How Freshpet Plans to Nearly Triple Its Customer Base

One of the biggest surprises in the pet products industry has been Freshpet (FRPT -0.61%), whose shares are up more than 1,700% over the last five years. On top of that growth, the fresh pet food company aims to nearly triple its customers base by 2025, growing from 4 million to 11 million.

In this episode of "Upgrade or Topgrade," Fool contributor Jeremy Bowman and Millionacres Editor Deidre Woolard break down Freshpet's business and explore its prospects.

Deidre Woollard: That's why I want to talk about Freshpet because that stock has done really well in the last couple of years. That's ticker FRPT. It's priced now at around $141. It's up 1,500 percent since the IPO. It's only up around two percent year-to-date. They're different than Chewy because Chewy is doing a lot of things. Freshpet is really something that's just doing one thing. They're mostly doing that food, those little refrigerators you see in the grocery store that have food for dogs that you can buy there. That's what they do and what they've been good at, and really how they're continuing to grow. I like this company for a lot of reasons. Like I said, I don't own a dog. People think cats are picky. I sometimes think dogs are more picky. But people spend a lot of money on pet food for their dogs, and so Freshpet's motto is pets, people, and planet. The thing that they're doing that's really interesting to me is they're building massive kitchens. They are building what they call Kitchen 3.0. It's in Ennis, Texas. In their earnings presentation, they had this awesome little drawn tour of it under construction.

But it's really focused on food safety, worker safety, and sustainability. It's solar-powered. They've had some supply chain issues. Really, who has not had supply chain issues this year? But they're trying to step up their production, and I think it's fascinating to see how they are growing and all of the connective pieces of it because they have all the factories to make the food, and then you've got all these refrigerators in stores all around the country. E-commerce for them, not quite as big a thing right now. In Q2, their e-commerce was up 46 percent. It's now 5.6 percent of sales. That feels really small to me, and I'm surprised that the pandemic wasn't more challenging for them, but I guess because they're mostly in grocery stores.

Jeremy Bowman: I think we were just comparing them to Chewy, and they have a much different model going through brick-and-mortar stores. I think they have those Freshpet fridges that a lot of us have seen in Walmart and your local supermarket or your pet store. They have more than 20,000 of those in stores across the country. I think that ties them to the brick-and-mortar model. Like you said, they do sell through your typical e-commerce channels: Chewy, Instacart, supermarkets, and Petco, but those fridges, I think, give them a competitive advantage. You walk down the pet aisle, and they catch your attention. They function as a billboard. Freshpet differentiates themselves because of their fresh refrigerated food as opposed to just dry kibble, and then I also think it creates a barrier to entry from other brands trying to do that because it's a lot of work to get 20,000 of those fridges in stores across the country. I don't think another brand is going to come around and do that in the next year or two.

Woollard: I think that's true. I think that the visual is interesting to me because thinking about Chewy, in Freshpet's investor presentation, they talked about that. They didn't mention Chewy by name, they're like a competitor has emerged. But I think one of the things is that with Chewy you don't get to see what the food looks like, or you don't know what's going to be like, so you might try it the first time. But with Freshpet, you're really like it's right there. You can see it. One of the things with Freshpet is they've recently raised their full-year guidance to at least 445 million, up from 430 million. Their net sales were really strong in Q2.

They were 108.6 million up 36 percent from a year ago. Their store count grew by 265 stores. They're planning to add another thousand stores this year, and they're seeing growth internationally. Their international growth was up by 48 percent, a lot of that from the UK. They've got some pretty ambitious goals for 2025. They want to be in 11 million households, spending an average of $162 a year spending, with a total of 1.25 billion in sales and 25 percent adjusted EBITDA. They're pretty ambitious, and I think a lot of that is coming from this idea that once they get Kitchen 3.0 up running, producing, that they'll be able to scale more rapidly.