Investors Beware: The Free Fall Continues for This High-Growth Stock

Despite revenue-growth rates of approximately 30%, Freshii Inc. (TSX:FRII) has plunged 65% year to date. Why the disconnect?

| More on:
The Motley Fool

The TSX Index isn’t home to nearly as many initial public offerings (IPOs) as the markets south of the border. As such, there is usually considerable excitement in anticipation of TSX IPOs. Unfortunately, not all IPOs are created equal. Research has shown that retail investors who jump on the bandwagon immediately once the stock begins trading tend to underperform.

Case in point, Freshii (TSX:FRII). Any investor who’d purchased upon open in January 2017 would have seen their holdings plummet by 80%. Ouch! This year hasn’t been any kinder to the company, as its stock price has been steadily trending downwards. Now trading near 52-week lows, the company has dropped 65% from its January 3rd high.

Give the massive decline, should investors take a flyer on this once high-growth company?

Recent quarterly results

Before jumping in to any investment, it’s best to understand the company’s financials. Are they improving or deteriorating? On November 7, Freshii released third-quarter results, and it was ugly. The company missed on both the top and bottom lines. The company posted a net loss of $0.01 per share, whereas analysts were expecting earnings of $0.04 per share. Likewise, revenue of $5.6 million was lighter than the $6.07 million expected.

Another red flag was the poor performance of same-store sales. Sales at stores open for at least a year dropped by 0.8% over the third quarter of 2018. In comparison, the third quarter of 2017 same-store sales saw 5.1% growth.

On the bright side, the company is still growing. Revenue increased 27% over the third quarter of 2017 and are up 31% over the first nine-months of the year. This is still a company with significant growth potential. Likewise, the company announced its intentions to repurchase up to 10% of its float, as it believes its shares are significantly undervalued.

There is one other aspect worth pointing out. The company has no debt and has been able to fund 2018 growth entirely through cash generated from operating activities.

Poor execution

More concerning was the company’s announcement that it intends to no longer provide guidance. This was effective immediately upon the release of third-quarter results, and, as such, it withdrew its 2019 outlook. Previously, it had guided to $285 million in sales from 760 stores, up from its current count of 431 franchised and company-owned locations. It had also anticipated same-store sales growth between 3% and 4% through 2019.

So, what gives? Management appears to be unable to execute.

It has had issues with timely store launches and has seen expenses rise. Management also admitted that its marketing and sales initiatives failed to deliver as expected. In other words, it over promised and under delivered.

As an example, the company opened 18 new stores in the third quarter. Yet it also closed eight stores for a net new store count of 10. For a new company such as Freshii, the number of store closings is alarming. Management has not been adept at strategically locating its stores.

Foolish takeaway

Despite trading at 52-week lows, investors should avoid Freshii. It’s trading at 3.96 times sales and 3.81 times book value. The company isn’t cheap. Investor confidence in management’s ability to deliver is virtually non-existent. As such, the company should not be priced as a high-growth company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Mat Litalien has no position in any of the companies listed.   

More on Investing

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »