Plant-based alternative milk manufacturer Oatly (OTLY 3.05%) has had a rough go as a publicly traded company. The stock has crashed more than 94% since soon after its IPO in mid-2021. Much of the damage has been self-inflicted. Oatly's aggressive expansion plans were risky and expensive, and while revenue is still growing, it's almost hard to believe how inefficient the company's manufacturing operations have become.
Oatly raised some much-needed cash earlier this year with the sale of high-yield convertible notes, but the clock is now ticking. Oatly needs to turn things around before it runs out of cash again. The odds don't look good.
Incredible inefficiency
Oatly's core product is oat milk, a milk alternative made from cheap ingredients. Oats, water, vegetable oil, and some other odds and ends. The end product sold at retail is not cheap. A half-gallon of Oatly's oat milk is around $5 at Target. That's far more expensive than normal milk.
This should be a high-margin product for Oatly, but it's not. Even in 2020, before the company's grand expansion, Oatly managed a gross margin of about 30%. The pandemic and its associated supply chain impacts could be used as an excuse, but the situation has only gotten worse since then.
In the second quarter of 2023, Oatly's gross margin sank to 19.2%. Inventory write-offs and co-manufacturer penalties were part of the problem. The company has also expanded its manufacturing and logistics footprint quickly, probably too quickly given that revenue growth has slowed down dramatically.
Oatly spent $274 million in 2021 and another $202 million in 2022 on capital expenditures. Revenue in 2022 was $722 million, so capital spending was about 28% of revenue. That's a lot. This spending was part of Oatly's plan to expand rapidly. "We continue to focus on prioritizing growth investments over profitability to increasingly scale our operations to best position Oatly to serve customers and consumers, with the understanding that this creates some near-term margin headwinds," said CEO Toni Peterson in the company's Q4 2021 earnings release.
This aggressive growth strategy has not gone well. Revenue grew by just 10.1% in the second quarter of 2023, and the company slashed its outlook for the full year. Oatly now expects revenue to grow by 7% to 12% in 2023, down from a previous range of 23% to 28% growth. The company also cut its capital spending plans, something it was also forced to do in 2022.
Running out of time
Oatly had $340 million in cash at the end of the second quarter following its sale of convertible notes. At the rate that it's currently burning cash, this will last about a year.
Oatly is now looking to cut costs. On top of greatly reducing capital spending, which will decrease how much cash is flying out the door, the company is aiming to knock down operating costs by about $85 million by the end of fiscal 2024.
The company has already made some progress. By consolidating its co-packer network in North America, it's reduced its outbound freight costs per liter of product by about 25% so far this year. Given that the company has been solely focused on growth and expansion since it went public, there's likely plenty of low-hanging fruit.
Still, the hole Oatly has dug itself into is deep. Oatly posted a net loss of $87 million on $196 million of revenue in the second quarter. Free cash flow through the first six months of the year was a loss of $153 million. The company routinely writes off millions worth of inventory -- $7.6 million in the first half of this year, $8.2 million in the first half of last year. None of this suggests that Oatly is a well-run company.
Oat milk is still popular, and its popularity is still growing. But Oatly vastly miscalculated how quickly it should expand. Sales growth has slowed dramatically, gross margins are abysmal for a packaged food company, and the company is burning cash at a concerning rate. The company may be able to muddle through this crisis by slashing costs, but a meaningful turnaround doesn't look likely anytime soon.
