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Black Rifle Coffee’s Subscription Model Is Timely, but It’s Not a Slam-Dunk Buy


InvestorPlace’s Alex Sirois recently wrote that Black Rifle Coffee Company (NYSE:BRCC) has 285,000 coffee club subscribers. One would think with that kind of customer loyalty, BRCC stock would be a slam dunk investment.

The facade of the New York Stock Exchange is decorated for the listing via a SPAC of Black Rifle Coffee Company (BRCC)

Source: rblfmr / Shutterstock

Maybe. And maybe not. Here’s why.

It’s been 13 days since Black Rifle Coffee closed its merger with SilverBox Engaged Merger Corp. I, a special purpose acquisition company (SPAC). The SPAC raised $300 million in February 2021 so it could pursue a combination with an operating business like BRCC.

When I first wrote about Black Rifle Coffee in November, I failed to mention that it was owned by Authentic Brands LLC, the corporate parent of BRCC. 

It has an eerily similar name to Authentic Brands Group. This retail conglomerate scrapped plans to go public in November. It sold a significant stake in the business to CVC Capital, HPS Investment Partners and some existing shareholders, including Blackrock (NYSE:BLK).

But I digress. 

The Value of BRCC Stock

If Authentic Brands Group CEO Jamie Salter was behind BRCC, I might be more enthusiastic about its $862 million market capitalization. But, alas, he’s not. 

According to its latest presentation, BRCC’s 2020 revenue was $164 million. Its 2021 estimated revenue is $230 million. That’s a price-to-sales (P/S) ratio of 5.26x. By comparison, Starbucks (NASDAQ:SBUX) trades at 3.6x sales. So even if you base BRCC’s P/S ratio on expected 2023 revenue of $430 million, that’s 2x sales.

My colleague points out that Black Rifle is solidly in the black. However, that’s not entirely true. Unless I’m missing something, his figures are the company’s gross profits, not operating or net profits. 

Page 54 of Black Rifle’s presentation shows that between 2019 and 2023, it expects to generate cumulative gross profits of $512.7 million. However, this translates into cumulative operating losses of $12.4 million. 

In the trailing 12 months ended Dec. 31, 2021, Starbucks’ gross and operating profits in the trailing 12 months ended December 31, 2021, were $8.7 billion and $4.9 billion, respectively. 

Do you still think Black Rifle’s valuation is worth more than that of Starbucks? I don’t. 

What About the Subscription Base?

I’m pretty sure that if Starbucks thought the subscription model for coffee was all that and a bag of chips, it would have launched something.

As my colleague stated, BRC had 285,000 direct-to-consumer (DTC) subscribers in 2021. That’s projected to grow to 325,000 or more by 2023. In 2020, DTC income accounted for 84% of its revenue. By 2023, that will have dropped to 46% as it strengthens its wholesale and outposts businesses. That makes sense. 

On page 15 of its presentation, the company estimates the annual U.S. at-home and online coffee markets at $14 billion. So, Black Rifle is attempting to hit both of those markets.

How’s it doing?

On the DTC front, it expects to grow sales from $163 million in 2021 to $199 million in 2023. That’s 22% growth over 24 months. In addition, it expects to increase sales by 158% on the wholesale front, from $55 million in 2021 to $142 million in 2023.

Of the two segments, my guess is the DTC business has higher gross profits due to its direct sales model. But for now, let’s look at the DTC segment. 

Based on $163 million and 285,000 subscribers in 2021, Black Rifle is generating approximately $47.66 per subscriber per month [$163 million divided by 285,000 divided by 12]. It expects to generate $51.03 per subscriber per month in two years. 

That seems pretty good. However, daily, that’s approximately $1.70 per customer. I know I spend more than $1.70 per day at Starbucks. 

And nowhere does BRC lay out its customer acquisition costs and the lifetime value of a customer. I’m sure you can spitball a number, but it sure would be nice to know the precise figures. That dictates how fast it gets to consistent net profits. 

When it reports its first quarterly earnings results as a public company in late March, that’s what I’ll be looking for. 

The Bottom Line on BRCC Stock

The competition in the coffee industry is extreme. Starbucks sold the rights to sell its coffee products worldwide to Nestle (OTCMKTS:NSRGY) in 2018 for more than $7 billion. Even the mighty Starbucks recognized it needed a helping hand. 

If Black Rifle weren’t so focused on the political leanings of its customers, I think it might have a fighting chance. But when it alienates half its potential customers, it also cuts the total addressable market in half from $28 billion down to $14 billion. 

In my opinion, that’s not a wise move. I’ll continue to follow BRCC’s story. But at this point, I can’t recommend its stock. It doesn’t hit the bullseye.    

At the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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. 

Article printed from InvestorPlace Media, https://investorplace.com/2022/02/brcc-stock-model-is-timely-but-its-not-a-slam-dunk-buy/.

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