Stock Talk #14: Don’t Fight Growth (and $CHEF Update)
Today’s Stock Talk – the market continues to love growth, and CHEF’s CEO compares the company’s new direct-to-consumer business to Isaac Newton discovering gravity.
I’ve been watching this week’s earnings and have been amazed by a few companies reporting start-up like growth – Beyond Meat (BYND), Shopify (SHOP), Peloton (PTON), Wayfair (W) and Twilio (TWLO). Two things all of these companies have in common:
– All of these companies are routinely disparaged by analysts for being overvalued
– All of these companies are reporting start-up like growth that doesn’t appear vulnerable to COVID
Let’s go down the list.
BYND
Beyond Meat actually recorded a profit in Q1 and increased net revenues 141%. On the cost side, the company recorded its best ever product unit cost per pound. The stock is up 26% over the last five trading days.
SHOP
Shopify revenue increased 47% y/y for the first quarter and saw 62% growth for new stores created on the platform between March 13th and April 24th. The stock is up 17% over the last five trading days.
PTON
Peloton (who has a non-standard fiscal year, they’re in Q3) grew revenue 66% and saw 64% paid digit subscriber growth. The stock is up 17% over the last five trading days (and 18% pre-market as I write this).
W
Wayfair – which was trading at a multi-year low and announced layoffs not but a few weeks ago – saw 20% revenue growth and increases in activate customers, average revenue per customer, total orders and more key metrics. The stock is up 41% over the last five trading days.
TWLO
Twilio revenue was up 57% and highlighted a number of parts of its business (ex. combating illegal robocalling) that will benefit from COVID (recall TWLO is a platform developers can use to make and receive phone calls and text messages). As an aside, their CEO Jeff Lawson was on one of my favorite podcasts (Invest Like the Best with Patrick O’Shaughnessy) a few months ago, and I highly recommend listening. The company is up 28.7% pre-market today and prior to that was up 10% over its last five trading days.
As amazing as the growth numbers are, the stock market returns I personally think are even crazier. These five companies on an annualized basis if you take the last five days are projected to be 1,000%+ annualized returns. Obviously, this is probably not sustainable, but I think it evidences how much the market values growth right now.
Double digit top-line growth is impressive in stable economic times; it’s even more impressive during COVID. Importantly, in all five of these cases, I don’t think COVID is providing a one-time sales boost that will fizzle out once things “return to normal” (and yes, the quotes are there because I buy into thesis some parts of economy will be changed forever). These companies all were hyper-growth stories pre-COVID – SHOP has a slide in their investor deck from its earnings call showing 50% CAGR: 
If this growth continues, it’s very hard to sell into. We have seen for the last five years and more that investors are willing to pay rich premiums for high growth businesses. Why would this trend not compound during COVID?
We hear this adage all the time – Don’t fight the fed. I want to add another one – Don’t fight growth. I’m definitely sensitive to valuation concerns and appreciate that on a multiple basis relative to how stocks have historically traded, these five stocks are expensive. Yet, were they not expensive a week ago? A few years ago for the ones that were publicly traded?
When the number one concern on a company is overvaluation, I honestly think that’s a buy signal.
CHEF Update – Bad Earnings, But Shop Like a CHEF Represents Exciting Pivot
A company I wrote about in Stock Talk #6 – Chef’s Warehouse – reported yesterday, and the results were mixed. CHEF beat on the top line and disappointed on the bottom. $CHEF reported a one-time $3.3 million inventory obsolescence charge due to COVID as most of its customers were forced to shut down. They also were burned to the tune of $15.8 million by bad debt expense (i.e. customers not paying). Altogether, these factors drove non-GAAP EPS of -$0.60 versus expectations of -$0.48.
This was definitely a bad print, but in my original note I zeroed out revenue and simply tried to project whether the company could survive. I maintain CHEF is fine for at least few more quarters and has no debt maturing until $238 million in 2022, most of which it could pay off with its $200 million plus in cash. Based on the amount of debt that was issued in March and April and the quality of some of the issuers (ex. cruise lines, Boeing), I’m very confident that CHEF could refinance, albeit at a more expensive rate than it’s used to paying. From CEO Chris Pappas:
In terms of liquidity, you can see from our prepared remarks and the release, between cash on the balance sheet, the remaining availability on our ABL, we’re at about 14% of prior-year revenue, which I think is a fairly strong liquidity position. And we expect to be able to manage through this crisis. We’ve noted in our 10-Q that we expect to be able to manage the business for the 12-month period, kind of our standard disclosure. And so, we’re staying with that disclosure
The real highlight for me during CHEF’s call was the company’s pivot to sell directly to consumers, which early on has been successful and you could tell Pappas was extremely excited about:
But when we name the company Chefs’ Warehouse, we always had shop like a shaft and knew it would be some sort of consumer business. Whether we were going to open up shop like a Chef outlets which is probably still a good possibility in the long term, but the intricacies of delivering to people’s houses, we’re still in the process of figuring out, and that’s why trying to predict an EBITDA. We’ve learned from a lot of the business have gone ahead of us to deliver to people’s homes. You have to give people a time slot and all the things to packaging
So right now, I think we’re in the raw stage. So even though we’re having tremendous success, the model is going to have to evolve. Our packaging will be evolved. But what I always — intrinsically, I think new just from being in the business for 35-plus years was a lot of our customers — customers would always ask how can we shop all these incredible products.
You know, I still find it amazing that this week, we hit a 50% compared to last year’s volume day with our customers basically closed. So, it just shows you that the creativity of our team, our sales team, our leadership to be able to go find business. I think, we were the first to actually — and I’ll give our customers credit. We have customers say, there’s lines out the door.
Can you turn us into a Chefs’ Warehouse outlet? And I think our first store went out and sold almost 5,000 boxes, I think it was about $200,000 worth of product to their customer base because, obviously, you see the lines that we’re going at supermarkets and the line to get into Costco. So, I think we found all different outlets of — I think a lot of people have copied it since then. They call them Grocerettes and stuff. And a lot of that will go away, but I think that what will not go away will be restaurants know that they need other avenues of income.The company has introduced a completely new business that’s selling to a new customer base. You can go on CHEF’s website now and order raw ingredients in Boston, Baltimore, Orland and more. When I think about the success of Blue Apron and other companies that have tried to leverage the desire people have to to cook restaurant level meals, I’m confident CHEF can capitalize on this trend and come out of COVID with a new line of business that increases its future earnings potential.
Pappas was so excited about this he literally compared this discovery to Isaac Newton discovering gravity:
So, I would say we’re in the first inning of something that’s really interesting. And the triaging and the team is really psyched to really take it to the next level. So, if there’s any silver lining, I think it was — Newton that finished this theory of gravity during the plague and I think Chef Warehouse created Shop Like a Chef during the corona pandemic.
As a shareholder I’m looking forward to see how Shop Like a Chef plays out over the next few quarters. At worst it’s a flop, and at best it raises CHEF’s profile and gives them a Corona-proof line of business.
– Brostoff
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