What happened

Shares of plant-based meat company Beyond Meat (NASDAQ:BYND) slipped on Wednesday, after the company reported results for the second quarter of 2020. Revenue exceeded expectations, while earnings fell short. As of 10:30 a.m. EDT, the stock was down 6%.

It's possible investors are worried about Beyond Meat's earnings miss. But it's more likely they're concerned with how the company's food-service sales were decimated by the COVID-19 pandemic.

Beyond Meat's products are packaged on an assembly line at a facility.

Beyond Meat's bottom line took a hit from repackaging products for retail sales. Image source: Beyond Meat.

So what

Beyond Meat's revenue can be divided into two categories. First, it generates revenue through its restaurant partners. Second, it generates revenue through retail outlets like grocery and convenience stores. And prior to the pandemic, sales were split fairly evenly between the two.

In Q2, Beyond Meat's total net revenue increased 69% year over year to $113 million -- the company's first quarter surpassing $100 million in revenue. Retail sales surged 195% to $90 million, fully responsible for the company's quarterly gains. Food-service revenue, by contrast, plunged 61% as many of its restaurant partners closed for the coronavirus. 

Clearly, there was still demand for Beyond Meat's products. Unfortunately, many products were already packaged and ready to go to food-service partners. As demand shifted overnight to retail, the company was forced to repackage products for retail sales. This activity cost an extra $5.9 million, leading to a decrease in gross profit margin and explaining why earnings fell short of expectations. Had it not been for this one cost, gross margin would have grown to 34.9% compared to 33.8% last year.

Now what

Since Beyond Meat's earnings miss is easily explained by this one-time cost, it's doubtful that's what spooked investors this morning. Rather, seeing a 61% drop in food-service revenue is more rattling, especially considering the coronavirus isn't in the rearview mirror yet. For now, however, I believe shareholders should be encouraged by Beyond Meat's incredible growth in retail because it suggests the plant-based craze is more than a fleeting fad. Demand is real.

Beyond Meat CEO Ethan Brown highlighted several encouraging retail metrics including increased household penetration and growing purchase frequency. Going forward, it will be interesting to see if retail sales hold as restaurant activity returns to normal. If they do, that would be a bullish signal for shareholders of this growth stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.