Back in March, I placed a “Sell” rating on Beyond Meat (NASDAQ:BYND), saying management greatly misread demand for its product. I reiterated my “Sell” rating in September, noting that its volumes declines were expanding into more of its channel. So far my “Sell” thesis has played out as expected, although Q3 did see a glimpse of hope for the company on the volume side. With the stock down over -60% from my original write-up, let’s catch up on the name after its recent earnings report from earlier this month.
Company Profile
As a quick reminder, BYND makes plant-based food items created to have the taste and texture of meat. The Beyond Burger is its flagship product, but it also makes a variety of other plant-based meat alternatives including Beyond Chicken Tenders, Beyond Chicken Nuggets, Beyond Sausage, Beyond Steak, and other items. It sells its products in the U.S. and internationally through both the grocery retail channel and the foodservice channel, such as quick service restaurants.
International Volumes Rise, Gross Margins Negative
While recent BYND quarters have been marked by declining volumes, BYND actually saw a year over year increase this past quarter, with volumes up 3.5%, as international gains more than offset continued U.S. declines. However, the overall volume gains were more than offset by a -11.6% decline in price per pound.
U.S. retail volumes sank -18.7% to 7.199 million pounds. U.S. Foodservice volumes, meanwhile, plunged -37.7% to 2.104 million pounds. International retail volumes jumped 42.8% to 3.375 million pounds. International Foodservices volumes soared 90.9% to 5.317 million pounds. The company credited the gain to strong sales to a large QSR customer in the European Union.
Revenues declined -8.7% to $75.3 million. The price per pound decrease of -11.6% accelerated from the -8.6% decrease in price per pound it saw last quarter. Revenue topped analyst expectations of $73.0 million.
Revenue in the U.S. retail channel fell -33.9% to $30.5 million, while U.S. Foodservice sales dropped -21.6% to $12.5 million. Internationally, Retail revenue climbed 38.8% to $14.2 million, while Foodservice sales zoomed 78.7% higher to $18.1 million.
The company lost 7,000 distribution points quarter over quarter to 183,000. The International Foodservice channel lost 8,000 points of distribution, while it gained 1,000 distribution outlets in the U.S. foodservice segment. The U.S. and international retail points of distribution remained unchanged. The company said the loss of international distribution points was in China.
Gross margins have been a huge problem, and once again turned negative after the company was able to post a slim 2.2% gross margins in Q2.
Adjusted EBITDA for the quarter was -$57.5 million versus -$73.8 million a year ago. Operating cash flow was $9.1 million.
The company ended the quarter with $1.14 billion in convertible notes and $217.5 million in cash and equivalents. The 0% convertible note is not due until 2027.
Looking ahead, BYND forecast full-year revenue of between $330-340 million, down from a prior outlook of $360-380 million, and a year over year decline of -21% to -19%. It now projects gross margins to be breakeven versus a prior forecast for them to be positive mid to high single digits.
Discussing the company’s results on its Q3 earnings call, CEO Ethan Brown said:
“We are disappointed by our third quarter 2023 results and are taking immediate action to pull significant costs out of our operating base as we enter 2024. Simultaneously, we are heightening and narrowing our focus around specific geographies and channels where we are experiencing growth, including in the EU, where we’re seeing favorable near-term trends, such as certain segments of U.S. foodservice. As we head into 2024, we believe we have a solid portfolio and marketing strategy to address category and brand headwinds in U.S. retail, one built around the fundamental benefits available to the consumer through our carefully designed plant-based meats. Though we believe that our achievement of cash flow positive operations for the third quarter is an encouraging directional signal, we are committed to a far more comprehensive and aggressive rebalancing of operating expense to current revenues as we plan for the future. We understand the current results, category challenges and the intended media coverage can distract from what we believe is a far brighter future. We see this future in colleges and universities here in the U.S. and abroad, including those where youth-driven movements are calling for fully plant-based campuses to fight climate change, drawing analogies to university pledges to divest from fossil fuels. We see this future in countries where per capita animal meat consumption is the lowest ever in recorded history, such as in the U.K. and Germany, and the corresponding progress we are experiencing in McDonald’s McPlant platform in these and other EU economies. We see this future in cities, such as Amsterdam, where officials are taking tangible steps to increase availability of plant-based meats and dairy in support of their target to have 50% of citizens consuming a plant-based diet by 2030.”
Overall, the BYND quarter once again was not good, but unlike some recent quarters there were some bright spots. The company saw nice volume growth internationally in both the retail and foodservice channels. The latter appears to be driven by McDonald’s (MCD) McPlant platform. The platform failed in the U.S and was discontinued due to low sales last year, but so far it appears to be performing better in Europe. This could just be because of newness and a slow rollout, as U.S. fast food chains initially saw a surge in demand for plant-based products that eventually dried up. However, MCD is continuing to introduce the platform to new EU countries, including Switzerland and Slovenia last month, while adding menu items in the Netherlands, such as Veggie nuggets and McPlant Steakhouse burger.
BYND also was able to generate positive operating cash flow, although that was largely due to inventory drawdowns. Meanwhile, the company returned to negative gross margins and its pricing continues to rapidly fall despite an inflationary environment, which shows a lack on pricing power. It also lowered its full-year guidance for revenue and gross margins as well.
While management has expectations for a better 2024, I think the company needs to prove that plant-based meat alternatives aren’t just a fad whose sales have peaked. That has played out in the U.S. and if it plays out in Europe, the company is in pretty big trouble.
Conclusion
BYND has a lot of work to do to try and turn itself around. It must dramatically cut costs and right size its manufacturing capacity. The company was able to generate positive EBITDA in 2019 before the pandemic on nearly $300 million in revenue, but that was before introducing a slew of new products and the inefficiencies that come with them given their modest demand. Demand continues to contract in the U.S. in both the retail and foodservice channel, while at the same time it is lowering prices.
Even if BYND pulled a great turnaround, powered by Europe, and doubled its sales over the next 5 years and brought its gross margins up from 0% to 40% (33.5% is the highest it has achieved), that would still be a gross profit of only around $270 million. Paying over 5x potential future gross profits 5 years out for a company where everything would have to go right over the next several years doesn’t make sense in my view. I view that scenario as unlikely, but even if it did come to fruition, I think the stock should trade under $1 and that the equity is nearly worthless at this point.
Thus, despite the huge declines in the stock, I still feel that BYND is very overvalued and the stock remains a “Sell.”
Risks to the upside would be if the McPlant platform was able to just completely take off in Europe, and the company was able to rightsize its manufacturing footprint and actually get to above scenario I laid out with 40% margins. But getting to those numbers seems very unlikely in my view.
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