What happened
Shares of Freshpet (FRPT 4.20%) soared 140.3% in 2020, according to data provided by S&P Global Market Intelligence. During the year, the company set an ambitious five-year sales goal, stayed operational throughout the pandemic, and profitably grew sales. These three things alone likely wouldn't cause the stock to spike this much in normal years, but 2020 was no normal year.
So what
If you look at the chart for Freshpet stock in 2020, you'll notice an absence of pronounced spikes. The stock fell when the market crashed, but by and large, it was a steady climber throughout the year. Perhaps investors were merely optimistic since the company retained sales during the COVID-19 pandemic. Indeed, its Kitchens (where its pet products are manufactured) stayed open, allowing ongoing sales growth throughout the year.
Net sales were up year over year by 27.9%, 33.2%, and 29% in the first, second, and third quarters, respectively. In aggregate, the company's sales were up 30% to $234 million, and it's guiding for at least $86 million in sales in the fourth quarter.
If Freshpet has its way, shareholders should get used to sales growth north of 30%. In February, the company hosted an investor-day event and laid out a goal of $1 billion in net sales by 2025. To get there, sales will have to keep growing at a 33% compound annual growth rate (CAGR).
Image source: Getty Images.
Now what
It can be easy to overlook, but a company doesn't simply grow sales at a 33% CAGR without simultaneously investing in manufacturing capabilities. According to Freshpet's management, it shipped everything it could make in the third quarter. Because of this, the company has already broken ground on a new factory in Texas that will be able to produce almost twice as much as its plant in Pennsylvania.
Getting the Texas factory up and running is a big deal for Freshpet, and investors should monitor whether it remains on schedule for its projected mid-2022 opening. Furthermore, the new facility assumes there's substantial unmet demand in the pet food market. If sales start to slip in the coming year, it may be fair to question whether this consumer-discretionary business truly has as big a market as management believes.
