Heat And Eat Launch Will Revitalize Consumer Retail

Key Takeaways

• Goodfood's new product line and digital enhancements are driving revenue growth and increased customer spending.
  
• Strategic acquisitions, ethical certifications, and strong cash management bolster financial stability and brand loyalty.
  
• A significant sales decline and macroeconomic pressures are challenging growth, with Bitcoin reserves adding financial volatility and cash flow issues hampering investment capability.

Catalysts

Goodfood Market Corp. delivers fresh meals and add-ons in Canada.

• The launch of Goodfood's new Heat & Eat line represents a major expansion in product mix, with early consumer adoption suggesting a strong growth avenue. This initiative is expected to boost revenue by capturing a growing segment of time-sensitive consumers.
  
• Enhanced digital experience features and improvements in protein customization have led to increased basket sizes, indicating increased revenue per customer through higher average order values (AOV).
  
• The recently acquired Genuine Tea brand is exceeding revenue expectations, showing potential for sustained top-line growth and strong EBITDA margins, contributing positively to earnings.
  
• Achieving B Corp certification reinforces Goodfood's commitment to ethical practices and sustainability, which may improve brand reputation and customer loyalty, potentially improving revenue and net margins.
  
• Strategic cash management, including repayment of convertible debentures and maintaining a healthy liquidity position, enhances financial stability and allows for capital flexibility, potentially improving future earnings.

Goodfood Market Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Goodfood Market's revenue will decrease by 9.5% annually over the next 3 years.
• Analysts are not forecasting that Goodfood Market will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Goodfood Market's profit margin will increase from -5.0% to the average CA Consumer Retailing industry of 3.4% in 3 years.
• If Goodfood Market's profit margin were to converge on the industry average, you could expect earnings to reach CA$3.4 million (and earnings per share of CA$0.03) by about May 2028, up from CA$-6.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from -2.3x today. This future PE is lower than the current PE for the CA Consumer Retailing industry at 22.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.02%, as per the Simply Wall St company report.

Goodfood Market Future Earnings Per Share Growth

Risks

• The company reported a 23% decline in year-over-year net sales, reflecting lower active customer counts and a challenging consumer spending environment, which could continue to pressure future revenue growth.
  
• With a decrease in the active customer count and the order rate as a primary driver, the company faces reduced volumes, potentially impacting earnings as fixed costs are spread over a smaller sales base.
  
• The decline in adjusted free cash flow to negative $1.5 million, compared to a positive figure in the prior period, indicates cash flow challenges that could affect the company's ability to fund operations or investments in the future.
  
• While gross margins remain strong, continued pressure from macroeconomic conditions and reduced spending could stress the company's profitability, affecting net margins if market conditions don't stabilize.
  
• Goodfood's strategy of holding Bitcoin as a treasury reserve adds potential volatility and risk to its financials, possibly impacting net income due to the inherent price fluctuations of cryptocurrencies.

Valuation

• The analysts have a consensus price target of CA$0.25 for Goodfood Market based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$0.3, and the most bearish reporting a price target of just CA$0.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$102.1 million, earnings will come to CA$3.4 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 11.0%.
• Given the current share price of CA$0.16, the analyst price target of CA$0.25 is 34.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.