Frozen Foods and Chefs' Tattoos

In this episode of Industry Focus: Wildcard, Emily Flippen is joined by Motley Fool contributor Brian Feroldi to take a closer look at Tattooed Chef (TTCF 4900.00%), in particular, and the plant-based nutrition industry more generally. They discuss the company's operations, food production process, the market opportunity in front of it and how it is bringing its products to markets. They also get into the company's management structure, some things to consider before you make an investment, and much more.

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This video was recorded on Nov. 2, 2020.

Emily Flippen: Welcome to Industry Focus. It's Wednesday, November 4th, at least for everybody listening at home, we're actually taping this on the 2nd. So, if you're tuning in to today's Industry Focus Wildcard Wednesday episode expecting to hear something about the election, expecting to hear something about the crazy markets, you're actually not going to get that this episode, I'll redirect you to one of the Motley Fool's other daily podcasts, MarketFoolery, as well as, Motley Fool Live, if you are a subscriber to The Motley Fool, to get great content about the election.

But for this episode, I'm your host Emily Flippen for this Wild Card Wednesday, but for this episode I am joined by the true tumultuous titan of terribly tough tongue twister titles, Brian Feroldi. Good title, Brian, that one was a painful one.

Brian Feroldi: You nailed it Emily; I'm really disappointed. [laughs] Well done! That was great.

Flippen: [laughs] I might have had some prep before, but Brian ...

Feroldi: Oh! that's cheating then. You know, Dylan goes in cold to these things and puts the pressure on. [laughs]

Flippen: Exactly. I mean, Dylan is on a different tier than I am, you know. I have to prep, Dylan, is just naturally efficient. [laughs]

Feroldi: Yeah, sure, let's go with that. [laughs]

Flippen: Brian, you and I are going to be taking a deeper look at a frozen food company that's really looking to expand the trend of plant-based nutrition. The company is the Tattooed Chef, and hopefully, if you are a listener who's looking for a little bit of reprieve from the constant election talk, today's frozen food conversation will serve your needs.

But Brian, thank you for joining, as always.

Feroldi: Happy to be here. This is a company that I came across by somebody on my Twitter feed when I put out a tweet about, hey, what kind of 10-baggers do you think could be out there? This ticker came up. I had never heard of the Tattooed Chef before, but did a little bit of digging in, thought it was interesting enough to bring it to the Industry Focus audience.

Flippen: Yeah, I'm happy you brought this up, because it's a company that I had heard of only in name. Analyst Joey Solitro actually messaged me when it IPO'd; he's always on top of the most recent IPOs. And having not looked at the company at all, he simply told me it's a frozen food plant-based nutrition company, and my immediate thought was, oh, that's going to be a malarkey, right, it's going to be nothing, just nothing good here. Frozen food! And look, I get it, I'm flexitarian myself. But the idea of a publicly traded frozen food company where all they do is make lean cuisines that are plant-based, [laughs] that just sounded ridiculous to me.

But when you messaged me and you said you want to talk about it, I was like, oh! Okay, well, it has Feroldi interested, so I should be interested, it has Joey interested, so maybe I need to give it a little bit more thought. And I was a little bit impressed, actually, when I was reading through it and doing my initial round of research.

What can you tell us about the basics of this company?

Feroldi: Yeah, well first off, A+ for bringing back the word "malarkey" into the conversation, Emily, I mean --

Flippen: [laughs] I was trying to think of a podcast-appropriate word to use to say how I felt about reading this. And a load of malarkey maybe sounded the best. [laughs]

Feroldi: Well, you get an A+ from me for that, that's the word I haven't heard, oh! I don't know, in a decade or two. But, yeah, Tattooed Chef, an interesting company. They came public earlier this year via a SPAC, that's a Special-Purpose Acquisition Company. That is a trend that we've seen really take off in 2020 where more and more companies are choosing to forego the traditional IPO process and come public via a SPAC. So far, the company is up about 50% since it hit the public markets, so clearly there was investor demand for this company, and the current market cap is about $1 billion.

And as you, kind of, teed up at the beginning of the show, they are focused on selling plant-based foods. Very similar to the likes of, say, Impossible Foods or even Beyond Meat, but they are going specifically after, for now anyway, the frozen food category. So, most of their products can be found in the frozen aisle as opposed to in the meat aisle.

Flippen: Yeah. That to me immediately makes me lose interest. [laughs] I'm obviously coming up with a strong opinion here. Again, Brian, you're going to break down why this company is actually really interesting. I have to say though, what made Impossible Foods and Beyond Meat so interesting to me, both as a consumer and as an investors, is that they broke out of the frozen food aisle where all the plant-based alternatives were always stuck, you could always find your plant-based alternatives frozen, but nobody ever, when purchasing meat thought to go to the frozen food aisle to look for those products.

So, the fact that Beyond and then Impossible got the coveted placement in the meat aisle, it meant consumers actually saw them potentially as a meat substitute. So, to me, just hearing you say that, it makes me think the Tattooed Chef is almost taking a step back, it's going back into the frozen food aisle, but maybe I'm not giving consumers enough credit here, maybe this is such a big trend we have all now been trained to look for plant-based alternatives wherever they may be, even in the frozen food aisle.

Feroldi: Hot take there, Emily. And when it comes to strategic decisions like that, I never pretend that I know as much as the management team, and I always just say, well, you pursue whatever strategy you think is right, and then I'll judge your results based on the numbers that you put up, so that's how I like to do it, but you could be right there about this.

Flippen: That's why you're a great investor, Brian. Now, let's be clear here, a lot of times emotion clouds the investment process, right? I clearly have a lot of emotion coming into this conversation.

Feroldi: You really do, I'm loving it though. But the business, what's interesting to me is when you dig into the history of this company, first off, it wasn't founded as the Tattooed Chef. Second off, it wasn't founded as solely a plant-based company. The company was actually founded in 2009 by the current CEO, his name is Sam Galletti. The company was founded as Stonegate Foods. And the idea was to import food from Italy to sell in the United States.

Sam Galletti, he had decades of experience in the food industry, and this is a company that he started from scratch. The good news here is that he still owns a sizable amount of this company on his own. He owns about 48% of the stock and his partner and the President of the company, who operates out of their facility in Italy, his name is Giuseppe Bardari, he owns about 3% of the company. Now, a private equity firm owns about another 7%, so between those three, that is some serious inside ownership.

The company took a different turn in 2014 after Sam, the Founder, hired his daughter Sarah as the company's Creative Officer in 2014. Sarah is a foodie and a chef who spent a lot of time training in Italy. And Sarah convinced the company to launch a brand-new brand at the company called the Tattooed Chef. That was launched in 2017 and it was named after Sarah, who is a chef with -- wait for it -- tattoos; that's where the name comes from... shocker. But, hey, they've done a great job of branding the company, as we'll see when we get into the results.

But Sarah's idea was to make a company that was completely clean, that really played in all of the modern trends. So, this is plant-based foods, it's organic, it's non-GMO, the company is actually completely vertically integrated to the point that they actually plant, manufacture, and produce all of their own foods themselves out of ...

Flippen: No, and it's frozen, and they sell it frozen?

Feroldi: And they sell it frozen, well, some of it is sold frozen, the longer-term plan is to change that, but they operate two facilities, one is in Italy, which is where most of their food comes from, and a second one they recently built in Los Angeles. But the idea here is farm-to-table operations, where they literally go from planting the food to getting it on consumer shelves. And as we'll see when we get to the numbers, so far so good.

Flippen: Yeah, this is blowing my mind right now, why you would vertically integrate, essentially, a food distributor, right? You're growing the food, you're packaging, you're selling, you're producing, all of that process they have in-house. And instead of making fresh food that demands higher margins, they're making frozen food. And yeah, I guess it stays better longer, but it is a really interesting strategy. And I do want to hear -- kind of, bury the lead here, I want to hear a little bit more about their sales, their finances, what makes this company interesting. Because if you're going this direction, I can't think of another company that has vertically integrated their entire food processes and then start selling it frozen in grocery stores. I mean, it's just blowing my mind right now. What are they selling? What are these products?

Feroldi: Well, they offer a range of different products right now, and they're broken down to a couple of big categories. So, their No. 1 category would be, like, premade meals, that's about 35% of their sales. They also offer smoothie bowls; those are about 20% of sales. They also offer frozen vegetables, frozen pizza, veggie spirals, grains and just a broad category that they call "other." So, they are not completely tied to the success of one product, they have dozens of products that they have launched, all mostly under the Tattooed Chef brand.

Now, they have taken a strategy where half of their sales, so far, are company-branded under the Tattooed Chef brand. About 53% of their sales are under that. They also have a private label business where they partner with a retailer who then, you know, uses their facilities, their foods, their everything, and then the retailer slaps their name on there. This is something that, like, Whole Foods has done with its 365 brand, for example. So, that's about 47% of the business. So, just looking at that, the business is actually pretty well diversified in the revenue perspective.

Flippen: One of my favorite things to do in preparation for either podcast or my work as an analyst at The Fool is to do company "research," and the listeners can't see me right now, but I'm putting up little air quotes when I say "research," because I love to go out and just, especially when I'm looking at food, try the product. And I have to say, I did wander around my local grocery store for a good fair amount of time this past weekend looking for some Tattooed Chef products, I was unable to find them. So, if they're not serving me, where are their products?

Feroldi: They are in a lot of natural grocery stores right now. They actually don't call those out by name, but they are in some big box ones too, you can find their products in Costcos, in Sam's Clubs, as well as Walmarts. Now, I don't know if they're in every single Walmart and every single Sam's Club, or every single Costco, those are obviously massive retail outlets, but they do have partnerships there.

One of the things that the company calls out as a growth tailwind for them, is that they are not in many of the other big-name companies. So, for example, I don't think they're in Target right now, they're not in a lot of the big grocery store chains, those are all opportunities for them down the road to increase their distribution.

Flippen: Yeah, when I didn't see them on the shelves, at first, I took it as a negative, but when you're talking about a company that's just above $1 billion in terms of market cap, that means it's still relatively small in the grand scheme of things, especially when you consider the market opportunity for plant-based foods. Therefore, if you're getting in now as an investor with this company, going public via direct listing, theoretically you're buying it for the growth opportunities. If they were already well distributed and still had the sales that they had today, it would be more of a red flag than a green flag.

So, I'm actually really excited about that, and getting into Costco, Walmart, and Sam's Club, I mean, these are not easy places to get into, so it says something about their strategy for reaching distribution chains. They clearly have the capacity, not only to produce their branded products but to produce private label as well, there's a lot of things that when you talk about distribution, when you talk about their product lineup do make me really excited, but when I think about the reason why investors could be interested in buying Tattooed Chef today versus maybe five years ago is clearly because we're entering a different phase of consumer trends right now, it's really, we talked about Impossible, we talked about Beyond Meat, there's been a huge focus on plant-based alternatives.

So, I'd love to hear you just maybe talk about the market opportunity, how you perceive it. Is it bigger than just plant-based alternatives or is it, in this case, a rising tide lifting all boats?

Feroldi: So, I believe that the plant-based meat movement in food is a durable trend that is here to stay. I don't think that it's the right thing to write this off as a fad right now. I myself consider myself to be a flexitarian, just like you, but my household eats meat, you know, every single day. I have gone out and I have sampled a lot of these plant-based meats, such as, like, Impossible and Beyond, and I'm really excited about them. I think that they are delicious and I could easily see them being incorporated into my household.

The problem with these alternatives right now is price, you are paying a premium, a big premium, to go with these foods. And that is, to me, mostly a problem of scale. The sales of these companies and these products are so new that they're just dwarfed by the meat industry in general, that is something that I could easily see changing over time as these companies attract more sales, they can use that to increase their scale, drive down prices, that will attract more sales, that will increase their scale, etc., etc.

So, I think that the plant-based meat is in a positive feedback loop, and it's entirely possible that 10 years from now buying plant-based foods would be cheaper than buying real meat foods, if that is the case then I could see this being extremely disruptive to the food industry.

Flippen: I don't want to derail the conversation too much from Tattooed Chef, but I really do agree with everything you just said and I think it applies to more companies than just Tattooed Chef, arguably more directly to companies like Beyond Meat, again, that have broken out of the frozen food barrier. I think if you're an investor in these companies -- and they are companies I'm excited about, maybe we need to do a deeper dive if we haven't already on plant-based foods, in general, in some future Industry Focus episode, but if you are an investor in this trend -- I'll call it a trend, not a fad, I think it's a long-term trend -- if you're an investor in these companies, you're doing it because you genuinely believe the price point. in my opinion, will come down below the cost of meat.

Consumers clearly have a demand for this product, if you look at the retention rate for Beyond Meat, for instance, a majority of the people who buy a Beyond Meat product once, will purchase it again. There is a clear demand here for the products that these companies are creating, but ultimately when you're sitting -- and I've been this consumer before, I was this consumer this last weekend -- when you're sitting in the meat aisle, and you know you want to make a pasta dish that has some, sort of, a meat-based sauce for dinner, Sunday night, which I did, right? And you're looking at the plant-based alternatives that's two times, at least, the price of the meat alternative, you're thinking to yourself, OK, I want to make the better choice, but am I willing to pay twice as much for it? A lot of times I make the decision to pay more, a lot of times I don't, but I know for a fact if the price point came down, there would be many consumers like myself who would automatically go to the meat alternative every time they're making that choice.

So, I'm a big believer in everything you just said about the price point coming down, and I do agree that it comes with scale when you think about companies like Tattooed Chef making the choice to be vertically integrated, they're turning in what is usually a very low margin business into a business that potentially has much higher margins allowing them to get the price point down even further.

Feroldi: Yeah, these guys have so many mega trends behind them. I mean, there's a lot of research that I've seen that suggests that one of the greenest things you can do in your life isn't to drive an electric car, it's actually to change your diet to a plant-based one. Companies like Tattooed Chef, Beyond Foods [Beyond Meat] (sic) and Impossible, they create opportunities for consumers to do just that. So, that is a megatrend that is behind them. And I think it'll just continue to accelerate, especially as millennials continue to increase their purchasing power.

So, when it comes to opportunity ahead of this company, it's just simply massive, the company pegs its current market opportunity in just prepared foods, pizza, vegetables, fruits, and pasta grand and rice at a $27 billion opportunity just in the United States. Their near-term plans are actually to break into the dessert market, which could add in another $12 billion, and longer term they hope to challenge Beyond Meat and Impossible Foods. So, that right there, when you add all that up, just in the United States, just in the frozen food section, that's a $55 billion opportunity for this company. So, if this company does not succeed, it's not for lack of opportunity.

Flippen: And I know that because this company went public via a SPAC or is going public via a SPAC, we don't have a lot of information about the company's finances, we really only have what they've chosen to self-report, but when you do see what they self-reported in terms of their finances, what is the situation. Because I have to be honest, when I heard about this company, a frozen food company going public, my mind immediately went to liquidity needs, right? This is an unprofitable company that's going public to try to raise money, to try to find some equity markets that they could eventually tap long term, but is that the case here?

Feroldi: That's a completely fair thing for your mind to go to, and just like you said, since this did come public via a SPAC, there's no S-1 for us to look to, we are being given the information that the company has given us, and they haven't even reported their first quarterly report yet, that actually doesn't happen until next week, but the numbers that we do have, shocker, looked pretty good, Emily.

So, this is a company that did $47 million in sales in 2018. This year, for 2020, they're estimating to do $148 million in sales; that's a triple in three years. They've actually gone out and said that next year, for fiscal 2021, we plan to do $222 million in sales, that's a 67% compound annual growth rate over that four-year period. Importantly, that is much faster growth than the category, in general. The plant-based food market is growing at about a 13% rate. Again, this company, 67% growth rate. So, they are really taking market share.

Now, we don't have, again, [laughs] true financial data that we're looking at here, which is why the next thing that they report is adjusted EBITDA, which is a metric that I just hate, because there's so many things that go into making this number look exactly as you want it. But we have clearly seen during this period of rising sales that adjusted EBITDA has grown from about zero to they're predicting a 14% adjusted EBITDA margin in fiscal 2021. That, if true, is quite an impressive number for "a frozen food company."

Flippen: I always get a chuck about adjusted EBITDA, I want to say, I report my adjusted weight, you know, if you take out Thanksgiving, if you take out the cake I ate last week, I actually lost a pound. So, everything [laughs] is fine. The reality is the adjusted EBITDA number says exactly what you want it to say. But what is worth noting is that you can backtrack a lot of these metrics, and a lot of times companies like Tattooed Chef are adjusting for non cash charges. So, even that adjusted EBITDA positive number isn't terrible, there are plenty of companies that report adjusted EBITDA, [laughs] and it is still negative. So, things significantly could be worse in this case, but it's great to hear that it seems like there's at least some sound financial backing to this company, there's unit economics here that are not immediately, in my opinion, going to destroy shareholder value.

And before we sign off here, Brian, I know I respect your opinion, a lot of our listeners respect your opinion, you are constantly one of the people, whenever we hear reviews, whenever we get emails, they're like bring Feroldi back, so I know that people like to hear your take. You are a growth investor, you're the mind behind great many investments, are you interested in Tattooed Chef today?

Feroldi: The answer there for today is no, even though I see a lot of positives about this company. We talked about the market opportunity that is huge, the trend here is something that I firmly believe in. I think the company actually has a lot of optionality to it, as we've seen that they've launched so many products just within the last three years, and they are clearly planning on launching more. There's plenty of space for them to grow. The limited financial data we actually have so far looks pretty good, and we have a Founder-led management team that is heavily invested in the success of those companies.

All those things are positive. The bad thing is that, a lot of my big questions that I always have about companies, I don't know the answer to right now. Does this company have customer concentration? I can't imagine that the answer is "no," given that they have Costco and Walmart and Sam's Clubs as clients, but we don't have that information. The other thing is, what is this company's reaction going to be to life as a public company? Are they going to behave differently once they have a number over their head? Are they going to be a company that gives guidance and outperforms it or are they going to whiff right out the gate? We don't know that.

How about the company culture? There are no Glassdoor ratings on this company that we could find. Zero. I did searches for Tattooed Chef, for the old name of the company, for the Italian name of the company. None, zero. So, I don't have a good sense of what it's like to look at this company. The bigger question that I have, and the most important question here is really about long-term competitive advantage in this industry and what that does to margins. The big food companies certainly are aware of the rise in plant-based food and the interest here in these products. And they are going to flood the market with alternative products of their own. If that happens, or excuse me, when that happens, because even at my local grocery store I have, like, five or six different options when it comes to these kinds of products, what is it that's going to protect Tattooed Chef and keep customers buying its brand versus another brand? For right now, the only advantage that I can see is branding, the brand's name, that's it. Will customers, on mass, be willing to pay a premium for Tattooed Chef products versus generic ones that come out? The answer there is, I don't know; I have actually a hard time seeing that happen. And if they don't, I could easily see management saying, we're going to "invest in price," meaning, we're going to lower the prices of our products again and again and again.

That's the problem with categories like this, you always have to think as an investor, while I believe that the entire category is going to grow and create huge value, who captures that value? To me, society will capture that value and consumers will capture that value. I'm not yet convinced that investors will capture that value. The only exception that I would make is that if Impossible Foods came public, I see Impossible Foods as the leader here, I have tasted their products, and as a consumer, I would clearly be willing to pay more for Impossible Food brands myself. The downside is that Impossible Foods is not yet public.

But I would love to know your opinion here, Emily.

Flippen: [laughs] I think I generally agree with you. I think that the price point for all of these products needs to get down to where it is achievable for most consumers in a way that you don't think twice when making the purchase. I think the problem that Tattooed Chef has is that their products really, right now, the majority of them are prepared meals, prepared food, and at that point you want to be the premium option, you don't want to be the cheap option. Because there are lean cuisines, [laughs] when I'm sitting in the frozen food aisle and I'm trying to make a healthier choice for myself, I need a reason to go out and pick the Tattooed Chef. And I think the reason is, more organic or plant-based, we have a great brand. I'm not sure if you want to start competing with lean cuisines on prices.

But either way, by this point, the show is airing on the 4th, I think, it's fair to say, maybe around half of Americans are feeling maybe pretty good, half are feeling maybe pretty bad, and for the people who are out there feeling maybe pretty bad today, if you're like me, you probably want to eat your feelings. And if anything, I hope today's show encourages you to go out, maybe get a Tattooed Chef meal to eat your feelings, maybe avoid the cake. [laughs] Don't report your adjusted weight numbers as a result of this election. Get yourself some Tattooed Chef, I'm a big believer and especially somebody who focuses on the consumer goods industry, that your opinion as a consumer, for your portfolio as an investor is really important. So, try the food, let us know if you like it, report back. I don't think Brian or I have been given the opportunity to try this product yet.

Feroldi: No, and I look forward to it. The next time I'm in a grocery store, if I see something with the Tattooed Chef brand name on it, I will buy it and I will just try it myself. That's the great thing about investing in consumer good companies, right, you get to experience them on the consumer basis and call it "research."

Flippen: [laughs] Yeah, Brian, I'm really living the dream right now; you have no idea. [laughs]

Well, Brian, thank you so much for A. bringing this topic to the table today. I do hope it provides some reprieve for our listeners from the election, it's been a fun conversation. But more importantly, thanks, as always, for joining me and bringing your insight, I really appreciate it.

Feroldi: Anytime, Emily.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any opinions about the Tattooed Chef, about Brian Feroldi, about me, whatever it may be, [laughs] you can always email us at [email protected], or tweet at us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for his work behind the screen today. For Brian Feroldi, I'm Emily Flippen, thanks for listening and Fool on!