Description

Stock Price:  $6.00

Shares Out: 26MM

Market Cap:  $156MM

Debt: $21MM ($70MM capacity)

Cash: $44MM

Ent Val:  $133NN

EV / 2022 / 2023 Revs:  1.1x / .8x

EV / 2024 EBITDA: 8.9x 

Price Target:  Short-term $12, Long-term $20+

Situation Analysis

·         Real Good Foods (“RGF” or the “Company) represents an off-the-radar and mispriced security that was a victim of an ill-timed and busted IPO in Q4 of last year. 

·         At present, the stock trades at an appreciable discount to its high-growth consumer products peer group and we feel that with proper execution the stock can play out to be at worst a double and at best, a multi-bagger over time.

·         Founded in 2016, RGF is a high growth, health-and-wellness-focused frozen food company focused on redesigning comfort foods to be higher in protein and lower in carbs vs. conventional equivalents.

·         RGF went public on November 4, 2021, at $12 and raised approximately $64MM.  After the IPO, the stock traded down to as low as $5 along with the broader small cap market sell off.  

o   Pro forma for the IPO, insiders and management own ~25% of the Company including senior management stock purchases (~$350K) in the mid to high $5 range following the decline in the share price post-IPO.

·         RGF products cater to keto-focused and diabetic consumers.  RGF products typically have 2x the protein and ¼ the carbs of conventional frozen items.

o   Key products include comfort foods that use chicken, cheese, and vegetables as a substitute for traditional carbohydrate-based ingredients.   

·         Currently, RGF offers 10 core SKUs sold in 15,000 stores nationwide with a robust product pipeline and a compelling white space opportunity to introduce new products to market.   Core items include chicken entrees, entrée bowls, stuffed chicken, enchiladas and breakfast items

·         2021E sales mix:  53% Costco, 17% Walmart, 10% Kroger, 18% other retailers.

·         To date, RGF has achieved rapid success and recently introduced some of its core products to all nine Costco regions across the U.S.

o   Members of RGF management have worked with Costco for over 30 years and have brought multiple $100MM+ products to market via this channel many times over. 

·         In 2021, RGF transitioned to a self-manufacture model which currently represents ~70% of sales. 

·         The current City of Industry facility can produce ~$140MM of output annually. 

·         Starting in Q122, RGF will start to ship from a state-of-the-art facility in Chicago (Bolingbrook) that will be able to produce $275MM of output annually while dramatically reducing production and distribution costs.  

o   In total, RGF will have the ability to generate over $400MM over 4x current sales.

o   Current 2022 revenue guidance excludes contribution from the Chicago facility which could be quite meaningful. 

o   Management intends to discuss the impact of Chicago on its Q421 conference call.    

Key Growth Trends and Valuation Metrics

·         In December, RGF reported better than expected growth (123% y/y) and provided guidance:

o   2021 revenue of $83-85MM, GM between 19.6%-21% and EBITDA loss of 8-9.5MM

o   2022 revenue of $115-125MM, improving GM y/y and EBITDA loss of 8-15MM.

o   LT rev. growth of 30%, GM of at least 30% and EBITDA % approaching the low teens.

·         As of January 11th, U.S SPINS retail scanner performance data which captures ~50% of RGF’s sales show RGF brand sales accelerating to 56% over a four-week period (vs. the overall frozen category growing 6.2%) compared to 40% over a three-month period. 

·         With a strong balance sheet that includes $90MM of liquidity (including $44MM of cash), management feels that they have a strong runway to drive growth and capture improved gross and operating margins.

o   Management anticipates spending $40-45MM over the next two years to achieve scale and profitability, which should come once sales surpass $200MM.   

·         Currently, the stock trades around 1x 2023 sales (growing 40%+ next year) versus high growth consumer trading comparable that trade on average around 3x forward sales that are growing at a median rate of 30%.

What is of Value?

·         Large Addressable Market and Whitespace Opportunity

o   Health and Wellness frozen foods are currently underpenetrated (15% vs. 23% for the category) representing a multi-billion-dollar penetration opportunity.  RGF’s share in this niche segment is rapidly expanding, driven by both increased distribution as well as velocity (how well product sells once it’s on the shelves).

§  Currently, there are a dearth of low carb / high protein options in the frozen food aisle at a reasonable price point. 

o   To date, RGF has achieved widespread success with several low carb / high protein key items (enchiladas and bacon wrapped stuffed chicken breasts). 

o   It is important to note that while RGF currently offers 10 core SKUs there are plans to introduce several new and innovative products that include lower carb versions of frozen comfort food favorites that include Asian entrees (High carb / sugar Orange Chicken is one of Costco’s top selling items) and breaded chicken.   RGF can leverage its existing success to gain incremental shelf space with new innovations.

·         Innovative Marketing Strategy

o   RGF organizes its marketing managers based on consumer need, including those with diabetes, those looking to reduce carbohydrate intake (keto / low carb) and athletes.

o   RGF has developed a social media marketing campaign with over 400,000 followers on Instagram with a high level of engagement – larger than all Conagra brands combined.

o   The Company leverages its relationships with its most devout followers to test and refine new product introductions. 

o   Management has mentioned that RGF’s engagement with its community resonates well with retailers and has led to addition shelf space for its products.

·         Rapid Expansion Within the Club and Grocery Channel

o   Through Q3 of 2021, RGF generated sales in the club channel (mainly Costco) of ~$35MM and is run rating closer to $60MM+ on an annual basis. 

o   Following the announcement of the availability of RGF products in all nine of Costco’s regions in January, we think the sales growth with Costco could be substantially higher. 

o   We also think that mgmt’s 2022 revenue guidance accounting for Costco sales could prove to be conservative as products will have greater availability within the system this year.  In total, more stores are selling product with higher velocity per store.

o   In early Jan, RGF announced it launched one of its top selling products, bacon wrapped stuffed chicken breasts at Sam’s Club.  While likely not as great of an impact as Costco, the growth contribution could be significant

o   U.S. SPINS retail scanner performance data which represents approximately half of RGF sales (excl. Costco) shows RGF brand growth of 56% over the four-week period ending 12/26/21 vs the overall Frozen category that grew 6.2% and the Health and Wellness Frozen Food subcategory that grew 8.5% over the same period. 

§  Core products that include Entrée and Breakfast items grew 143% over the same period while RGF Brand velocity grew 100%.

·         Key Facility Expansion Opportunity Currently Unaccounted for in Guidance

o   Starting in Q121, RGF entered a lease for a 45K sq. foot facility in California (City of Industry) to manufacture its products, reducing its reliance on co-manufacturers.  It currently manufactures ~70% of its products and has the capacity to produce approx. $140MM of revenue output annually.

o   In 2022, one of mgmt’s priorities is to automate its manufacturing process by improving efficiencies and lowering direct material procurement costs. 

o   In 2H21, RGF entered a lease for an 80K FDA-grade manufacturing facility in Bolingbrook, IL (Chicago area) and will start shipping product from this facility in Q122.  

§  By running two shifts in this plant, revenue output could be as much as $275MM annually.

o   Management intends to utilize this plan to not only produce some of its best sellers but also use it for its new platform opportunities that include Asian and chicken entrees.

o   Shipping from Bolingbroook can also cut shipment costs in roughly half (currently 15% of sales) given the density of customers in the Midwest and East Coast.

o   With both facilities, we think RGF can generate more than $400MM of sales compared to its 2021 and 2022 guidance (midpoint) of $85MM and $120MM, respectively.

o   Management intends to provide a detailed overview of Bolingbrook and the impact it will have on capacity, capabilities and margin opportunities on its Q421 call in March.

·         Experienced Management that is Highly Incentivized to Create Shareholder Value

o   Executive Chairman Bryan Freeman comes from Slingshot Consumer, a PE fund focused on emerging food manufacturing companies.  He was also a senior executive at AdvancePierre foods (“APFH”) where he served on the M&A team.  APFH was acquired by Tyson in 2017 for $4BN (16x EBITDA).   

o   CEO Gerry Law has 30 years of experience in the space and was formerly SVP at J&J Snack Foods where he managed 16 manufacturing facilities.

o   CFO Akshay Jagdale was formerly a sell side analyst at KeyBank at JPMorgan where he covered consumer products companies exclusively.

o   Key account managers have had deep relationships with Costco for over 30 years.            

What Needs to go Right?

o   Continued growth and velocity in existing channels.   Achieving $200MM of sales is an important milestone.   This will be driven principally by successful new products and continued shelf space gain opportunities.  The contribution of Bolingbrook will be a key factor in achieving such scale.

o   Crisp operational execution and improving gross margins.  As the business ramps and automates, gross margins are currently in the 20% range.  It is management’s goal to achieve GMs over time of 35%, in line with peers which should translate into at least LDD%+ EBITDA margins.

o   Effective use of capital and balance sheet.  Currently, the market is not a fan of non-cash generating companies however RGF has an incredibly strong balance sheet with ample liquidity ($44 of cash and $50 of debt availability).  Mgmt. anticipates burning $40-45MM to achieve break even which we estimate should happen sometime in 2024.

o   Rerate of multiple.  Compared to peers, RGF is currently trading at the absolute bottom of the range at 1x forward sales with forecasted growth of 40%+ this year.  Continued growth and execution, as well as investor awareness should help rerate the multiple over time to a level closer to its peers (3x+).

Risks / Issues to Consider

·         The big risk here is not executing on the plan:  To date, RGF’s success has been staggering with its swift penetration of products, but the success of new products will be crucial to the story.  In addition, driving profitable growth in the future will be very important.

·         Commodity price risk: With rising commodities managing expenses can be challenging however management has commented to date, they have been able to increase price with relative ease.

·         Competition considerations:  Competition from the large frozen food players will always be a risk however we think with the traction that RGF is achieving with brand awareness and store velocity that once it achieves scale it likely becomes acquired from one of the larger players.

·         The stock is relatively illiquid:  Management and insiders own approx. 25% of the company with 75% voting rights.  This structure may prevent the stock from entering any major indices as well as institutional investors that cannot own such names.

Valuation Considerations

Trading Comparables

·         While there is not one perfect comp for RGF, we think that TTCF could be considered a viable one given its club store mix and its tilt toward the health and wellness frozen food category (plant-based meals).  Note that while growth rates are comparable, TTCF margins are substantially lower, yet the stock trades 3x more expensive than RGF.

·         At current levels ($6), RGF offers a compelling risk reward proposition.  With proper execution, we think the stock can double in the short term and with proper execution can trade into the $20s from here.

Catalyst

Better than anticipated sales growth and margin improvement leading to multiple rerate

Increased Awareness for the Stock

Eventual acquisition of the Company