Vital Farms, Inc. — Q3 2020 Form 10-Q
Reporting period: Unaudited 13 weeks and 39 weeks ended September 27, 2020, compared with the corresponding periods ended September 29, 2019. The company packages, markets and distributes pasture-raised eggs, butter and related products, primarily through U.S. retail channels.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Revenue | $53.4 million | $34.1 million | $160.3 million | $99.3 million |
| Gross profit / margin | $18.4 million / 34% | $10.6 million / 31% | $56.9 million / 36% | $33.1 million / 33% |
| Operating income | $2.4 million | $1.2 million | $14.4 million | $9.4 million |
| Net income | $1.7 million | $0.8 million | $9.5 million | $7.6 million |
| Diluted EPS attributable to Vital Farms stockholders | $0.04 | $0.02 | $0.29 | $0.18 |
| Adjusted EBITDA (non-GAAP) | $3.7 million | $1.9 million | $16.9 million | $11.1 million |
Q3 revenue grew 57% year over year; nine-month revenue grew 61%. Eggs generated about 92% of revenue in both 2020 periods. Nine-month pasture-raised shell egg revenue was $143.4 million, approximately 89% of total revenue.
For the 39 weeks, operating cash flow was $15.0 million, versus $0.1 million a year earlier; investing cash use was $5.9 million, including $6.7 million of property and equipment purchases. Financing provided $102.2 million, principally from the IPO. Cash and cash equivalents were $112.6 million at September 27, 2020, versus $1.3 million at December 29, 2019.
At September 27, total debt carrying value was approximately $7.6 million, including $1.1 million current and $6.5 million long term; the $15.0 million revolving line had no balance, and the equipment loan had been repaid. The company reported compliance with its credit-facility covenants. The facility is secured by company assets and restricts use of net assets.
Material changes and notable items
- Gross margin improved 330 basis points in Q3 and 220 basis points for the 39 weeks, primarily from lower egg and butter material costs and production-volume leverage. Higher promotional spending and other material costs partly offset the gains.
- SG&A rose 72% in Q3 and 87% for the 39 weeks, reflecting increased staffing, marketing, public-company costs and, for the nine-month period, $1.4 million of IPO-related accounting and legal expenses. Shipping and distribution expense increased with sales volume.
- Nine-month net income rose less rapidly than revenue; prior-year results included a $1.2 million Ovabrite litigation-settlement gain in other income. The 2020 period also included a $624,000 reduction in sales-promotion incentives settled in Q2 relating to prior-year sales.
- The August 2020 IPO issued 5.04 million company shares at $22 per share and generated about $99.7 million net proceeds. Preferred shares converted into common stock at IPO closing. In October, the company placed $70 million of IPO proceeds in an investment account with PNC.
Outlook, commentary and risks
- No specific financial guidance was provided. Management said cash, operating cash flow and available credit were expected to fund operating expenses for at least 12 months and support planned growth investment. It expected adequate egg supply and processing capacity for anticipated fiscal 2020 demand.
- Management attributed some sales growth to pandemic-related at-home purchasing and increased e-commerce. It cautioned that these demand trends may not continue and could make revenue more variable. COVID-19-related milk-supply disruptions had caused supplier losses; management expected them to persist, although they had not yet prevented filling butter and ghee orders.
- Growth plans include expansion of Egg Central Station, marketing, new products and retail distribution. Risks include execution and capacity constraints, commodity/feed and packaging costs, seasonality, food-safety issues, and reliance on a concentrated farm, co-manufacturer, carton-supplier and distributor network.
- Customer and channel concentration is material: one anonymized customer represented 24% of Q3 revenue; distributors US Foods, KeHE and UNFI represented approximately 22%, 11% and 8%, respectively. The filing reports no material pending legal proceedings.
- The company reported effective disclosure controls at quarter-end. It also noted prior material weaknesses in financial reporting controls had been remediated; management’s internal-control effectiveness evaluation was not yet required for this quarterly filing.
Important facts for investors to verify
- Whether pandemic-related household demand and e-commerce gains persist, and how demand changes affect revenue and product mix.
- Progress, cost and timing of the Egg Central Station expansion, and the capacity and reliability of farm, co-manufacturer and packaging supply.
- Whether improved gross margins can be sustained amid feed, ingredient, packaging and promotional-cost changes.
- Customer and distributor concentration, including the transition of Whole Foods distribution from UNFI to US Foods.
- Debt terms, covenant restrictions and liquidity deployment, including the October investment of $70 million of IPO proceeds.
- Stock-based compensation, potential dilution, IPO-related costs and the $624,000 prior-period promotional-incentive adjustment; compare GAAP results with the company’s non-GAAP Adjusted EBITDA reconciliation.