Black Rifle Coffee (BRCC) Q3 2023: Wholesale Channel Surges 91%, Accelerating Path to Profitability

2023-11-09 | By EarningsIQ Research

Black Rifle Coffee’s wholesale channel delivered a 91% year-over-year surge, powering a 33% total revenue jump and an inflection in profitability momentum. Management’s focus on high-return channels, aggressive cost discipline, and brand expansion is reshaping the business model for scale, with clear signals of margin and cash flow improvement into 2024. Execution in RTD and FDM, alongside a strategic leadership transition, positions BRCC for sustained growth and operational leverage.

Summary

• Wholesale Channel Transformation: Rapid FDM expansion and strong retail partnerships are redefining BRCC’s growth engine.
• Margin and Cash Flow Inflection: Cost cuts and inventory normalization are unlocking operational leverage and cash generation.
• Leadership Realignment: CEO transition and seasoned hires signal readiness for next-stage scale and brand investment.

Business Overview

Black Rifle Coffee Company is a mission-driven premium coffee company targeting veterans, first responders, and patriotic consumers. The company generates revenue through four major segments: wholesale (mainstream retail and food, drug, mass “FDM” partners), ready-to-drink (RTD) beverages, direct-to-consumer (DTC) e-commerce subscriptions, and Outposts (company-owned and franchised retail stores). Wholesale and RTD are now the primary growth engines, with DTC and Outposts supporting brand engagement and mission alignment.

Performance Analysis

BRCC delivered 33% year-over-year revenue growth, with the wholesale channel as the standout, posting 91% growth and now representing the company’s largest and fastest-growing segment. This reflects rapid shelf gains at key FDM retailers including Walmart and Albertsons, as well as distribution expansion to 14 partners from just one a year ago. RTD sales grew 16% year-over-year, outpacing the broader category and driving up ACV (all commodity volume) to 42%.

Gross margin improved by 220 basis points to 33.9%, despite non-cash inventory write-downs in RTD. SG&A discipline is evident, with operating expenses rising only 4% against 33% top-line growth, and a $30 million annualized cost reduction plan underway. Adjusted EBITDA reached record levels, and management expects further acceleration in Q4 as RTD inventory normalization and cost actions flow through.

• Wholesale Channel Expansion: FDM revenue scaled from zero to over $100 million in one year, with strong early results and shelf position gains at major partners.
• RTD Recovery and Margin Focus: Inventory right-sizing and SKU rationalization are nearly complete, setting up RTD for margin expansion in 2024.
• DTC Stabilization: Tech upgrades and subscription innovation aim to counter post-COVID softness and maintain BRCC’s leading DTC coffee subscription position.

Outposts grew 20% year-over-year but declined sequentially, prompting a tactical pause in new store investment as resources shift to higher-return channels. Inventory was reduced by $18 million sequentially, improving working capital and setting up a cash tailwind into 2024.

Executive Commentary

Strategic Positioning

1. Wholesale Channel as Core Growth Lever

BRCC’s pivot to FDM and large-scale retail partners is transforming its revenue base. With 14 FDM partners and a focus on ACV rather than door count, the company is prioritizing depth of distribution and high-velocity partners like Walmart and Albertsons. Early shelf performance has propelled BRCC into the top 10 brands at major retailers, and management sees significant runway for further penetration and innovation within existing accounts.

2. RTD Optimization and Supply Chain Discipline

RTD, ready-to-drink beverages, is now a critical strategic category, with BRCC’s core SKUs ranking in the top 20 for RTD coffee. Inventory overhangs are being cleared through non-cash write-downs and targeted deals, positioning the segment for margin improvement and cash generation in 2024. Management is dedicating resources to demand forecasting and gross margin improvement, aiming to leverage RTD as a growth and profit driver.

3. DTC and Subscription Innovation

While DTC faces post-pandemic headwinds, BRCC is investing in technology upgrades, new subscription features, and targeted marketing to stabilize and grow this segment. The company remains the largest DTC coffee subscription provider in the U.S., and leadership is focused on converting brand loyalty into recurring revenue, with paid ad optimization already yielding early results.

4. Tactical Pause on Outposts, Focus on Brand and Mission

Outposts, company-owned and franchised retail stores, have seen a near-term investment pause as the company reallocates capital to higher-return channels. However, Outposts remain important for brand experience and veteran-first responder employment, aligning with BRCC’s mission. Management is committed to improving unit economics and supporting existing locations while refining the model for future expansion.

5. Leadership Transition and Organizational Scale

Chris Monzelewski (“Mons”) will become sole CEO effective January 1, with founder Evan Hafer shifting to Executive Chairman focused on brand and marketing. The leadership bench has been strengthened with CPG veterans and public company experience, signaling readiness for next-stage operational scale and capital allocation discipline.

Key Considerations

BRCC’s quarter reflects a decisive pivot toward scalable, profitable growth, with leadership emphasizing operational leverage, brand expansion, and disciplined capital allocation. The business model is shifting from DTC-centric to a diversified, omnichannel platform anchored by wholesale and RTD.

Key Considerations:

• Wholesale Penetration Leverage: Early FDM results suggest substantial upside as distribution and shelf presence deepen with major retailers.
• RTD Margin Expansion: Inventory normalization and SKU rationalization are expected to unlock margin and cash flow in 2024.
• Mission-Driven Brand Strength: Veteran and first-responder focus continues to differentiate the brand and attract talent, partners, and consumers.
• Cost Discipline and Resource Reallocation: $30 million in annualized cost savings provides flexibility for brand investment and growth initiatives.
• Leadership Realignment: CEO transition and new executive hires align organizational structure with next-phase growth ambitions.

Risks

Execution risk remains around scaling FDM and RTD while maintaining brand authenticity and quality. Post-COVID DTC softness and Outpost underperformance highlight the challenge of balancing growth across channels. Inventory management and gross margin improvement are not yet fully realized, and further cost cuts could risk operational agility if not carefully managed. Competitive intensity in premium coffee and RTD categories, as well as macroeconomic headwinds, remain key watchpoints.

Forward Outlook

For Q4 2023, BRCC guided to:

• Revenue at the low end of the $400 to $440 million range
• Adjusted EBITDA within prior guidance

For full-year 2023, management acknowledged:

• Gross margin will fall short of 36% to 37.5% guidance due to inventory write-downs, but operational improvements will offset this shortfall

Management highlighted several factors that will drive 2024:

• Material gross margin improvement, especially in RTD and FDM
• Cash flow before debt service expected to exceed EBITDA

Takeaways

BRCC’s business model is inflecting toward scalable, profitable growth as wholesale and RTD channels mature, and cost discipline unlocks operational leverage. The leadership transition and focus on brand expansion set the stage for the next growth phase.

• Wholesale Channel Acceleration: FDM expansion is the new engine, with early shelf wins and brand awareness translating to rapid revenue gains.
• Margin and Cash Flow Leverage: Inventory normalization, cost cuts, and SG&A discipline are driving a clear inflection in profitability and cash generation.
• Watch for 2024 Execution: Investors should monitor gross margin improvement, RTD margin recovery, and sustained wholesale momentum as key proof points for the next leg of growth.

Conclusion

Black Rifle Coffee’s Q3 marks a turning point, with wholesale and RTD channels fueling growth and operational improvements driving margin and cash flow gains. The company is now positioned for scalable, mission-driven expansion, with a strengthened leadership team and a clear focus on profitable growth levers entering 2024.

Industry Read-Through

BRCC’s results highlight the accelerating shift from DTC to omnichannel models in specialty CPG, with large-scale retail partnerships and RTD innovation emerging as critical growth drivers. The focus on ACV and high-velocity partners over door count offers a playbook for other premium brands navigating retail expansion. Margin recovery through inventory discipline and cost reallocation is increasingly vital as CPGs face inflation and competitive pricing pressure. The leadership transition underscores the need for experienced operators to scale mission-driven brands beyond founder-led growth phases. Investors should watch for similar channel pivots and cost discipline across the premium beverage and CPG landscape.

BRCC Consumer Staples Beverages Wholesale RTD Omnichannel Brand Cost Discipline