In Oct. 2020, a special purpose acquisition company (SPAC) named Forum Merger II completed its acquisition of Tattooed Chef (TTCF +0.00%), taking the small-cap food company public. Then in December, Tattooed Chef gave its first analyst-day presentation, laying out its plans to get to $1 billion in revenue by 2026.
For perspective, through the first three quarters of 2020, Tattooed Chef recorded revenue of $108.9 million, and it guided to $148.0 million for the full year. This implies the company will grow revenue at a 38% compound annual rate for the next five years, an ambitious goal to say the least.
While Tattooed Chef had a lot to say at its analyst day, I believe its plan for $1 billion can be boiled down to three main components: new products, broader distribution, and acquisitions.
Image source: Getty Images.
1. New products
Tattooed Chef had 38 different products to choose from in 2020, including its cauliflower-crust cheese pizza, zucchini spirals with basil pesto, and organic acai bowl. Although that's quite a selection already, the company plans to expand to 62 products in 2021. Long term, it intends to have more than 200.
Therefore, investors can expect a lot of product announcements from Tattooed Chef in the coming year, like the one it made to close out 2020. In December, the company announced its first two plant-based meat substitutes: pepperoni and sausage. As a result, some investors have compared the company to Beyond Meat, but I'd argue these two aren't competitors. Beyond Meat's primary objective is to replace animal protein, whereas Tattooed Chef aims to offer consumers a higher-quality selection in the freezer aisle.
Management's reasoning for more products is simple. It believes there's underserved demand in the market. Therefore, to increase sales, it needs to give those hungry consumers more options.
2. Broader distribution
Another key component to Tattooed Chef's growth plan involves broadening its distribution. And indeed, this is low-hanging fruit ripe for picking. Right now, its products are sold in 4,272 stores. But for 2021, management is targeting 10,000 stores, or 134% growth in distribution in just one year.
It's easy to see just how much progress Tattooed Chef is making on this front. In the final quarter of 2020, the company scored distribution deals with major retailers like Kroger and Target. With major deals like this coming recently, it should translate into strong revenue growth in 2021.
That said, there is a hidden danger for any company growing revenue through distribution expansion. Revenue growth will look strong, at least at first, as Tattooed Chef stocks its products in new aisles. But this isn't necessarily an accurate measurement of end-consumer demand. It's always possible that as the company stocks shelves for the first time, demand will be muted, and the company won't restock them. In other words, sales could spike initially but tank after that.
That risk is present for any company growing this way, Tattooed Chef included. But perhaps investors can dismiss that concern in this case. The company said that sales volume increased at existing retailers during the first three quarters of 2020. This would indicate that end-consumer demand is indeed there, so one would expect demand to remain as its distribution widens.
Since Tattooed Chef went public, its stock has outperformed the market average. Data by YCharts.
3. Acquisitions
Finally, Tattooed Chef has suggested that it wants to be the consolidator in its space. When the deal with Forum Merger II was proposed, part of the investment thesis for Tattooed Chef was its ability to use the company "as a platform for future mergers and acquisitions."
Acquisitions can jump-start growth in a hurry, but there's always risk involved. For starters, Tattooed Chef could overpay for a competitor, or it could fail to combine operations efficiently. Unfortunately for long-term investors, we'll simply have to wait and take things on a case-by-case basis as they come.
What we do know for sure right now is that Tattooed Chef is well capitalized to acquire other players. Thanks to its rapid stock price gains, it was recently able to redeem all outstanding stock warrants, taking its cash balance north of $200 million -- not bad for a small-cap stock.
This is Tattooed Chef's plan to clear $1 billion in annual revenue by 2026. Understanding the different components of a management team's vision is a crucial aspect of researching stocks, but it's only one part of the process. Much more would have to be explored before deciding whether this is a stock worth buying.
