Shares of frozen-food company Tattooed Chef (TTCF -5.80%) fell 36.5% in April, according to data provided by S&P Global Market Intelligence. And there was no company-specific reason for the drop: no negative press releases or troublesome filings with the Securities and Exchange Commission (SEC). Rather, the market was generally plunging in April, and unprofitable companies like Tattooed Chef found little support from investors.
With its greater than 36% drop in April, Tattooed Chef stock is now roughly 70% off its all-time high in 2020.
Tattooed Chef primarily sells frozen vegetarian meals and has enjoyed rapidly expanding distribution channels over the past couple of years. In 2021, the company grew revenue to $213 million, a 44% increase from 2020. And for 2022, it expects to grow revenue by about 32%, partly boosted by recent acquisitions.
The growth is great. But Tattooed Chef registered a $37 million operating loss in 2021, worse than its $10 million operating loss in 2020. And 2021 operating expenses were 27.7% of revenue, up from just 8.4% in 2019. The culprit has mainly been aggressive marketing and advertising.
Tattooed Chef’s advertising strategy appears to be working, considering its sales growth. However, this is causing the company to have steep losses. And unprofitable companies were exactly the kind that investors were avoiding in April.
Tattooed Chef will report financial results for the first quarter of 2022 on May 9 after the stock market closes. While it didn’t give guidance for the first quarter, full-year guidance indicates that investors should expect ongoing losses. Management expects its gross margin to be 10% to 12% in 2022, which would result in $28 million to $34 million in gross profit for the year.
But the company expects to spend at least $47 million in combined marketing and capital expenditures, to say nothing of other operating expenses. In other words, net losses for the year should be hefty.
Tattooed Chef can sustain steep losses for now. It ended 2021 with over $92 million in cash and cash equivalents and less than $1 million in long-term debt. So it’s well capitalized for its aggressive growth spending. And that’s kind of the point: The company went public in the first place to gain the capital needed to grow.
That said, even down 70% from its high, I want to see Tattooed Chef make progress on its bottom line before I consider buying the stock. Therefore, while I applaud the growth and recognize its balance-sheet strength, I’m staying on the sidelines for now.