BRCC - BRC: Will This Beaten-Down Stock Bounce Back? 3 Things To Know

2023-09-04 07:41:19 ET

Summary

• BRC Inc. is facing concerns over operational efficiency and profitability, but is working on a path to profitability in 2023.
• The company is expanding its wholesale distribution into the Food, Drug & Mass market, which is expected to drive further growth.
• BRC is experiencing growth in the Ready To Drink coffee market and is launching new products to attract customers and capture market share.

Investment Thesis

Shares of BRC Inc. (BRCC) have remained under pressure, hovering around record low levels of $4.66 a piece on the NYSE on concerns over operational efficiency and profitability issues. The in-depth analysis reveals that BRC is operating in an industry with a robust growth in the addressable market. Furthermore, BRC is working on a path to profitability in 2023. Through this strategy, the company has done channel expansion by introducing the FDM market, product innovation for the RTD market and measures for cost control. Based on my analysis, BRC is showing improvement in business performance based on the Q2-2023 earnings report. However, investors should wait for Q3-2023 earnings to confirm the positive trend for profitability.

BRC Inc. (Black Rifle Coffee Company) is a coffee company based in the United States.

3 Things Investors Should Watch

1. Expansion of Wholesale Distribution into Food, Drug & Mass ((FDM))

In Q2-2023 , wholesale channel revenue increased by 109% Y/Y to $50 million due to added new customers, growth in RTD products and entering the FDM market. The company has increased investment to acquired new customers and expand in the FDM market, which will drive further growth for wholesale channel.

The total addressable market for the wholesale coffee category (occurring within retail) was $11 billion in 2022. Furthermore, 66% of coffee purchased for personal home consumption is done within retail, mostly FDM. This trend encouraged BRC to enter FDM and is now seeing benefits through robust wholesale growth and is expected to continue with the same momentum due to the product launch (initially launched with 24 SKUs with the ability to expand) and expand in retail coverage. In Q2-2023, the wholesale doors were 8,770 compared to 3,730 in the previous year. This shows strong acceptance of BRC products in the FDM market and successful execution of the initiative to enter FDM. In addition, the FDM market offers attractive product margins and the possibility to ship truckloads of product in large sizes compared to small parcel shipping. The company is able to grow rapidly in a capital efficient manner due to the availability of outsourced co-manufacturing capacity.

From the chart above, we can see that shortly after launching in the FDM market, BRC ranked among the top 10 coffee brands in Walmart. Moreover, management is expecting to break into the Top 5 brands in the coffee aisle and need to compete with Starbucks (NASDAQ: SBUX ) and McDonald's (NYSE: MCD ). This clearly signifies the quality coffee products offered by BRC and traction in revenue growth from entry into the FDM market.

2. Ready To Drink (RTD) Growth and New Product Innovation

The total addressable RTD coffee market is $5.5 billion in 2022 and expected to grow to $9.3 billion by 2027, an increase of CAGR of 11.4%.

From the chart above, we can see that the growth rate in RTD coffee is steeply upward. Furthermore, 68% of RTD coffee consumers aged between 18-34 years in the U.S. market consume a single serve compared to 43% of the total U.S. Adults.

In such a growing market, BRC's RTD coffee sales increased through channel from national distributors and retail accounts. The distribution increased from 0 to 82,000 locations in less than 3 years, showing a strong momentum in RTD coffee. BRC launched RTD coffee products in 2020 with two SKUs and added another four SKUs. Investors must consider that four of these SKUs are among the top-35 products in the RTD coffee category (on a dollar to percent average cost value basis). Moving forward, it is important to continue innovating with new products and flavors to attract new customers. Furthermore, coffee should be made from the highest quality coffee beans to sustain and grow in the highly competitive market. BRC is at the top of their game and has developed a unique product pipeline for 2023.

From the above chart, we can conclude that the RTD coffee market has solid growth and BRC has expanded its distribution network exponentially in a span of 3 years to 82,000 locations. Furthermore, the company is launching innovative products to attract adults and capture more market share. All these factors will lead to better business performance in future.

3. Path To Profitability In 2023

Investors are concerned about the operational efficiency of BRC due to continuous operating loss and net loss. In 2022, the management has taken various initiatives to define the path to profitability in 2023.

The management has divided the strategy for profitability into three parts:

Channel Expansion : BRC launched the initiative to enter the FDM channel and is a major catalyst for revenue growth, and EBITDA margin enhancement. Furthermore, RTD coffee is rapidly growing in convenience stores with 82,000 locations, targeting 100,000 by the end of 2023. The channel expansion strategy has shown the result with 109% revenue growth in the wholesale division in the latest quarter. Moreover, net loss for Q2-2023 was $14.7 million and adjusted EBITDA was $0.1 million. This compares to net loss of $45.1 million and adjusted EBITDA of negative $10.5 million in Q2-2022. In summary, we can see improvement in revenue growth, operating loss and net loss.

Price Increase: Coffee has a low elasticity of demand, meaning that consumers have not shown any tendencies to consume less coffee after price increases. The price increases take effect in 2023 for RTD products and the management will continue to manage the input costs and competitor's pricing actions for the other channels. The price increase will result in a revenue increase and margin enhancement.

Cost Leverage: The gross profit increased to $32.2 million in Q2-2023 from $22.6 million in Q2-2022, an increase of 42.8% Y/Y due to higher sales volume. During the same period, gross margin increased by 100 bps to 35.0% due to a favorable product mix shift and higher gross margin products for FDM customers. Moving ahead, inflationary pressures will start to ease, which will drive gross margin enhancement further. In terms of operating expenses, marketing and other corporate expenses will be controlled to create P&L leverage. As planned, marketing expenses decreased by 600 bps to 7.6% in Q2-2023 compared to 13.6% in Q2-2022.

In summary, BRC is showing positive trends in revenue, gross profit, operating expense and net income to follow the path of profitability. Furthermore, management estimated low to mid 30% revenue growth, continued improvement in gross margin and adjusted EBITDA profitability.

Final Thoughts

In summary, BRC is trying to improve business performance in the growing industry with projected growth in the addressable market. It is poised to bounce back due to sustainable long-term revenue growth driven by channel expansion, adjusted EBITDA margin enhancement, better management of cost structure and a path to profitability. However, investors have to watch closely the path to profitability in 2023. In addition, the investor should keep a close eye on management guidance related to revenue and margins for FY-2023. In a nutshell, BRC is hovering around record low levels of $4.66 and investors should wait for a quarter to make any investment decisions. The positive trend is visible from the Q2-2023 earnings report but risk-averse investors should wait for trend confirmation through the next earnings report.

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