Where the growth is going (BRCC)
Black Rifle Coffee Company reported an EBITDA loss of $10.4M, below consensus expectations of -$5.6M. Revenue growth of 27% to $66M was 6% below expectations with upside in wholesale offset by DTC and Outposts.
- DTC revenue decreased 7% due to lower e-commerce sales (non-subscription). The number of subscribers grew 4% YOY to 288,000 but declined 2.7% sequentially.
- Outpost revenue grew 98% to $5.4M. The number of outposts grew to 10 in Q2 with one new opening, up 7 YOY.
- Wholesale revenue grew 145% to $24M. RTDs are now in 67,000 doors with 37% penetration of retail doors.
Gross margins contracted 670bps due to higher green coffee and RTD costs as well as a higher wholesale mix. New price increases for the DTC channel went into effect in June and July. Marketing expenses grew 1% and leveraged 350bps to 14% of sales. Salaries and wages deleveraged 160bps due to the growing headcount. G&A expenses increased 158% and deleveraged 11% of sales to 22% due to investments, support, and public company costs.
BRC announced that it was slowing Outpost openings from 15 to 10 this year. Management expected the growth in the wholesale channel more than to offset the revenue contribution of the five outposts. Management raised their guidance for revenue to $320M with an increase in wholesale and a decrease in retail and DTC. Management is no longer targeting positive EBITDA in the 2H, a goal that seemed unrealistic a quarter ago due to the inflationary pressures. Management also said they expect higher revenues in 2023 than the $500M guidance with LSD-MSD% EBITDA margins.
We have expected the wholesale business to be the largest contributor to growth in 2022 and 2023. Management’s shift to put more resources to support that growth makes sense. BRC is a small company in which a shift to support one channel would likely lead to a deceleration in the others due to marketing, personnel, capital allocation, and management’s focus. We are not going to be overly concerned about sales mix at this stage for a young company. Growing the brand has to be the near term focus, and wholesale is the quickest way to reach the largest number of customers.
July PPI (LANC, UTZ)
The headline PPI slowed 0.5% from June and was up 9.8% YOY. July’s growth rate, which was the lowest since October, was mainly (80%) driven by lower gasoline prices. The PPI for food manufacturing reaccelerated to 13.3% in July from 11.6% in June. The two-year average accelerated by 60bps to 12.4%.
The PPI for fats and oils decelerated dramatically in July with a 13.0% increase compared to 29.2% in June. Fats and oils are a component in a variety of food and beverages from chips and baked goods to oat milk and salad dressings. Due to the significant spike, fats and oils have been a meaningful headwind for margins for companies including Utz Brands and Lancaster Colony. The sudden drop in prices if sustained, will contribute to an inflection in margins.
Here’s the inflection (UTZ)
Utz Brands reported Q2 EPS of $.13 vs. consensus of $.11. The upside was driven by revenue and margins. Organic revenues grew 13.6%. Utz Brands continues to outpace the growth in the salty snacks category.
Gross margins expanded 60bps YOY despite a 120bps headwind from the accounting for IO conversions. Management’s adjustments for YOY comparisons and reporting changes would show gross margin expansion of 47bps and selling expense deleverage of 40bps. EBITDA margins expanded 7bps.
Management raised guidance for organic revenue growth from 8-10% from 10-12% and sales growth from 10-13% to 13-15%. Input cost inflation is still expected to be in the +mid-to-high-teens. Adjusted EBITDA growth guidance was raised to 2-5% from “modest growth.” The significance of raising guidance is management’s visibility for price increases recapturing margins from cost increases.
One of the factors in our constructive positioning on salty snacks is the low competitive risk from private label. As management shared private label has a 4.6% share in the category and it lost share over the most recent periods. The challenge for Utz has been the outsized inflation in cost categories that had a relatively larger impact on its margins including fats and oils and transportation. Price increases by their nature take longer to pass through, but now the company’s margins are inflecting. We moved Utz Brands higher on our position monitor earlier in the week.
