In a downward spiral
SG reported 4Q22 revenue of $118.6M vs. FS's $124.7M and EPS ($0.44); SSS +4% vs. FS 5.8% with guidance for SSS of +2-6% vs. FactSet 8.8%, with aggressive guidance for restaurant-level profit margin 15-17% they are unlikely going to hit the new (A)EBITDA guidance and the company should be rethinking the guidance for 30-35 Net New Restaurant Openings.
SG should never have come public, and one question on the earnings call speaks to that point: "last fall, you had talked about potentially renegotiating some of your New York City leases and trying to kind of rebased where you might have been as a percent of sales pre-COVID. Could you maybe give an update on kind of how these conversations are going, potential timing of that actually happening, just any updates there?"
"Thank you for the question, Karen. All I can say about that is, we are having discussions right now with several of our deep urban landlords, and those discussions are ongoing and probably, at this point, can't comment beyond that."
To be clear, the "lease issue" was a concern at the time of the IPO, and it was not because of the pandemic. The pandemic may have exasperated the problem, but the subject of unprofitable leases in deep urban markets (not just NYC) was a concern from the beginning. SG profitability issues are structural; when you have a bunch of unprofitable stores due to poorly negotiated leases, trying to become profitable is a problem!
BYND's battle for survival
Like SG, BYND'S profitability issues are structural, and for BYND, maybe even terminal.
The BYND management team has not delivered on any of the guidance they have promised since becoming a public company. Margins are in a free fall, while consumers reject its core product, giving the company few levers to pull to achieve profitability and restore growth. It has a decent working capital position that could extend its life; why should we believe CEO Ethan Brown when he says, "the company made solid progress in the transition to a sustainable growth model that emphasizes the achievement of cash flow positive operations within the second half of 2023."
It was not even a year ago, in May 2022, the company was touting the success of the three SKUs of Beyond Meat Jerky with the PLANeT Partnership, the JV with PEP. They said on the 1Q22 earnings call, "Sales of Beyond Meat Jerky since launch have been a resounding success, exceeding our initial expectations. Three, adjusted for Jerky, we made continued progress on our cost-down program with regard to material cost per unit. And despite short-term fluctuations, we do not see any fundamental change in our long-term margin targets of 30%-plus. Our cost-down program is a fundamental driver of this confidence. Now 9 months later, "BYND will restructure some of its meat jerky operations."
For BYND, the top goals of driving margin recovery and operating expense reduction while bringing inventory levels down through more aggressive, efficient management, its all part of the battle for survival, not long-term growth. Management needs to let go of the past and focus on reality. It does not help shareholders to fantasize about the future - "it remains intently focused on positioning Beyond Meat to capture the vast opportunity to be a major protein provider in the $1.4T meat industry and play a leadership role in transitioning global consumers to plant-based meats."
A GAME CHANGER?
Howard Schultz visited Sicily last summer and tried mixing olive oil with his morning coffee. Now he has set up the company’s corporate menu development team turning that experience into its biggest beverage introduction in years.
He used words such as “revolutionary” and “transformational” when describing the experience and the new Oleato; he also used the word “alchemy” on the recent earnings call. Adding a blender to the SBUX business 15-20 years ago was a game changer for the entire beverage category, making cold coffee popular. So some will sit up and notice if he says adding a shot of EVOO into our morning coffee is a big deal. At the same time, the company has had a number of spectacular failures:
- In November 2011, it bought Evolution Fresh for $30 million. At the time of the acquisition, the company said, "Starbucks will reinvent the $1.6 billion super-premium juice segment, its significant next step in entering the larger $50 billion Health and Wellness sector. It sold the business in August 2022 to Bolthouse Farms.
- It acquired La Boulange Bakeries in 2012 with the promise to transform the company's food, and now it might be even worse.
- Also, in 2012, it acquired Teavana, promising to “transform” the tea industry, and failed. It ended up selling Tazo Tea to Unilever.
I agreed with Johnathon Maze when he said, "Starbucks is taking considerable pains to make us believe this product is a game changer." Overnight, Starbucks has gone from Schultz’s Italian vacation to a major market introduction without a single test. Who is the target market, and how much will it cost? While adding fats to coffee is a practice that has been increasing in popularity, thanks to paleo and keto diets, it seems like a fad and not the next Frappicino. Some say you should put olive oil in coffee because the fats in the oil have beneficial health effects. These healthy fats slow the absorption of caffeine into your system, which prolongs its effects and makes it easier for your body to take in. Bulletproof coffee adds Ghee to coffee with MCT Oil to reduce your appetite while doing an intermittent fast.
The name “Oleato” is also an odd choice; its close association with Olestra can't be overlooked. Also known by its brand name Olean, Olestra is a fat substitute that adds no calories to products. It has been used to prepare otherwise high-fat foods (potato chips), lowering or eliminating their fat content. Olestra has been linked to gastrointestinal disease; as reported by the Center For Science In The Public Interest, Olestra is banned in Canada and European countries. The FDA still allows Olestra as a food additive, so you can find it in some diet versions of chips and fries because it's a calorie-free and fat-free chemical.
How does adding a new drink/ingredients help them accomplish the goal of simplifying the drink-making process? Why take all those steps only to add yet another beverage line in 2024 in the middle of adding new technology to the store base?
