Author: Dominic Teo
Competition, particularly from DoorDash, has had a material impact on Waitr’s business, along with that of other food-delivery companies including Grubhub, Postmates and Uber Eats.
However, Waitr still has a lead in restaurant supply in its core markets of small and medium cities in Louisiana, Alabama and Mississippi among others.
Based on Q2’s Free Cash Flow numbers, Waitr has about 3 quarters of cash left though management has promised FCF improvement in the second half.
Management has implemented costs cuts and more thorough tracking of marketing spend in order to achieve controlled growth by keeping costs low.
Our previous article on Waitr (NASDAQ:WTRH) focused on what I believed were the over-exaggeration of Waitr’s inevitable demise due to increasing competition particularly from DoorDash (DOORD). I wrote about its still strong position (in terms of restaurant supply) in its core (small and medium) markets in Louisiana , Texas, Georgia, Tennessee and Alabama, etc. However, I also wrote about the uncertainty regarding its long-term margins, made worse by its comparatively low gross margins due to high delivery costs as well as its high G&A costs. Since then, Waitr’s stock has done horribly, to say the least, with a current market cap of around $98 million, less than 10% of its 52-week high. It is clear that after Waitr’s recent earnings result, the market is now pricing in the inevitable end of Waitr in the near future.
What happened in the recent earnings result?
Here is a quick summary of what happened during the recent earnings result:
- FY 19 Guidance was materially lowered from > $250m to $210-$220m citing “delays in roll-out of planned revenue initiatives, additional time needed to integrate Bite Squad and current competitive dynamics.” This was a significant guide down as guidance was cut by about 16%.
- Co-founder and CEO, Chris Meaux resigned as CEO to “focus on the long-term strategy as Chairman of the Board.” Replacing him is Adam Price who was only recently promoted to COO from Chief Logistics Officer. This is a meteoric rise for Adam as he was only hired as Chief Logistics Officer in Feb 2019 where he was previously the CEO and founder of Homer Logistics which focused on expediting last-mile delivery process and was acquired by Waitr. Waitr also announced that it will be looking at strategic alternatives.
- Revenue increased 218% for the quarter but 41% on a pro forma basis which is a huge deceleration from Q1 ’19 which saw 78% pro forma revenue growth. Even more distressing is the fact that sequential revenue increased about 7% QoQ which is lower than the 14% from Q4 to Q1 and the 13% from Q3 to Q4. However, despite the reduced guidance, Waitr is still expecting sequential revenue growth for both Q3 and Q4.
- As previously mentioned, there are only 2 real competitive advantages for food-delivery companies – price and restaurant supply. Waitr announced that it had solidified its restaurant partnerships to increase restaurant supply – new brands now on Waitr’s platform include Subway, Popeyes, Church’s, Wing Zone and Tijuana Flats among others.
- Various impacts on margins. As previously stated, one of the reasons for Waitr’s high operating costs have been its high G&A costs, particularly after the Bite Squad acquisition. In response, Waitr has laid off about 100 people as a result of overlaps from the Bite Squad acquisition which should lead to $4 million of cost savings. Excluding one-time items and equity compensation, G&A actually decreased by $1 million on a pro-forma basis. From the quarter alone, 5 cities that included both platforms were merged into one with expected annual cost savings of $1 million. However, the most worrying trend is rising customer acquisition costs (CAC) due to competitive pressures. According to Waitr, CAC increased due to media spend increase of $3.9 million but “did not produce the intended result.“
How worried should we be?
“One is that we’re coming up with a cohesive strategy that unifies the two groups, as opposed to focusing solely on the integration of the groups. And second is we’re really leaning in on real-time monitoring of those strategies and the efficacy so that we know that the metrics we’re looking at on a daily basis are holding true in terms of our LTV-to-CAC ratios.”
Restaurant Supply Updates:
- Continued strength in restaurant supply in core markets? Management has stated as I previously did that there is a “direct correlation over time of restaurant penetration and restaurant variety that really helps drive increased penetration.” Hence, there was a heavy focus in Q2 on adding new restaurants and will continue to do so.
- However, restaurant supply has been negatively affected due to the new agreement it has on fees with restaurants. Only in 3 of the cities (highlighted below) did restaurant supply for Waitr actually increase. In the other cities that I searched up, restaurant supply decreased for the Waitr app. Thankfully, DoorDash did not respond with any dramatic increase in its restaurant supply hence it is not unrealistic to assume that Waitr has managed to maintain its lead in its core markets.
Source: Compiled by author on information from Waitr and DoorDash
Competitive Environment Updates:
- As I previously identified in my previous article, the only real competitor to Waitr in its small-medium markets is DoorDash. This was reaffirmed by management in Q2 when asked about competitive dynamics. “In all honesty, talking really only about one competitor here, and we’re talking about a competitor that’s arguably spending in an unsustainable way… if you go into a market and hand out free food, yes, you’re going to get growth. That’s just not the strategy we’re taking.” Management has also affirmed that it would not be responding with similar strategies.
- DoorDash’s dominance can be seen in the below two images of how Google Searches on the different food delivery companies have changed from the past 1 year to the past 90 days. As can be seen, DoorDash is now the clear winner in food delivery, at least in popularity and trends. For example, Bite Squad was the most searched food delivery app in North Dakota (48%) and South Dakota (36%) but it has now conceded the lead to DoorDash and its share of searches is now 27% and 21% respectively. Bite Squad has also seen its lead in Hawaii shrink considerably. On the bright side, Waitr has managed to maintain its dominance in Mississippi and Louisiana with slightly over 50% of searches though both were lower in the past 90 days than in the past 1 year. Waitr’s search share in Alabama, Arkansas, Texas, Georgia and Florida also shrank, though not as badly as Bite Squad in its core markets.
The former represents the past 1 year while the latter represents the past 90 days. Source: Google Search Trends
- Responding to a question of how Waitr is responding to DoorDash’s large price discounts, management says that they’re consciously avoiding such strategies due to the low LifeTime Value (LTV) of these customers, what management calls “low-quality customers… reliant on nonstop promotions.” Instead management is targeting:
We’re going after the high lifetime value, higher average order size, independent restaurant connection, the customer searching for that independent restaurant.
Cash Burn Updates:
- Having had a secondary offering in May 2019, Waitr now has about $72 million of cash but Q2 saw a negative FCF of $22 million which means that should FCF not improve, there will be only around 3 quarters of cash left. This is the area of greatest concern especially since management refuses to lay out any concrete time frame to achieve FCF break-even. Management has only stated that it will be pulling on the driver efficiency lever to improve margins. However, until that actually happens, I remain a skeptic especially as I believe that Waitr’s W-2 model is actually extremely inefficient in small and medium cities. Furthermore, Waitr raised $50 million by issuing stock at over $7; this is now no longer an option for Waitr considering that its stock price is at $1.30.
Conclusion
I have been long Waitr with an average price of around $3 and with an EV/S ratio of around 1, I will continue to buy into Waitr. Being long Waitr is a belief that Waitr has a business that while is threatened by competition (i.e DoorDash) has thus far managed to hold its own. It hasn’t been pretty as it has lost share (using Google Searches as proxy), particularly in Bite Squad’s core markets but it has managed to thus far keep its lead in its core markets. I believe that Waitr can be a possible acquisition target due to its strength in areas where DoorDash, Postmates and Uber Eats have generally not fared well.
However, I do recognise that Waitr has an unsustainable cash burn problem and desperately needs Q3 FCF to improve or continue to take on debt. I am gladdened that management has recognised what my earlier article pointed out regarding too-high G&A costs as well as low gross margins with efforts made to address both. Tilman Fertitta (owner of the Houston Rockets) recently increased his stake by 900k shares at a price of around $1.58 which is a sign of confidence that Waitr will not be going bankrupt soon.