BRBR - BellRing Brands: Growth Is Likely To Reaccelerate In FY24

Summary

• There is an ongoing secular trend toward consuming more healthy foods and snacks.
• BellRing Brands has a core product that is well-known and a fast-growing Dymatize brand.
• Growth could reaccelerate in FY24.

Investment thesis

I recommend to invest in BellRing Brands (BRBR). With increasing focus on health and nutrition, as well as the rise of snacking culture, the demand for convenient, nutritious food and drink options has skyrocketed. Premier Protein, BRBR's largest brand, represents 81% of the company's revenue, and is positioned well to benefit from this trend as it is a staple in people's diets and offers high amounts of protein in a low-calorie format. The combination of lapping SKU rationalization, increased production capacity, and a relaunch of flavors and marketing in FY24 point to the possibility of acceleration of growth in the following fiscal year.

Business overview

BBR key brands are Premier Protein and Dymatize. Premier Protein is primarily made up of RTD (ready-to-drink) protein shakes that are designed to deliver high amounts of protein while maintaining a low-calorie count. The Dymatize brand of protein powder and sports nutrition is aimed squarely at those who want to up their athletic game.

Health and snack trends

Increasing concerns about health and nutrition, as well as the prevalence of snacking in modern lifestyles, have contributed to the meteoric rise of the convenient nutrition category. Regular people are increasingly interested in finding nutritious food and drink options to help them maintain a healthy way of life. The vast majority ( 93% ) of American consumers have reported making an effort to improve their diet. In addition, a majority of American families ( 55% ) say that the amount of protein in a food item is a major factor in their purchasing decisions. In any case, the Center for Disease Control and Prevention estimates that roughly one-third of adult Americans are obese. In addition, people are eating more often, with nearly half of them snacking more than three times a day. Indicated by these numbers is a growing demand for on-the-go, protein-rich food and beverage products among a wider range of consumers, not just those with an interest in physical fitness.

Core product fits the demand of consumers today

Premier Protein is right in the sweet spot for today's consumers, who account for 81% of the company's revenue. The product is easy to use, tastes great, and contains a lot of protein (an award-winning brand ). In addition, I think the brand is positioned well because it is a staple in people's diets rather than a niche item, which increases the size of the market it can reach. Consumers, in my opinion, will always be looking for more flavorful and convenient options. Premier stands to benefit from this trend, as consumers are increasingly looking for general nutrition in their protein shakes, rather than focusing on more niche features like muscle building or weight management.

Dymatize is the faster growing brand

Currently accounting for 15% of BRBR's revenue, Dymatize is a sizable contributor to sales and one I anticipate will continue to expand. Post purchased Dymatize in 2014, a company with a primary focus on athletes and those interested in improving their performance through scientifically-based product development. Historically, Dymatize was widely available through the specialty retail channel, but in recent years, the brand's reach has expanded to include the online, club, and mass retail markets as well. Dymatize is now BRBR's fastest growing brand, with sales more than double from $100 million in 2018 to more than $210 million in 2022. I have faith that Dymatize will be able to keep its growth rates in the double digits. A large part of this faith is based on Dymatize's growth in FY22, which was not only greatest in the food, drug, and mass market segment, but the company still saw double-digit expansion across all distribution channels. In 1H23, I anticipate Dymatize to perform as well due to inflationary pressures and the lag in a decline in commodity prices.

BRBR asset-light model

With its asset-light production model, BRBR purchases all raw materials and pays a tolling fee to a co-manufacturer for the finished goods. This model necessitates negligible financial outlay on the part of BRBR, typically permits adaptability around demand fluctuations, and frees up management time to concentrate solely on brand development. That said, the model has the potential drawback of not having sufficient spare capacity during times of high demand. To address that, BRBR has signed agreements for additional RTD capacity in 2022, which will be added in FY23, all of which are expected to be operational by the end of the fiscal year. As a result, I anticipate that capacity constraints in manufacturing will become less of an issue by the second half of 2023.

Production bottlenecks should ease in FY23, but I anticipate raw material price increases to be a drag. Due to a lack of suitable tradable instruments, it is challenging to successfully hedge the costs of all of these materials (i.e., whey-based proteins). Since input costs can be reasonably predicted, BRBR prefers to conduct business via fixed contracts. Given the fixed nature of these agreements, the effects of input price inflation or deflation don't usually become apparent until six to nine months after the underlying market price change.

Possibility of acceleration of growth in FY24

In FY24, I think BRBR has a decent chance of picking up growth speed. This conclusion is founded on a few obvious triggers. First, the Dynamite brand's SKU rationalization and the temporary delisting of the Dymatize club will become a positive effect in FY23 due to the absence in FY22. Two, in FY24 BRBR will have significantly more shake capacity online, coinciding with the relaunch of flavors and marketing to drive sales. These two factors, together, should come as a shock to consensus estimates, which are currently projecting a slowdown in growth for FY24.

Valuation

My model suggests BRBR is worth $33.51, if it trades at 21x forward revenue multiple in FY24.

Model walkthrough:

1. Revenue to follow management full year guidance in FY23, and growth to accelerate in FY24 as all the catalysts I cited above come to fruit. That said, growth should decelerate in FY25 optically as BRBR lap a tough comp in FY24.
2. Looking back in history, BRBR forward PE might seems have if we compare to the average. However, I believe this multiple is justified given my expectation for an acceleration in growth.

Risks

Production constraints

Volume has been negative for four quarters due to production bottlenecks and pricing; in FY23, inflationary pressure may cause consumers to cut back on spending, and a wider selection of products may not be enough to win back lost customers.

Channel concentration

A lot of people buy BRBR from places like Costco and Walmart. Disputes and customer defections from these sources would have a devastating effect on BRBR's reputation, sales, and bottom line.

Conclusion

The popularity of snack foods has led to a surge in the demand for healthy, on-the-go meals and beverages. The largest brand at BRBR, Premier Protein, accounts for 81% of sales and stands to gain from this fad because it is a consumer staple and provides substantial protein in a low-calorie package. Dymatize is BRBR's most successful brand, contributing 15% of revenue and growing at double digit rates in recent years. Acceleration of growth in FY24 is possible due to the combination of overlapping SKU rationalization, increased production capacity, and a relaunch of flavors and marketing.

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