Elevator Pitch
I have a Hold rating assigned to Freshpet, Inc. (NASDAQ:FRPT) stock. I previously wrote about FRPT’s revenue growth prospects, profitability outlook, and financing needs in my March 13, 2023 initiation article.
With this latest update, I perform a preview of Freshpet’s upcoming Q2 2023 financial results. I come to the conclusion that FRPT’s second quarter performance won’t be either a positive surprise or a negative shock for the market. My expectations of in-line Q2 results for Freshpet lead me to maintain my Hold rating for FRPT.
The Date Of FRPT’s Q2 2023 Earnings Release
Freshpet is scheduled to disclose the company’s financial performance for the second quarter of this year on Monday August 7, 2023 prior to trading hours, as per its earlier July 24 announcement.
In the subsequent section of the article, I highlight the sell-side analysts’ expectations regarding FRPT’s results for Q2 2023.
Wall Street Expects Top Line Expansion And Narrower Losses In QoQ Terms
The market is of the view that FRPT will have achieved a sequential improvement for both its top line and bottom line in the most recent quarter.
The sell side is forecasting that Freshpet’s revenue will increase by +10.3% QoQ from $167.5 million in the first quarter of the current year to $184.7 million for Q2 2023. If the analysts turn out to be accurate with their financial projections, Q2 2023 will represent the seventh consecutive of sequential revenue expansion for FRPT. In YoY terms, the company’s top line is projected to expand by +26.5% for Q2.
Also, FRPT’s non-GAAP adjusted net loss per share is estimated to narrow from -$0.46 for Q1 2023 to -$0.42 in the second quarter.
I evaluate the likelihood of Freshpet meeting Wall Street’s expectations with its actual Q2 2023 performance in the next section.
My Analysis Points To In-Line Second Quarter Results For Freshpet
I am of the view that FRPT’s second quarter results will be pretty close to the current consensus Q2 financial estimates for the company.
It appears to be highly probable that Freshpet can register QoQ revenue growth in the second quarter, based on a review of recent data and management commentary.
Retail sales in the US contracted by -0.7% and -0.9% for February 2023 and March 2023, respectively. But the US retail market has witnessed a recovery in recent months, with retail sales growing by +0.4%, +0.5% and +0.2% for April, May and June, respectively.
Separately, a July 5, 2023 research report (not publicly available) titled “Top-Line Momentum Looks On Track To Hit 2023 Guidance” published by Piper Sandler which cited data from IRI/SPINS. As per this Piper Sandler report, FRPT’s sales for the four weeks ended June 18 increased by +23.7%, which represented a faster pace of expansion as compared to its +22.9% growth rate for the previous four-week period.
Also, Freshpet emphasized at the Stifel 2023 Cross Sector Insight Conference on June 6 this year that “we expect to have similar kind of mid-20s (percentage) net sales growth (for Q2 2023) versus what we had in Q1.” FRPT also highlighted at the Stifel investor event that there is an “incredibly strong correlation” between its “cumulative advertising investment” and “net sales”, and revealed the company’s year-to-date advertising spend was $70 million higher YoY in early June. This explains why Freshpet has confidence in its Q2 2023 sales performance.
Moving on to the bottom line, FRPT is very likely to remain loss-making in the second quarter of 2023, but its net loss should be less significant on a QoQ basis.
An increase in advertising expenses (as mentioned above) and higher depreciation expenses associated with a new distribution center in Dallas will weigh on Freshpet’s profitability in Q2. As such, it is reasonable that FRPT will still report a loss for Q2 2023.
On the flip side, FRPT’s bottom line will benefit from positive operating leverage, as the company expands its revenue. At the Stifel 2023 Cross Sector Insight Conference, Freshpet also mentioned that “logistics efficiencies” and the alignment of “commodity costs in line with pricing” will be positive factors for the company’s profitability going forward.
To sum up things, I expect Freshpet’s Q2 2023 financial performance to be in line with expectations.
This Is A 2024 Story
FRPT’s shares have done pretty well in this year thus year, as its stock price went up by +40.3% year-to-date. Freshpet trades at a consensus forward next twelve months’ Enterprise Value-to-Revenue multiple of 4.50 times (source: S&P Capital IQ) now, which is a new one-year peak.
In my opinion, Freshpet will have to achieve a substantial improvement in profitability to warrant further valuation re-rating. The market’s consensus financial forecasts point to FRPT turning EBIT-positive in fiscal 2024.
Specifically, the reduction in logistics expenses could be the driver of better profitability for FRPT next year. At the Goldman Sachs (GS) Global Staples Forum in mid-May, Freshpet disclosed that it is “already seeing significant reductions in logistics (costs)”, thanks to “a new team managing our logistics process” which is “bidding out lanes really effectively and doing a lot of smart things.”
In summary, I think FRPT’s current valuations are quite rich, and I expect another round of positive valuation re-rating to only materialize in 2024.
Closing Thoughts
I agree with the sell-side consensus that Freshpet’s second quarter results will be better than how it performed in the preceding quarter. But the expected sequential improvement in FRPT’s financial performance seems to be priced into the stock’s current valuations. In that respect, I stick to a Hold rating for Freshpet.
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