Growing Pains For Freshpet
Freshpet (NASDAQ: FRPT) has been a very interesting story for the past year. The company was supported by accelerating trends within the pet care industry, those trends were accelerated by the pandemic, and Freshpet’s operations were pushed to capacity. Since the onset of the pandemic, Freshpet has doubled down on its Feed The Growth strategy by expanding capacity to meet demand and those efforts are paying off. The only problem is that inflationary pressures are cutting into profitability and that is the root cause for a major price increase scheduled for this year. In our view, Freshpet is still a high-quality growth name but a new risk has emerged. If the company's planned price increases sap consumer appetite the growth story could come to a quick end.
"The acceleration of Freshpet's second-quarter growth rate continues to demonstrate the significant potential of the brand and the potency of our Feed the Growth strategy - enabling us to raise our projection for this year's net sales growth rate to 40%," commented Billy Cyr, Freshpet's Chief Executive Officer. "But we are not immune to the inflation being felt across the industry and are taking the necessary steps to address it - ensuring that our growth converts to the sustainable profitability we expect and enabling the capacity investments needed to change the way more people nourish their pets . . . forever."
A Mixed Quarter For Freshpet
Freshpet had a great quarter in terms of revenue. Freshpet had an iffy quarter in terms of margins and earnings but there are mitigating factors. While increasing input and logistics costs are cutting into margins and increasing SG&A as a percentage of revenue some of the missed earnings were spent on growth. So, what we have, is a high-growth company experiencing inflationary pressures but one that still has plenty of cash flow and earnings to fuel its growth strategy. The key takeaway is that revenue is up 16% sequentially, 35.8% over last year, 80% over the past two years, and it beat the consensus by 250 basis points and all with zero long-term debt.
As for earnings, the company reports gross margin declined to 39.7% versus 42.2% last year. SG&A as a percentage of revenue increased by 350 basis points with rising input and logistics costs offset by rapidly increasing revenue leverage. Looking forward, expenses focused on capacity expansion at two of the company's key facilities are 1) one-time costs that will soon pass and 2) investments in future growth that will also soon pay off. As for inflation, the company is planning price increases to offset rising costs and that should bring profitability back in line. On the bottom line, the company reported -$0.17 in GAAP earnings to miss the consensus by $0.11.
Freshpet Raises Guidance
Freshpet raised its guidance for revenue this year but there is a factor to be aware of here as well. While increased guidance is a good thing, this guidance increase is driven almost entirely by plans to raise prices. The company's guidance is now calling for 40% revenue growth this year which is a 3.5% increase over the previous guidance. Regarding the price increases and their impact on the consumer, CEO William Cyr said the increases will be "very noticeable to consumers," in the company's earnings call.
The Technical Outlook: Freshpet Hits Bottom
The price action in Freshpet is moving higher in the early action and may have hit a bottom. The question is whether or not this is a long-term bottom or a near-term bottom and we think it is a long-term bottom. Price action appears to be confirming support above the key $140 level, a level that has been significant resistance and support in the past. If that support holds, we see this stock moving up to retest the all-time highs fairly soon. Longer-term, assuming the company's growth strategy and price increases equate to earnings, we see Freshpet moving up to set new highs before the end of the year.
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