Tattooed Chef's Place In the Freezer Aisle
While 2020 introduced a number of new habits into peoples' lives (bread making, anyone?) it simply amplified others. The "cook from home" wave, despite something humans have been doing for thousands of years, has been on the steady increase over the past few years.
It's been getting easier and easier for busy people to stay at home and cook. Meals in a box providers like Home Chef and Blue Apron have amped up the fresh product lines, while other companies have leaned into the colder side of the grocery store. Companies like public-market darling Beyond Meat and private-market darling Impossible Foods have both showed that plant-based proteins have an incredibly strong foothold in the health-conscious sector of the market. And, based on the initial stock performance of Beyond Meat, investors are seeking out "the next one." That leads us to today's deep-dive on a frozen food purveyor focused on the plant-as-a-protein sector. This is Tattooed Chef (NASDAQ: TTCF).
2020 Full Year Revenue: $148.49 million (+74.86% YoY)
2020 Full Year Net Income: $67.25 million (+1,385.84% YoY)
Q2 2021 Revenue: $50.72 million (+45.89% YoY)
Q2 2021 Net Income: -$53.20 million (-5,907.42% YoY)
How Did Tattooed Chef Start?
Before we start, some background: This is actually one of my more requested companies that I dig into. The combination of financial message-boards like Twitter and StockTwits, combined with the whole short-squeeze fiasco earlier this year has really shined a light on companies of this size (<$5 billion). These factors, combined with one of the bigger financial education accounts on YouTube essentially going all-in on this company, has piqued a fair amount of interest in the company.
Information on the origins of this company is surprisingly hard to come by. When you dig around, the only trustworthy information surrounding it is the "About" page on their website, which reads more like a sales-pitch for how fertile the ground in Italy is. But if we are rolling with the site, the company started with a literally tattooed chef, Sarah Galletti, who used her film degree to travel to Europe and become a pasta...maker...? Anyway, she decided to ditch the film thing and do the food thing, culminating in owning two manufacturing plans and leasing out fields in both Italy and California. This gives them what they call their "true farm to table product range."
What's Tattooed Chef's Business?
If you haven't guessed already, Tattooed Chef's product is frozen "fresh" foods with a heaping helping of millennial vibes. I'm not kidding. Go to their website for two seconds and you get hit with a pop-up newsletter sign-up form from a blog, an Instagram feed and even a curated Spotify playlist at the bottom of the site. You'll also even find food, if you dig deep enough.
Their product range is impressive. They have a wide assortment of frozen foods that they tout as "offering convenience for busy lifestyles, without sacrificing on quality, nutritional value or freshness," which is a compelling pitch for someone like me who works a 9-5, has a family and spends hours dissecting frozen food websites for readers and investors. Something you won't find on the site? Meat! All of their products are either vegetarian or vegan, despite names that include "buffalo" or things that look a heck of a lot like pepperoni.
Will I Invest In Tattooed Chef?
Now that we've chatted the quirky side of the business, let's chat the business side of the business. Their website, despite coming across like a food blog, actually contains a direct-to-consumer (DTC) component that not even much bigger competitors like Kellogg's Morningstar Farms vegetarian brand can claim. However, online DTC prices are higher because (as noted by the website) "each product is delivered with TLC" which is millennial for "shipping costs are expensive." Though the company doesn't appear to split out DTC revenue vs retail revenue, this is a strong advantage they have in selling and shipping their own product.
Capturing Grocery Stores Like Walmart and Target
Outside of their DTC avenue, they are also located in 4,300 "grocery" locations nationwide. I put "grocery" in quotes because they really aren't grocery-first locations. Outside of more boutique retailers, you can find them in Costco, Target, Walmart and Sam's Club, which is a big win for their distribution being located in such being retail chains. However, think about when you go to Target or Walmart. Are you there specifically for groceries? Probably not. It's probably one of those things where if you walk past the grocery aisle, you might be there for a bottle of wine to pair with that DVD of The Notebook you just purchased.
The bigger get for this company would be the major grocery-first retailers like Publix, Kroger, Safeway, Food Lion, etc. This isn't the kick in the teeth it sounds like. This is actually a positive for the company because it gives them a load of room to expand. The company agrees, with their own projections citing that they'll be in over 10,000 stores by the end of this year. The company also announced in their most recent earnings that they acquired RTE manufacturer Foods of New Mexico this past May, expanding their footprint into the Latin-oriented frozen food market, a potential boon.
Now that we've touched on some qualitative metrics, let's chat numbers. The Motley Fool cites a study that indicates millennials and Gen-Z alike are shifting to more plant-based diets, with 79% of these groups eating a plant-based food 1-2 times per week. This is representative in some of the numbers TTCF is putting up: Q1 of this year showed a 59% increase in revenue YoY and product revenue 105% higher. While marketing costs pushed the total net income into negative territory, it seems to be working. With 48,000 points of product distribution, double what they had at the same point in 2020, they're setting themselves up for striking growth rates moving forward. However, there are some things to be keenly aware of prior to dumping a second-mortgage into the company.
Tattooed Chef's Business Risks
The first issue the company has is general revenue guidance. Digging into their financial statements from the Q2 release, previous guidance indicated product margins of 20%-25%, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) between $2 million and $4 million.
New guidance issued on the call indicated much lower than expected numbers, dropping the margins to a 16% low end and dropping EBITDA to negative $14 million to $17 million, scaring the hell out of investors and cratering the share price 15% on the day. Considering that the company has also stated a $1 billion revenue goal by 2026, this reversal in forward guidance has thrown that majorly into doubt.
Next up, we have their valuation. Despite being only a $1.4 billion company with revenues growing at over 50% year-over-year, the above revenue numbers mean that the company is currently trading at a 14,748 price-to-earnings (PE) ratio. That's outrageous. That's "early stage software company with 3 employees" type multiple, and is expensive even on a forward-looking basis. This is despite the recent decline in the share price, which still doesn't look like an attractive entry point for a new investor.
Tattooed Chef's Major Controversy
Finally, we have management. Despite Sarah the chef being the titular character for the company, the CEO is actually her father, and questions have arisen about certain business practices he allegedly fosters at the top. According to an August 2021 press release, Pomerantz LLP opened an investigation into TTCF for investors. The basis of the investigation was allegedly around securities fraud and "unlawful business practices" among its top brass, and is now a class-action suit open to investors of the company. Several other law firms have jumped into the suit at various points in 2021.
2020 also saw a short report published from Kerrisdale Capital that Tattooed Chef refuted as "false" and "misleading." Despite the company refuting the claims, however, short interest has increased to nearly 14 million shares at the end of August 2021, which is about 30% of float.
The Bottom Line
Theoretically, this company should be right up my alley. It's a health food company with a strong brand, improving marketing and a rosy distribution outlook. It's also only a $1.4 billion company, which really intrigues me. However, the insane multiple and massive reduction in guidance, as well as the dubious refutation of the short report, are just too much for me to overlook in the near term. If you have a 10+ year outlook, then Tattooed Chef might be a compelling investment. At these level, though, I'm...
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