HelloFresh: Turning Around.

Q3 2024 ER Update

Edited by Brian Birnbaum and an update of my original HelloFresh deep dive.

HelloFresh stock continues to move into a highly asymmetric position, with vast upside.

HelloFresh’s unit economics continue to improve, driven by a shift towards focusing marketing efforts on higher value customers. This is visible in the rising AEBITDA margin, which is up from 3.8% in Q3 2023 to 3.9% in Q3 2024 as you can see in the graph below in yellow. The increase has primarily come as a result of HelloFresh increasing AOV (average order value) to €66.2 in Q3, up 3.8% YoY and of marketing expenses declining. Marketing expenses as a % of revenue are down from 19.1% in Q3 2023 to 18.9% in Q3 2024 and the AOV increase is the result of pushing additional products to more affluent customers.

Expanding unit economics are indicated by the company’s rising EBITDA margins, which do not factor in special items and stock based compensation, unlike AEBITDA. EBITDA margin went down from 7.8% in Q2 2023 to 5.4% in Q2 2024. But there are other signs of HF reaching an inflection point. 

For example, EBITDA margin is up from 2.3% in Q3 2023 to 2.5% in Q3 2024, suggesting HelloFresh is now on the path to solve previously weak demand. The only critical pain point HelloFresh resolves at present is returning to customers the time otherwise required to cook at home. As such, HelloFresh prioritised customers that valued money over time. But this is changing. 

The company’s process power continues to impress. Although the meal kit operation continues to decline, with revenue down 9% YoY, RTE (ready-to-eat) revenue is up 40% YoY. The former is a shrinking business, with near-zero odds of resuming some degree of growth over time. The latter is by all standards a fast growing business. 

While I still lack an in-depth understanding of the qualitative demand drivers of the RTE operation, it remains evident that HelloFresh is making good progress in evolving from a nice-to-have into a critical problem solver. Should we see continued progress in this direction, an expansion of valuation multiples seems likely. And the RTE operation seems to be affording HelloFresh a growing volume of earning power over time, with AOV up 4.3% in North America and 3% Internationally–the delta being due to North America’s larger exposure to the RTE operation.

RTE seems to have pricing power. Combined with expanding unit economics, I see fewer reasons each passing quarter for justifying such a low valuation. Any further margin that flips into the black renders the business criminally cheap at these prices.  

Contribution margin is down 1.3% YoY, coming in at 24.3% in Q3 2024 versus 25.6% in Q3 2023, as the meal kit operation continues to deleverage from the pandemic peak. Yet the quarterly delta seems to be reducing; contribution margin declined from 28.4% in Q2 2023 to 24.3% in Q2 2023. According to management, this slower decline stems from continued productivity improvements in the RTE and meal kit operations, the latter being especially pronounced in North America– most visible in the meal kit operation’s AEBITDA margin increasing YoY, seen in the graph below, from 5.8% in Q3 2023 to 8.5% in Q3 2024.

Although meal kit revenue is down 9%, efficiency is up considerably. On the RTE side, AEBITDA margins are not up because HelloFresh continues to invest heavily. This adds to my sense that HelloFresh has the ability to optimize highly complex problems. 

I was also intrigued to hear Dominik Richter, the founder and CEO, discuss on the Q3 call how HelloFresh can accurately predict the lifetime value of a customer after only three to four weeks on the platform. In my original deep dive I explain why the complexity of the operation requires a world-class ability to measure and optimize for user LTV–HelloFresh’s supply chain being impossible to efficiently operate otherwise. It was encouraging to hear Dominik confirm this. 

Here’s what Dominik said about HelloFresh’s predictive power in the Q3 call: 

So given that we've been operating now the business for about 13 years, we have a lot of data points that we can feed into the different prediction and machine learning models that we have. 

3-4 weeks to predict a customer’s future: And so usually, it takes us about three to four weeks until we have very,  very high predictive power, how a group of customers will do over the next six, 12, 18, and 24 months. 

So the big advantage in our model is that you generate data points of a customer every week rather than every month or every couple of months.

Much of HelloFresh’s financial performance in the medium term depends on its ability to: 

1. continue shifting towards more valuable customers–i.e. those that value time over the cost of HelloFresh’s product.

2. Continue optimizing as they wind down the meal kit operation, as demonstrated this quarter by the rising AEBITDA margin of the operation. 

3. continue optimizing and growing the RTE business.

This quarter the global RTE operation came in “slightly better” than breakeven. Therefore, going forward, RTE will be accretive to the bottom line. Across HelloFresh’s operations, I see continued signs that the company excels at efficiency. 

Cash production remains positive, which de-risks the thesis considerably. Remember, when a growth company shows negative net income but produces positive cash from operations, it’s not losing but rather accumulating money. 

At €30M, free cash flow came in at €50M lower than in the same period last year due to a €100M decrease in AEBITDA. But this decrease was driven primarily by severance costs from efficiency enhancing measures, along with higher depreciation and amortization. In other words, despite the complexity of the operation, HelloFresh remains a financially viable company with meaningful odds of both enhancing margins on the bottom line and multiple expansion of its stock price.

For now, I remain on the sidelines as I continue to learn more about HelloFresh. I haven’t ever seen anyone consuming its products and I lack that piece of qualitative information to make a final decision on the company. In the meantime, analyzing HelloFresh continues to be a fascinating exercise. While its financial performance remains a question mark, HelloFresh displays clear and tremendous process power. Regardless of whether I see ROI on my money, this investment case will pay rich dividends toward my investment process, further informing the relative importance of process power (and by extension culture)as compared to other corporate variables. 

Until next time!

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