Real Good Food Company Stock: Not Too Good (NASDAQ:RGF)

In March of last year, I concluded that I was waiting for the good part for the Real Good Food Company (NASDAQ:RGF). The company was struggling since it went public late in 2021. While sales momentum was quite strong, margins were the real issue. Valuations had been reset in a substantial way already, as real upside could see if margins could be addressed, which was a big if.

A Recap

The name of the company – Real Good Food – is what it is all about, with the company offering innovative, branded, healthier and better frozen food, typically high in protein, low in sugar and gluten-free, so far the marketing part.

Typical ingredients include chicken, cheese, plant-based protein, sold under the namesake brand as well as private label products sold through retailers like Walmart, Kroger and Costco. By savvy usage of social media, the company has been able to market its wrapped chicken, chicken enchiladas, sandwiches and entree bowls.

The company went public at $12 per share, actually down $3 from the midpoint of the preliminary offering range. With 25 million shares outstanding, the valuation dropped to $300 million on the first day of trading, with that valuation even including $30 million in net cash. The resulting $270 million valuation was applied to a business which generated a mere $39 million in sales in 2019 on which an operating loss of $9 million was reported.

Revenues were flattish in 2020, with operating losses increasing up to $10 million, far from rosy numbers given the lack of growth and the extent of the losses. Momentum revealed itself in 2021 with first quarter sales doubling to $36 million, driven by Costco which made up 57% of total sales.

Preliminary third quarter sales were seen as high at $22 million with operating losses reported at $3 million. The resulting 3 times sales multiple based on an $88 million revenue run rate looked a bit friendlier, but losses remained substantial.

This was the situation at the time of the offering as shares had fallen to $6 per share in March 2022, cutting the equity valuation to just $150 million. In the meantime, the company posted a 136% increase in third quarter sales to $23 million, yet operating losses rose to $5.6 million. The company guided for 2022 revenues at around $120 million in sales which looked decent, yet EBITDA losses were seen at $8-$15 million, which is a real dreadful outlook.

After all, this EBITDA number is before numerous adjustments, including substantial stock-based compensation expenses. Trading at just 1 times sales at the time, the multiple came down rapidly, yet the issue was that of the continued operating losses.

Range Bound

Since March of last year, shares have been trading in a rather narrow trading range between $6 and $8 per share, now trading at $6.50 per share. In May, the company posted spectacular first quarter results with sales up 124% to $37 million and change. That was about the good news as gross profits of just 11% were cut in half on a percentage basis. As a result, operating losses were posted at $8.6 million, a substantial loss, as the company went into net debt territory.

The company hiked the full year sales guidance to $150-$160 million, now seeing EBITDA losses between $4 and $9 million after a substantial $3.3 million loss in the first quarter.

Second quarter sales rose 65% to $30.8 million, marking a fall on a sequential basis, with operating losses rising to $9.8 million following another quarter of soft gross margins.

In November, the company posted third quarter results with revenues up 63% to $37.6 million, with more gross margin pressure observed and operating losses actually increasing further to $10.6 million. By now, the company has incurred a net debt load of around $56 million as the dilution is quite tough.

The company guided for 2022 sales between $155-$160 million and gross margins between 19-21%. The 2023 initial outlook looks encouraging: with sales seen around $200 million and gross margins seen around 24%. While this marks a modest improvement from 2022, likely continued losses will be seen.

Concluding Thought

The reality is that I am surprised that shares have held up so well. While the sales momentum has been solid in 2022, the increasing losses are a huge concern for me.

While some improvements are seen in 2023, I fear the debt overhang as the options for the business might be rapidly coming down, as again I have been really surprised to see shares hold up so well in turbulent times, making it a very easy stock to continue to shy away from.