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SmileDirectClub must quickly show investors profits: strategists

Brian Sozzi

It’s good that the executive team at SmileDirectClub (SDC) is focused on profits today, not 15 years in advance like the C-suite at Uber (UBER) and Lyft (LYFT). Delivering on the bottom line is critical for the startup and newly minted public company to keep existing investors and attract new ones, says two veteran strategists.

“SmileDirectClub is a show me the money story,” Invesco global market strategist Brian Levitt said on Yahoo Finance’s The First Trade. Sevens Report Research founder Tom Essaye echoed Levitt’s sentiment, adding the stock could stay under pressure near-term as investors grow comfortable with the thesis. Essaye does give SmileDirectClub credit for a business model people could understand, unlike the aforementioned Uber and Lyft.

The verdict is out thus far on how the early trading days will be for SmileDirectClub. Shares of the at-home retainer company fell 28% on their first day of trading on Thursday. The stock rebounded by about 10% on Friday.

SmileDirectClub was founded in 2014 by one-time metal braces wearers — and longtime pals — Alex Fenkel and Jordan Katzman. Since its debut, SmileDirectClub has expanded into new products such as teeth whitening, overnight retailers and lip balm.

Retailers are key

It has also launched in three countries besides the U.S., and inked deals with CVS Health (CVS) and Walgreen Boots Alliance (WBA) to open hundreds of shops in their stores. Co-founder Alex Fenkel tells Yahoo Finance he is particularly upbeat on the prospect to open close to 1,500 stores inside CVS over time.

SmileDirectClub Chief Financial Officer Kyle Wailes said in an interview with Yahoo Finance the company is in talks with other retailers for similar relationships, which are critical in driving sustained profitability.

Those expansion efforts have at least taken SmileDirectClub to the cusp of profitability unlike other hot IPOs this year such as Uber, Lyft and Slack (WORK).

Dental assistant Jessica Buendia looks at a scanned image of patient's teeth in SmileDirectClub's SmileShop located inside a CVS store Wednesday, April 24, 2019, in Downey, Calif. CVS Health is venturing into dental care with plans to offer the relatively new teeth-straightening service. (AP Photo/Jae C. Hong)

For the six months ended June 30, SmileDirectClub’s sales surged 113% to $373 million. Operating losses tallied $15.7 million down from $19 million a year ago. But on an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis, the company eked out a $2.3 million profit versus a $8.5 million loss a year earlier.

Wailes stressed the company is laser focused on getting to profitability.

“It’s important to point out that our view on profitability is profitability today, we are profitable today. If you look at the fundamental unit economics in the business it starts with an 85% gross margin. For every liner we sell, there is a 30% contribution margin associated with that. So there are very, very strong unit economics in this business,” Wailes said.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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