BEYOND MEAT, INC. quarterly report, Q2 FY2020

Business context and reporting period

Beyond Meat, Inc. filed this unaudited Form 10-Q for the quarter ended June 27, 2020. The company sells plant-based meat products through retail and foodservice channels in the U.S. and internationally. Results reflect the substantial effects of COVID-19, particularly the shift in demand from foodservice to retail.

Financial performance and position

• Q2 revenue increased 68.5% year over year; first-half revenue rose 95.8%. Q2 retail revenue increased 191.9%, while foodservice revenue declined 58.6% year over year. U.S. retail revenue was $90.0 million and international retail revenue was $9.6 million in Q2.
• Q2 gross margin fell 410 basis points year over year, primarily because $5.9 million of costs were incurred to repurpose foodservice inventory for retail. First-half margin improved 270 basis points year over year.
• Operating expenses rose materially: Q2 SG&A increased 121% to $34.3 million, including higher share-based compensation, staffing, donations, commissions, legal and public-company costs.
• Management reported non-GAAP Adjusted EBITDA of $11.7 million for Q2 and $25.6 million for the first half, versus $6.9 million and $4.7 million, respectively, a measure that excludes, among other items, share-based compensation, restructuring and specified COVID-19 expenses.
• Cash and equivalents were $222.3 million at June 27, versus $276.0 million at December 31, 2019. Current assets were $429.3 million and current liabilities $66.3 million. Inventory increased to $143.0 million from $81.6 million at year-end.
• First-half operating cash use was $44.3 million and investing cash use was $28.3 million; financing provided $19.2 million. Capital expenditure purchases were $26.0 million. Cash declined $53.5 million during the half.
• Debt was $50.0 million, all drawn under a new $150 million, five-year secured revolving facility; the rate was 3.5% at quarter-end. The facility has an accordion feature for up to an additional $200 million and financial covenants begin with the quarter ending September 26, 2020.

Changes, outlook and risks

• COVID-19 sharply reduced foodservice demand and delayed customer tests and launches, while at-home consumption boosted retail sales. Sequential foodservice revenue fell from $41.2 million in Q1 to $13.7 million in Q2. Retail growth did not prevent lower Q2 gross margin, partly due to repacking costs and promotional pricing.
• The company expects COVID-19 to adversely affect revenue, gross profit, margins, earnings and cash flows at least through the balance of 2020; foodservice is expected to remain significantly affected. Management cautioned that it cannot reliably predict the pandemic’s overall impact or whether elevated retail demand will persist. No specific financial guidance was provided.
• Management cited cost savings, improved production throughput and localized manufacturing as longer-term margin opportunities, while stating a goal of reaching price parity with animal protein in at least one product category by 2024. It also expected near-term promotional activity and pandemic-response measures to weigh on margins and profitability.
• The company acquired a manufacturing facility in the Netherlands, expected to be operational by year-end 2020, and announced a new Dutch co-manufacturing facility. It also registered a subsidiary in China. Expansion execution and international market conditions remain uncertain.
• Pea-protein purchase commitments totaled $192.4 million through 2022, including $51.6 million for the remainder of 2020; capital-expenditure purchase commitments were $17.8 million. These commitments are relevant alongside inventory growth and cash use.
• Material legal matters include the Don Lee Farms dispute, for which the company said a reasonably possible material loss range could not be estimated, and shareholder securities and derivative litigation, also with potential losses not estimable. A judge allowed Don Lee Farms fraud and negligent-misrepresentation claims to proceed; trial was set for June 14, 2021. The company disputes the claims and intends to defend itself.
• Other risks include supply-chain and facility disruption, ingredient availability and pricing, customer and distributor concentration, competition, product-labeling regulation, and credit-agreement covenants. One distributor represented approximately 16% of Q2 gross revenue. Management said disclosure controls were effective and there were no material changes in internal control during the quarter.

Important facts for investors to verify

• Whether retail demand can continue to offset pandemic-related foodservice weakness, and how channel mix affects revenue and profitability.
• Whether gross margin recovers after Q2 repacking costs and whether discounts, promotional spending and operating expenses remain elevated.
• Inventory utilization, cash burn, capital spending and the ability to meet pea-protein and other purchase commitments.
• Compliance with the secured credit facility’s financial covenants beginning in September 2020 and continued access to borrowing capacity.
• Developments and potential financial exposure in the Don Lee Farms and shareholder litigation, together with progress on Netherlands and China expansion.