Slowing growth for profits (OTLY, STKL)
Oatly reported a narrower loss than consensus expectations, -$.07 vs. -$.12, due to better margins, while revenue was less than expected. Total revenue was flat in constant currencies, with volume down 1% and price/mix up 1%. EMEA revenues grew 16.1% in constant currencies, with volume up 6.3% and price/mix up 9.8%. Americas revenues decreased by 3.6% in constant currencies, with volume down 5.6% and price/mix up 2%. In constant currencies, Asia revenues decreased 28%, with volume down 14.8% and price/mix down 13.2%. Market share in the Americas was 24.4% in the last four weeks, up 30bps compared to the last 12 weeks. Total distribution points also gained 18% YOY.
Gross margins expanded 1470bps YOY to 17.4% but contracted 180bps sequentially. Inventory write-offs and co-packer penalties in the Asia business as part of a strategic reset had a 320bps impact on gross margins. The cost per liter improved by 10% since Q1 with the consolidation of co-manufacturers.
Oatly is discontinuing the construction of its new production facilities in the EMEA and Americas segments and will expand capacity at the existing facilities more gradually. The company’s capacity of 900M liters far exceeds the 515M liters sold over the past four quarters.
Revenue growth is now expected to be at the low end of the previous 7-12% forecast. Gross margins in Q4 are expected to be in the mid-20% range from the high-20% range previously expected. Capex is now expected to be less than $75M, down from $110-130M previously projected.
Oatly said it is doubling down on its asset-light manufacturing strategy. A strategy we implored the company to employ before it went public. There is a reason why the competition uses co-manufacturers. Being a maverick in marketing can be a good thing, but it’s another thing in manufacturing.
There are several positive read-throughs for SunOpta. Oatly’s food service business in the U.S. was down 6%, but excluding its largest customer (Starbucks), it was up 10%. Starbucks North American same store transactions grew 2% in Q3 and grew for SunOpta. Considering the size of the Starbucks business at ~$100M, continuing to win more share represents future sales growth – something we highlighted in our Black Book earlier this week.
Spinoff special (SN)
SharkNinja reported Q3 EPS of $.95, above consensus expectations of $.81. Revenues were slightly ahead of expectations, but better margins drove the upside. Revenue grew 12.8% in constant currencies, with strength in cooking and beverage appliances partially offset by declines in cleaning appliances. Cleaning appliances decreased by 9.0% due to softness in vacuums. Cooking and beverage appliance revenue grew by 31%, driven by the U.K. market and a full quarter of sales of outdoor grills. Food preparation revenue grew by 33.5%, driven by ice cream makers, compact blenders, and new portable blenders. Other sales grew by 209%, driven by haircare products.
Gross margins expanded by 950bps, benefiting from supply chain tailwinds, cost optimization, favorable pricing, and promotional mix. The company is on track to return to pre-COVID gross margins of 45% this year. R&D costs grew by 12.5%. Sales and marketing costs increased by 530bps as a percentage of sales. G&A expenses increased as a percentage of sales by 660bps due to separation costs, additional personnel, and share based compensation. Inventory is up 15% YOY. Management said retailers overall are being very conservative for their inventory.
Management raised revenue growth guidance from 10-12% to 12.5-13.5%, with Q4 “is off to a great start.” Adjusted EBITDA was raised from $650-680M to $690-705M. EPS guidance was raised from $2.85-3.02 to $3.06-3.14. The company also announced a special dividend of $1.08.
SharkNinja’s valuation is undemanding despite having strong sales trends, a visible pipeline of new products, margin recovery, no GLP-1 risk, and a more favorable inventory level at retailers. It is also commendable the company has declared a special dividend so quickly after the spinoff.
A new focus (BRCC)
The Black Rifle Coffee Company reported Q3 EBITDA of $6.2M vs. the consensus estimate of $3M. The upside was from better margins, while sales were below expectations. Revenue in the quarter increased 33.2%, driven by wholesale growth of 90.8%, a DTC decline of 13.9%, and outpost growth of 20.3%. The ACV of the RTD product increased 465bps to 41.9%, while door growth was 21.4%. BRC is now on the shelves of 14 FDM partners compared to one last year. RTD growth was 16%. The company’s outpost count grew to 17 in Q3 from 11 in the prior year. The decline in DTC came from less marketing and acquisition spending.
Gross margins expanded by 220bps due to higher sales volumes and a favorable product mix. Marketing spending increased by 11.4% but leveraged by 160bps as a percentage of sales. Wage expense decreased by 12.2% and leveraged by 720bps. G&A costs increased by 19.5% and deleveraged by 220bps.
Management guided to sequential improvement in gross margins and EBITDA in Q4. The 15% sequential decline in outpost revenue has caused management to refine the store model. The RTD inventory has to be right-sized over the next three quarters.
The new CFO's influence can already be seen in the increased focus on expenses and further focus on the wholesale channel while the outpost and DTC business are being pulled back to a level with better returns. With distribution in large chains mostly limited to Walmart and Albertsons, there is considerable growth in expansion with other chains. Black Rifle Coffee Company is an early-stage company that is now focused on higher return growth with less capital and expenses instead of growth at all costs. We expect to see sequentially improving results with the strategic update.
