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Investment Thesis
BRC Inc. (NYSE:BRCC) is an American coffee company headquartered in Salt Lake City. Utah. BRCC is involved in the purchase, roasting, and sale of coffee and coffee products through multiple channels throughout the United States. My thesis is primarily based on the company’s performance in the fourth quarter of FY22 and its future growth prospects. I believe their transition from a DTC brand to a wholesale player is causing costs to increase significantly, eventually resulting in deteriorating profits. I expect the costs to remain higher throughout FY23, which is a real cause of concern and my main reason behind assigning a sell rating for BRCC.
Company Overview
BRCC sells coffee and other coffee-related products through multiple sales channels like e-commerce, convenience stores, drug stores, franchised, and self-owned stores. The company operates under the brand name Black Rifle Coffee Company. The company is also involved in the sale of coffee brewing equipment and lifestyle accessories. The company is gradually scaling into becoming a brand catering to the masses, and as a step in that direction, they have shifted their focus towards the whole sales channel from direct to consumer (DTC) channel.
Q4 FY2022 Results
BRCC reported weak fourth-quarter results with declining gross and net margins. The company did witness a strong revenue growth y-o-y, but the increased expenditure to drive that growth is a reason for concern. The gross margins for the quarter decreased from 34.3% to 31.5% y-o-y owing to the increased marketing and general administrative expenses.
BRCC reported Q4 FY22 revenue of $93.6 million, an increase of 30% compared to $71.8 million in the same quarter last year. As per my analysis, the increased sales from the wholesale channel resulted in this increase. The company has been shifting its focus from being a niche DTC brand to serving on a mass level. This is clearly reflected in the growth experienced by the wholesale business. The wholesale revenue for the quarter was reported at $42.3 million, a solid increase of 140% compared to $17.2 million in the corresponding quarter last year. The DTC revenues for the quarter experienced a decline of 8% from $49.6 million in Q4 FY21 to $45.6 million. The gross profit for the quarter was reported at $29.4 million, an increase of 19% compared to $24.6 million.
Now let us have a look at BRCC’s operating expenses. They reported total operating expenses of $49 million, a massive jump of 70% compared to $28.7 million in the same quarter last year. If we break down the operating expenses, we will realize that the general and administrative expenses witnessed an increase of 112% y-o-y. The major reason behind this increase was higher spending on technology and professional services that the company opted for the smooth functioning of the business. The salary and wages expenses increased by 88% y-o-y, primarily due to the additional workforce employed for the wholesale channel. I believe the higher wages resulting from inflation and an increased workforce really impacted the company’s performance, and I don’t see the expenses going down anytime soon. The company is focused on growth which will require a consistent and even higher expenditure in the coming quarters. The marketing expenditure for the quarter stood at $13.5 million, up 22.5% compared to $11 million in the same quarter last year. The company stated that it had increased its marketing expenditure to create awareness around its brand. I believe the operating expenses increasing 70% compared to the revenue growth of 30% is quite concerning, given that the expenses are not expected to go down any time soon in this highly inflationary market. The net loss for the quarter was reported at $19.4 million, up $15.4 million compared to $4 million in the same quarter the previous year. The increased losses can primarily be attributed to the significant rise in operating expenses.
Now let us have a look at BRCC’s balance sheet. The company reported cash and cash equivalent of $39 million, an increase of $20.5 million compared to $18.5 million in FY21. At the same time, the long-term debt also witnessed an increase of $24.3 million to $47 million, compared to $22.7 million. I think the current level of debt is necessary to boost the revenue growth that the company is targeting in the coming quarters. As of now, the company’s balance sheet looks fine, and I do not find anything alarming.
Overall, the Q4 FY22 results failed to impress, with deteriorating margins coupled with rising expenses. BRCC has provided optimistic guidance for FY23. They estimate the net revenues in the range of $400-$440 million, an increase of 39.5% at the mid-point compared to FY22 revenues of $310 million. The adjusted EBITDA is estimated to be in the range of $5-$20 million, compared to the FY22 adjusted EBITDA of -$31 million. I think the company will have to put in great effort in managing its costs while at the same time ensuring consistent revenue growth. The higher inflationary market will make their job even more difficult in the coming quarters.
Quant Ratings and Valuation
Seeking Alpha
Seeking Alpha has a Quant rating of sell for BRCC. This reflects the fact that the company is consistently underperforming and that there are better investment opportunities in the market. BRCC has an A+ grade for growth, reflecting the revenue growth experienced by it in the past few months. However, they have underperformed on all other parameters, which is reflected by D-, D-, D, and C grades for valuation, profitability, momentum, and revisions. I think the company needs to improve its profitability along with revenue growth for it to become a prospect for investment.
BRCC is currently trading at a share price of $5.76, down 67% in the past one year. They have a market cap of $1.25 billion. Having negative earnings, I believe the price /sales ratio will be the appropriate evaluation method for BRCC. It has a twelve-month trailing price/sales ratio of 1.2x against the industry standard of 1.05x. This clearly reflects that BRCC is overvalued with respect to its sales. I think, even when it comes to earnings, there are better investment opportunities in the market.
Conclusion
BRCC witnessed a decline in the gross profit margins and a significant increase in the net loss for Q4 FY22. The increased operational costs remarkably dented the profits of the company. Though they experienced a 30% revenue growth, the cost to boost those revenues isn’t justified in my view. I believe the costs will only increase in the coming quarters if the company has to maintain its revenue growth. Considering all these factors, I do not see a significant upside for the stock from the current price levels. Hence, I assign a sell rating for BRCC.