Is Goodfood Market (TSX:FOOD) a Buy at These Levels?

Given the favorable industry trends and its increasing customer base, Goodfood Market can deliver superior returns over the long term.

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Although the pandemic has created headwinds for most businesses worldwide, it has also created opportunities for some companies, such as Goodfood Market (TSX:FOOD). The online private-label grocery delivery and fresh meal solutions company has returned more than 520% from its March low of $1.49, driven by growing demand for online grocery. Amid the pandemic, people preferred to shop online, which has benefited the company.

Let’s look at its performance in the first three quarters of 2020.

Impressive YTD performance

Goodfood Market’s top-line has grown 74% in the first three-quarters of this fiscal to $201.7 million. The expansion of the active subscriber base, higher-order rates, and increased basket sizes have contributed to its top-line growth. As of May 31, its customer base stood at 272,000, representing year-over-year growth of 44%. Meanwhile, the continued expansion of its product offerings and lower incentives and credits also drove the company’s revenue.

During the third quarter, the company reported a positive adjusted EBITDA for the first time. Meanwhile, for the first three quarters, its adjusted EBITDA losses came in at $2.04 million, representing an improvement from a loss of $13.04 million in the previous year. Higher revenue, improvement in gross margin, and operating leverage due to a decline in SG&A expenses as a percentage of total revenue drove the company’s adjusted EBITDA.

Goodfood Market generated $6.1 million from its operating activities in the first three quarters, improving its liquidity position. At the end of the third quarter, the company’s cash and cash equivalents stood at $80.5 million. So, the company has ample liquidity to fund its growth initiatives.

Outlook looks healthy

The shift in customers’ preference towards e-commerce grocery shopping has created a long-term tailwind for Goodfood Market. Meanwhile, the company is also expanding its operations and enhancing its offerings to capture the favorable trend.

The company is building a 200,000 square foot state-of-art fulfillment facility in the Greater Toronto Area, which could become operational at the end of summer 2021. The highly automated facility could support the company’s next phase of growth and improve its operational efficiency.

During the third quarter, the company expanded its Goodcourier initiative, which provides a last-mile delivery service, to deliver around 1/3 of its members’ orders. With the company taking control of last-mile delivery services, it has improved customer experience and lowered delivery costs. Also, it has become crucial for developing the company’s same-day and next-day delivery capabilities.

Meanwhile, the company is also focusing on expanding its product offerings to attract more subscribers. At the end of the third quarter, the company offered 300 exclusive private label grocery products, representing an increase of over 100% in just the last three months. So, I believe the company’s outlook looks healthy.

Bottom line

With Goodfood Market still in the growth phase, I have considered the forward enterprise value-to-sales multiple for my analysis. Despite the strong surge in its stock price, the company still trades at an attractive forward enterprise value-to-sales multiple of 1.8.

Given its well-established brand, best-in-class last-mile logistics, and expanding purpose-built fulfillment centers, Goodfood Market is well positioned to benefit from the shift towards e-commerce sales. So, investors with a long-term horizon should buy the stock for higher returns.

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.

The Motley Fool recommends Goodfood Market. Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.

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