For years, public companies have been distorting their true profitability by emphasizing their “Adjusted EBITDA”, not their true Net Income profit. Unfortunately, newly-public DTC companies are getting in on the game.

I was at a conference last week where someone working at HelloFresh, the DTC meal kit company, told me the company made €66mm in Q1 of this year. This surprised me, as I knew the company actually lost €25mm this past quarter. Why the discrepancy? He was talking about HelloFresh’s Adjusted EBITDA, not Net Income.

I quickly looked up how some other public DTC companies are reporting out their profitability. Here’s a quick sample from Q1 2023:

  • FIGS: Adjusted EBITDA: $16mm. Net Income: $2mm
  • Allbirds: Adjusted EBITDA: -$22mm. Net Income: -$35mm
  • Warby Parker: Adjusted EBITDA: $18mm. Net Income: -$11mm

Not you, Warby! In their latest earnings presentation, Adjusted EBITDA is shown prominently on the first quarterly results slide. GAAP Net Income is shown on page 27.

Warby isn’t unique here. Most public companies try to make their profit numbers look as good as possible. The problem is, as the investor Charlie Munger has said, EBITDA is “BS Earnings.” And “Adjusted EBITDA” is even more BS. There’s a reason the SEC mandates that Net Income be reported every quarter–it’s the real earnings.

Let’s go a bit deeper. Why is “Adjusted EBITDA” BS? Let’s see how Warby Parker defines it: “Adjusted EBITDA is defined as net income (loss) before interest and other income, taxes, and depreciation and amortization as further adjusted for asset impairment costs, stock-based compensation expense and related employer payroll taxes, amortization of cloud-based software implementation costs, and non-recurring costs such as major system implementation costs.”

In theory, management will tell you that Adjusted EBITDA is emphasized because it tracks the “normalized” cash-based profit of the business. This is just…not true.

For one, interest on debt and taxes are real cash costs! This is especially true as interest rates have risen in the last year.

Second, stock-based compensation, though technically not a cash-based cost, is a real cost to the business. Employees are given stock options to incentivize them to grow the company and they, rightfully, treat those options as part of their compensation. These options dilute shareholders and if they weren’t granted many employees would leave. You can’t just say these don’t count.

Finally, companies often claim they should exclude “non-recurring” costs like, say, a major system implementation cost. Sure. The problem is every company has different non-recurring costs every year. Each one may be different and non-recurring but, in the aggregate, they recur.

Is there some value to looking at metrics like EBITDA occasionally? Sometimes, of course. But companies do a disservice to investors and their employees when they emphasize the wrong numbers. Adjusted EBITDA is not profit.