Business Overview Black Rifle Coffee Company (NYSE:BRCC), the veteran-founded, mission-driven premium lifestyle brand and coffee company, has steadily built a loyal customer base by delivering high-quality coffee products and embracing its support for the military and first responder communities. However, the company is now looking to diversify its offerings beyond its core coffee business, positioning itself for long-term growth.
Black Rifle Coffee Company was founded in 2014 by former U.S. Army Green Beret Evan Hafer, who sought to create a premium coffee brand that would appeal to the military, veterans, and patriotic Americans. The company's commitment to supporting the veteran community is not just a marketing ploy – 50% of BRCC's employees are either veterans or have family members connected to the military.
Hafer's motivation for starting the company stemmed from his frustration with the poor quality of coffee he encountered while serving overseas. Initially operating primarily as an e-commerce business, BRCC sold its specialty coffee blends and merchandise directly to consumers online. The company quickly built a dedicated following among its target demographic, leveraging social media to cultivate a loyal brand community.
As the business grew, BRCC expanded into wholesale distribution, securing placements in specialty retail stores and outdoor outfitters. In 2019, the company launched its first company-operated retail location, opening an "Outpost" cafe in Salt Lake City, Utah, marking its initial foray into brick-and-mortar presence.
Throughout its early years, BRCC faced challenges common to fast-growing startups, including managing inventory, scaling operations, and maintaining its unique brand identity as it expanded distribution. However, the company's unwavering focus on its mission and the strength of its customer relationships have enabled it to navigate these obstacles and emerge as a leading player in the premium coffee and outdoor lifestyle space.
From its humble beginnings, BRCC has rapidly expanded its reach, evolving from an e-commerce-focused business to a multi-channel operation with a growing presence in wholesale, retail, and licensing. In 2022, the company completed a business combination with SilverBox Engaged Merger Corp I, going public on the New York Stock Exchange. This transaction provided the company with additional capital to fund its expansion plans.
Financials Financially, BRCC has made significant strides in recent years, despite some challenges. For the fiscal year ended December 31, 2023, the company reported revenue of $395.62 million, a 31.3% increase from the prior year. However, net income remained in the red, with a loss of $16.75 million. The company's gross profit margin improved to 31.7% in 2023, up from 32.9% in 2022, as it focused on enhancing operational efficiency and managing costs.
In the most recent quarter (Q3 2024), BRCC reported revenue of $98.20 million, a 2.3% decrease year-over-year. This decline was primarily due to cycling of barter transactions from the prior year and shifting consumer preferences away from direct-to-consumer channels, partially offset by growth in the wholesale channel. Net income for the quarter was a loss of $1.40 million. Operating cash flow (OCF) for Q3 2024 was $1.93 million, while free cash flow (FCF) was negative $0.21 million.
Year-to-date performance has shown improvement in key metrics. BRCC's year-to-date EBITDA has improved significantly, generating nearly $30 million compared to just above breakeven in the same period last year. Their EBITDA margin has risen over 10 points to 10.4%. Additionally, year-to-date gross margin has improved by over 8 points to 42.3%, driven by productivity improvements, favorable mix, and lapping of RTD headwinds.
Liquidity BRCC's balance sheet reflects a mixed picture. As of the most recent quarter, the company had $7.34 million in cash and cash equivalents. Total debt stood at $109.24 million, resulting in a debt-to-equity ratio of 4.47. The company's current ratio, a measure of short-term liquidity, was 1.14, while the quick ratio was 0.58. BRCC has $9.40 million available under its $75 million ABL Facility, after considering the $15 million reduction required before reaching certain financial covenants.
Diversifying Beyond Coffee While BRCC's core coffee business remains the foundation of its operations, the company is now looking to expand its product portfolio to drive long-term growth. In the third quarter of 2024, the company announced the launch of its Black Rifle Energy™ line of energy drinks, which are set to hit the market in the fourth quarter of 2024.
The energy drink market presents a significant opportunity for BRCC, as it is a much larger category than the coffee market. According to Nielsen, the energy drink category generates over $20 billion in retail sales across tracked channels, significantly outpacing the $11 billion coffee market and the $4 billion ready-to-drink coffee market.
BRCC's entry into the energy drink space is strategically aligned with its mission-driven brand and the preferences of its customer base. The company's research suggests that 58% of its consumers are already energy drink consumers, and about 90% are interested in energy drinks derived from natural sources. By leveraging its strong brand recognition and loyal customer base, BRCC believes it can carve out a significant share of the energy drink market.
To support the launch of Black Rifle Energy™, BRCC has partnered with Keurig Dr Pepper (KDP), a leading beverage company with a vast distribution network. KDP's direct store delivery (DSD) system currently reaches 80% of the U.S. population and provides access to over 180,000 retail outlets nationwide. This partnership will allow BRCC to scale its energy drink business efficiently and at a speed that would have been challenging to achieve on its own.
Channel Performance BRCC operates through three main product segments: Wholesale, Direct-to-Consumer (DTC), and Outpost.
The Wholesale channel has been a key driver of BRCC's revenue growth, increasing 17% year-over-year for the nine months ended September 30, 2024 to $177.84 million. This growth was primarily driven by continued expansion of BRCC's packaged coffee products in the Food, Drug, and Mass (FDM) market. The company also saw a net $7.7 million increase in Wholesale revenue related to barter transactions where finished goods inventory was exchanged for prepaid advertising credits.
The DTC channel, comprised primarily of revenue from BRCC's e-commerce websites and subscription services, saw a 12% year-over-year decline in revenue for the nine months ended September 30, 2024, decreasing to $91.63 million. This decrease was attributed to lower customer acquisition in the DTC market, a strategic shift in advertising spend to other higher-return areas, and increased distribution through the Wholesale channel providing more brick-and-mortar availability for consumers. However, the DTC channel benefited from a $5.7 million increase in revenue due to a change in BRCC's loyalty program points expiration policy.
The Outpost channel, which includes revenue from BRCC's company-operated retail coffee shops, gift cards, franchise stores, and licensing, experienced a 20% year-over-year decrease in revenue for the nine months ended September 30, 2024 to $16.14 million. This decline was primarily due to lower transaction volumes across all retail locations compared to the prior year period.
Overall, BRCC's total revenue increased 3% year-over-year for the nine months ended September 30, 2024 to $285.61 million. The company saw strong growth in its higher-margin Wholesale channel, which offset declines in the DTC and Outpost channels.
Risks and Challenges Despite BRCC's ambitious growth plans, the company faces several risks and challenges that investors should consider. The highly competitive nature of the coffee and energy drink markets, as well as the potential for changing consumer preferences, could impact the company's ability to maintain its market share and profitability.
Additionally, BRCC's reliance on a limited number of large customers, such as its largest customer which accounted for 29% of revenue in the third quarter of 2024, represents a concentration risk. The loss of a significant customer or a decline in orders from these large customers could have a material adverse effect on the company's financial performance.
The company's high debt levels and negative net income also pose risks to its long-term sustainability. While BRCC has made progress in improving its operational efficiency and profitability, it will need to continue this trend to service its debt obligations and generate positive cash flow.
Outlook and Guidance BRCC has provided updated guidance for the full year 2024. The company narrowed its revenue guidance range, with variability primarily driven by timing of shipments and seasonal volume ramp-up. They raised their full-year gross margin guidance to 42%, expecting Q4 gross margin to be in the high 30s range due to normal seasonality in promotions.
BRCC also narrowed their EBITDA guidance to $35 million to $40 million for the year, which represents an increase at the midpoint from their prior range. They adjusted their free cash flow conversion expectations as a percentage of EBITDA and now expect to be free cash flow positive for the year, citing improvements in profitability and working capital.
Looking ahead to 2025, BRCC expects continued strong growth, driven by energy drinks and further expansion in the FDM channel. However, they also anticipate some headwinds, including cycling of partner transactions, rising coffee prices, and costs related to the energy drink launch.
Conclusion Black Rifle Coffee Company's transition from a coffee-focused business to a diversified lifestyle brand presents both opportunities and challenges. The company's successful launch of its energy drink line, supported by its partnership with Keurig Dr Pepper, could unlock significant growth potential in a much larger addressable market.
However, BRCC must navigate the competitive landscape, manage its concentration risk, and improve its financial position to deliver sustained, profitable growth. The company's recent performance shows promising signs, with improvements in gross margin and EBITDA, but challenges remain in certain channels.
Overall, BRCC's mission-driven approach, strong brand recognition, and ability to diversify its product portfolio position the company for potential long-term success, provided it can effectively execute its strategy and address the risks it faces. Investors should carefully consider the company's risks and long-term growth prospects, as well as its improving financial metrics, when evaluating BRCC as an investment opportunity.