SECAUCUS, NJ. — Freshpet is making incremental improvements in key operating cost areas, according to the company’s second-quarter earnings report for the three-month period ended June 30. Leaders at the fresh pet food company also shared it is benefitting from recent capacity expansions in Texas, workforce retention initiatives, and continued investments in its retail presence.
“The Freshpet business has real momentum,” stated Billy Cyr, chief executive officer. “In the second quarter, we delivered strong volume and net sales growth, and significant improvements in our operating performance — particularly in quality and logistics — which is the basis for increasing our 2023 adjusted EBITDA guidance today.”
The company reported a net loss of $17 million, down from $20.6 million in the second quarter of 2022. Net sales were $183.3 million, up 25.6% year-over-year, and adjusted EBITDA was positive at $9 million in the second quarter, an improvement from an EBITDA year-ago loss of $1.9 million.
The company attributed net loss improvements to higher sales, partially offset by increased media spend, unabsorbed plant costs and higher depreciation, as well as increased selling, general and administrative (SG&A) expenses, which totaled $76 million over the quarter, up from $69.2 million year-ago.
“The decrease of 590 basis points in SG&A as a percentage of net sales was mainly a result of reduced logistics cost as a percentage of net sales, leverage on media spend, decreased cost related to the ERP implementation, and increased leverage on depreciation and option expense as the business scales,” the company reported.
Adjusted EBITDA improvements were attributed to improved adjusted gross profit, partially offset by higher SG&A expenses. Net sales growth was driven by higher pricing and velocity gains, Freshpet shared.
“We have now taken price increases totaling a cumulative impact of approximately 27% over the past 18 months to reflect the higher input costs we have absorbed,” Cyr said in the company’s second-quarter earnings call on Aug. 7. “Despite this higher pricing, volume growth continues to be strong and is accelerating. This demonstrates the strength of our brand and the Freshpet consumer proposition.”
Over the first six months of the fiscal year, Freshpet reported a net loss of $41.7 million, up from $38.1 million year-ago. Net sales were up 26.1% to $350.9 million, also driven by higher pricing and velocity gains. Six-month adjusted EBITDA came to $12 million, compared to a year-ago loss of $2.2 million.
According to Todd Cunfer, chief financial officer, net sales growth was “broad-based across channels,” with pet specialty sales growth up 15%, growth in xAOC up 25%, and growth in unmeasured channels up at least 50%.
The company made key improvements to optimize its operating costs as a percentage of net sales over the second quarter, including bringing down its input costs from 36.8% of net sales in the second quarter of 2022 to 34.4% in the second quarter of 2023; bringing logistics costs down from 11.5% to 8%; and reducing quality costs from 4.7% to 3.6%.
The company is approaching its 2027 target for these expenses, which are set at 33.5% of net sales for input costs, 7.5% of net sales for logistics costs, and 2.9% of net sales for quality costs. It is also approaching its 2027 target of 25.3% of net sales for SG&A expenses, which currently make up 34.9% of net sales and made up 40% of net sales in the second quarter of 2022.
The company also improved its adjusted gross margin from 38.7% in the second quarter of 2022 to 39.8% in the second quarter of this year.
“The operational improvements are the result of the intense focus and organizational capability we have built in the areas of quality, logistics and input costs and in an improving operating environment,” Cyr said.
Additionally, the company shared its Freshpet Academy has driven higher retention and skill levels across its workforce. As of July 1, 85% of the company’s workforce has been with the company for one year, compared to 46% who had stayed for less than six months in July 2021. Cyr noted these efforts have “stabilized and strengthened our production workforce, dramatically reducing turnover and building critical skills that have delivered the results we are sharing today.”
Freshpet also shared its newest Kitchen in Ennis, Texas, is now producing more than 20% of the company’s total production. There are currently two lines running 24/7 at the plant, and a second bag line will be commissioned in the fourth quarter. Phase Two of facility construction is underway and expected to start operations in the back half of 2024.
“The increasing production in Ennis will also make us a much more resilient company able to absorb the kinds of incidental supply issues that we struggled with in previous years and also lower our total logistics costs,” Cunfer said.
On the retail side, Freshpet continues to bolster its household penetration and buying rate. The company has officially reached more than 10 million households, with household penetration up 10% so far this year compared to 2022. Buying rate is up 19% year-over-year to $95.19.
“Ultra/super heavy/heavy buyers,” which represent Freshpet customers who purchase at least $40 worth of product over the last 10 weeks, have also increased to more than 3.5 million customers, an increase of 17% year-over-year and reflecting an average 10-week purchase rate of $242.06.
Freshpet continues to grow its brick-and-mortar presence. The brand is now available in 25,963 stores and reported its retail availability hit “record levels” as of July 15. Cyr noted the company expects to have more than 1.7 million cubic feet of refrigerated retail space by the end of 2023.
“With a strengthened organization in place, accelerating household penetration growth, record levels of new fridge placements, and a successful start-up of the Ennis Kitchen, we are well positioned to fulfill the long-term potential of Freshpet and change the way people nourish their pets forever,” Cyr added.
Following its recent financial performance, the fresh pet food company has updated its full-year guidance for adjusted EBITDA, now expecting at least $55 million, up from its previous projection of at least $50 million. Net sales are still expected at roughly $750 million for the full year, which would represent a 26% increase from 2022. Freshpet’s guidance on capital expenditure is also unchanged at roughly $240 million for the full fiscal year.
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