Higher Supply Chain Costs Force Another Snap One Price Increase

As predicted, Snap One will institute another price hike (see 2203230053) June 6 in an “evolving pricing strategy” to address rising supply chain costs, “competitive forces” and “affordability of solutions,” said CEO John Heyman on an earnings call Thursday for Q1 ended April 1.

The custom-channel distributor and manufacturer said it will raise prices 8% on its proprietary product portfolio to address higher supply chain costs and inflationary pressures, which Heyman said is in line with competitors’ recent moves. The price strategy includes corresponding adjustments to the manufacturer’s suggested retail price to protect dealers’ margins, said Chief Financial Officer Mike Carlet. He doesn’t expect significant advanced ordering due to integrators’ limited ability to warehouse inventory.

The June price hike should protect Snap One’s margins, but Carlet cited market uncertainty and said a February price hike, planned in October, didn’t cover cost increases “as the world has continued to evolve and costs have continued to change.” The company will “keep adjusting as needed going forward” and make sure integrators can pass along price hikes to customers, he said. It also raised prices 5% in August.

Heyman said the company thought the supply chain “was going to turn around toward the middle of this year” so it didn’t add a “buffer” into the February price increase. “We paid the price in the first half of the year a little bit on the cost side.” The June increase does include a buffer to minimize future increases. It’s hard for integrators to “continue to absorb a high frequency of price increases” because they have to update catalogs and revise customer proposals, he said. Dealers have told the company, “Don’t keep coming back to us.” But if costs continue to rise, “We’ll have to reconsider that," Heyman said.

The company tweaked guidance upward for the fiscal year ending Dec. 30. It now projects revenue of $1.16 billion-$1.18 billion, up from $1.14 billion-$1.17 billion given in February, due to coming price hikes, strong Q1 performance and “our anticipation of supply chain headwinds and economic uncertainty,” Carlet said.

Carlet cited a shift in supply chain challenges. Last year, most challenges were logistics based, he said, and “most of that has cleared” at West Coast ports. A “couple dozen SKUs” remain affected by component and chip shortages and manufacturing capacity limits, he said. The company has over 2,400 proprietary SKUs, “but there are some SKUs that are pretty important, pretty significant volume.”

Carlet expects those supply chain challenges to continue through this year, describing a “Whac-A-Mole” scenario. “You take care of one -- you figure out how to engineer around a chip that we don’t have -- and then you hear about another chip that impacts three other products,” he said. That requires more engineering or a switch to replacement products, he said.

Proprietary products revenue in Q1 totaled $187.8 million vs. $89.6 million from third-party products, said Carlet. Those metrics were up from $152.04 million and $68.43 million, respectively, a year earlier. Proprietary brands generally generate a higher margin rate, he said; they were 67.7% of net sales in Q1, down from 69% in the prior-year quarter. The growth of third-party products outpaced growth of proprietary product as part of the strategy to expand the local branch network, he said.

Snap One opened a branch in Rockville, Maryland, in Q1, bringing the domestic store total to 31; it also operates two in Canada. The company remains on track to open about 10 stores annually, said Carlet. The stores drive dealer acquisition and spend per integrator, he said.

Snap One added new key performance indicators to its earnings report. The company separated U.S. accounts by integrator count and “other," including national accounts. The total U.S. integrator count was 225,406; other domestic accounts numbered 13,353. It also added 12,285 international integrators, bringing that count to 38,675, Carlet said. The company broke out domestic integrator net sales as $829.8 million for 2021. Its 20,000 transacting domestic integrators had an average $41,500 spend, the company said. Spend per integrator grew 8.4%; the number of transacting integrators increased 11.7%.

Heyman was bullish on trends in the custom integrator channel, citing “robust” housing starts, building permits, housing completions and product backlogs. Homeowners’ repair and remodel spending is also expected to be strong and “insulated” from the broader economy, he said. Demand for luxury, single-family homes remains positive, he said.

On the company’s manufacturing strategy, Carlet said over 95% of Snap One’s proprietary products are produced in Asia, but it has “diversified away” from relying on China, which now represents a third of manufacturing vs. 20% in Taiwan. It also manufactures now in Malaysia and Vietnam to avoid relying on one country, he said. The company has also diversified ports it ships from, he said, and just 1% of shipments were affected by recent port shutdowns in Shanghai, he said.

Q1 revenue increased 25.8% to $277.4 million; net loss narrowed to $2.3 million from $6 million in the prior-year quarter, the company said. Shares closed 8.9% higher Friday at $12.42.