Goodfood Market Corp

TSX:FOOD

Earnings Call Analysis

Goodfood's Q4 2024 Highlights: Growth in Profitability and Strategic Acquisitions

In Q4 2024, Goodfood achieved an adjusted EBITDA of $9.1 million, nearly doubling from the previous year, while free cash flow reached $7.6 million, marking its first full-year positive generation. Despite a 9% decline in net sales to $34.1 million due to seasonal factors, active customers remained stable at 101,000. The introduction of a $9.99 value meal plan and the acquisition of Genuine Tea aim to enhance customer engagement and profitability. Goodfood's strong cost management reduced net leverage from 4.4 to 2.5 turns, positioning it well for future growth.

Strong Financial Performance Amidst Challenges

Goodfood Market Corp. marked a transformative year in fiscal 2024, celebrating its 10th anniversary with a noteworthy nearly doubling of adjusted EBITDA to $9.1 million (6% margin) from the previous year's $4.7 million (3% margin). This 93% growth is attributed to implementing structural efficiencies, disciplined cost management, and optimized pricing strategies despite a challenging consumer spending environment.

Cash Flow and Debt Reduction

The company generated an impressive adjusted free cash flow of $7.6 million in fiscal 2024, marking its first full year of positive cash flow generation. This accomplishment allowed Goodfood to reduce its net leverage ratio substantially from 4.4 turns in fiscal 2023 to 2.5 turns, thereby enhancing financial flexibility and the capacity to invest in future growth opportunities.

Challenges with Active Customer Base

Despite these financial gains, Goodfood faced challenges with net sales, which declined by 9% to $34.1 million compared to Q4 of '23. The active customer base fell to 101,000 from 116,000 the previous year. However, there was a positive signal with a 5% increase in net sales per active customer, reaching $337, indicating effective engagement with loyal customers.

Sustained Profitability and Margins

Goodfood has now achieved 7 consecutive quarters of positive adjusted EBITDA, maintaining a stable gross margin of 38%, consistent year-over-year. For fiscal 2024, the adjusted EBITDA margin improved by 3.1 percentage points, reflecting the company's focus on efficiency and cost optimization in its operations.

Customer-Centric Initiatives and New Offerings

In response to evolving consumer preferences, Goodfood expanded its value plan to offer delicious recipes at $9.99 per serving, a move recognized as vital in broadening its customer base. The uptake of this plan doubled since its introduction during the summer, enhancing affordability and accessibility without compromising quality.

Strategic Acquisition Plans

Goodfood recently executed its acquisition strategy, successfully acquiring Genuine Tea, a leading third-wave craft tea company. This represents an initial step towards building a diverse portfolio of next-generation brands. The acquisition is expected to be accretive to adjusted EBITDA and aligns with Goodfood's long-term strategy to partner with founder-led, high-growth, and profitable businesses.

Outlook for Fiscal 2025

Looking ahead to fiscal 2025, Goodfood is enthusiastic about expanding its platform and enhancing the customer experience. Management plans to continue focusing on margin-accretive acquisitions and incremental efficiency gains, notably optimizing operational costs, to drive both top-line and bottom-line growth.

Navigating Foreign Currency Risks

The management acknowledged potential impacts from the weakening Canadian dollar, particularly as they source more products from the U.S. While these pressures may slightly affect gross margins, they emphasize that imported costs represent only a small portion of their overall cost structure.

Earnings Call Transcript 2024-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Goodfood Q4 and Fiscal 2024 Earnings Call and Webcast. [Operator Instructions].

I would like to remind everyone that this conference call is being recorded today, November 27 at 8:00 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Goodfood's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements or other future events or developments.

As such, please take a moment to read the disclaimer on forward-looking statements on Slide 2 of the presentation. Please be aware that during the call, presenters will refer to certain metrics and non-IFRS measures. Where possible, these measures are identified and reconciled to the most comparable IFRS measures in our MD&A. Finally, let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated.

I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood Chief Executive Officer. Mr. Ferrari, you may begin.

[Jonathan Ferrari, executive]

Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the fourth quarter of fiscal 2024 ended September 7. I'm joined on the call today by Neil, Goodfood's President and Chief Operating Officer; and Ross, Chief Financial Officer.

This morning, we announced our Q4 and fiscal '24 results. You can find our press release and presentation on our website and SEDAR. All figures in today's call are expressed in Canadian dollars unless otherwise noted.

Let's start with Slide 3. Fiscal 2024, marking Goodfood's 10-year anniversary has been transformative for our company with significant advancements in profitability and cash flow generation, starting with adjusted EBITDA, which nearly doubled year-over-year. For fiscal 2024, adjusted EBITDA reached $9.1 million, representing a margin of 6% compared to $4.7 million or a 3% margin in fiscal 2023. This 93% growth in adjusted EBITDA reflects the structural efficiencies we've implemented, strong cost discipline and optimized pricing strategies that are now firmly embedded in our operations.

Free cash flow generation has been equally strong. For fiscal 2024, we achieved $7.6 million in adjusted free cash flow, marking a pivotal moment for Goodfood as this is our first full year of free cash flow generation. This has allowed us to reduce leverage by nearly 2 full turns, bringing our net leverage ratio down from 4.4 turns in fiscal 2023 to just 2.5 turns today. This not only strengthens our financial flexibility, but also positions us to invest confidently in future growth opportunities.

On top of the financial accomplishments, we've continued to enrich our customer value proposition. Over the past year, we've added a record number of new recipes to our offering, giving more variety and choice than ever before. We've also expanded our value plan, which delivers delicious recipes at just $9.99 per serving, making high-quality home cooking accessible to more Canadians. This focus on affordability has been key in addressing evolving consumer preferences and broadening the customer base we have access to.

Finally, I'm excited to highlight that we've begun executing on our acquisition strategy, which was discussed in previous quarters. Our acquisition of Genuine Tea, a leading Canadian third wave craft tea company, marks the first step in building a platform of next-generation brands. This acquisition is accretive to adjusted EBITDA and aligns perfectly with our vision of building a portfolio of founder-led, high-growth and profitable businesses. With a strong foundation of financial discipline, innovative customer offerings and a road map for growth, we're entering fiscal 2025 with momentum.

On that note, Ross will now go over our financial performance in greater detail.

[Roslane Aouameur, executive]

Thank you, Jon, and good morning, everyone. Let's move to Slide 4 to discuss our net sales and active customer base. On Slide 4, you will see that net sales for the quarter were $34.1 million compared to $37.2 million in Q4 of '23, representing a 9% decline. Beyond usual seasonality we see in the summer months as customers travel and spend time eating out rather than at home. This also reflects a challenging consumer spending environment as well as our focus on more profitable customers. As such, active customers ended the quarter at 101,000 compared to 116,000 in Q4 last year, though relatively stable compared to the Q3 number when factoring seasonality.

As mentioned, we continue to focus on engaging with our most loyal existing and most profitable new customers. We have seen, as a result, our highest net sales per active customer for our fourth quarter, standing at $337 per active customer this year, up 5% from last year. Our focus on enhancing basket size and order frequency has driven that increase even in a difficult macroeconomic climate.

Turning to Slide 5 to review our profitability levels. We are pleased to have brought consistency to our profitability and have now delivered 7 consecutive quarters of positive adjusted EBITDA. Gross profit for the quarter was $13 million, representing a gross margin of 38%, consistent with last year's gross margin. This level reflects stable profitability, supported by operational efficiencies and by pricing optimizations.

On the back of the consistent gross margin, we continue to work to take costs out of the system and reduce SG&A and have delivered adjusted EBITDA this quarter of just over $0.5 million for a margin of 1.5%. Seven consecutive quarters of positive adjusted EBITDA has required strong cost discipline from every employee in our team. Everyone has and continues to drive efficiencies in our operations and optimization of our cost structure. Our employees persistently work to build and implement a culture of continuous improvement and lean operations, which has enabled this consistent level of EBITDA generation.

Moving to Slide 6. Cash flow generation remains a key highlight for fiscal 2024. Cash flows used by operating activities were $0.9 million this quarter, a $1.1 million improvement compared to the same quarter last year. As profitability gained consistency, our CFO has improved compared to last year and with capital expenditures remaining low given the good condition of our relatively new and well-maintained assets, our adjusted free cash flow has remained stable for the quarter.

As outlined throughout the year, this free cash flow improvement is enabling a reduction in debt, which combined with growing profitability, have brought our net leverage from 4.4 turns in the fourth quarter last year to 2.5 turns this quarter.

Turning to Slide 7, which summarizes our key financial metrics this year. We are proud of the profitability metrics we delivered this year. Gross margin improved by 2.4 percentage points and adjusted EBITDA margin improved by 3.1 percentage points on route to delivering record adjusted EBITDA of $9.1 million.

Going from this improved profitability is also record adjusted free cash flow, which reached full year positive territory for the first time in Goodfood's 10-year history at $7.6 million for the year. This level of cash flow and cash balance provides meaningful financial flexibility to continue enhancing our financial position and the ability to invest in various strategic initiatives such as the recently announced acquisition of Genuine Tea.

Overall, the results this year highlight our continued focus on providing more to customers with strong unit economics and building operating efficiencies. While our active customer base has shown some stability and lower contractions, it has also shown its highest net sales per active customer every quarter this year, which have in turn driven increased profitability.

Combined with further use of technology tools, outsourcing initiatives, disciplined cost management and improvement in operational metrics such as labor cost per portion or shipping cost per order, which have both shown double-digit percentage improvement year-over-year, our profitability has reached levels never seen before.

On balance, our profitability metrics for the year came ahead of our expectations, and we are pleased with the sustained strength of our financial performance and satisfied with growing profitability. While the majority of our financial KPIs, unit economics and customer feedback metrics continue to show improvement, we continue to strive for growth in both the top line and the bottom line. As we look to generate growth in a difficult environment, we are energized by this performance, energized and hungry for more.

Jon will now provide an update on our recent customer-centric initiatives and the acquisition of Genuine Tea.

[Jonathan Ferrari, executive]

Thank you, Ross. Turning to Slide 8. Our outlook for fiscal 2025 centers on delighting our customers and expanding our platform. We recently introduced the value plan built on the value recipes made available to members earlier this year. It's a cornerstone of our strategy. This plan offers delicious classic recipes for under $10 per serving, making high-quality affordable meals accessible to more Canadian households. It is not just an add-on, but a growing segment of our ready-to-cook portfolio, and its uptake has doubled since launch in the summer.

Members are increasingly signing up to the plan and still have access to the rest of our recipes, upsells and grocery add-ons. We are also excited about our Chef partnerships, which include collaborations with industry legends like Chuck Hughes or Susur Lee, up-and-coming stars like Chef Laurent Dagenais and Michelin-starred chefs like Lee Cooper of ’l’'Abattoir in Vancouver. These partnerships bring unique culinary experiences directly to our customers' homes, creating a sense of joy and discovery that sets Goodfood apart.

Moving to Slide 9. We are thrilled to welcome Genuine Tea into the Goodfood family. Genuine Tea, a leading Canadian third wave craft tea company, embodies the values we look for in an acquisition, passionate founders, a strong growth history, meaningful profitability and a commitment to quality.

In addition, Genuine Tea has been recognized as one of Canada's fastest-growing companies by the Globe and Mail and has won Best Tea in Toronto multiple years in a row. We are excited to be working with Sarah and David, the founders of Genuine Tea, who will continue to lead the business for years to come, maintaining the brand's unique identity known for product innovations in high-quality, organic and transparently sourced tees.

We believe Genuine Tea is well positioned to continue to grow through its successful omni-channel strategy, selling into Canada's most discerning cafes, specialty grocery stores and their e-commerce website. This acquisition is a critical first step in our long-term strategy to build a global portfolio of next-generation consumer brands. We aim to partner with founder-led businesses that share our values, have demonstrated consistent growth and profitability and can operate within a decentralized model.

We will also support the acquired businesses and drive value creation through, for example, combining logistics networks, offering fulfillment as a service and cross-selling initiatives among many value-creating options. Our investment approach is designed for the long term. We plan to invest in businesses that align with our ethical and sustainability values and provide autonomy to founders while leveraging our platform for growth. This approach will be central to achieving our audacious goal of becoming a leading portfolio of next-generation brands globally.

On the 10-year anniversary of Goodfood, we are pleased with our financial performance and excited by the future of the company. This year has demonstrated the consistent cash flow generation ability of Goodfood as well as its ability to attract and invest in next-generation businesses and build a platform that is lean and well positioned to generate meaningful shareholder value.

On that note, I will turn it over to the operator for the Q&A portion of this call.

[Operator]

[Operator Instructions]

Your first question comes from the line of Martin Landry with Stifel.

[Martin Landry, analyst]

My first question is on the trends that you're seeing in Q1, Q1 is almost done. So I was wondering if you could talk a little bit about how your customer count has evolved, how your average revenue per user has evolved and your customer acquisition costs in Q1. Just to give us a little bit of a sense on how things are going post the year-end?

[Jonathan Ferrari, executive]

Thanks for the question, Martin. I think one of the things we mentioned in the script is Q4 was continuing to see consumer challenges and softness across Canada. And within Q1, we're seeing some of the same trends in terms of consumer softness. I think one of the things that we're looking at is the subscriber count stability. So I would say since Q3 of 2024, we've seen relative stability in our customer counts, which I think is a good leading indicator being able to maintain that over several quarters is what leads to year-over-year revenue growth ultimately.

So we're encouraged by the stability in that customer count. It's been driven, I would say, through really focusing in on the ROI of our marketing spend. As we've talked about in the past, I think we saw about a 15% improvement in customer acquisition costs throughout the summer, and we're continuing to maintain that trend in Q1. And what else can I add? I think the value plan is helping us both attract customers who are signing up to the value plan for the $10 meals, but we're also seeing existing customers interact with the value menu, so they can stay on their existing plans and add value menu recipes within their selection. And so it's creating a lot of options and ways in which customers can save money while continuing to shop at good food.

So we're seeing some positive things across those trends. But as I'm sure you're seeing across all consumer businesses in Canada, we're working really hard to meet customers' needs and the environment remains challenging.

[Martin Landry, analyst]

Yes. So if your customer count is stable and you're seeing that you're seeing consumer softness, does that imply that your ARPU is down a little bit?

[Roslane Aouameur, executive]

I think -- as you know, revenue is based on the basket size and the frequency of the orders. I think we're seeing subscribers being relatively stable. I think on an activity level, there's probably not as much activity or it's driven -- there is softness in the activity from the customers. I think the basket size has held quite nicely though.

[Martin Landry, analyst]

Okay. And one thing we're seeing is our Canadian dollar losing ground versus the U.S. dollar. And if I recall, I know you've got some purchases in U.S. dollars. Can you talk a little bit about how the weakening Canadian dollar is impacting your business right now?

[Roslane Aouameur, executive]

Yes, there's some impact, especially as we start sourcing more with the winter season from the U.S. There's some impact on our food cost. I wouldn't say it's very, very significant. It is pressuring gross margin a little bit at this point. We still try to have as many of our purchases as possible in CAD. Of course, some of the products coming from the U.S., even if they're quoted in CAD, the exchange rate has an impact and then there's some USD purchases. It is still a minority of our cost structure.

[Operator]

And your next question -- your next question comes from the line of Frederic Tremblay with Desjardins.

[Frederic Tremblay, analyst]

Congrats on the first acquisition. Just on that, I wanted to maybe dig a bit deeper on the acquisition strategy here and specifically if you view it as being more brand related or category related. And I guess, I mean by that, are you screening targets by brands that are resonating with customers first? Or are there specific product categories that you're looking at? Just want to better understand what the sort of the filters are initially on the acquisition strategy?

[Jonathan Ferrari, executive]

Thanks for the question. I think what we're looking for is really the concept of next-generation brands. So we're looking for brands that are aligned with Goodfood's values, right? So Goodfood's core purpose of delivering joyful nourishment and helping our community live longer on a healthier planet. That's kind of one of the overarching themes that we're thinking about and talking about with the businesses that we're interacting with. I think having a similar end consumer is something that we're favoring. So having the ability to say the brand has potentially a similar customer base that we can cross-sell their brand into Goodfood's customer base and vice versa. I think that's a real plus.

Next generation for us also means a significant amount of e-commerce sales, and that creates some interesting opportunities for us to offer fulfillment as a service to some of these smaller brands that are fulfilling their products internally themselves. And we can do so on a larger scale with many efficiencies, probably at a cost basis that's 15% to 20% below what a smaller brand would be doing on their own.

And then I think for us as well, what we really like about Genuine Tea is they've carved out a unique niche for their brand and their business that's fast growing and is gaining adoption in Canada. So they're one of the leaders in the third wave tea movement. And if you've heard about the third wave movement on the coffee bean side, it's all about promoting quality, freshness and transparency of the product.

So Genuine Tea is sourcing directly from international farms, getting high-quality products and getting it really fresh for their customers. And it also creates a real focus around innovation, which I think is another core piece of next-generation brands. So Genuine Tea was the first tea brand to offer traditional matcha in Toronto, for example. They're also a leader in adaptogenic tea blends, working with nutritionists to build out those tea blends. And so those are a few of the characteristics that we see in the next-generation brands that we're interested in working with.

And what we love about the Genuine Tea situation as well is the founder, Sarah and David have this combination of a really deep understanding of their consumer base and their products. They're both tea [indiscernible] but they also have business backgrounds and have MBAs, which gives them a really interesting combination of business acuity and entrepreneurial abilities and deep knowledge of their consumers in their space.

And so I think the -- for us, what we're trying to do is make sure that in addition to targeting Goodfood's organic growth, we can build out this platform of brands that give us many ways to win and many ways to grow within the portfolio. And Genuine Tea has been really an impressive fast-growing brand over the past few years and we're excited to work with the founders.

[Frederic Tremblay, analyst]

That's great. And maybe just a last clarification there. I think in your script, you mentioned global brands a few times. Was that meant to say that you're looking outside of Canada as well? And if so, like how would you think about some of those synergies in terms of logistics and other, I guess, Canadian-centric synergies that we could see from some of the acquisitions that are made in Canada and how you would offset that if you were to acquire outside of Canada?

[Jonathan Ferrari, executive]

So we focused our core efforts within Canada. Of course, since we've made the Genuine Tea announcement, we've had some interest from businesses, I would say, across North America. And so we're keeping an open mind within the U.S. market. We're trying to find businesses that we have an edge in and we understand better than any other buyer out there. So I think that's a core piece of it. And we're also exploring opportunities to bring U.S. brands into Canada and leverage our platform for that. So that could be one of the ways in which value could be created working with a U.S. brand.

[Frederic Tremblay, analyst]

Okay. Great. That's interesting. Maybe switching topics here, more on the margin side, obviously, great progress in fiscal '24. Without giving any, I guess, forward guidance for fiscal '25, are you seeing any sort of levers that would potentially continue to move the margin higher in the next year? Or are we sort of at a plateau and maybe we're relying more on margin-accretive acquisitions? Just how you're thinking about the gross and adjusted EBITDA margin going forward?

[Roslane Aouameur, executive]

It's a good question. I think from a gross margin perspective, what we've mentioned in recent quarters and highlighted with the value plan is we're looking to find ways to give more to the customer. So I think there are some investments that are being made in terms of the amount of diversity in some ingredients and up and down the pricing options. So that's on the gross margin.

I think on the EBITDA margin, definitely margin-accretive acquisitions will play a role in that. I think overall, we're still always going to look for marginal cost improvements on the OpEx side to see what we can do better, whether it's focusing on improving some of our technology tools and how they can help increase productivity within the business or look at some of the longer-term contracts that we've had that we can work through.

So I think those gains are probably going to be more on the marginal side. So I think if you look at the mix of adding both margin-accretive acquisitions and doing some small improvements on the SG&A side, and there's the path to get to margin improvement on the EBITDA side.

[Operator]

And I'm showing no further questions at this time. I would like to turn it back to Mr. Jonathan Ferrari for closing remarks.

[Jonathan Ferrari, executive]

Thank you for joining us on this call and we look forward to speaking with you again in the new year.

[Operator]

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.