SECAUCUS, N.J. — Freshpet, Inc. posted 27.8% sales growth in the three months ended Sept. 30 despite what Billy Cyr, chief executive officer, described as “unprecedented supply chain challenges.” The company reported a net loss of $2.1 million and net sales of $107.6 million, attributing sales gains to velocity, distribution and innovation.
The company also shared its nine-month earnings, which included net sales of $309.6 million, up 32.2% compared to the first nine months of last fiscal year, and a net loss of $20.4 million. Net loss both in the third quarter and in the first nine months of the fiscal year were attributed to increased selling, general and administrative (SG&A) costs.
According to the company’s presentation of its third-quarter earnings, net sales growth was partially offset by inflation and “temporary operating inefficiencies.”
"Like everyone else, we are facing extraordinary labor and material shortages, and accelerating inflation that have modestly delayed the start-up of new capacity and increased our costs more rapidly than we anticipated – causing short-term challenges that we are addressing,” Cyr said. “However, the long-term trends driving Freshpet's growth remain strong and, thanks to our aggressive capacity expansion initiatives and the investments we made in maintenance, training and automation in Q3, we have never been better positioned to fulfill our mission of 'changing the way people nourish their pets forever' than we are today."
Operational setbacks and supply chain disruptions limited production over the quarter. The company continues to work toward refilling trade inventory. In the second quarter, Freshpet refilled roughly $8 million of trade inventory, and continued to refill another estimated $8.5 million in the third quarter.
Freshpet expects added capacity coming online in the fourth quarter at its Kitchen South site, including a high-capacity bagging line running two shifts, which will help it continue to refill trade inventory.
“If our bag lines come online as expected, we will finish refilling the trade inventory on our Roasted Meals in November and December, also delivering net sales above consumption. We do not expect to finish refilling the trade inventory on Fresh From The Kitchen until early February, but will also record net sales above consumption in both Q4 and part of Q1 2022 on that item.”
However, operational challenges are expected to continue to affect the company through the remainder of this fiscal year.
“Supply chain challenges that impacted our equipment suppliers will constrain our Q4 capacity, and that is causing us to change our guidance from greater than $445 million to approximately $445 million,” Cyr said.
According to Cyr, the company lost more than a month of production in September and October from the second production line at its Kitchen South facility “due to delays getting equipment through the ports.”
The company has taken steps to optimize production planning and stock higher inventory levels to sustain growth and ultimately meet its year-end goal of $445 million in sales. The decision to invest in maintenance and production efficiencies cost the company up to an additional $10 million in net sales over the quarter and increased on-hand inventory cost the company roughly $8 million in quarterly sales, according to Cyr.
In July, all Freshpet production lines underwent a three-day shutdown for maintenance. In August and September, one of the company’s bagging lines was shut down so it could be automated and upgraded.
“…While we continue to generate strong sales… we could've generated even more if we had not made the decision to invest in manufacturing upgrades, automation, and much overdue maintenance that will enable us to deliver the quality and supply reliability that we will need to sustain our growth,” Cyr said.
He also shared the company’s pet treat supplier sustained “significant capacity constraints” caused by labor shortages, which cost the company roughly $1 million in net sales in the third quarter. The company is looking into long-term solutions to support its pet treat supply.
Adjusted EBITDA for the company was $14.6 million in the third quarter, down 14% compared to year-ago EBIDTA. The company has adjusted its full-year guidance for adjusted EBITDA of approximately $50 million, which would represent a 7% increase from last fiscal year.
“Our costs escalated much more quickly than we had anticipated and more quickly than we had budgeted in our guidance,” Cyr explained. “Simply put, we absorbed rapidly escalating costs without any pricing relief, which we estimate cost us about $5 million of adjusted EBITDA in the quarter, versus the results we would have had if we've taken pricing on the same timing as our competitors.”
E-commerce sales for Freshpet grew 57% compared to last year’s third quarter, and now account for 6.4% of total sales for the company. In-store, Freshpet continues to grow its refrigerator network, adding fridges to 226 new stores in the third quarter. The company also upgraded 48 fridges and installed 51 second fridges at existing stores.
“It will take quite a finishing push to get to our 2021 target of 1,000 net new stores as customers remain hesitant to put in new coolers until we are fully stocking existing coolers,” Cyr said. “…While this rate of additions has slowed, we're anticipating significant increases in new stores and second fridges next year, based on our increased supply and rapid growth.”
Sales of Freshpet in Canada were also affected by supply chain issues, growing 9% in the third quarter but showing strong consumption trends, Cyr reported. Sales in the United Kingdom, however, remain strong at 57% growth over the quarter. Cyr noted the company will increase investment in the UK market next year.
“We believe we are well-positioned to continue accelerating our growth, but we have significant work to do, to get Freshpet positioned for a strong 2022,” said Heather Pomerantz, chief financial officer. “The investments we are making are designed to maximize the long-term opportunity. In 2022, we will have production capacity to support a significantly larger business with an increasing mix of more efficient lines.”
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