HelloFresh Q1 2024: On Track
56% growth in the ready-to-eat (RTE) vertical; guides for significant margin expansion in Q2
Summary:
Strong growth in the RTE vertical
Q1 revenue growth slightly ahead of expectations
Guides for 5.5-7.0% adj. EBITDA margins in Q2
As HelloFresh is currently one of my largest positions, I would like to share my thoughts regarding the Q1 numbers that HelloFresh reported last Thursday.
Overview
Revenue growth came in ahead of expectations at 2.9% year-over-year (+3.8% in constant currencies). This was driven by 56% revenue growth in the RTE vertical. Q1 revenues for the RTE vertical came in at €496m, or a run rate of already about $2b, while 2024 full year guidance for RTE is €2.1b. HelloFresh is thus very well on track to achieve and probably exceed targets in this striving segment. Adjusted EBITDA came in relatively light at €17 million (0.8% of revenues). However, HelloFresh guided for significant margin expansion in Q2 and sees itself well on track to achieve full year adj. EBITDA guidance of €350-400 million.
Mealkits (HelloFresh)
In the first quarter of 2024, HelloFresh's meal kit segment experienced a decline of about 7% in constant currency revenue. This contraction was influenced by a softer consumer market and a strategic decision to focus on acquiring higher-quality customers rather than pursuing volume growth. This strategy, initiated mid-quarter, aims to enhance the customer value proposition and protect adjusted EBITDA margins. As a result, the decline in orders was primarily due to the reduced intake of new customers, aligning with the company’s revised strategic focus on quality over quantity. This shift has also begun to positively impact the average order value (AOV), reflecting the reduced financial incentives as part of this strategy adjustment.
Ready-to-Eat (Factor)
HelloFresh's Ready-to-Eat (RTE) segment showcased remarkable growth, with a 56% increase on a constant currency basis, pushing quarterly net revenue around €500 million. This surge aligns with an annual revenue run rate surpassing €2 billion, attributed to the efficient scale-up of new facilities that came online at the end of the previous year. The U.S. expansion and internationalization of the RTE business are set as strategic priorities, expected to drive significant growth through 2024 and 2025. Since its acquisition in 2020, RTE revenue has escalated 20-fold, supported by a robust operational playbook refined through numerous country launches in the meal kit sector over the past decade.
HelloFresh's strategic priorities within the Ready-to-Eat (RTE) vertical focus on expanding its solid foundation in the US and pursuing steady international growth. Specific efforts include:
International Expansion: Building on strong product-market fit phases in Australia and Canada, with plans to invest more to scale operations while maintaining cash flow discipline.
European Launches: Continuing expansion in Europe with recent entries into Benelux, Denmark, and Sweden, despite these markets currently being loss-making and subscale.
Operational Efficiency in the US: Enhancing unit economics at the new Arizona site, improving productivity, and driving better margins.
Menu and Product Expansion: Increasing the variety of healthy recipes and expanding the Factor marketplace with private label offerings like juices, smoothies, and protein powders to enhance average order value (AOV) and customer appeal.
In the earnings call, HelloFresh's CFO commented on the RTE unit's economics, describing them as very attractive, particularly when normalized for the initial production ramp-up costs. The contribution margin for RTE is comparable to, if not better than, the core US meal kit business, especially when applied to a higher average order value (AOV). Customer retention and ordering patterns in RTE are at least as strong as in the meal kit segment. With the new facility reaching critical mass, the focus will shift towards enhancing productivity and improving margins, which is expected to positively impact the AEBITDA margins moving forward.
Reasons behind the low Q1 Margins
The lower Q1 adj. EBITDA margins can be attributed to several factors:
High Marketing Activity: Q1 saw the highest level of marketing activity aimed at boosting new customer acquisitions, particularly when compared to Q4.
Rapid RTE Expansion: The Ready-to-Eat (RTE) segment's rapid scaling, which grew at a 56% revenue rate, led to a significant increase in absolute marketing spend.
Customer Lifetime Value Initiatives: Investments shifted from acquisition to enhancing product offerings and supporting existing customers. This included menu enhancements, a broader assortment in the HelloFresh Market, and launching the HelloFresh Loyalty program.
These initiatives, while aimed at improving customer lifetime values and average order rates, impacted margins due to initial costs and the subscale, loss-making status of new RTE market entries like Benelux, Denmark, and Sweden.
Margin Improvement Going Forward
For the remainder of the year, HelloFresh anticipates margin improvements primarily due to the stabilization of initial high costs associated with new fulfillment centers, particularly in the U.S. Ready-to-Eat (RTE) segment. As these facilities move past their initial ramp-up phase, the elevated costs—especially those linked to the rapid expansion at the Arizona site—are expected to normalize, contributing to better cost efficiency and margin performance.
Moreover, the company has implemented strategic measures aimed at enhancing operational efficiencies, such as reducing procurement and cooking expenses in international markets. These measures, achieved in a more stable inflationary environment, are part of a broader strategy focusing on driving cost efficiencies across all segments. This strategic emphasis is set to gradually lead to a targeted 10% adjusted EBITDA margin for meal kits and RTE products in the midterm, reflecting a significant improvement in profitability and free cash flow generation.
Q2 Guidance
HelloFresh expects Q2 to show a slight decrease in year-on-year order and revenue growth compared to Q1, mainly due to strategic changes in how the marketing budget is allocated for the first half of 2024. However, the company anticipates better margins in Q2 relative to Q1. This improvement in margins is attributed to significantly lower marketing expenditures planned for the quarter. Additionally, even though production costs are still high due to ramp-ups in RTE and new meal kit centers, the reduced marketing spend will help in achieving a more favorable AEBITDA margin of 5.5% to 7%.
During the earnings call, CFO Christian Gartner was if the adjusted EBITDA is expected to be within a €100 million to €140 million range. He responded that his margins indicated a slightly wider range, but that the numbers fall within the broader guidance.
The CFO also reiterated confidence in meeting the full-year financial guidance based on two key factors: first, the company's performance is closely aligned with their financial plans, both in terms of revenue and profit. Second, EBITDA typically increases in the second half of the year, following a strategic push in the first quarter focused on marketing and new customer acquisition. This pattern is expected to continue, enhanced by improved margin management in upcoming quarters due to a more controlled operational ramp-up.
Conclusion
Overall, I was pretty pleased with this earnings report. A little easter egg was the 159% year over year growth to €19 million in the “Other” vertical that comprises HelloFresh Pet Food and butcher verticals.
The share price has remained very volatile on Thursday and Friday following the release of these numbers. I expect less volatility going forward. This was a confirming report. I remain very confident that HelloFresh is severely undervalued at the current share price.