EmailFreshPet (FRPT) has been quietly making new 3-year highs this week. This stock has been the subject of a lot of criticism and doubts about its business model, but it seems those fears are fading away as the stock has been steadily climbing since its $5.60 all-time low in February 2016. A little over two years later and the stock is up 333% since then, closing at $24.25 yesterday. Let's dig into the story a bit.
In case you're not familiar, FreshPet makes food and treats for dogs and cats using only natural ingredients with no preservatives. What really makes FreshPet different is that its food stays refrigerated even at the retail store. It has its own branded refrigerators, known as FreshPet Fridges, installed at thousands of retail stores (Wal-Mart, Petco, PetSmart etc.) across North America. Check it out next time you're at the store.
FreshPet says its mission is to improve the lives of dogs and cats everywhere through the power of fresh, natural food. Packed with vitamins and proteins, its foods offer fresh meats, poultry, and vegetables farmed locally. At its Freshpet Kitchens, the company prepares these natural ingredients and everyday essentials, cooking them in small batches at lower temperatures to preserve key nutrients. Freshpet refrigerated foods and treats are kept cool from the moment they are made until they arrive at Freshpet Fridges in your local market. Its foods are available in select mass, grocery, natural food, club, and pet specialty retailers across the US, Canada and are currently testing in the UK.
FreshPet founded the fresh, refrigerated pet food category in North America. FreshPet believes it's disrupting the $22.5 billion North American pet food industry by driving consumers to re-assess conventional dog and cat food offerings that have remained essentially unchanged for decades. The company positions its brand to benefit from mainstream trends of growing pet humanization and consumer focus on health and wellness.
In terms of its most recent earnings report, FRPT reported solid Q1 results on May 7. Revenue rose 28.2% YoY to $43.2 mln. The company is not currently profitable but they are reporting positive adjusted EBITDA. FRPT has guided to 2018 revenue to be above $185 mln and they have laid out a goal of $300 mln in revenue as soon as 2020 with 20% adjusted EBITDA margins.
About a year ago, FRPT decided to boost advertising and pay for that with some improvements in fixed costs. And it has worked as growth accelerated in 2017. It took the growth rate from the low double digits to north of 20%. Also, the increased ad spending led to an increase in awareness from 35% to 40% and household penetration grew from 1.4% to 1.8%.
FRPT has also been innovating in terms of product. For example, it launched the Small Dog product which was long overdue but it's doing phenomenally well in the market. It also launched a couple of other flavors on its Roasted Meal line that are also doing very well in the market. And in combination with the media and some fridge upgrades, FRPT has seen a tremendous increase in the growth rate.
Another wrinkle in the story is that there has been some M&A in the pet food space. On April 4, J.M. Smucker (SJM) announced it will acquire Ainsworth Pet Nutrition for $1.7 bln. Ainsworth sells premium pet food and pet snacks, predominately within the US. Approximately two-thirds of Ainsworth's sales are generated by its Rachael Ray Nutrish brand. Ainsworth also sells pet food and pet snacks under several additional brands. This deal follows a late February announcement from General Mills (GIS) that it will acquire Blue Buffalo Pet Products (BUFF) for $8 bln.
In sum, FRPT seems to have made the right choice by boosting ad spending. It seems to have paid off well and is driving top line growth. FRPT now seems quite positive about its growth rate going forward. It was not long ago that some investors were doubting that FRPT would survive. But they are now proving that it can work.
Also, these M&A deals may be helping the stock as well as perhaps FreshPet could get acquired. It's clear that the premium/natural side of the pet food market is where the action is. The interest is there because premium/natural is the fastest growing portion of the overall pet food market. And that is the side of the market that FreshPet operates in. With that said, FreshPet is pretty unique in that its food is refrigerated so it's a little different than Ainsworth and Blue Buffalo. However, its positioning on the premium side could attract interest.
Aside from the M&A angle, FRPT is a play on the trend toward fresh food without preservatives etc. People are increasingly watching what they eat and they are increasingly choosing organic and natural foods. FreshPet's hope is that this trend will extend to people's pets. Finally, while FRPT reported a loss in 2017 on a full-year basis and another loss is expected in 2018, it seems that 2019 will be when FRPT reports a profit, so that's a positive for the story as well.
