SECAUCUS, N.J. — Despite capacity constraints, growth for fresh pet food company Freshpet, Inc. shows no signs of slowing. The company reported 29% net sales growth to $84.2 million in the third quarter, attributed to gains in velocity, innovation and distribution.

Adjusted EBITDA totaled $17 million in the third quarter, up 42% from third-quarter adjusted EBITDA of $11.9 million in 2019. Net income rose 13% to $3.5 million compared to $3.1 million in the third quarter of 2019.

Improvements to EBITDA and net income were attributed to higher net sales and increased adjusted gross profit, and partially offset by increased selling, general and administrative (SG&A) expenses, Freshpet reported.

“Despite capacity limitations and the COVID pandemic, Freshpet continued to deliver incredibly strong and consistent growth on the top line and even stronger growth on the bottom line in the third quarter,” commented Billy Cyr, chief executive officer of Freshpet, in a company earnings press release.

"Clearly, our strategies are working,” Cyr continued. “More importantly, our engineering team was able to complete construction and start up our Kitchens 2.0, which will provide the capacity to support continued strong growth in 2021 and beyond. We now have the ability to change the way so many more families will feed their pets – forever.” 

Freshpet experienced capacity limits and out-of-stocks late in the third quarter, caused by strong consumption rates throughout the quarter. The company cut the ribbon at its Kitchens 2.0 facility in Bethlehem, Pa. in late October, which will add to the company’s capacity going forward.

“Let me start by saying that it feels really good to have Kitchens 2.0 up running and producing sellable product because we need the capacity to catch up with the demand,” Cyr said in Freshpet’s third quarter earnings call. “…Kitchens 2.0 is more than just incremental capacity; it is an indication of the capability of our manufacturing and engineering team completing such a large and complex project under some of the most difficult conditions we have experienced in a long time.”

Freshpet continues to develop its product portfolio, recently launching Freshpet Vital dog food, a 100% non-GMO option. The diet is available in two formulas: grain-free chicken recipe with spinach, cranberries and blueberries, and chicken with whole grains and green beans.

The company also added to its small dog products earlier in 2020, resulting in consumption growth of 119% versus year-ago consumption for its small dog product category.

“Our Fresh From the Kitchen product only grew 14% due to that product having the most severe capacity constraints within our lineup,” said Heather Pomerantz, chief financial officer. “We shipped every case we could make, but just could not make enough. We expect that growth to re-accelerate beginning later in Q4 and really take off in Q1 as we bring on the new capacity. The total business will begin to shift back toward bags in Q4.”

The company’s strategy has been focused on media marketing, increasing household penetration and buying rates, and making the Freshpet brand available in its own in-store fridge network across various pet supply and CPG retailers.

“The consumption growth was incredibly broad-based, with grocery up 40%, mass up 46% and big box pet specialty up an impressive 32%,” Cyr said.

Freshpet has added fridges to 801 stores so far in 2020, of which 251 were added in the third quarter, bringing its grand store count to 22,371. The company upgraded fridges in 417 stores, installed a second fridge in 565 stores in the third quarter.

Cyr stated the company is on-track to achieve its goal of adding fridges to 1,000 net new stores in 2020.

However, in-store purchases aren’t the only thing driving Freshpet onward and upward. E-commerce is proving to be a successful channel for Freshpet, with online sales growing 188% from the third quarter of 2019 to approximately $4.3 million in the third quarter of 2020. This represents 5.1% of total Freshpet sales for the quarter.

Of all e-commerce sales in the third quarter, 85% went through an in-store Freshpet fridge. The company uses several omnichannel outlets to facilitate its online orders. These include last-mile delivery services such as Instacart and Shipt, which accounted for 34% of online sales in the third quarter; “click and collect” services from Kroger, ClickList, Walmart Grocery Pickup, and From Home, which made up 56% of online sales; and fresh online delivery from Amazon Fresh, FreshDirect and Peapod, which accounted for 10% of online sales.

The company increased household penetration to 3.02% so far in 2020, up 23% compared to the first nine months of 2019. Household penetration for its core dog food products has increased to 2.41%, up 27% compared to the same period. 

Buying rate has also increased for the company, with total buying rate up 5% from year-ago to $113.48, and core dog food product buying rates up 4% to $130.18 compared to the same period.

“Over the last 12 months, we've added 725,000 incremental households,” Cyr said. “This puts us slightly ahead of the pace we expected on our quest to add 5 million more households by 2025.”

The company reassured investors its capital investments to expand capacity are on track. Freshpet has begun preparations to install a second production line at its Kitchens South facility, which is expected to add $50 million in capacity and begin running by late 2021. Construction at Freshpet’s Ennis, Texas facility, began in August, and is projected to wrap up in mid-2022.

“Our capacity additions are on track and will position us very well to drive growth in 2021,” Cyr said.

Freshpet reiterated its full-year 2020 guidance, which includes net sales exceeding $320 million, up 30% from 2019 annual sales, and adjusted EBITDA exceeding $46 million, up 57% from 2019.

“We are well positioned to finish this year strongly and come out of the gate quickly next year,” Pomerantz concluded. “We are thriving in the midst of an incredibly chaotic year and have successfully added capacity that will enable us to unleash our marketing and innovation expertise next year."

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