SmileDirectClub Doesn’t Have Much Time to Straighten Itself Out
This column is part of the sixth annual Heard on the Street stock-picking contest.
Consumers have less to smile about as inflation stays stubbornly high. That is bad news for an already loss-making maker of clear teeth aligners.
SmileDirectClub Inc. (SDC)
- Recommendation: Sell
- Price: $1.62
Since
initial public offering in 2019, its Nasdaq-listed shares are down 90%. The company was set up to offer a cheaper alternative to teeth-straightening companies such as
which owns the Invisalign brand. SDC’s basic treatment costs around $2,000 compared with the $5,000 or more rivals charge. Treatment is carried out remotely with new aligners sent out every couple of weeks in the mail, cutting out the expense of face-to-face visits with an orthodontist.
In the three months through June, SDC made sales of $126 million—a 28% on-the-year fall—and a net loss of $65 million. Align Technology reported a 4% sales decline for the same period and is still profitable. SDC’s typical customer earns around $65,000 a year and has less disposable income now that inflation is close to 10%. The business also spends heavily on advertising to keep the flow of new clients coming: Since the first quarter of 2020, marketing and selling costs have swallowed up 56% of total sales on average.
Management is pinning its hopes on two new innovations to boost demand. Later in 2022, the company will launch a smartphone app that takes a 60-second scan of your teeth to create a treatment plan within a few minutes. The process normally takes up to three weeks as the customer must send back a putty mold of their mouth.
This might increase the low 0.5% conversion rate of website visitors that go on to make a purchase. Improving that to 0.75% would bring in an additional $200 million in annual revenue. SDC also wants to attract higher-income customers by joining with dental practices to offer in-person treatment. Its new premium package will cost double the basic plan.
If inflation continues to squeeze its core customers’ income and these new innovations don’t live up to expectations, SDC could run short of cash. It is cutting costs by reducing its workforce and pulling out of some overseas markets. At the midpoint of its guidance, the company expects to have $140 million of cash by the end of 2022—enough to last around four quarters, based on its current rate of cash burn.
SDC’s access to debt markets looks shaky. Around $750 million of outstanding convertible bonds that were issued by the company early in 2021 trade at 15% of their face value. In April, the company did manage to borrow $255 million, but had to pledge intellectual property and receivables cash linked to its consumer financing unit as collateral. This loan came with an effective interest rate of over 13%, including a portion that is paid in kind, said Krishan Sutharshana, a distressed debt analyst from Reorg.
Betting against the stock has been lucrative, and short interest is high at close to a quarter of the free float, according to Fintel data. That does raise the risk of short squeezes if the company’s turnaround strategy shows any signs of working. But a business model inspired by the wider direct-to-consumer trend might continue to show limitations in a field as sensitive as orthodontics.
In its short life as a listed company, SmileDirectClub’s stock has suffered serious erosion, and the pain might not be over yet.
Write to Carol Ryan at carol.ryan@wsj.com
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