Vital Farms (Nasdaq: VITL), a Certified B Corporation that offers a range of ethically produced foods nationwide, was recently listed as one of the Top 10 Mid-Market CPG (Consumer Packaged Goods) brands of 2022, joining nine other leading companies that brought in between $100 million and $1 billion in sales and experienced over 50 percent sales growth compared to 2021.
Market Cap: $720.96M; Current Share Price: $17.70
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Vital Farms is a national consumer brand that works with over 300 family farms and is the leading U.S. brand of pasture-raised eggs by retail dollar sales. Vital Farms’ products, including shell eggs, butter, hard-boiled eggs, ghee, and liquid whole eggs, are sold in over 22,000 stores nationwide.
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Industry Outlook and Market Opportunity
According to SPINS, LLC, or SPINS, data, the U.S. shell egg market accounted for approximately $6.2 billion in retail sales for the 52 weeks ended December 26, 2021 and grew at a CAGR of 0.4% between 2018 and December 2021.
Shell eggs accounted for approximately 90% of the Company’s net revenue in fiscal 2019, 90% of their net revenue in fiscal 2020 and 89% of their net revenue in fiscal 2021. Shell eggs are the Company’s flagship product and have been the focal point of their sales and marketing efforts. It is expected that sales of shell eggs will continue to constitute a significant portion of their net revenue, net income and cash flow for the foreseeable future.
Vital Farms had a relatively low household penetration of 5.0%, compared to the shell egg category penetration of approximately 98%, which provides a significant long-term growth opportunity for their business.
Significant Revenue Growth
For Q3 FY22, Vital Farms displayed 28% YoY volume growth, outpacing the category, which declined 0.5% During the same time, net revenue increased 42.4% to $92.0 million compared to Q3 FY21.
Growth in net revenue was primarily due to continued growth in egg-related sales, driven by volume growth of 28% and pricing increases at customers, as well as distribution gains at both new and existing retail partners.
Adjusted EBITDA was $5.2 million, or 5.7% of net revenue, in Q3 FY22, compared to Adjusted EBITDA of $0.2 million, or $0.3% of net revenue, in Q3 FY21.
The change in Adjusted EBITDA was primarily due to higher sales and improved gross profit performance. This was despite the face of a higher input cost environment – during this period, the grocery environment was most inflationary in over 40 years.
In addition, for Q3 FY22, the Company’s household penetration was up over 40% compared to the same period last year to nearly 8 million homes.
These results demonstrate the ability of management and crew members to deliver exceptional results despite a challenging operating environment and cost increases across various inputs, including organic feed and packaging.
For FY21 as well, the Company reported an increase of 22% in net revenue to $260.9 million, compared to $214.28 million in FY20, primarily due to volume increases to distributors as well as new distributions to new and existing customers.
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The Company has continuously delivered outstanding revenue and gross profit growth, over the last five years, as demonstrated in the image above.
It can be expected that the strength of Vital Farm’s platform and management team, coupled with significant investments in crew members and infrastructure, will allow the Company to continue to deliver industry-leading growth across new and existing categories.
Certified B Corporation
In order to be designated as a Certified B Corporation, companies are required to take a comprehensive and objective assessment of their positive impact on society and the environment. The assessment evaluates how a company’s operations and business model impact its workers, customers, suppliers, community and the environment using a 200-point scale. While the assessment varies depending on a company’s size (number of employees), sector and location, representative indicators in the assessment include payment above a living wage, employee benefits, stakeholder engagement, supporting underserved suppliers and environmental benefits from a company’s products or services. Once certified, every Certified B Corporation must make its assessment score transparent on B Lab’s website.
Vital Farm’s ethics are defined by their focus on animal welfare and sustainable farming practices, and they also prioritize the long-term benefits of each of their stakeholders (farmers and suppliers, customers and consumers, communities and the environment, employees). Their Certified B Corporation certification indicates that they balance profit and purpose to meet the highest verified standards of social and environmental performance, public transparency and legal accountability.
To maintain the certification, Vital Farms is required to update their assessment and verify their updated score with B Lab every three years. The Company was initially recertified in February 2018, began their latest reassessment process in 2021 and were most recently recertified in January 2022. This demonstrates the Company’s commitment to maintain a high level of ethics and quality with respect to their products and stakeholders.
Continued Efforts towards Innovation
In April 2022, the Company introduced True Blues, a specialty carton of beautiful pasture-raised heirloom blue eggs. Their aim was to bring novelty to their customers and “spark excitement in the community, whether as hard-boiled for Easter brunches and egg hunts, or simply to brighten up a weekday breakfast.”
In August 2022, Vital Farms released Restorative pasture-raised eggs, produced using regenerative agriculture principles like perennial rotations and cover crops. For this purpose, the Company collaborated with regenerative thought leader Understanding Ag for over a year to transition five initial farms to a core set of tenets that promote rich, nutrient-dense soil.
In 2021 as well, the Company introduced new products such as pasture-raised butter with sea-salt and avocado oil and Breakfast Bars.
These measures indicate that the Company is continuously striving and willing to improve its product offering through innovation. It is also expanding its areas of operation and making strides towards building on its reputation for sustainable farming. Given that environment protection is the need of the hour, Vital Farm’s business framework and model should ensure that the Company stays relevant in the future.
Vital Farms operates in a highly competitive environment, against large egg companies such as Cal-Maine, Inc., large international food companies such as Ornua Co-operative Limited (Kerrygold), and local and regional egg and dairy companies. However, the Company seems to have an advantage based on an ongoing process of values-driven decisions, their fundamental commitment to producing ethically minded food, and the trust they have developed through their ability to provide reliable and quality supply to distribution partners and customers.
Their long-term goal is to maintain net revenue growth of over 25% and gross margin in the mid-30s range. The Company has a successful operating model. It continues to make sustained efforts towards innovation and improvement, and has robust relations with customers, distributors, suppliers and employees. Hence it seems that Vital Farms will continue to deliver good results in the future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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