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May 13, 2022

Beyond Meat founder Ethan Brown guns for long term despite results-fired share slump

Founder and CEO Brown said he is "managing this business to create the longest-term growth opportunity."

By Simon Harvey

Beyond Meat’s shares have suffered again after the US alternative-meat producer reported its largest quarterly loss since going public three years ago.

The US$80.4m net loss for the opening months of Beyond Meat’s new fiscal year contributed to driving the shares below the May 2019 IPO price of $25 at one point this week.

Gross margins were also whacked as the Beyond Burger maker incurred costs from projects that included the launch of plant-based jerky in collaboration with PepsiCo in March. Margins evaporated to 0.2% in the quarter to 2 April from 30.2% a year earlier.

Investors were also spooked by what one analyst referred to as “cash burn”, as funds used to support operating activities surged to more than $165m from north of $30m in the first quarter of 2021. Inventories also tied up cash, rising to $283.8m from $241.9m, as founder, president and CEO Ethan Brown prepares for the upcoming summer barbeque season in the US.

Brown’s answer to investors was a commitment to long-term value creation and profitability.

“Today, we are clearly in a period in which certain decisions that we believe best position the company to capture our long-term opportunity can generate adverse short-term results,” Brown told analysts on a post-results call. “In each instance, as we take a decision, we align around the path that we believe will build over the long run a profitable business of global scale.”

Revenues rose 1.2% in the quarter to $109.5m, reversing a decline of the same magnitude in the previous three months but well below the 11.4% gain to $108.2m in the corresponding period last year. Adjusted EBITDA was also in the red at $78.9m, also the largest since the IPO, and was last in profit in the second quarter of 2020.

Sales at the retail level rose in the US but were down in the international market, including Europe, where Beyond Meat instigated price promotions to keep competitive with emerging brands, despite the inflationary environment. Foodservice revenues were also in the doldrums, falling in the company’s home market and abroad.

“We navigated significant cost challenges in the first quarter of 2022, the majority of which relate to scaling for strategic product launches and are temporary in nature,” Brown explained. “We saw some important signs of post-pandemic resumption of growth, as foodservice entered Q1 with sluggish results but exited with solid momentum.”

Signs had already emerged plant-based meat sales were slowing in the US before Beyond Meat’s latest results. Analysts had previously alluded to overblown potential growth rates for the category based on assumptions that meat-eaters would flock to alternatives. To some consumers, price premiums have been a barrier, made worse by the cost-of-living crunch.

While Beyond Meat’s US retail sales climbed 6.9%, Brown referred to SPINS data for the 12 weeks to 20 March.

“Our brand saw a decline of 3.3%, excluding jerky, versus a category increase of 2.8%. We believe this result is driven by four main factors: first, broader softness in the natural and specialty channel continues,” he said.

Brown explained the second factor: “We saw a shift in consumer purchase from refrigerated to frozen. Refrigerated plant-based meats, where we are heavily represented, were down 3.6% but frozen plant-based meats were up 7.2%. This change from refrigerated frozen in part reflects increased consumption of plant-based chicken in the frozen section versus plant-based beef in the refrigerated section.”

He added: “We faced increased competition in the category … We increased our promotional spending, resulting in lower net revenue per unit sold. This increase in discounting in part reflects competitive dynamics in the category.”

CFO Phil Hardin explained the roll-out of plant-based jerky, described as “high cost”, will continue to be a headwind in the second quarter before a “substantial improvement in jerky unit economics in Q3”, as operating expenses rose to $97.8m from $57.4m in the first quarter of 2021.

Hardin explained the increase in operating costs was “driven mainly by increases in marketing, non-production headcount expenses, G&A primarily driven by ongoing consulting agreements and increased selling expense driven by higher outbound freight costs”.

He added: “While we are thrilled with its early sales performance and strong customer response, Beyond Meat Jerky manufacturing, still in its infancy, was a significant headwind to our gross profitability this quarter.”

Brown was pressed on the call for insight into the potential hit to gross margins in the second quarter from jerky, given what an analyst said was “a bit of a big surprise to the downside” in this week’s results.

“I think first and foremost, the underlying theme here from my comments will be around we continue to manage the business to open up the longest and best long-term growth outcomes that we can,” Brown responded. “And so when we have opportunities like this, even though they’re going to be somewhat challenging in the near term, we’re going to pursue them, and we did that here because of a clear line of sight to much better margins in jerky as the year progresses.”

Margins are also expected to improve as inventories are wound down through the year, Brown said, a move that will “generate quite a bit of cash”.

Beyond Meat’s founder also defended his price-parity proposition – where he envisages another two years to go – in the context of a question fielded around the inflationary environment and discounts on its plant-based burgers in the US.

Brown countered: “One is to continue to drive the taste profile, which we really do need to do and have some terrific innovation coming later this year. Second is to continue to communicate the value proposition, which is around health to the consumer and then to a lesser extent, the environment. And then the third is price.”

He added: “But what’s happening in the sector overall in grocery is you see all these new entrants coming in, and many of them are using price as a way to try to capture early market share. While the animal-protein industry has been able to substantially increase pricing to essentially offset significant reductions in volume, in our sector, we have not had the opportunity to do that.”

In jerky, while only recently introduced, Brown said Beyond Meat is already at price parity with the average in the US market.

“I know there’s a lot of hand waving and a little bit of wringing of the hands regarding some of our quarterly results. But what we’re doing is managing this business to create the longest-term growth opportunity,” he said.

Beyond Meat’s shares ended the day on Thursday down 4% at $20.58. Only six months ago they were worth north of $80.

Brown was questioned on how he plans to balance his longer-term goals over short-term considerations for shareholders.

“I think that the moves that we’re making today are really the best for the long-term shareholder. It’s not easy stuff, right? For those that understand the long-term value that we’re trying to unlock, this is exactly the right thing to be doing.”

Just Food analysis, December 2021: Is US plant-based meat market facing inflection point or short-term blip?

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