Efficiency Programs And Food Market Diversification Will Unlock Future Potential

Key Takeaways

• Strategic shift towards operational efficiency aims to boost profitability, improve margins, and enhance free cash flow long-term.
  
• Market diversification and customer experience investments are expected to drive revenue and earnings growth through expanded TAM and RTE segment success.
  
• HelloFresh's shift to profitability over growth, coupled with market challenges, may limit revenue and market share, potentially disrupting earnings and growth efforts.

Catalysts

Operates as meal kit provider for home industry.

• The company's strategic shift to prioritize profits over volume growth by implementing an efficiency program is expected to enhance profitability, improve net margins and boost free cash flow generation in the long term.
  
• Expansion into new markets such as pet food, premium butchery services, and health supplements aims to diversify revenue streams, potentially increasing overall revenues in the future.
  
• The focus on elevating customer experience through investments in menu variety and improved service levels is anticipated to grow the company's total addressable market (TAM), potentially driving future revenue growth.
  
• Improvement in direct labor productivity and streamlining the fulfillment network should lower operational costs, thereby enhancing contribution margins and supporting overall earnings growth.
  
• The RTE (Ready-to-Eat) segment, which has seen substantial growth, is expected to drive both top-line and bottom-line growth with continued branding efforts and channel diversification strategies, contributing positively to overall revenue and earnings.

HelloFresh Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HelloFresh's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.8% today to 2.1% in 3 years time.
• Analysts expect earnings to reach €157.7 million (and earnings per share of €0.87) by about April 2028, up from €-136.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €209.5 million in earnings, and the most bearish expecting €118 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from -9.9x today. This future PE is lower than the current PE for the DE Consumer Retailing industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 4.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.55%, as per the Simply Wall St company report.

HelloFresh Future Earnings Per Share Growth

Risks

• HelloFresh's strategy to prioritize profitability over volume growth, such as reducing marketing spend, could lead to a decrease in revenue, particularly in the short term, as fewer new customers are acquired. This could impact overall revenue and market share.
  
• The ongoing efficiency program and rightsizing of the network, involving site closures and noncash asset impairment charges, suggest potential disruptions and additional costs, which could impact net margins and earnings during the transition phase.
  
• The expected decline in meal kit revenue, with North America experiencing a sharper drop due to reduced marketing efforts earlier and harder than international segments, signifies vulnerability in its core business, which may affect future revenue growth.
  
• The macroeconomic environment, particularly in the U.S., where HelloFresh is experiencing softer consumer demand, could pose further risks to revenue as external market conditions affect customer spending and company performance.
  
• The RTE segment's slower growth rate than historical levels, as the company focuses on brand-building and customer offering improvements, indicates potential limitations in scaling this segment rapidly, affecting the anticipated revenue diversification and earnings contribution.

Valuation

• The analysts have a consensus price target of €11.93 for HelloFresh 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 €18.0, and the most bearish reporting a price target of just €8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.5 billion, earnings will come to €157.7 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 5.5%.
  
• Given the current share price of €8.43, the analyst price target of €11.93 is 29.3% higher.
  
• 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.