Vital Farms, Inc. — Q3 2022 Form 10-Q
Reporting period: 13 weeks ended September 25, 2022; year-to-date (YTD) covers 39 weeks. Comparisons are with the corresponding periods ended September 26, 2021. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
Vital Farms packages, markets and distributes eggs, butter and related products, primarily in U.S. retail and foodservice channels. Eggs generated approximately 94% of Q3 and YTD revenue. The company reported more than 22,000 stores carrying its products and sourced from a network of over 300 family farms. It discontinued its convenient breakfast product line in 2022 to focus on core categories.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $92.0 | $64.6 | $252.0 | $183.5 |
| Gross profit | $29.5 | $19.8 | $76.1 | $63.1 |
| Gross margin | 32% | 31% | 30% | 34% |
| Operating income (loss) | $2.0 | $(1.8) | $(1.3) | $4.3 |
| Net income (loss) attributable to Vital Farms shareholders | $0.7 | $(1.3) | $(0.6) | $6.1 |
| Adjusted EBITDA, non-GAAP | $5.2 | $0.2 | $9.4 | $10.1 |
| Operating cash flow | Not separately presented | Not separately presented | $(3.4) | $13.3 |
Q3 diluted earnings per share were $0.02; YTD diluted loss per share was $0.02. Q3 income tax provision was $1.5 million, with a reported effective tax rate of approximately 67%.
- Liquidity: At September 25, 2022, cash and cash equivalents were $18.8 million and available-for-sale securities were $68.1 million. Current assets were $151.1 million and current liabilities $50.8 million.
- Debt and commitments: No outstanding balance under the $20 million revolving credit facility, which matures in April 2024; the company said it was in compliance with covenants. Finance lease liabilities were $0.02 million. A five-year transportation agreement carries approximately $10.3 million in undiscounted minimum payments.
- Investment securities: Available-for-sale securities had $2.4 million of gross unrealized losses at quarter-end, primarily attributed to rising interest rates; the company reported no credit-loss allowance.
Changes versus the prior comparable periods
- Q3 revenue increased 42% year over year; management attributed the increase to $18.0 million of volume growth and $9.4 million from pricing. YTD revenue increased 37%, from $53.6 million of volume growth and $14.8 million of pricing.
- Q3 gross margin improved to 32% from 31%, as pricing increases helped offset higher input and packaging costs. YTD gross margin declined to 30% from 34%, reflecting feed, packaging and transportation cost inflation.
- Q3 returned to operating and net income from losses in the prior-year quarter. YTD results shifted from net income of $6.0 million to a net loss of $0.6 million, while operating results moved from $4.3 million of income to a $1.3 million loss.
- YTD operating cash flow fell to a $3.4 million use from $13.3 million provided. Management cited increased inventory to support growth, higher receivables amid increased sales and higher accrued liabilities. Inventory rose to $25.5 million from $10.9 million at fiscal year-end.
- YTD capital spending was $6.9 million, down from $14.2 million. The Egg Central Station expansion was substantially complete in April 2022; $22.5 million of construction in progress was placed into service during the YTD period.
Outlook, management commentary and risks
- No specific full-year revenue or earnings guidance is provided in the filing. Management expected adequate supplies of eggs, butter, packaging and freight to meet anticipated demand through mid-2023, and said cash, operating cash flow and available credit should fund operations and planned investments for at least 12 months.
- The company planned additional price increases on certain products effective January 2023. It cautioned that further increases could reduce demand, particularly given premium pricing and consumer price sensitivity.
- Management cited inflation and rising costs for feed, packaging, labor and freight, as well as economic uncertainty, interest rates and the Russia-Ukraine war. It reported no material adverse impact from COVID-19 at the time but noted potential supply-chain and demand effects.
- Key exposures include dependence on egg sales, customer and distributor concentration, a sole-source supplier for substantially all shell-egg cartons, limited co-manufacturers, supply from family farms, and reliance on Egg Central Station. The filing also discusses avian influenza, food safety, weather and seasonal demand risks.
- The company incurred $2.3 million of YTD charges related to exiting convenient breakfast products; $119,000 of asset write-down liability remained at quarter-end. Dissolution of related party Ovabrite resulted in a reported $122,000 loss. No material legal proceedings were reported.
- Quarterly revenue concentration included one customer at 24% and another at 11%. The filing separately reports UNFI at approximately 24% of Q3 revenue, reflecting distributor concentration. Management also noted that high customer concentration can affect sales and receivables.
Important facts for investors to verify
- Whether volume growth and planned pricing can be sustained without materially weakening demand or margins.
- Whether YTD cash use, inventory growth and receivables convert into stronger operating cash flow, and the company’s remaining investment and working-capital needs.
- Progress in staffing and utilizing the expanded Egg Central Station, and the timing, cost and financing of any next processing-capacity expansion.
- Current exposure to major customers, distributors and suppliers, and whether backup sources are available for cartons, co-manufacturing and farm supply.
- How feed, packaging, freight and labor costs, avian influenza and seasonal demand affect subsequent-quarter results; interpret Adjusted EBITDA alongside GAAP earnings and cash flow.