Freshpet (FRPT +11%) is attracting significant attention after reporting another strong beat-and-raise in Q3, highlighting the ongoing demand for premium pet food. Freshpet, known for its fresh pet food stored in branded refrigerators at various retailers, surpassed top and bottom-line estimates for the fifth consecutive quarter. The company also increased its FY24 revenue outlook to approximately $975 million, up $10 million from previous guidance.
Despite inflationary pressures, Freshpet maintained robust revenue growth in Q3, expanding its top line by 26.3% year-over-year to $253.4 million, building on a 32.6% increase from the prior year. Freshpet holds a commanding 97% share of the fresh pet food market. However, within the $37 billion dog food market, Freshpet's share is just over 3%.
High-income pet-owning households (HIPPOHs), which grew by 24% year-over-year in Q3, primarily drive Freshpet's steady growth. Although they represent only 39% of its consumer base, this group accounted for 90% of Freshpet's total sales in the quarter. Many spend over $1,000 annually on Freshpet products, making this a lucrative demographic that the company is increasingly targeting.
Freshpet's manufacturing operations have consistently supported its impressive top-line growth. The company has focused on enhancing profitability through operational improvements, such as boosting production yield and reducing input costs. These efforts led to a third consecutive quarter where adjusted gross margins exceeded its 2027 target, with margins improving by 60 basis points year-over-year to 46.5%, bolstering earnings in Q3.
Regarding its 2027 targets, Freshpet remains cautious, acknowledging a dynamic economic environment despite strong Q3 performance. Management indicated it will monitor inflationary trends before adjusting its 2027 goals. Nevertheless, based on current and past quarterly reports, Freshpet is optimistic about achieving its long-term targets.
Freshpet's strong Q3 results underscore the relative inelasticity of premium pet food in the current economic climate. Premium food also drove e-commerce pet supplier Chewy's (CHWY, Financial) record net sales per active customer in JulQ, and General Mills (GIS, Financial) saw its wet pet food category outperform dry pet food in AugQ. Freshpet distinguishes itself with its branded refrigerators, which are gaining popularity among retailers, leading to additional fridges and shelf space, thus enhancing its market presence and economic moat.
In conclusion, with persistent demand for premium pet food despite economic fluctuations, Freshpet is well-positioned for further growth, especially if favorable trends continue, potentially enabling the company to elevate its long-term financial goals.
