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This Coffee Stock Posted 14% YTD Growth During COVID

Jon Brown Jon Brown, Stockhouse
8 Comments| November 18, 2021

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Click to enlarge
(Image via SPoT Coffee Ltd.)

Life doesn’t stop for everyone. COVID-19 may have meant lockdowns at home for many, but it has opened the door to an amazing business opportunity for the café industry to capitalize upon.



Everyone from the cast of TV’s “Friends” to philosophers in 1600’s Rome has gathered in cafés to share ideas and companionship over beverages and snacks. Even Ernest Hemingway wrote “Three Stories and Ten Poems” in Paris cafés.

Though times have changed, the focus is the same - build a business that serves the market with legitimately enticing products, fresh perspectives, and of course, invest in all the right things. This has been the mission for enlightened businesses out to do better than survive the pandemic but thrive in it.

For investors out to diversify their portfolios, the restaurant industry has a lot of opportunity for financial gain as people get back to their lives.

SPoT Coffee Ltd. (TSX-V: SPP, Forum) has been designing, building, and operating 24 company-owned and franchise community cafés in the northeastern United States. SPoT's cafés provide their customers with the highest quality service, signature made-to-order meals, and award-winning micro-roasted coffee.

This company offers two bonuses for investors – it is relatively new in the public markets, meaning a lower valuation to its peers, but has been a private business for about 25 years in the Eastern United States, meaning a proven track record of success.


(Image via SPoT Coffee Ltd.)

In an interview with Stockhouse Editorial, the company’s leadership explained that what ultimately led to the decision to move forward and expand the growth potential of the company essentially went hand in hand with the franchising aspect of the business.

With that, the company was able to open several new franchise cafés, as well as several express locations thanks to the exposure from going private to public.

SPoT knows coffee:

To work at a SPoT Coffee shop is to know and love coffee. Each employee tastes the espresso in-store every day to make sure that it's within the brand parameters. Quality control of each bean is of the utmost importance and making a brew is a manual process, which means more time to get to know each guest. As President Sterner calls it, a “romantic experience”.

“All of the single-origin coffees that we have, the single vineyard and the single lot coffees are excellent. Excellent features for us that come in depending on the time of year, the terroir, and where we're located on buying green coffee purchases for those periods, we, of course, have our middle of the roadhouse coffee, which has good notes of chocolate and graham cracker, it appeals to a very wide audience, our dark roast is hyper-localized to the region.”

Once a month, the company’s director of coffee operations will visit each café and test the products and equipment to make sure that things are up to brand standards. The company has also updated its COVID procedure guide, from inside the store to how it handles deliveries of stock.

Quality inspection is something that the company has placed an increased emphasis on through COVID.


(Spot Coffee Ltd. stock chart – January 2021 to October 2021. Click to enlarge.)

It isn’t just a marketing tagline, SPoT Coffee embodies the neighborhood community cafe on a public market level, it is as critical to the brand as the beans it brews.

SPP stock is up 14% year-to-date and 33% on the month.


A lot has changed, but the perfect roast is the same:

To update its business, the company introduced online ordering, reworked its menus, and opened more express cafés for those in a rush to get a caffeine rush, all without losing its community focus.


(Chart via SPoT Coffee Ltd. Click to enlarge.)

Despite the fact the general public has been discouraged from gathering around indoor places, segments of the restaurant industry, specifically anything involving takeaway food and drink, have done well since the onset of the COVID pandemic. From the likes of Restaurant Brands International Inc. (TSX / NYSE: QSR), which owns Tim Horton’s, to Starbucks Corp. (NASDAQ: SBUX), this growth is shared by smaller operations such as SPoT, but some key differences set this Venture stock apart from the major players.

The company’s leadership has always maintained that the home kitchen table and their café tables are the same. Those who come through their doors are guests, not customers, it is all about community. While there is much more than coffee brewing, the company is nothing without it.

John Lorenzo, the CEO and chairman of the company reflected on his experience with Starbucks and Dunkin’ Donuts as he helped build SPoT’s business and make it distinct.

“These cafés are not cookie-cutter”, he said “A lot of thought went into the design of each café.”

These cafés are also not diners, the coffee is award-winning and is taken care of like wine.


Q2 2021 financial highlights:

The company wants its financials to speak for itself and recently provided a financial and operational update for its Q2 2021, highlighting a net income for the three months ending June 30, 2021, at $694,734. The company achieved a positive EBITDA of $1,134,999.

Other key highlights from the company's financial statements for the 6 months ending June 30, 2021, include:

  • Working capital has increased by $1,751,764 since December 31, 2020, due primarily to the closing of a non-brokered private placement, providing SPoT with $455,030 in equity financing. SPoT also received $940,137 (USD 758,542) from the US Small Business Administration under its Restaurant Revitalization Fund (RRF). SPoT anticipates further funding under the RRF program;
  • SPoT’s liabilities have decreased by $1,374,675;
  • In the six months ending June 30, 2021, as compared to the same period in 2020, SPoT has reduced expenses by $129,504.
  • SPoT received confirmation of loan forgiveness of $792,855 (USD 639,709) from the US Small Business Administration under the Paycheque Protection Program;
  • The company's accounts payable and accrued liabilities decreased by $626,146 as of December 31, 2020, to $1,508,352 as of June 30, 2021;

2021 operational highlights:

In 2021, SPoT's management continued implementing service improvements, menu optimization, quality assurance, procurement, marketing, quality control inspections, and online operations. SPoT's management also improved its Toast point-of-sale system with an enterprise expansion that includes a loyalty program and kitchen order display screens.

In the last 18 months, SPoT's management has also responded to COVID by implementing and maintaining rigorous operating policies and procedures following the recommendations of New York State and the Center for Disease Control and Prevention to protect the health and safety of the company's employees and guests.

Since the onset of the COVID pandemic in early 2020, the company continued to grow with the opening of several SPoT cafés.

SPoT also announced in September 2021 that Brandon Sterner had been appointed as President of SPoT International. He will also continue to serve as Chief Operating Officer. Mr. Sterner brings strong analytical, managerial, communication, and leadership skills to the management team.

President Sterner authored SPoT’s COVID response plan and continues to ensure its proper implementation and ongoing effectiveness.


Dining out in a “post COVID society”:


(Image via SPoT Coffee Ltd.)

Navigating the supply chain was a very large part of how SPoT Coffee has grown in the past year. In the company’s Q2 2021 report, it was noted that the cost of goods sold had decreased throughout COVID, which is a point of conversation that management is particularly proud of.

Considering the costs associated with personal protective equipment (PPE), unemployment insurance, everything that ties into the employee, human resources, and the human capital side of things, the team has done an impressive job managing its supply chain during trying times at its company cafés and franchise locations, while ensuring that quality control maintains consistency.

SPoT Coffee subsidiaries have also received approval for approximately $1.5 million (CAD) in COVID relief loans.

The loans come from a US Small Business Administration (SBA) loan program. The program originates from the US Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is providing relief to small businesses, allowing them to maintain their workforce during the COVID pandemic.

SPoT will use the funds to cover payroll costs, rent and utility payments, and interest on other debt obligations. The company will also use it for group healthcare benefits during periods of paid sick leave, medical leave, or family leave. Furthermore, the loans will address insurance premiums, employee wages, commission, and other similar compensations.

SPoT has also gained approval for the Canada Emergency Business Account. As a result, the company has obtained a $40,000 line of credit at zero% interest. The company will not have to make any minimum monthly principal payments until December 31, 2022.

SPoT’s US subsidiaries have also applied for another set of loans, under the SBA Economic Injury Disaster Loan program. However, the approval for those working capital loans is still pending and will be determined by the SBA.

If the subsidiaries qualify for the EIDL loans, they could receive up to $2.8 million in funds. The proposed amount will depend on the company’s eligibility and carry an interest rate of 3.75% per annum.

The company will not be able to use the loans to replace lost sales or profits, or for expansion efforts. It could, however, use them to pay fixed debts, payroll, accounts payable, and other invoices impacted by the COVID pandemic.


Franchising:

The company’s franchisees, or business partners, have enjoyed the same success as the company for the past 20 to 25 years. New franchise stores have opened in recent years, even during the COVID pandemic, such as two in New York state - the Niagara Falls café and the North Tonawanda location, which started as a franchise location.

President Sterner told Stockhouse Editorial that the employees at the cafés come from the communities they serve.

“One of my favorite things to do, of course, is table touches. Being able to interact directly with the guests. I think the baristas have an excellent opportunity every time they make a beverage for a guest to do exactly that. We'd like to talk about how they see the same folks over and over that come in, that lived down the street, or down the road from the cafe and whichever community it may be. They will have the drink halfway poured and in the cup, by the time the guests gets to the register to place their order.”

There is a very communal aspect in these relations, it is what President Sterner called “A beautiful closed-loop system.”

This company is very engaged, especially with its guests and this has translated into a very popular “home away from home” for many coming out of a “COVID hibernation”.

CEO Lorenzo added, “The village conquers the city, it is where you belong … in a city, that’s where you live.”

He pointed out that even people who live in cities narrow their habitat down to a borough or neighbourhood when they talk about where they live, be it Williamsburg in New York, or Kitsilano in Vancouver.




Looking ahead:

The company’s Q2 report laid out incoming expectations for the months and years ahead, looking at everything from more restaurant revitalization funds, the paycheque protection program, the employee retention credit (ERC), all forecast to come as the US government continues to roll out these programs.

This translates to solid opportunities moving forward that will pave the way for future operational changes, as needed.

President Sterner added that the pandemic’s spread motivated the company’s leadership to get proactive about making SPoT Coffee more accessible, through third-party delivery services, online ordering, open-air settings, and more.

“When COVID first started. It was made very clear by John Lorenzo that we were not going to be complacent, that we were not going to be hands-off, that we were going to continue to drive progress in the company and strategize and continue to push the company’s strategies forward and not rest on our laurels.”

The company has a new food and beverage menu updates in store, including a kid’s menu and bona fide dinner menu, and efforts to drive more business and more sales to the dinner hours.

On a bigger scale, SPOT Coffee is scouting locations to penetrate new and surrounding markets and that would do well with one of their locations, such as Vermont, Rhode Island, Connecticut, Massachusetts … all along the Eastern seaboard, even further into New York state, as well.

This is a long-term investment. 2023 and 2024 will be significant for the company as it looks to expand its reach and grow 10 cafés in the next three years, 40 cafés in total, building on the 25 operating now.

For investors who want to deepen their due diligence in a growing segment of an already prosperous market, visit the company’s website at spotcoffee.com.



FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.


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