Investors have had their fill of Beyond Meat (BYND -0.17%) stock. The plant-based protein specialist has fallen out of Wall Street's good graces, mainly due to its plunging sales volumes. Shareholders are right to question the fundamental growth thesis, which relies on the premise that consumers' appetites for alternative meat products will keep growing.
Instead, demand for these products is plunging. That's partly due to temporary factors like inflation and slowing consumer spending. But Beyond Meat has some other big challenges to navigate over the next several quarters. With that big picture in mind, let's consider where this business -- as well as the stock -- might be by late 2023.
The two big problems
Beyond Meat's last few quarterly reports clearly don't describe a healthy business. Sales cratered by 23% in its fiscal third quarter (which ended Oct. 1) even as the company slashed prices on many of its products.
If you believe the management team, though, the slump was mostly driven by the record inflation that has hit grocery store aisles, not by a loss of interest in plant-based protein foods. There is "a well-established history of consumers trading down among proteins during difficult economic times," CEO Ethan Brown said in a recent call with Wall Street analysts.
On top of that pressure, Beyond Meat is also dealing with a flood of new competition in the space. It is starting to lose market share as plant-based meat options proliferate, including store brands from grocery chains like Kroger. And more companies chasing after fewer customers is a recipe for plunging margins.
The path forward
The prescription for both of these challenges is the same: slash costs. Beyond Meat needs to ensure that it will be one of the main companies left standing after the ongoing shakeout. It also must quickly get to the point where it can operate profitably at a lower sales volume.
BYND Operating Margin (TTM) data by YCharts.
It is far from that level today. Last quarter, it delivered a net loss of $102 million, which amounted to a brutal 123% of sales. Sure, that figure includes some one-time charges. But Beyond Meat is also unprofitable on a gross profit basis. Its gross margin was negative 18% in the third quarter.
Send this burger back
Investors might be happy to wait out the next few quarters as Beyond Meat progresses back toward profitability by slashing costs and reducing its production and inventory levels to match up better with demand.
But the food company also holds significant debt, complicating its turnaround efforts. As a result, Beyond Meat might still be dealing with major growth and earnings challenges by this time in late 2023.
That's why investors should keep this stock on their watch lists right now, but out of their portfolios. It is possible that the company will be highly profitable after its cost-cutting program and after some of its rivals are shaken out of the industry. But there's no evidence of that in the business yet. In fact, operating trends are on track to worsen over the short term.
Consumers' appetite for plant-based proteins might bounce right back once inflation eases. But it isn't clear how well Beyond Meat will be able to capitalize on that shift. That's why the stock could have another tough year in 2023.
