Earnings Call
Beyond Meat, Inc. (BYND)
Earnings Call Transcript - BYND Q1 2020
Operator, Operator
Ladies and gentlemen, thank you for joining us, and welcome to the Beyond Meat Inc. 2020 First Quarter Conference Call. All participants are in a listen-only mode at this time. Following the presentation, we will have a question-and-answer session. I would now like to introduce your host for today's call, Lubi Kutua. You may begin.
Lubi Kutua, Host
Thank you. Good afternoon, and welcome to Beyond Meat's first quarter 2020 earnings conference call and webcast. On today's call are Ethan Brown, Founder, President and Chief Executive Officer; and Mark Nelson, Chief Financial Officer and Treasurer. By now everyone should have access to the company's first quarter earnings press release and investor presentation filed today after market close. These documents are available on the Investor Relations section of Beyond Meat's website at www.beyondmeat.com. Before we begin, please note that all the financial information presented on today's call is unaudited, and during the course of this call, management may make forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release, the company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 19, 2020, the company's quarterly report on Form 10-Q for the quarter ended March 28, 2020 to be filed with the SEC and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that on today's call management will refer to adjusted EBITDA, which is a non-GAAP financial measure. While the company believes this non-GAAP financial measure provides useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP. Now, I'd like to turn the call over to Ethan Brown, President and Chief Executive Officer of Beyond Meat.
Ethan Brown, CEO
Thank you, Lubi. Good afternoon, everyone. Before discussing our first quarter results, I'd like to comment on the COVID-19 global health crisis. This is a time of extraordinary challenge and sorrow, but one that we can emerge from with insights that can make us stronger as communities, as a country, and as a global society. On behalf of the entire company, I want to extend our deepest sympathies to families around the globe who've been affected by the pandemic. We cannot overstate our gratitude and respect for the frontline responders, who risk and in many cases have given their own lives to care for the sick and help keep the healthy safe. Behind each rise in the global toll, there are cherished and irreplaceable lives that have been lost and countless more impacted, and it's this context and meaning that must remain front and center as we navigate this global challenge. At Beyond Meat, the health and safety of our team members and their families and that of our consumers, customers, and supply chain partners is our number one priority. I am proud of how swiftly our entire organization has responded to the COVID-19 crisis. We have established an internal task force and brought in qualified advisers, including an epidemiologist on the faculty at UCLA, to help guide us in planning and implementation of steps to help minimize the possibility of COVID-19 occurrences within our operations. Consistent with gubernatorial directives, we've closed our headquarters and have employees working remotely. Additionally, for any essential activities at our Manhattan Beach Project laboratory, we are strictly limiting the number of employees allowed in the building. We are prohibiting outside visitors and we have implemented physical distancing protocols and comprehensive preventative hygienic measures. Likewise, at our manufacturing facilities, we have implemented a series of physical distancing and hygienic practices to support the health and safety of our manufacturing teams and their families. We have also modified our PTO requirements temporarily, so that employees do not have to deduct sick times from their PTO if they're feeling unwell. Collectively, we believe these actions have been crucial to our thus far successful risk mitigation efforts. Our task force, which is being led by our Chief People Officer, is monitoring information from the World Health Organization, the Centers for Disease Control and Prevention and the U.S. State Department, among other resources and we will make necessary adjustments to existing protocols as the situation evolves. We continue to strengthen our supply chain to support business continuity and mitigate risk. We source ingredients from multiple suppliers around the world with our plant-based proteins coming from suppliers in the United States, EU, China, and India. More generally, in addition to having an improved redundant supply chain in the majority of our ingredients, we maintain inventory positioned near our manufacturing operations, as well as floor stock agreements with many of our vendors. Throughout this dynamic situation, our operations team has shown flexibility in keeping up the demand for our products, even as we've had a significant shift in demand mix from food service to retail customers. Nevertheless, even with the above considerations and very strict COVID-19 health and safety measures in place, like others in our industry, we are still subject to heightened risk of disruption to our supply chain. Externally, we continue to offer the highest level of support we can to our foodservice and retail customers during this period. We hope it is clear at this point that we view our customers as partners and our role as being of service to them as they take their lead from consumers. In this spirit, we are in frequent communication with our quick-serve restaurant partners as they address the significant disruption to their businesses. As has been our consistent refrain, our focus is on the long-term and there are a few things more important in that regard than being a truly supportive partner during periods of instability. Finally, before turning to our first quarter results, I'd like to share some comments on our Feed A Million+ pledge. In late March, we launched a program to provide more than one million Beyond Burgers and nourishing meals at no cost to frontline workers addressing the pandemic as well as to organizations that serve the most economically vulnerable of our society. It has been gratifying to see our broader family go beyond ambassadors, as well as friends of the brand spearhead this initiative with us, including among others Kyrie Irving, Kevin Hart, Snoop Dogg, Lindsey Vonn, P.K. Subban, Billie Eilish, Karlie Kloss, Jewel, Ludacris, DeAndre Hopkins, Erin Andrews, Ashanti, Todd Gurley, and Kenny Stills, each of whom have joined us in giving Beyond Burgers away to frontline workers and those in need, reinforcing a sense of community during this challenge. I'd like to thank each of them along with our entire team from production through to sales and marketing, the strong execution of this initiative across the country. Now turning to the first quarter. Our results continue to validate the strength of the broader plant-based meat movement and our leadership position therein. We achieved net revenues of $97 million in Q1 2020, an increase of 141% compared to the first quarter last year, despite growth being negatively impacted toward the end of the quarter by the pandemic. Mark will walk you through our financial results in greater detail, including an estimate of the impact of COVID-19 related demand shifts in our foodservice and retail businesses. However, at a high level, I will share that we began the year with strong momentum across our enterprise, followed by a meaningful slowdown in our foodservice business during the latter half of March as various regions around the world implemented stay-at-home orders. Although we did see a simultaneous boost in sales to retail customers, this was not enough to offset the deterioration of demand in our foodservice business. Nevertheless, we believe our dual-pronged approach of aggressively expanding the availability of Beyond Meat products in both retail and foodservice outlets served us well and helped to mitigate even more significant COVID-19 related disruptions to our revenues. In U.S. retail, sales of Beyond Meat products were up 190% year-over-year, with velocity growth of 158%, contributing to a 770 basis point increase in market share. According to SPINS data for total U.S. multi-outlet, natural, and specialty channels for the 12-week period ended March 22, 2020, while the plant-based meat category as a whole was up 54%. During this period, Beyond Meat continued to own the top four best-selling SKUs in all plant-based meat and outpaced its closest competitor in terms of year-over-year sales growth by a factor of roughly six times. Furthermore, during the four-week period ended March 22, 2020, in which retailers saw stockpiling by consumers as stay-at-home orders proliferated, sales of Beyond Meat products were above 233% year-over-year, with velocity growth of 195%, outperforming the plant-based meat category as a whole, which rose 93%. First quarter 2020 net revenues in our foodservice doubled versus a year ago despite the impact of COVID-19 in late March. This increase was primarily driven by growth in the number of foodservice outlets carrying our products versus a year ago. As in retail, our growth in foodservice outpaced that of the category as a whole. According to NPD data for the first quarter of 2020, dollar sales of plant-based meat products to U.S. foodservice locations were up 18.4% on a year-over-year basis, while Beyond Meat's growth was up 51.9% over the same period. Reflecting the impact of COVID-19 on the foodservice segment, NPD tracked sales of plant-based meats were down 25% sequentially during the month of March as compared to February 2020. As a reminder, NPD data captures approximately 80% of the U.S. broad-line distribution and excludes cash and carry and direct delivery customers. As such, NPD will not correlate perfectly with our own reported sales to U.S. foodservice customers but is nonetheless directionally informative. After launching Beyond Breakfast Sausage with Starbucks in Canada in early March, in April we announced together with Starbucks our entry into Mainland China. The April 22, 2020 launch of Beyond Beef items at Starbucks throughout China represents an important milestone for Beyond Meat. It has long been our aspiration to be a global protein company, and being of service to the growing demand for high-quality protein in China is a key part of our strategy. We applaud Starbucks for making and acting upon a strong commitment to advance health and sustainability and are pleased to partner with this trusted brand as they seek to tackle that, which matters most. We believe the new Beyond Beef items in Starbucks' menu throughout China will deliver on our promise of enabling consumers to eat what they love while enjoying the nutritional and environmental benefits of plant-based protein. In addition to our partnership with Starbucks, we finalized a distribution agreement with a leading local distributor in China, Sinodis, to unlock a network of distribution opportunities across retail and foodservice. We have further established a Chinese language website, as well as branded Weibo and WeChat accounts in order to engage with the Chinese consumer and support the brand's introduction in this important market. We remain committed to our goal of establishing a production footprint in Asia before the end of 2020 having further developments with the COVID-19 pandemic. The magnitude of the opportunity in Asia merits significant investment, and reflecting such recent disruptions in the region's protein supply due to African swine flu, we are proceeding with a sense of urgency appropriate for the challenge and opportunity alike. As I have often said, at our core, we strive to be an innovation engine using technology to source the core parts of meat directly from plants, relying on non-GMO plant-based ingredients. Even as the size and complexity of our organization grows, we strive to sharpen our innovation capabilities and quicken the pace of the Beyond Meat rapid and relentless innovation program. We are pleased with the initial outputs of our new center of commercialization and believe this cross-functional initiative will, one, further strengthen our ability to rapidly innovate on behalf of our QSR partners; and two, accelerate the pace at which we improve our beef, pork, and poultry platforms in pursuit of our true north of plant-based meat that is indistinguishable from its animal protein equivalent. In the marketplace, we launched our Beyond Breakfast Sausage in select retailers across the United States, beginning in late March, previously only available in select QSR partners, including Dunkin', Hardee's, Carl's Jr. and Starbucks Canada. Beyond Breakfast Sausage offers 11 grams of protein per serving from peas and brown rice, 50% less total fat, with 35% less saturated fat and sodium, and 33% fewer calories than the leading brand of pork sausage patties. Furthermore, Beyond Breakfast Sausage, which is certified kosher NOL, is made without GMOs, soy, or gluten. And it has no cholesterol, no nitrates or nitrites, no antibiotics, no hormones, and no artificial ingredients. These nutritional wins embody what we seek to achieve throughout our products without sacrificing important qualities such as taste, texture, and other sensory attributes of popular animal protein products. Although we are excited about the prospects from the retail rollout of Beyond Breakfast Sausage, we do anticipate it will be slower than normal given the impact of COVID-19 on retailer operations. Before closing, I want to be as clear as possible with respect to our view on the impact of the current pandemic on our business. It is having and will continue to have a negative impact in the short term. This impact was largely due to the disruption of normal business operations within the foodservice sector. We can neither predict when nor in what form normalcy will resume for our customers in this segment, nor when we'll see resumption of any expansion plans for our product lines for those QSR customers who are in trial or test phase. For these reasons, we are joining many other companies in the food and beverage industry who are withdrawing guidance until further notice. Nevertheless, we are not idly waiting for circumstances to accommodate our planned growth trajectory. I am proud of how our management team and all of our team members have reacted to this challenging environment. As the pandemic began to interrupt the world economy, we created offensive and defensive teams across the company to guide our navigation of the changing landscape. Offensive measures include switching foodservice production lines over to retail products, developing value packs for instant retailers, and offering aggressive pricing with a strategic opportunity to encourage consumer trials during this period of disruption in the animal protein market. Defensive measures have primarily been focused on trimming discretionary spend and activities in areas where effectiveness has been impeded by the pandemic, for example, certain marketing programs or delaying until later in the year or until 2021 makes sense under the circumstances. To reiterate, a prevailing perspective that runs through Beyond Meat, we are only getting started. Even with our significant traction to date, we represent an exceedingly small fraction of the $1.4 trillion global meat category today. For example, according to our most recent Nielsen panel data, in the U.S. where household penetration stands at slightly less than 4%, and although our products are now available in approximately 94,000 retail and foodservice outlets and in 75 countries worldwide, we have only a small number of SKUs available in retail on limited distribution within many of our foodservice partners and are just scratching the surface within the vast majority of economies we are in globally. Despite the current disruption, we remain highly optimistic about our long-term growth prospects and we continue to accomplish milestones along our exciting upward trajectory. We remain focused on the consumer and customer alike, seeking to delight the former while being an exceptional dedicated service to the latter, thinking and behaving like a long-term partner who is investing in their success as well as our own. For the balance of 2020, you will see us tell our story on health ingredients and processes with content across digital and print media. You'll see us push forward on global growth and expansion as evidenced by our recent launch with Starbucks in China, and you'll see us invest in research and development to advance and expand our product roadmap across beef, pork, and poultry platforms, while pursuing long-term fundamental science in pursuit of step-change progress across sensory, nutritional, and cost objectives. And we will continue to keep pace on our steady march toward our long-term objective of being able to underprice animal protein in certain product lines. In short and in closing, we remain steadfastly committed to constructing the building blocks today that are necessary to become the global plant-based protein company we envision for tomorrow. I'd like to now turn the call over to Mark Nelson, our Chief Financial Officer who'll walk us through the first quarter financial results in detail.
Mark Nelson, CFO
Thank you, Ethan, and good afternoon everyone. We are pleased with our first quarter financial results, which we achieved amidst an increasingly challenging operating environment due to the COVID-19 global health crisis. Our strong Q1 results largely reflect demand that exceeded our expectations in January and February, followed by softer results in March as we experienced a deterioration in sales to foodservice customers as domestic and international stay-at-home orders became more widespread. However, we did experience a significant boost in retail demand during the quarter as consumers shifted towards more at-home consumption, partially offsetting the deceleration in foodservice sales. Overall, as Ethan indicated, net revenues in the quarter were $97.1 million, up 141% compared to the first quarter of last year. Growth in net revenues for the first quarter of 2020 was primarily driven by an increase in volumes sold, partially offset by lower net price per pound. Growth in volume sold was driven by expansion in the number of distribution points both domestically and abroad, higher sales velocities at existing retail customers, and contribution from new products introduced subsequent to the first quarter of 2019. Looking at our distribution channels, retail net revenues increased 185%, while foodservice net revenues increased 100% versus the first quarter of 2019. Sales to international customers across retail and foodservice channels represented 25% of our net revenues during the quarter compared to 30% in the prior year period. As a reminder, beginning this quarter, we are now breaking out international separately in our revenue by channel presentation and we now include sales to our Canadian customers within this international bucket. Additionally, as we mentioned on our last earnings call, we will no longer be reporting a product category breakout between our fresh and frozen platforms beginning with this quarter. Our fresh or ready-to-cook product platform now represents substantially all of our consolidated net revenues. And as such, we determined that delineating between sales of fresh and frozen products no longer provides additional insight into the company's results. Gross profit during the first quarter of 2020 was $37.7 million or 38.8% of net revenues compared to $10.8 million or 26.8% of net revenues in the first quarter of 2019. The 1,200 basis point year-over-year improvement in gross margin was primarily due to an increase in the volume of products sold, production yield improvements, direct materials and packaging cost savings, and improvements in direct labor and other variable overhead costs relative to the first quarter of 2019. The combination of these factors led us to achieve the company's best ever quarterly cost of goods sold per pound and reinforce our belief in our long-term goal to take cost out of our manufacturing operations and narrow the price gap of our products relative to animal protein. While we are extremely pleased with our strong gross margin performance in Q1 2020, we do expect near-term headwinds at the gross profit level associated with volume deleveraging and repackaging costs as we repurpose a certain portion of our existing foodservice inventory into retail SKUs. In light of these factors, we expect our gross margin to be sequentially lower in Q2 2020 compared to our strong margin performance in Q1 2020. As you have heard me mention previously, over the long-term, we continue to believe that gross margin improvements will be delivered primarily through improved volume leverage increases in throughput, greater internalization of our manufacturing footprint, materials and packaging input cost reductions, tolling fee efficiencies, and improved supply chain logistics and distribution costs. We remain committed to passing a portion of these cost savings on to the consumer as we pursue our goal to achieve price parity with animal protein in at least one of our product categories by 2024. In addition to leveraging our cost of goods sold, we were also able to achieve year-over-year operating cost leverage in Q1 2020. Operating expenses were 37% of net revenues in the first quarter of 2020 as compared to 40% in the first quarter of 2019. Net income was $1.8 million or $0.03 per common diluted share as compared to a net loss of $6.6 million or $0.95 per common share in Q1 last year. The strong improvement was primarily the result of the increase in net revenues and gross profit, as well as operating expense leverage compared to the first quarter of 2020. Adjusted EBITDA was $12.7 million or 13.1% of net revenues in the first quarter of 2020 compared to an adjusted EBITDA loss of $2.1 million or negative 5.3% of net revenue in the first quarter of 2019. We note that the increased level of share-based compensation expense, which is an add-back to adjusted EBITDA, was largely due to appreciation in our stock price as well as substantially higher staffing levels versus the prior year period. Now, looking at our capital structure, the company's cash and cash equivalent balance was $246.4 million. Total debt outstanding was $30.6 million as of March 28th, 2020. Net cash used in operating activities was $15.9 million for the quarter ended March 28th, 2020 compared to $13.3 million for the prior year period. Capital expenditures totaled $13.7 million for Q1 2020 compared to $3.8 million for the prior year period. The increase in capital expenditures in Q1 2020 was primarily driven by growth capital production equipment purchases related to our capacity expansion initiatives. On April 22, 2020, we announced that the company has entered into a new $150 million five-year revolving credit facility, replacing our previous secured credit arrangements. This new credit facility, which includes an accordion feature for up to an additional $200 million, increases our borrowing capacity, lowers our cost of capital, and enables greater strategic flexibility for future global growth initiatives. We appreciate the strong support of our lenders in completing this transaction. Finally, as we noted in today's press release and as Ethan alluded to earlier, given the unprecedented disruption and ongoing uncertainty related to the COVID-19 pandemic including uncertainty regarding the magnitude and duration of the impact to the foodservice channel in particular, we are suspending our 2020 outlook previously provided on February 27th, 2020 until further notice. We believe this is the most prudent approach considering the extraordinary circumstances facing our global community from consumers to businesses and governments alike. Over the long-term, we remain committed to our strategic and financial objectives, anchored on innovation including improving existing products and launching new ones, expanding brand awareness, growth of our distribution channels, and investments in infrastructure and capacity to be able to serve Beyond Meat's global market demand. With that I'll now turn the call back over to Ethan.
Ethan Brown, CEO
Thank you, Mark. In closing, we are very pleased with the results for the first quarter of 2020. Although we faced difficult challenges in the near-term operating environment as a result of the COVID-19 pandemic, we remain optimistic about the long-term prospects for our business and believe that Beyond Meat continues to be well positioned to lead the global movement toward increased adoption of plant-based meats. I would now like to turn the call over to the operator for your questions.
Operator, Operator
Our first question comes from Ben Theurer with Barclays.
Ben Theurer, Analyst
Hey, good afternoon. Congrats on the strong result in the first quarter, and I hope you're all safe and sound.
Ethan Brown, CEO
Thank you.
Ben Theurer, Analyst
My question relates to what you've mentioned earlier. You indicated that March saw a decrease of about 25% in foodservice compared to February. However, it seems that March was only partially affected. Could you provide insights on how trends in April compared to March and what you've observed more recently? We've heard from some protein companies that there have been ways for certain foodservice areas in the QSR segment to recover. Have you noticed any stabilization at a lower level in recent days or weeks compared to the initial decline? Additionally, could you clarify how much of your foodservice revenue comes from QSR versus more traditional foodservice and delivery systems? That would be my main question.
Ethan Brown, CEO
Thank you. I'll address the first part of your question about the impact in April, noting that we aren't ready to disclose the complete numbers for that month yet. Overall, we had an exceptional quarter, with net revenues doubling year-over-year. However, the last two weeks of March were more challenging. Looking at the division between large quick-service restaurants (QSRs) and smaller operators in the foodservice sector, approximately 33% of our business comes from strategic QSRs, while the remainder consists of smaller regional or independent establishments. The larger QSRs managed to continue generating business through drive-through services, although at a reduced level. As a result, we observed some sell-through due to their ability to remain open and utilize delivery services like DoorDash and Grubhub, which we have partnered with and collaborate effectively. We view this situation as a challenge that requires us to reroute and repurpose our efforts. In terms of rerouting, we're focusing on how to reach consumers even though their usual habits may be disrupted. We've been in constant communication with many foodservice partners, including Subway, KFC, McDonald's, Dunkin', Starbucks, Hardee's, Carl's Jr., and Del Taco, discussing how we can support them during this difficult time. Patience has been our main contribution, as they work to stabilize their operations. None have indicated a desire to change their partnership with us or halt our expansion together, but they require time to reset their business models, which we are providing. Additionally, we've engaged in helpful initiatives through them, such as our Give a Million campaign. For instance, we collaborated with Erin Andrews and Ludacris for Hardee's, DeAndre Hopkins for Carl's Jr., and Jewel in Nevada for Del Taco to distribute product to those in need. We've aimed to be a supportive partner to our quick-service restaurants in the U.S. and Canada as they navigate this crisis.
Ben Theurer, Analyst
Okay. Perfect. Regarding the partnership with Starbucks in China, I understand you initially planned to establish manufacturing there. Now that you are launching with Starbucks in China, which presents a great opportunity, how has the COVID-19 situation impacted your ability to supply products from your current production facilities to stores in China? Additionally, when can we expect to see some of the products available in Starbucks locations in China?
Ethan Brown, CEO
It's been great. I think we're fortunate with our timing. The pandemic did not cause much disruption for us. There was a slight delay, but the team has executed flawlessly in getting this project up and running. We're seeing excellent results on social media regarding consumer acceptance of the product and are excited to expand further in Mainland China, as we've discussed. Starbucks has been an exceptional partner in this effort.
Ben Theurer, Analyst
Okay. Perfect. I will pass it on. Thank you. Congrats, again.
Operator, Operator
Our next question comes from Rupesh Parikh with Oppenheimer.
Erica Eiler, Analyst
Good afternoon. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So I guess, first I was hoping maybe you could talk a little bit more about your ability to convert that foodservice supply into the grocery retail channel. So maybe a little bit more color on what you're doing there.
Ethan Brown, CEO
Sure. I'd be happy to. And again we said, as I mentioned in my comments, early on we set up a strategy both offensive and defensive to continue to grow throughout this period. And I think that's been paying dividends recently. And around the particular issue of shifting over from foodservice to retail demand there are some very concrete things we did in terms of repurposing. We shifted foodservice lines over to retail production. We've been repacking foodservice into retail sale units and doing things like launching an Amazon Fresh nationwide. We're also establishing our own direct-to-consumer system that will launch later this quarter. I'm working very hard with partners such as DoorDash and others, as I mentioned to help get the product to the consumer even if it's still in the QSR system. And then going much more aggressively in Club so we can get consumers value packs and allow them to have more at home. We are also offering lower cost value packs not just in the Club channel, but to retailers nationwide that are interested in taking advantage of lower-cost pricing and higher quantities. And so it'll be interesting to see the uptake there given the spike in beef prices. That will be rolling out in the next couple of weeks. And then more generally, as we shift more and more of the production just very temporarily, right? I don't think the foodservice situation is going to persist for that much longer. But temporarily, we are putting more and more resources into retail. We're doing so at a pricing and cost structure that will allow us to get closer to the animal protein equivalent pricing given the very significant surge in beef prices that's just occurred.
Erica Eiler, Analyst
Okay. No, that's helpful. And then just kind of shifting to kind of marketing and R&D. I mean, so you mentioned potentially delaying some of that marketing expenses as circumstances warrant. I mean, can you maybe just talk a little bit about how we should think about marketing and R&D expenses going forward in light of the current environment? And then as we think about what's going on in the QSR channel, how has kind of support and advertising there changed towards your product in light of the environment?
Ethan Brown, CEO
Yes. So I think we take the marketing first. I mean, we really have sought to try to take care of our QSR partners. And so, we've offered to do deals with them. We also are very focused on what we can communicate about our brand during this period. And so I think the Give a Million campaign is representative of that. We want to be part of the solution. And so instead of doing a lot of typical marketing, we sought to put resources into distributing free food to people in need and to frontline responders. So I think that was something that we all felt strongly about at the company. I don't think you'll see us launch major campaigns right now. I don't think this is the right time to do that. We'll continue to try to be a solution. And one of the ways we can be a solution is to offer lower pricing. And so you'll see us do more discounting this summer than normal just because of the opportunity to be relevant to the consumer as animal protein prices are spiking and supply is in short order. So it's those types of commercial moves, we'll make versus more standard marketing. Innovation, we'll always spend on innovation. And so it doesn't much matter what's going on in the world. We'll continue to do that. We've made adjustments across our budget in various areas to make sure that we're still being very fiscally responsible. But we are, as I mentioned, an innovation engine and that's what we are at our core. And we have some long-term goals, and the short-term environment is not going to affect that.
Steve Strycula, Analyst
Hi, good afternoon and congratulations on a very strong margin quarter.
Ethan Brown, CEO
Thank you.
Steve Strycula, Analyst
So the first question would be just more backward-looking. How do we think about why the gross margin was so strong in the fiscal first quarter? I mean, your COGS per pound were at record low levels, but what really drove favorable unit economics as you think about deconstructing that? And then I've got a forward-looking question.
Mark Nelson, CFO
Sure. This is Mark. We experienced strong performance in the first quarter, with year-over-year improvements across the board. Part of this was due to reduced variable costs related to direct materials and packaging, while the rest came from increased labor efficiencies and overhead savings. We're beginning to see enhancements in these variable cost areas as well. Previously, our gains were largely from optimizing fixed costs, which will continue to contribute moving forward. However, we are now also making progress in managing material and labor variable costs, which is an area where we can keep reducing expenses.
Ethan Brown, CEO
I want to highlight the excellent work the operations team has accomplished in lowering our cost structure to the lowest level it has ever been. This is a significant milestone in our goal to eventually underprice animal protein. We will continue to focus on protecting our margins in the long run. In this quarter, we will make some adjustments due to the summer conditions to help grow our customer and consumer base, but we will remain committed to driving cost reductions.
Steve Strycula, Analyst
Great. Ethan, it seems like your organization is being a strong partner to your end customers during this time. You mentioned the QSR channel specifically, but what are you doing in the retail sector, particularly with independent restaurants or foodservice businesses, to create value? You talked about narrowing some of the price gaps. What are they looking for in terms of innovation? Also, are there any new limited-time offers in the market that you can share? That would be very helpful. Thank you.
Ethan Brown, CEO
Sure. I believe that in terms of limited-time offers and new innovations on the retail side, patience is essential right now. Retailers are facing a lot of complexities, and some are even closing their stores early to restock. So, we don't want to complicate their processes by introducing multiple new items. Instead, we should focus on meeting their needs, which currently center around basic protein. Our decision to offer value packs of burgers, allowing customers to purchase them in bulk, is a positive step. This approach supports retailers struggling to stock protein items while also providing consumers with healthy, affordable options. In the quick-service restaurant sector, it's quite challenging to roll out limited-time offers at the moment. We are having ongoing discussions with our major partners and intend to wait for stability before introducing any complexities in their menus, such as new pricing schemes. However, you can expect developments from us as the year progresses.
Ken Goldman, Analyst
Hey good afternoon, everybody. Ethan you mentioned that QSRs are not making any major decisions right now as far as your products. I did want to make sure, though. On Slide 11 just looking at the text there. It says McDonald's Canada that that test happened between January and April of 2020. And it's the only customer on that slide with an end date. Am I reading too much into that line? Or did the test end last month? I just wanted to see if I'm missing something there?
Ethan Brown, CEO
Yes, that's correct. The test was specific to that time period and concluded without any negative feedback. We are very optimistic about our relationship with McDonald's and the future developments both there and possibly in other areas. Since it was a test, it naturally had a start and an end.
Ken Goldman, Analyst
Okay. Can I follow up on that? Typically, if a retailer has a successful test, they would choose to expand it rather than end it. Can you help us understand why it stopped instead of going in the other direction?
Ethan Brown, CEO
I think we need to have a broader discussion. I can assure you there are no issues with McDonald's. This has been planned and executed as intended, and there has been no change at all. I can't guarantee a significant expansion tomorrow, but there has been no change in the information since we started this test and we received positive results both at the beginning and the end.
Alexia Howard, Analyst
Good evening, everyone.
Ethan Brown, CEO
Hey, Alexia how are you doing?
Alexia Howard, Analyst
Good. Okay. Can I ask about the pricing dynamics? You mentioned that pricing was maybe down in the quarter. Are you able to quantify that? I guess looking out, you talked about the shifts to value packs and wanting to do sort of discounting. That's kind of a different sense from what you've focused on in the past which was to really hold sizing. I'm just curious about whether we would expect to see net pricing per pound down more significantly as we roll forward. Thanks and then I have a quick follow-up.
Mark Nelson, CFO
In the quarter, we sold 16 million 652,000 pounds. Our sales per pound were $5.83, which is quite similar to last year when it was about $5.88. We haven't experienced any net sales price erosion during this period. There was less discounting in the first quarter, which helped us maintain that net sale price per pound. Looking ahead, we plan to introduce more value pack-oriented products and possibly increase discounting. We remain confident in our ability to offset this with cost reductions. As we aim to offer more value-priced items and provide cost savings to consumers, we will continue working to drive down costs.
Alexia Howard, Analyst
Great and as a quick follow-up, you've given us an update pretty about each quarter about what the receipt purchase numbers look like. I can imagine that might have been disruptive given everything that's going on. But do you have another number? And is it still in the mid-40s?
Mark Nelson, CFO
I believe last year we had some information that discussed repeat purchase activity.
Ethan Brown, CEO
That's approximately 46%.
Robert Moskow, Analyst
Hi. Thank you. I might have missed it, but I think at the beginning of the year you mentioned significant spending on consumer education programs regarding the health and wellness of your product. Are those programs still ongoing, or did you say you would reduce that spending and shift it towards pricing instead? Also, I have a follow-up question.
Ethan Brown, CEO
So we did a lot of work to develop content, which we're holding, given the complexity of the global situation. And we will release it at the point in which we feel that the environment's right. So I wouldn't say essentially a trade-off between doing that and putting directly into pricing. We've held off on discounts in the past and just feel now. But we actually don't feel any competitive pressures. You could tell by the 38% margin we enjoyed this quarter. But we do think it's the right opportunity to take advantage of. When you look at beef now, it's $4.10 a pound wholesale assuming retail mark-ups take it up to about $6.80 or so. We're in pretty good shape to begin to make some inroads toward not necessarily price parity, but be in the same consideration set for the consumer. So you will see us spend and have more trade, as a result.
Robert Moskow, Analyst
Okay. But Ethan, I thought what you needed to do was kind of defend the ingredients and your processes, against some targeted campaigns that have been leveled against you. Is that what you're referring to but that's kind of in your back pocket now? Is that right?
Ethan Brown, CEO
100%, yeah, we have a ton of good development work going on their content. And I just think people don't want to hear that right now. The global components are elsewhere. Between us clashing our swords with the coming industry, it's probably not the right idea.
Robert Moskow, Analyst
My follow-up is about a headline I saw today indicating that Impossible is launching in Kroger. You mentioned that your pricing strategy is intended to demonstrate value compared to beef. How do you foresee both your brand and Impossible being able to grow at Kroger stores? Is that what you expect, or do you need to remain competitive on price against them as well?
Ethan Brown, CEO
My honest expectation is to win there for sure, but I believe there's a place for both of us. I think there are two different consumers looking at those products. Impossible does a nice job; they are a great company with good people. It's a different value proposition. We have been very clear about our non-GMO stance, while they have positioned themselves differently, which is neither bad nor good. I think this appeals to a different consumer base. It will be interesting to see how this develops as they expand their distribution. Currently, we are in over 90,000 distribution points across 75 countries. I believe we have a significant head start and plan to maintain that advantage.
Rob Dickerson, Analyst
Thank you very much. My first question is a bit direct, but it seems that in Q2, you mentioned gross margin is expected to be lower compared to Q1 due to volume deleverage and repackaging costs. There might also be some impact from pack sizing or pricing, although not as significant. When you mention volume deleverage, I'm aware of the trends you referenced for March following Q1, particularly the higher mix on the U.S. side and in the foodservice channel, which would have a greater effect in Q2. So, are you implying that the lower margins in Q2 due to volume deleverage will primarily stem from foodservice rather than retail? Does that mean Q2 revenue from foodservice would actually decline year-over-year? I'm asking because we often discuss year-over-year comparisons with Beyond, but for many emerging growth companies with revenues under $100 million, we focus closely on sequential performance. Additionally, revenues did technically decline by $1 million from Q4 to Q1, so I’m trying to understand the potential sequential impact on revenue from Q1 to Q2. Thank you.
Mark Nelson, CFO
Yes. We are likely to refrain from providing guidance, but as we approach the second quarter, we expect a more significant impact on the foodservice channel compared to the first quarter. In the first quarter, up until March, we were mostly unaffected. However, we began to notice this impact in March, and we anticipate it will be more pronounced in the second quarter. You can make your own assumptions based on this, but we expect the effects on foodservice to be more substantial in the second quarter.
Rob Dickerson, Analyst
Okay. Fair enough. Ethan, there has been a lot of recent activity in the alternative protein space, which is still very fragmented even though you lead in the refrigerated segment. Many smaller players may be entering a tougher economic environment, and some of them might not be as well funded. You mentioned having a strong balance sheet and likely more scale than most in the industry. Looking ahead to a year from now, even if we experience a challenging economic backdrop, how do you think this will impact the industry? My initial question was about the possibility of increased pressure in foodservice in the short term, but looking longer term, it seems you have the potential to gain more market share in a highly competitive category if you maintain your scale and capitalize on current opportunities.
Ethan Brown, CEO
Yes, that's exactly what we are pursuing. We don't view this as merely a survival moment; it's about strengthening our overall position. Given the higher prices in the protein market today, we believe we can make significant inroads with consumers and expand their protein choices. We're focusing more on the animal protein market than on the plant-based meat side. We have a substantial lead over competitors in the plant-based segment, growing six times faster than the leading brand in the past 12 weeks. We're dedicated to advancing more rapidly than others, and we do this intentionally. Our primary goal for growth right now is to provide solutions for consumers as prices rise and supply disruptions occur across other protein sources. We believe that if we pay attention to consumer needs, we will emerge from this period as a much stronger company.
John Baumgartner, Analyst
Good afternoon. Thanks for the question. Ethan on the marketing side, as you've launched in the U.S., you're basically building this category from scratch. And as you go into Europe, a market where you've got some plant-based competitors already, and you're pretty entrenched in Asia where it's a bit of a different product, how does the market entry strategy differ? I mean, how are you approaching the communication's different with consumers with retailers sampling promos and so on?
Ethan Brown, CEO
Yes. First of all, I wish I could be there right now. It's such an exciting time, and I've been closely following the launch. We have some excellent advisers with extensive experience in Asia who have been helping us understand that market and its consumers. We will soon announce a fantastic hire we've made in that region who has a wealth of experience and is guiding us. There are significant differences that we need to be very mindful of, and that includes choosing the right partner. Starbucks has proven to be a strong partner. They have effectively integrated an American brand into the cultural fabric of China, and it has been well received by Chinese consumers. However, we must be very attuned to local preferences, ensuring that our offerings resonate culturally, nutritionally, and in terms of ingredients. We are fully committed to that part of the world and are taking it very seriously. We plan to make substantial investments there and expect to contribute to addressing the constrained protein situation in the region. It’s apparent to anyone observing global trends that there are significant opportunities for us to act quickly, whether considering the impacts of the coronavirus on the U.S. meat industry, the African swine flu that affected a large portion of the Chinese hog population, or the recent avian flu cases in South Carolina and Ireland. There is an opportunity for consumers to explore a different model for sourcing their food. We aim to be as proactive as possible in providing consumers with additional options, particularly in regions where we can make a significant impact, and right now, China is a key focus for us.
John Baumgartner, Analyst
Great. And then just a follow-up, I wanted to come back to the aggressive pricing and the value pack you mentioned at retail. And I guess for a product still very much in the trial phase, how do you think about getting a consumer to buy a 10-pack or a 12-pack for their first purchase? I mean, is there anything in the consumer work in terms of trial versus repeat, where you're looking to kind of lean into here? Or is it more just a need to call the audible and just move that foodservice volume as quickly as possible and Club gives you the best chance to do that?
Ethan Brown, CEO
Yeah. I think it's – I mean, to me something really interesting happened for us. So if you look at our household penetration, so July of 2019 we were about 2%. We're now at about 3.6%. But something interesting's happening along the way. Our buyer rate which is the – this is the amount that each individual is buying, each household is buying, is also increasing substantially, right? So we have a group of consumers that are not only consistently buying, but consistently buying more. And so to the extent we can make some of this available to them, but also, if we can get close enough on the product that we're competing against in the beef category itself, I think there's enough momentum around our brand that we can get people to try it. They probably won't first buy the 10. Maybe they'll buy the two-pack, but we can offer more aggressive pricing on that as well this summer. So you'll see both approaches from us.
Michael Lavery, Analyst
Thank you. Good afternoon. Could you give a little bit of color on your retail expectations? You already had really strong momentum there running up around 200% even before the virus really had an impact. We're seeing a similar pace hold up, but how do you think about what's ahead? Should we expect an acceleration or some upside just especially as you shipped capacity or see shortages of meat protein? Or is the volume lift likely offset by lower price? How do you think about just the next – the near-term runway there?
Ethan Brown, CEO
I think it's going to be a frustrating answer for me to give and probably to be received. We just don't know, yet. I mean there's so many different moving pieces there. And does foodservice recover in a reasonable amount of time? Do consumers go for the value pack? Do they go for more aggressive pricing to the degree we think that they will? So there's just so many variables. What I can promise is that we're – Beyond Meat's fine throughout this process, throughout this issue thankfully because we have this split between foodservice and retail and we'll continue to be fine. But we're doing everything we can to try to be a solution during this period. And hopefully the consumer will gravitate toward that. But we can't make predictions now.
Rob Dickerson, Analyst
Thank you very much. My first question is a bit direct, but it seems that in Q2, you mentioned gross margin is expected to be lower compared to Q1 due to volume deleverage and repackaging costs. There might also be some impact from pack sizing or pricing, though less significant. When you refer to volume deleverage, we know that March saw a trend off of Q1, and the mix in the U.S. and foodservice channel was higher, which could have a greater effect in Q2. Are you suggesting that a lower margin in Q2 is primarily due to volume deleverage from foodservice rather than retail? This would imply that year-over-year revenue in foodservice would actually decrease, right? I ask this because we frequently discuss year-over-year comparisons with Beyond. However, for emerging growth companies with revenues under $100 million, we're really focusing on sequential trends. It's worth noting that revenues did decline by $1 million from Q4 to Q1. I'm trying to understand what the potential sequential impact on revenue from Q1 to Q2 might be. Thank you.
Mark Nelson, CFO
Yes, we will likely refrain from providing guidance. However, as we approach the second quarter, we expect a more significant impact on the foodservice channel compared to the first quarter. In the first quarter, particularly in March, we were relatively unaffected, but we began to notice this impact in March. By the time we enter the second quarter, we anticipate seeing a greater effect. You can take that into account for your assumptions, but we expect the foodservice impact to be more pronounced in the second quarter.
Ethan Brown, CEO
Sure. Thanks.