Freshpet customers are buying more in bulk to save money rather than buying less

By Tomi Kilgore

Sales rose above expectations, as volume drove the increase with no help from pricing

Freshpet Inc. reported on Monday second-quarter sales that rose above expectations and raised its full-year outlook amid healthy consumer demand, but shares of the provider of "real food" for pets fell amid sharp selloff in the broader stock market.

The growth in sales was primarily a result of volume gains, while losses narrowed sharply due to improved gross margins, lower transportation costs and gains on equity investments.

Chief Executive Billy Cyr acknowledged on the post-earnings call with analysts that customers are looking for ways to stretch their spending budgets, but that's actually helping results because, rather than spending less, they are buying more in bulk as a way to save money.

"[W]e have been seeing a steady trend towards consumers buying larger pack sizes, which slightly reduces the price per pound, but improves the efficiency of our production lines and our distribution systems," Cyr said, according to a FactSet transcript. "This consumer behavior is a positive indication that value-seeking consumers move up to larger sizes of Freshpet rather than reducing the size or amount they buy."

The stock (FRPT) was down 3.2% in morning trading, but had been down as much as 9.9% at its intraday low. Meanwhile, the Nasdaq Composite Index (COMP), of which the stock is a component, sank 3.7% and the Dow Jones Industrial Average DJIA was down 938 points, amid growing worries of an economic slowdown.

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Net losses narrowed to $1.8 million, or 3 cents a share, from $19 million, or 35 cents a share, in the same period a year ago.

That beat the FactSet consensus for a per-share loss of 4 cents.

Sales grew 28.3% to $235.3 million, above the FactSet consensus of $231 million, as volume increased 28.3%.

"[O]ur growth in the second quarter was entirely driven by volume growth," CEO Cyr said. "There was no impact from pricing or mix this quarter."

He noted that a lot of growth is coming from the "fresh-frozen" segment, where Freshpet is by far the market leader.

Cyr noted that while Freshpet has 3% market share of the $36 billion dog food market, within the fresh-frozen subcategory in measured channels, Freshpet has a 96% market share.

Meanwhile, gross margin improved to 39.9% from 32.3%, as the cost of sales rose 13.9%, or less than half the growth in sales.

"Freshpet is delivering disciplined growth," Cyr said. "That has enabled us to significantly improve profitability while continuing to deliver category-leading net sales growth."

For 2024, Freshpet now expects sales of at least $965 million, compared with previous guidance of at least $950 million.

The company also boosted its outlook for adjusted earnings, before interest, taxes, depreciation and amortization (Ebitda) to at least $140 million from at least $120 million.

Freshpet's stock has soared 36.3% year to date through Friday, while the S&P 500 index SPX has gained 9%.

-Tomi Kilgore

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08-05-24 1020ET

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