Goodfood (TSX: FOOD) is a leading online grocery company in Canada, delivering fresh meal solutions and grocery items that make it easy for members from across Canada to enjoy delicious meals at home every day through its online platform.

Key highlights

• Collaborates with Microsoft to enable technology platform: The firm recently announced that it has leased its first tech-enabled local fulfilment centre in Ottawa, which would be able to deliver 4,000 goods same-day or faster. In addition to its own software for order orchestration and delivery optimization, the automation infrastructure would be powered by Microsoft Dynamics 365 and Microsoft Azure cloud computing technologies.

• Impressive growth in Active Subscriber’s count: The company reported an impressive subscriber’s of around 3,17,000 at the end of Q3FY21, which reflects a surge of 17% on y-o-y basis. The improvement was driven by an ongoing surge in the demand of grocery items as people are opting for online delivery. This has resulted in higher-order value per customers and an increase in repetitive orders.
  

• Favorable outlook: The online grocery sector is one of the world's fastest expanding industries. As a result, the company believes that investing in highly targeted marketing campaigns, capacity expansion through additional facilities and automation, increasing its product offering, and continuing to expand its national platform would provide significant opportunities to rapidly grow its subscriber base and basket sizes.

Financial overview of Q3 2021

Source: Company

• In Q3 2021, the company posted revenue of CAD 107.7 million against CAD 86.6 million in the previous corresponding period. The rising revenue favored by the company’s strategy to expand its product offering and same-day delivery which in turn drives higher average basket sizes and order frequency.
• Gross profit increased to CAD 37.7 million compared to CAD 24.9 million in pcp, primarily due to an increase in average order value driving fixed cost leverage in a quarter marked by lower packaging costs.
• The quarter was marked by an increase in selling, general and administrative expense (CAD 36.8 million v/s CAD 19.4 million in pcp), higher depreciation and amortization (CAD 2.3 million v/s CAD 1.4 million in pcp) which resulted in net loss of CAD 2.0 million against a profit of CAD 2.7 million in pcp.

Risks associated with investment

The group witnessed a surge in the input costs due to rise in the company’s wages and salaries coupled with higher operational expenses due to expansion of the company’s distribution network. Continuation of the above trend is likely to weigh on the company’s cash flows and margins.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company's impressive third-quarter results reflected the benefits of its leading and differentiated ready-to-cook offering, expanding grocery selection, and same-day fulfilment capabilities in key markets, which drove larger basket size and higher order frequency from the company's increasingly loyal and engaged members, which is a key positive. The company reported healthy subscribers base of around 3,17,000 at the end of Q3FY21, which reflects a surge of 17% on y-o-y basis. The company believes there are significant opportunities to rapidly grow its subscriber base and basket sizes by investing in highly targeted marketing campaigns, also recently it has collaborated with Microsoft to enable technology platform which would enable the company to order orchestration and delivery optimization. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 9.60 on July 29, 2021. We have considered Rogers Sugar Inc, Premium Brands Holdings Corp, Jamieson Wellness Inc, etc. as the peer group for the comparison.

One-Year Technical Price Chart (as on July 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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