We are short shares of Tattooed Chef, a $1.2bn packaged-food company that trades at about 7.5x 2020 revenues despite extreme customer concentration and flagging retail sales. Having recently gone public through acquisition by Forum Merger II Corporation, a special purpose acquisition company (SPAC), financial details regarding Tattooed Chef’s business are sparse. Investors have nonetheless bestowed a fanciful valuation on the company based on the torrid year-over-year growth rate of its namesake brand over the last few quarters, and the rosy projections made by management for 2021.

But in-depth interviews with the brand’s largest customers and a thorough analysis of scanner data from Nielsen paint an ominous picture. Tattooed Chef’s rapid revenue growth isn’t a reflection of broad-based sales growth but an artifact of the company’s relationship with a single customer – Sam’s Club, which accounts for about 70% of branded revenue. In a bid to try and “beat Costco at its own game” and foster a “treasure-hunt-type” shopper experience, Sam’s Club began stocking its frozen-food section with some Tattooed Chef prepared meals in late 2018. The initial success led to growing volumes at Sam’s in 2019 and 2020, with pandemic-driven consumer purchasing patterns greatly benefiting the frozen food category in the current year.

Though successful, Tattooed Chef’s unusual approach of launching with Sam’s Club leaves the company ill-prepared to expand elsewhere. Sam’s buyers are adamant about offering Tattooed Chef products that can only be found in club stores, which paradoxically means that successful products sold at Sam’s will be extremely difficult to leverage elsewhere. That only partly explains Tattooed Chef’s absence from the grocery channel. Another snag is that despite constant references to “innovation,” Tattooed Chef’s business with Sam’s is concentrated in just a few items, while its oft-cited relationship with Costco consists almost entirely of private label frozen vegetables. The dearth of creativity will make it impossible to displace hot brands like Caulipower or Daiya in grocers’ freezers. Finally, the relative lack of operational complexity involved in mainly selling a few SKUs to every-day low-price retailers leaves Tattooed Chef woefully unprepared for managing the intricate details of merchandising, distribution, and product assortment that are required for success in the much larger grocery channel.

More worrying than an inability to expand into the grocery channel is recent scanner data that shows that across its customer base, over two thirds of which is comprised of Sam’s, the Tattooed Chef brand has dramatically underperformed comparable frozen food brands in recent months. While frozen food categories have begun their typical post-summer sales acceleration, Tattooed Chef’s sales at retail have just experienced their worst 3-month period since last December. That’s not exactly the mark of a “disruptive” and rapidly growing upstart that’s portrayed in the company’s investor presentation. Worse yet, breadth of the brand’s sales has narrowed considerably in recent months, concentrating primarily in just a handful of frozen prepared meal products and losing almost all momentum in frozen mixed vegetables.

Going public through a SPAC acquisition has allowed Tattooed Chef to avoid the kind of scrutiny that might reveal customer concentration risk far more serious than suggested by the company’s disclosures. It’s also allowed for a pandemic-driven paroxysm of consumer frozen food purchases at one retailer to be portrayed as sustainable sales momentum. But the reality cannot be hidden for long: Tattooed Chef’s frozen food sales are melting, and investors will be left holding the bag.

Read the full report here.