Q1 performance narrows the range of outcomes for Vital Farms. They are on pace for 18-20% growth and operating margin of 8-12%, improved from 7% achieved in 2023. We expect they will be worth $3.5b in 3 years. Factoring a doubling of stock price in 3 years and 30% margin of safety, we would buy under $30 per share. They are currently at $37. So its wait and watch for now.
Revenue
The increase in net revenue of $28.8 million, or 24%, was primarily driven by volume-related increases of $21.9 million and price-related increases of $6.9 million. The volume favorability was driven by accelerated demand for existing products, expanded item offerings and store distribution at existing customers. Net revenue from sales through our retail channel was $142.2 million and $108.6 million for the 13-week periods ended March 31, 2024 and March 26, 2023, respectively.
Read: 75% increase from unit sales, 25% from price increases. There is a limit to which you can increase prices.
Gross Profit
The increase in gross profit of $16.2 million, or 38%, was driven by higher net revenue generated during the period. The increase in gross margin during the 13-week period ended March 31, 2024 compared to the corresponding period in the prior year was primarily driven by price increases on our organic egg portfolio in January 2024 as well as fully realizing our February 2023 price increase across the entire shell egg portfolio. Conventional commodities and lower diesel costs also contributed to margin favorability. This was partially offset by an increase in promotional rate as well as an increase in labor and overhead costs.
Read: Commodity costs went down. This may reverse in future.
- Labor costs will keep increasing
- Commodity costs will fluctuate
- Raising prices has limits
- They had more promotions to counter price increases
Is this improvement sustainable?
As commodity prices normalize, they will give back some operational improvements. Rate of price increase is capped, or they risk losing market share. Labor costs will keep increasing. Long term growth rate of 18-20% makes sense.
Operating margin improved to 16%, but dependent on low commodity prices. We can assume 12-14% as likely longer term.
Range of outcomes in 3 years
| Growth Rate | Revenue | Gross Margin | Gross Profit | Op ex % Rev | Operating expenses | Operating profit | Operating profit % | PE (2x growth rate) | Value | |
| Best Case | 20% | 814 | 36% | 293 | 23% | 187 | 106 | 13.0% | 40 | 4232 |
| baseline | 18% | 774 | 32% | 248 | 24% | 186 | 62 | 8.0% | 35 | 2167 |
Likely market cap in 3 years = $3.5b
For money to double in 3 years, market cap today should be $1.75b
Margin of safety of 30% means market cap should be $1.25b or lower.
Bottom Line: buy below stock price of $30.