Why SmileDirectClub's main focus is investing in 'growth initiatives'

SmileDirectClub CFO Kyle Wailes joins Yahoo Finance to discuss the company's ability to avoid the volatility in the market as the stock saw recent surges, competition, and the company's focus on expansion.

Video transcript

BRIAN SOZZI: One stock that has been an interesting hedge against the recent bout of market volatility, the SmileDirectClub. Shares are up about 35% in the last month compared to a 2% drop for the S&P 500. Let's check in on the company, with SmileDirectClub CFO Kyle Wailes. Kyle, always good to speak with you.

Thanks for taking some time this morning. Are you surprised by where your stock has been going over the past month? And what do you think is driving it?

KYLE WAILES: No, look, you know, first off, great to be here. Thanks for having me back-- always great to be on the show. Look, I think we've got a lot-- [AUDIO OUT] --public about two years ago now, just over two years ago. You know, there's been a lot of volatility since inception. And I think we've had a nice run here, but we had a big pullback, you know, before that as well.

And so I think for us as we look at the business, nothing has really changed. We've got to remain focused on the long-term fundamentals of our business, and, more important than anything, just remember what our mission is as a company. It's about serving our customers and democratizing access to orthodontic care by making it affordable to everyone. So you know, the stock, it's always nice to see it moving in the right direction for us, but it doesn't change what we're focused on as a company.

BRIAN SOZZI: And, Kyle, what are you focused on right now?

KYLE WAILES: Yeah, look, like I said, I think first and foremost, it's about the mission, right? And so that goes back to what drives our entire business. But we've got a lot of, you know, growth prospects that we see. And if you look at the growth initiatives that we've talked a lot about in the past, you know, first and foremost, we're in the very early stages of what is truly, we think, just a massive opportunity from a market perspective.

But we've got our initiatives as well-- you know, the first stop being a partner network. So we're selling into dental practices as a new initiative. That's still pretty early but going well. We've got team market expansion, which is about 75% of all case starts. And again, that's early, but off to a good start there.

And then international expansion-- if you look at the International market, it's about, we think, from a pure market perspective, it's about 75% of the global opportunity. And so, clearly, a large market that we're going after there. And we recently just announced France as well as our 14th country that we're going to be expanding into.

And we think France is a top three market. If we look at Europe, it's one of the top three markets in Europe. And so, again, continuing to execute against the strategy there that we've outlined.

EMILY MCCORMICK: Kyle, this is Emily. I'm wondering what your customer trends and demand has really looked like over the course of the pandemic and as we've had these multiple waves of the Delta variant. Are you finding that demand trends have shifted as people stay in place more or, perhaps, more apt to want to get their teeth fixed and teeth realigned using your products while they're not going out as much?

KYLE WAILES: Yeah. So you know, I think if you take a step back and just look at the entire pandemic as a whole, what it's really highlighted for us is just the overall agility and flexibility of our business model-- you know, from pre-COVID to where we are now. And we had 90% of our business that was going through a Smile shop pre-COVID.

If you look at where that is today, it's about 50% from impression kits and 50% coming from shops or a dental practice. So it would completely reset the business and the overall scale of the business coming out of COVID here. You know, I think when you look at the trends overall, what we've seen in our business-- our core demographic, again, if you think about our mission going back to democratizing access to care for people that really can't afford orthodontic treatment, our core customer base historically has been a household income of around $65 to $70,000.

And so if you look at that demographic in particular, they've really been suffering. And inflation's a great example of that-- inflation in Q2 was up almost 7% on a year-over-year basis. That's several thousand to the bottom line of our core demographic. So our core customer base has been hurting here as we look over the past couple of quarters, which is why, as we think about things that we've talked a lot about in terms of moving upstream to a more affluent demographic, one that would typically be purchasing Invisalign, we've recently launched our Why SDC campaign and our Challenger campaign.

So if you go to our website today, you'll be able to see the benefits of why someone, even if they could afford to pay $5,000 to $8,000 to straighten their teeth, can realize that they can get a safe and clinically effective outcome that we will guarantee for life, we'll guarantee the outcome of that smile, which is a pretty unique benefit for our members-- but they can do that for a cost point of $1,950 versus $5,000 to $8,000. And so I think all of that, if you look over the past several quarters and even years here as you look at the impact of COVID, is what we're focused on coming out of it.

BRIAN SOZZI: Kyle, some folks I've talked to that know the industry well, they've highlighted to me increased competition over the past three or four months. What are you seeing in your markets right now? And where is that competition coming from?

KYLE WAILES: Yeah, we don't think a lot has changed there. You know, as we look at the competitive landscape, the consumer is really making a decision between two paths. So one is they want to go in-person to straighten their teeth. And by in-person, they're going to their dentist or their orthodontist.

And generally, if you look at that market historically, Invisalign has done very well there. That's part of our rationale for why we're focused on selling into the dental channel with the partner network approach that we've recently launched. The other approach or decision that consumers are making is the tele-dentistry platform.

And you know, historically, if they choose to take that second path, we win the vast majority of the time. And if you look at the competitive barriers that we built within our business, we truly believe that they're still there. We've got over 50% aided awareness in the business, which is significantly beyond where our next closest competitor is in the call it mid to high single-digits.

If you look at the omnichannel presence that we've built as a business and the hundreds of locations that we have around the country today, that drives a really big lift in our conversion from everyone's coming to the website. Again, no one else has that scale today. Our proprietary tele-dentistry platform is a unique advantage that we've built over time that we can continue to iterate on and provide a better experience for our club members.

We've got Smile Pay as a captive program. So what that means is there's 100% financing approval for anyone who's coming through to purchase aligners. You know, no one else has that same program and the ease and efficiency that we have. And we're vertically integrated-- and so we're starting with a much higher gross margin than other competitors.

I think when you put all those together at scale, you know, you'll truly see the barriers that we built. And so it's not to say that someone couldn't replicate some of those, but it's going to take hundreds of millions of dollars, a lot of time, and a lot of money to get to a similar place that we've built today. You know, our focus-- we look at our competitors very closely, obviously, but our focus remains on moving upstream, higher demographics, and taking share from Invisalign and the more traditional orthodontic channel.

And again, it goes back to what I said before-- there's no reason why someone who could afford to pay $5,000 to $8,000 wouldn't want to pay under $2,000 that we charge when they realize that they're going to get a safe, and clinically effective outcome, and get the smile they want that, again, we're going to guarantee for life. So that remains our focus from a competitive perspective.

BRIAN SOZZI: And, Kyle, lastly, the Stifel team recently highlighting or calling out that SmileDirectClub might need to raise more capital. Do you think you'll have to raise more capital to support where you see the business growing?

KYLE WAILES: Yeah, we think we're in a great spot. You know, if you look at the cash we have on the balance sheet as of quarter end in addition to the accounts receivable that we have on the balance sheet, more than $500 million in liquidity that we have on the balance sheet today-- so that puts us in a great spot, obviously, and more than enough liquidity for us to continue to focus on the growth initiatives that I've outlined here, and continue to execute against them.

So we still believe that we've got sufficient liquidity to get us to cash flow profitability, while at the same time, and most importantly, continuing to invest in the growth initiatives that we talk so much about. And that will bring us long-term success as a company.

BRIAN SOZZI: Fair enough. SmileDirectClub CFO Kyle Wailes, good to see you. Stay safe. We'll talk to you soon.

KYLE WAILES: Thank you. You as well.