How did Huel 10x in 5 years?

Huel is a DTC food company that was valued at $560M in 2022. It specializes in ‘complete nutrition’ from ready to drink protein shakes to powdered meals and protein bars. The brand is pretty popular among bio hackers or busy professionals - the first time I bought Huel, after meeting their CEO James McMaster a few years ago - it was definitely for the value prop of saving time over lunch.

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Huel has been on an absolute ripper - meanwhile competitors like the incumbent Soylent was sold for parts late last year (Soylent sold for a revenue multiple sub 1x to Starco brands. The company was doing ~$100m in sales and sold for ~$67m).

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It is not the best known brand out there, but Huel has experienced some incredible success. Trust me, I’ve seen a lot of financials for consumer products and this brand really is something special and is on its way to unicorn status.

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Let’s take it from the top

Huel was founded in 2015 by Julian Hearn in the United Kingdom. The idea for Huel emerged from Hearn's personal experiences and his desire to create a convenient, nutritious, and sustainable food solution. Prior to founding Huel, Julian Hearn was involved in a successful online marketing venture and had developed a keen interest in nutrition and wellness.

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Huel was born during the perfect time as far as some of the late 2010s wellness trends go - veganism, Keto, nootropics, biohacking, etc. In theory, you could buy huel and have the perfect fuel for a human being down to the gram of micro nutrients since it was coming in powder. 

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After starting in 2015, Huel raised $26M in 2018 from Highland Europe, since then it's been off to the races, raising another $24M from Highland Europe in 2022 and most recently announced an investment from Morgan Stanley - which we of course can only assume was real money numbers. The brand has expanded rapidly since its founding in 2015 to a much wider product line and customer base and is attracting massive amounts of capital in an environment where most investors aren’t touching consumer products with a 10 foot pole. Bravo.

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Anyways, let’s get into the meat

While we’re breaking down Huel, I want to focus on one big theme that jumped out to me immediately when evaluating their financials: operational excellence. 

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Huel has had an extremely impressive journey. Fellow UK 9 figure brand Gymshark, while also an immensely impressive business, had a little bit of a different story the last few years with regards to working capital and inventory planning. And to be fair, there are VERY few 9 figure brands that have experienced rapid growth that have run a balance sheet as well as Huel. I have seen so many brands continue to overbuy inventory and miss revenue forecasts - Huel is different.

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Consider the following charts below, which compare revenue growth and Days Inventory Outstanding between Huel & Gymshark. Both were growing top line extremely rapidly, with Gymshark certainly adding more revenue dollars, but Huel’s days inventory outstanding is actually going down over this period of time, while Gymshark’s doubled.

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While the purpose of this analysis is not to compare Gymshark & Huel, it is worth calling out in front of the article that Huel is not like the other children with regards to how it has succeeded over the last couple years. 

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This can also be observed in the trends in the cash conversion cycle profiles of the two brands over the last 3 years of data (disclaimer: Gymshark data is through 2022 and Huel is through 2023).

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Income Statement

Huel posted revenue growth of 28% in 2023, with most of its business coming from its home region of the United Kingdom, which is closing in on 100m/yr of revenue. In the U.S., the company does over $50m in sales, which is a feat in itself.

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Cost of Goods Sold

If there is one obvious hardship Huel has gone through over the last couple of years it is in an area that most DTC brands have felt pain: COGS.

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In 2021, Huel had a strong gross margin of 62% - which puts them in the top decile of companies according to the iris finance data set. 62% is strong, especially for a higher price point with strong repeat rates like Huel has. A lot of food & beverage companies are fighting to generate positive unit economics by banking on massive retention curves to generate enough gross profit to pay off the CAC, but with top decile gross margins, Huel likely has a shorter payback period than many other subscription based food and beverage companies.

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What Huel is not immune to, however, is inflation. In 2022 the company saw 7 full points of gross margin compression year-over-year as the company faced ‘inflationary pressures in freight services.’

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Gross margin headwinds were the primary driver of causing Huel to generate a net loss of 10mm as the company added ~42mm in top line and only ~16mm in gross profits.

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I’m not generally a huge fan of the ‘Gross Margin Return on Inventory’ metric, but it’s worth calling out that despite a decrease in gross profits of 5% from 2021 to 2023, the company was able to grow GMROI in 2023 compared to 2021, a tribute to the operational management of the business during times of COGS volatility:

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In order to address contraction in gross margin, Huel had to act quick and pull the marketing lever:

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Marketing Expense

After experiencing the gross margin compression in 2022, Huel scaled back marketing expenses as a percent of revenue from 41% in 2021 to 35% in 2022. This caused estimated MER* to go from 2.44 to 2.87. The net effect is that the company lost 7 points in gross margin, but was able to minimize the impact to contribution margin before logistics & selling fees. Notably, the company used price hikes to achieve much of this, growing AOV 11% YoY in 2022.

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*NOTE: I am using provided information to make an estimation for marketing expenses. See below reconciliation. For the purposes of this analysis I am including logistics & selling fees as below the line for contribution margin. I have estimated this line to be 10% of revenue:

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Overall, the gross margin losses did send the company into the red for net income for the year in 2022, though in general Huel has been a close to breakeven business.

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In 2023, the company bounced back to profitability, adding another 40mm or so to top line, but with 2 points of gross margin expansion YoY

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Operating Expenses

There were two things specifically about Huel that stood out to me - number one was the bounce back from ‘22 to ‘23 in operational efficiency, and #2 was how lean their OpEx appears to be. 

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In my analysis, I’ve made some assumptions to arrive at a guess for their marketing expense, which ultimately implies an opex figure as well. It appears that the company runs with a fixed operating expense budget of around 10% of revenue.

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Balance Sheet

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This is definitely where Huel has shined, in my opinion. The company has been able to attract significant capital during an otherwise turbulent time for consumer products startups - most recently from Morgan Stanley’s 1GT climate fund, for an amount I am guessing is in the $50m+ range.

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We touched on this earlier, but Huel has done a great job orchestrating their sources and uses of working capital over the past couple years. The chart below shows what they are using their working capital on. We saw a large increase in using cash for inventory in ‘22 - but that was quickly corrected in the following year where inventory actually acted as a positive source of cash as the company was able to sell the inventory as it continued to grow. This is where a lot of DTC and consumer brands have messed up the last several years.

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The net result of this is Huel improving its cash conversion cycle, while growing revenue aggressively.

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As a result of its execution, Huel has attracted capital from investors that has allowed it to continue to scale while in a comfortable cash position, with healthy current ratios bolstered by financing activities - which brings us to cash flows.

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Cash Flows

2022 inventory requirements did take a chunk of cash out of the business, however the company was able to attract outside capital in the form of a convertible note from existing investor Highland Europe.

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All in all, the balance sheet and cash flows here have been a little volatile in the past years, but Huel clearly has access to capital to plug any working capital gaps. If I had to guess, they saw the working capital gap coming and pitched a bridge loan to Highland - their private equity partner - to strengthen their balance sheet before/while in talks with Morgan Stanley. The investors would get to roll the loan into a priced equity offering at a discount, and the company would maintain its operating ability without having to answer any questions about liquidity.

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Valuation

The company was valued at $560M in December of 2022 - which is obviously rich for a company with no real earnings. The financing was a convertible note, so while it's impossible to know the terms or duration of negotiation, I suspect that this valuation was arrived at sometime in 2Q22, which was still before the worst of the market downturn. 

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There is definitely some work to do to exceed that valuation, in my opinion, however I do think that is significantly more doable than a lot of other high flying DTC brands who will never eclipse their last price tag.

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Conclusion

Huel is a huge success story. The company does not get the same attention as the other massively scaled DTC brands like Gymshark, True Classic, or Athletic Greens - however I do suspect that the company will be a near-billion dollar M&A target at some point in the next 3-5 years as they continue to expand product lines and channels.

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