Will Black Rifle Coffee Be the 'Next Starbucks' After Its IPO?

Mohit Oberoi, CFA - Author
By

Feb. 10 2022, Published 11:00 a.m. ET

While the U.S. IPO market has dried up in 2022, SPAC mergers have kept the market afloat. On Feb. 9, SilverBox Engaged Merger Corp. I (SBEA) announced that its stockholders have approved the merger with Black Rifle Coffee and the merged entity will trade under the ticker symbol “BRCC.” What’s the forecast for Black Rifle Coffee stock after the merger and is it a good buy?

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Over the last year, at least three companies with conservative leanings have announced SPAC mergers. Apart from Black Rifle, former President Donald Trump’s TMTG (Trump Media & Technology Group), and YouTube Competitor Rumble are also going public.

When is the Black Rifle IPO date?

Since Black Rifle isn't going public through a traditional IPO route, it doesn't have an IPO date per se. However, for all practical purposes, Feb. 10 is the IPO date for Black Rifle because it will officially merge with SBEA and the merged entity will start trading on the NYSE.

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How much money will Black Rifle receive from the merger?

As part of the merger, Black Rifle will receive net proceeds of $150 million. While the amount is lower than what was originally planned, it exceeded the minimum cash requirement. In some of the other recent SPAC mergers, the vast majority of investors opted for a redemption, which left the merger target well short of the committed cash.

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BRCC stock forecast

The merger valued BRCC at an equity value of $1.9 billion. BRCC expects to post revenues of $230 million in 2021, which it forecasts will rise to $430 million by 2023. Based on the financial projections, we get a 2021 price-to-sales multiple of around 10x, while the 2023 price-to-sales multiple is around 5.4x.

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Black Rifle expects the Outposts and Wholesales business to drive most of its growth between 2020 and 2023. The DTC (direct-to-consumer) business, which accounted for 84 percent of its 2020 sales, is expected to grow at a CAGR of only 13 percent between 2020 and 2023.

Black Rifle expects to post a gross margin of 40 percent in 2021, which it forecasts will rise to 44 percent by 2023. While the company is currently posting an EBITDA loss, it expects to turn EBITDA positive by 2023 and is predicting an adjusted EBITDA margin of almost 20 percent when its operations reach scale.

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Black Rifle plans to expand its outposts.

Black Rifle expects to expand its outposts to 78 by 2023. Over the long term, the company sees an opportunity to open more than 1,300 such outposts across the U.S. Black Rifle is using both the company-owned and franchise model for the outposts.

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What’s Black Rifle Coffee's key strength?

Black Rifle Coffee has a conservative image. However, the company irked some far-right supporters when it condemned the Capitol Hill violence. Black Rifle has been trying to position the brand as a right-of-center company while carefully avoiding a far-right image. According to The Washington Examiner, Black Rifle has even been supporting Joe Rogan lately.

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One interesting takeaway from Black Rifle’s merger presentation was the results of a third-party survey conducted in September 2020. According to the survey, 84 percent of the respondents said that they purchase Black Rifle Coffee to support the military and veterans. Almost half of BRCC employees are either veterans or veteran spouses.

Meanwhile, 59 percent of the respondents said that they buy Black Rifle Coffee because the brand shares their values. 68 percent of the respondents listed great taste and flavor as the reason, while only 24 percent said that they liked the value of the company's products.

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What risks does BRCC face?

While Black Rifle’s projected growth outlook is strong, it’s a loss-making company like most other SPAC merger targets. The company faces two main risks. The first risk is on the valuations, which are somewhat on the higher side. Secondly, the company has to carefully manage its brand image and keep its core conservative customer base in mind.

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Overall, while BRCC stock might see an initial pop, it should eventually come down in line with other growth stocks. BRCC stock looks a good investment given the growing conservative base. At these prices, the valuations look somewhat elevated.

While some people think that Black Rifle Coffee could be the "next Starbucks" at least for conservatives, the company has a long road ahead if it intends to challenge the coffee giant.

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