Vital Farms, Inc. — Q2 2020 Form 10-Q
Reporting period: 13 weeks ended June 28, 2020; comparative quarter ended June 30, 2019. Year-to-date figures cover 26 weeks. Amounts are in millions of dollars unless otherwise indicated.
Business context
Vital Farms packages and sells pasture-raised eggs, butter and related products, sourcing primarily through a network of about 200 small family farms. Eggs accounted for approximately 92% of revenue in both the quarter and first half. The filing reports strong retail-driven growth, while foodservice remained a small channel.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $59.3 | $32.3 | $106.9 | $65.2 |
| Gross profit | $22.7 | $11.0 | $38.6 | $22.5 |
| Gross margin | 38% | 34% | 36% | 35% |
| Operating income | $9.1 | $3.9 | $12.0 | $8.2 |
| Net income | $5.9 | $2.8 | $7.9 | $6.8 |
| Net income attributable to Vital Farms common stockholders | $6.0 | $2.8 | $7.9 | $5.9 |
| Adjusted EBITDA | $9.3 | $4.4 | $13.1 | $9.2 |
Quarterly revenue rose 84% year over year; first-half revenue rose 64%. Management attributed growth mainly to higher egg and butter sales volumes, including increased purchases of staples during COVID-19 stay-at-home conditions. Gross margin improved by 4 percentage points in Q2 and 1 point in the first half. The company said Q2 improvement reflected higher volume associated with pandemic trends and lower warehousing and transportation costs; first-half improvement also reflected operating leverage.
SG&A increased 110% to $10.0 million in Q2 and 98% to $19.6 million in the first half, driven by staffing, marketing, commissions and public-company-related costs. Shipping and distribution expense rose with sales volume, though as a share of revenue declined to 6% from 7% in both comparisons.
Cash, debt and liquidity
- Cash and cash equivalents were $17.1 million at June 28, 2020, versus $1.3 million at December 29, 2019. Current assets were $46.2 million and current liabilities $25.4 million.
- First-half operating cash flow was $17.7 million, compared with $2.0 million a year earlier. Capital expenditures were $5.4 million, versus $1.5 million; reported investing cash outflow was $5.4 million.
- Debt carrying value was approximately $9.8 million, including $1.5 million current and $8.3 million long-term, net of issuance costs. The facility is secured by company assets; the company reported covenant compliance at quarter end. Net assets were restricted in use under facility terms.
- The company received a $2.6 million PPP loan in April and repaid it in full that month without using the proceeds. It repaid the revolving-line balance in April; the equipment-loan balance was repaid in September 2020.
- After quarter end, the August 2020 IPO generated approximately $99.5 million in net proceeds to the company. All outstanding preferred shares converted into common shares upon the IPO. Management said available cash, operating cash flow, IPO proceeds and credit-facility availability were expected to fund operations and planned investment for at least 12 months.
Changes, outlook and notable items
- Revenue growth was partly offset by higher customer sales incentives. Q2 included a $0.6 million reduction in incentives settled during the quarter but related to prior-year sales.
- First-half 2020 other expense of $0.4 million compared with other income of $1.2 million in the prior-year period, which included a one-time Ovabrite litigation-settlement gain. Q2 other expense included a $0.2 million write-off of software implementation costs.
- Management gave no numerical revenue or earnings guidance. It expected adequate egg supply and processing capacity for anticipated fiscal 2020 demand, but said pandemic-related disruption could affect supply, operations and demand. Recent stay-at-home buying trends contributed to growth, and management cautioned that their duration was uncertain.
- Milk-supply disruptions had caused supplier losses; management reported no then-current effect on ability to fill butter or ghee orders but expected the disruptions to continue. The company also cited packaging availability and quality issues, using recycled plastic packaging for a small number of egg products.
- Key risks include reliance on a small number of distributors and product suppliers, concentration of shell-egg processing at Egg Central Station, commodity and feed-cost volatility, seasonality, food safety and quality, and continued dependence on premium consumer demand. One major hard-boiled-egg co-manufacturer had recalled product in December 2019 and temporarily constrained supply in early 2020.
- The company reported disclosure controls were effective as of June 28, 2020. It said two previously identified internal-control material weaknesses had been remediated in 2019; management’s assessment of internal control was not required in this quarterly report.
Important facts for investors to verify
- Whether pandemic-driven purchasing and the associated gross-margin benefit persisted after Q2, and how much of revenue growth reflected durable demand versus temporary pantry loading.
- Customer and distributor concentration: several distributors each represented significant portions of revenue, and the distributor serving Whole Foods changed during 2020.
- Whether egg and milk supply, packaging availability, co-manufacturer capacity and Egg Central Station expansion can support continued growth without quality or fulfillment issues.
- Debt and liquidity after the IPO, including the effect of facility covenants, repayment of equipment debt and planned capital investment.
- Underlying profitability and cash generation after separating one-time items, stock-based compensation, public-company costs and the non-GAAP adjustments used in Adjusted EBITDA.