Vital Farms, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and 26 weeks ended June 27, 2021; comparable periods ended June 28, 2020. Vital Farms sells pasture-raised eggs, butter and other products, primarily through U.S. retail channels. Figures below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net revenue | $60.3 | $59.3 | $118.9 | $106.9 |
| Gross profit / margin | $21.9 / 36% | $22.7 / 38% | $43.3 / 36% | $38.6 / 36% |
| Operating income | $3.0 | $9.1 | $6.1 | $12.0 |
| Net income | $3.9 | $5.9 | $7.4 | $7.9 |
| Adjusted EBITDA (non-GAAP) | $5.1 | $9.3 | $9.8 | $13.1 |
| Operating cash flow | Not presented by quarter | $15.0 | $17.7 |
Q2 diluted earnings per share were $0.09 versus $0.16; first-half diluted EPS was $0.17 versus $0.21. Revenue growth was concentrated in eggs: egg and egg-related sales were $56.3 million in Q2 and $110.8 million for the first half, while butter-related sales declined year over year in both periods.
At June 27, cash and cash equivalents were $37.3 million and investment securities were $69.0 million. Current assets were $141.5 million versus current liabilities of $26.9 million. No borrowings were outstanding under the $20 million revolving credit facility; the company reported covenant compliance. Lease obligations were $0.6 million in total. The filing reports $15.0 million of operating cash flow and $7.8 million of property and equipment purchases for the first half.
Changes versus prior comparable periods
- Q2 revenue increased 2%, but gross profit fell 3%; gross margin declined about 1.9 percentage points. Operating expenses rose to $18.9 million from $13.6 million, reducing operating margin to 5% from 15%.
- First-half revenue increased 11% and gross profit rose 12%, with gross margin unchanged at 36%. Operating expenses increased 40% to $37.2 million, and operating income fell about 49%.
- Management attributed higher SG&A to added personnel and stock compensation, public-company professional and insurance costs, and marketing. Shipping and distribution costs rose 47% in Q2 and 50% for the first half, primarily due to higher outbound freight rates.
- Net income was supported by favorable income tax benefits related to exercises of non-qualified stock options. First-half operating cash flow declined year over year.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided. Management expected cash, operating cash flow and available credit to fund operating expenses for at least the next 12 months, and anticipated adequate egg supply and packing capacity for fiscal 2021.
- The company is expanding Egg Central Station; construction in progress was $13.0 million at quarter-end. Capital requirements depend in part on growth, innovation and facility expansion.
- Management said COVID-19 had not caused material adverse effects to the business at the time of filing, but warned that pandemic-related changes in demand, supply chains, operations and consumer behavior could create material risks. Pandemic pantry-loading had eased, making revenue less predictable; pasture-raised milk supply disruptions were expected to continue.
- Key exposures include dependence on shell eggs and a concentrated distributor/customer base; reliance on a single shell-egg processing facility and a sole-source carton supplier; limited co-manufacturers and pullet supply; feed, ingredient and packaging costs; freight inflation; seasonal demand; food safety and regulatory compliance; and execution of the facility expansion.
- Shell eggs represented approximately 93% of revenue in both Q2 and the first half. Foodservice represented approximately 1% of first-half revenue. The company noted that demand is typically lowest in summer and higher around the school year and holidays.
- The company reported no material legal proceedings, effective disclosure controls at June 27, 2021, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether freight, promotional spending and conventional-egg material costs continue to pressure gross margin and operating profitability.
- Progress, timing, spending and expected capacity benefits from the Egg Central Station expansion.
- Whether COVID-19-related demand shifts and pasture-raised milk supply disruptions affect sales, fulfillment or costs.
- Exposure to major distributors and customers, including the reported 25% of Q2 revenue associated with Customer B, and the ability to diversify distribution.
- Cash generation and planned capital expenditure needs; compare GAAP results with Adjusted EBITDA, which excludes specified expenses and is not a substitute for GAAP measures.