Oatly Group (NASDAQ:OTLY), which produces dairy alternatives from oats, shares rose on Wednesday after the company’s first quarter financial results came in either in line or slightly better than expectations.
For the quarter ended March 31, 2023, Malmö, Sweden-based Oatly reported a year-over-year jump in revenue of 17.7%, or 23.5% on a constant currency basis, to $195.6 million while it narrowed its net loss from $87.5 million in the year-ago quarter to $75.6 million.
Analysts at Barclays said that the perhaps most encouraging part was Oatly’s commentary that, despite the company having recently put through pricing in a number of regions, volumes for the most part have remained robust across geographies, suggesting that brand equity remains solid and consumers have not been overly deterred and continue to see value.
“To that end, OTLY reported 1Q23 organic sales growth of 23.5% year-over-year, comprised of an about 15% year-over-year pricing benefit and still plus HSD year-over-year volume growth,” they wrote.
From a margin perspective, the analysis noted that Oatly continued to make progress toward its goal of achieving positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the full year in 2024 and it was starting to gain improved visibility toward its high 20s fourth quarter 2023 gross margin target.
“1Q23 gross margin of 17.4% came in a touch above consensus expectations of 17.1% and showed sequential improvement of about plus 150 basis points versus 4Q22, but it is not until the back half of 2023 that the company expects to see a much more substantial improvement in gross margin,” they wrote.
“Specifically, the company expects a big step up in gross margin from 2Q23 to 3Q23 as it looks for improved absorption stemming from more efficient utilization of plants starting in 3Q23 and another material step change in margin, this time towards the high-20s range in 4Q23, largely driven by the co-packer consolidation in the Americas, now that operations in conjunction with Ya YA Foods have begun running smoothly.”
The analysts noted that 1Q marked the second consecutive in which Oatly had made progress towards stabilizing its supply chain, which they believe could enable the company to get back on the offensive with its merchandising and marketing spend.
“Specifically, as the company continues to improve its fill rates and execution, so too has it started to increase promotional rates in the last few weeks, and has set expectations for promotional rates to continue to increase in the coming months,” the analysts wrote.
“And, while some may view this return to promotional activity as an incremental negative, we view it more optimistically, particularly given the fact that OTLY has been able to do very little in the way of merchandising activity over the last couple of years due to severe supply constraints.”
The analysts reiterated their ‘Overweight’ rating on the stock and US$3 price target, representing an upside potential of 37%.
Oatly’s US-listed shares added 4.1% at US$2.28 in the early afternoon on Wednesday.
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