Keep your eye on Goodfood stock, this investor says

For a number of years now, Canadian online grocer and meal kit company Goodfood Market (Goodfood Market Stock Quote, Charts, News, Analysts, Financials TSX:FOOD) has been growing its business by leaps and bounds and the results have been reflected in its stock price which ballooned in 2020 by over 400 per cent. Those gains were great for shareholders, says Jamie Murray, head of research for the Murray Wealth Group, which held the name for its clients. But all good things must come to an end, and Murray says while Goodfood may be a buy again in the future, the stock is a wait-and-see for the time being.

“Goodfood is one of those grocery and meal delivery companies operating in Canada and its big competitor is Hello Fresh which is more of a global player,” said Murray, speaking on BNN Bloomberg on Monday. “Goodfood is a name that we’ve held in our Canadian-focused portfolios for the last two years and we actually just sold the remaining amount of our position last week.”

Montreal-based Goodfood went public in 2017, raising $21 million of capital in the process, which the company poured into expanding operations. The company opened a production and distribution facility in Calgary in 2018 and followed up with last year’s opening of a Vancouver fulfillment centre to further stretch its reach. Goodfood had about 45,000 subscribers by the end of 2017 and as of its last reported quarter that number was up to 317,000.

“When we first purchased it, it was growing revenue at 30 to 40 per cent, so very high growth,” Murray said. “We met the management team and we really liked them and I think they’re pretty sharp.”

“We saw the 30-40 per cent growth rate and it was trading at a reasonable valuation for about 1x sales. Fast forward two years and there’s obviously been a big explosion in the business and their growth has beaten all expectations,” he said.

For its third quarter fiscal 2021, delivered in early July, Goodfood generated $107.8 million in sales, up 24 per cent year-over-year, with a gross margin of 35.0 per cent, itself up 6.2 per cent from a year earlier. The company’s net loss for the quarter was $2.0 million.

Goodfood says it’s been making progress on its move into grocery delivery, having opened a fulfillment centre in Ottawa, increasing its product offerings for members and offering same-day delivery. All that groundwork has put profitability off by a few steps but management seems confident in the path taken to expand beyond its meal kit beginnings.

“Our Adjusted EBITDA continues to be impacted by our on-going investments in people, processes and technology as we build out Canada’s leading on-demand grocery delivery network,” said CEO Jonathan Ferrari in a press release. 

“I am pleased with the progress we continue to make as evidenced by the expansion to 970 grocery products, the launch of the new Goodfood mobile application, and the recent announcement of our first local fulfillment centre in Ottawa, which will allow us to offer same-day delivery in a third major Canadian market,” he said.

Murray says competition in the meal kit space is now proving to be an issue for a home-grown company like Goodfood, and that might dec elerate year-over-year growth.

“We’re starting to see again those COVID comps that we’ve seen in some other companies where we think there might be a little bit higher churn. Goodfood is pivoting more to a grocery delivery business, so in certain markets you can pay a membership fee of $5 or $6 a month and I think you get really unlimited same day or next day grocery deliveries.”

“We think that’s a pretty big value proposition but very competitive against the established grocers and the Instacarts of the world,” Murray said. “We think the revenue growth looks like it’s gonna slow a little bit to more of the 15-20 per cent range from the elevated levels, so we just took some profits.”

“The high-growth names that don’t have the same cash flow strength may be a little bit susceptible to interest rates, as well, so we took our profits, and it’s one we’ll probably look at as the market plays out,” he said.

On its new Ottawa facility, Goodfood says the automation infrastructure employs Microsoft Dynamics 365 and Azure cloud computing solutions along with Goodfood’s own proprietary software for order orchestration and delivery optimization. The company said that it will be teaming with Microsoft on artificial intelligence projects in the future aimed at supply chain management.

“As we continue to build our footprint, we are convinced the agile portfolio of intelligent business applications Microsoft provides will combine to propel Goodfood’s supply chain and fulfillment capabilities to world-class level and, combined with our internal automation and robotics initiatives in development, will enable us to deliver more groceries faster and more profitably than ever before,” said Goodfood President and COO Neil Cuggy in a June 22 press release.