SmileDirectClub’s (SDC) Q1 results couldn’t bring cheer to shareholders

COVID-19 pandemic has challenged all sorts of healthcare professions and systems in the first few months of 2020, and dental care is no exception. All the routine dental care like regular check-ups and teeth whitening were stopped all over the world to minimize the spread of the coronavirus. Only patients who required urgent care were treated by dentists and orthodontists. Many countries have now started relaxing their lockdown rules. However, the limited distance between the dentists and patients still remains a potential concern in the field of dentistry.

Q1 2020 results

In this scenario, oral care company SmileDirectClub (NASDAQ: SDC) reported its first quarter 2020 results on Thursday that failed to create a smile for the investors. The company’s loss ballooned to $107.4 million in the first quarter of 2020 from a loss of $20.5 million in the prior-year quarter. Even though revenue rose 11% to $196.7 million in the first three months of 2020, the growth rate was very less compared to the revenue growth rates of 53% and 51% in Q4 2019 and Q3 2019, respectively. The Nashville, Tennessee-based firm, which debuted on Wall Street with a price tag of $23, plunged to a low of $3.64 in early April and closed down 2% at $6.86 today.

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With the direct-to-consumer model, SmileDirectClub creates aligners and sells them directly to its members. The company has a network of 250 orthodontists and general dentists in the US and the other seven countries it operates. A member books an appointment to take a free, in-person 3D oral image at any of the company’s SmileShops or requests an easy-to-use, doctor prescribed impression kit online, which is delivered to them directly. The members can either pay fully $1,895 as an upfront payment or they can enroll in SmilePay, a monthly payment plan with a down payment of $250 and an average monthly payment of $85.

Onslaught of COVID-19

SmileDirectClub closed down all SmileShops on March 21 except those in Hong Kong. It also temporarily closed manufacturing facilities on March 20 and reopened them on a more limited basis on April 6. To cut down costs, the company reduced its marketing spend, furloughed employees, and suspended its outlook for 2020. The kit and scan volume was down by approximately 40% in the quarter.

Positives

During the quarter, SmileDirectClub had entered into a new five-year $500 million debt facility with HPS Investment Partners. After refinancing, the company will have $420 million of cash on the balance sheet. With regard to the regulatory environment, the company said the importance of telehealth model has been accepted and growing, especially for teledentistry. CEO David Katzman stated:

“We have started to see state legislatures passing legislation that specifically permits teledentistry in their respective state and rejecting proposed legislation that it sought to conclude this much needed form of remote care. As you can see we are starting to reap the benefits of our continued investment in proactive legal and lobbying efforts, which combined with the climate of ever increasing receptivity and adoption of telehealth, represent very positive momentum toward continued validation of our model and the care provided by our affiliated network of dentists and orthodontists.”

International

On a question related to international expansion, CEO David confirmed that 100 stores will be added and the company expects revenue to be down a little bit from the earlier targeted revenue of $100 million from those 100 stores. He added that SmileShops in Singapore will be reopening in June and Spain is reopening at the end of June or the beginning of July.

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Uncertain future

BofA Merrill Lynch analyst Michael Ryskin downgraded SmileDirectClub to “underweight” from “buy” and cut down its stock price target to $7. He expects the curtailed environment to result in slower recovery for the company in 2020. When answering an analyst’s question, CFO Kyle Walles said:

“And if we look at the near future and we end up in an environment where COVID could go on for a very extended period of time and because of that, it would put a potential ceiling on what the growth could be. We could be profitable off of the levels of revenue that we are seeing today.”

Read the entire SmileDirectClub (SDC) Q1 2020 earnings transcript