Plant-based foods company Tattooed Chef (TTCF -98.00%) had a bumpy 2021, its first year as a public company. Sales fell short of what management originally guided for early in 2021 while inflation on costs like freight and higher sales of private-label products squeezed gross profit margins.
The stock market has become more volatile over the past year, and investors are less likely to give unproven companies the benefit of the doubt. It's time for Tattooed Chef to answer the bell and deliver on these three burning questions for 2022.
Will revenue beat guidance this year?
Tattooed Chef started as a food packer, manufacturing food products for other brands. However, CEO Sam Galletti's daughter, Sarah -- a chef with tattoos -- joined the company in 2017 and created her own brand of frozen, plant-based food products, such as burritos, pizzas, and burgers. And so the Tattooed Chef brand became the focal point of the business. The company is based in California but includes multiple facilities, including in Italy where the company grows most of its ingredients.
As it's an up-and-comer in the plant-food space, investors naturally want to understand how well Tattooed Chef's products are doing with consumers. Management point out that distribution has grown rapidly. In 2020, the company had 4,000 points of sale across just four retailers. A year later, Tattooed Chef had 14,000 points of sale across 160 retailers. This is a massive increase, literally multiplying the company's footprint in the market.
Since Tattooed Chef got 73% of its sales from three national retailers in 2021, there should be ample room for these new distribution partners to flourish.
Image Source: Getty Images.
So why is the company guiding so conservatively for 2022? Management anticipates revenue of $280 million to $285 million, or 34% year-over-year growth at the high end of guidance. That's a solid increase, but the company grew revenue by almost 44% year over year in 2021, so I wouldn't blame anyone for expecting more growth considering the additional distribution added.
Perhaps management is setting a low bar to clear after falling short of its early guidance in 2021. Investors will get answers in the coming quarters, but I would have liked to see revenue growth hold up better. Management stated that its five manufacturing facilities can support a capacity of $600 million in revenue, so that doesn't seem to be what's holding growth back.
Will profit margins stabilize?
Tattooed Chef wasn't unique in facing margin pressure in 2021; gross profit was 10.4% of revenue in 2021, a notable drop from 14.6% in 2020. Management pointed to surging freight and shipping container costs as a major reason for falling gross profit margins.
Additionally, the company recently made two acquisitions, buying up New Mexico Food Distributors and Belmont Confections -- and the lower-margin, private-label products made there also hurt margins. Gross margin guidance for 2022 was 10% to 12%, which seems reasonable because nobody knows how long inflation will persist.
Factories are more profitable when running at full capacity than when they aren't, so investors will want to look for profit margins to improve as new facilities come online and sales efforts give them orders to fill. Again, it's probably too early to judge the company on its falling margins, but it's something that investors should monitor.
Will Tattooed Chef raise cash?
Perhaps the hottest question is whether the company will need to raise cash soon. The company only went public in December 2020, so raising cash so soon wouldn't be ideal -- especially when the share price has been beaten down, making any potential share offering that much more dilutive to shareholders.
Management noted in its quarterly filing that it has $185 million in cash and equivalents on hand, enough to fund the company's needs for "at least" the next 12 months. That certainly seems fair. You can see below how the company's free cash flow burn was about $68 million over the past year.
TTCF Free Cash Flow data by YCharts
That cash burn could increase in 2022 based on management's plans for additional investments, including $20 million for factory automation and another $27 million to $32 million in marketing expenses. Is the company growing revenue fast enough to keep pace with this spending? Investors will find out over the next several quarters. If not, the company's cash balance could drop a bit in 2022 and put a cash raise on the table for the end of the year or beyond.
Investor takeaway
Tattooed Chef is a young and growing company. That usually comes with growing pains, and it seems like management is working through some of those challenges right now. The ultimate cure for investors is business execution, and Tattooed Chef has an opportunity to put in a strong 2022.
The stock has a lot of long-term potential; it operates in a plant-based food industry that management believes will be worth more than $160 billion by the end of the decade. Whether Tattooed Chef can grab a chunk of that remains to be seen.
