It's not often that a stock can report weak revenue numbers and slash its guidance but still jump double digits on the news. That's exactly what happened to Beyond Meat (BYND 0.95%), a producer of plant-based meat, on Thursday. Shares gained 18% as the company released a disappointing third-quarter update.
Beyond Meat now expects $75 million in revenue in the third quarter, down 9% from a year ago and well below the analyst consensus of $87.9 million. It also forecast a negative gross profit of $7 million to $8 million in the quarter, and cut its full-year revenue forecast to between $330 million and $340 million, reflecting a year-over-year decline of 19% to 21%.
The reason the stock rallied on the news was the company's announcement of yet another cost-cutting plan, including layoffs for 19% of its non-production workforce, or 8% of total jobs. It's also initiating a review of its operations that includes adjusting its pricing strategy to support gross margin expansion, and it aims to improve its inventory management to reduce working capital.
Image source: Beyond Meat.
The key challenge
Not long ago, Beyond Meat's revenue was soaring. The plant-based meat category, led by Beyond and privately-owned Impossible Foods, was supposed to gradually displace conventional meat.
However, the recent revenue declines show that is far from the case. Beyond Meat isn't like one of a number of fallen angels that saw sales soar during the pandemic only to come crashing down as the economy reopened. Instead, its problems are specific to its own industry. In particular, it faces poor pricing economics and weakening consumer demand.
Those challenges are evident in the company's challenge with gross profit, including its negative gross profit in the current quarter. Gross profit equals revenue less the cost of goods sold, or the direct costs that go into selling the product like materials and labor. It doesn't include selling, general, and administrative (SG&A) expenses, which include management salaries, marketing expenses, and other indirect costs.
If Beyond Meat is struggling to generate a gross profit, that means its product costs are simply too high. The company doesn't have pricing power so it can't raise prices. It competes against other plant-based meat companies as well as conventional proteins, which tend to be cheaper.
Additionally, there are signs that consumer demand for plant-based meat is waning: Rival Impossible Foods is struggling as well, announcing layoffs earlier this year. Plant-based meat products are readily available at supermarkets and restaurants, and consumers interested in trying them likely already have. A number of reports also show that consumers are not satisfied with the taste of plant-based meat, which could be an even bigger problem than high prices in the category.
Can Beyond Meat recover?
In order to return to revenue growth and deliver a sustainable profit, Beyond Meat needs to do at least one of two things. It needs to find a way to lower costs so it can reduce prices to be more competitive with animal-based protein, or it must improve the taste of its product so it's more desirable to its target market of "flexitarians," meat-eaters who are willing to eat vegetarian foods.
Neither of those things will be easy to do. In fact, the company has been working hard to accomplish both of those goals for years but without much success.
Decisions like cutting costs through layoffs and revisiting its pricing strategy may help improve performance at the margins, but the business will be structurally flawed until it finds a way to lower direct costs or improve its product.
Beyond Meat's balance sheet doesn't indicate immediate danger, but it also doesn't instill much confidence. The company's liabilities are greater than its assets, meaning it owes more than it owns, and it burned through $95.5 million in free cash flow in the first half of the year. As of the end of the second quarter, the company had $210.8 million in cash on the balance sheet, so if the trajectory from the first half of the year persisted, it would burn through its cash balance in a little more than a year.
Fortunately, the company expects free cash flow to come in at $7.6 million in the third quarter, but even that silver lining will be short-lived as "management does not expect to sustain free cash flow positive operations in the fourth quarter of 2023."
Given this latest guidance, it doesn't seem like Beyond Meat has much breathing room to repair the business without raising more cash.
Don't be fooled by the sudden surge in the stock price. Beyond Meat's business still looks broken, and cutting costs and changing its pricing won't be enough to fix it.
