A Member of Pat McKeough’s Inner Circle recently asked for his advice on Freshpet, a pet food company that makes fresh, natural food for dogs and cats.
Pat likes the involvement of an activist investor trying to generate better value for shareholders (including a possible company sale), but doesn’t like the widening losses and stiff competition faced by the company.
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FRESHPET INC. (Nasdaq symbol FRPT; www.freshpet.com) makes fresh, natural food for dogs and cats. Freshpet uses natural ingredients, cooking them in small batches at lower temperatures to preserve the natural goodness of the ingredients.
The company sells its products to grocery stores, mass merchants, warehouse stores, specialty pet, and natural food stores in the U.S., Canada and Europe. Freshpet foods and treats are kept refrigerated from when they are made until they arrive at Freshpet Fridges at local retailers.
As of March 31, 2023, it had 25,650 Freshpet Fridges installed at grocery stores and other food retailers across North America and parts of Europe.
The company first sold shares to the public at $15 each in November 2014.
Earlier this year, activist firm Jana Partners acquired 9.3% of Freshpet and is now its largest shareholder.
New York-based Jana was founded in 2001 by Barry Rosenstein. It has agitated for changes at other consumer companies including Whole Foods Market, sold to Amazon in 2017, and Pinnacle Foods, sold to Conagra in 2018.
In 2014, Jana pushed for PetSmart to be sold. The pet-supply retailer was acquired the following year by a consortium of private-equity firms.
Meanwhile, Jana announced that it aimed to place some of its nominees on Freshpet’s board of directors. As well, Jana also opposed the move by the company’s board to approve a more than $1 billion capital expenditure plan without providing an actual funding source. In addition, it argued that Freshpet’s management has consistently overpromised and underdelivered on profitability goals over the past four years.
In August 2023, Freshpet reached a cooperative agreement with Jana.
As part of the mutual agreement, Timothy McLevish, former chief financial officer of Kraft Foods, and Joseph E. Scalzo, former chief executive officer of Simply Good Foods, were both been appointed to Freshpet’s board of directors. The new directors are expected to add leadership and financial expertise to Freshpet’s board and are expected to support continued growth for the company.
Inner Circle: Revenues rose sharply but losses widen for Freshpet
In the three months ended March 31, 2023, Freshpet’s revenues increased by 26.7%, to $167.5 million from $132.2 million a year earlier. Sales increased due to higher prices and volumes. The company lost $24.8 million in the quarter, or $0.52 a share. That’s compared to a loss of $17.9 million, or $0.40.
Freshpet’s outlook is mixed. While it will continue to benefit from increased pet ownership in the wake of the pandemic, it faces a lot of competition.
This includes food giants Nestle SA and General Mills. Nestle owns the Purina brand, among others, while General Mills’ portfolio includes Blue Buffalo, a premium brand it bought for around $8 billion in 2018. As well, in August 2022, Colgate-Palmolive acquired three dry-pet-food manufacturing plants for $700 million to support the growth of its Hill’s Pet Nutrition business.
At the same time, though, the chance of either improved operations, or a takeover bid—spurred by Jana—adds appeal for investors.
Recommendation in Pat’s Inner Circle: Freshpet Inc. is okay to hold, but only for highly aggressive investors.