Forget about the analysts.
The bottom line is that Beyond Meat’s management is stickhandling through a challenging time in the food industry. To deliver as well as they did in the second quarter is indicative of just how focused its management team is on delivering growth.
To me, that commitment is best exemplified by one decision it made during the quarter. A decision that will pay dividends in the weeks and months to come. Here’s why.
Beyond Meat’s Pivot
If you look at the company’s gross margin in the second quarter, you will see that it was 410 basis points lower (29.7%) than a year earlier.
However, if you exclude the $5.9 million it spent in the quarter repacking product initially destined for the food-service segment that ultimately went to the retail sector, the gross margin increased by 110 basis points to 34.9%. Even better were the numbers for the first six months, which saw Beyond Meat generate an adjusted gross margin of 36.7%, 550 basis points higher than in the same period a year earlier.
Heck, even with the $5.9 million expense, its gross margins in the first half of 2020 increased by 270 basis points.
Covid-19 Triggers Change
In its Q2 2020 conference call, Chief Executive Officer (CEO) and founder Ethan Brown pointed out how difficult it was to alter its business to meet the changing environment due to the novel coronavirus.
“Recall that at the beginning of the year, the split between our retail and food-service business was approximately 50-50. And as we report today, the balance was 88% retail, 12% food-service in the second quarter of 2020,” Brown stated.
“Adapting to such a dramatic change in mix over a short period was no small feat. Led by the shift in consumer behavior toward retail, the team repurposed assets and repacked and rerouted inventory to this sector.”
More importantly, it finished the quarter in more than 112,000 retail and food-service outlets around the world, compared to 18,000 at the end of March. Its products are now available in 84 countries, 33 more than a year ago. Finally, in terms of market share, it gained 550 basis points during the quarter.
A Risky Bet for Growth
Buyers are going crazy over their products. Yet the penetration rate for U.S. households is only 4.9%. Meat producers are naturally getting scared as this penetration rate continues to rise.
The company could have tempered its growth to save a little money. On the other hand, why not get the product out there when you’ve got eager buyers.
“We had to make a decision. Did we want to sit and try to weather this, and potentially take a step back in our growth trajectory, or did we want to go very aggressively toward the retail sector even if it curved more expensive doing so?” Brown stated in an interview.
It had a net loss of $10.2 million in the quarter, $764,000 higher than a year earlier. That’s not a high price to pay for keeping your customers engaged and buying. That’s especially true when you consider that on an adjusted basis, it still made money in the first six months of the year ($1.8 million). This is 150% higher than in the same period a year earlier.
The Bottom Line on BYND Stock
In late April, when Beyond Meat’s share price was trading around the century mark, I thought there was a chance it would fall to $75, providing investors with a better entry point. It hasn’t cooperated, up 33% since then.
Long term, I do think it’s a buy. After spending almost $6 million to keep the proverbial gravy train rolling – a brilliant move in my opinion – I’m not sure we’ll see $75 for some time, if at all.
Having fallen in love with its spicy sausages, which I consider better than its burgers, I don’t see a problem buying BYND stock at these prices because it’s proven that it can handle growth during a crisis. Not every business can.
Buy away, but keep some dry powder to buy should it fall below $100, because if it does, it’s a bargain.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.