Chit Chat Stocks - Goodfood Market Corp | Fundamental Analysis

Episode Date: October 25, 2020

Hosts, Ryan Henderson and Brett Schafer, look into Canadian meal kit delivery business Goodfood Market Corp. Goodfood is set up different than its American counterparts, but will that help them succeed? Ryan will explain what Goodfood does and the history of the company (1:03). And Brett will dive into the valuation for you (3:47). As always enjoy the episode! Watch this episode on YouTube: https://youtu.be/Ye5r0o2WfHw Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett. https://www.chitchatmoney.com --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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Restrictions apply. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation.

Now, please enjoy this episode. Okay, welcome in. This is the Fundamental Analysis Show on Chit Chat Money, and I am here with Ryan Henderson as always. Ryan, how are you feeling today? I'm feeling good. Nintendo's going lower, so happy day, right? I know, this is good.

Yeah. Buy low. It's like gas prices, right? The whole Buffett thing. Yeah, yeah. Always good, always better. But we're talking about Good Food Market Corp. They are an under-the-radar company, actually under a billion dollars in market cap.

So I'm going to let you get into what they do and then the history of the company. Good Food Market Corp. is a Canadian online grocery, home meal, and meal kit company. So they put their mission as – they said their mission is to make the impossible come true. That's like the biggest red flag. It is a red flag, yeah. What does that even mean? Why can't you just say our mission is to deliver food and get profits? yeah well it also think about that that feels like peloton's mission that could be they could

put that for peloton's mission and i'd be like okay that's peloton i guess but it's any any company yeah costco our mission is to make the impossible come true hot dogs for a dollar fifty like it shouldn't be this hard to describe your own business like just tell us what you actually do but anyway so from the customer side you subscribe to good food and you get delivery of fresh food directly to your home so it isn't just people you might be thinking of instacart it's not like that it's not just people bringing you food from the grocery stores good food is they have direct relationships with suppliers so farms stuff like that for the fresh groceries and then they also have meal kits that are prepared at some of their production facilities if i'm not mistaken

and that's all delivered directly to you they also have partnerships with delivery companies but they're building out a last mile delivery service called good courier so that's their own part so they're trying to sort of uh basically build the entire infrastructure and not just be a middleman yeah they're not trying to just arbitrage like the difference between what someone pays at the grocery store because that seems just kind of it's kind of like doordash where you're like this is really good business model this is a little more interesting still don't know if it's going to work but it's kind of cool they're trying to vertically integrate like that a little bit about the history good food was established in 2014 so really recently by

jonathan ferrari and neil cuggy i think i'm getting that right under their first name culiniste the service grew pretty fast and was helped along by ann marie withenshaw a canadian television and radio personality don't know who that is and we're gonna get canadian audience so they might they might know what that is so the it's like six percent of you guys out in canada um you probably know who these people are um so she apparently advocated for the product in its early years uh and then two years after being established they changed their name to good food and went public on the Toronto Stock Exchange in 2017. Question, do you like Coloniste or Good Food Market Corp better?

Good Food Market Corp is better because I think it's really when they're actually going to consumers, it's just good food, and that's definitely better than Coloniste. I don't know. Coloniste's got a ring to it. What type of ring? You know, it's kind of got some pizzazz. Yeah. Anything with East Day at the end? Maybe, maybe.

If it was Colonify, then I would invest. but okay uh the enterprise yeah i'll get into the valuation they have an enterprise value of 468 million dollars so you know not a large company at all um and it's kind of getting closer to the bottom of the small cap their ticker is f o o d and then it's a canadian company like you said so look for the actual uh ticker if you're going to invest in whatever country you're in but it's probably big like united states is going to be food.ca or maybe food.whatever the to for toronto exchange i just look for that uh their stock price on the toronto exchange i believe is about nine dollars and 29 cents but really that's irrelevant and that number some of these numbers if they're

on here they may be listening canadian dollars um it's like a three-fourths of what a u.s dollar is it's just a little different so when you're actually going through the analysis make sure either to convert it or just know that there's going to be that slight difference yeah and if you're on most of the like koi fin or stuff like that it's already converted for you yeah so this is mainly if you're looking at earnings numbers and stuff like that uh so their ev to sales is 2.5 on the last 12 months gross margin 28.8 ev to gross profit of 8.68 so fairly low margin adjusted ev to sales of 11.74 and that's what we do when we take ev divided by sales growth and divided by gross margin to get an overall look of what a growth company is trading at it's really

really really low but it kind of makes sense that it's this low because they had a abnormal bump in sales growth because of the pandemic a lot of people doing grocery delivery and meal kit delivery to try to you know uh socially distance uh so you know that makes sense but typically even if growth slows they'll still be you know relatively fine if growth slows to like 20 30 percent by the way before this they were growing revenues in triple digits oh really yeah it was like 120 percent something like that and so it's declined but they said they're still seeing a bit of an acceleration yeah and i think that has to do with marketing expense spend uh but that's not something we have any in like we can't look at that so they're saying that um on their internal

metrics their marketing spend or whatever their unit stuff uh but as an outside investor you just have to take their word for it they have no dividend 30 million dollars in working capital if we look at the balance sheet 12 million dollars in long-term debt and 23 million dollars in convertible debt insurers. And I think the strike price on that is around $4.50. So as long as the stock price doesn't go down by 50%, that debt should convert into stock. $21 million in leases outstanding. So nothing concerning on the balance sheet. And then their shares outstanding have gone up from 56 million to 57 million in the last year. Again, nothing too crazy. With that, we're just kind of looking for, all right, are they diluting the shares by like 20% a year or something like

that? Right. I'll get into the earnings. As of the third quarter for 2020, they had 272,000 customers growing at about 44% year over year. They had 179.3 million trailing 12-month revenue. That's up 76% year over year. So growing pretty fast. And then in the most recent quarter, they had around 28.8% gross margins. Their adjusted gross margins are more like 40%. percent and then they were adjusted they were profitable in general that but they've pretty much been around break even for a long time but this quarter they were profitable their adjusted ebita margin was seven roughly seven percent ten percent operating cash flow margin positive net income for the quarter but like i think it was like a net margin of less than one percent so

right above profitability they had 61.2 million dollars in cash and cash equivalents so if they're not at any sort of burn rate that's enough liquidity to last them for a while um and it's a very seasonal business so the summer months make up only about less than 18 percent of trailing 12 month revenue so it's uh it's something it's a business that really makes a lot of their money and that is keep in mind that is during covid that that month uh that quarter didn't make up that much so it's yeah they make a lot of their money in the winter months and spring as well yeah this holiday season especially will be um interesting to watch especially you know with covid plus that winter boost they typically get but we're gonna hit the ad break and then we're

gonna come back for the second half of the show okay welcome back first segment is digging trenches which is our zero to three rating on the moat tough for this business because it's kind of young but i i think i'd give them the way they're going about it and maybe like a 0.5 or 1 but they don't have a moat yet if they succeed and build out what they're doing they could have a moat just from an economies of scale um sort of like how walmart had it although that's a big comparison but that's the easiest one maybe more like kroger back in the day i might go for the delivery i might go a little higher i might go like a one and a half because they are really i mean they're you've seen probably the infomercials of like the come get these free meal kits yeah or whatever and

so they're not that kind of business and then they're also not just the go pick it up in the grocery store for you which is that's just vc money getting burned right they've yeah built out a real supply chain and they've become a good business and that is very capital intensive to do and they've had fortunately a great catalyst in the uh pandemic so not a lot of companies are going to be able to get a boost like that and be able to build out the infrastructure that good food has i think food delivery in general is a hard business to do but if you do it right you can be sort of isolated yeah yeah yeah you gotta it takes a unique business model you gotta go out with a different angle you can't just say all right i'm gonna be a food delivery business

well i mean that's very repeatable uh so let's get to future growth opportunities why don't you go first yeah so just continuing to expand their logistics infrastructure right now they're building out two production facilities in the greater toronto area one of which is already operational so they're working on the second one they've been opening and ramping up the vancouver fulfillment center and they've also ramped up their good courier service which uh one third of all customer orders were delivered through their good courier service and apparently that makes it much easier delivery costs come way down uh it makes it much easier on the customer experience because delivery comes a lot faster it said in order for them to be able to do same day

and one day delivery they're going to need to rely on this good courier service a lot yeah that's another example of them trying to vertically integrate not trying to rely on third parties and that might be more expensive up front but hopefully it can increase their margins down the line my future growth opportunity is good food wow and they have an all caps here i'm not sure if that's how they market it but it's just w-o-w all caps um this is their new unlimited same day grocery delivery that's starting in the montreal area so it allows any member to order any combination of meal kits groceries and prepared meals trying you know so i think that's a good idea where they're trying to show that all right we're not just meal kits we're not just grocery

delivery you can combine everything and kind of maybe get a hot meal and then some of your produce some of your uh you know consumer staple stuff and then if you're a member of this you get you know same day delivery and you get free delivery and it costs ten dollars a month kind of like the prime offering i know everyone says this is our prime offering but i think it makes sense here and it kind of i mean do you think that will differentiate themselves at all i guess we'll have to see what the numbers say but yeah it's like so i've never been a fan of amazon fresh is that their amazon delivery service or whatever yeah i think this has the potential to sort of be the amazon of food delivery at least in canada right and it's a very ambitious goal but they're

going at it i believe in the right way and having that last mile logistics service helps um and then yes if you have a lot of loyal customers i see no reason why you shouldn't do a membership like i'm sure people are more than willing to pay ten dollars a month to get the food on same day yeah i think looking at it just internally like not internally but just personally it makes sense because I think the big concern with delivery services is, all right, I've got to pay this fat fee for these groceries to get delivered. It wouldn't be that hard to go pick it up at the store. But, yeah, maybe this can help them create that competitive advantage.

Last segment we have is highlights and lowlights. What do you have? Yeah, so the vertical integration is a big differentiator. That's a highlight for me, I think. This can be a big, big business, and they are getting a bump. And so you have to sort of determine what the staying power of those customers is, because if the pandemic starts to basically go away or there's a vaccine or whatnot and people are going back to the grocery stores, have they gotten to the point now with good food where they're like, I'll just order everything on good food. I don't need to go back to the grocery store. Or is it because they're still afraid to go out?

You kind of got to determine that. But if it is more of an acceleration of the inevitable and it is going to propel them faster into the future and growing much faster as opposed to just a temporary shift, this is going to be a good business and it's selling at a good price. Low lights for me, though, they are very dependent on bad weather. so their marketing order rates and new subscribers are all really low in the summer months and so i believe it's because people in canada just like don't want to go outside in the winter and so they get their stuff delivered which is fine that works in canada but it doesn't bode well for international expansion because i mean if they're saying basically that in the summer months people will just go to the grocery store well the thing is they're not saying that no one's using it so i

think uh the usage rate just might be a little lower if they expand south to the united states or europe uh so it doesn't mean the business is not viable in the summer it just means that they get a bump in the winter so it's not like things are going bad for them yeah but is the business sustainable if it was just the summer numbers essentially you know i mean it's maybe they'd be a lot earlier in their business uh growth maybe they just expand into like scandinavian countries or only cold weather places hey there's there's a lot of people that live in canada and there's a lot of people that live in cold weather places so i don't think this is a problem they're going to run into anytime soon all right what's your highlights and lowlights

okay uh sgna as a percentage of their revenue is went from 34 to 23 last quarter uh so i think there's a lot of strong leverage there obviously they got that organic or sorry inorganic boost from the coronavirus that won't be repeated at least let's hope uh operating cash flow is positive and stock-based compensation is not egregious so i think that shows that they're generating cash without just financing everything by diluting shares um they have 300 exclusive private label products that was a little redundant in their note because exclusive and private label you know yeah you know what i mean that's but uh they're showing they're making strides though with that vertical integration like you mentioned they have the last mile delivery service that now serves

one-third of their customers solely in the montreal area right now but still good and if it helps reduce costs and improve shipping times that you know provides more value to the consumers and then helps good food be more profitable so that's a win-win low light for me is these type of business models have a history at least over the past decade of not working out at all and they have typically terrible unit economics but good foods look better so my concern here is blue apron it's just blue apron like they were just a terrible business instacart doordash seem like bad businesses uh and good food could be a good business but they're going up against a lot of historical evidence that says otherwise okay are you more or less interested in the business

today than you were yesterday i am more interested if it was just instacart or if it was just blue apron and not the combo plus trying to do it in-house having their own fulfillment centers i would be less interested because i'd be like all right the unit economics don't work but i think i'm more interested because one people are discounting these type of businesses simply because all of them not all of them but a lot of them have failed and gone to zero in the past but that means a lot of people aren't looking at them that means the valuation is a lot lower which we're seeing there with the sales ratio so there could be some value here um i've just looked at them i gotta do a lot more research but i'm more interested for sure yeah i i'd agree with

you there i think the prior failures in this industry have led to a largely inefficient market or because people think everyone's just going to repeat what blue apron did or they're just going to end up being a place where vc dollars get burned yeah um yeah but that doesn't look like that's what good food is i mean good food has proven that they can be profitable um obviously they're not like an 80 margin software business but they can definitely reach scale and they can deliver food for a lot of people um it does feel a bit like a young amazon story um but just specifically in the food market yeah so maybe more gosh i'm trying to think of some other and and i i feel like a lot of people say that anytime you deliver any product digitally or you do it like an

e-commerce business everyone says it's going to be amazon but this they are actually building out the infrastructure and the logistics and having the private label brands to be able to do it well does this remind you of let's say revolve group or stitch fix a little bit but with obviously their food um good foods food a bit like stitch fix but except they're not like i don't want that carrot i'll give it back yeah it's a little different but it's similar where they're trying to create that e-commerce model but more niche so they can kind of attack maybe amazon because they're focused on that one product right all right well that's going to do it for this episode thank you guys for listening make sure to follow us as always on twitter and just dm us or just

add us on there for any suggestions for new shows and remember as always we are not financial advisors anything we say on this show is not formal advice or recommendation thank you all for listening to this episode we will see you next sunday Thank you. Thanks for watching!