Beyond Meat tumbles despite surge in U.S. retail sales

CFRA Analyst Arun Sundaram joins Yahoo Finance’s Zack Guzman to break down Beyond Meat's latest quarterly results, after U.S. retail sales surged 194.9% from a year ago.

Video Transcript

ZACK GUZMAN: We'll start with Beyond Meat, as shares there are moving lower by about 6.5% after the company reported net sales that topped $113 million versus estimates for $99 million. It was Beyond Meat's first quarter that they saw sales coming in above that $100 million mark. Adjusted loss per share came in about at expectations at a $0.02 loss on that front. But here to discuss what we should expect from the quarter in more detail is our next guest. Arun Sundaram, CFRA analyst, joins us now.

And Arun, when we look at it, you actually upgraded the stock to hold from sell and boosted your target price $130 from $95 a share. And when we look at the earnings, I mean, you break down kind of the split here, right? And we know it's about 60-40 restaurants versus what comes through grocery. On the retail side-- or I guess in terms of the grocery side-- we saw 192% sales growth there, a 60% decline in food service-- not exactly great, though, when we think about what could happen to all the restaurants moving forward. So I mean, how do you put that in context with the plus and minus split here for Beyond Meat?

ARUN SUNDARAM: Yeah, thanks, Zack. Yeah, this quarter, the retail sales of 192% was just, like, extraordinary growth. But then the decline in the food service-- the 59% decline-- was a bit more than we expected. Last year, in 2019, their sales are split roughly 50-50 in food service and retail. And because of the huge decline this quarter in food service, now they're-- the ratio is 88% retail and 12% food service. So it's a drastic shift right there.

And I think food service channels could experience some softness for probably next few quarters, and that's because they-- many people think Beyond Meat-- you know, they're at a lot of these quick-service restaurants, the fast-food restaurants. But actually, that's only 1/3 of their food service sales. The remaining 2/3 is in these smaller independent restaurants. And as you know, these are the guys that are experiencing the worst of the pandemic right now. So there's a chance that many of these restaurants could go out of business. Or even the ones that do reopen, many of them may decide to downsize their menu to cut costs there.

ZACK GUZMAN: Yeah, so maybe explain why the upgrade, versus keeping the price target below where shares are trading right now-- admittedly, just about $2 off. But if you've got a hold, it seems to make sense you would think shares aren't going to be moving too much to the upside here. But what are kind of those future catalysts here when we think about Beyond Meat?

They did note on the earnings call that right now, about half of Beyond's customers are now repeat buyers. That would seem strong for something that was so early on, when we think about people trying these things last year when they came out as a public company. Not a lot of people had even heard about them. So what's your take on maybe how the long-term growth projections are still intact?

ARUN SUNDARAM: Yeah, so that's exactly the reason why-- one of the reasons we upgraded to a hold is our long-term thesis, our long-term growth story. I think it's still intact for Beyond Meat. Yeah-- yes, they're going to experience softness in the food service channel because of their exposure to these smaller independent restaurants, but I think they can make up a portion of these losses through expansion in the fast-food or quick-service area. There's still relatively low penetration there, and there's a lot of opportunities to grow there-- and not just in the United States, but in Europe, South America, Asia, specifically China. Right now, they're piloting some products with-- alongside Yum China right now, with KFC, Taco Bell, and Pizza Hut. And there's a chance that, you know, those partnerships can expand globally as well.

But another reason we upgraded to a hold today is we value Beyond Meat using a discounted cash flow approach. And right now, because interest rates are super low, our-- the discount rate we use to-- present value is future cash flows is a lot lower. So because of that, our valuation looks a little more attractive.

ZACK GUZMAN: Yeah, and when we think about that too, I mean, a long-term thesis there, if smaller restaurants might take longer to come back-- if they can lean into some of these biggest-- or bigger-- QSRs, that'd be fine. But also, on top of it, it's a discussion that we really had when they first came out last year in thinking about whether or not this is a tech company, right? And we're talking about a company that might continue to try and lower prices here. It might suffer losses for a bit more time. But it's operating with very few competitors-- big competitors, in terms of the scale that they have. There might be newer entrants.

But I think in that market share early on, I mean, is it fair to still be looking at this company as a tech company? I mean, they crossed-- net sales crossed $100 million for the first time. It continues to operate here, like we saw in this quarter, at a loss. I mean, how should we be thinking about it in terms of maybe suffering the short term on price to get a little bit more market share and become a dominant leader, in terms of alternative meats?

ARUN SUNDARAM: Yeah, it's exactly what they're doing right now. They're sacrificing some profits here in order to take market share, and that's because of the-- I mean, they're being really smart with by one, there were some challenges experienced in the traditional animal protein market over the past few months. So they decided, hey, this is our opportunity to really go out and grab some new customers. So they aggressively started promoting, and they started introducing more value-based products so that way, you know, the consumer can gravitate towards these plant-based meat products.

And I think that's a smart strategy right now because the economic-- the backdrop still looks a little bit dire. And you know, if these products continue to stay priced at a heavy premium to the traditional animal meat-- you know, once consumer discretionary spending starts going down, which could in the next few months after the government stimulus starts to wind down, you know, then they could-- hopefully they don't experience as much softness anymore.

ZACK GUZMAN: Yeah, especially if their main customers are people like me who eat meat and might want to shift to an alternative form here. But very interesting to see it all play out, especially with their new packs, as you said, at Walmart and Target, some of these value packs, just to give people a try, but very interesting thoughts there. Arun Sundaram, CFRA analyst, appreciate you taking the time to chat.