SECAUCUS, NJ. — Double-digit revenue growth for Freshpet, Inc. partially offset significantly higher net loss and a decline in adjusted EBIDTA in the second quarter of fiscal 2022, as reported by the company on Aug. 8. The company announced another price increase, effective next month, and adjusted its full-year outlook to reflect muted growth in adjusted EBIDTA compared to previous expectations.
"We made solid progress on our most important long-term value drivers in the second quarter, despite external challenges such as inflation and some short-term internal challenges with our operations," said Billy Cyr, chief executive officer at Freshpet. "We are encouraged by our strong consumption growth in the face of higher pricing, the acceleration in our household penetration growth, and our strong production performance that supported it. However, the combination of inflation and short-term operating challenges negatively impacted our bottom line in the quarter, and we are reflecting those factors in our 2022 outlook.
“We continue to take the necessary corrective actions, such as another price increase to offset inflation, and are steadfastly committed to fixing the operational issues so that the rewards of our strong growth become more apparent,” Cyr added.
Second quarter net sales amounted to $146.0 million, up 34.4% year-over-year, supported by velocity, pricing, distribution gains and innovation, the company shared. Net loss totaled $20.6 million, up 174.7% from $7.5 million in the second quarter of 2021. Adjusted EBITDA came to $3.9 million, down 64.2% from year-ago $10.9 million.
“Adjusted EBITDA was below expectations in the quarter due to media investment timing, inflation, logistics challenges and the quality issue we had in June,” Cyr noted in the company’s second quarter earnings call on Aug. 8. “We have already taken the necessary actions to adjust for the critical issues, including announcing a third price increase. However, the cost of the quality issue and the new timing gap on inflation versus our pricing require us to lower our adjusted EBITDA guidance for the year to $48 million from $55 million.”
Gross profit of $52.2 million accounted for 35.8% of net sales in the second quarter, down slightly from gross profit as a percentage of net sales in the second quarter of last year.
The company attributed this net loss increase to higher selling, general and administrative (SG&A) expenses, which were $70.4 million in the second quarter of 2022, compared to year-ago $49.6 million. SG&A expenses as a percentage of net sales increased to 48.2%, up roughly 2.6% year-over-year. Freshpet cited increased media spending for this rise in SG&A expenses, partially offset by net sales growth.
Cost inflation and supply chain challenges continue to plague the fresh pet food company, like so many others in the industry. The company incurred higher costs for logistics, which accounted for $2.4 million in the second quarter. Heather Pomerantz, chief financial officer at Freshpet, noted the cost of many key ingredients and inputs continues to rise, while protein has stabilized, and underlying construction and equipment costs have “dropped considerably.”
Still, the company will implement a third price increase — this time at 2.6% — in late September.
“We have replaced a pandemic with inflation, yet we've unfortunately kept the supply chain problems that came with the pandemic,” Cyr said. “And now we are facing a potential recession… While the recent challenges have caused inconsistency in our margin delivery performance, we are in a much stronger position today than we have been over the past two years, with a more formidable organization that provides greater control and confidence in the long-term opportunity that Freshpet presents.”
Cyr assuaged stakeholder doubt in the company’s second quarter earnings call by claiming the resilience of the pet food category and the Freshpet brand. He said he expects the brand to “perform very well in a recession.”
“We believe that a short and not very deep recession could better align supply and demand for the various ingredients and equipment we buy, lowering cost, shortening lead times and improving availability of the materials we depend on,” he added. “That could lead to greater capital efficiency and better margins.”
Adding to the mix of challenges seen in the second quarter, Freshpet issued a voluntary recall of one lot of its Select Fresh From the Kitchen Home Cooked Chicken Recipe for dogs on June 17 for potential Salmonella contamination. The company noted only a small portion of the lot was distributed to retailers across the United States, with the rest designated for destruction.
Pomerantz said the recall partially impacted adjusted EBITDA declines over the quarter, as well as logistics challenges and incremental inflation.
“We experienced increased inflation in some input costs, mainly due to labor and energy, as well as transportation cost increases at our suppliers and expect them to continue for the balance of the year,” she explained. “Further, our cost for diesel and natural gas is well in excess of the cost we estimated when we gave our initial guidance.”
Sky-rocketed gas prices also affected Freshpet customers in the second quarter. Pomerantz shared retail foot traffic and household penetration growth suffered in June, but as gas prices drop the company is seeing a “strong bounce back.”
The company has also reevaluated its capital expenditure plans for fiscal 2022, now expecting to spend significantly less than previously projected.
“We are updating our CapEx expectations to reflect our current best estimate of the actual timing we will experience with our various capacity addition and fridge expansion projects,” Cyr explained. “Our initial estimates were very conservative and designed to give us significant flexibility. But now that we are more than halfway through the year, we have much greater visibility and expect that we will spend approximately $80 million less this year than the $400 million previously projected.”
The company is operating at full capacity out of its existing Kitchen in Bethlehem, Pa., and is gearing up for the official opening of its “even larger and more efficient” facility in Ennis, Texas, in September.
"We look forward to opening our new, state-of-the art Freshpet Kitchen in Ennis, Texas, next month, which — when it is fully operational — will take our total capacity over $1 billion,” Cyr said. “In connection with that, we have further refined — and reduced by $80 million — our capital spending forecast for this year with an eye on maximizing near term efficiencies while enabling us to continue driving towards our long-term growth objectives.”
Freshpet hopes to produce its first saleable products in Ennis by the end of next month, with first shipments expected in October.
“Once that start-up happens, it will unlock significant potential for Freshpet,” Cyr said. “In addition to the significant increase in production capacity, it is designed to be our most cost-efficient, most sustainable, highest quality facility with room to grow and support an even larger business.”
In May, Freshpet announced plans to construct another manufacturing kitchen in Hanover Township, Pa., which is expected to be operational in the second half of 2023. The facility will span 99,000 square feet and house new pet food manufacturing lines to drive product innovation and expand capacity.
“Despite the litany of new obstacles and our own admitted missteps, we deeply believe that Freshpet remains one of the best growth opportunities in the CPG space, if not the broader consumer sector,” Cyr concluded. “We have consistently demonstrated an ability to grow the business at very strong rates and have now done it at higher prices, improving the pricing power of the brand.”
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