Long Bias List Addition (RGF)
Real Good Foods reported Q4 revenue and EBITDA below consensus expectations. Management attributed the revenue shortfall to pulling back on promotional expenses on a non-core product that would have had dilutive margins. Revenue grew 39% to $36M, short of consensus expectations of $49M.
The company’s Bolingbrook facility has reached its final start-up phase. Gross margins improved to 13.7% in Q4, up from 5.0% last year. The company achieved an adjusted gross margin of 27.7% despite manufacturing utilization being below 50%.
Despite the shortfall in Q4 management reiterated their expectations for revenues to reach at least $200M in 2023. The company has secured 50,000 new distribution points for 2023, representing 38% distribution growth and $60M in annualized POS. Management believes it can achieve the revenue goals for 2023 with four product lines in distribution with the other four product lines in distribution representing potential upside. Due to a change in timing revenue growth will be more 2H weighted. Gross margins are expected to expand to at least 24%. The commodity cost outlook points to a 600-1,000 bps tailwind in 2023. Adjusted EBITDA is expected to be in the mid to high single-digit millions in 2023.
We view the long-term target potential of $500M in sales with adjusted EBITDA margins of 15% not reflected in the current share price. The execution risk to achieving the long-term target is backstopped by the likelihood of being acquired if the company can partly achieve its plan. We are vetting Real Good Foods in our Idea Hunt tomorrow.
CA drought (WMT)
California Governor Gavin Newsom ended some of the state’s water restrictions. Local agencies that supply water to 27 million people and farmers would receive a lot more water from the state than originally planned. The water districts will get at least 75% of the water requested from the state compared to 5% last year. California will no longer ask residents to voluntarily reduce water consumption by 15%. As of January, the cumulative savings was only 6.2%. In some areas, farmers have received permission to flood fields to allow water to seep underground and refill groundwater basis. Roughly 64% of the state is drought free as seen in the chart below.
Since December a dozen storms have hit California bringing 12 of the state’s 17 major reservoirs at or above their historical averages for this time of year. The snowpack is at 223% of its April 1 average. However, the Governor stopped short of declaring an end to the drought. The Colorado River basin, which supplies much of Southern California, remains in drought. Over a third of our vegetables and three-quarters of our fruits and nuts are grown in California. The end of the California drought for produce is deflationary.
Falling Freight rates (UTZ)
According to the ATA Truckload Tonnage Index overall freight volumes have been holding steady. The Logistics Managers Index in February was 54.7, down 2.9 from January’s level. The diffusion index indicates that it is still in expansion territory, but with decelerating growth. Transportation costs falling 5.9 points contracted at the fastest pace in 6.5 years. Warehousing capacity increased 10.2 points in February to 56.6, the first loosening in 2.5 years, indicating an easing of warehouse space.
Dry van spot rates in March have fallen 27% from a year ago and 9% from December. Spot rates have largely returned to 2019 levels. Contract rates in March were 14% below a year ago and 6% below December. Diesel prices are 17% lower than a year ago. Lower freight rates and diesel prices are a tailwind for CPG margins in 2023. Utz Brands and other food companies shipping low-value goods like potato chips have more exposure to freight costs.
