Egg and butter company Vital Farms (NASDAQ:VITL) reported Q1 CY2024 results beating Wall Street analysts' expectations, with revenue up 24.1% year on year to $147.9 million. The company's full-year revenue guidance of $575 million at the midpoint also came in 2.6% above analysts' estimates. It made a GAAP profit of $0.43 per share, improving from its profit of $0.16 per share in the same quarter last year.
Vital Farms (VITL) Q1 CY2024 Highlights:
- Revenue: $147.9 million vs analyst estimates of $136.9 million (8.1% beat)
- EPS: $0.43 vs analyst estimates of $0.20 ($0.23 beat)
- The company lifted its guidance for the full year: revenue of at least $575 million (previously $552 million) and adjusted EBITDA of at least $70 million (previously $57 million)
- Gross Margin (GAAP): 39.8%, up from 35.8% in the same quarter last year
- Free Cash Flow of $22.63 million, similar to the previous quarter
- Sales Volumes were up 18.4% year on year
- Market Capitalization: $1.26 billion
With an emphasis on ethically produced products, Vital Farms (NASDAQ:NATR) specializes in pasture-raised eggs and butter.
The company was founded in 2007 by Matt O'Hare, who had a vision of transforming and championing ethical food practices. Vital Farms started with just 20 hens, and over the years, the company grew organically rather than through the acquisitions that are common for farm-based or agricultural businesses.
Today, Vital Farms is renowned for its pasture-raised eggs. Unlike conventional "free-range" or "cage-free" labels, pasture-raised labels mean that chickens genuinely spend significant time outdoors. Vital Farms also offers butter, egg bites, and ghee.
Vital Farms' core customer is the conscious consumer. This customer cares about where their food comes from, how it's produced, and the impact it has on the environment and animal welfare. These individuals often pay a premium for products they trust and believe in.
Vital Farms enjoys widespread distribution with its products stocked in national grocery chains and local health-conscious food stores.
Perishable Food
The perishable food industry is diverse, encompassing large-scale producers and distributors to specialty and artisanal brands. These companies sell produce, dairy products, meats, and baked goods and have become integral to serving modern American consumers who prioritize freshness, quality, and nutritional value. Investing in perishable food stocks presents both opportunities and challenges. While the perishable nature of products can introduce risks related to supply chain management and shelf life, it also creates a constant demand driven by the necessity for fresh food. Companies that can efficiently manage inventory, distribution, and quality control are well-positioned to thrive in this competitive market. Navigating the perishable food industry requires adherence to strict food safety standards, regulations, and labeling requirements.
Cal-Maine Foods (NASDAQ:CALM) is a publicly-traded competitor and dominant player in the egg industry. Private competitors include Rose Acre Farms Hillandale Farms, but Cal-Maine’s scale and market share are unique.Sales Growth
Vital Farms is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale. On the other hand, one advantage is that its growth rates can be higher because it's growing off a small base.
As you can see below, the company's annualized revenue growth rate of 30.5% over the last three years was incredible for a consumer staples business.
This quarter, Vital Farms reported remarkable year-on-year revenue growth of 24.1%, and its $147.9 million in revenue topped Wall Street estimates by 8.1%. Looking ahead, Wall Street expects sales to grow 16.7% over the next 12 months, a deceleration from this quarter.
Volume Growth
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
Vital Farms's average quarterly volume growth of 18.6% over the last two years has beaten the competition by a long shot. This is great because companies with significant volume growth are needles in a haystack in the stable consumer staples sector.
In Vital Farms's Q1 2024, sales volumes jumped 18.4% year on year. This result was a deceleration from the 26% year-on-year increase it posted 12 months ago, showing the business is on track but demand might be slowing.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a company gets to keep after paying for the direct costs of the goods it sells.
Vital Farms's gross profit margin came in at 39.8% this quarter, up 4 percentage points year on year. That means for every $1 in revenue, $0.60 went towards paying for raw materials, production of goods, and distribution expenses.
Vital Farms's unit economics are higher than the typical consumer staples company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see above, it's averaged a decent 34.1% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 10.7% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).
Operating Margin
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
In Q1, Vital Farms generated an operating profit margin of 16.3%, up 7.2 percentage points year on year. This increase was encouraging, and we can infer Vital Farms was more efficient with its expenses because its operating margin expanded more than its gross margin.
Zooming out, Vital Farms was profitable over the last two years but held back by its large expense base. It's demonstrated mediocre profitability for a consumer staples business, producing an average operating margin of 7%. However, Vital Farms's margin has improved by 5.1 percentage points on average over the last year, an encouraging sign for shareholders. The tide could be turning.EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, Vital Farms reported EPS at $0.43, up from $0.16 in the same quarter a year ago. This print easily cleared Wall Street's estimates, and shareholders should be content with the results.
Between FY2021 and FY2024, Vital Farms's EPS grew 223%, translating into an astounding 47.9% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period, showing that Vital Farms has excelled in managing its expenses.
Over the next 12 months, however, Wall Street is projecting an average 15.3% year-on-year decline in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Vital Farms's free cash flow came in at $22.63 million in Q1, up 441% year on year. This result represents a 15.3% margin.
Over the last two years, Vital Farms has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 5.5%, slightly better than the broader consumer staples sector. Furthermore, its margin has averaged year-on-year increases of 13.6 percentage points over the last 12 months. Shareholders should be excited as this will certainly help Vital Farms achieve its strategic long-term plans.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Vital Farms's five-year average ROIC was 17.2%, higher than most consumer staples companies. Just as you’d like your investment dollars to generate returns, Vital Farms's invested capital has produced solid profits.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Vital Farms's ROIC averaged 14.3 percentage point increases. The company has historically shown the ability to generate good returns, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.
Vital Farms is a profitable, well-capitalized company with $137.5 million of cash and no debt. This position gives Vital Farms the freedom to borrow money, return capital to shareholders, or invest in growth initiatives.
Key Takeaways from Vital Farms's Q1 Results
We were impressed by how significantly Vital Farms blew past analysts' revenue and EPS expectations this quarter. We were also excited that it raised its full year guidance, showing that things are going better for the company than just three months ago when it previously gave financial guidance. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is up 7.2% after reporting and currently trades at $32.05 per share.
Is Now The Time?
Vital Farms may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We think Vital Farms is a good business. First off, its revenue growth has been exceptional over the last three years. And while its projected EPS for the next year is lacking, its volume growth has been in a league of its own. On top of that, its EPS growth over the last three years has been fantastic.
Vital Farms's price-to-earnings ratio based on the next 12 months is 41.9x. There are definitely things to like about Vital Farms and there's no doubt it's a bit of a market darling, at least for some investors. But when considering the company against the backdrop of the consumer staples landscape, it seems there's a lot of optimism already priced in. We wonder if there are better opportunities elsewhere right now.
Wall Street analysts covering the company had a one-year price target of $25.14 per share right before these results (compared to the current share price of $32.05).
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