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Dylan Carden of William Blair: From P.I. to Analyst - Business Insights from a Life-Long Researcher
January 31, 2023
May 10, 2023
min read

Dylan Carden of William Blair: From P.I. to Analyst - Business Insights from a Life-Long Researcher

The Profit Forecast: The eComm CEO's Podcast

Episode #20: Dylan Carden of William & Blair

Join Ben Tregoe and Dylan Carden on The Profit Forecast podcast as they discuss the current state of the consumer technology and specialty retail industry. Dylan Carden, an analyst specializing in consumer technology and specialty retail at William Blair, will share his insights on the industry and how companies can remain competitive in the current market. He will also discuss the importance of reviews, store openings, investor sentiment, and more. Tune in to learn more about the current state of the consumer technology and specialty retail industry and how companies can remain competitive.

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Ben Tregoe: [00:00:00] All right, Dylan, it's awesome to have you on the Bainbridge podcast. Thanks for joining us. 

Dylan Carden: Yeah, absolutely. Thanks for having me. This is great. 

Dylan Carden 

Ben Tregoe: is from, William Blair is an equity analyst of William Blair. I think what is what has made me so excited for this conversation is the fact that he has like an inside seat, an inside view of the public market.

Bainbridge, we obviously have the Bainbridge d c index. But we're observing it from the outside and the results of all this. But you get to be in on the calls, you get to go have the private meetings with the CFOs and the management team. You get build and maintain your own models.

You just have such a deeper, richer view of the public markets, particularly around E-com. So I'm excited to talk about that. . But before we do that, why don't you, I hope I don't disappoint a little brief

I'm not worried about that but why don't you just give a quick introduction of yourself and your experience. 

Dylan Carden: Yeah, absolutely. Yeah, so I'm sell side equity analysts at William [00:01:00] Blair. . I've been at Blair for about eight years. We have a different approach to coverage where we're not as beholden to certain sectors.

So I am most appropriately called a soft lines analyst, and I've spent much of my time covering apparel companies. I like to say I grew up in the Briar patch covering the really fun names like Abercrombie,Urban, francesca for those of these month, might remember that one. Everything from Vera Bradley used to cover the handbag companies, Nordstrom, all the way through.

And then more recently that's evolved and a lot of sort of the newer entrance into the space your stitch fixes revolves. All Birds, brilliant Earth Warby Parker, companies like that. It's been where the coverage is migrated to naturally over time. And then just for fun, I sprinkle in some stuff like national Vision which is an eyeglass maker Amazon, which, is an everything maker.

A little bit of this and a little bit of that, but it's a broad sort of overview, your spectrum of kind of consumer more broadly. . Yeah, before that I covered casinos and hotels for a firm called Chelsea Advisory for about four years, which is really fun [00:02:00] space. Really dead space though. So I'm glad I got out of that.

And journalist, sort of journalist, private investigator by training led me into the wonderful world of research. So lifelong researcher, I guess is the way I would. Overview at all. 

Ben Tregoe: You can't just drop that you're a private investigator and then they're like, , let's move on.

Thank you . 

Dylan Carden: Yeah, I could probably the most interesting part of this call. Yeah. So I, yeah I got an English degree and tried to monetize that, which is incredibly difficult. My options, I thought, and I did it because I thought that I was gonna go into journalism and the sort of the fork and the road graduating college thinking that you're gonna be a journalist is you either go to journalism school, which I saw as a very, bleak option.

Or you go to Tupelo and you start out writing obituaries and classifies and things like that. So neither of us was very attractive. So I used a little bit of old school nepotism and my father, who was a lawyer, Worked with a private investigations firm in. and I said that's really interesting. Maybe I can go and do some of that.

So yeah, I spent two years in London doing, [00:03:00] I, I off balance sheet due diligence is the way you describe it. But really what it was clients who are private equity firms, rich individuals, family offices, looking to do business in Russia, the Middle East Africa, places where you have zero visibility.

and we would just use a network of sources to see who people were and whether or not they were, of character that you wanted to be in business with. Yeah, it was fun stuff. Did a little bit of trash diving. Did that a little bit of phone calling. really lagging, they call.

Oh yeah. Little bit of surveillance. Yeah, little bit of everything. . 

Ben Tregoe: Did the experience like change your view of humanity? Did you become a cynic or did it, 

Dylan Carden: Maybe you were already, I don't know. I, I've always found pretty cynical. I, what it did do in reality, I think it's a great, it's a job that people don't really know that exists.

People think about, they think, oh, people like stalking people's wives to see if they're cheating. Which is a very real job. But it, ours was much more, I looked at almost every single industry. in a lot of different countries over a two year period. So for someone that doesn't really know where they're headed professionally, you're looking at oil [00:04:00] and ga, you're looking at oil and gas companies outta Switzerland or Russian, Gar Garcia, aluminum trade out of Russia, or all of its cell phones in Africa.

You get this broad spectrum of the world and then the research component. was really what stuck with me, right? The same kind of probably inkling of why I wanted to be a journalist. And I said, okay, great. There's all these different ways that you can take research, including from a financials perspective.

So it was from that experience that I first identified, I wanted to go into sell side research, and then that took seven years to actually actualize. That was the initial launchpad of wanting to do, wanting to be where I am right now, which is interesting.

But no, I yeah. The world's a terrible place. We had this one. Yeah. It's, it was a lot. You're dealing anytime, particularly London, you're dealing with a lot of extremely wealthy people who just, treat the world as their kind of playground and Yeah. So there, I probably have some part of my worldview that's been colored by some of those old clients.

Yeah, sure. I'll give that to you.

Ben Tregoe: Tell, tell me about I don't think a lot of people are super [00:05:00] familiar with the kind of reporting mechanics and like the, as a company goes from private, Hey, I've raised all this VC money, and then Terre, we have the I P O and then our pictures, ringing the bell and then.

I think people like just look at the stock price, right? And they're aware that there's these filings, but like what is the cadence of a public D to C company, and from the public market standpoint? Yeah. 

Dylan Carden: Traditionally and so like my relationship with the company typically starts I like to engage companies really early on because I think that's where you really build some of the most organic relationships.

More typical is that you'll have a company, so how early find some I like pre like the bootstrap companies that don't have any investors in them. that early, right? Like pre seeking outside capital. You're doing like media. They're like, these are like 10 million, $5 million revenue.

Yeah. Yeah. Just smaller. Yeah. Okay. Yeah. Yeah. And that's what I like to do because again you're not, there's no agenda there other than. The mutual the mutual benefit is that you can tell [00:06:00] me what you're seeing from your vantage being in the frontline, trying to sell goods to consumers.

And I can, have a conversation kinda like what we're having now where I provide some insider perspective, hopefully into what this world of, institutional investors are. But, more typical, I would say that's rare when I can really do that or have that opportunity.

But, and more typical is that you've got a company that's got, a couple rounds of financing behind it. They're either looking for another one and through that process instinctually understand that the exit from there will be a public offering. For example, I met with icr was the big conference that we just had.

The industry had. Monday through Wednesday of this week, met with a company that, similar idea, they've had about a five year track record. They've raised a little bit of money. They're trying to raise more now with an idea to go public in kind of mid 24. Okay.

Right now, so call it a year and a half out is where they're starting to think about what it is that you're speaking. . And it's how do we present the story? Because they've, the story's been pitched at this point, right? You've got some money in there, right?

But how do we pitch it? How do we think about trying to pitch it to the broader public [00:07:00] equities landscape? And Yep. A lot of that conversation is. , and this is where I think it's most helpful to maybe have someone like myself hopefully not to be too kind and cocky about it, but because the conversation or most the instinct is to look at a bunch of other companies and what they've done and just copy that, right?

And so this is where you get a metric like LTV to C this is where it just explodes because maybe that made sense for one company at some point or a handful of companies. And all of a sudden everyone just latches onto it. And you get to the point where when Madewell wanted to go public, What was that like?

19 I think it was, and that was the first time I had seen an LTV to CAC Metric in like a traditional retailer pitch deck. So these metrics have, and what Chewy did. . Yeah, chewy put in metrics where it was spend per customer per year. And for them that was a great metric because it just showed this really nice consistent trend line.

And then after Chewy did it, a lot of other companies started to think they needed to do it and it wasn't as attractive. Cuz of course, if you're buying dog food versus a pair of pants, there's no way you're gonna show the same kind of consistency or repeat spending. So where I think it's where [00:08:00] I get most engaged is trying to.

Companies not go at it from the outside in, but the inside out as far as thinking about sort of brand value, what their actual kind of relationship is to their customer. What is the DNA of the business that you really need to get across in a couple bullet points to express, why this is a, a sustainable, engaging, long vision business.

Yeah. And that's gonna be different for each company, but the me and so those metrics, relate to Can the market ab Yeah, go ahead. No. Go. Please take me somewhere else. 

Ben Tregoe: Can the market, it along those lines, can the market absorb those nuances? If you are, yeah, that's a great question.

Too much of a snowflake are people like, I don't have time to deal with this . I just wanna know the LTB to C or, spend per customer whatever. No. Yeah. 

Dylan Carden: That is a hundred percent. The default is to go the easy way, right? Show the L t V to K show that it's good compared to others that have come before you put in, put in the arbitrary 25% top line growth to a billion dollars in three years, right?

Like all this stuff that people think the street needs here. I got into a, not a, [00:09:00] a, someone, a private company the other day asked me what do I consider to be a growth? and I said 10% top line. Yeah. That's a lot lower than I think you'll hear from anyone else. And so yeah. A lot of people are gonna dismiss Yeah.

The way that I want to go about it. And it's not just because it's harder too, right? But it should have been, it should be easy. I guess that's where I draw the distinction, if that's hard to do, if it's hard for you to distill the identity and the value of the. , it might be that it's hard to put it in metrics. I get that part, but if it's hard to even speak to, that's a whole other separate issue, right? Yeah. And so I think it's a worthwhile exercise, just even just taking, listening to me or just even having a conversation, whether or not you think that I'm gonna be the one, because you think you need the 25% growth to get the investors right?

I get all that. I'm not gonna, I'm not a franchise analyst. That's the way I put it. Typically, . Yeah, I could probably be more commercial if I wanted. Yeah. But yeah, no, that you're right. The instinct is right. It's much more that you look at the standard comp tables. Perfect example is comp [00:10:00] tables, right?

And comp tables where you have whatever you think the relevant public companies are that you should be matched up against. And what they. . So the idea is that, yeah, you're viri, right? So you've got Lulu and Nike, and maybe Warby is on there, right? And that spits out a nice little me multiple that is say, okay, 15 times ebitda, 18 times That's our benchmark and that's fine. Nothing against comp tables. But yeah it doesn't at all get at the nuance between those different brands, and speak to. , why a, why someone should be much more invested in a business like yours because of the unique aspects and value proposition that it offers.

I don't know. It's something that I think is at least a worthwhile exercise to think about as a thought experiment. 

Ben Tregoe: Yeah, that's interesting. And I think it would be helpful for people to maybe better understand, what a sell side. , is doing like, how do you know you're not getting paid by the companies to come and cover them?

And do you do a ton of work and you're attending all these meetings and [00:11:00] building and maintaining models? So what is the business model behind that? And you know what, I think there's a perception of how that might influence it, but what's your take on, whether it's there is an influence on that or not.

Dylan Carden: Yeah. So yeah, you're right. It's a really interesting part. Of the financial ecosystem. So historically it evolved from when trading got commoditized, right? When there was, there's no way to differentiate yourself on pricing from a trading standpoint. And I think that was in like the sixties or seventies.

It's kinda like healthcare in, in why healthcare got introduced from a labor standpoint. It was a way to attract, yeah. Workers research was a way that you could offer your trading partners added value. So you trade with us. Sure. We're gonna be just, we're gonna be priced just like the next guy.

Execution is probably gonna be pretty comparable, but we offer you an opinion on the companies that you might be interested in buying or selling. So it emerged a add-on product to the sales and trading. and it's [00:12:00] value is ethereal, right? Like in theory, we are driving mindshare, and instigating trading, right?

So we are, we're attached the budget that we have draws from our trading desk, right? And like the perfect example, client from an institutional firm, a mutual fund, hedge fund, whatever it might be, pension fund calls me and I give him an idea, Hey, you know what, Abercrombie's gonna be a great buy for the next year.

they read the report. Yeah. Listen to what I have to say. Agree with me. And for the effort, if you will, go and buy Abercrombie stock through our trading desk that covers the trader salary, the commission on that covers trading the sales guy who represents them. And theoretically my cut as well.

I'm right because I'm not where the rubber touches the road. I'm further down the pecking order there. Just from a compensation standpoint. But that's the basic thrust of the idea. It's access to mindshare for the training clients. And whether or not, there's a lot of of course Reg fd, what happened was that a big part of a trading desk budget is going to be IPOs.

That's a huge[00:13:00] yeah. Revenue source for any sort of sales and trading desk. . And so what happened was that these research firms started jockeying for a position just to be at the spigot as it relates to essentially banking. Essentially follow-ons. Yeah. IPOs, secondaries, whatever it might be.

And therefore their credibility and their, got called into question and that really came to a head in, the late nineties, early two thousands when there was just these research channels that were caught on tape effectively saying, yeah, I wouldn't touch that company with a 10 foot pole.

We got, we do so much banking, I rating. Yeah, exactly. The, I think it was the Morgan Stanley guy that got fired for having a neutral rating on Enron. , great example. He was like the one negative guy in Enron, and it was very, 

Ben Tregoe: could be a problem, but 

Dylan Carden: it could be a problem, right? He saw it and they were like, you know what, because you're such a good researcher, you're gonna get outta here.

You're gonna get out of our research department. So that they changed those rules in 2002, 2003 where they really kind and really all they really did was. Tighter, tighter laws [00:14:00] around dissemination. So there's a guy at our firm, Nick Haman, wonderful man who's covered, he's covered GE for as long as I've been alive.

He started covering GE in 1982 and he would tell stories about the model used to be, , you would get in tight with management. You'd go out for lunch, you'd have a two martini lunch, and he would mention that they're gonna raise the dividend the next quarter, and you could sit on the information because you were the only one, you could go sober up and then the next day you could come back and you could go to the hoot and say, Hey guys, GEs gonna raise the dividend next quarter.

That was the model. And that all changed, obviously. Yeah. And for the better. I do think that, yeah, it's a spectrum, but yeah, there's still a part of research that's driven by, Banking and relationships. No question. I think if you're really thinking about being in the industry for a long period of time it just behooves you to be as, because where you really lose it is credibility with investors, right?

Again, getting back to of the whole model, right? You need those people to trust you to trade with you, right? And so the more that you're out there selling them wood, that's a short career, potentially, right? Unless and then it gets down to incentive schemes of individual banks and what have you.

But that's of [00:15:00] how I feel. . 

Ben Tregoe: Yeah. No that's great. I think that gives a really good context. Let's switch gears a little. I thought you had this really interesting observation about the kind of, the kind of recent history of retail and in E-com.

Yeah. You know, Starting with the retailers in order to grow added stores. If you don't mind, would go through that? Cause I think that gives a really good history of the space, which maybe people that are newer to e-com. It's it didn't just start, five years ago.

This thing started a long time ago. 

Dylan Carden: What's interesting is that the commercialization of the internet was the mid. . And if, and this is I think totally circumstantial, but if you look at inflation for, let's just take, I'm, I talk mostly about apparel, so I'm gonna, most of what I'm speaking to is apparel.

But I think it has ramifications across a lot of other discretionary categories. But if you look at inflation, yeah, 9 19 95 was essentially, you haven't seen any inflation since that point in most discretionary categor. inflation for a lot of discretionary categories was seen actual inflationary trend up until that point.

[00:16:00] And then since then it's been effectively flat. And it gets into the kind of what you're speaking to, it's what is the background in the history of this industry or other sort of industries like that. In the late nineties and early two thousands is when you saw a lot of IPOs for companies that you now would recognize as mature old.

Dead in the water. Retailers, L brands, formally the limited Abercrombie Macy's gap, Macy's goes back further. But that was really when a lot of this flow of public companies really happened. And to attract investors these companies need to have a growth plan. It gets back to what.

is growth 25% growth, right? Is that a responsible pattern of growth or is it 10 or 5%, if that's sustainable over decades. And the easiest way for these companies to show that they were going to grow was to open stores. So throughout 2000 and really into the into the, great recession and oh 8, 0 9, all these companies were just opening up stores like crazy, right?

And really forsaking a lot of more traditional [00:17:00] channels, namely whole. , and going direct to consumer. So this is where like coach pulled themselves out of Nordstrom more materially and started opening up coach stores literally in the same mall down the hallway. And what happened there?

Yeah. And then you get to store counts that are, American Eagle, I think at its peak head, 800 stores. Macy's of course had a thousand gap had a thousand, right? Victoria's Secret I think. So it starts building on itself cause it. , 

Ben Tregoe: it starts creating demand from the developers to build more malls.

And so they're like hundred percent. 

Yeah. Yeah. The over restoring just took 

Dylan Carden: off. Yeah. And it's like the every, because everyone else is doing it, you think there's the opportunity that you can do it as well. And the cover that they had right, was that there was no real online threat at that point, right?

Like from 95 to call it 2000 and. , the sale of apparel online was like, you one, two, 3%. It was really impinging along. And this is where you get some p I wish I've gone and tried to look for these quotes, but I have been able to find 'em. But this is where you get, people like Mickey Drexler saying, oh, the Internet's n no one's [00:18:00] ever gonna buy a cashmere sweater on the internet.

right? Because they need the touch and feel and the trust. There's a trust deficit, right? So stores are allowed this capacity and obviously oh 8 0 9 puts a wrinkle in it. But stores just, they kept the industry kept opening up stores all the way through to 20 15, 20 16. And then a really interesting thing started to happen.

That was a time the online penetration in apparel reached 15 one 5% in 20. And you can go back and look at early, early online adopters. Books is the most obvious because of Amazon. Amazon just turbocharged the online adoption of books. You can look at books, you can use con Consumer electronics office supplies actually happens to have been an early online migrator.

And that 15% range is where consistently you start seeing a more one for one trade off between cannibalization of. . So it almost becomes a one for one, a hundred basis points. Moving online is about a 1% decline in the retail sales of that industry. So all these [00:19:00] companies that opened up thousands of stores I can I'll share the charts with you. I have 'em. All these companies just got these hugely bloated retail channels just as the internet was taking off. And so then you get into 16, 17, 18, where this is where stores become a four letter. , right? Uninvestible. Macy's is Uninvestible. Gap is Uninvestible.

L Brands is Uninvestible because they essentially have to unwind all of that development. And just to give you a sense of how severe that was, there's 200 MSAs, metropolitan statistical areas, big city areas. There's 200 sort of larger urban areas in the United States. Over 200,000 people. So if you have.

a reasonable store footprint. If you look at a free people or an Aritzia brands are brands that are really quite, rational in their store rollout. Coach, it tends to be about 200 stores. 200, 250. You can have a couple stores in New York, right? There's not a lot of white space to have a thousand.

So that's what you're, these companies essentially had to go from a thousand to 300 in a best case [00:20:00] scenario. So that gives you a sense of the scale of the issue. And then at that same time, yeah. Because these companies, these mature legacy retailers were so hobbled by their own irresponsible expansion.

The narrative that it emerged out of that was, look how great and look how you. Favorable. The online channel looks right. No, you and I going back five years could have started a khaki company. There was no overhead. We just need to scrounge up a couple dollars for production in China, maybe some marketing, and that's it.

That's just it. You can go and you can go on Facebook and just market the crap out of it and there boom, there's your 25 million and so that's where the sort of next generation of what people view to be competitively advantage. Digital only platforms emerged in that wake of the store closures that had to happen to their primary competitors.

Yeah. getting back to the mid nineties and how there has been no inflation in this space. The inflation that you have seen in the United States has been largely non-discretionary. Housing, healthcare, education, [00:21:00] anything that's discretionary, that's not an iPhone has been deflationary.

And that's just simply the net effect of that is that wallet. has been coming out. We used to spend 17% of our income on a close back in the seventies. That's 3% right now. Yeah. It's just been this massive crowding out, so there's no, if people like to talk about tam Wait, go through that again.


Ben Tregoe: Explain that again. Cause I think that's, this is a really interesting point. So you're talking about share of wallet erosion due to inflation. 

Dylan Carden: Exactly. If you think about, so if you look at, if you look at over. , this idea of 2% inflation. This is why I think this is so misunderstood.

Yeah. If you look at 2% inflation in the United States, which is the fed's target, right? 2%. First of all, do, has anyone kinda laid out? They're killing, 


Ben Tregoe: doing a great job. They're 

Dylan Carden: That 2% inflation historically the sort of academic idea of inflation. , which is also crazy, is that, okay, why do you even need inflation?

Why can't things just be stagnant in price? Wouldn't that be great? One of the ideas behind inflation is that you need to incentivize people to [00:22:00] spend, right? So if, you know the flat screen TV is gonna be more expensive in the future, you're not gonna buy it now, right? And so there's a whole growth for growth like aspects.

Yeah. Even all the way down to the inflationary level. But yeah, if you actually look at the categories of inflation over the. Call it 20, 30 years. It's really, and without exaggerating, been housed in those three categories. Healthcare, housing and education. That's your 2%. Everything else is flat to deflationary.

Food does this, by and large, gasoline does this. Anything that's a consumer product is more or less flat or deflationary. And the net effect of that is that if you look at, you can get, cons you can get. PCE data, personal consumption, expenditure data. And you can look at Yeah, how much we dedicate to certain categories of wallet.

And yeah, we used to spend 17% of our income on apparel, on clothing in the 1970s. And that is now 3%. It's because it now costs, what, a hundred thousand dollars to send a kid [00:23:00] to college or something crazy like that. I It's not right. And the interesting thing about those three categories, healthcare, housing, educat, , someone else pays for all of that.

You've got health insurance, you've got mortgages, and you've got student loans. So that allowed for unchecked, runaway. And so that that's all I was saying about that. But it's interesting because then the point I really wanted to draw from that is that you're not, if you're an apparel company and you're growing 20%, you're not doing that because of the industry.

You're doing that because you're taking that 20% from somewhere else, right? Yeah. And so it's really, it's important because it's if you're gonna have a strategy in apparel, you have to understand that fundamental aspect of the business, right? If you're growing 20%, it's really coming from somewhere else, right?

The fact that off price right has gotten so big in the post-recession era has come entirely, almost as a result of department stores getting smaller. , right? The online guys growing so quickly from 15 all the way to 2020 was because of that closing of retail from the mature store base, right? And of course, consumers [00:24:00] moving online because it becomes a manifest destiny to some extent, right?

So that takes you up to 2020, right? And okay. The really fascinating thing that's happened really since 21 is now we have in the public domain those digitally native c. For investors to pick over. At the same time, the mature retailers have done, have now spent five or so years in some instances more than that, including accelerated years in 20 20, 21 closing stores.

So some of the healthiest businesses right now are actually a company like Abercrombie. , Abercrombie is in a lot healthier position, I would argue, than a company like like an Allbirds. Because they're much more further along in their store rollout because they have a history of operating because they have a more healthy mix of online and retail sales.

So it's an interesting point in, in, in this whole process because now we've evened it out a little bit. And the risk, of course, would be that the digitally native companies that have come public since 20. repeat the sins of, the 1990s and the early two [00:25:00] thousands where they say we're gonna have a thousand stores.

Or more likely is that they're just gonna open up stores too quickly. That they're gonna say, Hey, we can have a hundred stores, so let's open 20 a year. Yeah. 

Ben Tregoe: You made this point where you said I can't remember the company, but they were like talking about their, Retail expansion being like 50%, but their growth was like 20, some number less.

And I was curious, like if you could go through that again because you were like, you and all the other analysts were like, you guys see the problem here, right? And they're like no. It's a good thing. , right? 

Dylan Carden: Yeah. May not say the name of the company per se, but it's, I remember too, I once looked at a banking presentation and they were all happy.

They were. Proud of themselves, and they showed a chart where it was revenue and then it was labor or employment. This has been what revenue and banking has done, this has been how much we've been hiring. It's you guys see the problem with that, right? Yeah. Like you're just becoming less efficient.

But yeah, this is this Duluth is a company, I can speak to this as well, like this one company you're speaking [00:26:00] to reported the other day. It's all birds. We'll just say what it is. They reported their third. and they were really proud of the fact that, I'm gonna get these numbers wrong, but directionally, they're right.

They're really, they were really proud that their retail sales, their sales in stores had grown, call it 40% over the year. And yet US analysts were looking at the underlying numbers and drivers and saying yeah, but the number of stores you have has increased 70%. And so if you wanna talk.

Health of a business, you're not necessarily a healthier business if you're opening up stores faster than your revenue, right? It's the same idea with b, revenue and employment, right? The underlying driver should be the two things that, that make for a sale, right? The, essentially the distribution in the customer should equal a rate that's growing greater than those two drivers in theory.

Easiest example is active customers and spend per customer, right? You're, that should equal revenue. That's above both of those, right? Because if you're growing customers at a [00:27:00] faster clip and your revenue is not keeping up, those customers are spending less and it gets to, the overall right?

Health of that customer. Same thing here with stores. If you're growing stores, 70% for those stores, yeah. That the revenue across those stores is ongoing. 40. , you're effectively opening up stores that aren't comping, that aren't seeing positive, same store sales on a year over year basis, which is, which totally takes away the credibility of opening up stores.

Do stores, do they hit like a hundred percent ef, EF efficacy like day one, or did, is there a ramp to 'em or is it the ramp not really 

meaningful? It's, and they're supposed to , right? Yeah. And instinctually, that makes sense, right? You open a store, usually you're opening up a store in a new market, right?

So dig For digital companies, it's a little bit different because they're opening up stores in areas where people already know they exist because they've shopped 'em online, which is where this gets a little bit fuzzy. Sure. But in, in theory, you're opening up a store in a new market, and even for digital companies, you're opening up that store to expand.[00:28:00] 

Everyone talks about this, open up a store in Boston, right? In the, in, in the second year, that market has grown anywhere from 80 to 150%. Some companies talk about 200% growth in that market. That would be retail and online, right? So the overall market is doing two x what you're doing historically. So yeah, you wanna store to open, typically open anywhere from 60 to 70% productivity.

It. Productivity being kinda the average fleet. Okay. So if all your stores are growing, yeah. If you do a million on average across any store you have your typical new store will come up at, call it 600,000, 700,000, and then over the next four years. Okay. It ramps to the fleet average.

That's what you typically see. It takes that long. Some, it does. Yeah. And some digital retailers. Duluth is one we'll see with all birds, it could be another. for whatever reason, they're opening up these stores and then they're actually seeing decline in volume. And Allbirds even said on their call, yeah, when asked that question and you can go back to the transcript, and you was asked to them about three different ways, [00:29:00] they actually acknowledge that there was so much volume in some of those older stores that they don't think they're actually gonna get back to those volumes.

So you're almost seeing this like inverse store waterfall. is tough because right now they're budgeting out that those stores should grow it. It's tough if you get into a position where that's not the case, and again, I'll keep mentioning it, but Dilute is exhibit one for when that goes wrong.

Ben Tregoe: Oof. Okay, Dylan, what a common, the sort of conventional wisdom and d C is oh, I need to grow, so I need to go omnichannel, right? So I'm gonna go into, maybe I'll go Amazon and I'll start going wholesale and target or whatever, know, the right channels are and I should start opening stores.

D does. Are there examples of that working out well? E-com brands or is it too early to say ? 

Dylan Carden: No, it's it again, speaks to like what is, like who, this is the risk, right? You're, you see what everyone else is doing and you say, okay, that's what I need to do too. And that's where you [00:30:00] go to certain areas of cities you know them well, where you've got all the DTC brands that have just gone and opened up a store all next to each other in a row, right?

Again, not to call it individual companies and some of those stores even look like one another, like they've hired the same design consultant or something. It gets back to Aritzia is a great example for retail rollout. Aritzia, which is a Canadian women's clothing company.

Phenomenal company. Phenomenal company for lots of reasons. But one of the reasons is their merchant their retail strategy. They will. Upwards of five plus years before they, they want the exact location to be right for them. They don't just want to be on lower Broadway. They want literally one address.

So if that address isn't available, they'll wait. . They have an in-house architecture team, a five person, large architecture team that designs every store uniquely and uniquely fit for whatever market they're going into. So every store looks different, right? And so that, and [00:31:00] that's not what these brands are doing.

A lot of these companies are going out into this saying, okay, we can have a hundred stores. We're targeting 20% growth. This is where that whole arbitrary 20, 25%, that's what growth is. That's where this goes array. Because you're saying, okay, we need to hit 20. , how do we do that? We can have a hundred stores.

Let's open 20 a year. That's where that's top down, which ignores a lot of the fundamentals of, and the identity of the brand. I think for some brands a combination, wholesale, retail, online makes sense. Allbirds is clearly one. I think wholesale could be a bigger piece of their business than people may be initially.

Wholesale serves a very real purpose. But as far as someone that's out there now, who you would say, who? Someone A, a brand that's existed called in the last 10 years. Who's really doing it arguably Warby Parker has messed up their retail right. And the fact that Warby Parker doesn't make money and they have 200 stores.

That's interesting. The fact that they're now having to go back and put doctors in stores Yeah. Could tell you that they didn't really understand their business in the first place. To not think that you needed a doctor and an eyeglass, right? Yeah. So that's one that, [00:32:00] it's just hard to know who's really doing the omni well at this point, because I think it's such early days for a lot of these brands, right?

And you see a lot of them at greater risk of messing it up than, knocking it outta the park, so to speak. . Yeah. 

Ben Tregoe: Aritzia. I remember you talking about Risu because a number, you gave me a number that just blew me away. Was that it? I think I'm gonna get this right. 85% of their sales are in full price.

Dylan Carden: Yeah, that's right. That's boot barn. Barn. Similar too. That's astounding. That's shooting, that's astounding. That's shooting the lights out. That's I think, people are grasping for metrics that really help underst. The underlying health of a brand. That's one of 'em. Repeat spending, full price spending organic engagement, word of mouth.

There's things that you can really assess like what is the health of the brand and the health of the brand is. Most people that rock up to your business will pay whatever it is that you ask 'em to And it's not because you're gouging them, it's because [00:33:00] you're offering. real value, whatever that might be a price.

The case of Aritzia, it's all private labels. So here's the greatest, here's the one vignette or snippet for Aritzia that you need to that sort of speaks to that. There's two types of down, gray, down and brown down. One is good, one is bad. I don't, I forget which one. I think gray down is the higher quality down Aritzia puts the gray down and their puffer jacket and Canada goose puts the sh the worst.

The less the inferior down and their jackets. And can Goose charges more much more than Aritzia does for their jackets. So and is the consumer gonna know? No, Aritzia doesn't put a sign out that says, Hey, we've got, don't look at can Goose look at us? Great Everest. Yeah. And your in your super puff.

And yet though, you talk to anyone that wears an aAritzia puffer jacket, they swear by how warm. , so anyway, it's stuff like that. Oh, really? I think, yeah. . Yeah. 

Ben Tregoe: What what do you think is pricing power the true measure of a brand? Would repeat purchases [00:34:00] via a measure of a brand?

Dylan Carden: Yeah. Repeat purchases. I think full price selling. I think there's some value to nps. . It's tough cuz nps, everyone measures it a little bit differently. So like I asked Revolve, yeah, revolve doesn't disclose their NPSs. And I asked 'em why and they said, because it's, how do you wanna measure it?

And I actually saw, I was in a presentation the other day, someone put up a Madewell NPS for a comparison that was negative five . . know, I've never seen a negative nps. I didn't even know that was possible. I guess it is possible in theory, it'd be the way you measure it. But anyway, so I, but I think the underlying goal of NPS is correct and it's word of mouth, organic, how much do you actually need to promote your brand and how much is your brand being promoted by those that use it?

What else? Review. , how, like, how many people are taking the time to write a review for you and are those reviews? Obviously whether or not they're positive matter. But yeah I think real measures of a brand are things that kind of get at the stuff that is harder.

One, because if you go and you open up 20% new stores in any given year, that's not focusing on what's supposed to be [00:35:00] going in the stores, right? Like you need to start every decision for the business with what is the product itself. and then find the most appropriate way to distribute and to speak to that customer.

I, I think it's really, which is harder . Yeah. By and large. Yeah. Unless harder to dis, yeah. Sorry, I cut you off. 

No, you're 

just, you're good. Dylan. 

Ben Tregoe: What's it's it's, what is it? It's January 13th of 23. What is the kind of feeling about what 2023 will hold for e-com?

Dylan Carden: On public investors. It's fortuitous because I'm just, again, coming off this conference and this conference's called icr. It's ICR itself is an outside IR firm. You're probably familiar with it. And it's a collection of, again, those like Abercrombie was there American Eagle was there, Lululemon was there.

So these older, more mature legacy retailers, The newer entrance, right? They have a [00:36:00] private day. The last day Wednesday was all private companies. Wolf and Shepherd was one of them. Some other companies that I think are a little bit smaller, all to say like it's ever eve. So it's a nice way to speak to a a bunch of investors quickly and see how the take the temperature of a lot of different companies that are actually trying to make their budgets right now.

and what shocked me and everyone that I spoke to, all the clients and companies I spoke to is just how positive sentiment was. You would think with the headline risks and Right, everything going on. That these companies wouldn't have any capacity to really find array of sunshine, so to speak.

But, and there's, it's not maybe of the purview of this conversation, but I think it boils down to the fact that there's a lot of tailwinds going into next year, right? Inflation, theoretically eases comparisons get easier. Freight costs are coming down are back to where they were. Labor costs ease, right?

So you've, even if you get some sort of macro malaise, , you still have a [00:37:00] lot of support from an earnings and demand standpoint, right? And Jamie Diamond just changed his tune too, right? It's not gonna be this economic hurricane, it's gonna be a little bit more of a drizzle, right? So I think a lot of people are feeling that even if you do get some sort of pressure and if it is a recession, it's been the most telegraph recession of all time too, right?

We've just been waiting by the fellow for it, right? I think people are taking a happier view as it relates. , it may be not being such a major overhang and that you have very real margin support. So that's, it's a hopeful message of any company, as it relates to dtc. Yeah. And these digital brands, this is where it's gonna get very interesting because the messaging from the investor side, it's pretty clear if you don't make money if you don't make positive free cash, It's very difficult for me to own your stock, right?

Unless you're early stage SaaS, or, unless there's a real reason why, you're not making money. But if you're a consumer brand at 50 plus percent gross margin and you're [00:38:00] 300, 400, 500 million in top line for you to not be, it's like a kid being kicked outta the house. Like you need to go find a job, right?

That's a scale. And a maturity level whereby you need to start of proving that you're a real business. And so what is that gonna do? That is largely, I think, going to force these direct brands to stop marketing so aggressively. Right now the conversation has been how do you shift, how do you shift marketing dollars from social?

to something else. Streaming has been a big one. TikTok, stuff like that. Yeah. New platforms for marketing not, how do you cut back on marketing? That hasn't been as much of the conversation. But it's the biggest lever all these companies have to pull. So they're gonna have to weigh marketing versus sales.

And this is the buffet where you're gonna see people are swimming naked. This is the companies that can go from 20% marketing spend as a, relative to sales to, I, I think rational levels are in the low single digits, but call it 10% just as a waste station, what does that do to your top line?

Yeah. [00:39:00] and it gets back to the repeat full price selling, right? Are you gonna have repeat spending? Are those customers that were there for you five years ago gonna come back? And this is why it all starts from a product standpoint, right? So this is, this year and next year are gonna be the years that I think that really gets tested.

Because if you're still spending into that aggressive top line, because that's always been the thesis, mind you, right? That we're spending a lot because we're just gaining customers and those customers are gonna be loyal. And then we're at a scale where we're profit. You're already 500 million in revenue.

You think you're gonna get to a billion in three years, and yet your EBITDA's still gonna be flat. Come on. And so I think that's a big, yeah, a big stress test that's about to happen in the market. And the other prediction I have would be that wholesale, you mentioned it there, wholesale gets taken a lot more seriously than it has been historically.

Yeah. For that same reason. 

Ben Tregoe: Yeah. I think those are really spot on.

Do you think that the growth expectations then will reset not only in the public [00:40:00] markets, but down into the private markets? Where two years ago people were like trying to grow like 200, I know it depends on the stage of the company. Yeah. 200% growth or a hundred percent growth, whereas people might be like, Hey, fif 50 is like a massive win, 25 is a win.

Or do you. It doesn't trickle all the way down from public to private. 

Dylan Carden: This is, look it's where you started this conversation about why would anyone wanna talk to me if it's just easier to go and do the easy stuff that everyone else is doing but this is where I want the revolution to happen.

That's exactly what I want to happen. And I think again, it speaks to what metrics are gonna matter on a pitch deck. Can you put, people have already stopped putting L t V to tech on their pitch. , right? That's almost like a laughable metric at this point. Because if you're telling me that your LTC is so great, and then on the next slide you're spending 30% of your sales on marketing, like there's a disconnect there and one does not explain the other, right?

I don't care if you get a one year payback. Yeah. That's a crazy irresponsible amount of marketing, right? So I think the metrics will have to change and the metrics will have to show, if I'm an investor, [00:41:00] I want to know. The profitability and the sustainability of the profitability. Going back to an aAritzia or a national vision or a boot barn, why are you able to comp at 5% consistently?

That's it. Yeah. Sales are the lifeblood, right? Why is your top line sustainable? And those, the metrics that support that are full price spending, repeat spending, autoship in the case of a chewy, stuff like that. It's gonna start having to we're gonna have to invent metrics or really agree on metrics that show brand health to suggest top line health that then trickles down to underlying profitability.

And so on the private side, one interesting conversation that's happening, like the churning group and this idea around what does content do for your business, right? So if it's not marketing, what is the real value of a consumer brand? And a lot of that is the organic engagement You.

with your customer base, right? And so models like Food 52 or Heinke, metate or everything that's in their portfolio speaks to a capacity to engage a customer that moves well [00:42:00] beyond marketing into an actual community of people. And so I, I think you'll start seeing private capital flow to businesses that they understand there's sort of structural supports for engagement more so than just an over bloated marketing.

and those companies that can't do that. Yeah. Market capital, and that'll be a healthy Yeah, that'll be a healthy cleansing, right? You starve the market of companies that were just overblown marketing budgets and you're left with a sort of a healthier underlying base of competitively advantaged businesses and hopefully that's how it flows out.

I think that's true. I think that will happen, but we. Yeah. 

Ben Tregoe: That's a, I think a terrific place to stop. That's, I think you just dropped a huge gem there, of wisdom among many during, in this conversation. Dylan, thanks so much for being on. I really hope you 

Dylan Carden: Yeah, no, I just, that part of that same equation is that scale's gonna be.

You're not gonna, you're not gonna fund these brands with the hopes of being billion dollar, $20 billion brands. You're gonna fund these [00:43:00] businesses with hopes of being a hundred to 500 and sustainable. And free cash flow positive. But it's just gonna, yeah. We're gonna have, and I already talked to another investor the other day, we're gonna have to think about scale differently, and I think that's gonna be another hard awakening for people.

Yeah, no, it was great to be there. Yeah. Agreed.

Ben Tregoe: Yeah. Thank you so much. And I can't wait to do this again soon, cuz there's so much more to explore. 

Dylan Carden: Yeah. And it's gonna change.

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