Goodfood Market Corp (TSX:FOOD)’s decision to exit the on-demand delivery services market is likely to mean eroded investor confidence in its management’s ability to execute and result in the stock being in the “penalty box” for the foreseeable future according to analysts at Canaccord Genuity (TSX:CF, LSE:CF).
The broker described the decision as unexpected and abrupt, while analysts at Stifel described the exit as disappointing but necessary, because of the precarious financial position of the company.
Canaccord also noted that Goodfood had breached a covenant under its credit facilities in the fourth quarter.
The broker pointed out the company ended the quarter with C$38 million in cash and noted that it continues to work with lenders to potentially generate a revised credit facility agreement.
Analysts at Stifel said that its model suggested there was no need for additional capital over the coming year but cautioned that its visibility on cash burn was limited.
The broker said the strategy shift is bold as for the last 12-18 months significant time and resources have been dedicated to growing this area evident in the large impairment charge of C$45-50 million announced relating to the exit.
Stifel pointed out that the time spent growing the on-demand delivery services business had perhaps taken management's focus away from the core meal kit business and said the decision was a necessary step that may enable it to return to positive EBITDA.
Canaccord said the group believes this improvement in profitability will be driven by: previously announced operational improvements, the consolidation of existing facilities into Montreal and Calgary and SG&A improvements such as headcount reductions.
But the overall conclusion from both broking houses was similar with both reiterating hold ratings on the group and both cutting their price target to C$0.60 (from C$1.00 by Stifel and from C$1.40 by Canaccord).
Stifel said given the company’s “precarious financial position, and choppy track record, it will take time for investors to return into the stock, potentially capping upside in the near-term” while Canaccord expressed concerns about the abrupt change in strategy, the eroded confidence in management all compounded by the precarious financial position of the group.
Canaccord said its new price target represented 0.5x its revised full year 2023 sales estimate of C$196 million (down from C$299 million).
Shares of Goodfood plummeted 24% on Monday, trading at C$0.45 in Toronto by the afternoon.
Contact the author at jeremy@proactiveinvestors.com