BLACK RIFLE COFFEE COMPANY BECOMES PUBLICLY HELD – A NEW LIFESTYLE BRAND
The newest publicly held restaurant company is Black Rifle Coffee Company, which came public on February 3rd through a Business Combination with a SPAC called SilverBox Engaged Merger Corp (SBEA), starting to trade tomorrow on the NYSE as BRCC.
FOREWORD: The following article should not be construed as an all inclusive analysis of BRCC. The proxy material, with exhibits, kept the lawyers busy producing over 500 pages. We no doubt left a lot of good stuff on the table and will keep our readers posted as we fill in the blanks.
THE DEAL
SBEA raised $345M by way of an IPO, at $10.00/unit, on February 25, 2021. The Sponsor of the SBEA SPAC is a joint venture between Boxwood Capital, Helena Capital, Silver Rock Financial L.P., and Engaged Capital. Suffice to say here that the Sponsor Group is very well qualified to have done the appropriate due diligence leading to the Business Combination and expects to play an influential long term strategic role. The structure was typical of most SPACs, with the Sponsor buying about 20% of the post IPO outstanding shares for only $25,000. A distinction, however, is that the Sponsor paid an atypically large $9.4M for the purchase of their warrants (at $11.50/share) and agreed to invest an additional $100M at $10.00/share upon the closing of the Business Combination. Also noteworthy is that the founding management of Black Rifle Company is remaining with SBEA, with major stock ownership and voting control.
THE NUMBERS – and THE VALUATION
SBEA, about to trade as BRCC, post the Business Combination has about 191M shares (subject to adjustment from redemptions)outstanding (209M, fully diluted with $11.50 warrants). At the current price of about $10/share, and subtracting the $230M pro forma cash on the balance sheet, the Enterprise Value is $1.665 billion. BRCC revenues have grown very rapidly, as shown in the following chart. Profits and cash flow are yet to come.
THE COMPANY
Founded in 2014 by ex-Special Forces Green Beret, Evan Hafer was joined by fellow veterans, Mat Best, and Jared Taylor, who agreed to sell 500 one pound bags of coffee just roasted in Hafer’s garage. The corporate mission, as stated in the proxy material, is “to serve premium coffee and content to active military, veterans, first responders and those who love America….giving back.. through direct hiring, inspiring stories told through our media channels and charitable donations….our goal is to hire 10,000 veterans and be the employer of choice for….a post-military career…inspiring veterans to become entrepreneurs…”
According to Evan Hafer’s letter in the proxy material, a subscription based Coffee Club, started in 2015, “changed everything”. From three employees shipping 15,000 orders in 2015, sales doubled in ’16 and ’17, with the founders planning to hire 10,000 veterans in 10 years. By the end of 2020, the pandemic year, more than half of the 400 full time employees were veterans or their family members and 3.7 million orders had represented over six million pounds of coffee. Today there are 270,000 Coffee Club subscribers, a growing network of highly productive brick and mortar Outposts (both company and franchised), multiple subscription products, and a run rate of over two million ready to drink (RTD) canned coffees per month sold in over 35,000 stores nationwide. It is important to note that merchandise, as shown below, generated 12% of overall revenues in calendar ’20 and represent about 48% of Outpost revenues.
The impressive fundamental growth is fulfilling the mission. In 2021 BRCC will have donated over $3M of coffee to military and first responder units and over $1M to other charities. Additionally, 530,000 shares of BRCC common stock ($5.3M in value) has been donated to the BRCC Fund, focusing on veteran-related causes such as education and job training for veterans and scholarships for family of veterans killed or wounded in action. Needless to say, the Company’s demonstrated dedication to the mission receives reciprocal loyalty from the customer base.
The DTC platform
Through the Coffee Club subscription service, consumers receive ground, whole bean, single serve, instant or Ready to Drink (RTD) coffee, shipped as frequently as every fourteen days. There are 270,000 Coffee Club subscribers, who can also buy apparel and gear on a non-subscription basis. The DTC channel was up 29% in the first nine months of ’21 to $115.7M, with more than 40% in 2021 expected to come from recurring subscriptions.
Wholesale
BRCC sells coffee, apparel and gear through outdoor, DIY, specialty and lifestyle retailers, including Bass Pro Shops, Cabela’s and 5.11 Tactical. RTD coffee is sold through convenience, grocery, drug and mass merchandise retailers, including Casey’s, Circle I, Kum & Go, Speedway, 7-Eleven, Publix, HEB, Walmart, CVS and Sam’s Club. The Wholesale Channel was up 186% in the first nine months of ’21 to $38.6M.
Outposts
BRCC operates and franchises Black Rifle Coffee Shops, called Outposts. They offer an “immersive” store environment, allowing purchase of Black Rifle merchandise, bagged or fresh brewed coffee, as well as “connect with the local community”. There were a total of sixteen Outposts operating at 12/31/21, split equally between company and franchised. Outposts generated $7.0M in BRCC revenues for the first nine months of ’21, up 574% from $1.0 million. This division is expected to be the most rapidly growing portion of BRCC in the foreseeable future. The following chart shows the Outpost unit level economic “targeted” model. We note that the early franchised Outposts were in a variety of physical retail facilities, and the newer locations (both company and franchised) have not been opened long enough to provide a statistically reliable model. Having said that, our calculations of revenues (per operating store-month) indicate that the current fleet of company operated locations are likely doing more, rather than less, revenues than the $2.5M suggested AUV. Since store level cost of goods and labor, distorted no doubt by pre-opening expenses and “honeymoon” inefficiencies, are not broken out in reported financials, the store level cash flow should also be considered an approximation. Our judgement, however, is that the cash-on-cash return seems reasonable, if not conservative, based on the indicated AUV and what we know about cost of goods for both food and merchandise as well as labor expense.
A comprehensive effort to build brand awareness and gain market share includes:
Social Media — This effort serves as a home base for the Black Rifle Coffee community to “gather, get informed, get inspired, and share their passion.”. As of November 2021, there were approximately 11.1 million followers on Facebook, Instagram, Twitter, TikTok, and YouTube and across the Black Rifle Coffee, co-founders’, and key media personalities’ accounts.
Community Ambassadors — Over 50 Ambassadors are experts in their field and include professional athletes, actors, sports brands, and significant media platforms. The objective is to “Inform, Inspire, and Entertain the BRCC community on coffee, current events, and other branded content.” The Ambassadors are equipped with BRCC products to promote the brand and some of the top-tier partners that participate in content shoots and Black Rifle Coffee events are compensated. This is in addition to 32 company employees who work on website content.
Advertising — A primarily digital approach is used, investing in measurable channels across search, social media, and video. Brand and product marketing messages drive awareness, increase purchase intent, and generate measurable growth.
BlackRifleCoffee.com — BlackRifleCoffee.com is the flagship destination to deliver the Black Rifle Coffee experience. Consumers can purchase coffee and merchandise, as well as subscribe to the Coffee Club subscription service.
Coffee or Die Magazine —This is Black Rifle Coffee’s news and lifestyle magazine, published online and in print. Launched in June 2018, the magazine covers stories both about and for the military, first responder, veteran, and coffee enthusiast communities. Initiatives have included embedding reporters with troops in Iraq and Afghanistan as well as covering civil unrest across America.
Outpost Grand Opening Events — The goal is a memorable experience, giving people a feeling for the brand and a taste of the coffee. The grand opening team is staffed with activation experts who know how to create the “fun and flair” that helps to differentiate the BRCC brand.
Retail Product Marketing — The company strives to build strong relationships with retailers that align directly with the BRCC growth strategy. The retailers range from nationwide chains to independent shops, who integrate BRCC into their own ad campaigns.
Per the proxy:
Reflected in the social media following above, and as a result of the mission driven approach, BRCC has received endorsements from well-known celebrities and brands, including Joe Rogan, Dave Portnoy, Bass Pro Shops, Bassmaster Elite Series, JR Motorsports, The Washington Football Team, and NASCAR. Customers proudly wear Black Rifle Coffee apparel, display Black Rifle Coffee banners and decals, buy multiple Black Rifle Coffee products, and proactively build the Brand with recommendations to their friends, family and others through social media and by word-of-mouth. The Company believes that their Net Promoter Score (NPS) of 78, per a 6/21 survey, compared to an average NPS of 21, is the highest in their category. The social media following across Black Rifle Coffee, co-founders’, and key media personalities’ accounts, drove 3.7 billion social media impressions YTD as of November 2021 on Instagram, Facebook, TikTok, Twitter, and YouTube. The technology and media ecosystem also drives unpaid traffic to BRCC, with 70% of website sales coming from owned sources and a 7% conversion rate from unpaid web traffic, according to Google Analytics. The bottom line of the marketing effort, as presented in the proxy material, is: “The lifetime value of a new customer, on average, is more than 4x the cost to acquire them, generating a 5x return on advertising spend.”
THE VALUATION
The current Enterprise Value of SBEA, soon to become BRCC, at $10.00/share, is about $1.7 billion dollars, obviously a leap of faith relative to $15.1M of projected Adjusted EBITDA in 2023.
The equity market has been willing to provide high growth F&B companies and lifestyle brands with multi-billion dollar valuations, as long as revenues and profit margins are moving rapidly upward. There is no question that BRCC is a differentiated retailer and appears to be at any early stage of a long growth cycle. The proxy material provides the following table, comparing the growth rate and gross profit margin of BRCC to other high growth (and highly valued) F&B companies and lifestyle brands
The table above demonstrates that BRCC’s projected revenue growth and gross margins compare favorably to the F&B category. Compared to the DTC lifestyle brands, BRCC’s revenue growth is faster, while the Gross Margin is lower. Overall, the table indicates that BRCC is “in the same league” as the above highly valued situations.
Projections are one thing, but we like to evaluate the current Enterprise Value relative to trailing twelve month (TTM) sales, giving us an idea of today’s valuation before evaluating future possibilities. The following table shows (at today’s prices) that, based on TTM revenues, BRCC’s current valuation is generally in line with the “comps” suggested in the proxy material.
CONCLUSION
Investment opportunity gets back to specific company fundamentals and the likelihood that investor expectations can be met over time. Very high current valuations can be justified if the company performs over the long term, and the stock price will suffer badly if the results are not there. We are not experts on the “comps” provided above, but Peloton is in the news today as a takeover candidate, and the stock is down about 80% from its recent high. Oatly and Beyond Meat have disappointed since the IPO enthusiasm just a couple of years ago. The above package of “comps” demonstrates, as Yogi Berra presumably said, how difficult projections are, especially about the future.
Black Rifle Coffee Company is on a roll. While giving due allowance to future unpredictability, nothing in the history to this point or the strategic plan suggests to us that projections over the foreseeable future are in jeopardy to a material degree. The inherent inefficiencies within a rapidly growing company could affect near term margins but investors won’t care too much if the top line is there. The expense and time necessary to service the investment community are often surprising, but investors will understand that as well. The necessary buildup of G&A to support the omni-channel approach could also exceed expectations, but investors will live with that as long as further revenue growth and profits are on the horizon (e.g. Shake Shack’s “Project Concrete”). Overall, Black Rifle has touched a nerve in terms of consumer appeal, has created a differentiated retail approach and appears to have dedicated professionals leading the effort. We therefore have no reason to doubt their continued success.
The valuation of Black Rifle seems reasonable in terms of long term reward and risk, in particular for long term investors who can live with inevitable short term price volatility. Over time, if the Company performs as expected, the growing revenues and resultant earnings and cash flow will render the valuation more acceptable in Graham & Dodd traditional terms. The good ones are hardly every cheap.
Roger Lipton
