Freshpet is still working to replenish inventory for its retail customers, following supply challenges the Secaucus, N.J.-based manufacturer of refrigerated pet foods has faced over the past six months, CEO Billy Cyr told investors during the company’s Q1 2021 earnings call on May 3.
“The Freshpet Kitchens are delivering the increases in output we had expected and are now producing at a rate that is almost 50 percent above year ago,” Cyr said. “That is enabling us to refill the trade inventory that we had drawn down during the back half of 2020 and satisfy our customers and consumers with much better in-stock conditions.
“We are not done refilling the inventory on all the SKUs at all customers, but we are getting close,” he added.
In February, Cyr cited “booming demand” and a labor shortage during the fourth quarter due to COVID-19 testing and shelter-in-place orders as reasons for the shortage.
During the earnings call, Cyr reported that the company has bolstered its staff at its manufacturing facilities and kitchens.
“We raised the wages for our night shift and recruited a flex pool of talent to both insulate us from any further COVID-related absenteeism and to further expand our capacity,” he said. “COVID still exists in the Lehigh Valley [Pennsylvania] community where the kitchens are located, so we are still incurring some COVID-related costs. We expect that to wind down in Q3 as our entire team became eligible for vaccines on March 31, and we have strongly encouraged them to get vaccinated if they can.”
Two major winter snowstorms also contributed to Freshpet’s food shortages, Heather Pomerantz, chief financial officer, said during the earnings call.
“We lost about $3.5 million of production to the two major snowstorms that occurred in the quarter,” Pomerantz said. “While winter snowstorms should not surprise anyone, these storms had a disproportionate impact on us because of the magnitude of the storms where we have production facilities, the fact that we had no excess capacity and neither we nor our customers had any inventory to buffer the impact.”
Freshpet’s Q1 2021 net sales increased 33.3 percent to $93.4 million compared to $70.1 million for the first quarter of 2020. Net sales for the first quarter of 2021 were driven by velocity, distribution gains and innovation.
“The growth in the quarter continued to be led by strong performance in the pet specialty channel, with Nielsen-measured big-box pet specialty consumption up 43 percent in the quarter,” Pomerantz said. “Our e-commerce business also performed well, growing 156 percent in the quarter and now accounts for 6.3 percent of sales.”
The company’s out-of-stocks during Q1 showed the company and its retail partners that the brand has become “a very important destination for pet parents,” Cyr said.
“When a store is out of stock on Freshpet, consumers are willing to go to a second or third store to find the product, and they call us asking where they can find it,” Cyr said. “Freshpet really is that important to our pet parents and their pets. And our retail partners have noticed.”
Retailers are looking to expand their fresh assortments with dual fridge placements, Cyr said.
“Before we place new fridges, we need to be able to supply them. It makes no sense to put lots of new fridges in stores if we can't supply the fridges that we already have,” he said. “As a result of the out-of-stocks we incurred in Q1, in cooperation with our customers, we delayed many of the new store fridge placements until later this year, early next year, when our capacity could support them.”
The company expects to begin new placements throughout this year, most of which will occur in Q4 during the first half of 2022, Cyr said, adding that the brand will have the capacity to support its customers who want to aggressively expand their Freshpet assortments at that time.
“With rapidly improving retail conditions and increased capacity in place to support strong growth, we are in position to deliver our 2021 guidance and remain bullish on our 2025 'Feed the Growth' goals of 11 million households, $1.25 billion in net sales and a 25 percent adjusted EBITDA margin,” Cyr said. “We are changing the way people nourish their pets forever."