Freshpet, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Freshpet manufactures and markets fresh pet food and treats, sold through retail channels using its branded refrigerated displays. It reported 18,277 Freshpet Fridge locations at quarter-end.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $43.2 million | $33.7 million |
| Gross profit / margin | $20.1 million / 46.6% | $15.8 million / 46.9% |
| SG&A | $23.5 million | $18.5 million |
| Operating loss | $3.4 million | $2.7 million |
| Net loss | $3.5 million; $0.10 per share | $2.9 million; $0.09 per share |
| Operating cash flow | -$0.2 million | $2.1 million |
| Capital expenditures and equipment deposits | $5.0 million | $3.3 million |
At March 31, cash was $3.0 million, total assets $135.2 million, and stockholders’ equity $114.7 million. Debt under the revolving credit facility was $6.0 million, leaving approximately $24 million available on the $30 million facility. The revolver matures in September 2020; rates are variable. Management said cash, expected operating cash flow, and borrowing capacity should fund foreseeable needs, while noting financing needs depend on growth, cash generation, and costs.
Adjusted EBITDA, a non-GAAP measure, was $1.8 million versus $1.9 million. Adjusted gross margin was 50.1% versus 51.2%; adjusted SG&A as a share of sales was 51.8% versus 52.4%.
Changes and management commentary
- Sales rose 28% year over year. Grocery, mass, and club sales were $34.9 million; pet specialty and natural sales were $8.3 million. Management attributed growth to refrigerated-channel expansion and higher sales, while baked-product sales declined.
- Freshpet Fridge locations increased 7.3% from 17,031 a year earlier. Management cited sales velocity, broader retail penetration, and consumer interest in pet health as growth drivers.
- Gross margin decreased 30 basis points, reflecting higher labor ahead of a planned seven-day operation beginning in Q3, higher-cost inventory, commodity inflation, and inbound freight; throughput and yield gains partly offset these pressures.
- SG&A increased 27%, including higher media spending, selling and volume-related costs, and additional staffing and incentive costs. Management said Feed the Growth increases media investment and expected near-term SG&A as a percentage of sales to change little.
- Operating cash flow turned negative, primarily due to changes in operating assets and liabilities, including lower accrued liabilities from compensation-payment timing. The company invested $5.0 million in facilities, refrigerators, and other capital items and drew $6.0 million on its revolver.
Outlook, risks, and unusual items
The filing provides no specific revenue or earnings guidance. Management expects to support operations and growth with cash, operating cash flow, and available borrowing capacity, but cautions that weaker-than-expected revenue or cash generation, faster expansion, unplanned investment, or limited access to financing could require additional funding. Commodity-price increases may pressure costs; variable-rate debt exposes the company to interest-rate changes. A 100-basis-point rate move would affect annual interest expense by approximately $0.1 million.
A securities lawsuit, Curran v. Freshpet, Inc., remains pending. The company disputes the allegations and intends to defend itself; it could not estimate a reasonably possible loss range. A related $0.1 million litigation expense was excluded from certain non-GAAP measures. The company adopted revenue-recognition Topic 606 retrospectively; the change reclassified $0.8 million in Q1 2017 from cost of goods sold to a reduction of sales, with no material effect on gross profit or net loss. Management expects the future lease standard to result in recognition of its corporate office lease on the balance sheet. No material risk-factor changes were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether sales growth and refrigerator expansion continue, and whether store productivity supports growth.
- Whether gross-margin pressures ease as the planned seven-day operation begins and cost efficiencies develop.
- Whether operating cash flow improves relative to capital spending and the company’s reliance on revolver availability.
- Developments in the securities lawsuit, including any change in the company’s ability to estimate potential exposure.
- Comparable-period figures reflect the company’s retrospective Topic 606 presentation; distinguish GAAP results from management’s non-GAAP measures.