Tattooed Chef: Freezing Kerrisdale Capital’s Baseless Claims

Summary

• Kerrisdale Capital, hedge fund and shortseller, came out on Thursday with a short report against Tattooed Chef (NASDAQ: $TTCF).
• The report states baseless and unfounded claims against the plant-based company.
• The hedge fund has an average return of -19.9% on their ratings, according to TipRanks.

On Nov 19, Kerrisdale Capital published a hit piece against Tattooed Chef (NASDAQ: TTCF). The report claims collapsing sales growth, elusive profitability, thin product set, poor branding, amongst other false and erroneous information.

In this piece, we will go through multiple claims to verify the facts and credibility behind the short-sellers report.

PART 1

CLAIM:

“Retail scanner data from Nielsen, which includes the brand’s sales at Sam’s Club, suggests an entirely different narrative than the one of a “disruptive” frozen vegetable juggernaut. While it’s true that the brand’s 2020 sales far exceeded those of 2019, the momentum has slowed considerably in recent months, with sequential sales performance dramatically underperforming industry sales patterns in comparable frozen food categories.”

FACT:

The entirety of the hit piece is based upon data provided from Nielsen’s CPG Retail Scanner Data. Retail Scanner Data consist of weekly pricing, volume, and store environment information generated by point-of-sale systems from more than 90 participating retail chains across all US markets.

What’s measured by syndicated store data? According to CPG Data Insights, syndicated store data provides a highly accurate measure of retail sales, on both a dollar and unit basis. If you’re sizing a market, this is the simplest and most accurate way to get that information. Syndicated store data is a good metric to measure what happened to sales, but not always as good at explaining why.

So what’s NOT explicitly measured by syndicated store data?

• Other in-store activity (sampling, coupons, etc.)
• Economic and demographic trends
• Manufacturer (as opposed to retailer) advertising and promotion
• Product Quality
• Weather
• Other Factors

The impact of these factors is too small to quantify. For example, some marketing programs reach individual households and shoppers. Store data, which adds sales from everyone who shops in a particular store in a particular week can a very poor tool for assessing shopper specific programs.

PART 2

CLAIM:

“The story at Costco, which accounts for about a third of the company’s total sales, is slightly different but also underscores the company’s concentration risk."

FACT:

Nielsen does NOT provide CPG market data for Costco. Since 2004, Coscto’s supplier information platform, the Costco Collaborative Retail Exchange (CRX) is operated with Nielsen competitor, Information Resources, Inc.

As mentioned earlier, the entirety of this piece is based upon Nielsen’s Retail Scanner Data provided around Sam’s Club’s ONLY, not accounting other retail channels such as Costco, Walmart, Target, e-commerce and more.

PART 3

CLAIM:

“Beyond Sam’s Club, the rest of Tattooed Chef’s branded revenue is split between Costco, which stocks a maximum of two SKUs from Tattooed Chef in just 3 of their 8 regions”

FACT:

Once again, baseless claims. Costco has stocked at least more than 6 different SKUs from Tattooed Chef across different time frames and depending on region.

A quick look at Instacart and other sources show the following (at least):

1. Organic Greens
2. Organic Zucchini Spirals
3. Mexican Style Street Corn
4. Organic Acai Bowls
5. Organic Riced Cauliflower Stir-Fry

This definitely looks more than the “maximum of two SKUs” mentioned in the hit piece.

PART 4

CLAIM:

“Tattooed Chef’s gross margins have pretty consistently declined as the branded proportion of revenues has increased. The only exception to that has been the first quarter of the current year, in which gross margins jumped to abnormally high levels entirely because pandemic-induced supply chain disruptions at large CPG companies forced retailers to scramble to find frozen food inventory at any price.”

FACT:

• GM Q1 2020: 27.9%
• GM Q2 2020: 10.8%
• GM Q3 2020: 9.2%

Once again, cherry picking the data. The company filings have shown that TC branded products have consistently increased every quarter since Q2 2019. The gross margin has declined due to a simple fact: increase in marketing efforts and hiring efforts. Since its inception, the company has relied on word-of-mouth and grassroots marketing. The company hasn’t been involved in any high level brand marketing. Since June and upon announcement of merger, the company has been more active in hiring to fulfill their expansion plans as well as increase marketing spend on social media (content, branding, influencer marketing).

The chart from the hit piece doesn’t paint the full picture.

PART 5

CLAIM:

“In our discussions with Sam’s Club’s frozen food buyers, they explained that they’ve made it very clear to Tattooed Chef that they expect that the Tattooed Chef-branded products on their shelves remain unique to Sam’s.Sam’s Club sees itself, in its buyers’ words, as responsible for “helping to launch [Tattooed Chef] to where it is today.”

FACT:

No substance and a corporation with the size of Sam’s Club won’t share confidential information as such to a hedge-fund. Let’s play it differently: In my discussions with Sam’s Club’s frozen food buyers, they explained that they’ve made it very clear to Tattooed Chef that they are very happy with their products and promised the company to continue to shelve their products across all their outlets as long as the demand is there.

Very easy!

PART 6

CLAIM:

"And while we’ve seen Tattooed Chef, and some of its more excited investors, try and talk up expansion in Walmart, it’s fairly clear from Sam’s buyers that they won’t tolerate any of the successful Tattooed Chef products in the club’s freezers being cannibalized by sales at Walmart."

FACT:

With a quick search on Walmart’s website, they currently or have stocked at least 12 different products over the past year.

1. Riced Cauliflower Quinoa
2. Balsamic Glazed Vegetables
3. Cauliflower Burgers
4. Riced Cauliflower with Creamy Tahini Sauce Buddha Bowl
5. Organic Riced Cauliflower Stir Fry
6. Cauliflower Mac & Cheese Bowl
7. Riced Cauliflower Enchilada Bowl
8. Riced Cauliflower Sofrito Bowl with Chipotle Spiced Tofu
9. Buffalo Cauliflower Burgers
10. Farmers Market Ratatouille
11. Mexican Street Corn
12. Green Bean Medley W Garlic

It’s evident that Sam’s has and will tolerate Tattooed Chef products in other club channels.

Also, fun fact… Walmart owns Sam's Club.

So let's hear this again: Sam's Club, which is a subsidiary of Walmart (parent company) and is named after Walmart founder Sam Walton, won't tolerate any products cannibalized by sales at Walmart. Yes, you read that right!

PART 7

CLAIM:

“That’s almost certainly why Tattooed Chef has recently boasted of penetrating half of the Walmart store base; the other half is probably off limits due to proximity to a Sam’s Club.”

FACT:

By the beginning of the year 2020, Tattooed Chef was in 7% of Walmart stores. Today, Tattooed Chef is in almost 50% of Walmart stores nationwide. “Probably”, which is mentioned in the hit piece is not a substantial fact. There is no evidence that Sam’s has put restrictions on expansion, or else they would’ve not allowed the 7% to grow to 50%. The 43% growth in Walmart just this year, which is equivalent to thousands of stores, is not highlighted as an opportunity in the hit piece, but rather the main focus in only on Sam’s which also justifies the data provided from Nielsen’s Retail Scanner Data.

PART 8

CLAIM:

“And yet, with a concentrated customer base and flailing momentum at the consumer level, the company has garnered a $1.1 billion valuation, or 13x its branded 2020 sales.”

FACT:

With an expected enterprise value of $482 million, Tattooed Chef has debuted on public markets trading at 2.2 times sales versus 13.2 times sales for Beyond Meat. Its forward EV/EBITDA is far lower than Beyond Meat’s at 15.6 times versus 126.8 times. Since focusing predominately on Tattooed Chef-branded sales and on plant-based foods in 2017, it has enjoyed a supercharged compound annual growth rate of 61.7%, with $222 million in sales estimated next year. That rate comfortably paces 55.4% growth for key competitors like Beyond Meat.

Additionally, Roth Capital analyst George Kelly initiated coverage of Tattooed Chef with a Buy rating and $26 price target. Kelly thinks expanded distribution, additional products and brand advertising should keep growth elevated in the coming years.

PART 9

CLAIM:

“Finally, it’s quite apparent that Tattooed Chef’s executive team isn’t really aware of the merchandising competence necessary to build branded relationships with grocers. Merchandising means targeted price reduction programs, seasonal promotions, shelf placement consulting, and other subtle elements of selling packaged foods through grocers that are entirely absent from the club store relationships.”

FACT:

Over the past four months, Tattooed Chef has achieved the following:

1. Growth from 7% to 50% of Walmart stores nationwide (43% increase)
2. Partnership with KeHe, a natural food supply chain company with 16 distribution center in the US, supplying to 30,000 storefronts. This distributor relationship may put Tattooed Chef products on the shelves of Sprouts Farmers Markets and Albertsons stores.
3. Expansion into Target (over 2,000 stores in the U.S.)
4. Launch of its e-Commerce site with over 15 SKUs and counting.

The company is aggressively hiring new retail specialists over the past two months:

1. Region Sales Manager West
2. National Sales Manager, Natural & Specialty Grocery
3. Region Sales Manager, East

The job description for the regional sales manager roles highlight the growth and expansion plans across different grocery and distribution channels, which include the following:

• High level experience in the Grocery Channel (Safeway-Albertsons, Stater Bros. HEB, Sprouts, Smart & Final, Gelson’s, Publix, Wakefern, Ahold, Meijer, Stop & Shop etc.) with CPG and better for you product selling background in the frozen food space is a plus.
• Established relationships and demonstrated success working with key retail accounts along with the leading brokers and distributors (UNFI, KeHE, DPI, etc.), servicing these channels.

PART 10

CLAIM:

“But running costly promotions at Costco is not an exception to the modus operandi of selling to wholesale clubs, it’s the rule, and it puts Tattooed Chef in the unenviable position of overwhelmingly selling its product to customers that will squeeze the company on costs.”

FACT:

Tattooed Chef’s brand is not yet mature. It’s in growth-mode. Hence, brand awareness is key to further growth and expansion. All growth-brands need to spend on promotion/marketing to generate further awareness. This successful promotion gave the Tattooed Chef brand exposure in 450 stores for an eight-week period across the entire U.S. and resulted in increased sales and brand awareness.

As mentioned by Tattooed Chef CEO Sam Galletti, the company will utilize cash from the merger transaction to invest heavily in different marketing channels and outlets.

1. Since June 2020, the company has contracted with BLND PR, a full-service PR, social media services and influencer engagement agency. Since then the brand has focused on social media awareness, creative content and fan engagement, and heavy influencer marketing amplification (see images below).
2. Last month, Tattooed Chef hired a national marketing agency, Nitro C, with plans to aggressively market at point of sales, traditional outlets, as well as heavily across digital platforms. Nitro C’s client list includes Marvel, United Nations, AV InBev, Disney, and Hello Fresh to name a few.

CONCLUSION

As evident, the hit piece is nothing but pure manipulation of data and facts with the purpose of profiting upon the decline of the company’s stock price. A quick look at the disclaimer at the end of the hit piece shows the following:

“The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors’ views as of this date, all of which are accordingly subject to change.”

Key Word? “Selected Public Market Data”. The entire report is based on speculation, probability, selected data, to direct the overall perception in a specific direction.

To end this blog piece sharing some facts:

FACT:

Kerrisdale Capital shorted Match Group $MTCH on Feb 13, 2020.

• Price of stock in February 2020: $75
• Price of stock in November 2020: $130

Kerrisdale Capital shorted Mirati Therapeutics, Inc. $MRTX on April 21, 2020.

• Price of stock in April 2020: $85.62
• Price of stock in November 2020: $226.89

Kerrisdale Capital was long Korn Ferry $KFY on Feb 5, 2020.

• Price of stock in February 2020: $42.76
• Price of stock in November 2020: $31.28

Kerrisdale Capital was long Adamas Pharmaceuticals $ADMS on Nov 1, 2017

• Price of stock in November 2017: $27.75
• Price of stock in November 2020: $4.35

Kerrisdale Capital has a 44% success rate and a -19% average return per rating on Tip Ranks.

Disclosure: I am/we are long TTCF.

Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.