Freshpet

Freshpet's second-quarter sales grew 15.5% year over year, as a 15.7% volume gain offset lower price/mix. Adjusted EBITDA margin expanded 30 basis points to 17.1% on lower input, operating, and media costs, which outpaced higher startup and logistics costs and variable compensation.

Why it matters: Freshpet continued to generate robust top-line growth driven by volume. Unlike prior quarters, growth drove a higher bottom line, alleviating market fears and driving shares up on Aug. 5. Our previous argument that higher expenses were transitory appears confirmed. Given the strong first-half performance, management raised 2026 guidance for sales growth to 10%-12% (from 8%-11%) and adjusted EBITDA to $210 million-$220 million (from $205 million-$215 million). We expect to slightly raise our prerelease forecasts of 9% and $211 million, respectively. Freshpet also updated 2027 guidance, reiterating net sales well in excess of category growth and adjusted EBITDA margin of 20%-22%. We expect to raise our prerelease forecasts of 10% and 19%, respectively, but maintain our long-term low-30s margin outlook.

The bottom line: We don't expect a significant change to our $100 fair value estimate for no-moat Freshpet. While we expect to increase our 2026 and 2027 forecasts in line with guidance, we view this as pulling forward performance that we viewed as eventual. We continue to see shares as undervalued. Despite fresh pet food product launches from narrow-moat General Mills (Blue Buffalo's Love Made Fresh) and wide-moat Costco (Kirkland brand), we expect Freshpet to remain the leader of the fast-growing category.

Between the lines: Freshpet grew retail distribution points by 13%, to over 30,000 stores, with 25% having multiple refrigerators. Moreover, buy rates among existing consumers grew 7%. Expanded distribution and high repurchase rates should enable Freshpet to maintain its leadership position.

After reviewing second-quarter 2026 results, we have maintained our fair value estimate of $100 per share.

Our fair value estimate implies about 21 times enterprise value/adjusted EBITDA off our 2027 estimates. The price/adjusted earnings multiple is not informative, given the firm's current growth stage.

Freshpet's second-quarter sales grew 15.5% year over year, as a 15.7% volume gain offset lower price/mix. Adjusted EBITDA margin expanded 30 basis points to 17.1% on lower input, operating, and media costs, which outpaced higher startup and logistics costs and variable compensation. Freshpet continued to generate robust top-line growth driven by volume. Unlike prior quarters, growth drove a higher bottom line. Our previous argument that higher expenses were transitory appears confirmed.

For 2026, we forecast sales to increase 11% to more than $1.2 billion, in line with management’s updated guidance of 10%-12%. Over our 10-year forecast period, we expect annual average sales growth of more than 9%, with growth slowing to midsingle digits by 2035. Comprising this growth rate, we forecast the store count will increase about 3% per year over the next decade, reaching nearly 40,000 stores by 2035. This compares with the nearly 46,000 stores in the US today, including grocery, supercenters, warehouses, and clubs but excluding pet stores.

Most of the sales growth in our forecast comes from our assumption of increased sales velocity within its existing footprint. At a rough assumption of $8 per product currently, we estimate the company only sells about upper-80s products per store per week. Under our forecast, tailwinds like growing pet ownership and humanization combined with increased brand awareness and new product innovations will increase turnover to more than 130 products per store per week, exceeding the range we estimate General Mills’ Blue Buffalo turns over today.

Our forecast from increased velocity across Freshpet’s distribution footprint also drives improved profitability. By 2035, we forecast gross margins will improve to 52%, compared with 41% in 2025 and historical peaks in the high-40% range. In recent years, profitability was weighed by inflation as well as the opening of new facilities in Texas and Pennsylvania. We believe that as these facilities reach maturity and price increases catch up to input cost inflation, the company can reach higher gross margins.

We also forecast overhead cost leverage opportunities in marketing and advertising, shipping, and other operating expenses, which include refrigerator operating costs and R&D, among others. As a percentage of sales, we expect improvement to 9.5% (from 14.3% in 2025) for marketing and 11.5% (from 12.8%) for other expenses.

By 2027, the company is targeting 20%-22% in adjusted EBITDA margin. We forecast it will reach nearly 21%. Longer term, we expect it to reach 32%, a drastic improvement from the 18% level reached in 2025 mostly from gross margin expansion.

For 2026, we forecast $150 million in capital expenditures, in line with guidance, about 12.5% of sales. We expect this to average about 10% over the next 10 years before declining to about 7.5% as the company invests in expanded capacity gradually to support sales growth. This is higher than the low to midsingle digits we observe in other consumer packaged food companies like General Mills (about 3% to 4% of sales) but closer to Conagra (about 5%), which shares the same distribution complexities for its frozen food but doesn’t have to maintain its refrigerator fleet.

We don’t see any ESG risk having a high enough probability to be included explicitly within our forecast.

We don’t think Freshpet has an economic moat. For food producers, even those focused on the pet market, brand intangible assets and cost advantage are the typical sources of a durable competitive advantage.

Brand intangibles are most often observed through pricing power, dominant market share, and/or entrenched retailer relationships. While its products carry high prices relative to other pet food, we think this largely reflects both its focus on the premium segment as well as the higher costs of its refrigerated fresh pet food offering as opposed to evidencing much in the way of pricing power. In support of our contention, gross margins fell dramatically to the low-30% range in 2022 and 2023 from the high 40%-range amid rapid inflation. Gross margins have recovered to the 40% range but will take a couple more years to fully restore historical levels in the upper 40% range, which we think shines a light on Freshpet’s lack of pricing power.

In considering its brand standing through the lens of market share, Freshpet holds the second largest share in the US wet dog food market at nearly 14%, according to Euromonitor. Given wet food represents less than 20% of the broader dog food market, in which Freshpet is the seventh largest producer with just 2.5% market share, we don’t think this position is sufficient to place it as a critical retailer partner. Moreover, lacking a portfolio of any other market-leading products means that Freshpet has yet to become entrenched with retailers. Although its placement in 30,721 stores of roughly 46,000 nationally is impressive, Freshpet has achieved this largely by paying for it. It owns the refrigerators and pays for their operation on top of the inherently more costly shipping and handling of fresh food. Thus, we wouldn’t construe its store footprint as suggesting any entrenchment with retailers unless it’s able to take more share of the overall pet food market.

We see early signs of a potential cost advantage but not enough to recognize a competitive advantage. To measure this, we’ve tried to home in on direct operating costs (manufacturing and distribution), while extracting discretionary operating costs, including advertising and research and development, noncash costs including depreciation and amortization, and nonrecurring expenses to assess which firms are best positioned to overcome customer acquisition costs. Based on this metric, we estimate it chalked up a 2025 direct operating margin of 30%, surpassing previous highs in the low- to mid-20% range previously. This is beginning to exceed the industry average of 25%, but we're skeptical this reflects a lower-cost model and instead think this is a byproduct of the higher price point.

From a qualitative perspective, we think Freshpet faces some unique challenges to creating a durable cost advantage. Because it sells fresh pet food that requires refrigeration, the company’s shipping and handling is inherently more expensive. Moreover, paying for its presence on store shelves further adds challenges to any cost advantage. In the latter half of our 10-year forecast, we think direct operating margins could exceed 40%. However, this is largely predicated on operating and overhead expense leverage from a larger sales base, which will require the company to increase the turnover of the goods in its refrigerators to get there. At a rough assumption of $8 per product, we estimate the company sells about 88 products per store per week. To reach our forecast direct operating margin, turnover would need to increase to more than 130 products per store per week. Although we think this is likely, enough uncertainty exists to believe this doesn’t evidence a moat.

Returns on invested capital have generally lagged our estimate of Freshpet’s cost of capital of 7.5%, averaging about 3.7% over the last five years. By the end of our 10-year forecast period, we forecast ROICs will reach roughly 21% as the company achieves critical mass in sales, allowing it to boost capacity utilization of production facilities, leverage its inherently more costly distribution, and increase turnover of its products in its store-placed refrigerators. But we lack the confidence required over the next 10 years to assign the firm a narrow moat. If the company is able to demonstrate an extended period of consistent excess returns, we would consider revisiting our moat rating.

Freshpet’s focus on premium fresh food exposes it to the fastest growing segment in pet food, which should help drive robust growth for years to come.

Freshpet’s refrigerator installation gives it a leg up against competition which seeks to enter the fresh pet food market and lacks the necessary shelf space.

Rising pet ownership and ongoing pet humanization trends create tailwinds for Freshpet’s premium offering.

Larger, more diversified competitors can distribute pet food along with a plethora of other products. Freshpet’s narrow offering limits its ability to scale its distribution costs.

Canned, freeze-dried, and other shelf stable products can offer similar quality at lower prices, inherently limiting the potential addressable market.

A focus on the premium market puts Freshpet at risk of pet owners’ downgrading during challenging economic periods.