The Rundown – Your weekly SPAC Deep Dive (11/07/21)
Capitalizing on the Shift to Plant-Based Diets
Over the last few years, there has been plenty of debate as to whether meat farming has been truly detrimental to the ecology of the planet. Furthermore, while proponents of vegan based/meat alternative diets claim that a meat based diet can be harmful, there is no conclusive evidence of such claims. Despite both these facts, Millennials and Gen Z consumers have been more conscious about their diets and its impact on the environment.
A recent survey conducted across 2,000 families in Britain found that 51% of the respondents considered switching to a meat-free diet to help the planet. A survey conducted by Bloomberg estimates that the global plant based market is estimated to grow to approximately $162 billion by 2030. Companies like Beyond Meat and Impossible Foods have undertaken ambitious plans to replace meat through plant based alternatives.
But with more competition than ever before, especially from Kellogg, Kroger and Nestle, it is unclear who will come out a winner in the market. Unlike those companies, Tattooed Chef is aiming for a much less ambitious (but more realistic) plan of offering frozen vegetarian and vegan based options for customers shopping in Supermarkets.
The company’s offerings include a wide range of cuisine that range from ready-to-cook bowls, zucchini spirals, rice cauliflower to plant-based pizzas. TTCF distributes its products to customers both through a Direct-to-Consumer model as well as through leading retailers like Walmart, Costco, Kroger, Target and Whole Foods. Since going public last October through a merger with Forum Merger II Corporation, shares have been on a roller coaster ride, bouncing between $16 and $25.
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Dominating Retail Shelf Space
TTCF shares have seen a decline of 25% since the start of the year primarily due to revenues missing consensus estimates. But the key takeaway from earnings is that the company is rapidly expanding its reach across the US, both through its range of product offerings and total store presence.
Management expects the company’s footprint to expand to over 12,000 stores by the third quarter, which is far ahead of the 10,000 store rollout target at the start of the year and nearly 3x store coverage from 2020 (4,272 stores in FY20). In 2021 alone, the company has signed agreements with Kroger, Whole Foods, Bristol, Lowes, Bristol Farms and others to gain a national presence. The long-term diets of US consumers have been trending towards frozen foods and should prove to be a steady tailwind to maintain revenue growth.
The frozen food industry is crowded, with plenty of competitors looking to battle for viable shelf space in supermarkets (and online stores), so TTCF aims to keep them at bay though product innovation and expansion into new verticals. The company has nearly doubled its products compared to 2020 (73 vs. 38) with exotic products like Tempura Green Beans & Rice Cauliflower Pad Thai and staples like Almond Butter Banana Smoothie Bowl & a Plant Based Pepperoni Pizza.
While TTCF primarily offers products in categories including Frozen Breakfast ($4.2b), Frozen Entrees & Pizza ($23.09b) and Frozen Fruits and Vegetables ($7.5b), it aims to expand into adjacent markets like Frozen Appetisers & Snacks and Salty Snacks.
Back in May, the company acquired Foods of New Mexico for $37 million in cash, which it hopes to build out into a $100-$200 million business. Management estimates that Frozen Mexican food is a $1 billion category and will begin introducing offerings including alternative tortillas and burrito enchiladas by next year.
In October, the company acquired Belmont Confectionaries in an $18 million deal, which is expected to close by Q4. Belmont specializes in the development and manufacturing of snack and nutritional bars ($10 billion opportunities). Belmont’s 47,000 sq ft plant is equipped to manufacture different types of bars and is now poised to lead the sector after the acquisition. Over the next 3 years, TTCF estimates that the Belmont business will generate revenues of over $100 million at full capacity production. The acquisitions of Foods of New Mexico and Belmont Confectioneries will undoubtedly help TTCF reach new customers and drive growth through the synergies of the acquisitions.
Q2: Red Flag or Anomaly
The street has primarily been disappointed with Q2, not only because revenues missed consensus estimates, but also because it came in lower sequentially ($52.7m in Q1 vs. $50.7m in Q2). Yet still, compared to revenues in FY20, Q2 numbers represented an impressive 45.9% YoY growth ($50.7m vs. $34.8m).
Furthermore, gross margins came in lower than expected (13.4% in 1H 2021 vs. 19.1% 1H 2020), primarily due to increased raw materials, packaging, freight, and container costs due to inflationary pressure. Inflation is expected to persist for the next few quarters, but management expects improved unit economics and new equipment to significantly improve gross margins compared to Q2.
For the full year, management now expects revenues to come in between $235-$242 million, which is a YoY improvement of 58-63%. The rest of management’s guidelines aren’t very promising, with full-year gross margins expected to come in between 16%-22% and Adjusted EBITDA expected to come at around -15m (vs. 12m in FY20). The company’s margins will likely deteriorate further, especially as TTCF increases its employee count, invests in upgrading its equipment, and pays a premium for freight and container costs (at least in the short run).
TTCF is currently trading close to $18, implying a market cap of $1.5 billion. At its current valuation, the stock is trading close to 6.25x forward sales, which is a reasonable multiple, considering the company’s growth and expected future tailwinds. In comparison, Beyond Meat is trading at forwarding sales of 12.7x, while having a lower growth rate compared to TTCF, so the valuation premium is unjustified (this may warrant a correction in BYND rather than TTCF seeing a rise, but on a comparable basis, TTCF seems like a more attractive stock).
Unlike most companies in the sustainable food space, Tattooed Chef isn’t trying to revolutionize the industry, but is rather capturing a niche segment of customers. A combination of expanding store footprint in conjunction with the growing product offering both organically and through strategic acquisitions is turning TTCF into an exciting opportunity. While there are concerns about persistent inflation and competition from traditional players in the space, TTCF’s business model is durable to overcome these concerns.