SECAUCUS, NJ. — Freshpet ended the fourth quarter of 2023 with $15.3 million in profit, rebounding from a loss of $2.9 million to close out 2022. While the fresh pet food company reported an overall net loss in the full year 2023, it continues to ramp up net sales and adjusted EBIDTA and is expecting to maintain this upward trend into 2024.
On Feb. 26, the company reported its fourth-quarter and full-year net sales for the three- and 12-month periods ended Dec. 31, 2023.
“Our strong 2023 results demonstrate that Freshpet has reached an inflection point,” said Billy Cyr, chief executive officer of Freshpet. “The significant investments we have made to create scale and extend our first mover advantage have begun to generate improved profitability and significant operating cash flow. That is the promise of the Fresh Future plan we announced last year, and it is working.”
The company reported a 29.9% increase in net sales in the fourth quarter to $215.4 million, largely attributed to increased volume, which was up 25%. Adjusted EBITDA was $31.3 million, up from $18.8 million in the fourth quarter of 2022. Pricing was up 5% in the fourth quarter.
Fourth-quarter gross profit totaled $74.6 million, making up 34.6% of net sales, up from $45.7 million or 27.6% of net sales in the fourth quarter of 2022. Freshpet attributed these gains to “improved leverage on plant expenses and reduced quality costs.”
The company also lowered its fourth-quarter selling, general and administrative (SG&A) expenses as a percentage of net sales year-over-year, thanks in part to reduced logistics and ERP implementation costs. Still, SG&A expenses were up over the quarter at $59.7 million compared to year-ago $47.8 million, impacted by increased media spend of $10.4 million.
The switch from net loss to net income in the fourth quarter was attributed to broad-based net sales growth across channels, reduced logistics costs and gross margin improvements.
“We saw a 15% growth in pet specialty, 30% in xAOC, and over 100% growth in the unmeasured channels,” commented Todd Cunfer, chief financial officer at Freshpet. “… Nielsen-measured dollar growth was 27% versus prior year, again, with broad-based consumption growth across all channels, with 18% growth in pet specialty, 29% in xAOC, and approximately 85% growth in the unmeasured channels.”
For the full year 2023, Freshpet reported net sales of $766.9 million, up 28.8% from 2022, and a net loss of $33.6 million, improved from a net loss of $59.5 million in 2022. According to the company, 2023 marks the company’s sixth consecutive year of net sales growth exceeding 25%. Adjusted EBITDA for the full year came to $66.6 million, up from $20.1 million year-over-year.
Gross profit for 2023 was $250.9 million, representing 32.7% of net sales, up from $186.0 million or 31.2% of net sales in 2022. Freshpet attributed these gains to “improved leverage on plant expenses, reduced quality costs, and decreased input cost as a percentage of sales mainly due to an increase in net sales pricing.”
SG&A expenses were also down as a percentage of net sales but up in value from 2022 to 2023. The company reported $281.3 million in SG&A expenses, or 36.7% of net sales, in 2023 compared to $238.0 million or 40.0% of net sales in 2022. Reduced logistics and ERP implementation costs were also cited for the decrease in SG&A as a percentage of net sales for the full year, partially offset by an increased media spend of $23.1 million.
In 2023, logistics costs were down 320 basis points, quality costs were down 130 basis points, and commodity cost management expenses were down 110 basis points.
“These financial results demonstrate real momentum, the potency of our plans, and the capability of our team,” Cyr said in the company’s fourth-quarter and full-year earnings call on Feb. 26.
The fresh pet food company continues to invest in its retail real estate by installing its branded refrigerators in new stores and adding second and third fridges to existing stores. Freshpet’s store count increased by nearly 1,500 in 2023, now totaling approximately 26,777 locations. While the majority (78%) of stores have only one Freshpet fridge, 22% now have second or third fridges, according to the company.
Freshpet is also making headway online as e-commerce continues to capture pet care dollars. According to Cyr, the company increased digital sales by 58% year-over-year, and is expecting online net sales of more than $100 million in 2024.
“The vast majority of our digital orders today are pickup or click and collect, which leverages our existing fridge network in retail,” he said. “According to NielsenIQ, pickup is also the fastest-growing segment of online e-commerce in dog and cat food.”
Freshpet reported household penetration growth of 19% in 2023 to more than 11.56 million households as part of its mission to convert more and more pet owners to its fresh diets. The company is also focused on its “super heavy and heavy” consumers, which currently account for nearly 4.25 million customers or 37% of Freshpet’s consumers but made up 89% of the company’s total sales in 2023.
The company also shared part of its strategy to increase its buy rate, which involves converting people who purchase Freshpet diets as meal toppers into customers that feed Freshpet as a main meal. According to the company, buy rate was up 6% from $90.61 in 2022 to $95.86 in 2023.
“We’re making the Freshpet brand more mainstream and getting people to use it as a main meal component, and this creates intensity and concentration of the business that we believe will allow us to be more profitable,” Cyr said. “… We know that 40% of Freshpet buyers use the product as the main component of their pet’s meal, and there is a huge opportunity to significantly increase this percentage.”
As it moves into 2024, Freshpet expects net sales of at least $950 million in 2024, which would represent a 24% increase from 2023. Adjusted EBITDA is projected between $100 million and $110 million.
“We believe the future of pet food is fresh and Freshpet is well positioned to drive growth and deliver the profitability one would expect from our leadership position,” said Billy Cyr.
“In 2024, we intend to continue making strong margin improvement and demonstrate continued capital discipline, while sustaining the net sales growth that Freshpet has become known for —further driving profitability and creating significant shareholder value,” Cyr said. “We believe the future of pet food is fresh and Freshpet is well positioned to drive growth and deliver the profitability one would expect from our leadership position.”
Freshpet expects to spend roughly $210 million in capital expenditures in 2024. Phase II construction on the company’s Ennis, Texas, facility is on track to wrap up in the summer of 2024, which will provide the company space to accommodate at least five more production lines at the site. The plant is currently operating three lines that produce roughly 25% of all products for the company, with December and January representing record production months at the plant.
“We will have some startup costs on the third line in Ennis in Q1, and additional start costs on the fourth line in Ennis in Q4,” Cunfer said. “At this point, we have about 70% of our commodity costs locked in for the year and currently expect modest deflation in 2024.”
Continued capital investments will be focused maximizing capacity, improving efficiency and ongoing fridge placements.
“We’ve continued to evolve our capacity expansion plans to drive greater capital efficiency,” Cyr said. “We are very focused on, first, maximizing the output of our existing lines by investing in an operational excellence program designed to increase throughput. We are making good progress on that program in Bethlehem, and just started the plan in Ennis.
“Second, maximizing the capacity of our three existing sites so that we can avoid the high cost of incremental infrastructure and overhead,” he added. “This means finding ways to get more lines into each of the three sites. We’ve already announced plans to add a seventh line in Bethlehem. We believe we found a way to get an additional line or two in Kitchens South, and are also looking for ways to get more lines in Ennis.
“Third, developing new technologies that generate more throughput per line and per square foot of space,” he added. “We’ve been working on this for some time and are making good progress, but are not ready to share any details at this time.”
Freshpet is also looking forward to its long-term strategy through 2027, at which point it expects to be in 20 million households, bank $1.8 million in net sales, and grow its adjusted EBITDA margin to around 18%.
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