Description

COOK is a seller of wood pellet grills, pellet fuel, and related accessories, with 97% of rev in US & Canada.  Grills are produced by 3P manufacturers in China and Vietnam.  Grills are ~73% of sales, consumables are ~21% (mainly wood pellets) and accessories are ~7%.  COOK’s grills are premium priced, with an ASP range of $600-2,000 & an average ASP of $839, compared to the avg grill sold in the US at ~$204 (source: NPD), the avg gas grill sold at $328 (source: Traqline), and the avg pellet grill sold at $596 (source: COOK).  The US grill market is $3.2B as of March ’21 (source: NPD), implying COOK has ~5% / ~20% unit / dollar share, vs. market-leader WEBR at ~24% / ~32%.

COOK IPO’d on 7/28/21 at $18, and like many consumer IPOs in ’20-’21, shares ripped higher due to exuberance from retail traders, supported by hyper bullish sellside, ultimately hitting a peak of $32 in August.  I think COOK is a short and fits the “high-high” framework, with covid-inflated earnings being capitalized at a massive multiple.  We also think consensus medium-long term growth estimates are highly optimistic, and I model a 30-40% miss on revenue and EBITDA in ~2023.  The short has started to work over the past month (stock at $21), but I see further downside.  At a still-healthy multiple of 15-18x EBITDA, I believe shares could fall to $10-14 (down 25-50%) over the next 2 years.  If I’m wrong, I don’t think COOK should trade at more than 20x EBITDA given the cyclical nature of grills particularly at COOK’s price point.  That potentially limits an upside case to $26 (+25%).  Summary points below: 

·   Covid pulled forward demand for grills.  Demand vacuum in ’22-’23, driving a 20-25% industry decline.  Grill sales grew 40%+ in the LTM vs. historical growth of 2-3% per year (mature market, mainly price).  This was mainly a pull-forward of replacement demand (5-10 avg grill life); expect a demand vacuum, not just difficult comps.

·   COOK’s TAM is smaller than the market believes. Grills at COOK’s price points represent only ~10-15% of unit sales & ~35-45% of dollar sales in the US according to my estimates.  Pellet grills take longer to heat up / cook, and are more akin to a smoker hybrid, limiting the use case.  Cons est for 20-25% rev growth imply more share gains than COOK can achieve.

·   The pellet grill market is becoming more competitive.  I believe COOK’s share of the pellet market has fallen from ~90% to ~70% in the last few years as new entrants have proliferated.  Share losses likely to continue.

·   Margins are falling & cost pressures are mounting.  EBITDA Margins were 25% in ’20 but will be MSD-HSD in the back half of ’21 into ’22 due to a significant increase in raw materials, shipping costs, & AMP expense (due to increasing competition).

Grill industry sales to shrink ~20-25% over ’22 & ’23 as pull forward of demand reverses.  Including share gains, I think COOK grill sales will fall at least 5% over that timeframe, vs. consensus expectations of 30%+ growth. 

·   The grill market in the US is mature; according to the HPBA, household penetration of grills has been flat at ~70% for a decade, and there are some indications that migration out of rural areas has driven declining penetration.  However, annual unit sales grew from ~12M in ’19 to ~16M in ’20 and are on pace for similar levels in ’21, according to NPD.  This represents an incremental ~6M units sold in ’20-’21, or 50% of an entire normal year, when compared to historical trend. 

·   However, according to Traqline, only 19% of units sold in ’20 were described as a “first time purchase,” suggesting the majority of these incremental sales were replacement, aka demand pull-forward. Because grills are a long-lived capital expenditure (warranties are for 5-10 years), not only is the grill industry facing tough comps, it is likely facing a demand vacuum after covid goes away.  In other words, grill sales going forward will likely be below pre-covid levels until replacement demand catches back up. 

·   Supply chain disruption and steel inflation, combined with a very strong consumer, allowed the industry to take some incremental price over the past few years.  This will offset some of vacuum in unit demand, but this only serves to offset cost pressure.  Net, sales in ’22-’23 should be slightly above sales in ’19 (lower units, higher price) but the profit pool is likely to be on par with 2019.  Consensus thinks the profit pool has structurally increased & will grow from current inflated levels.

·   Even if 100% of the industry sales increase was incremental demand above replacement rather than pull forward, this still implies sales in ’22-’23 should be 10-15% lower than ’20 & ’21, as these purchases won’t be repeated for years (the vast majority of the outdoor cooking industry’s sales are capital goods, not consumables). 

·   However, sellside estimates imply industry sales will not only be above pre-covid levels for the next few years, but in-line or above covid-inflated ’20-’21 levels.  When pressed on the industry math, I think it’s clear they’re not really modeling the industry, but they generally believe COOK can gain enough share to hit their numbers, even if the industry shrinks.

·   I think the grill industry is likely to suffer a 25% decline sometime in ’22-’23.  If that happens, COOK would need to nearly double its industry share to hit consensus sales.  Even in a bull case scenario for the industry (a 10-15% decline), share gains required to hit consensus (19% to 30% in 2yrs) would be very difficult.  If the industry doesn’t shrink, I think COOK has a shot at hitting numbers, but only then.

·   In total, I assume COOK’s grill sales will fall ~5-10% over ’22 & ’23 in my base case, vs. implied consensus growth of over 30%.  This consists of a 20-25% market decline, offset by COOK’s US dollar share increasing from ~20% to ~24%, which is in line with their pre-covid share gains according to my math.

·   In addition to grill sales, consumables sales are also inflated, as nesting has driven more at-home cooking.  I estimate pellet lb’s sold per installed grill have gone from ~70 pre covid to ~100 on an LTM basis.  This represents only a ~3% tailwind to sales but a ~15% tailwind to consumables sales that likely reverses.  This may seem small in the grand scheme of things, but note that a big component of the bull case here is COOK’s “recurring” consumables sales.  If these sales underperform, it would pressure the bull case.  Note I assume COOK generates ~$20M of other sales from sauces, rubs, etc. by ’23, vs. only ~$4M in ’20.

COOK’s TAM penetration potential is smaller than consensus believes

·   I spoke to a number of industry participants, and on average they think pellet grills can go from ~20% dollar share in the US now to ~27-33% by ’25, primarily taking share from gas grills (currently at ~50% share).  However, they also believe pellet’s long-term share potential is capped at ~35%.  Consensus thinks pellets will eventually replace gas as the dominant form factor.  Limiting factors are as follows:

·   Pellet grills are very expensive & the high-end grill market is smaller than consensus believes: The avg grill in the US costs ~$205 per NPD, w the avg charcoal grill at ~$100 and the avg gas grill at ~$325.  I estimate that grills that cost $450+ represent only ~15% of unit sales & ~40% of dollar sales.  However, the avg pellet grill costs ~$600 per COOK and the avg COOK grill costs ~$840.  If we’re right that the industry in aggregate will shrink ~25% over the next couple of years then grows LSD-MSD from there, COOK would need to capture nearly 100% of the high-end market to hit consensus numbers (in ’25).  Thus, the only way COOK reaches sellside’s penetration estimates is if the high-end grill market increases dramatically or if COOK introduces a cheap grill and sells a ton of units.  The latter would be an issue for COOK’s “high-end” brand cache.

·   Grill time & functional use: Pellet grills heat up more slowly, using a smoking method to cook, and their max temps are 400-500 vs. gas grills that can hit 600+.  This means (1) pellet grills aren’t good for searing, which is the primary method of cooking for steak, chicken, and fish, (2) pellet grills take 2x as long to heat up to ~400 degrees (15 min vs. 7 min) (3) cooking takes 1.5-2.0x as long (for a steak at medium, 20 min vs. 10 min).  In short, from start to finish, grilling a steak takes 35 min for a pellet grill vs. 15-20 for a gas grill. 

·   Habits die hard:  Pellet grilling is very different than charcoal or gas, more akin to cooking in an oven+smoker than on a grill.  Even COOK indicates significant consumer education is required to capture significant TAM.  Any share gains are thus likely to come more slowly than consensus expects.

·   Int’l will help, but not very much:  Int’l will grow from ~3% of sales today, but the potential there is a fraction of the US biz.  The US + Canada market is ~$3.5-4.0B, representing ~60% of the global market.  Germany, Aus, and France (the next 3 largest markets) combined are only ~$1.0B.  I assume int’l grows from ~3% of total to ~7% by ’24.

The pellet grill market is becoming much more competitive

·   COOK created the pellet market in the 80’s, but penetration remained low until COOK’s patents expired in the mid-00’s, & ~5-10 new competitors entered from ‘06 to ’10.  Today, there are 25-30 pellet grill companies, including industry leader WEBR, which launched the Smokefire in ’19.  As a result, COOK’s share of the pellet market has fallen from ~90% ten years ago to ~70% today.  This roughly tracks with data from Google Trends, which highlights mindshare gains from new competitors.

·   The bulk of these new competitors have much lower price points; ~half the cost with 80% of the function.  Pit Boss in particular has gained share, with prices 30-40% below COOK, and positive consumer reviews.  Pit Boss is now the official sponsor of Nascar and the American Cornhole League (fastest growing sport in the US), and has exclusivity with LOW, the #2 seller of grills in the US (behind HD, where COOK has exclusivity).

Cost pressures mean EBITDA is falling y/y despite industry tailwinds

·   COOK’s EBITDA margin hit 21% last year, but mgmt. guided to a ~13% margin this year in the most recent earnings release (vs. 14% guide at the IPO).  In fact, 2Q21 EBITDA was 39% below 2Q20 despite sales being 39% above 2Q20.  This decline is partially driven by marketing spend, which will rise 60%+ this year, going from 17% of sales in ’20 to 19%+.  The market is simply getting much more competitive.

·   Freight pressures may cause further margin downgrades.  Historically, ocean freight was ~3% of sales (my estimate) and all other shipping costs were ~4%, for a total of ~7% (per mgmt.).  When mgmt. issued their guidance for the year, they assumed a ~200 bps headwind in ’21 from freight (i.e., ~300 bps in Q2-4).  Since IPO, freight costs have gone parabolic, up another 25%. 

·   Based on WEBR’s raws breakdown, I can estimate raw materials + ocean freight cost to build and ship a 125 lb COOK grill (roughly equivalent to the Pro 575).  That number has more than doubled y/y from ~$100 to ~$250, and this doesn’t take into account other costs like land freight, manufacturer margin, etc.  To put this into context, the wholesale price of the pro 575 was ~$560 before a 9% price increase in Sept '21.  This means these costs have increased from ~20% of the wholesale price to ~45%, or 40% after the px increase (still a massive increase).  All of these margin pressures won't hit them (there is a bit of hedging, there's a delay in cost flow through, and they'll take more price next year) but the margin pressure will be more severe than the market expects nonetheless (sellside has margins going back up to 2019 levels in 1H22). Sales trends matter more, but according to sellside, a key concern of the bulls is margin trajectory given margins have been quite poor recently.

Why the opportunity exists

·   Consumer IPO’s in ’20-’21 have exhibited striking similarities.  Run-up post IPO driven by retail exuberance & highly optimistic sellside, followed by severe underperformance as expectations become more realistic. 

·   Covid, stimulus, and high income savings have created a perfect environment for COOK.  However, the vast majority of COOK’s sales are driven by 1x capital good purchases.  Unlike many covid beneficiaries, their wallet share gains are inherently “not sticky.”

·   Data on the industry is difficult to come by & there is little comprehensive industry data (outside of NPD, which is expensive, as many of you know).  My industry growth analysis is based on a lot of number crunching from a variety of industry resources.  An incoming industry decline is the crux of my thesis.

Expectations & Valuation

·   COOK trades at ~21x consensus ’22 EBITDA today.  There is only one pureplay comp (WEBR, also recently IPO’d) but most sellsiders comp it to Yeti, Thule, and Azek, which trade at 20-23x EBITDA.  On average, consensus expects these three comps to grow the top line at similar rates to COOK.  WEBR trades at 15x EBITDA but is expected to grow revs at MSD-HSD (vs COOK at ~20%).

·   I believe COOK will miss consensus sales estimates by 30% in ’23.  In short, I expect flattish revs in ’22 (grills decline 5-10%, offset by revs from the Meater acquisition) as the market shrinks and I expect COOK’s ’23-’25 revenue CAGR to be ~10% rather than consensus ~17-20%.  At 17.5x EBITDA, this drives 30% downside using ’23 estimates, to $14. 

·   However, my base case gives COOK credit for a lot.  In my bear case scenario, which I peg at a 20% probability, COOK could miss sales and EBITDA by 35% & 45%.  At a 15.5x EBITDA multiple, this would drive 50% downside, to $10.

·   Even in a bull case where the market only shrinks 10%, I expect a HSD rev miss in ’23.  At 20x EBITDA, shares could trade at $26-27.  I consider this outcome to be a <30% probability event. 

Catalyst

• I expect COOK to continue to trade lower as the market’s concern on “lapping 2021” grows larger.  There is some limited high frequency data available on the company (credit card data tracks DTC sales and Nielsen / IRI track consumables sales), and I expect those signposts to trend below bullish expectations in the next 6 months.
• I also think rising ocean freight costs & steel prices will cause the market to reset expectations for near-medium term margins.  This is likely to play out in the next 6 months.
• Finally, while a near term revenue beat is possible (3Q), I expect revenue misses to begin in late this year or early next year.  This should drive ’22 revenue expectations lower, and the multiple should follow.