Restaurants
We are hosting our Restaurant Themes Call today at 2 PM ET.
Our three investment themes are as follows:
Inflation pressures persist
Inflationary pressures are well known, but the pervasive impact on the restaurant industry can't be ignored. Labor is a critical issue for the industry, and it requires extraordinary moves by companies to attract a quality labor supply. As Hedgeye's Macro Team said last week, "the fastest growth in money printing globally has predictably produced not just the fastest pace of asset price inflation on record, but also the highest rates of global price inflation in decades."
Macro setup favors secular growers.
The current setup favors vigorous secular growers in the restaurant space, and OLO, DASH, and TOST now account for over $100 million in equity value. Unfortunately, the Delta variant caused sales trends in August to cool, and it has continued to impact sales trends into September. However, with case counts rolling over, we could see a sequential improvement as we roll through 4Q21. Unfortunately, that is where the good news ends, with tough comparisons beginning in March 2022. As a result, we are maintaining our cautious stance on casual dining into year-end.
Valuations stretched, fundamentals slowing.
Fast Casual remains the one subsector where valuations look stretched, while Casual Dining is the least expensive subsector. They are two of the three best performing subsectors, with the other being Pizza - the best performing subsector YTD. Over the past three months, Distribution and Casual Dining have seen the sharpest negative revisions in Revenues and Earnings, while Family, Delivery, and Pizza have seen the highest revisions.
Consumer Staples
Vita Coco IPO (COCO)
Vita Coco filed its S1 registration statement on Monday evening. Vita Coca has the largest share of the $2B global coconut water category at 46%. Vita Coco's growth this year represents 89% of the growth in coconut water. Other products include Runa, a plant-based energy drink, Ever Ever, a sustainably packaged water, and PWR LIFT, flavored protein-infused water. Sourcing coconut water is more complex than most mainstream beverages. Vita Coco has a global network of 15 factories across ten countries.
The company had sales growth of 17% to $334M in the year ended June 30th. Sales have been accelerating in the most recent months. In the most recent quarter, sales accelerated to 29% growth. In the last six months, the company has seen growth at or above 19% across the mass, C-store, food, and retail drug channels. The adjusted EBITDA margin in the past year approached 10%.
Vintage Wine Estates FQ4 results (VWE)
Vintage Wine Estates reported revenue growth of 36.8% in FQ4, bucking the declines in the wine category. B2B revenue grew 51.5%, driven by private label and custom wine programs. DTC grew 17.8%, driven by a large e-commerce company. Wholesale grew 30%. Vintage Wine Estates identified a material weakness in its process and controls surrounding inventory. Inventory adjustments resulted in a $9M increase in COGS. Adjusted EBITDA grew 12.8%, and margins were 15.4%.
Management's outlook for 2022 includes three acquisitions instead of the one to two targets set during the IPO. As a result, management expects revenue between $265-275M, representing 23% growth, and EBITDA between $63-65M, representing a margin expansion of 900bps.
The company also announced the acquisition of Vinesse, a DTC platform specializing in wine clubs with over 60,000 members. Vinesse currently outsources nearly all of its operations. Vintage Wine Estates believes it can create synergies by bringing the wine production and distribution in-house. Vintage Wine Estates is paying $14M representing 12x EBITDA but expects the multiple to be less than 5x after synergies in the first year. Vinesse had $20M in revenue.
