Hellofresh
I have two reasons to write:
1.to provide a foundation for readers to conduct their own research by outlining the current situation of the company. By doing this, I hope to help readers form their own assumptions about its future.
2. to revisit these assumptions in a few years to see how accurate (or wildly off) they were, allowing me to reflect and hopefully refine my thought process in the process.
Not an investment advice. duh
Content:
Equity story
Hellofresh offering, business model and simplified income statement
Unit economics
Unit economics to financial development
Financial development to assumptions
Equity Story
HelloFresh has faced challenges with rising customer acquisition costs (CACs) and declining revenues. The company’s stock crash can be attributed to management’s flawed assumptions about current meal-kit market demand, which they clearly overestimated. For too long, management pursued an ambitious $10 billion revenue target for 2025, only to lower this guidance at the start of 2024. Despite this misstep, HelloFresh has demonstrated strategic discipline since its IPO, achieving a near-monopoly in the global meal-kit market.
After a steep 70% decline following a profit warning, HelloFresh’s stock began recovering from its July lows. However, this rebound was not driven by any significant fundamental changes in the company’s outlook but by short sellers closing their positions. At its lowest, the stock was trading at just 3x adjusted EBITDA.
Since 2021, HelloFresh has faced a significant contraction in valuation multiples. Its EV/sales multiple has dropped sharply from 3.0x in 2021 to just 0.3x by November 2024. Meanwhile, its revenue growth projections have steadily declined since 2022. Compounding the issue, a high fixed cost structure designed for a $10 billion revenue goal continues to weigh heavily on profitability.
Despite the apparent issues, I like Hellofresh for several reasons…
Abundance of investment opportunitities in the long term
Founder led and owned
Near-monopoly status globally
1% improvement culture constantly improving the product for the end customer
Strengthening moat year by year.
Hellofresh offering, business model and simplified income statement
Business Model. HelloFresh operates as a direct-to-consumer company, offering meal kits, ready-to-eat meals, pet food, and fresh meat through a subscription-based model across 18 countries. The company manages the entire value chain, from ingredient procurement to final delivery, increasingly utilizing its own delivery fleet. With a nearly exclusive focus on private-label products, HelloFresh benefits from significant cost advantages. Each year, the company delivers over one billion meals through approximately 120 million orders.
Profitability. In the past two years, HelloFresh has struggled with profitability as the meal-kit market matured at a lower revenue level than management had anticipated. Management underestimated this shift and continued to invest heavily in marketing and new customer acquisition, despite rising customer acquisition costs (CACs) and a declining lifetime value (LTV) of new customers. Next, we will explore the unit economics in more detail.
Unit economics
Illustrative only. Unit economics calculated based on LTM figures. Full price is based on Hellofresh meal-kits and 2 person household with a total of 8 meals per week. Hellofresh has multiple brands and pricing varies a lot across different countries and products.
Customer types:
Hellofresh relies highly on discounting and the case is to lower the heavy discount users and hence showcase the true profitability of mature and sticky customer base. The average discount across all brands and products in Hellofresh is around 20%. That doesn't mean every customer is utilizing the discounts, but is the sum of all different customer types, which I will briefly clarify:
Experimentalist try with + -50% discount and never use again. These are obviously massively unprofitable for Hellofresh
Deep value - reactive only with decent discount.- I have received multiple reactivation offers with some 30% discounts from Hellofresh Sweden as I have ordered a couple of times visiting Sweden longer periods of time.These offers are likely unprofitable. If marketing costs are excluded, they might be slightly profitable, but this would depend on the contribution margin for HelloFresh’s Swedish operations. Based on the group-level contribution margin figures, these discounts are highly unprofitable.
The mature sticky customers. These customers pay the full price and order rather frequently. This customer base can post double digit EBIT-margins.
Over the past year, HelloFresh's customer base has shifted toward less profitable segments, as people are less inclined to cook and eat at home compared to the COVID years. The company’s prolonged push for a $10 billion revenue target led to acquiring customers primarily attracted by discounts. This strategy has significantly eroded the group’s margins.
Unit Economics to group financial development
HelloFresh’s goal of reaching $10 billion in revenue by 2025 is evident in its marketing strategy. Marketing expenses have risen from a low of 12.5% in 2020 to 20% of revenue in the last twelve months (LTM) as of Q3 2024. However, this increased spending has not translated into revenue growth over the past two years, heightening investor concerns about the viability of HelloFresh’s business model.
While the total revenues have remained flat for two years, RTE business has grown rapidly. I’ve estimated that Hellofresh meal-kit revenue has decreased by 15.6%. I’m uncertain where the mature revenue base is for meal-kits, where HFG can generate good profits and cash flows. It has now decreased by 16%, but how much more discount-driven, high churn revenues remain?
Ready-To-Eat revenue has grown by 50% CAGR since the acquisition was made in 2020. I’m uncertain how much of this growth is discount-driven artificial growth and how much will be converted to mature sticky revenue with good profitability. We will see. I would guess HFG won't push for too long for revenue growth if the unit economics turn to worse like they did with meal-kits. I would assume they have learned from their mistakes.
Higher marketing spend has naturally weakened HFG profitability along with lower contribution margin.
Contribution margin development could be the result of two things in my view:
in 2020 HFG was able to drive revenues with minimal discounts. While AOV was lower the AOV came with low discounts. As I’ve shown in my unit economics illustration lower marketing converts to better contribution margin. Since 2020 HFG has increased discounting in my view and this has resulted in lower margins. AOV has increased as the basket sizes have increased, but so have the discounts. Contribution margin has decreased from 28% in 2020 to 25% this year.,
2. Overall production inefficiencies in the past two years: HFG has struggled with excess capacity, because the demand for meal-kits was lower than the company had expected and tuned their fixed cost base for. This one is easier to tackle as they right-size the production.
Operating profit margin has declined from 11% to -1% this year (Q3 2024 LTM)
CapEx cycle is behind
HFG invested heavily during the covid years so that they have the capacity to carry the 10B in revenues. If i remember correctly, HFG achieved the capacity for this, but since then they have started to right-size the operations to match the lower demand.
Consequently, this means that the next few years we can see generous cash flows as the capex keep coming down.
FCF has been increasing since the CapEx peak even though the EBIT has been decreasing ever since 2020. When the profitability picks up, the FCF can skyrocket in the next couple of years.
Financial development to assumptions
Valuation:
I believe the meal-kit revenue will decline by -5% in 2025 and remain flat in 2026. This would mean that the current revenue base is almost fully well profitable. Once the right-sizing of operations is completed, we will see the true nature of the customer base.
RTE revenue will increase by 15% in 2025 and 10% in 2026. I think this assumption is lower than Hellofresh’s own estimates, meaning that the cost base is tuned for higher growth and hence if such low growth were to happen this would lower profitability.
Others segment will grow 70% and 30% in 2025 and 2026, respectively. This growth is from a low revenue base so really doesn’t matter whether it’s 70% or 100% next year.
I expect profitability to improve from here. I expect marketing expenses to decline by 3pp from 2024 to 2030. HelloFresh has clearly communicated they will prioritize profits and FCF generation from here rather than growth. Similarly, I expect lower discounting on average, which should boost both margins to better. In addition, current right-sizing and UK factory ramp-up has further squeezed contribution margins. Once this is all done the contribution margin can once again increase.
Lower capex means more money for us. One of the interesting factors in Hellofresh is the massive capex cycle, which has come to an end. I expect capex to to decline to 180M next year and this year it will be in the low 200Ms as the company has communicated.
Hellofresh has excess capacity and capacity is plenty for growth in the future years. This can allow for growth without any more growth capex, which is appealing. Q3 YTD capex was 131M.
Overall profitability and revenue assumptions
I expect HFG's EBIT margin to improve to 5.8% by 2030, with revenue growing at a 4% CAGR as previously discussed. While the EBIT margin target is ambitious given recent performance, it's not unattainable. The past few years have been particularly challenging for HFG in terms of management’s strategy execution, but improvement is possible. Notably, Hellofresh previously set a long-term target of over 10% AEBITDA margin for 2025, which suggests that achieving a 6% EBIT margin by 2030 should be well within reach.
The profit growth comes with good cash conversion improving owners earnings.
Let’s look at the valuation. Hellofresh enterprise value is around 2.3 billion euros. With that you get revenues of 7700M and negative EBIT of -73m (LTM Q3 2024). Hellofresh is trading at 0.32 x sales, with a somewhat rational assumption of future EBIT margin of around 6%. The valuation looks appealing in sense that we are supposedly at the bottom as far as financial perfomance of HFG.
Let’s assume HFG trades at 12x EBIT in 2030. This would convert to Enterprise value of 6.6 billion euros. The EBIT assumptions seems high, but the past years hasn’t been a good proxy for the true potential of Hellofresh. Let’s look at the IRR potential for HFG with these assumptions:
12x EBIT with an assumption of 550M EBIT in 2030 would derive a share price of 40.9€ or 7.1B market cap.
This is for illustrative purposes only, providing an example of potential outcomes in this scenario. There are numerous uncertainties in HFG's meal-kit business and the growth of the ready-to-eat (RTE) segment, and the results could turn out very differently. RTE revenue might be driven by discounts, leading to low future profits, and the meal-kit business could easily shrink further. This is not investment advice. Please do your own research.
