” Carlet said. Heyman said: “Unlike some competitors in certain categories, Snap One has inventory to deliver on a timely basis to our integration partners.”

Integrators have had a hard time meeting demand over the past few years due to the labor shortage, so “the capacity of our current integrators is generally fixed,” Heyman said. Integrator capacity has been a “governor for us in terms of growth, which is why we’re so focused on adding new integrators to our business,” he said. Integrators “have a lot of demand coming at them, but they can only execute at a certain pace.”

Growing the local branch footprint is key to Snap One’s ability to gain market share, Heyman said. In Q2, the company opened a branch in Orlando, bringing the number of U.S. branches to 32, plus two in Canada. In the second half it expects to open “mid-single-digit” stores, Carlet said.

On supply chain, Heyman said component availability has started to free up, “so that drives a much more efficient process for us than our manufacturing partners.” Costs have moderated but haven’t dropped, he said. “What’s been driving our price increases is the increases we’re seeing from our supply chain partners,” he said. That will improve margin “that we had previously, frankly, lost in the business,” he said. The company has operated “at much higher margins at previous times in our history,” he said.

Inbound freight issues have started to ease, too, Heyman said, which is improving inefficiencies that rippled through Snap’s operations. The company expects to get back to business as usual over the next six to nine months, resulting in “meaningful seven, if not eight-figure movements of dollars.”