Tattooed Chef, Inc. (NASDAQ: TTCF), a plant-based food company, produces and sells a portfolio of frozen foods in the United States.
In June 2022, we published an article on Seeking Alpha, titled: “Why we avoid Tattooed Chef for now.” After reviewing the pros and cons, at this time we rated the stock of Tattooed Chef as a “reserve”.
On the positive side, the main drivers of our rating were:
- Double-digit revenue growth in the first quarter of the year.
- Potential for improved margins through investment in cold storage facilities and improved automation.
On the negative side, we highlighted several risk factors, which were:
- High valuation.
- Macroeconomic headwinds, including low consumer confidence, high commodity prices.
- Current downward trend in margins.
Overall, we believed that despite the headwinds, TTCF could hold, due to the impressive growth numbers.
From June to September, the stock essentially performed in line with the broader market, despite higher volatility. However, due to the sharp decline from mid-September, the TTCF ended this period well below the S&P 500.
Now, we will review our analysis and provide an updated view, taking into account recent news and developments that could impact the company’s financial performance in the future. We will focus on two new pieces of information, which could have particularly significant impacts on stock prices in the future.
Extended distribution agreement with Walmart
In August 2022, it was announced that TTCF’s presence in Walmart (WMT) stores would increase significantly. The brand’s frozen presence is expected to grow from 5 to 13 SKUs, and it will be available in around 2,000 Walmart stores, up from the current count of around 300 stores. We believe this move will help TTCF gain greater brand awareness and provide tailwinds for future sales growth.
Additionally, the company acquired assets from Desert Premium, which currently operate out of a leased facility in New Mexico, significantly increasing cold and ambient storage capabilities. This step is part of the strategy to increase cold storage capacity previously put forward by the company. The new facility is expected to be cash flow neutral for the remainder of 2022.
Although this news had a large positive impact on the stock price, these gains were quickly reversed as market sentiment turned more bearish.
On the other hand, the company’s quarterly financial performance was rather poor.
In August, TTCF released its quarterly results and provided an updated outlook for the rest of the year. The company missed both high and low estimates, causing the stock price to drop significantly after the announcement. The outlook has also been revised down, with gross margin expectations falling to 8-10% from the previous forecast of 10-12% due to inflationary forces. The downward pressure on margins is expected to continue over the next few quarters.
During the conference call, the CEO openly addressed the macroeconomic issues and their expected impacts on the business:
We certainly experienced challenges in the first half of the year, across the board, inflationary pressures impacted our operations, particularly our gross profit, which includes domestic and international freight costs which significantly increased, […]
The worse-than-expected performance also led many analysts to downgrade the stock and lower their price targets.
On a more positive note, we should mention that the company has extended its revolving credit facility to $40M, which we believe could provide more financial flexibility to TTCF in the current volatile market environment.
Key points to remember
Overall, the macroeconomic headwinds we highlighted in the prior quarter continue to negatively impact the company’s financial performance. Under the revised outlook, the company expects these headwinds for the remainder of 2022, potentially through mid-2023.
Expanding the distribution agreement with Walmart could be a good opportunity to increase brand awareness and capture more of the market share. We also expect this action to continue fueling the company’s impressive revenue growth in the near future.
Due to the earnings-driven sell-off, the company has become slightly more attractive from a valuation perspective; however, we still believe the premium it trades at to its peers is not warranted.
For these reasons, we maintain our holding rating on the firm.