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Freshpet (FRPT +11%) is fetching plenty of buyers today after delivering another decent beat-and-raise in Q3, underpinning a sustained demand for premium pet food. FRPT, which crafts fresh pet food housed in branded refrigerators across numerous retailers, exceeded top and bottom-line estimates for the fifth consecutive quarter. FRPT also raised its FY24 revenue outlook for the second quarter in a row, projecting around $975 mln, up $10 mln from its previous guidance.

• Even as inflationary pressures continue to stress consumers, FRPT maintained robust revenue growth in Q3, expanding its top line by 26.3% yr/yr to $253.4 mln, on top of a +32.6% jump from the year-ago period. A commanding piece of the fresh pet food market certainly helps; FRPT estimates it holds a 97% share. Still, of the $37 bln dog food market, where FRPT primarily operates, the company estimates its market share at just over 3%.
• Instead, high-profit pet-owning households, or HIPPOHs, which increased by 24% yr/yr in Q3, primarily underpin FRPT's steady growth. While only comprising 39% of its consumer base, this cohort represented 90% of FRPT's total sales in the quarter. Many of these consumers spend over $1,000 on FRPT's products annually, making it a lucrative demographic that FRPT has increasingly been shifting its attention toward.
• Alongside impressive top-line growth has been FRPT's consistency in manufacturing operations. The company has emphasized bolstering profitability through several operational enhancements, like improving production yield while lowering input costs. Its actions resulted in a third consecutive quarter where adjusted gross margins surpassed its 2027 target, improving margins by 60 bps yr/yr to 46.5%, supporting its earnings upside in Q3.
• Speaking of 2027 targets, FRPT stayed prudent, remarking that despite the healthy outperformance in Q3, a dynamic economic environment still exists. Management added that it will wait to see where inflationary trends settle before lifting any previously outlined 2027 goals. Still, given its current and past quarterly reports, FRPT is confident that it will, at the least, achieve its longer-term targets.

FRPT's solid Q3 numbers further showcase how premium pet food has proved its relative inelasticity during the current economic landscape. Premium food was an underlying driver behind e-commerce pet supplier Chewy's (CHWY) record net sales per active customer figure in JulQ. Also, General Mills (GIS), which supplies a line of wet pet food, saw this category outperform its dry pet food line in AugQ. However, what separates FRPT from the competition is its branded refrigerators, which retailers are becoming increasingly fond of, adding second and third fridges and allocating additional shelf space within company-owned fridges. These fridges are powerful marketing tools, standing out among competing premium pet food brands and carving out a wider economic moat for FRPT.

Bottom line, with an unwavering demand for premium pet food despite a fluid economy, FRPT remains well-positioned for further upside, especially if trends stay favorable, allowing it to potentially lift its longer-term financial goals.