BRC Inc. (NYSE:BRCC ) Q2 2022 Earnings Conference Call August 11, 2022 8:00 AM ET

Tanner Doss - Vice President of Investor Relations

Evan Hafer - Chief Executive Officer

Tom Davin - Co-Chief Executive Officer

Greg Iverson - Chief Financial Officer

Toby Johnson - Chief Operations Officer

Heath Nielsen - Chief Retail Officer

Sharon Zackfia - William Blair

Michael Baker - D.A. Davidson

Stephen Powers - Deutsche Bank

Bill Chappell - Truist Securities

Greetings, and welcome to the Black Rifle Coffee Company's Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to Tanner Doss, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone. Thank you for joining Black Rifle Coffee Company’s conference call to discuss our second quarter 2022 financial results, which we released this morning and can be found on our website at ir.blackriflecoffee.com.

With me on the call today is Evan Hafer, Founder and Chief Executive Officer; Tom Davin, Co-Chief Executive Officer; Toby Johnson, Chief Operating Officer; Greg Iverson, Chief Financial Officer; and Heath Nielsen, Chief Retail Officer.

Before we get started, I would like to remind you of the company’s Safe Harbor language, which I’m sure you are all familiar with. On today’s call, management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, please see our previous filings with the SEC.

This call will also contain non-GAAP financial measures, such as adjusted EBITDA. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the earnings released furnished to the SEC and they are also available on our Investor website.

Now, I’d like to turn the call over to Tom Davin, Co-Chief Executive Officer of Black Rifle Coffee Company.

Thanks, Tanner, and good morning, everyone. Thank you for joining us on our second quarter 2022 earnings call. Today, I will talk about the key strategic initiatives that will power our growth into 2023 and beyond. Evan Hafer will talk about brand evolution and marketing strategy. Greg Iverson will walk through the Q2 results.

Here are the three key takeaways that are the foundation of this call. Number one, Black Rifle Coffee Company has a unique connection to our community. Number two, we are rapidly evolving our omnichannel business model in order to maximize profitable growth and return on investment. Number three, we're responding to significant rated drink demand by adding capacity and execution capability. I'll provide more color on each of these headlines.

Number one, Black Rifle Coffee Company has a unique connection to our community. We are the only mission driven lifestyle brand in the coffee industry. And our mission is core to everything we do. The mission is a major driver behind our success to date because it resonates with our customers, our retail partners, vendors, and even our landlords, as people align with and support the mission of helping active-duty military veterans, first responders, and their families. Because of the trust we've built within our community we're confident that we will continue to take market share as we increase brand awareness throughout the United States.

Recall that we have a massive market opportunity. The U.S. coffee market is over a $45 billion in size, and we estimate the Black Rifle Coffee serviceable, addressable market to be approximately $28 billion, which includes over 100 million consumers who are aligned with our brand values. We bring the Black Rifle Coffee Company brand to life through our own media capability, which is a significant competitive advantage. Evan will talk more about this capability, but in short, we are directing our marketing investment from paid media into areas where we have the most control and achieve the highest returns.

Number two, we are rapidly evolving our omnichannel business model in order to maximize profitable growth and return on investment. The key advantage of our omnichannel business model is the capability to meet customers where they are. As you know, the elements of our model today include direct-to-consumer, both subscription and non-subscription, Outpost and wholesale consisting of ready-to-drink and partnerships with leading retailers, such as Bass Pro shops.

We've continued to see excellent sell-through of our rated drink products in the food, drug and mass channel and that success has led several FDM accounts to reach out, asking to sell our bagged coffee and rounds. Today, I'm excited to announce that due to demand from customers and retailers, we've made this strategic decision to enter the food, drug and mass or FDM channel in quarter four of this year with both bagged coffee and rounds.

To help put the size of this opportunity in perspective, the at-home coffee market is roughly 40% of the overall coffee market or approximately $18 billion of the total addressable market and about $11 billion within our Black Rifle Coffee serviceable addressable market. Today, we've served this at-home segment primarily through our direct-to- consumer channel. Here's some additional information that will help explain why we are so excited.

Roughly 4% of coffee purchases for at-home consumption are bought solely online. Approximately 30% of households are using the omnichannel approach of buying both in-store as well as online. The remaining 66% of individuals are only buying coffee in retail stores. By moving into the FDM channel, we will unlock a huge incremental opportunity to get Black Rifle Coffee into the hands of consumers, both new and existing. Related, we have a massive brand awareness opportunity with aided brand awareness currently below 20% around the United States.

Entry into this FDM market, done correctly with the right partners, will boost brand awareness, contribute significant incremental revenue, and be margin accretive as we will ship full truckloads of coffee to stores as opposed to one to four bags shipped to individual homes. In terms of timing, we'll be launching bags and rounds in the FDM channel in Q4 of this year and we look forward to sharing launch details via our social media channels once the product is in market.

Number three, we are responding to significant RTD demand by adding capacity and execution capability. Our leadership team and Board of Directors are committed to building a large enterprise that is both mission-driven and profitable. Evan Hafer calls this profit with a purpose. We are making progress in multiple strategic areas. The wholesale channel, including FDM and RTD will command the highest priority for our leadership focus and investment given its scalability and capital efficiency.

Focusing on RTD, our RTD products can now be found in approximately 67,000 doors, more than doubling from a year ago. As of Q2 we've overtaken Duncan as the number three RTD coffee in the convenience channel on a dollar per ACV basis as measured by Nielsen. Further, we continue to be the fastest growing single serve RTD coffee across all channels of trade. Today our RTD products have approximately 30% penetration of convenience store and FDM accounts across the U.S. as measured by percent ACV. Meaning the remaining 70% are a huge opportunity. Since our ready-to-drink product launch, demand has always outpaced our contract manufacturing capability.

With the addition of our two new co-manufacturing partners now ramping up production, we'll be able to capture more of the unmet demand and continue penetrating the remaining 70% of convenience store and FDM accounts. Because of this, we expect RTD revenue will be an area of meaningful outperformance in the second half of 2022 and significant growth in 2023, increasing our revenue outlook and forecast.

Pulling together all the components of our omnichannel model, we are updating and increasing our previously disclosed revenue outlook. For 2022, we are increasing our revenue outlook to be at least $320 million as the ramp up and wholesale revenue from the new FDM channel will contribute to Q4 and continued ready-to-drink growth will further enhance the wholesale channel's growth in excess of our initial expectations. The $320 million in 2022 revenue represents 37% growth in revenue versus 2021 revenue of $233 million.

Due to inflationary headwinds, elevated supply chain costs, and the ramp up and hiring, especially for our wholesale channel, we now expect adjusted EBITDA to be a loss in 2022. Looking ahead to 2023, based on demand and new sources of supply, we see the FDM and RTD channels continuing to accelerate such that we are now giving an update to increase our revenue forecast previously disclosed at Investor Day to at least $500 million in 2023 revenue, representing growth of more than 50% relative to our 2022 revenue outlook. This revenue outlook is only inclusive of contracted RTD capacity to date and could be even higher if we are successful in onboarding additional co-manufacturers.

Importantly, this revenue growth will enable substantial operating leverage in our P&L as the growth rate in SG&A will moderate versus our increased revenue growth rate. Combined with gross margin accretion from the FDM channel, we continue to expect our 2023 adjusted EBITDA margins to be in the low-to-mid-single digits, consistent with the margin originally forecasted at Investor Day.

Lastly, let me address our direct-to-consumer and Outpost channels in the context of our omnichannel model. For direct-to-consumer, the subscription business will always be the foundation of Black Rifle Coffee Company. We continue to invest in improving the selection and variety of subscription offerings, as well as the delivery and out of the box experience. We expect revenue to decline in this channel high single digit to low double digit versus 2021 as this year, we continue to be disciplined with our marketing investments Outposts.

Given our sharpened focus on driving growth in the wholesale channel in the near term, we are now planning to open 10 company-owned stores in 2022 and 15 in 2023. The Outpost strategy is an important growth platform and we anticipate it will deliver significant revenue growth in 2024 and beyond. We continue to make significant investments in the key drivers of cold beverage platform, mobile order and pay, loyalty, in-store experience and of course, leadership talent. Net-net we've made a conscious decision to align company resources on the wholesale channel given the demand we are experiencing. The overperformance in the wholesale channel will more than offset the more conservative guidance for both direct-to-consumer and Outpost.

With that, I will turn the call over to Founder and CEO, Evan Hafer. Evan?

Thanks, Tom and good morning, everyone. Thank you for joining us on our second quarter of 2022 earnings call. For those of you that aren't familiar with our story, I want to start with a quick background on why we are a Black Rifle Coffee Company. BRCC story starts in 2013 when I was working on a range training former special operations veterans to come over and join the CIA. I had a little one pound roaster that was on the back tailgate of the government truck, and I was roasting coffee for the soldiers that were going through their course. I had my service rifle sitting right next to my coffee roaster. At that time I thought, well, I'll just put these two things together and merge the names, Black Rifle and Coffee. It will be a tribute to the generations of men and women that have served our great country and continue to serve our country.

So that's exactly what I did and I founded Black Rifle Coffee in 2014. We've come a long way since 2014 and BRCC's business model has continued to evolve since we first launched our coffee subscription. We entered the pandemic as a pure DTC business and exited as an omnichannel business, launching our wholesale channel, as well as outpost business.

Over the past couple quarters, these strategic initiatives have really paid off, as we've had the ability to meet our customers wherever they shop, be it online with our DTC subscriptions or purchasing our ready-to-drink products in C-stores and grocery stores, or visiting us at one of our 21 outposts. We've continued to see the evolution of our customer and where they are purchasing our product. Since we've launched our RTD product within the FDM channel, we've seen tremendous demand from our customers to have our products wherever they are shopping.

As Tom mentioned earlier, over 66% of at-home drinkers are buying their coffee within the FDM channel. This not only allows us to serve our current customer base, but it also opens up an entirely new customer base who might not have tried our product in the past. Now, before Greg gets into our second quarter results, I also want to touch on how the tremendous growth and the mission of our business has led us to work with some of the most recognizable brands in the world.

We're incredibly excited about our first partnership with Amazon on the launch of The Terminal List series on Amazon Prime. Our good friend, Jack Carr, The Terminal List author, and Executive Producer for the show, wanted an exclusive Black Rifle Coffee aptly named Terminal List as part of the launch of the new series. In this collaboration, all profits from BRCC coffee sales will be donated to the Special Operations Warrior Foundation and the HunterSeven Foundation to support veterans.

This partnership goes hand in hand with BRCC's mission to give back to our veterans. For the trained eye, you can also see our hat worn proudly by the show's main character played by Chris Pratt and our T-shirts and stickers throughout the show. This quarter, we've also become the official coffee of the Dallas Cowboys, and now America's Team will be serving America's coffee throughout the stadium. We'll have two standalone kiosks, frozen drinks in two bars, coffee, and over 300 suites in our products in 12 concession stands. We started this partnership through the Dallas Cowboys commitment to giving back to active duty military veteran, and first responder communities.

Our mutual dedication to those serving or have served our country makes this partnership so proud to stand by. Similar to our exclusive coffee we made for Amazon, we also worked alongside the Dallas Cowboys by launching the Medal of Honor blend of coffee, where all profits will go back to the Medal of Honor Museum in Arlington, Texas. Outside of our latest company partnerships, we've also continued shifting our marketing spend from paid media to more of an owned media strategy with our customer acquisition costs continuing to climb post the iOS change.

We've continued shifting our marketing efforts through investments and influencers, brand ambassadors, podcasts, and sports. Most recently, we finished filming B.J. Baldwin's Recoil and Travis Pastrana's Gymkhana series. They'll both be coming out in Q4. As a reminder, these video series have a huge global following with Recoil having over 500 million YouTube views and Gymkhana franchise, having over a billion YouTube views. This content appeals to our core community, as well as a broader global audience, which will help continue to grow our brand recognition.

Finally, we also announced the appointment of Roland Smith as our Executive Chairman. With this transition, I will continue to remain a CEO and board member. Roland's experience with BRCC as a board member and his extensive background in consumer packaged goods, restaurant and retail sectors, make him the perfect fit for this role. Roland's background as a U.S. Army Aviation Officer provides him with an innate understanding of our community and vision. We are very fortunate to have Roland on the Board and his additional expertise within our management team is extremely helpful, given the momentum and the opportunities we are seeing in this business.

In conclusion, the expansion into FDM rounds out our omnichannel flywheel model. As we broaden our distribution to meet our customers where they are, we are still maniacally focused on providing the best experience to our customer in whatever channel they are purchasing our product. Our unique connection to our customer base allows us to shape and modify our advertising in order to effectively and efficiently meet the demands of our customer. Every decision we make is influenced by our mission of helping veterans, first responders and their families.

Now I'll pass it over to Greg Iverson to walk through the financial details of the quarter. Greg?

Thanks, Evan and good morning, everyone. Today, I will expand on the update that Tom provided on our second quarter results, provide some additional perspective as you update your models in the back half of the year, and walk quickly through our balance sheet and share count, before we open the call to answer your questions.

Turning first to our financial results, during our second quarter, we continued our impressive growth trajectory and made significant progress on key strategic initiatives that will enable us to deliver on our near term and long range plans. For the second quarter, total revenues increased 27% to $66.4 million compared to $52.4 million in Q2 of last year. The meaningful increase in revenue was driven by our wholesale and outpost sales channels, which continued their remarkable growth increasing by 145% and 98% respectively versus last year.

Now I will give some additional details on our three sales channels. First, our direct-to-consumer revenue was $37 million compared to $39.8 million in Q2 of last year. This decrease was primarily due to lower e-commerce sales in a post COVID environment where more consumers who transitioned to buying coffee online during the pandemic are returning to brick and mortar.

We ended the quarter with 288,000 subscribers representing growth of 4% over Q2 of last year, but a decline of 2.7% sequentially from the end of Q1, 2022. The small decline in subscribers from Q1 was not due to increased subscriber churn, but rather was a result of our decision to redirect marketing investments to other faster growing areas of the business as we continued to experience elevated DTC and subscriber acquisition costs.

Note that last month during July we also revamped our pricing metrics for our bag coffee subscription business, increasing the price per subscription bag of coffee by $1, which will partially offset the inflationary impacts of increased costs of green coffee and shipping. This change was made after significant analysis and supported by a comprehensive subscriber communication program. Thus far, we have not seen any elasticity in the subscriber base and continue to see our churn rate remaining steady at three to 4%, which is a testament to the quality of our coffee and loyalty of our coffee club members.

While our DTC channel has been the core of Black Rifle and remains important to us, we are focused on ensuring our customers can access our products when and where they choose. The shift we and other DTC to companies are experiencing with consumers returning to brick and mortar for their purchases is another data point that validates we made the right decisions in 2020 to broaden from a DTC business to an omnichannel model.

Before I turn to our wholesale channel, I want to be clear that we approach capital allocation to our sales channels from a disciplined perspective. And to that end, we will continue to invest where we see the greatest opportunities. Today, that is in our wholesale channel. While we could be investing more heavily in new customer acquisition in our DTC channel, those investments would currently yield a lower return than the investments we're making in our wholesale channel.

Importantly, we are confident we can achieve the financial outlook that Tom discussed earlier today in an environment with declining DTC revenues. Additionally, we are laser focused on both becoming operating cash flow positive in the near term and making the prudent investments that support sustainable growth for our business.

Turning to our wholesale channel, revenue increased 145% to $24 million in Q2 compared to $9.8 million during the prior year period. The increase was primarily driven by growth in our RTD product and expanding wholesale partnerships. Our RTD product can now be found in almost 67,000 doors, more than doubling from a year ago.

Moving to our Outpost channel, revenue increased 98% to $5.4 million in Q2 compared to $2.7 million in Q2 of last year. This was primarily due to an increase in the number of company owned outposts, which increased to 10 outposts as of the end of Q2, compared to three outposts a year ago. Overall, we continue to be impressed by the growth, and then our wholesale channel, specifically our RTD product in both convenience, and food, drug, and mass.

Turning to our profitability, our Q2 gross margin was 34% decreasing 671 basis points from 40.7% in Q2 of last year. The decrease was driven by higher product costs, including increases in green coffee and RTD ingredients, as well as a continued shift in our product mix as our RTD has a higher product cost and lower gross margin as compared to rounds and ground and whole bean coffee. Our wholesale business now accounts for 36% of total revenues versus 19% in Q2 of last year.

In addition, we've continued to see inflationary pressures from our third party suppliers on everything from T-shirts to corrugate for our small parcel shipping. We have also made several productivity and pricing improvements throughout the quarter. On the productivity side, we consolidated and moved our small parcel shipping to a new carrier. This move saved us over 10% per parcel.

On the pricing front, as we mentioned on our Q1 call, we notified our RTD wholesale customers of a price increase that went into effect in late June and we also increased our non-subscription pricing and our DTC shipping rates. As I mentioned a moment ago, we recently rolled out a new pricing metrics in July for our subscribers and we are beginning to see the benefit of that increase. Our consumers remain engaged with the brand, and we've seen our churn rate remain within its historical range since we implemented the pricing change.

As I mentioned, we are investing to support our growth and as such our operating expenses during Q2 increased by approximately 51% to $39.4 million as compared to $26.1 million last year. I will quickly walk through the drivers of these increases beginning with marketing and advertising. For the second quarter of 2022 marketing expenses slightly increased 1% to $9 million from $8.9 million in the prior year period. As a percentage of sales, marketing decreased by 349 basis points to 13.6% compared to the same quarter last year. The decrease in expense as a percentage of revenue was driven by more targeted ad spend in our DTC channel and growth in our wholesale and outpost channels, which require a lower marketing spend than DTC.

Next salaries, wages and benefits increased 36% to $15.5 million from $11.4 million in the second quarter of 2021. As a percentage of revenue, they increased by 156 basis points to 23.4% compared to 21.8% last year. The increase was primarily driven by increased employee headcount to support our significant sales growth, especially investments in key positions to support the growth of our wholesale and outpost channels. Within wholesale we've added materially to our internal sales team, as well as additional leadership for our coffee entry into the food, drug and mass space.

Furthermore, as I mentioned last quarter, a large portion of our outpost cost structure is included in the salaries, wages and benefits line as we typically bring on 35 to 40 new employees for each outpost opening. As we build our outpost business, you will continue to see growth in salaries, wages, and benefits.

Finally, G&A expenses increased $9.1 million or 158% to $14.8 million compared to $5.8 million in the second quarter of 2021. As a percentage of revenue, G&A increased to 22.3% of revenue compared to 11% last year. This increase was primarily driven by increased consulting and other professional services needed to support the rapid growth of our business across multiple sales channels and the transition to operating as a public company.

Approximately $2 million of the year-over-year increase were fees paid to an internationally recognized consulting firm to support the planning and execution of our growth and productivity initiatives. We do not expect these additional costs to continue in 2023. We also had 10 company owned outposts in 2022 versus three in 2021, and the incremental lease and other occupancy costs for these outposts also contributed to the increase.

As I mentioned earlier, we are investing in a strong foundation to support the incredible demand we are seeing for our brand and products and we expect to start seeing operating leverage in 2023.

In addition to the GAAP measures I discussed, adjusted EBITDA is an important profitability measure that we use internally to manage our business. For the second quarter of 2022 adjusted EBITDA was a loss of $10.4 million versus a loss of $1.4 million a year ago. This increased loss was primarily due to the increased operating expenses incurred in advance of the revenue we expect from those investments, as well as lower margins from inflationary pressures and products mix shift that were not fully offset by our productivity and pricing initiatives.

Next I'd like to share a few additional points building on the update to the outlook Tom included in his remarks. While we expect an acceleration in year-over-year revenue growth in the back half of the year, this will be most pronounced in Q4. New supply of RTD is expected to have a more significant impact in Q4, along with the introduction of bag coffee and rounds in the food, drug, and mass channel. Thus, we expect roughly 60% or more of sales during the second half of 2022 to occur in Q4.

Furthermore, given the full flow through of pricing, margin accretion from expansion in food, drug, and mass, and more favorable revenue growth as compared to operating expenses, EBITDA margins will begin to show improvement in Q4.

Now I'll briefly walk through our balance sheet for the second quarter of 2022. Our balance sheet remains strong with $93.1 million of cash and cash equivalent compared to $18.3 million as of December 31st, 2021. We have $17.2 million of long-term debt compared with $22.7 million as of December 31, 2021. Finally, we had 211.6 million shares outstanding as of quarter end with all of the warrants, earnouts, and other items related to our SPAC merger affecting our share count having been fully converted to common stock by the end of our second quarter.

I will now turn the call back over to Tom. Tom?

Thanks, Greg. I trust you can sense our excitement for the future. To recap the three key takeaways for this call are, number one, Black Rifle Coffee has a unique connection to our community. Number two, we are rapidly evolving our omnichannel business model in order to maximize profitable growth and return on investment. Number three, we're responding to significant rated drink demand by adding capacity and execution capability.

With that I'll turn the call back over to the operator for your questions. Thank you.

Thank you. [Operator Instructions] Our first questions come from the line of Sharon Zackfia with William Blair. Please proceed with your questions.

Hi, good morning. So, a lot of news today and congratulations on the announcement for food, drug, and mass. I guess, can you help us think about for this year obviously you are bridging the gap from outpost and subscribers our DTC, with the FDM and the DTC growth. Can you kind of unpack how much of that gap was FDM versus the increase in the RTD capacity? And then in terms of door ramp, I might have missed this, but do you have something you can share with us on doors for FDM this year versus, what you would expect for next year?

Hey, Sharon, this is Greg. I appreciate the questions. And just to make sure I'm tracking on the first one, are you referring to mix between among our channels for 2022?

Yes. So if I understand correctly, the expectations were lower for outpost, because you're opening fewer than expected. You lowered the DTC outlook, but you raise the full year aggregate outlook for revenue. So I'm just trying to figure out how much of that bridge is FDM launch versus increased RTD?

Got it. Yes, and so you got the pieces, right and so we've said that we can grow and we can achieve that guidance even in an environment with our DTC revenues declining, which did occur in the second quarter. We've also given updated guidance in terms of our outpost openings. So the growth is of course all within the wholesale channel and it's a combination of entry into food, drug and mass, as well as the additional revenues we generate from the additional capacity of rates drink. What we're not doing is disaggregating or separating how much of that increased wholesale revenue comes from RTD versus food, drug and mass.

And then the second part of your question, Toby?

Yes. And then Sharon, to address the door count part of your question, this is Toby, good morning. So we did in July and P7 we exceeded 67,000 doors just over, which clearly has us on track to blow away our target for the year of 75,000 doors. So we feel very confident that we will exceed that. I think we're also really happy with our progress in ACV.

If you look at where we entered the year, we started at about 12% ACV in FDM, and we were about 29% ACV in CMG [ph], those numbers have increased to 32% and 37% respectively for an average of about 33%. So it's a lot of progress in growing that distribution. But it's also a huge runway that we have ahead that was mentioned by Tom earlier in his remarks. Does that answer your question?

Yes and to clarify the bag coffee and K-Cups going into FDM, are those partners that you're already working with on ready-to-drink?

Yes, so the performance of our ready-to-drink business in FDM has been really strong. And I think the resonance of our brand within those channels and with those partners is part of the reason that our retail partners are excited to have us enter with coffee and round SKUs later on in the year.

Okay. And then just final question on the slowdown in outpost growth, is there anything that you're seeing at the outpost that gives you pause or is this really just a matter of, you can only do so much at once and there's a lot of focus right now on the wholesale channel, ready-to-drink, you know, getting bag coffee and K-Cups into food, drug and mass. I'm just trying to unpack that?

Hey, Sharon, it's Tom. Good morning and thank you for the question. Yes, overall we're seeing consistent trends in our outpost business check was actually up versus trend and versus prior year again, on a small base of stores, that's driven by the high merchandise mix, including bag coffee and rounds. Overall, we've got Heath Nielsen now working on a number of key initiatives. Heath, you want to talk about the initiatives you're driving to?

We remain incredibly competent on our retail outpost strategy. The must haves right now I think that we're focused on mobile order and pay with a combination of loyalty as mentioned before our cold beverage platform, extension of our food line and very happy that we're launching and we'll have our prototype finished this year. So this allows us to deliver exceptional work on those key areas.

Thank you. Our next questions come from the line of Mike Baker with D.A. Davidson. Please proceed with your questions.

Hey, thanks guys. A couple, so you gave a sales number for next year. So you must have some plan in there, some number as it relates to this wholesale business and particularly the bag coffee in food, drug and mass. So I'm wondering if you can share of that $500 million, how much is coming, is planned from that business? And then bigger picture for that business, I think this is something that maybe you would contemplated in the past, but it wasn't really in the numbers. It was more of a theoretical thing, but now that you're doing it, can you help dimensionalize what this does for the overall potential of the company? How much bigger can this make Black Rifle, versus what you had previously thought?

Sure, Michael, this is Greg. I'll answer the first part of that question and then I'll pass it over to Tom to talk about the size of the market. But in terms of, and I guess this ties back to Sharon's question too, in terms of we've got so much growth expectation in both 2022 and 2023 in the wholesale channel and it's across both this additional capacity for ready-to-drink as well as the entry into FDM. So around the question in terms of this $500 million plus revenue outlook for 2023, it's my expectation that, call it 60, perhaps 60% plus of that will come from this wholesale channel. And again, that includes both the RTD as well as FDM and our other customers that exist within the wholesale channel today. And then Tom I'll pass it to you on market size.

Yes, Michael, so I think, the overall coffee market about 40% of the market in total is at-home consumption. We've always served that market through our direct-to-consumer channel, plus some sales through people like Fast Pro. So we're tapping into not only a massive market, we think it's $11 billion serviceable addressable for us. So we get our existing customers and then as we mentioned earlier, 66% of people don't buy coffee online. So we'll be able to tap into them. So it doesn't take much of a market share to have significant incremental revenue growth. And it will also drive massive increases in brand awareness. So we are very excited about the FDM channel.

Fair enough. So I guess it makes the potential much bigger. One more followup if I could, and I don't know if this is, if you can answer it as it relates to the outpost or the direct-to-customer or whatever channel, but just in general, the idea of inflation both within the coffee business, but more outside of coffee and people needing to spend more in other areas of food and gas, et cetera, are you seeing any unit degradation? Is coffee a necessity, this is a high end coffee, is that a necessity that people are going to spend on even when their pockets are being squeezed elsewhere? Are you seeing any kind of trade down or people sort of maybe foregoing their -- the more expensive coffee for cheaper versions or not drinking coffee at all?

Well, I think, this is Evan. Thanks a lot for the question. I think what we've seen; it validates the, the studies and research that have already been published I think by a combination of efforts, one to include the Specialty Coffee Association of America Research that they've done in the past, which is people don't necessarily trade down from a premium coffee, especially when it's lifestyle based. What they start doing is they start going to more of a DTC or they start buying more for home.

So they cut out their stop on their way to work or one of their stops and then they start going and looking for that same coffee in a grocery store, but they don't start or decrease their consumption of coffee. They actually increase their consumption of coffee. When we look at, we'll talk in economic slowdown terms, it's been, I think it's been proven that they increase coffee consumption, but they're looking for their option or their favorite coffee in FDM. So that's -- I think it's one of those things to conscious effort of the company to concentrate on what the data has shown and really kind of doubled down on where the customer is shopping.

Okay, that makes sense. I'll turn it over to someone else. Thanks for the color.

Thank you. Our next questions come from the line of Joe Altobello with Raymond James. Please proceed with your questions.

Hi, this is Martin Martello [ph] for Joe Altobello. I had a question about the subscribers for DTC, it went down quarter-over-quarter, and I understand a lot of this is going to be post-COVID spending habits, but when do you expect the subscription growth to resume?

Well, this is Evan again. I think what we have to see is a and really when we look at it from a company's perspective, you can only be good at so many things at once. And when we're talking about investments in marketing and then opening up additional channels, we've got to make sure that we're capitalizing on the channel growth and we're capitalizing on our high growth potential products. So what we don't want to do is overspend or over index in DTC subscription.

We're seeing such large opportunity within our RTD and then as we start to expand into FDM. So I look at this as the opportunity starts to increase gross revenue increases, we'll start to equal out marketing opportunities based on channel. And then that growth opportunity will directly correlate to how we're spending against each one of these channels in a very conservative and conscious effort to capitalize on the most profitable and also I think the most opportunistic channel that defines the brand.

Got it, thank you. And then I just have a quick question about the outpost. I know you kind of cut it by 5 for this year, and it sounds like basically you have already a lot on your plate. If I cut it correctly, I think you have 15 planned for 2023. So just trying to get idea the outpost differential of 5 for this year, is that something that's being pushed back or is it just kind of the reprioritizing efforts and capital allocation?

I think, I'll answer the first part and then I'll let the guys chime in on this. I think from our perspective, we really want to build exceptional experiences and we've got to be concentrated on providing an exceptional experience to the customer, but we also have to be very conscious of capital. So what we've really tried to allocate is resources based on how can we directly relate the customer experience, find exceptional places to build coffee shops that enhance the brand that allow the customer to interact with the brand, and then continue to concentrate on our high growth opportunities across RTD and FDM. So that's kind of where my position is, and I'll let Heath and Greg round out the rest of that.

Yes, it's fine Evan. I think the market planning efforts that we just spoke to last quarter, highly focusing in Arizona, Texas, Florida, and Tennessee is going to give us that density, though that's going to allow us to, it’s better for food distribution. It's better for beverage. It's better for marketing. It's better for labor spend. So our focus in really owning those particular markets is going to be a benefit and that helps us in that store account number.

Got it. Thank you very much.

Thank you. Our next questions come from the line Stephen Powers with Deutsche Bank. Please proceed with your questions.

Hey, thanks and good morning. I guess, so I understand intuitively the allure and the focus on FDM. I guess, I think it makes intuitive sense, I guess, where I'm struggling a little bit is, just a very different narrative than we have heard from you to date including, inter quarter as you've laid out growth strategies. It always started with DTC and experiential retail, the outposts ready-to-drink expansion, et cetera. Wholesale was number four and it was always very targeted. So I guess again, the opportunity is clear, but I'm just, I'm a little bit, if I can get a little bit more insight as to what drove the switch, how long the switch has been kind of contemplated and what made you flip the switch now, as opposed to later?

Well, this is Evan again. I think, this is something that we've not only contemplated, but obviously we've discussed internally and then we've developed a strategy over this over the course of, I would say, the last couple of years. And when we look at it, I think it's, it's prudent of any business to look at their overall channels and say, how are we going to execute against each one of these channels? How are we going to allocate the capital and resources and then grow the company and exceed customer expectation? Where I think from my perspective and this is like one of my opinions directly related to this is customer purchasing behavior and then capitalizing on customer purchasing behavior is a necessity of the business.

So we've always had to go there. We've known this for years. We just wanted to make sure that it was right and we had the right timing with the right team. So it's been here. It's just not necessarily something that we've discussed and it's directly related to customer purchase behavior and then making sure that we're meeting our customer where they are purchasing product.

Stephen it's Tom. I'll just add to Evan's comment. So we always wanted to go into the channel, but we did not build it into the model or show it as a priority previously because we didn't want to be lost on a wall of coffee. So we'd always said, when we can find the right partners with the right merchandising setup to appropriately showcase the brand in the FDM channel, we'll go and we'll go hard. So those opportunities have now presented themselves, given the success of ready-to-drink in those FDM channels.

Yes, and this is Toby. I'll just add some data to, when you look at the momentum of our brand in this channel, so looking at RTD and share growth, if you look at that data, what in all classes of trade, whether it's in FDM, C&G [ph], whether it's last four, last 13 or last 52, we are – weeks, yes. We are leading share growth in all of those areas, whether you pick any combination of those in any class of trade. So we've got incredible brand momentum with shoppers that are in these channels, and we want to take advantage of that. And as Tom mentioned earlier, we want to be where shoppers are buying their coffee. So just makes a ton of sense when you look at the momentum of the brand as well.

So we're responding to pull from retailers and the customers, right, that's the bottom line.

Yes, all right. Thank you for that. And I don't know if it's too early or possible or forthcoming, but I don’t know if you have updated, you mentioned where you stood against the retail door targets for this year ahead, obviously outpost revised lower. Are there new targets in mind that you have for DTC subscribers and or wholesale doors? I mean, it feels like the described subscriber number is lower and the wholesale door number by year end and obviously in 2023 will be a lot higher. I just don't know how to kind of, prior kind of think about that order of magnitude.

Yes, Steve it's Greg. I'll take that. And again, direct answer to your question is we're not giving updated outlook in terms of a subscriber count or on a door basis. But our outlook that we provided in terms of revenue assumes that the trends we saw in Q2 from a subscriber perspective continue on in Q3 and in Q4. So that represents modest, sequential declines. And then as you've also seen we're tracking well ahead of our prior guidance in terms of the RTD door. So we're certainly, we certainly expect we're going to end 2022 well ahead, but we're not, at this time we're not giving an updated door count number.

Yes, okay. Fair enough. And if I could squeeze one more and just on the, on the outpost, I realized the base is really small, but the revenue declining sequentially on a theoretically higher store count base, and I think Tom, you mentioned that ticket was up. It implies that traffic was down sequentially, pretty meaningfully. If I put all of that together, just per door anyway, can you just either dispel that or talk about, kind of what you're seeing and then if whether we should or shouldn't extrapolate some of that? Thank you.

Yes. Thanks, Steve, yes. So on a sequential basis versus trend, obviously on a very small base, traffic is lower versus Q1. We think a lot of that is driven by seasonality. Heath has talked about the fact that on cold beverage, we run as a percentage of drinks below 40%. Obviously some of the other major players are the 70 plus percentage. So seasonality in warm climates, like Texas, definitely a factor. And obviously as we build more stores and annualize performance, we get a lot better at forecasting seasonality.

And Steve, this is Greg. I'll add just one point to that. But we did open one store in the second quarter, but it was very late in the quarter. So it didn't have enough time to contribute a lot of incremental revenue in that period.

Understood, okay. Thank you so much. I appreciate it.

Thank you. Our next questions come from the line of Bill Chappell with Truist Securities. Please proceed with your questions.

Good morning. Certainly fantastic news that you are expanding the food, drug and mass, and the raised guidance, and I understand you have a lot of, a lot of brand momentum, but I guess just trying to understand you're going now food, drug, and mass. If you go to most stores, they have 20 to 40 coffee brands already in the store, and most of those brands are putting a lot in terms of slotting fees, marketing, advertising, brand equity type stuff like that. And so it's not, it's kind of like swimming in the deep end or spending more time in the deep end for your business.

So can you talk about plans as you move into the fourth quarter? I mean, do you just expect to kind of rest on the existing momentum of the brand or you need to step up marketing, advertising meaningfully as we go into the next year to just kind of keep the momentum going? What changes on the cost side now that you're kind of pivoting more towards food, drug and mass? Thanks.

This is Toby. Thanks for the question. So we definitely are investing to make sure that we're successful in our entry into this channel. We're also being very selective with the partners that we want to work with, so that we can make sure the brand shows up well. It's important that, when consumers are shopping, when they're going down the aisle, they can see our brand that we show up in a way that's going to represent what we're looking for. So we're not sharing a lot of the specifics until we actually are in market, as far as what that will look like, but we feel very confident about the partnerships and the discussions that we're having about the way that we will show up, that it will represent what we stand for is about grateful and that our consumer base will be happy with the way they find us on shelf.

Yes and I'll layer in with, this is Evan. I'll layer in with the marketing strategy associated with that, which is; we've been concentrated on a DTC marketing strategy that's been more optimized on what I would say is a cost per acquisition. So now we're moving into is more awareness based, so more of a CPM or awareness based marketing strategy as we move in two, three and four and beyond. So that's not necessarily an increase in marketing spend. What it is, it's a different set of prioritization and execution, but it's still the same playbook. It's just allocated differently to awareness versus D2C acquisition, if that makes sense.

And it was mentioned in the comments earlier, but there are a lot of efficiencies as well as you move into this channel. So rather than shipping a bag, two, three, four bags to a consumer's home we're shipping full truckloads to retailers in this model, which has efficiencies that enable us to reinvest in the business.

And this is Greg. I just probably – I want to add one more thing too, but you referenced swimming in the deep end, which certainly we recognize moving into food, drug and mass. We're working with large, very sophisticated companies. We've also talked a lot about the investments that we've made in G&A and talent. And so we've brought in a number of people who come from this environment who spent decades within the largest and most sophisticated CPG companies in the world and have tremendous experience. So that's a big part of why we have so much confidence going into this space at the time.

Yes, and I'm not saying you don't know how to swim butterfly. I just saying -- deeper pool. Following up with that, and I've asked this before, obviously you're not hitting your EBITDA targets for this year. And I don't think that's all a bad thing, not that my opinion matters, but does it change your look kind of building on marketing, advertising, brand support, going into the wholesale of, is profitability in the next few quarters as important, or is getting the brand right, and getting the positioning right and getting the market share near term more important, how do you balance those things as we go in with this kind of change to food, drug and mass?

I'll answer the first part and then I'll shovel pass this off to Greg here in a second, which is, I think there's an important consideration with the brand representation into FDM, which is we have billions of impressions. We're one of the most well-known coffee companies in America. So what we have to consider on the shelf is that Black Rifle Coffee is one of the most recognizable names in America. So when we look at the competitive advantage is that we've built an extremely loyal and also active fan base with already preexisting awareness.

So when we look at it, I think it's almost an unfair advantage to the competition on the shelf. So it's not as if we're entering in as a new product, new brand on the shelf against a group of competitors. We're a preexisting national and well-known brand. So as we slide into this, I think this is a natural extension. I think this is something our customers expect and actually demand. So then I'll hand that over to Greg.

Yes, Bill, I mean, something we've said in our prepared remarks and something that we'll reinforce is we're focused on sustainable and profitable growth. So we've talked about getting to being EBITDA positive in 2023 and so we've guided, or our outlook is low-to-mid-single digits. So that's something we have clear line of sight to. It is not a focus for us for the back half of 2022. Although we've also said we do expect our EBITDA margins or our losses to start showing improvement in the fourth quarter, but so longer term we're like I said, we're focused on this profitable and sustainable growth, but in the near term, we're prioritizing those investments over getting to profitability sooner.

And just want to add, we're building this business as we enter FDM with coffee, it will be gross margin and EBITDA accretive. So we're building it to be a positive addition to our portfolio.

Great. Thanks for the color.

Thank you. We have reached the end of our question-and-answer session. And with that, this does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.