Thorne HealthTech (THRN) reported Q4 results last night. While net sales and adjusted earnings for the period of $63.0 million and 13 cents per share came in $1.1 million and 3 cents shy of their respective consensus estimates, this still marked a new record performance with continued fantastic year-over-year top-line growth of 27.7%. This came on the back of persistently strong demand across both its Direct-to-Consumer (DTC) and Professional/B2B channels, where sales rose 46.1% and 17.5% to $25.6 million and $37.3 million on increased order volume, subscription growth and an expanded network of healthcare professionals. And even with the sell-through of the higher-cost raw ingredients the company secured out of prudence (and to help maintain/expand market share) earlier in the year pressuring margins a bit more than anticipated, profits nearly doubled from the 7 cents earned last year.

What’s more, while THRN’s forecast for 2023 net sales and adjusted earnings of $280-290 million and 37-39 cents per share appears to be missing the mark by an even wider margin—as analysts were projecting the company to earn 62 cents on net sales of $298.4 million—this is largely due to the additional investments necessary to complete the recently announced expansion and upgrade of its primary manufacturing facility in South Carolina, which will shave roughly 300-400 basis points off its gross margin this year, as well as the more than doubling in its effective tax rate to 26% from just 10% in 2022. Indeed, if you were to exclude the margin impact from the facility expansion and assume the same tax rate, I estimate the midpoint of THRN’s adjusted earnings guidance would be right in line with the Street’s view. Yet even with this drag slowing it down, the company’s outlook still suggests top and bottom-line growth of 25% and 19%—which is far better than what most companies are likely to achieve—supported by the strong sales trends THRN continues to see, which have had it fulfilling a new record level of orders each month thus far this year.

Longer out, I continue to expect THRN to benefit from this facility expansion/upgrade as it will give the company full control over its manufacturing process from formulation to production. Apart from being able to better supply its customers and more quickly adjust to changes in product demand versus competitors that rely on third-party contract manufacturers, these investments will allow it to generate personalized packaging and improve its printing operations. More importantly, this kind of in-house production helps ensure that the quality of its products is up to the high standards set by THRN, which is among the company’s biggest competitive advantages in my view. When you couple this with the boost in margins THRN expects as the extra costs to train its blue-collar workforce to operate the new machinery fades and this expanded and more efficient production capacity continues to scale, I think THRN is in excellent position to enjoy even stronger top and bottom-line growth beyond the current year as well.

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In my view, this is probably the biggest reason why THRN’s shares held up better than you’d expect today for a company that just provided a full-year profit forecast that fell well short of expectations. That said, when you consider the acceleration in growth and the much stronger free cash flow
production that these plant expansions/upgrades should also contribute to longer out and the attractive valuation THRN’s stock is trading at even relative to its softer-than-expected earnings guidance, I don’t think it should be down at all.