Public direct-to-consumer businesses not only are nearly universally unprofitable, they have an even bigger issue: negative cash flow.

First, let’s recap some Accounting 101 concepts. Profitability is the amount of money left over after deducting all of a company’s expenses from its revenue. If a company makes capital investments like opening new stores or warehouses, those investments do not count as a cost against profit (other than the initial amount depreciated).

Free cash flow, on the other hand, takes capital investments into account. It tells you how much cash a business generates from its operations including the cost of capital expenditures.

Ultimately, what matters most to investors over time is cash flow. Investors want a return on their investment and that return comes from the businesses’ ability to generate cash, not on paper profitability.

Unfortunately, the vast majority of public DTC businesses have neither. In addition to all being unprofitable, here’s a representative sample of DTC businesses’ 2022 free cash flow:

  • Allbirds (footwear): -$122mm
  • Warby Parker (eyewear): -$50mm
  • Hims (telemedicine): -$34mm
  • Bark (pets): -$63mm
  • Purple (mattresses): -$111mm
  • Grove Collaborative (cleaning): -$133
  • Smile Direct Club (teeth aligners): -$210mm
  • Blue Apron (food): -$95mm
  • Honest Co. (eco-friendly products): -$54mm

I’ve written in the past about a couple of DTC businesses that were actually (barely) profitable in 2022: HelloFresh and FIGS. Unfortunately, that didn’t translate into positive free cash flow.

  • HelloFresh (food): ‘22 Profit: $127mm. ‘22 Free Cash Flow: -$104mm
  • FIGS (scrubs): ‘22 Profit: $21mm. ‘22 Free Cash Flow: -$31mm

You could argue that these profitable companies are burning cash because they’re making major capital investments which will translate to greater growth and cash flow in the long run. It’s possible–but the recent data are not encouraging. In Q1, HelloFresh’s revenue grew 3.3% year over year on a constant currency basis, actually down adjusted for inflation. FIGS grew 9.2%, which is fine but down 85% from their 2021 growth rate.

One concern I have here is whether a company like HelloFresh’s CapEx is “maintenance” or “growth” CapEx. Maintenance CapEx is capital investment which doesn’t lead to new infrastructure–it’s about repairing or replacing existing physical assets–but it’s an investment that’s required to maintain revenue and profit levels. Growth CapEx is investment in new machinery which should expand future profit. HelloFresh had €418mm of CapEx in 2022 but it’s impossible to tell from its financials what the CapEx is going towards. If it’s mostly growth CapEx, it doesn’t seem to have affected growth yet. If it’s mostly maintenance, that’s not a good sign for future cash generation.

The unfortunate state of affairs today is that nearly all public DTC businesses are unprofitable. The exceptions that make money on paper are not currently generating cash.