What happened
Shares of Oatly Group(NASDAQ: OTLY) fell by as much as 27% this week, according to data from S&P Global Market Intelligence. The oat milk company posted disappointing earnings for the third quarter, leading investors to sell off the stock. As of 12:06 p.m. EST on Friday, shares are down 22.4% this week.
So what
On Nov. 14, Oatly reported its financials for the three months ending in September. Revenue increased 7% year over year to $183 million, even with some foreign exchange headwinds. But that is the extent of the good news from the report.
Due to supply chain difficulties, a lack of execution at the company's distribution facilities, and COVID-19 lockdowns in Asia, Oatly's gross margin declined significantly in the third quarter. Gross profit was $4.9 million, down from $44.8 million a year ago, giving the oat milk brand a gross margin of only 2.7%. Unless you have a revenue base in the tens of billions of dollars (Oatly doesn't) and a lean expense structure, it is going to be extremely difficult to generate positive cash flow with those margins.
That is the problem for Oatly at the moment. Operating expenses for the quarter were over $100 million, leading to an operating loss of $104.4 million just in the third quarter. Through the first nine months of 2022, Oatly has lost $270.9 million.
The cash flow statement is much worse. Through the first nine months of this year, Oatly has an operating cash flow of negative $215 million. Combined with $170 million in capital expenditures, the company had a free cash outflow of $385 million through the first nine months of 2022. Not great for a business that generated $527 million in sales over that time period.
Now what
With only slightly over $100 million in cash on its balance sheet, Oatly is not in a healthy spot as a business. Management is likely going to need to raise cash through a debt or stock offering, which is not a good thing for long-term shareholders.
And with such a big cash burn, these losses are not going to be fixed within a few quarters. If you sell stuff at super-slim gross margins, it doesn't matter how efficient your operating expense line is; you are not going to be profitable.
With the stock down big this week and down 90% over the past year, investors should stay far away from Oatly.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
