BEDMINSTER, NJ. — Freshpet had much to share in its third-quarter financial report for the period ended Sept. 30, 2024. The company continues to optimize its business, homing in on reducing costs, enhancing capacity and raising its household penetration.
“Our objective this year was to continue our strong top line growth but do it at a rate that would enable us to live within our capacity limits while strengthening our operating performance and cash generation,” said Billy Cyr, chief executive officer of Freshpet. “The result would be category-leading growth, outsized improvement in profitability, and more effective cash management. We described that as disciplined growth. If we do that well, consumers will win, customers will win and our shareholders will win.
“And that is what we are delivering. In Q3, we delivered our 25th consecutive quarter of 25% year-on-year growth, a significant expansion in our adjusted gross margin and adjusted EBITDA margin, and sizable operating cash flow,” he added. “In fact, this is the third quarter in a row where our adjusted gross margin exceeded our 2027 target and our 6th consecutive quarter where our logistics cost was better than our long-term target. And, we have generated more than $100 million in operating cash flow so far this year.”
Net sales for the third quarter were $253.4 million, an increase of 26.3% compared to $200.6 million in the prior year period. Freshpet attributed this increase to volume gains of 26.1%. Gross profit was $102.2 million (accounting for 40.4% of net sales), compared to $66.3 million (accounting for 33.0% of net sales) in the prior year. Adjusted gross profit was $117.7 million (accounting for 46.5% of net sales), compared to $80.6 million (accounting for 40.2% of net sales) in the prior year period. These increases in percentage of net sales were attributed to lower input costs and reduced quality costs.
Selling, general and administrative (SG&A) expenses were $90.3 million for the third quarter, an increase from $73.4 million in the prior year. Despite the increase in SG&A, these expenses as a percentage of net sales decreased 90 basis points to 35.7%, compared to 36.6% in the prior year period. Freshpet attributed this to reduced logistics costs and non-recurring charges from the previous year, which was partially offset by increased media spend. Adjusted SG&A was $74.2 million (accounting for 29.3% of net sales), compared to $57.4 million (accounting for 28.6% of net sales) in the prior year.
Net income clocked in at $11.9 million in the third quarter, a change from net loss of $7.2 million in the prior year period. Higher sales, improved gross margin and reduced logistics costs as a percentage of net sales all contributed to this increase, according to Freshpet.
Adjusted EBITDA was $43.5 million for the third quarter of 2024, compared to $23.2 million for the third quarter of 2023.
Reduced costs helped contribute to the fresh pet food company’s third quarter performance. Logistics costs dropped 120 basis points year-over-year, representing 5.6% of net sales; input costs dropped 450 basis points, representing 29.6% of net sales; and quality costs dropped 220 basis points, representing 2.1% of net sales.
Net sales for the first nine months of 2024 were $712.5 million, an increase of 29.2% compared to $551.5 million in the prior year period. Freshpet attributed this increase to volume gains of 28.2%. Gross profit was $284.4 million (accounting for 39.9% of net sales), compared to $176.3 million (accounting for 32.0% of net sales) in the prior year. Adjusted gross profit was $327.2 million (accounting for 45.9% of net sales), compared to $218.1 million (accounting for 39.5% of net sales) in the prior year period.
SG&A expenses were $265.7 million for the first nine months of 2024, an increase from $221.6 million for the first nine months of 2023. As a percentage of net sales, SG&A expenses dropped 290 basis points to 37.3%, compared to 40.2% in the prior year. Adjusted SG&A expenses were $218.0 million (accounting for 30.6% of net sales), an increase from $182.9 million (accounting for 33.2% of net sales) in 2023.
Net income was $28.8 million for the first nine months, compared to a net loss of $48.9 million in the prior year period. This improvement was attributed to higher sales, improved gross margin, reduced logistics costs as a percentage of net sales, and gain on equity investment, according to Freshpet.
Adjusted EBITDA was $109.2 million, an increase from $35.2 million in the prior year.
In addition to reduced costs, Freshpet also experienced continued consumer growth. Household penetration rose 17% to 12.9 million in the 52 weeks ending Sept. 29, 2024. The company remains dedicated to focusing on its heaviest users, as these consumers accounted for 90% of third-quarter net sales.
Additionally, the company will also focus on its strategy of converting topper-users (those that serve Freshpet as a topper in addition to a different pet food) to main-meal users in order to increase buy rate. To accomplish this, the company plans to continue launching new products including a formula for senior pets. It also shared that its new products launched this year have grown to be a success, particularly its Large Dog formula.
“Part of our strategy for making Freshpet into more of a main meal item is to offer a range of items that meet the broadest range of consumer needs,” Cyr said.
In the 52 weeks ending Sept. 29, 2024, the company shared that buy rate rose 6% to $103.64, compared to $98.07 in the prior year period.
“Our customers continue to believe that Freshpet is the future of pet food and continue committing additional retail space to Freshpet,” Cyr explained. “At the end of the quarter, we had 22% more Total Distribution Points (TDP) due to the addition of more than one thousand new stores year-to-date, more than 750 additional stores with second and third fridges year-to-date, and a sizable increase in shelf space in retailer owned fridges.”
Regarding its continued efforts to expand capacity, Freshpet shared that it is currently operating 13 production lines at its three facilities—Bethlehem Kitchen, Kitchen South and Ennis Kitchen—and is projecting a total of at least 22 lines. A fourth line in Ennis Kitchen began production at the end of third quarter and a fifth line is currently underway, which is expected to provide capacity into 2026. The company is currently installing a bag line at Kitchen South with startup expected in the first quarter of 2025. At Bethlehem Kitchen, the company will begin installing new production technology for bagged pet foods in 2025.
Looking to the rest of 2024, Freshpet updated its guidance, expecting higher net sales and adjusted EBITDA and lower capital expenditures. Net sales are expected around $975 million for the full year, an increase of 27% from 2023 net sales, and an increase from the previous expectation of $965 million. Adjusted EBITDA is expected to be at least $155 million, compared to previous guidance of at least $140 million. Capital expenditures is expected to be around $180 million, a decrease from previous guidance of $200 million.
With this in mind, Freshpet also shared its long-term growth goals, seeking to reach $1.8 billion in net sales around 2027, as well as increase its penetration to 20 million households.
“This disciplined growth is the result of our strengthened organizational capability, improved analytics systems and intense focus,” Cyr concluded. “That has enabled us to generate outsized gains in productivity and profitability. We are increasingly confident that we can sustain this type of performance and deliver the levels of shareholder returns that we believe the proprietary Freshpet business model is capable of generating.”
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