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Bear of the Day: Freshpet (FRPT)

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Freshpet Inc. (FRPT - Free Report) is a pet food company that manufactures and markets natural fresh foods, refrigerated meals, and treats for dogs and cats in the United States and Canada. Freshpet provides meat-based recipes, such as chicken, beef, lamb and salmon; fruits and vegetables like carrots, peas and leafy green vegetables; and high-fiber grains, such as brown rice, oats and barley. It sells its products under the Freshpet, Dognation, and Dog Joy brand names, and is headquartered in Secaucus, New Jersey.

Q3 Earnings Recap

Back in early November, Freshpet released third-quarter earnings results that missed the mark, and shares of the pet food stock slid over 15% as a result.

Revenue of $107.6 million fell short of the analyst consensus of $115.5 million, though the top line rose 27.8% year-over-year.

Gross margin decreased to 38.6% from 43.5%, weighed down by wage increases, higher ingredient costs, and other investments.

And because of this, adjusted EBITDA dipped from $17 million to $14.6 million for the period. Freshpet also reported a GAAP loss of $0.05 per share compared to estimates of a loss of $0.07 per share.

What really spurred on the post-earnings sell-off was Freshpet’s disappointing guidance update.

The company now expects full-year revenue of $425 million to $430 million, down from the previous outlook of $445 million. Freshpet also guided adjusted EBITDA to be $42 million (vs. the prior forecast of $50 million).

“Supply chain issues continue to cause new challenges for our business, this time with parts supplies for key packaging components. While we've since solved this issue, it nonetheless caused a temporary decrease in production,” said CEO Bully Cyr.

Bottom Line

FRPT is now a Zacks Rank #5 (Strong Sell).

Six analysts have cut their full year earnings outlook over the past 60 days, and the consensus estimate has fallen 43 cents to a loss of $0.57 per share. Freshpet’s earnings are expected decline considerably year-over-year, down over 600%, but it looks like bottom-line growth will pick back up next fiscal year.

Shares are down over 32% year-to-date compared to the S&P 500’s gain of 27+%.

Despite Q3’s lackluster performance, Freshpet’s management is confident as the company heads into the new year, adding that key metrics are improving. Its long-term growth model remains intact, as the team believes its current challenges are temporary in nature.

Some Wall Street analysts think the same. Stifel analyst Mark Astrachan lowered his price target on FRPT but maintained a buy rating, telling clients in a note that Freshpet’s “end-demand” remains sound.

FRPT may continue to experience some ups and downs as the supply chain crisis lingers, so potential investors should proceed with caution.

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