Vital Farms, Inc. — Q1 2022 Form 10-Q
Reporting period: 13 weeks ended March 27, 2022; comparisons are with the 13 weeks ended March 28, 2021. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context
Vital Farms packages, markets, and distributes shell eggs, egg products, butter, and related products through retail and foodservice channels. Egg and egg-related products generated $72.1 million, approximately 94% of quarterly revenue. The company sources from nearly 300 family farms and identifies retail as its largest revenue channel.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net revenue | $77.1 million | $58.5 million |
| Gross profit / margin | $21.7 million / 28% | $21.3 million / 36% |
| Operating income (loss) | $(4.1) million | $3.1 million |
| Net income (loss) | $(1.5) million | $3.5 million |
| Adjusted EBITDA, non-GAAP | $0.5 million | $4.7 million |
| Cash from (used in) operating activities | $(4.9) million | $8.0 million |
| Cash and cash equivalents at period end | $24.8 million | $35.1 million |
- Revenue rose 32%, driven mainly by $17.2 million of volume growth and $1.3 million of price increases. Revenue from retail sales was $75.7 million, versus $57.7 million.
- Gross margin declined to 28% from 36%. Management cited higher shell-egg input costs, higher cream prices, and $1.0 million of convenient-breakfast product exit costs in cost of goods sold; price increases partially offset these pressures.
- Operating expenses increased 41% to $25.8 million. Selling, general and administrative expense rose 34% to $17.6 million, including higher employee costs and product-exit charges. Shipping and distribution expense rose 61% to $8.2 million, reflecting higher volume and freight rates.
- Cash, plus $67.1 million of available-for-sale investment securities, totaled approximately $91.8 million. The company reported no outstanding borrowings under its $20 million revolving credit facility and said it was compliant with covenants.
- Current assets were $134.1 million and current liabilities were $38.3 million. Total liabilities were $40.3 million; these included $3.1 million of operating lease liabilities and $0.2 million of finance lease liabilities.
- Operating cash use reflected the quarterly loss and working-capital outflows. The cash balance decreased $6.2 million during the quarter. Capital expenditure cash payments were $1.7 million; additional property, plant and equipment purchases were included in payables and accrued liabilities.
Material changes versus the prior period
- The company moved from $3.5 million of net income to a $1.5 million net loss, despite 32% revenue growth; Adjusted EBITDA fell from $4.7 million to $0.5 million.
- Cost of goods sold increased to 72% of revenue from 64%, while gross margin fell eight percentage points. Freight and distribution costs also increased as a share of revenue, from 9% to 11%.
- Operating cash flow shifted from $8.0 million provided to $4.9 million used.
- In January 2022, the company decided to exit its convenient breakfast product category. It recorded $2.3 million of exit charges, with $1.7 million of related liabilities remaining at quarter-end; the company expected settlement by the end of the quarter ending September 25, 2022.
- The company adopted the new lease accounting standard, recording operating lease right-of-use assets and liabilities. Management said adoption had an immaterial effect on earnings and cash flows.
Outlook, management commentary, and risks
- No specific full-year revenue or earnings guidance is provided. Management expects adequate supplies of eggs, butter, packaging, and freight, and sufficient packing and processing capacity to meet anticipated fiscal 2022 demand.
- Management expects cash, operating cash flows, investment securities, and available credit to fund operating expenses for at least 12 months. The Egg Central Station expansion was expected to cost $25.8 million in total, with approximately $3.3 million remaining to spend as of the filing.
- Management said elevated freight-market costs were expected to persist in the near term and shipping expenses to rise as the business scales. Input-cost inflation, including feed, cream, and freight, could pressure margins; the company increased prices on certain products in January and May 2022.
- Revenue concentration is material: UNFI represented approximately 35% of Q1 revenue, compared with less than 10% a year earlier, reflecting a distribution-channel shift. The filing also reports that Whole Foods accounted for approximately 27% of retail sales in both periods, based on estimates the company says are imprecise.
- Key disclosed risks include dependence on shell eggs, a limited number of distributors and co-manufacturers, a sole-source supplier for substantially all shell-egg cartons, supply and commodity-cost volatility, food safety and avian-influenza risks, and reliance on Egg Central Station and third-party freight providers. Inflation, COVID-19-related disruption, and geopolitical and international-shipping uncertainty are also cited.
- Available-for-sale securities had $1.4 million of unrealized losses at quarter-end, primarily attributed to rising interest rates. Management reported no significant decline in issuer creditworthiness and no need to sell securities before maturity; no credit-loss allowance was recorded.
- The income tax benefit was $2.4 million, and the reported effective tax rate was approximately 61%; the filing cites tax benefits related to non-qualified stock-option exercises and tax expense related to amended federal returns.
- Management concluded disclosure controls and procedures were effective at a reasonable assurance level. The company reported no material legal proceedings and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing and cost-management measures stabilize gross margin amid continued input and freight inflation.
- Whether the distribution mix and concentration in UNFI and other large customers remain sustainable.
- Whether Egg Central Station’s expansion achieves expected capacity and whether remaining capital spending stays within plan.
- How much operating cash use reflects temporary working-capital timing versus ongoing profitability and growth investment.
- The final cash costs and completion of the convenient-breakfast exit, and the comparability of non-GAAP Adjusted EBITDA after its exclusions.
- Whether investment-security unrealized losses remain rate-related and whether liquidity assumptions continue to hold.