Nikko Asset Management: HelloFresh

HelloFresh SE is an international, publicly traded meal-kit company based in Berlin, Germany. It is the largest meal-kit provider in the United States, and also has operations in Canada, Western Europe, New Zealand and Australia. As a disruptor in the highly attractive $7.5 trillion global food segment, in which e-commerce penetration is only 2%, HelloFresh has an excellent opportunity to grow its total addressable market.

We like HelloFresh because it is the leader in the fast-growing meal-kit market. It has created high barriers to entry through investment in data analysis and marketing, which allow it to effectively assess and respond to consumer demand. The company has proven resilient through the COVID-19 pandemic, highlighting the durability of its supply chain and a strong operating model. Additionally, it is well-positioned to address long-term consumer trends such as health & wellness and sustainability, which should drive long-term growth. Importantly, HelloFresh is committed to the United Nations Sustainable Development Goals, with a primary focus on reducing food waste. According to HelloFresh, its meal-kits contribute 66% less food waste on a production level compared to supermarkets.

HelloFresh has the Future Quality characteristics we look for in a stock idea. Committed to a data-driven approach that facilitates very lean inventory and flexible ordering, HelloFresh has a strong franchise quality. We have confidence in company management. In Q2, HelloFresh added 2.4 million customers to the platform and achieved an AEBITDA margin of 15.8%, highlighting the ability of management to generate impressive top-line growth and margin expansion hand-in-hand. Additionally, with strong cash generation and an undrawn credit facility, HelloFresh has the ability to cater to growing consumer demand. In terms of the valuation, we believe the total addressable market is underappreciated. Management is rolling out new price points to address different market segments and the marketing spend required to attract and retain customers will decline as a percentage of sales allowing margins to stay high. In light of this, we added HelloFresh to the portfolio at the beginning of Q2 and have recently added to our position.

A key risk to the investment thesis is that customer retention rates are not as high as we expect. Pent-up demand for eating out could result in higher churn off for meal-kits and HelloFresh may be forced to increase marketing spend to acquire and retain customers. However, recent evidence of higher number of orders and average order value per customer indicate that habit formation around meal-kits is proving to be more enduring.

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