SunOpta Stock: More Headwinds Than Tailwinds At This Time (TSX:SOY:CA)

As input costs have risen SunOpta Inc. (TSX:SOY:CA) (NASDAQ:STKL), a company that manufactures and sells plant-based and fruit-based food and beverage products, has had to increasingly raise prices in order to offset the inflationary impact on its business operations, and so far it has worked, but with food prices expected to continue to rise in 2023, the question arise as to how much higher the company can raise prices before customers resist buying at those levels.

Some of this is already reflected in inventory levels, as end-users have been resorting to destocking their pantries and storage bins in response to some food shortages and price inflation. That’s likely to continue, which will result in uneven demand going forward.

Food price inflation for food consumption at home (not including restaurants) is projected to increase in a range from 11 percent to 12 percent in 2022, according to the USDA, and another 3 percent to 4 percent on top of that in 2023.

Food prices away from home are estimated to climb 7 percent to 8 percent in 2022, and another 3.5 and 4.5 percent in 2023. The importance of the combination of food inflation at home and away is that consumers will increasingly prioritize their spending budget, gravitating toward lower price offerings – whether at home or eating out.

While there is some built-in resistance in transitioning to lower prices from the products STKL offers because of the customer base it serves, there is still the point where many people will have to make choices in regard to pricing, and when that happens, volume will decline and raising prices won’t be able to cover all of that because of the risk of losing more volume if it does so.

In this article, we’ll look at some of STKL’s recent numbers and the headwinds it faces in 2023.

Some of the numbers

Revenue in the third quarter was $229.7 million, up 15.7 percent from the $198 million in revenue generated in the third quarter of 2021. The majority of the improvement came from increasing prices.

Revenue from its plant-based business segment was $138 million in the third quarter of 2022, up 20 percent year-over-year. Pricing in this unit increased by 16.2 percent. Volume in the segment was up a modest 3.7 percent in the quarter.

Revenue from its fruit-based business was $92 million in the reporting period, up 10 percent year-over-year. Raising prices offset a decline in volume. Gross margin in this segment reached a 5-year high of 12.3 percent.

Gross margin in the reporting period was 13.7 percent, up 190 basis points from the 11.8 percent in gross margin from the third quarter of 2021.

STKL had a loss of $(13.4) million in the quarter, or $(0.12) per share.

At the end of the third quarter, it held cash and cash equivalents of $459,000, $75 million in accounts receivable, and $225 million in inventory. Long-term debt stood at $275 million at the end of the reporting period.

A look at inventory

In this section I don’t want to primarily look at the inventory of STKL, but rather at the impact of inventory management of people at home. Destocking of inventories at home has resulted in unpredictable demand from its food business customers, which the company said could change in a relatively short period of time.

What’s important to take into consideration here is how long it’s going to take before the retail customer gets back to historical buying habits. With the ongoing food price inflation expected to continue on into 2023, I’m not convinced this is just a passing phase that is going to quickly fade away.

If I’m correct on that, it means STKL is in for a challenging 2023 in regard to inventory management, especially when its food business customers are consistently changing demand because of the unpredictable behavior of retail customers.

After all, the reason people stock up on food is for the very economic conditions we face today, and usually these people are efficient in their stocking patterns and should have more than enough to destock in response to food price inflation.

What’s interesting here is not only does STKL have to manage its own inventory, but so do business customers and retail customers (consumers). So this brings an interesting mix that is difficult to get a handle on based upon changing consumer behaviors. With the elevated level of inventory, the company has, it could become a problem if sales volume continues to slow down.

An unknown at this time is how general inflation will have an impact on consumer habits in 2023; this is specifically true when consumers increasingly focus on prioritizing spending.

As this relates to SunOpta, I think some of its more popular products will probably continue to do okay, but its overall product portfolio will probably come under heavy pressure in 2023, if things get worse before they get better, which is probably how it’s going to play out in the first half of 2023.

This is a catch-22 for STKL, as there is only so far the company can go in raising before increasingly price-conscious consumers stop buying, even as it has to continually eat some of the input costs.

With volume levels at the company growing at a very modest pace, I’m tending to think we’re already seeing demand slowing down, and if so, as food prices continue to rise in 2023 and consumers are forced to make food buying decisions, they’re likely to go for lower-priced options.

The company does offer some private label products which may partially mitigate the potential decline in buying branded products, but I don’t see that offsetting it much because under that scenario people are looking for the absolute lowest prices.

Conclusion

The very nature of the business STKL competes in is one of low margin, so anything that disrupts the business will have a negative impact on the company, and its profitability.

It lost money last quarter even with the increase in revenue, and when considering it’s opening up another facility in Texas heading into 2023, there will be more costs that will directly impact margins and earnings.

Over the long-term that could pay off for the company, but over the next year or so, when considering continuing food price inflation, modest volume growth, and the strong possibility that consumers will further destock their pantries, the performance of SunOpta is going to be an uneven one at best, in my opinion.

As the company stands today and the headwinds it faces, accompanied with lack of visibility concerning predictable consumer behavior in a period of food price inflation, I think taking a position in STKL is basically like tossing the dice.

When I say that I’m primarily referring to getting a good entry point and cost basis in a period of time there the company is probably going to trade very volatile.

I think further out the company has a lot of promise, but that time isn’t now.