When few changes are good (BRCC)
Black Rifle Coffee Company reported in-line revenue and EBITDA for its first quarterly results as a public company. BRCC reported 19.9% revenue growth in Q4. DTC revenue grew 2.9% as it lapped 78% growth in the prior-year boosted by COVID-19 at-home spending. Wholesale revenue grew 74% driven by RTD expansion to 42,000 doors. Outpost revenue grew 181% from a modest base. BRCC opened seven new stores and now has 16, with eight being company-owned. Gross margins contracted 570bps with inflationary pressures accounting for 400bps and channel mix accounting for 130bps. Higher promotions offset price increases by 40bps.
Pricing vs. profitability. Management believes achieving profitability is an important milestone in the company’s growth to be a great company, so margins will not be abandoned for the sake of the top line. The company has raised prices in several areas including RTD, bagged coffee, shipping fees when not meeting the free threshold, and brewed coffee. Additional pricing actions are anticipated over the course of the year. To date, the company has not raised prices on subscriptions. DTC is not the growth engine for the company going forward, but it is a valuable connection to its most loyal customers.
Green coffee beans are only a single-digit percentage of COGS. The company is hedged for green coffee beans out one year. Larger buckets of inflationary pressure include parcel shipping, packaging, and labor.
No meaningful changes to the guidance are affirming. Management guided 2022 revenue to $315M, slightly above the $311M target provided at the analyst day. Management expects to open 15-20 new company-owned outposts, slightly above previous expectations although they will be heavily weighted towards Q4. Adj. EBITDA is still expected to remain positive.
The TAM opportunity. The on-premise coffee category market share is more vulnerable to fragmentation than any other time since Starbucks achieved prominence. Coffee’s daily, habitual consumption has seen it grow to $45B in the U.S. There is a scarcity of consumer companies that have visible drivers to generate 30% annual growth. There are few food and beverage companies with multiple channels to drive growth and minimal penetration of the TAM. Black Rifle Coffee Company also top decile store opening growth compared to the broader retail and restaurant sectors. Shareholders should focus on the potential share BRCC can ultimately achieve in the coffee category and the probability it can execute upon its strategies than near-term pricing actions and inflationary pressures.
It is interesting that Starbucks founder Howard Schultz announced his return to the company (on an interim basis) for the second time on the day BRCC reported its first quarterly results. The last time he returned he saw multiple challenges for Starbucks. Does he perceive BRCC as a risk in his second return? After all, Starbucks did not achieve its success by ignoring the competition.
Drought conditions worsen (PPC)
U.S. farmers and ranchers are facing the worst drought since 2012. More than 61% of the country is in a drought, the largest percentage since September 2012 when the all-time record was set at 65%. In the past month, the country went from 55% to 61% adding an area the size of California to drought conditions. After a wet start to the snow season the concern in California is that the snowpack peaked at 61% of normal. The Missouri River basin is predicted to have below-normal flows this spring and summer.
Green Cola (ZVIA, KO)
Two years after launching in the U.S. and ten years after being introduced in Greece, Green Cola is looking to make inroads in new retail accounts. It is currently distributed in 1,300+ stores in 17 states with national distribution through Amazon.com and Walmart.com. Green Cola uses stevia to sweeten the product, caffeine from green coffee beans, and natural flavors to be free of typical diet soda ingredients like phosphoric acid, potassium benzoate, and citric acid. Coca-Cola previously had a stevia flavored product called Coca Life in 2014 that was pulled after three years. Since then, Coca-Cola has focused on Diet Coke and Coke Zero. After pulling Cola Life, Coca-Cola has effectively put all its sugar-free products in the aspartame basket and ceded stevia to Zevia. Green Cola is not making the same mistake of being a middle product, (Coca Life had a blend of stevia and sugar and had 60 calories) but it will be difficult to be material to overall sales without a large marketing presence. Coca-Cola’s marketing is effectively handcuffed to aspartame or it could cause more reputational harm to its much larger brands.
