MamaMancini’s Holdings (MMMB): The Adults Are Now In Charge

MamaMancini (NASDAQ:MMMB) is already winning new customers and getting deeper penetration into the existing customer base. It has been able to grow revenue from $18M in 2016 to $70M on a TTM basis. However, gross profit dollars have only grown from $7.2M to $11.7M over that time frame. Gross margins contracted from 40% to 11.8% in Q2 FY23. Clearly there was a lack of attention to costs and the company was growing revenue at any cost. In July of 2022, the company hired Adam Michaels from Mondelez (MDLZ) to be the CEO and in September the company hired Anthony Gruber to be the new CFO. It has taken less than six months for their high quality management skills to make an impact on the company’s operations. We believe this management team (along with several additional hires) represents a significant upgrade in the management of the company and is the catalyst for further improvement in both operations and sales growth.

Bringing in fresh eyes to review all aspects of MMMB business has produced immediate results. For example, the gross margin improved from 11.8% in Q2 to 24.7% in Q3. This 1300bps sequential improvement is virtually unheard of in the food industry and shows how poorly run the company was before management’s arrival. This increase in gross profits produced, $6.6M in gross profit dollars, which was more than the $6M the company generated in the previous TWO quarters COMBINED. While a large decline in chicken prices in the quarter certainly helped margins, it is clear that better operational control, not just better pricing drove results.

For example, the company saved over $500K in shipping costs in the quarter by sourcing three new carriers. The company also started consolidating T&L + MamaMancini’s shipments to single customers into one truck, instead of two. The company was shipping product to the same store from the two different manufacturing facilities. Other examples of operational improvements include, reducing the number of storage facilities from six to four and reducing overtime (which saved over $250K in the quarter).

Current plant utilization is only 50%, therefore, significant volume leverage potential exists to improve gross margins over time.

The company is already winning new customers and getting deeper penetration into existing customers. On the last conference call management stated that:

1. In Q3, “we launched into three new customers and drove double-digit new items into existing customers, half of which were through our cross-selling of our new T&L products into legacy relationships.”

2. In Q4,”looking ahead to the fourth quarter, we have already successfully sold in and received orders from three new customers and shipped an incremental double-digit portfolio of new items into existing customers, further expanding the breadth and depth of our coverage.”

Finally, there are macro tailwinds in place (investments always sound better with “macro” theme attached) that should help the company grow revenue organically for several years. The categories the company participates in are growing 8-12% a year. From the conference call:

“This approach fits well with the significant pandemic-related lifestyle changes that consumers faced in the last three years, with many focusing more than ever on quick, clean, and fresh meals made with better ingredients at a price more affordable than eating out. On the other side of the counter, retailers continue to face significant supply chain and labor challenges and are seeking labor-efficient, reliable solutions for their hot bar, deli, and grab-and-go offerings.”

The company provides solutions to both sides of these macro trends, high quality, convenient, fresh prepared food items for customers with lower labor costs to the grocer. It should also be noted that 50% of company sales are private label, which should benefit from any trade down from either in-store purchases or reduced consumer purchases of out of the home meals.

Conference Call Comments We Found Interesting

CEO Michael spent a significant amount of time on the last call going through the new business model and strategy for the company. Here are what we feel are the most important takeaways:

The realization of our goal to shape MamaMancini’s into a one-stop-shop for these deli prepared food solutions has required a step change in our corporate structure in many ways. (NOTE: For those investors looking for “catalysts”, there you go!!).

On the cost front, we have designed and implemented new approaches to cost management, driving noticeable improvements in procurement, manufacturing, and logistics management capabilities. As Matt will mention later, our efforts to more efficiently manage labor costs, particularly overtime, outbound logistics, and cold storage are realizing noticeable returns, allowing us to reinvest in our business. (NOTE: This goes to our “adults are in charge” comment earlier. This is basic business school 101 blocking and tackling.)

We put new financial and operational controls in place to help our teams and provide agility for sales and operations staff. The weekly and monthly cadence of meetings as well as the clear and actionable KPIs we put in place are allowing our teams to communicate easier, make decisions faster with more information. (NOTE: More business school 101 stuff here. Create systems to automate and monitor the most important aspects of your business in real time to make quick adjustments.)

We have already started to build out the finance function. For example, our new Controller started today, as well as filling critical needs in logistics and soon procurement. (NOTE: It is very surprising that all of these important positions were not filled previously.)

Another C that Adam did not mention but is critical to the success inside the operation is consolidation. We’ve been addressing the need to take advantage of synergies across our business units, helping to gain efficiencies spanning every aspect of the supply chain. In Fiscal Q3, we created a dedicated shipping team to focus on consolidating both inbound and outbound freight across our New Jersey and New York facilities. This team was successful in sourcing three new carrier options, creating competition that was able to reduce overall freight costs by 200 basis points in Fiscal Q3. (NOTE: Simple solution of taking internal people and assigning them a simple, but important task that produced results within 3 months!)

Another consolidation focus during the quarter was on our third party storage. As MamaMancini’s Holdings is first and foremost a manufacturer and marketer of deli solutions, we recognize that we currently leverage the expertise of others when it comes to cold storage. We have utilized multiple locations to hold raw materials and pre-shipped finished goods in an effort to maximize our production capabilities in our plants. However, the saying too many chefs in the kitchen is fitting when recognizing that spreading products across multiple sites can be counterproductive. Fiscal Q3 began the process of consolidating these third parties down from six to four strategic locations, eliminating additional storage costs that were not creating value. (NOTE: Another example of how the company’s gross margin profile has materially improved on a go-forward basis and that these savings will not be just a one-time gain and revert lower next year. These are permanent improvements to the gross profit margin profile.)

We continue to research our cold storage options, including, but not limited to, investing in a centralized facility between the business units that we would control. Our dedicated costing models have empowered the sales team to make smarter decisions with regards to pricing products to our retailers that not only reflect fair perceived value to shoppers but also provide margin to invest back to help promote our products and keep us top of mind. (NOTE: THIS IS VERY IMPORTANT FOR SUPPORTING HIGHER GROSS MARGINS. CEO Michaels has indicated on several occasions that the company was blind as to how much gross profits were being made on sales in many areas. This is also shocking from a basic business sense.)

Finally, in Q3, I took our Management team to PACK EXPO International in Chicago where we walked the show in a continued effort to find better technology to further increase the plant’s efficiencies. We came away with multiple opportunities and started putting ROI documents together that will be addressed with the Board over the next coming weeks. (NOTE: COMPANY HAS ALREADY INSTALLED A NEW MACHINE THAT COOKS PRODUCTS

So it’s really easy for a customer that—I’m going to make it up, say they already have our meatballs or our sausage and peppers, they know we have quality. They know we have service. It’s, “Hey, by the way, do you have some chicken or do you have some grilled vegetables or do you have some paninis?” We now have all of those. We didn’t have them before. So that’s how we’re getting in. The customers see the quality, see the service and quite honestly, it’s easier for them. If they make one phone call to fill the entire deli case, that’s much easier than having to call 25 people to do that. That’s the vision.

What is the longer-term potential for earnings and valuation?

“Our vision is to become a one-stop-shop for prepared foods for grocery, mass, club and convenience channels, addressing the $30 billion-plus food service and prepared foods market with our grocer partners.”

We have said in earlier posts that we only use models to get a general idea of how the business model works and generate a range of potential outcomes. So with that in mind, let’s take a stab at what the income statement could look like at $150M in revenue. This will drive the obligatory “what does this mean for the stock price” guesstimate!!!

“It’s tough to make predictions, especially about the future.“

–Yogi Berra

Business model pre-mortem

Management has stated that it believes there is significant opportunity to increase SKUs per EXISTING customer. Currently, the company averages about 5.5 SKUs per door (Approximately 8,000 doors.) However, Publix sells 10 SKUs per store and we do not see any fundamental reason that their SKU should be an outlier to what is possible. Also remember, that these SKUs are almost entirely legacy MMMB meatball or pasta products. The acquisition of T&L increased the number of SKUs (i.e. chicken, paninis, olives) that can be cross sold to existing customers. While there will no doubt be a testing period and the number of SKUs will not double overnight, management did give examples on the call of customers already taking new products. If successful, this strategy could increase sales 20-30% or more. One caveat however is that, no one has been successful at dominating the deli opportunity, so this is a new industry strategy that could fail due to apathy or inertia of customers.

One benefit of taking additional SKUs from MMMB to customer is that there would be reduction in the number of vendor relationships it has to manage (more items sourced directly from the company) and they are also more likely to get volume discounts compared to multiple vendor purchases.

Management also believes there is significant opportunity to increase regional penetration in current customers. It is our understanding that the company does not sell into 100% of all the available stores with current customers. And that some stores do not carry all of the lines that other stores in the chain do. If successful in expanding their SKUs within a customer’s region, this strategy could increase sales 10-20%. (Just a guess). Again, there are reasons why this hasn’t happened before. Is current sales force/broker network up to the task? Does something have to change at customers (new buyers or management)?

The company is using product innovation to open new markets. For example, the new Meatball in a Cup ($1.25-$1.50 gross profit dollars per sale) example of this strategy. This product opens up convenience stores, grocer hot bars and food service (universities and colleges and hospitals) opportunities which doubles market size. The company has also mentioned tangent product lines that can be developed internally to increase customer penetration (i.e. Pizza, Soup).

Another example of innovation is the Meals for One product. This is a pre-prepared meal reduces labor costs for grocery store operators. Instead of dedicating employees to make a similar product in house, the store and save time and labor selling these meals.

All of these products are in the very early stages of rollout. Even though these products make intuitive sense to us (Meatball in a Cup has a strong low $ cost per protein and Meals for One are on trend and labor saving for customer), Widespread adoption is not guaranteed. It would take a LOT of Meatballs in a Cup sales to move the needle (Selling 1 million a year would be 2800 a day and still generate only about $1.5-$1.9M in gross profits to company).

Finally, Kroger is still huge opportunity. MMMB has not been able to penetrate into the largest grocery change in the country. However, the company has a relationship with Albertsons, so if Kroger is successful with their acquisition of the company, that might EVENTUALLY provide the opportunity to sell to Kroger. We think the sales cycle could be as long as 2-3 years because of integration focus initially. We haven’t heard specific reasons from management about why they have failed here other than several salesmen have tried, failed and been replaced.

Model Operating Assumptions:

• Sales $150M.

• GM 27-29%. (Note: peers have gross margins of 31-35%)

• Depreciation and Amortization stays at $2M.

• EBITDA Margin 8-10%.

  • While the comps we used have EBITDA margins about half of Gross Margins, we should note that T&L division that was acquired had 10-12% gross margins as is now at least 20% of sales, which limits upside of margin expansion.

• All growth is organic. No increase in leverage.

• P/E is 15X

NOTE: Armanino Foods of Distinction (OTCPK:AMNF) sells frozen pasta and pesto sauces primarily in three states (CA, NV, AZ). Sonos Foods (SOVO) sells pasta sauces, dry pasta, soups, frozen entrees, yogurts, pancake and waffle mixes, other baking mixes, and frozen waffles under the Rao’s, Michael Angelo’s, noosa, and Birch Benders brands.

EV/EBITDA Assumptions

• Company generates ZERO FCF. (Very conservative in our opinion, but keeps it simple).

• Assumes no real increase in shares outstanding. Shares probably do increase somewhat, offsetting some of the error in the no FCF assumption.

• No time table for achievement of sales and margin goals.

Summary:

From 2016 through the first half of 2022, the company great revenue from $18M to over $60M, but gross margins collapsed from 40% to 16%. There was clearly a lack of control over major costs and pricing. In less than 120 days, due to attention to detail and a professional approach to running a business, new management was able to recapture over 1200bps of gross margin. We think the company is in the early stages of returning the company to a sustainable 8-10% EBITDA Margin business, while at the same time maintaining its long-term growth potential. We do expect the company to reinvest some of the savings to drive revenue growth and do not expect a return to the 30%+ gross margins of the past, or even the two peers we used.

However, we are confident that the company will be run more cost-efficiently than it has been in the past, which should eventually lead to a higher valuation. The company is currently trading at an EV/sales of about 75%. CPG companies typically trade for 1-3X EV/Sales. Even after the 80% jump in the stock, investors are skeptical of the future margin potential and EPS growth rate. If the company can achieve $150M in sales, 1X EV/Sales would be about $4 per share in stock price alone. One quarter does not make a trend, but we believe the company has a greater chance for success under this management than at any point in the last six years. (No offense Carl, we still love you!!).

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