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Due to concerns over issues of operational efficiency and profitability, BRC Inc. (NYSE:BRCC) shares remain under pressure, hovering around a record low of $4.66 a piece on the NYSE. A deeper analysis shows that BRC operates in an industry that has strong growth in the addressable market. Furthermore, BRC is working on a path to profitability in 2023. Through this strategy, the company has channelized FDM market, product innovation for RTD market and channel expansion by introducing cost control measures. Based on my analysis, BRC is showing improvement in business performance based on Q2-2023 earnings report. However, investors should wait for Q3-2023 earnings to confirm the positive trend in 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 (FDM) in Food, Drug and Mass
In Q2-2023, wholesale channel revenue grew 109% Y/Y to $50 million due to new customer additions, growth in RTD products and FDM market penetration. The company has increased investments to acquire new customers and expand into the FDM market, which will further grow the wholesale channel.
The total addressable market for the wholesale coffee category (that is, within retail) was $11 billion in 2022. Furthermore, 66% of coffee purchased for personal household consumption is purchased at retail, mostly FDM. This trend encouraged BRC to enter FDM and is now witnessing gains through strong wholesale growth and expanding product launches (initially launched with 24 SKUs with the ability to expand) and retail coverage Due to this it is expected to continue with the same pace. In Q2-2023, the wholesale doors stood at 8,770 as compared to 3,730 in the previous year. This reflects the strong acceptance of BRC products in the FDM market and the successful implementation of the initiative to enter FDM. In addition, the FDM market offers attractive product margins and the possibility of truckloads of product in larger sizes than small parcel shipping. The company has been able to grow rapidly in a capital efficient manner due to the availability of outsourced co-manufacturing capability.
From the chart above, we can see that soon after its launch in the FDM market, BRC became one of the top 10 coffee brands at Walmart. In addition, management is hoping to be among the top 5 brands in the coffee sector and needs to compete with Starbucks (NASDAQ:SBUX) and McDonald’s (NYSE:MCD). This clearly shows the increase in revenue growth from quality coffee products offered by BRC and entry into the FDM market.
2. Ready to Drink (RTD) Development and New Product Innovation
The total addressable RTD coffee market is estimated at $5.5 billion in 2022 and is expected to grow to $9.3 billion by 2027, a growth of 11.4% CAGR.
From the above chart, we can see that the growth rate of RTD Coffee is on a rapid upward trend. In addition, 68% of RTD coffee consumers in the US market aged 18–34 consume a single serve, compared to 43% of US adults overall.
In such a growing market, sales of BRC’s RTD coffee increased through national distributors and retail accounts. Distribution grew from 0 to 82,000 locations in less than 3 years, showing strong momentum in RTD coffee. BRC launched RTD coffee products with two SKUs and added four more SKUs in 2020. Investors should consider that four of these SKUs are among the top-35 products in the RTD coffee category (based on a dollar to percent average cost price). Going forward, it is important to continue to innovate with new products and flavors to attract new customers. Furthermore, coffee must be made from the highest quality coffee beans in order to survive and thrive in a highly competitive market. BRC is at the top of its game and has developed a unique product pipeline for 2023.
From the above chart, we can conclude that there has been a solid growth in the RTD coffee market and BRC has rapidly expanded its distribution network to 82,000 locations in a span of 3 years. In addition, the company is launching innovative products to attract adults and gain more market share. All these factors will lead to better business performance in the future.
3. Path to profitability in 2023
Investors are concerned about the operating efficiency of BRC due to persistent operating losses and net losses. In 2022, management has taken various initiatives to define the path to profitability in 2023.
Management has divided the profitability strategy into three parts:
channel expansion: BRC initiated the initiative to enter the FDM channel and is a major catalyst for revenue growth and EBITDA margin growth. In addition, RTD coffee is growing rapidly in convenience stores with 82,000 locations, with a target of 100,000 by the end of 2023. The channel expansion strategy has shown results with 109% revenue growth in the wholesale division in the latest quarter. In addition, net loss for Q2-2023 was $14.7 million and adjusted EBITDA was $0.1 million. This compares to a net loss of $45.1 million and adjusted EBITDA of negative $10.5 million in Q2-2022. In short, we can see improvement in revenue growth, operating loss and net loss.
price hike: The elasticity of demand for coffee is low, meaning that consumers show no tendency to consume less coffee after a price increase. The price increase for RTD products will take effect in 2023 and management will continue to manage input costs and competitor’s pricing actions for other channels. The price increase will lead to revenue growth and margin enhancement.
Cost Leverage: Gross profit increased from $22.6 million in Q2-2022 to $32.2 million in Q2-2023, an increase of 42.8% Y/Y due to higher sales volumes. During the same period, gross margin increased 100 bps to 35.0% due to a favorable product mix shift and higher gross margin products for FDM customers. Going forward, inflationary pressures will start to ease, leading to further growth in gross margin. In terms of operating expenses, marketing and other corporate expenses will be handled to create P&L leverage. As per the plan, marketing spend to decline by 600 bps to 7.6% in Q2-2023 as compared to 13.6% in Q2-2022.
In short, BRC is showing positive trends in revenue, gross profit, operating expenses and net income to continue on the path to profitability. In addition, management anticipates low to mid 30% revenue growth, continued improvement in gross margin and adjusted EBITDA profitability.
In short, BRC is seeking to improve business performance in a growing industry that is projected to grow in the addressable market. It is poised to bounce back due to sustainable long-term revenue growth driven by channel expansion, adjusted EBITDA margin growth, better management of cost structure and path to profitability. However, investors will have to closely watch the path to profitability in 2023. Furthermore, the investor should keep a close eye on the management guidance related to revenue and margin for FY2023. In short, BRC is hovering around a record low 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 the confirmation of the trend through the next earnings report.