Goodfood Market’s profitability improvements and strengthened balance sheet in the fiscal second quarter of 2023 have warranted a price target bump, according to analysts at Stifel GMP.
The analysts maintained their ‘Hold’ rating on the Montreal-based meal kit company and upped their price target from C$0.60 to C$0.65. Goodfood's Toronto-listed shares are currently trading at about C$0.58.
“Valuation multiples of meal kit companies are low with HelloFresh and Blue Apron trading at 0.5x and 0.2x forward EV/Sales, respectively, leaving limited potential for Goodfood's valuation multiple to expand,” they wrote in a note to clients.
They noted that Goodfood had posted a fiscal 2Q 2023 miss on revenues offset by a strong earnings before interest, taxes, depreciation and amortization (EBITDA) beat.
Sales of $42 million were down 43% and lower than the analysts’ expectations of 44%, attributed to price-sensitive customers leaving due to recent price increases, a less aggressive customer acquisition strategy, and market share loss, the analysts said.
“Profitability improved significantly with gross margins reaching a record 42.2%, while selling general and administrative (SG&A) reduction continued, allowing the company to generate positive adjusted EBITDA of $3 million compared to a loss of $13.6 million in Q2FY22, a meaningful improvement over a short period of time,” the analysts wrote.
“The balance sheet position has strengthened following the recent financing, and Goodfood's cash position appears sufficient to sustain operations for at least the next 18 months.”
However, they pointed out that revenue continues to come under pressure and growth potential remains unclear. “Goodfood's revenues have been in decline for the last seven quarters, and the timing of a return to top-line growth remains unclear,” they wrote.
The analysts noted that Goodfood is focused on acquiring and retaining higher value customers through differentiated product offerings, such as Paleo and Keto meals, or by partnering with Michelin star chefs.
It has also hinted at the possibility of introducing a wider selection of ready-to-eat meals and also lower-priced meal kits to attract a different customer base which could add more complexity to the business and put pressure on profitability as seen in the past, the analysts wrote.
“Nonetheless, with the exit of the 'On-Demand' completed, Goodfood should be able to refocus its marketing dollars towards growing its legacy meal kit business, which could create traction with customers,” they wrote.
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