The pandemic was a bonanza for the plant-based "meat" industry. U.S. sales of plant-based meat soared 45% to $1.4 billion, and refrigerated plant-based meat sales expanded 75%. Beyond Meat (BYND 0.46%) certainly benefited, with retail sales of its products more than doubling in 2020.
That red-hot demand hasn't lasted. Sales of plant-based meat were essentially flat in 2021, and 2022 isn't looking any better. Beyond Meat is being hit particularly hard. The company's refrigerated pea-based products have fallen out of favor, and the expensive launch of Beyond Meat Jerky hasn't gone according to plan.
Cash is flying out the door
Beyond Meat's products are more expensive per pound than real meat, so the pressure that elevated inflation is putting on consumers right now is not helpful. Beyond Meat's total revenue dipped 1.6% year over year in the second quarter, but that includes the impact of the Beyond Meat Jerky launch and the company's efforts to reduce inventories by dumping product into liquidation channels.
The Jerky launch really seemed like a Hail Mary. Beyond Meat rolled the new product out very broadly all at once, bumping up its U.S. retail distribution points count from 35,000 to 78,000. That entire increase was due to Jerky.
As CFO Phil Hardin explained in the Q2 earnings call, that launch came up short: "Although Beyond Meat [J]erky has approximately quadrupled the size of the plant-based meat snacks sub-segment, we had very high expectations for this product and velocities are now turning below initial forecast."
As tepid demand for its products led to ballooning inventory levels, Beyond Meat turned to liquidation channels to convert some of that inventory into quick cash. The company's average revenue per pound tumbled 14% year over year, driven by the liquidation effort, foreign exchange rates, and increased trade discounts.
This helped boost sales a bit, but it also led to a negative gross margin in Q2. And Beyond Meat still has $255 million of inventory, up from $242 million at the end of 2021 but down a bit from the end of Q1. Not surprisingly, net income came in at a loss of $97 million for the quarter.
The cash flow situation looks even more bleak. Through the first six months of 2022, Beyond Meat's free cash flow was a loss of $278 million. The company's inventory levels are way too high relative to sales, and its ability to convert that inventory into cash is limited. There's only so much retail demand for its products, and turning to liquidation channels means accepting rock-bottom prices.
BYND Inventories (Quarterly) data by YCharts.
Raising cash will be necessary
CEO Ethan Brown didn't have much of an answer to a question about cash flow during the Q2 earnings call. When asked about when cash flow would start trending in the right direction, he said: "So I don't think we're going to offer a direct answer on future cash rates, but we are working extremely hard on bringing the business into a more sustainable position. I don't know. Nothing further to that."
Beyond Meat's balance sheet isn't exactly pristine. Long-term debt totals $1.13 billion, and the cash balance is rapidly dwindling. Total cash stood at $455 million at the end of Q2, down from $733 million six months prior. Shareholders' equity has now dipped into negative territory.
At the current rate cash is being burned, Beyond Meat is going to run out of cash in less than a year. Certainly, the company can take actions to reduce cash burn. Layoffs were announced in August, for example. But that won't buy much additional time if demand continues to sink.
It's almost a guarantee that Beyond Meat will need to raise additional capital. The best time to raise capital is when you don't need it. The worst time is when you're fighting to survive. Beyond Meat's stock has crashed more than 92% from its all-time high, bringing the market cap down to around $1.1 billion. A secondary offering will buy the company months, not years, at its current cash-burn rate.
More debt is an option, but that would just make the balance sheet more precarious, and Beyond Meat would likely have to pay dearly to compensate investors for the risk that it doesn't survive. It's hard to know how much appetite there would even be for Beyond Meat's debt, given the economic backdrop.
Beyond Meat may be able to sell itself to a larger packaged food company. It does have a well-known brand, after all. But if the market for plant-based meat continues to decline, suitors probably won't be lining up at the door.
Given how poorly things are going for Beyond Meat, I think there's a good chance the company doesn't exist in its current form five years from now. Either it will be acquired at a fire-sale price, or it will fail outright. Cost cutting will buy the company time, and it might be able to raise some additional capital. But unless consumers fall in love with plant-based meat again, I don't think the Beyond Meat story is going to end well for investors.
