Nashville-based dental aligner designer SmileDirectClub (NASDAQ:SDC) has had a year of ups and downs. The company has had more ups than downs, however, as SDC stock has entered into a relentless bear market.
In a previous column, I tried to warn investors that SmileDirectClub’s expenses were getting out of control. For example, during 2021’s second quarter, the company’s marketing and selling expenses increased by around 178% year-over-year.
At the same time, SmileDirectClub’s free cash flow (FCF) was -$51 million, and the company’s total debt at the close of Q2 was a staggering $744.1 million.
Just recently, SmileDirectClub had a chance to redeem itself. Instead of delivering stats to make you smile, however, all we got was a bad checkup and an excuse that will make you grind your teeth in anger.
A Closer Look at SDC Stock
SDC stock started off 2021 at around $11.50. There were rallies throughout the year, but none of them lasted very long. May was one of the worst months for the shares, as the stock fell below the crucial $10 level. Moreover, as if that wasn’t bad enough, SmileDirectClub’s share price looked like it might drop below $5 in early November.
Then a trap door opened and SDC stock plummeted to the $4 area on Nov. 9. It closed at $4.03 yesterday. This puts it in penny stock territory (informally defined as a stock of a small company that trades for less than $5 per share).
Obviously, this is a cause for concern for SmileDirectClub’s shareholders. So what could have caused SDC stock to lose so much value so quickly? Let’s explore this question now – and see if SmileDirectClub is making the right moves to regain investors’ confidence.
Didn’t Expect Much, Didn’t Get Much
On Nov. 8, the day prior to the stock’s latest drop, SmileDirectClub released its third-quarter financial results. Analysts polled by FactSet weren’t particularly optimistic. On average, they had anticipated $183 million in revenues and a quarterly earnings loss of 14 cents.
Yet, despite the low bar set by the analyst community, SmileDirectClub still managed to come in under it. In Q3, the company’s revenues totaled $138 million, far below Wall Street’s mean expectation. Moreover, its top line fell 18% year-over-year.
Turning to the bottom line, SmileDirectClub reported a Q3 loss of $89 million. That equated to 23 cents per share, much worse than analysts’ average estimate. Also, just to offer some perspective on this, the company “only” lost $13 million, or 11 cents per share, in Q3 of 2020.
So now, the already low bar will have to be set even lower. While analysts’ average 2021 revenue estimate for SmileDirectClub is around $758 million, the company provided a guidance range of between $630 million and $650 million.
No, It’s Not the Economy
To borrow a phrase from Ricky Ricardo in the classic TV show I Love Lucy, SmileDirectClub has some “‘splaining” to do.
The shareholders did get an explanation, but not necessarily a good one.
“We are disappointed with our third-quarter results driven by the macroeconomic headwinds that are influencing the spending of our core demographic,” SmileDirectClub CEO David Katzman stated.
What the company needs now is fundamental change, not excuses. The third quarter of 2021 ended on Sept. 30. By that time, Covid-19 vaccines had already been widely available for awhile, and the economy was getting back on track.
The major U.S. stock-market indexes moved up during that quarter. There were so many jobs available that employers could barely find enough workers to take them. Consequently, blaming the economy isn’t a satisfactory response by the company.
SmileDirectClub needs to look inwards and find ways to contain its expenditures. Furthermore, the company needs to sell more of its core product; SmileDirectClub’s sold 69,900 aligners in Q3, down 25% from the same period a year earlier.
The Bottom Line
Frankly, I’m disappointed in SmileDirectClub and its CEO. The company is still a leader in home-delivered dental aligners, and it provides an essential service for folks who can’t afford braces.
Still, despite the rout of SDC stock, this story may have a happy ending. If SmileDirectClub takes more responsibility for its financial issues, it could, at long last, be worth investing in.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.