2023-04-12 03:39:05 ET
Summary
- THRN has been growing the top and bottom lines, but faces headwinds that are probably going to slow down its growth trajectory.
- Adding to an existing facility and building a new one is going to put downward pressure on its margins going forward.
- If the economy has a soft landing the company could surprise to the upside, if not, its share price will probably collapse.
Thorne HealthTech, Inc. ( THRN ), a company that provides products and services related to customized and personalized approaches to health and wellness in the U.S. and around the world, has been increasing its revenue over the last year, primarily from the increase in direct-to-customer ((DTC)) sales that were up 45 percent year-over-year, and taking off in the fourth quarter of 2022.
The company is in the midst of adding to an existing facility, and building a new one not too far from the older plant. That is going to put some downward pressure on margins, based upon costs associated with the projects.
While management hasn't seen signs of slowing demand as of the earnings report, my thought there is that the slowdown is going to come in the second half of 2023 and early 2024, and that will likely have an impact on the sales and earnings of the company, based upon additional costs and probable slowing of sales from its customers reprioritizing spending, especially on the DTC side of its business.
In this article we'll look at its latest earnings numbers, the headwinds it faces, and what it must do to meet future expectations.
Some of the numbers
Revenue in the fourth quarter of 2022 was $63.00 million, compared to revenue of $49.3 million in the fourth quarter of 2021, up 27.7 percent year-over-year. Full year 2022 revenue was $228.7 million, compared to revenue of $184.3 million for full year 2021, a gain of 24.1 percent.
Breaking it down, DTC revenue was $25.6 million in the fourth quarter of 2022, compared to B2B sales of $37.00 million in the fourth quarter of 2021. DTC sales for full year 2022 were $100.5 million, compared to DTC sales of $69.6 million for full year 2021. B2B sales for full year 2022 were $128.2 million, compared to B2B sales of $114.7 million for full year 2021.
DTC was particularly strong for THRN in the quarter and year, with the number of active subscriptions up 45 percent year-over-year. So far management says it hasn't seen a decline in demand from concerns over potential macroeconomic weakness in the latter half of 2023, but if things get worse than expected, it would, in my opinion, slow down the growth trajectory of the company until the economy recovers.
Something to take into consideration here is the customer base of THRN is higher-end, so it's possible a weak economy and/or product inflation may not have as much impact as it would if its customers didn't have as much disposable income. Not too long from now I believe DTC is going to be the primary driver of revenue, with B2B slowing down some, although I expect it to continue on with a modest growth trajectory.
The B2B segment reflects THRN's network of health professionals and B2B customers. This segment was hindered some by the disruption in sales to Russia and Ukraine, but the company still managed to modestly grow this segment out, mostly from its network of over 47,000 health professionals, which has been gradually growing as an entry point for consumers looking for various nutritional supplements.
Gross margin in the reporting period dropped to 50.2 percent, which was primarily attributed to the decision to bolster supply before its peers did in order to mitigate supply chain risk. The idea is for the company to be able to gain incremental market share because some of its competitors won't have products to compete.
It remains to be seen whether or not the strategy will produce the desired result of winning long-term market share, but I believe it was a calculated risk that needed to be taken, even if it puts some downward pressure on gross margin in the near term.
Adjusted EBITDA in the fourth quarter of 2022 was $9.00 million, compared to adjusted EBITDA of $5.4 million in the fourth quarter of 2021, an improvement of 65.00 percent.
Net income in the fourth quarter of 2022 was $12.5 million, or $0.24 per diluted share, compared to net income of $3.3 million, or $0.01 per diluted share in the fourth quarter of 2021.
Net income for full year 2022 was $15.7 million, or $0.30 per diluted share, compared to net income of $3.75 million, or $0.14 per diluted share for full year 2021.
At the end of calendar 2022 the company had cash and cash equivalents of $36.00 million and $14.00 million of debt.
Guidance for full year 2023 includes revenue to be in a range of $280.00 million to $290.00 million; gross margin to be in a range of 49 percent to 52 percent; adjusted EBITDA to be in a range of $30.00 million to $32.00 million; and adjusted EPS to be in a range of $0.37 to $0.39.
Quant factors and metrics
Profitability
Based on company expenditures concerning expanding its existing plant and completing a new one, it's going to face some headwinds in regard to profitability metrics in the near term, by which I mean the next year or two.
THRN does get a good grade in regard to gross profit margin ((TTM)), coming in at 50.25 percent, compared to the sector median of 31.46 percent, up by 59.73 percent. That said, it does appear the company is going to lose three to four gross margin points in 2023, which should also erode some of its other margin categories.
EBITDA margin ((TTM)) is 5.17 percent, compared to the sector median of 10.72 percent - lower by 51.76 percent.
Net income margin ((TTM)) is 6.85 percent, compared to the sector median of 3.68 percent, better by 86.34 percent.
Return on equity ((TTM)) was 11.90 percent, compared to the sector median of 10.59 percent - better by 12.34 percent; return on capital ((TTM)) was 2.18 percent, compared to the sector median of 6.33 percent - lower by 65.62 percent; return on assets ((TTM)) was 6.82 percent, compared to the sector median of 4.17 percent - up by 63.49 percent.
Cash from operations ((TTM)) was $5.22 million, compared to the sector median of 354.93 million - lower by 98.53 percent.
Outside of Revisions , Profitability factor grades were the lowest of the Quant metrics for THRN.
Growth metrics
Revenue growth (YoY) was 24.11 percent, compared to the sector median of 10.59 percent - higher by 127.61 percent. Revenue growth ((FWD)) is 25.21 percent, compared to the sector median of 6.19 percent - higher by 307.07 percent.
EBITDA growth (YoY) was -(25.01) percent, compared to the sector median of 3.24 percent. EBITDA growth ((FWD)) is 39.25 percent, compared to the sector median of 5.13 percent - higher by 665.42 percent.
EPS growth (YoY) was 186.76, compared to the sector median of 6.92 percent - higher by 2,600.55 percent. EPS growth ((FWD)) is 43.24 percent, compared to the sector median of 5.80 percent - higher by 645.26 percent.
Even with weak revisions the company remains on a decent growth trajectory, with the major caveat being what level the bottom line will grow with the top line.
Valuation
Quant valuation metrics for THRN look strong as well, with P/E GAAP ((FWD))at 15.69. compared to the sector median of 20.55, lower by 23.64 percent.
PEG GAAP ((TTM)) was 0.08, compared to the sector median of 0.75, lower by 89.13 percent. PEG non-GAAP ((FWD)) is 0.20, compared to the sector median of 2.56, lower by 92.31 percent.
EV/Sales ((FWD)) is 0.90, compared to the sector median of 1.69, lower by 46.38 percent.
Price/Sales ((FWD)) is 0.86, compared to the sector median of 1.11, lower by 22.43 percent.
With a lot of positive Quant metrics, the question is, why isn't the market rewarding what appears to be a solid, long-term growth trajectory for the company? We'll examine that in the next section of the article.
Headwinds
Expenditures on facilities
There are two major headwinds I see for the company over the next year or so, and that is the expenditures on its two facilities, and the macroeconomic environment that I believe is going to get worse before it gets better.
As mentioned earlier, the company is in the middle of expanding its existing facility while finishing up a new facility. The latter is expected to come online in the second half of 2023.
The major expenditures on the facilities will be financing it, equipment purchases, and hiring and training more employees. That will shave off an estimated three to four gross margin points in 2023, according to management. This should also lower its adjusted EBITDA results as well, when taking into consideration company guidance.
Further out, management expects gross margin to recover, reaching the mid-50s range sometime in the middle of the decade. Once it leverages the added production and expected increase in sales, gross margin should sustainably recover; presumably other margin metrics as well.
Besides scaling the business, another factor on the bottom line is that once the facility is fully staffed, there will be less expenditure on workers, which should result in lower overall costs.
This will be a short-term headwind for the company, but if it's able to execute on its strategy (not a guarantee by any means), it should be able to generate significant top line growth while it improves its bottom line.
Management said the growth trajectory of the company basically required a response to demand, and the expenditures are considered a long-term investment in the performance of the company.
Last but not least, the company believes it's vital that it controls the manufacturing process. It's doing that by building its own facilities and doing it in the safer confines of the U.S. The thought is that reshoring is the future of manufacturing in the U.S., and the company wants to get ahead in that process in order to get what it perceives will be a competitive advantage over its competitors.
The company sees it as a moat because it'll be difficult to "disrupt a highly skilled and trained blue collar workforce that knows how to run a large manufacturing operation efficiently when paired with AI and all these other areas."
Having expertise and control of production and complexities associated with formulation will set it apart from its competitors, which the company believes relies primarily on marketing to reach customers.
I agree with management when it asserts the new plant in particular is a huge bet on the future of the company. At the completion of the facilities, management believes it'll have the capacity in place to become a top five manufacturer of supplements in the U.S. market.
Essentially, THRN is betting the farm on the new plant in particular, and if it can execute on its strategy, over time, it should reward investors. On the other hand, if it fails to execute, it could be a disaster.
Macroeconomic headwinds
As for economic headwinds, so far, the company hasn't seen a slowdown in DTC demand and sales, but that doesn't mean it's not going to happen.
The customer base, as mentioned above, is one that is higher-end, and in part insulates the company from a significant drop in sales if the economy slows moderately. If the economy does get much worse than many expect, even its customer base with more disposable income will start to focus on prioritizing their spending. That in turn would cut into sales, which would eventually hit the bottom line if the company had to cut prices to grow the top line.
It is my belief that there's a strong chance of the economy entering into a recession that is going to be worse than expected (I believe we're already in a mild recession). Assuming that's how it plays out, THRN is going to struggle to meet expectations over the next year or two, with much of its potential performance being pushed further out into the future.
Conclusion
With rising costs and an expected weakening of the economy in 2023 and probably early 2024, THRN's share price could take a big hit. It'll have a lot more expenses associated with the opening of its new facility and will have a trained workforce in place that'll it would probably have to keep in place to take advantage of the eventual economic rebound. That means a lot of pressure could come on the top and bottom lines going forward, with the bottom line in particular being especially susceptible to underperformance.
If the company is able to navigate through those waters, it could in fact be positioned for long-term growth that will reward shareholders. It's operating in a segment of the market that will continue to grow, and if it can grow its share over the years, it's going to have a strong growth trajectory in the years ahead.
Nonetheless, it has yet to prove it can successfully operate the facilities at the level it believes it can, and in that case has a lot to prove. If it can differentiate and stay ahead of its competitors by executing on its plan, this is a stock that could be a solid performer for many years.
In the short term, if it does get bogged down by recessionary forces that change consumer and business behaviors, it's share price is going to head a lot lower than it is today, providing a much better entry point than offered at this time.
Last, potential investors need to consider the extremely low amount of volume of the stock, which could result in getting stuck in positions that are difficult to get out of if the stock tanks, or not being able to sell when wanting to exit and take profits.
Until there is more clarity with the economy, I would hold off on taking a position in THRN stock. I would put it on my watch list but would wait for economic confirmation one way or the other, and further out, wait to see how the company is able to operate its new plant, which represents the future of the firm.
For further details see:
Thorne HealthTech: Headwinds Likely To Push Growth Further Out