Story Stocks^®

Freshpet (FRPT +8.5%) is trading nicely higher following its Q2 earnings report this morning despite some rough spots. The best part was that this supplier of refrigerated, premium dog and cat food reported a big EPS beat on a GAAP basis. However, revenue was a bit light and, more troubling, FRPT lowered its FY25 revenue guidance to +13-16% from +15-18% while reaffirming adjusted EBITDA guidance at $190-210 mln.

• Freshpet concedes it's facing a more challenging consumer sentiment backdrop. However, the silver lining is that it continues to significantly outperform the dog food category. FRPT has been accelerating its advertising and distribution programs, reducing cap-ex (FY25 guidance lowered to $175 mln from $225 mln), and strengthening its operations, which has driven a healthy improvement in adjusted gross margin.
• Looking back over the past six months, FRPT says it's now apparent that the dog food category has faced a sizable headwind for the first time in years. FRPT is being impacted by consumers hesitating to trade up their dog food, defer visits to the vet, decline medical treatments for their pets, and defer getting a new dog or replacing a recently deceased dog. Return to office mandates and the high cost of housing have not helped either.
• In order to attract more value buyers, Freshpet is looking to expand its presence in the warehouse club channel. It recently expanded its test in a leading club retailer and is now in 125 stores with more likely to be added. Also, FRPT is launching a new complete nutrition bag product and rolling out new multi packs and bundles of rolls and bags later this year. It also offers subscriptions, which provide lower prices.
• In terms of the lowered FY25 revenue guidance, FRPT is assuming macro and consumer uncertainty stays relatively the same. In terms of cadence, FRPT expects a sequential increase in sales per quarter as it invested more heavily in media in Q2 to drive household penetration growth in the second half. FRPT will be launching a new marketing campaign, adding more value-oriented offerings in the fall, and expects to increase distribution.
• Looking longer out, the company removed its $1.8 bln prior target for FY27 sales, to adjust for the recent slower growth; however, it still expects to continue to deliver growth significantly in excess of the dog food category. At the same time, FRPT expects FY26 cap-ex will be the same or lower than FY25. The majority of cap-ex spend is focused on the installation of new capacity to support demand in the out years.

So why is the stock higher despite the lowered FY25 guidance? The stock has been weak and a lot of bad news has been priced in. We think investors were already bracing for a guidance cut and were relieved the cut was not more severe. The common wisdom is that consumers tend to continue to spend on their pets even in times of economic hardship. However, that rule is clearly not absolute. Freshpet is on the high end of the pet food price spectrum and attracting new customers in this macro environment is becoming more difficult given its position as a premium brand. We like the steps FRPT is taking in terms of value-packs and subscriptions, but near term results are likely to remain pressured.