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"Our operations team has shown flexibility in keeping up the demand for our products even as we've had a significant shift in demand mix from food service to retail customers."
BYND CEO on 1Q20 Earnings Call.
BYND WAS NEVER GOING TO CHANGE HOW CONSUMERS EAT AT RESTAURANTS – Pre-COVID, the demand for plant-based products in the restaurant industry was nascent. The success of McDonald's, Wendy's, Burger King, or any QSR concept was built on serving food that people want, which does mean healthy. Consumers know what they are getting from the QSR industry/brand, and BYND or any other plant-based product is not going to change the eating habits of consumers. Is there a market to tap into? Yes, but it's not a $35 billion opportunity in the USA. Post-COVID, in the restaurant industry, simplicity is the name of the game, and that means removing items on the menu that not core to the brand. The company recently announced that it launched Beyond Breakfast Sausage in chains like Dunkin', Hardee's, Carl's Jr. and Starbucks Canada. The problem here is the decline in the breakfast category, and the future is dim for this daypart.
THE CHAIN RESTAURANT OPPORTUNITY IS SMALL – If plant-based products took a 5% share of the $235 billion in Chain Restaurant systemwide sales in the USA, that would equate to an $11.7 billion market. If only 50% of the chain restaurants sell a plant-based product, it's only a $5.8 billion opportunity. If we assume that BYND gets a 25% market share, the real opportunity for BYND is about $1.4 billion. The company cites a $35 billion opportunity in the USA, but I have a hard time getting there, even including independent restaurants and other retail outlets. At a market value of $5.0 billion today, the stock is reflecting significant growth already.
GROSS MARGINS - On the earnings call management said in 2020, BYND will have the capacity to generate $1 billion in revenues. As the company continues to build excess capacity, and the real opportunity falls short of the company inflated TAM, the target of mid to high-30s gross margins is going to be challenging to achieve. While the company had a 1,200 basis point year-over-year improvement in gross margins in 1Q20, that will be as good as it gets for the foreseeable future. The current near-term gross margins headwinds will come from volume deleveraging and repackaging costs as they repurpose specific existing foodservice inventory into retail SKUs. Gross margin is to be sequentially lower in 2Q20 compared to the strong margin performance in 1Q20 and likely for FY20.
AGGRESSIVE INTERNATIONAL EXPANSION – On their recent earnings call, management stepped up its commentary around international expansion. The CEO said, "looking forward, we've made significant additions to our team, including senior leadership in operations and marketing while investing in aggressive international expansion." If we assume that management has overstated the international TAM as they have in the US, this aggressive expansion will only increase the likelihood of reduced margin structure and make the long-term mid-teens adjusted EBITDA margin structure more difficult to achieve. In April 2020, BYND announced its entry into mainland China with Starbucks. The company also finalized a distribution agreement with a local distributor, Sinodis, to allow for future growth across retail and foodservice. The current price for BYND products in the international markets are out of reach for a majority of consumers in China.
US GROWTH DECELERATING - Not only are US restaurants removing BYND products from their menus, but the company is also seeing a sequential decline in the number of domestic doors the company is selling products into.
A BRAND BUILT ON CELEBRITY ENDORSEMENTS? - One of the most significant issues I have with the bull case is the level of competition already in the space and from better-capitalized companies than BYND. We are led to believe that BYND can compete better against these much larger companies because of the strength of the BYND brand. Importantly, the company cites the brand’s success so far as because, "we built it with some very famous consumers and users that are lending their name and their voice to our brand, whether it's the many professional athletes or the celebrities that work with us" Can you really trust a celebrity or professional athletes to build a brand and long term shareholder value?
A small list of the names the CEO dropped on the recent earnings call: “Kyrie Irving, Kevin Hart, Snoop Dogg, Lindsey Vonn, P.K. Subban, Billie Eilish, Karlie Kloss, Jewel, Ludacris, DeAndre Hopkins, Erin Andrews, Ashanti, Todd Gurley and Kenny Stills, each of whom have joined us in giving Beyond Burgers away to frontline workers and those in need, reinforcing a sense of community during this challenge.”
