A Member of Pat McKeough’s Inner Circle recently asked for his advice on a frozen foods company that supplies plant-based products.
Pat likes the company’s rising revenues and ambitious plans to exploit new product categories and sales channels. However, he cautions that it operates in a highly competitive market and is highly dependent on three main customers at the present time.
Tattooed Chef Inc. (Symbol TTCF on Nasdaq; www.tattooedchef.com), produces and sells a portfolio of frozen foods. It supplies plant-based products to retailers in the U.S. and was formerly called Ittella International.
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The company offers ready-to-cook bowls, zucchini spirals, riced cauliflower, acai and smoothie bowls, cauliflower crust pizza, and plant-based burgers. Its products, both private label and under the Tattooed Chef brand, can be found in the frozen food section of retail food stores. These include Walmart, Costco, Target and Sam’s Club.
In June 2020, Forum Merger II Corp., a special purpose acquisition company, or SPAC, announced that it would merge with privately held Ittella International to complete the qualifying transaction required for this type of acquisition.
SPACs are a specialized kind of IPO (Initial Public Offering, or new stock issue). One key difference is that SPACs, also referred to as “blank-check companies,” raise money from investors without providing a detailed business plan. The SPAC goes through an IPO-like process, raising some money and getting listed on an exchange. Its next goal is to find another business to buy, usually within two years. Then the two companies merge, giving the purchased company a relatively quick stock exchange listing and the liquidity that comes with it.
On October 16, 2020, Foreign Merger II and Ittella International completed their merger transaction. Ittella International then started trading on the New York exchange under its new name, Tattooed Chef, and new symbol TTCF.
On December 21, 2021, Tattooed Chef completed an $18 million cash-and-stock acquisition. It bought Belmont Confections, an Ohio-based maker of nutrition bars sold under private label by other companies.
Based in Youngstown, Ohio, Belmont specializes in the development and baking of snack and nutritional bars. Tattooed Chef now plans to use its 47,000-square-foot facility to let Belmont expand in the bar segment.
Inner Circle: Acquisition offers new offerings and sales channels
The transaction will let Tattooed Chef further diversify its product offerings and enter the billion-dollar, global plant-based bar category. This aligns with its growth strategy to develop more products and expand its channel penetration beyond retail and club stores.
The company’s revenue rose 74.9% in 2020, from $84.9 million in 2019 to $148.5 million. Tattooed Chef branded product revenue was a record $84.6 million in 2020, up sharply from $18.3 million in 2019.
The revenue jump for Tattooed Chef branded products was the result of a rise in the number of U.S. distribution points, as well as increased sales through existing club channel customers. Sales were strong for its current portfolio of products but also for new product introductions. They include smoothie bowls, vegetable blends, buffalo cauliflower, and other value-added riced cauliflower meals.
The company made $45.4 million, or $0.74 a share, in 2020. That was up sharply from $5.6 million, or $0.10 a share, in 2019. However, the 2020 results included a one-time $39.3 million income tax benefit.
In the second quarter ended September 30, 2021, Tattooed Chef’s revenue increased 43.5%, to a record $58.8 million from $41.0 million a year earlier. Revenue was higher due to strong sales of its Tattooed Chef brand products. Tattooed Chef branded product revenue was $35.3 million, an increase of 55.9% from $22.6 million.
The company lost $8.2 million, or $0.10 a share, in the quarter. That’s compared to a loss of $3.2 million, or $0.11 (on fewer shares outstanding).
Tattooed Chef now aims to expand its reach into more grocery chains in order to accelerate growth. And so far, it has added a number of chains as customers, including leading U.S. retailers like Kroger, Publix, and Albertsons. In fact, the company’s offerings are now in over 13,000 retail stores.
Still, Tattooed Chef operates in a highly competitive market. In addition, three of its largest customers contribute a high 88% of total revenue. That concentration adds risk.
Recommendation in Pat’s Inner Circle: Tattooed Chef Inc. is a hold.
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