BofA Downgrades SmileDirectClub, Sees Slower Recovery Ahead

SmileDirectClub Inc’s SDC recovery in aligner shipments and revenue growth in the back half of 2020 and through 2021 is likely to be slower than was earlier anticipated, according to BofA Securities.

SmileDirectClub reported quarterly losses of 28 cents per share, which missed the analyst consensus estimate by 9 cents. The company reported quarterly sales of $196.65 million, which missed the analyst consensus estimate of $219.52 million.

The SmileDirectClub Analyst

Michael Ryskin downgraded SmileDirectClub from Buy to Underperform, while reducing the price target from $10 to $7.

The SmileDirectClub Thesis

During a recent call, management maintained a positive tone, stressing on the resilience of the business model amid the coronavirus crisis and SmileShop closures, Ryskin said in the note.

While SmileDirectClub is making efforts to curb costs and management is focused on turning the company cash-flow positive and profitable, Ryskin said the business model is highly dependent on advertising spend on TV, media and online to drive volumes.

He explained that with companies lowering their advertising spend and SmileDirectClub facing other overhangs, like a decline in discretionary spending, the company’s recovery could be even slower than was previously projected.

A sizeable portion of SmileDirectClub’s future customer funnel “may be lost or significantly delayed by a protracted pause in a search for profitability, leading to a demand air pocket later this year or in ’21,” Ryskin wrote.

He reduced the sales estimates for 2020 and 2021 to $585 million and $835 million, respectively.

SDC Price Action

Shares of SmileDirectClub dropped by more than 10% to $6.94 at time of publication Thursday.

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