Freshpet is on “more solid footing” than it was six months ago when supply challenges resulted in food shortages, Billy Cyr, CEO of the Secaucus, N.J.-based refrigerated pet food manufacturer, reported during its Q3 2021 earnings call with investors on Nov. 8. However, the company still might fall short of its 2021 expansion goals with fridge placements in additional stores.
“We are like everyone else who produces and sells goods in America today, i.e., constantly incurring supply interruptions that require interventions by our team to keep our lines running and enabling us to meet consumer demand,” Cyr said.
“Over the past six months, we produced significantly more than we sold at retail, rebuilding retail conditions and providing ample capacity to support strong growth going forward,” he added. “Our customers are beginning to notice those improvements, and we hope it gives them the confidence to install more fridges next year.”
In the quarter, store count grew by 226 to 23,381, Cyr reported.
“It will take quite a finishing push to get to our 2021 target of 1,000 net new stores as customers remain hesitant to put in new coolers until we are fully stocking the existing coolers,” he added.
“We’re already well ahead of our annual targets for this year on upgrades and second fridges but still added 48 upgrades and 51-second fridges in the quarter,” Cyr said. “While this rate of additions has slowed, we are anticipating significant increases in new stores and second fridges next year based on our increased supply and rapid growth.”
Freshpet’s net sales increased 27.8 percent to $107.6 million for the third quarter of 2021 compared to $84.2 million for the third quarter of 2020. Velocity, distribution gains and innovation drove net sales for the third quarter of 2021, company officials said.
Gross profit was $41.5 million, or 38.6 percent as a percentage of net sales, for the third quarter of 2021, compared to $36.7 million, or 43.5 percent as a percentage of net sales, in the prior year period. For the third quarter of 2021, adjusted gross profit was $47.4 million, or 44 percent as a percentage of net sales, compared to $41.5 million, or 49.3 percent as a percentage of net sales, in the prior year period.
The company’s Q3 results reflect “tough choices” officials had made regarding Freshpet’s manufacturing capability, Cyr said.
“While we continue to generate strong net sales growth in the quarter, up 28 percent versus a year ago, we could have generated even more if we had not made the decision to invest in manufacturing upgrades, automation and much overdue maintenance that will enable us to deliver the quality and supply reliability that we will need to sustain our growth,” he said.
“We optimized our production planning schedule to restore customer service resulting in longer production runs and higher inventory levels,” Cyr said. “We believe it was very important for our customers to do everything we could do to restore customer service as fast as we could.”
In addition to manufacturing upgrades, Freshpet’s treat supplier had significant capacity constraints due to labor shortages, which cost the company about $1 million in net sales in the quarter, Cyr reported.
“We are looking for some longer-term solutions to this problem. Despite these limitations on our production, we still produced 45 percent more in Q3 this year than we did last year,” he said. “That enabled us to satisfy current retail sales we fill about $8.5 million of trade inventory and rebuild some of our inventories.”
For the first nine months of 2021, net sales increased 32.2 percent to $309.6 million compared to $234.3 million in the prior year period. Net sales for the first nine months of 2021 were driven by velocity, distribution gains, and innovation.
Gross profit was $120.9 million, or 39.1 percent as a percentage of net sales, for the first nine months of 2021, compared to $102.4 million, or 43.7 percent as a percentage of net sales, in the prior year period. For the first nine months of 2021, adjusted gross profit was $141.1 million, or 45.6 percent as a percentage of net sales, compared to $115.4 million, or 49.3 percent as a percentage of net sales, in the prior year period. The decrease in gross profit as a percentage of net sales and Adjusted Gross Profit as a percentage of net sales was primarily due to increased cost at the company’s Freshpet Kitchens as a result of its wage increase plan, investments as we grow into capacity, inflation of ingredient cost and higher costs at the company’s Freshpet Kitchens South partner.