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On Thursday, Telsey Advisory Group adjusted its financial outlook for Westrock (NYSE:WRK) Coffee Co. (NASDAQ:WEST), reducing the company’s price target from $10.00 to $9.00 while sustaining an Outperform rating on the stock. Currently trading at $6.79, WEST has shown a strong 10.77% gain over the past week, though it remains down 28.3% over the past year. According to InvestingPro analysis, the company’s overall financial health score is rated as WEAK, with particularly concerning metrics in profitability and cash flow. The revision reflects the firm’s updated expectations ahead of Westrock Coffee’s fourth-quarter 2024 earnings report, scheduled for March 11.
The adjustment was made in light of the significant rise in coffee commodity prices, which surged approximately 65% year-over-year (YoY) in the fourth quarter of 2024 and continued to climb by roughly 100% YoY to $4.13 per pound in the first quarter of 2025 to date. These increased costs are anticipated to negatively impact the company’s profits and have been compounded by challenges in execution. InvestingPro data reveals the company is currently unprofitable with a negative return on assets of -7.7% and is quickly burning through cash, though it maintains a healthy current ratio of 1.39, indicating sufficient liquidity to meet short-term obligations.
Westrock Coffee’s total sales growth is projected to be around 1.0% for the fourth quarter, reaching $216 million. This modest increase is attributed to a combination of factors. The Beverage Solutions segment is expected to see a 6.5% decline in sales due to persistent consumer spending constraints and weakening demand for ground coffee and K-cups. However, this is partially offset by a 32% sales growth in the Sustainable Sourcing & Traceability (SS&T) segment, bolstered by the higher coffee commodity prices.
From a profitability perspective, Telsey anticipates that Westrock Coffee will experience a squeeze in its adjusted EBITDA margin, which is forecasted to contract by 85 basis points to 5.5%. This is a decrease from the previously estimated 7.3% and below the FactSet consensus of 6.5%. Additionally, gross margin is expected to expand by 80 basis points to 17%, which is down from the earlier projection of 18.2% and under the FactSet consensus of 18%. Despite current challenges, InvestingPro analysis shows analysts expect the company to return to profitability this year. For deeper insights into WEST’s financial health and more than 10 additional ProTips, consider accessing the comprehensive Pro Research Report.
The increased pressure on profitability is largely due to the higher coffee prices, which might take several quarters before they can be passed on to customers. Moreover, the company is likely to face elevated operating costs and the negative effects of fixed cost deleverage on weaker sales, although some of these impacts may be mitigated by productivity improvements.
In other recent news, Westrock Coffee Company has expanded its revolving credit facility by $25 million, increasing the total available credit to $200 million. This expansion is part of an agreement with Wells Fargo (NYSE:WFC) Bank and includes participation from the Farm Credit System’s member banks. The additional funds are allocated for the installation of a second ready-to-drink (RTD) can line at the company’s facility in Conway, Arkansas, as well as for general corporate purposes. The Incremental Assumption Agreement and Amendment No. 4 modifies the existing Credit Agreement dated August 29, 2022. During a covenant relief period, the company’s secured net leverage ratio will be adjusted, with specific targets set for the test periods ending in 2025. The interest rates and other terms of the new revolving facility commitments are consistent with the existing facility. This financial adjustment is aimed at supporting Westrock Coffee’s growth and operational requirements. The details of this development were shared in a press release by the company.
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