What happened

Shares of Freshpet (FRPT 0.87%) were pulling back today after the fresh pet-food company missed earnings estimates significantly in its second-quarter earnings report as inflation ate into its margins. As a result, the stock was down 11.1% as of 10:28 a.m. ET.

So what

Top-line performance remained strong for Freshpet with revenue up 34.4% to $146 million, though that was slightly below estimates of $147 million. However, gross margin fell from 39.7% in the quarter a year ago to 35.8%, due to rising costs for ingredients and labor, as well as quality issues. Selling, general, and administrative expenses rose from 45.6% of revenue to 48.2% of revenue, due to an increase in marketing spending.

Rising costs weighed on the bottom line. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell from $10.9 million to $3.9 million. Freshpet reported a GAAP loss per share of $0.45, down from a $0.17 loss in the quarter a year ago and much worse than expectations of a per-share loss of $0.14. 

CEO Billy Cyr said, "We made solid progress on our most important long-term value drivers in the second quarter, despite external challenges such as inflation and some short-term internal challenges with our operations." He also said consumption growth and household penetration remains strong even in the face of higher prices, and the company plans to increase prices again to help it absorb costs. 

Freshpet will also open its newest Freshpet Kitchen, a state-of-the-art manufacturing facility in Texas next month, which will bring total capacity to over $1 billion. It also cut its capital spending by $80 million this year in an effort to drive efficiencies. 

Now what

Looking ahead, the company maintained its top-line forecast for the year, calling for revenue of at least $575 million, or about 35% growth. It slashed its adjusted EBITDA target to at least $48 million, or 12% growth, down from its prior target of at least $55 million, or 28% growth.

Like other pet stocks, Freshpet was a big winner during the pandemic, but the stock has crashed since last year because its valuation had gotten inflated and rising costs have hammered profitability. However, the long-term picture still looks sound. With the stock down nearly 70% from its peak last year, the price could be right to take a chance on Freshpet.