The prospect of Freshpet reaching or even exceeding its longer-term targets seems assured but management is reluctant to pull the trigger on any upgrade.

In the shorter term, CEO Billy Cyr was happy to raise this year’s sales and adjusted EBITDA outlook on Monday (5 August) as second-quarter results largely beat market expectations. Revenue growth continued to exceed the 2027 goal of a 25% annual tick, although net income dipped back into the red.

Nasdaq-listed Freshpet once again made some healthy inroads on margins, with double-digit sales growth led by volumes alone as the need for pricing against inflationary headwinds dissipates.

Freshpet’s shares continued to gain traction this year, despite some inevitable ups and downs, and are up 45% to trade at $127.06 at the close on Tuesday.

Cyr’s reluctance to renew the 2027 targets seemingly comes down to “discipline” as consumer demand is currently outweighing supply capacity until new production lines come on stream this year and next.

Nevertheless, Cyr didn’t entirely rule out an upgrade as he talked the talk with analysts, with a suggestion he might be tempted to pull the trigger at some point on the basis of a “consistent” delivery in 2023.

“We are on track to deliver the discipline to growth we committed to achieve this year. Carefully managing our growth to about 25% enables us to drive operating improvements and manage cash more effectively,” he said in his presentation remarks.

“Our second-quarter results demonstrate the strong progress we are making towards delivering that disciplined growth. We delivered our 24th consecutive quarter of net sales growth over 25% and did it within our existing capacity limit.”

Freshpet, which is focused on premium refrigerated fresh pet foods for cats and dogs, is aiming to reach a sales target of $1.8bn in 2027. Management also seeks to achieve an adjusted EBITDA margin of 18%.

While sales growth exceeded the target in the first and second quarters, Freshpet anticipates a sequential slowing through the back half, largely due to the supply and demand production dynamics.

Gross margin improved by an impressive 760 basis points to 39.9% in the three months to 30 June, building on a 910 point first-quarter increase. The adjusted EBITDA margin was up 100 points at 14.9%, equalling out to 109 points for the year so far to 14.3%.

“The bulk of the operating improvements came in our key focus areas of input costs, quality and logistics, totalling 770 basis points of improved operating improvements,” Cyr explained.

“Those operating results, specifically adjusted gross margin, input, quality and logistics costs exceed some of the key elements of our 2027 goals. As a result, we are in an even stronger position to achieve or exceed our full set of 2027 targets, as well as raise our guidance for this year.”

He added with a caveat: “We still need to prove that we can achieve these results consistently before we adjust our long-term targets. However, another quarter of strong performance has made us even more optimistic.”

Upgrade likelihood

Not content, analysts pressed Cyr on when he might be willing, or be in a position to make an upgrade, but he responded cautiously and suggested the gun will remain silent until 2027.

“We feel really good about the progress that we've made, particularly on the operation side. And at the same time, we're very mindful that we operate in a fairly volatile environment,” Cyr said.

“We'd like to see us deliver the full year at the rates that would be embedded in our 2027 targets. When we get to that point, we'll take a look at it and say what makes sense going forward.”

Robert Moskow, an analyst at US investment bank TD Cowen, wrote that Freshpet’s second-quarter beat and the raise in this year’s guidance “reinforced our conviction in the company's path to exceeding its 2027 long-term targets and becoming a mainstream dog food brand”.

Moskow added in his research note: “While management continues to emphasise the importance of capping the growth of the business while ramping capacity, the stronger operational effectiveness sets the stage, we believe, for more positive revenue revisions in the near term.

“Despite the value-seeking consumer backdrop, the premium-priced Freshpet brand shows no sign of elasticity.”

TD Cowen expects Freshpet to exceed the adjusted EBITDA target by 100 basis points in 2027 and to beat the sales threshold to the final tune of $1.95bn.

In the shorter term, the bank has raised its 2024 sales growth estimate to 26.9% on the back of the second-quarter results, along with an EBITDA upgrade to $148.8m and a 15.3% margin.

2024 outlook

Freshpet now expects to achieve 2024 sales growth of 26% as management upped the forecast to “at least” $965m from $950m. The adjusted EBITDA outlook was increased by $20m to “at least” $140m, while the adjusted gross margin is likely to expand 500 basis points, compared to 300 points.

Jon Andersen, an analyst at William Blair, shares the TD Cowen view as the US investment bank upped its 2024 EBITDA estimate by $20m to $140m. It also increased the metric estimate for next year by $15m to $180m.

“Second-quarter sales and margin metrics lend further credence to the view that the company’s 2027 financial goals are achievable or beatable,” Andersen wrote in a research note.

While “consumer migration toward [Freshpet’s] premium offerings” is a positive, Andersen said there are risks to the bank’s outperform rating.

Namely: “A softer economy and demand for premium pet food; competition including direct-to-consumer brands; consumer responsiveness to marketing; and the implementation of capacity additions.”

Added capacity

To better serve demand, Freshpet is on track to open a fourth production line at its Ennis, Texas, plant by the end of the third quarter, while a seventh line at its Bethlehem site in Pennsylvania is slated to come on stream in the back half of 2025.

“We feel very good about the amount of capacity we will have for next year but we're not going to get too far ahead of our skis,” finance chief Todd Cunfer said.

“We're trying to manage cash flow, capacity, earnings, top-line, all together and that’s the trick, but we literally review this every month and we have a clear strategy and path to get to our $1.8bn in ‘27.”

Cyr once again emphasised the discipline Freshpet is employing to get to its longer-term financial targets as he tried to downplay prospects of an upgrade, which analysts are keenly looking out for, if it comes at all before 2027.

“We planned capacity out 18 to 24 months, so you should expect us to be very, very close to the guideposts as we go from here through 2027,” he said.

“I expect that on a long-term basis our growth rate is going to be driven by our ability to add capacity and the rate at which we want to add capacity.

“We feel very comfortable about our ability to deliver the net sales growth that's embedded. I think people who look for us to go way above that are missing the fact that we're trying to stay very disciplined and very close to the guideposts that our capacity provides.”