BRCC - BRC: Increased Focus On Profitability

2023-11-22 00:19:04 ET

Summary

• BRC Inc. has corrected 21% since the last analysis, but now I am upgrading it to hold.
• BRCC reported strong Q3 results with significant revenue growth and expanding profit margins.
• The company's transition to wholesale sales channels has helped reduce costs and improve profitability in the short term.

Investment Thesis

BRC Inc. ( BRCC ) is an American coffee company that sells coffee and coffee-related products and accessories, headquartered in Salt Lake City, Utah. Since my last analysis, the company has corrected 21%. In this report, I will analyze its third quarter results and its future growth prospects. BRCC is working towards becoming profitable, and it is relying on the wholesale channel to achieve this. This will help the company to cut costs in the short term, but it might affect its future growth. I am upgrading my rating to a hold for BRCC.

Company Overview

BRCC is a veteran-operated coffee company established in 2014 by former US Special Forces members. It offers a range of coffee products, including whole bean, ground, and single-serve coffee options. In addition to its core coffee products, BRCC also provides a selection of gear and merchandise. The company sells its products through wholesale, direct-to-consumer ((DTC)) and company-owned stores. Wholesale accounts for the majority of the revenues, followed by DTC and company-owned stores.

Q3 FY23 Results

BRCC posted strong quarterly results with significant revenue growth and expanding gross and operating profit margins. The wholesale segment proved to be the outperformer, contributing 61% of the total revenue. The company decided to transition towards wholesale sales channels as it was incurring significant customer acquisition costs in the DTC segment. In the coming quarters, the company plans on increasing its exposure to wholesale as it is putting emphasis on turning profitable and cutting down its costs. I believe this move will help in improving profitability in the short term. However, this might compromise its long-term revenue and profit growth because the DTC segment provides the highest profit margins once the brand is established, and it can retain customers. With products like coffee, the repeat rate and frequency is quite high, and its sale from the DTC channel provides the best margins.

BRCC reported total revenue of $100.5 million, up a significant 33% compared to $75.5 million in the corresponding quarter the last year. As per my analysis, the expansion of the wholesale segment across the United States resulted in this increase. The company increased its presence in retail stores by 21.5% and the volume of its products at these stores by 42%. The company has partnered with 14 new food, drug, and mass ((FDM)) retailers including Walmart and Albertsons. The revenue from the wholesale segment stood at $61.5 million, a massive rise of 91% compared to $32.2 million in the same quarter last year. The DTC segment, on the other hand, witnessed a decline of 14% to $32.8 million, compared to $38.1 million in the corresponding quarter last year. The cut in advertisement spending and the shift of focus from the DTC to the wholesale segment resulted in this decline. Going ahead, the share of the wholesale segment in the revenues is expected to witness a further increase. BRCC managed to bring down its operating loss from $15.6 million in Q3 FY22 to $6.9 million in Q3 FY23. It has brought down its headcount in order to bring down the operating expenses, which is the main reason behind this fall in operating loss. BRCC reported a net loss per share of $0.05, compared to the net loss of $0.08 in the same quarter last year.

Now, let us have a look at the company's balance sheet. As of 30 September 2023, it reported cash and cash equivalent of $6.6 million against long-term debt of $70 million. The company saw a significant rise in long-term debt from $47 million to $70 million. The increasing obligation is resulting in higher interest payments for the company, limiting its profit margins. The interest expenses in Q3 increased to $3.5 million from $0.47 million. I think the management should address this concern as the interest rates are not expected to go down anytime soon, especially after the recent commentary by the Federal Reserve.

Overall, the company reported strong Q3 results, but the future outlook remains muted. BRCC provided FY23 revenue guidance in the range of $400-$440 million. The management expected to end the year in the lower range of this guidance. The adjusted EBITDA is expected in the range of $5-$20 million. However, the adjusted EBITDA is a non-GAAP accounting measure, so as per GAAP accounting, the company is expected to end FY23 with net loss. I believe the company is on the path to profitability, but there are still many issues that the company needs to address with respect to transitioning into the wholesale segment. Considering these factors, I would recommend investors not to initiate a fresh buying position in the company. Existing investors can hold the stock, but additional buying is not advisable.

Valuation

BRCC is currently trading at a share price of $4, a YTD decline of 37%. It has a market cap of $864 million. The company has improved its twelve-month trailing price/sales ratio to 0.64x, compared to 1.2x the last time I analyzed it. I think the company is fairly valued at this multiple. However, considering the future guidance, there isn't much room for improvement. Also, profitability remains a concern for the company, and there are better investment opportunities in the market.

Conclusion

BRCC experienced expanding margins and solid revenue growth. Its transition from DTC to wholesale has helped the company reduce costs and is helping it turn profitable. But the long-term effect of this transition might not be as expected and in fact, could hamper the company's growth. Considering all the growth and risk factors, I assign a hold rating for BRCC.

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