Freshpet Inc (FRPT) 2020 Q2 法說會逐字稿

Greetings and welcome to Freshpet Inc. Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Katie Turner.

Thank you. Good afternoon, and welcome to Freshpet's Second Quarter 2020 Earnings Conference Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; and Dick Kassar, Chief Financial Officer. Scott Morris, Chief Operating Officer; and Heather Pomerantz, Executive Vice President of Finance, will also be available for Q&A.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Please note on today's call, management will refer to certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

Finally, the company's produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather it's a summary of the results they will discuss today.

And now I'd like to turn the call over to Billy Cyr, Chief Executive Officer.

Thank you, Katie, and good afternoon, everyone. I'm speaking with you from Bethlehem, PA. Dick is in his home in Manhattan, and Scott and Heather are in our offices in Secaucus. We will do our best to not trip over each other on the call. And as always, please do excuse any barking in the background and any other technical issues we might encounter.

Let me start by saying that while it seems that the world is still quite unsettled, Freshpet has returned to the predictable growth that has been the hallmark of our business for the last several years. We are largely caught up on supply. The stores are back in stock on the vast majority of our SKUs, our advertising is on air and driving strong increases in household penetration and consumption. Our retail partners have returned to installing new and upgraded fridges. And our Nielsen-measured results show the impact of this, with continually accelerating growth now running well in excess of where we were in the pre-COVID period and ahead of where we would have been if there had not been a COVID crisis.

That is not to say that we are immune to any future changes in the external environment because we aren't. We still face the same uncertainty related to the public health crisis and changing consumer and retail conditions that everyone else faces. But we do believe that our recent results demonstrate our ability to adapt quickly to changing market conditions and continue to deliver strong results. As a result, we are quite optimistic about the balance of the year and our progress towards our long-term goals.

The COVID crisis presented some unique challenges, including new safety risks for employees, a badly disrupted retail environment, a surge in e-commerce and drastic reductions in consumer mobility. But it also presented some new opportunities, including lower media rates, higher media viewership and engagement, increased awareness of the role pets play in our lives and the willingness to try new e-commerce options. We believe that Freshpet is ideally positioned to take advantage of those opportunities and breakout of the post-COVID surge and trough stronger than we went in. We have a business model where growth is largely driven by advertising. We don't rely on retail promotions or price discounting to drive penetration gains, and we are an incredibly nimble company, capable of creating and implementing new ideas very quickly.

So at the end of Q1, we announced our post surge pivot, building on our foundation of keeping our employees safe to rebuild our supply and that would enable us to improve retail availability and offer new e-commerce options. With all of those key elements in place, we were able to turn on our advertising to drive consumption and penetration gains. During the quarter, we strategically invested in each of these areas, including safety enhancements to protect our team, incremental capacity at Kitchens South, incremental retail coverage, new e-commerce options and strong media support. The results of these efforts speak for themselves. Freshpet is now growing faster than it was before the COVID crisis, with the most recent Nielsen mega-channel data up in the high 30s, ahead of the 28.8% growth we averaged in January and February.

Consumption has grown consistently virtually every week since April '18 and shows no signs of slowing. Household penetration gains are strong. The buying rate is also growing. All this progress would not have been possible without the dedicated efforts of so many of our team members, from the folks who have kept our production lines running virtually nonstop since the COVID crisis began, to our incredibly nimble marketing and sales teams who use their creativity to seize new growth opportunities in a rapidly changing environment and position Freshpet for accelerated growth, to our dedicated customer and consumer service teams, who worked diligently to help consumers find our products and enabled customers to rebuild their inventories and restore their stores in the face of challenging conditions.

But most of all, I want to acknowledge the Freshpet team members who have taken on the responsibility for keeping our teams safe. The very foundation of our post surge pivot was building the idea that we could keep our teams safe and they would then be able to catch up to and meet the rising demand.

Thanks to the efforts of those teammates, our team members come to work each day, confident that the Freshpet Kitchens are a very safe place to work despite the numerous challenges that the coronavirus presents.

Our safety program has 3 layers of protection designed to stop the virus from entering our facilities, prevent it from harboring in our facilities if it does get in, and preventing it from being spread from one team member to another.

This program has resulted in us having no record of the virus being transmitted from one team member to another in our facilities despite the virus being present in our communities. That is not to say that none of our team members have been afflicted with the virus because they have, and it is an awful virus and it has impacted our team members and their families.

But it says that none of our teammates got the virus in our facilities or gave it to another person in our facilities to the best of our knowledge and after significant contact tracing. We consider ourselves fortunate to have had such good results, but are also incredibly grateful to the team that has worked tirelessly to keep our team members safe. Without them, none of the outstanding results I'm about to share would have been possible.

I would also add that we are very grateful to the teams at St. Luke's Hospital and Lehigh Valley Hospital Network, who have provided us with nurses, testing, advice and help for our teammates in need, while they cared for so many other members of our immunity during very challenging times. We could not have achieved the results we did without their support. But we are not out of the woods yet. Until there is a vaccine or effective treatment or the virus is no longer present in our communities, we must continue to be vigilant. Thus, we will continue to incur some of the $4 million in fiscal year '20 COVID-19 costs that we outlined last quarter, although the cost will likely be lower in Q3 than in Q2.

Part of that reduction is because our absenteeism has dropped significantly since we reinstituted our absenteeism policy on July 1, with exceptions for employees with underlying health conditions or who have someone at home at significant risk. Absenteeism is now running in the mid-single digits versus the mid-teens we experienced in May and June.

Now on to the results. We feel very good about what we accomplished in the quarter. We posted our strongest quarter of net sales growth since 2015, and we were able to drive a significant portion of that strong growth top line into our best bottom line performance ever. Net sales were up 33% versus a year ago, and adjusted EBITDA was $10 million higher than the result we posted one year ago. As a result of this strong performance and the continued strong trends we are seeing, we are raising our net sales guidance for the year from greater than $310 million to greater than $320 million, representing greater than 30% growth in a year filled with COVID and capacity challenges. We are also raising our adjusted EBITDA guidance by $2 million. Dick will provide more details on our guidance later.

The strong top line results are the product of 21% Nielsen mega-channel consumption growth for the quarter despite starting with less than 10% growth in April's post surge trough and the volume benefit from refilling the trade inventory hole we dug earlier in the year.

The consumption growth accelerated throughout the quarter, ending with 30-plus percent growth in June and still accelerating to July, where our growth is now in the high 30s. This is due in part to some outstanding work by our marketing team to make a very timely pivot replanning and rescheduling our media investment, taking the spending out of the shelter-in-place trough in April and investing more heavily in May through October, taking advantage of the higher viewership and lower media rates we are now seeing. The result was that we saw returns on our media investments well in excess of what we have seen historically, and that is driving the accelerated consumption growth we are seeing today. It is also driving very strong velocity growth, measured as dollars per million ACV, hitting 19% growth versus a year ago in the most recent 4 weeks.

The Q2 growth is also the result of the efforts of our manufacturing team to produce enough product to catch up to the demand. The Freshpet Kitchens never stopped operating in the quarter, producing record quantities. And in conjunction with the additional capacity we put in place at Kitchens South, we were able to increase our fill rates from the mid-70s in early April to the 90s by the end of the quarter. We are still not at the 95-plus percent rate we expect due to tighter capacity on a few items and surging demand, but we are getting close. We will, however, have very tight capacity on our Fresh From the Kitchen items until Kitchens 2.0 begins producing salable product in Q4. As a result of these efforts, we are able to largely refill the trade inventory hole we had at the beginning of the year and which we dug deeper in Q1 behind the COVID surge. Refilling those 2 holes combined to add 8 points to our growth rate in the quarter versus the consumption growth rate we experienced. But I want to be clear that we ended the quarter with trade inventories still slightly below what we would consider normal, largely focused on a few SKUs that we're still catching up on.

We also got the benefit of a slightly depressed quarter in Q2 last year due to short shipments in that quarter, providing an additional 3 points of growth versus a year ago and improved performance on spoils this year adding another point. Recall, in the second quarter of last year, we had some manufacturing issues that resulted in short shipments and an impact on our gross margin in that quarter. The favorable comparison that created versus a year ago will reverse itself in Q3 as we caught up on shipments in Q3 last year. A full reconciliation of the gap between consumption growth and net sales growth in the quarter is in the accompanying investor presentation.

If you look at the year-to-date results, you can get a clearer view of how we are performing. Year-to-date, Nielsen mega-channel consumption growth is up 27% versus a year ago through the end of June and accelerating. Year-to-date shipments are slightly ahead of that, up 31% due to the trade inventory hole we had at the beginning of the year, the short shipments in Q2 of last year and the improvement in spoils this year. That reconciliation is also in the accompanying investor presentation.

Another driver of our improvement in Q2 was a significant improvement in retail conditions. Our sales teams, in partnership with our customers and our broker partner, were able to restore the retail conditions, and we now have greater than 90% in stocks on most SKUs and most customers. Additionally, we're now benefiting from a significant number of end cap fridges and double fridges in high-profile retail outlets. The consumption growth was broad-based with each class of trade showing growth by the end of the quarter and only pet specialty not showing growth for the whole quarter. But even the big box pet specialty business showed strong growth by the end of the quarter, posting double-digit sales growth every week in June, in part due to the placement of second fridges in more than 744 stores and the foot traffic generated by the resumption of their services business. That growth has accelerated further in July.

Our e-commerce business grew rapidly, as you would expect, up 201% versus a year ago. Curbside pickup and last mile delivery services like Instacart grew the fastest, resulting in more than 90% of our e-commerce business going through our in-store fridge network. We are most encouraged by the strong engagement we got from the new advertising we ran that featured our e-commerce options, increasing click-throughs on our website, where we now prominently feature our various e-commerce options and make it very easy for the consumer to get Freshpet anyway they want it. Our small-scale DTC business is serving its purpose of providing a customer service to those afraid to go into stores and not comfortable with other e-commerce options as well as teaching us a bit more about DTC, but it is very small and not material to our results. Household penetration growth is strong at 19% despite canceling the April media due to the conditions of the stores and the shelter-in-place orders.

The penetration of our core dog business, i.e., the main meal items which accounted for 92% of our sales in the quarter, grew 21%. Since the beginning of the year, we've added 350,000 households towards our goal of 5 million new households by 2025. That is on pace with our expectations.

Buying rate resumed its growth, growing 6% on the total business and 5% on the core dog business. This is what we would expect when the number of new users added in the quarter was not so big that it would overwhelm the gains made on the existing user base as it did earlier this year. Fridge placements slowed in the quarter as we had indicated they would but the incremental placements were not inconsequential. We added 253 net new stores in the quarter, bringing our total for the year to 550 and putting us on track for our 1,000 net new stores target. As a result, ACV was up 12% versus a year ago, but only 0.5 points ahead of where we ended Q1. More importantly, we added 764 second fridges in the quarter and now have added 779 for the year. And we upgraded another 186 fridges in the quarter, taking our total upgrades year-to-date to 218. We remain confident that we will be able to deliver our revised targets of 500 upgrades and 1,000 second fridges this year.

Total distribution points, TDPs, were up 20% versus a year ago as a result of the large number of upgrades and second fridges we placed and against the out of stocks we incurred in the year ago period. All this combined to drive the strong top line we saw in the quarter and give us confidence that we will see continued strong performance in the back half of the year. We are particularly bullish on the back half of the year as we had advertising on the air for most of the summer for the first time ever with high viewership and low media rates, and that is continuing to drive strong consumption gains. Nielsen mega-channel consumption has been up 37% versus year ago in the first 3 weeks of July. We entered the third quarter with strong and accelerating consumption growth trends, strong household penetration and real momentum on fridge placements. All of that should support strong growth and make 2020 our strongest growth year since 2015 when Freshpet grew 34%.

To support that growth, we are making very good progress on our capacity expansion initiatives. So far this year, we have taken our second roll line to a 24/7 operation in January, started up Kitchens South in mid-February and added a second shift there by the beginning of June. At this point, we have run rate capacity of $350 million or about $87.5 million per quarter, assuming average absenteeism and holidays and full utilization of the product mix our lines produce. Kitchens 2.0 is on track to start-up within the next 8 weeks, shipping salable product in October in meaningful quantities in November. Once that facility is fully operational by Q1 of 2021, we'll have almost $600 million in total capacity making 2021 the first year in quite some time where we have the ability to grow without worrying about capacity. We intend to take advantage of that capacity.

Also, we are breaking ground next week on Kitchens 3.0 in Ennis, Texas. This facility will be built in 2 phases and is targeted to be operational by the third quarter of 2022. Once fully operational, it will take our total capacity to about $1.3 billion. Adjusted EBITDA in the quarter was $11.2 million, up $10 million or more than 9x a year ago as we demonstrated the significant leverage we get from scale, particularly in adjusted SG&A, excluding media, and the contribution from incremental volume.

Before I turn it over to Dick, I want to inform you that next week, we will be releasing the proxy for our annual shareholder meeting in September. In that proxy, we will outline a significant series of steps that we are planning to take to transition from the governance practices we have had since Freshpet went public in 2014 as a fast-growing small-cap private equity-backed company into the governance practices of a fully mature $1 billion company with a broad and sophisticated shareholder base by 2025.

We will match the increasing scale and complexity of our business over the next 5 years with a step-by-step process that removes many of the governance practices associated with early-stage companies. We will begin by recommending the elimination of supermajority voting requirements this year and follow that with a series of actions each year through 2023 that we are committing to in our proxy. This plan was developed by our Board after consultation with some of our most significant long-term shareholders, with advice from governance experts and by studying the academic literature on the best ways to optimize success for high-growth companies like ours.

We believe this plan delivers the right balance between the guidance needed by early-stage companies and the governance required for larger, more complex companies from our Board over the next phase of our growth. We also believe that laying out and committing to a long-term plan of governance enhancements now provides the greatest clarity for our investors about how we will continue to grow and develop Freshpet and is in keeping with what they have come to expect from us, i.e., a highly disciplined, transparent and proactive approach to the long-term development of the company they have invested in. We will be speaking with members of our shareholder base about this once the proxy is issued later this month.

I will now turn it over to Dick to discuss our Q2 financials in more detail and our outlook for 2020. As a reminder, this will be the final quarter that Dick will be presenting our financials as the CFO. On October 1, 2020, Dick will become Vice Chairman; and Heather Pomerantz, who joined us in January, will become the CFO. Dick has taken this business from a start-up through the angel investor and private equity phases, through a public offering and 2 subsequent equity offerings, to a company that now has a market cap in excess of $3 billion and is showing no signs of slowing down. And that is just the last 14 years of his almost 50 years as a financial professional. He had enough achievements before Freshpet to satisfy and impress almost anyone, including a very successful run with private equity-backed companies. But in an age when most people think about retiring, Dick started on the Freshpet journey, and we're awfully glad that he did. We would not be where we are today if it had not been for Dick's intelligence, tenacity, creativity and good humor. It has been a privilege for all of us to have him as our CFO.

The last 7 months have provided Heather a tremendous opportunity to learn every aspect of our business, tap Dick's vast knowledge and begin to forge relationships with our team and Board, the analysts who cover us and our shareholders. She has been part of the launch of our new 5-year strategic plan, a successful equity offering, the renegotiation of our credit facility and all the challenges presented by the COVID-19 crisis. Her presence gave us added horsepower to manage all that work while simultaneously bringing her up to speed on our business. Through it all, Dick has been a tremendous mentor to Heather, and he will continue to be available to all of us in his new role. That has made this one of the most successful transitions we could have hoped for, and I hope it is an indicator to all of you that we continue to put in place well-thought-out plans to manage the many challenges of a rapidly growing business.

And now let me turn it over to Dick.

Thank you, Billy, and good afternoon, everyone. When Freshpet got started in 2006, I never dreamed that I would have the opportunity to present quarterly results like the ones I'm going to share with you today.

Despite the incredible chaos in the world, Freshpet is hitting on all cylinders. We are delivering very strong and accelerated growth and are successfully taking the benefits of that growth to the bottom line. We're on track to deliver and exceed the $300 million net sales goal we've laid out more than 3.5 years ago when we launched our Feed the Growth Plan, and we're off to a very good start towards our $1 billion goal in 2025. We are adding bench strength and manufacturing capacity at a rapid rate to support that goal.

As Billy indicated, quarter 2 net sales were $80 million, up 33% versus the year ago period. For the first 6 months of 2020, net sales are up 31% versus a year ago. The 6-month view allows us to normalize the impact of the surge that occurred in March and the trough that occurred in April. As we said at the end of the first quarter, our capacity limits in quarter 1 prevented us from having shipments match retail scanner sales, but would allow our shipments to better match actual in-home consumption. We had to refill the depleted trade inventory pipeline in quarter 2, so our first 2 quarters look more consistent with each other and more normal than most CPG companies will.

More importantly, though, we have emerged from the chaos of last 5 months in very good shape with a strong growth rate and real momentum. Our post surge pivot has worked. As a result, we are raising our net sales guidance for the year to greater than $320 million. That would take our growth rate for the year to at least 30%. This growth rate is stronger than the first half growth rate when you adjust out the rebuilding of inventory that we did in the first half and the softer comparison in quarter 2. Additionally, this year's third quarter will be a tougher comparison than quarter 2 because that is when we rebuilt trade inventory in the year ago period. But with our current 30-plus percent growth rate we're seeing in our Nielsen mega-channel data, we believe the new guidance is appropriate.

Adjusted gross margin for the quarter was 49.1%, up 60 bps from the year ago period versus what we did in quarter 1, our mix shifted back towards bags from rolls as we had indicated it would, and that negatively impacted our margin. We also had a full quarter of production at Kitchens South, which provides a slightly lower margin. But overall, we had strong performance in the quarter. However, we are now expecting higher beef prices for the second half of the year that will impact the gross margin a bit, but we may come in slightly below our target of 49% to 50% gross margin for the year as a result of that cost increase. Without it, we believe we would achieve the goal. It will also eat into the contribution from the incremental sales reflected in our revised guidance. Without that increase in beef costs, our contribution from the $10 billion in higher net sales would be about $4 million. But we think we could absorb about $2 million in higher beef costs during the second half of the year, so we are only raising our adjusted EBITDA guidance to $46 million from $44 million. If those higher beef costs persist into 2021, we will look for opportunities to offset those increases via pricing and other efficiency improvements.

Our media spending this year will be a bit more evenly balanced between the first half and the second half than in prior years due to the COVID crisis. We pulled advertising out of April and spread it throughout the summer. As a result, our advertising will be split 65-35 between the first half and the second half. That turns out to be quite fortuitous as media rates are lower now and there's higher viewership. This -- that is creating significant media efficiencies that we want to capitalize on.

Adjusted SG&A in the quarter was $28.1 million or 35.1% of net sales, an improvement of 1,130 basis points versus the year ago period. Moving the media out of April, shelter-in-place time period to May through August drove 340 bps of that improvement. When you exclude media spending, adjusted SG&A improved by 260 basis points versus a year ago and keeps us on track for our 2020 goals.

Adjusted EBITDA in the quarter was $11.2 million, up $10 million versus the year ago period. These financial metrics demonstrate the meaningful benefit from scale we get across our P&L, an essential part of the virtuous cycle embedded in our Feed the Growth Plan. It's also a good indicator of our ability to grow adjusted EBITDA in excess of net sales as we achieve meaningful scale. From time to time, we will choose to increase investments to capture incremental growth opportunities. But excluding those opportunities, we expect to continue to generate scale benefits in the P&L and expand adjusted EBITDA margins for the seeable future.

We are continuing to project that we will incur $4 million in extra costs related to COVID-19 crisis this year, including enhanced compensation for our employees, increased efforts to protect them, higher cost to protect our supply chain and other related costs. As the results indicate, it's been a very good investment, has allowed us to run our lines continuously and catch up to the demand. But more importantly, it was the right thing to do for our employees, and that was why we did it. In the second quarter, we incurred $1.6 million of that $4 million. Year-to-date, we've incurred $1.9 million. We believe that we will continue to incur costs but at a lower level in quarter 3, and they will taper off in quarter 4. About 3/4 of those costs or about $3 million are wage and absenteeism-related costs, and the remaining $1 million covers the cost to keep people safe, such as nurses in our operations. As we communicated previously, we are adding back these costs to our adjusted EBITDA.

So to reiterate, our guidance is now for net sales greater than $320 million and adjusted EBITDA greater than $46 million. Our guidance continues to assume that the external environment progresses as it has for the last month or 2 and that there are no additional significant disruptions to the supply chain, our customers or our consumers, including any issues from an adverse macroeconomic environment and increased social unrest.

Our liquidity remains very strong. At quarter end, we had $128 million in cash, cash equivalents or short-term certificates of deposit. In early April, we amended and expanded our credit agreement and now have $165 million senior secured credit facilities that we have not yet drawn on. We believe those resources and cash we expect to generate from operation is sufficient to meet our long-term capital needs. We invested $71 million of capital against the Kitchens 2.0 project so far and other projects designed to increase our capacity, and our total spending on these projects to date is $91 million. Working capital increases offset P&L gains, a seasonal phenomenon for our business, so cash used in operations was $5.1 million. We continue to expect positive cash flow from operations for the year.

In closing, we are incredibly well positioned to succeed. We have a winning brand with a strong product and exceptional idea behind it. Growing consumer interest in less processed, more natural foods has been trending up -- and treating our pets well, a highly capable organization that has proven to be up to the challenge in front of us with a strong balance sheet. We are extremely grateful to our teammates who have worked so diligently under very challenging circumstances. We are also very appreciative of the work done by our customers, suppliers and their employees. We are all in this together. I am proud of how our industry has pulled together to support each other, and we remain committed to working collaboratively with them and all the federal, state and local officials who are fighting this public health crisis.

And personally, this has been an incredible fun ride. We started from 0 and have created 500 jobs, a nationally recognized brand and a product that is good for our pets and that our pets love. I can't tell you how proud I am of what we accomplished together. The people I work with every day are so dedicated to what they do and so incredibly professional. And it's a real joy to see how we are changing the way people feed their pets for the better.

Finally, I can't say how much I appreciate the investors who have believed in us and the analysts who have spent so much time with us, trying to get to know the story and challenging us to think harder about what we are doing. We are better for it, and I'm glad that we've been able to reward those investors who stuck with us through significant value that has been created.

That concludes our overview. We will now be glad to take your questions. Operator?

(Operator Instructions) The first question today comes from Peter Benedict of Baird.

I'll start off, congrats to Dick. Obviously, quite a journey with this one. So well done. Congratulations. It's been great working with you. I guess the first -- I have 2 questions. The first question is just maybe, Billy, how you're thinking about the sustainability of this new consumption growth trend that you're seeing? You talked about your ability to fulfill it and the capacity. But just thinking about more on the demand side, is there -- are there indications that new pet adoptions are helping drive this? Or how are we thinking about that? And as you think about the second half of this year, 30% growth, any differences between third quarter and fourth quarter that you see today that we should be -- that we should think about? That's my first question.

Yes. Thanks, Peter. Obviously, we're very pleased with the growth we had. And we gave you a lot of ways to think about the trend that we have so far and what you should expect for the balance of the year. I think, simply put, the way to look at the first half of the year was we ran at 27% consumption growth versus the year ago, yet we've seen it accelerate. And in -- as I said in the prepared remarks, the growth in the last 3 weeks of July were 37% growth in the Nielsen mega-channel data. So you can see there's quite a bit of acceleration. As we think about the comparisons, there's a tough compare in Q3 versus the year ago because we filled the pipeline in July of last year versus the flip side was what happened in Q2. And we also have a capacity limit in Q3, as I said in this prepared remarks, about $87.5 million of -- if we shipped everything perfectly according to our capacity, meaning the mix exactly matched our capacity. So it's a fairly tight third quarter.

The fourth quarter when Kitchens 2.0 comes online is when things really loosen up for us, and we'll have -- particularly our Fresh From the Kitchen product, a awful lot of capacity.

And as you think about where does that leave us and have us heading from next year, we believe we will end this year with significant momentum on expanded household penetration base because the media investment that we're making, which is skewed more towards the back half of this year than in prior years and is a sizable investment, will leave us with a much deeper household penetration gains that we'll carry into next year.

And next year, it will be a year for the first time in several years where we really won't be tapped by capacity limits. We'll be able to run fairly free. And so you think about the tailwinds we'll have, we'll have the benefits of the added household penetration. We'll have the added capacity we've gotten.

Retailers are now very energizing by the -- what they've seen from the growth rate on Freshpet, how quickly we came out of the trough, how strong our overall growth rate is. And also the business that left them on other dog food brands that went into e-commerce and probably isn't coming back as quickly as they might have hoped it would, makes us look even more strategically important.

So we're starting to see retailer pull for more fridges, bigger fridges and second fridges. So I think -- when you ask how long is the trend going to last, I'd say the conditions look very favorable, and we are looking forward to next year being a very, very robust year of growth for us.

Okay. No, that makes sense. And I guess my second question is just maybe an update on the direct-to-consumer efforts. I mean -- I know 90% or more of your e-commerce is going through the existing fridges but just trying to understand maybe the efforts that you started this year around the DTC? And then your plans to kind of expand maybe consumer access to Freshpet through direct channels. That's my second question.

Scott will take this one.

Peter, it's Scott. So we -- as we've talked over the past couple of years, and we want to be as omnichannel as possible and making sure we're -- have our products in our portfolio as available to as many people as we can in many different ways. E-commerce has been something that's expanded a lot in the last couple of years. And the way we do like to think about what's happening with COVID is it's something that was probably going to develop over 3 years, it probably developed in 3 months, where it's forced a lot of people, and including my kind of 72-year old mom, to get shipments from Instacart. And more and more people are using click and collect and many of the different vehicles out there. Now you'll probably remember that the vast majority of what -- when we look at e-commerce, it does support our fridge network. So that's everything from Instacart and Shipt to everything around the Clicklist from Kroger and all the click-and-collect models. So those grew quite fast because they had capacity to really kind of expand and absorb the influx of consumers coming in.

We also saw a really great growth around everything that was like AmazonFresh or FreshDirect, all of those models too. We did go ahead and during our response -- one of our responses to COVID was we did kick off a very small test around direct-to-consumer. We were finding there were a handful of consumers that are very concerned about going to a store and didn't feel like there was good access. So we did kick something off. We tested it for a while. It's still up and running, and we're getting some orders. It's incredibly minimal at this point, but it's been a really, really good experience and educated us as an organization for the time being. And I think what we'll do is we'll continue to evaluate that and decide how we address this into the future. Right now, many of our retailers are really excited about the opportunities to continue to build out the portfolio of retail, and that's obviously going to be the majority of our focus.

The next question is from Ken Goldman.

Dick, heartfelt thanks from me, too, for all of your help, much appreciated. Best of luck. I wanted to ask if you could be a little bit more specific on where the meat inflation is coming from that you talked about. I think you do lock in your chicken earlier in the year, and we saw beef higher for about a month and then it really collapsed. So just curious if you could add a little bit more color into that comment that you made.

Ken, this is Billy. The inflation that we're seeing is on beef. We buy different cuts of beef than you might see in typical grocery stores, but chicken is fine as -- you're right. We have locked in chicken for the year. So it's exclusively a beef issue.

Okay. And then follow-up, if you mentioned this, I didn't hear it, I apologize, but I know you talked about media rates being lower. Did you lock in those rates through October? Or is there a potential volatility into what you're paying if demand for advertising goes up?

Scott, you want to take that?

Yes. The vast majority of that is locked in. And look, the rates -- I mean, Billy touched on this, the rates have come down 5%, 7%, up to 10%, depending on what you're buying. But I think it's the productivity or the effectiveness that's gone up, and that's an impact of people being a little more focused on TV. But we've also had really extraordinary creative that we've been able to put on during this period. So I think we really kind of played this out incredibly well, where we -- and I know I'm expanding the answer a little bit here. But what we did is we literally kept an eye on when we were going to have a little bit more capacity. And then we went ahead and as soon as we thought we were going to have it, we committed to additional media because we knew the cost was better and it was also being more effective. So I think we kind of played coming out of COVID, honestly, pretty well.

The next question is from Bill Chappell of Truist Securities.

Just trying to understand the kind of capacity the remainder of the year. I mean, we -- and I'm sure you've heard that there's been certainly a spike pet ownership across the U.S. and clearly, it seems like you're seeing some of that show up in July, like is there a ceiling over these next 3,4 months until 2.0 comes out in terms of growth? Would you look to source some of that out and did that have some impact on margins? Just trying to understand the path between here and 2.0 opening up.

That's a -- it's a really good question. So right now, we -- as you have said in the script, we've got -- the rolls capacity we're fine on. We started on our fourth -- rolls line, second rolls line went to 24/7 back in January, and we're going to be fine in that until the end of the year. So bags is the only place we've had issues. To recall, we started up Kitchens South in February, and we put a second shift in there in June, and that has helped us catch up.

So it means the place that we're going to be tightest is on our Fresh From the Kitchen product because that's only made in our facility and only on 1 of our 2 lines. When we start-up Kitchens 2.0 in the fall, starting that up, that will bring on a -- basically, we'll triple our Fresh From the Kitchen capacity once it's up and fully operational and so that's sort of the next lever.

There is a little bit of potential for tightness on some of the bag products between now and then, but if you think about it, right now, we have $350 million of capacity, if everything was used uniformly, which means that it's basically a ceiling of $87.5 million a quarter, assuming normal absenteeism and normal holiday scheduling.

So as you think about it, heading through the third quarter, it will be kind of a tight quarter. As we head into the fourth quarter, Kitchens 2.0, we're very comfortable we'll start-up in September, salable product, sometime in October and then meaningful quantities in November and December. So by the time we get to the end of the year, even if we've drawn down some trade inventory in the third quarter and the first parts of the fourth quarter, we should be able to refill any trade inventory holes that we have created. There might be a little bit of out of stocks, not a lot on our Fresh From the Kitchen. But for the most part, I think we'll be able to get all fully caught up by the end of the year. So it's just a little tight, mostly on Fresh From the Kitchen. Is that clear enough? Or do I need to give you a little bit...

No, that's great. And then just a follow-up. I think you've had store brand from one retailer in your kitchens -- I mean in your fridges now for about a year. So kind of any update, how that's going? Are you expanding it to bags? And then do you expect any kind of trade down if we have an extended recession?

Bill, yes, so I think that -- it's a really good question. It's something where we are really -- we played this out really, I think, well, we've been very thoughtful about the items that we've chosen. We don't anticipate any more expansion of those items in the near term, although, over the very long term, we do anticipate that we will do some additional partnerships with some retailers if we can find the right proposition that fits in that's incremental to our portfolio. And that's really what we did with that first test that we did, and we've been able to prove out that it did -- it works. But in the near term, we don't see anything in the next kind of 6 to 12 months, we don't anticipate anything significant changing from where it is today.

The next question comes from Mark Astrachan of Stifel.

I wanted to go back to one of the earlier questions and then kind of build on that. So you alluded to leverage in driving customer acquisition costs, meaning that they were becoming more favorable. What is -- what or who are the new consumers that are coming in, as you see it, in the breakout that you all like to give between visitors, mixers and loyal users. And partly, I ask it because I want to ask more of a main question around the buying rate. So that was up decently for core dog after being flattish last year. So are we talking about more productive consumers that you're bringing in with these leveraged customer acquisition costs? Can you maybe can you give us a bit more detail there? And then how do you think about that on a go-forward basis? Because presumably, it's not just household penetration that's increasing, it's obviously the other side of it as well that drives the sales growth upside.

Yes. So the people who are coming in -- first of all, I would say that when looking at the usage patterns, I'm not sure we have enough detailed data yet on this recent increases. I -- we do know, though, that we are seeing -- the disproportionate amount of our growth is coming from the younger audiences, so the millennials, the Gen Zs. That's where the market seems to be moving. That's where the market is shifting.

I think it's probably -- and Scott might have some commentary and this thing, it might be a little bit too early in the life cycle to say where -- what their usage habits are, other than the most recent data we have, now this is pre-COVID, at least the data that I've seen, suggests that the people who are coming in are looking extremely similar in terms of buying habits and practices as the people we've been acquiring over the last several years, and they're going through a very similar curve in terms of the practices of buy it, try it, mix it, top it and ultimately get to some ultimate pattern, which we would hope would be using the product on a full-time basis. That's what we're seeing.

In terms of the comment about the buying rate, we were glad to see that, but we actually decomposed that quite a bit over the last couple of quarters. And when we looked at it, if you took out the incredibly significant number of new people we were adding, like we were adding 30% new buyers, if you took it down to who are the people who have been around for more than a year, they were actually increasing buying rate at about the same rate we've seen all along. So we were not at all worried about that buying rate looking flat, it was purely being diluted by the rapid increase in new users. But Scott, I don't know if I got that right on the consumers who are adopting or not. Do you see it any differently?

No. No, I think that's exactly right. I mean the -- what we're -- we have some sneak peek here and there from a handful of different retailers for shopper cart data, and it does look like it's a very, very kind of similar consumer group that's coming in. And over time, you don't know upfront, but it appears they're very similar and their adoption curve will be trial and then over time to kind of graduate up to higher levels of usage. So very similar. I think the buying rates being driven by existing consumers is our take. I don't think it's the new consumers that are driving the buying rate.

And Mark, one other point is, one of the things that's really productive for us has been the launch of our Small Dog. It's now been -- it's in its third year, so it's 2.5 years old. And that Small Dog is continuing to grow at a very, very rapid rate. And those users tend to be people who adopted and use it as a complete meal replacement, and that's certainly helping us.

The next question comes from Brian Holland of D.A. Davidson.

Allow me to pass on my congrats to Dick as well and best wishes. If we talk about, Billy, I think the past couple of years, you -- one of the first things you've talked about is capacity is your biggest limitation to growth. As we start to move into 2021, that eases a little bit. So I'm curious with 2.0 coming on board, do we pivot from capacity being your biggest constraint to growth to really how much you want to spend on media? And from a media standpoint, that seems like it might be driven by how much you want to control that growth such that you can serve it reasonably, if that makes sense. If you could just help me understand how you're thinking about managing growth going forward. Because obviously, you could run pretty hard on media and you wouldn't see a slowdown in the household penetration. But certainly, at some point, that becomes maybe an issue to serve that level of growth. If you can help me understand how you sort of walk that tight rope.

Yes. It's a -- that's a very good question, Brian. So first of all, as we've said all along, when we have capacity, we want to fill it. It's both in our financial best interest. It's also in our strategic interest because we view this as, in essence, a land grab. So as we head into 2021, we have every incentive to try to, as productively as we can, making sure we're getting good returns for the investments, fill that capacity but do it in a responsible way where we don't compromise our quality or the -- our ability to supply the product.

However, I'd also encourage you to think about that we've already committed. We're building our facility in Ennis, Texas, that will break ground on it next week, and we will have that up and running in the third quarter or so roughly in 2022. And we want to accelerate into that so that when we get there, we need it, it comes on time and it's reliable.

So probably at the end of this year, we're going to sit down and look at how well did we start-up Kitchens 2.0, how far along are we in the planning, design and construction of 3.0. And we'll also take a look at what we've done at Kitchens South and say, "Hey, if we need any buffer capacity to support more rapid growth, is that something that we should consider as well?"

Because, frankly, if we get good returns for the investment and we can accelerate our growth, it's in everybody's best interest for us to go do that. So your comment about media being the driver, absolutely. But you can imagine we've tested and are looking at how we can use media to fill capacity, and if we need to add more, how we would add more.

Great. I appreciate the color. And I think, Scott, a question for you. When I think about the media spend and kind of the campaign and how you look to reach new users, you might argue that the messaging might have to look drastically different today than 6 months ago. So just curious if you can talk about how you sort of pivoted the messaging to new or potential new consumers.

It's a good question, Brian. And I don't want to bore everybody and go through everything that the -- I mean the marketing team did a brilliant job. The marketing team, our agency, the creative agency did a great job. Our planning agency did a great job. But -- and I don't want to bore everybody, but what I would say is the ability to be incredibly quick and nimble in this atmosphere really afforded us some incredible opportunities. That and being kind of bullish and entrepreneurial, I think, really afforded us a lot of different opportunities along the way. And that's what gave us those windows where we were able to put some new creative on air that was really relevant at the time when people were home and watching tons of TV.

And we -- it's not the only thing. I mean, from a digital standpoint, we layered in all types of different things from digital -- our digital advertising, digital communications, too. So I'd love to talk a lot further about it, but I really -- I don't want to kind of get into kind of a play-by-play. But I do think it goes back to how we think about running the business. And the theme I will constantly say is think big but stay small and operate in an environment where we -- what's made us successful all along the way and let's find partners that can operate the same way. And I do think that's a key piece of it, Brian.

The next question is from Jon Andersen of William Blair.

Congratulations, Dick. It's been fun working with you.

Thank you.

My question is around retail execution. Bill, you mentioned in the prepared comments that, obviously, retailers have had a lot on their plates. That's been caused for perhaps a little less new distribution this year. Where do you think retail customers sit today with respect to their both ability and willingness to place new fridges? And what are your expectations for net new stores through the balance of the year or by the end of the year?

So on the last part of your question, our expectations are consistent with the guidance we gave you at the last quarter, which is 1,000 net new stores. Obviously, a big part of that is how many stores are going to be around because there are stores that are going to be closed. But we're still sticking with the guidance we gave you the last time. I would offer one overall comment on the customers' willingness to do this. I think most of them are now back to doing their normal merchandising routines and whatever their operations are, may not perfect, but it's pretty close.

And it could go backwards, there's no doubt that it could go backwards. But what we're seeing is the strategic interest in Freshpet grew through this whole experience. And so we saw customers putting in second and third fridge -- 3-fridge islands in some stores in the middle of this chaos because they've now come to believe that Freshpet is the way that they can win in this kind of environment. And it doesn't matter where we saw, what channel they went in, they all seem to be delivering very, very strong performance.

So I would say just as an overall comment that this COVID crisis and sort of the rush on stores and the drive towards e-commerce has served to accentuate the strategic advantages we offer to the retailers. And that may not necessarily turn into stores this year, but it will certainly turn into stores in the first half of next year.

Great. That's helpful. One quick follow-up. I just want to talk about the cadence for a minute in the second half of the year. There's been a lot of discussion around capacity. It sounds like you have -- again, the capacity that's implied right now is around $87.5 million per quarter with the perfect mix, as you pointed out, of bags and rolls and Fresh From the Kitchen. Assuming the mix comes in somewhat different than that, should we be thinking about stronger growth in the fourth quarter perhaps than the third quarter, just in light of the fact that you'll have 2.0 kind of coming on and have addressed the Fresh From the Kitchen limitation? Or do you expect a pretty uniform growth rate through the second half of the year?

Yes. So 2 parts to that. So first of all, historically, our third and fourth quarter have been about the same size. There's a variety of reasons for that, not worth going into them. But historically, they have been. I would say this year, it might skew more towards the fourth quarter for exactly the reasons that you laid out.

I'd also say that if you're measuring it not on a Nielsen consumption basis, but on a shipment basis in our reported revenue, as I said, we're going to have a tougher comparison in Q3 than we will in Q4. So you should expect to see a little bit more in Q4 just because if we draw down the trade inventory a little bit at the end of Q3, we would refill it back in Q4 when Kitchens 2.0 comes on.

Great. And congrats on a great quarter.

Thanks.

The next question comes from Rupesh Parikh of Oppenheimer.

So I guess just going back to some of the new customers that you gained during the quarter. Any sense of whether those consumers are buying Freshpet for the first time directly online or through click and collect versus getting it directly from your fridges?

Scott, do you have any thoughts on that?

Yes. I -- the majority of them are -- end up being retail customers. There's -- now look, there is a slightly above-average group of people that are picking us up online or what we consider online through e-commerce. But the vast majority are people that are finding us at retail and buying us at retail and starting to use Freshpet from those sources.

Okay. Great. And then...

I think the -- yes, sorry, Rupesh. I mean I think the thing to keep in mind is the core idea around where people are buying their -- the rest of their fresh groceries, their milk, their eggs, their meats, their produce, whatever it may be, that's the trip that we're typically going to be on. And sometimes, we saw the trips expand and stretch a little bit, but then the buying rate was up in short periods. So net-net, it kind of -- it worked out pretty evenly for us. But that's, I think, a good rule of thumb, Rupesh.

Okay. Great. And then if you look at -- I guess, Bill, and maybe just going back to the strong consumption trends that you've seen recently, any sense of whether consumers are stockpiling more since they're seeing the products at the fridges right now?

Yes. We -- go ahead.

Yes. I think every once in a while, there are people that -- there's been a SKU or a certain product that they haven't been able to get, and you'll just hear someone, "Oh, I bought 2 of them today." But for the most part, buying a -- being a fresh product, it's not really conducive to stockpiling. And the other thing is, and I don't want to like overly focus on it, but the vast majority, over 90% of our products, were there. I mean there were some periods in some stores where it wasn't as available, but they were there. There were products to buy. It definitely impacted some of the sales in the period. So I think there's a few people that are -- did kind of buy an extra bag or so here and there, but that's not what's -- that's not really the fundamental that's driving the business at this point.

And Rupesh, if that were true, we would have seen that in May. And we're shipping and growing at a much more rapid rate in July than we were in May. So I think if there had been a, "Oops, I couldn't get it the last time, I'm going to buy it now." They would have done that in May and maybe in June. But in July, we were much stronger than we were in May and June.

Okay. Great. And I'll sneak in one quick one. Just on advertising, what did you see from your peers during the timeframe? Like were they also -- I guess was there intensity similar to where it has been? Or did they pull back? Or just any thoughts on what you're seeing from peers.

We don't -- some of this is anecdotal, unfortunately, because some of the data that we get on some of the advertising levels is a little bit in the rears, and we don't have it all quite yet. But we -- from what we could tell, it was similar to slightly down for many of our peers. There were some new entrants, I would say, newer people into the category that did spike their advertising. So overall share of voice probably stayed even. But the more traditional players, it looks like there was a little bit of an easing during some periods.

The next question comes from Ryan Bell of Consumer Edge.

When you think about the short-term increase in work from home, has there been a way that you've been measuring increased pet parenthood trends? And then outside of the short-term implications, has your team done any work to understand what's a one incremental day at home across 10% to 20% of the workforce would imply for new dog or pet ownership rates?

Yes. Ryan, we've looked a lot at this of late. Unfortunately, the data is very sketchy data on pet adoptions. There's also pet fostering and they oftentimes get blended together as if they're the same thing. And what we saw was a very significant uptick in pet adoptions at the beginning of the COVID crisis, but you can't manufacture dogs overnight. And so what we saw was the shelters were empty and breeders no longer had dogs. And so the adoption and -- rate dropped fairly significantly on the backside. And so it looks to us like there was a pull forward on pet adoptions.

When you add in the fostering, it looks like it's a little bit more balanced. But in total, we think that there is probably a pull forward of dog adoptions, and that gave us a little bit of a tailwind early on. But in the grand scheme of things, though, if you think about the number of net new dogs that are out there, we think there's 63 million dogs in the United States. And if you added a couple hundred thousand from these incremental adoptions, it really doesn't materially change our opportunity. We're going from being in the 3 million households that we're in, and we're trying to get ourselves into 8 million households by the -- by 2025 and a couple of hundred thousand extra doesn't really change that opportunity.

In terms of time at home, spent at home, we think that certainly reinforces the value of Freshpet and the value of the relationship you have with your dog, and there's no doubt that's driving people to reconsider their pet food without a doubt. We're seeing that over and over and over again. They have time to research it. They really pay attention to and think about their pet. And we think that's helping us. And we don't know how long that phenomenon is going to be around and how much of it's going to stick, but while the sun is shining, we're going to make hay.

Great. That's very helpful. And I know that you have many price tiers to your portfolio. But if we're in a particularly negative economic environment and it stays more entrenched, do you have thoughts and strategies about mitigating the negative effects for your business? If consumers start to trade down, would that be lower-priced innovations? Or do you have any other strategies that might be able to better deal with that?

Yes. So if you look at -- first of all, the data we've seen historically says that premium pet food does very well in a down economy. We've looked at that back from the 2007, '08, '09, '10 period. We'll see again what happens now. We're monitoring our consumers and asking them questions on a regular basis, and we published that in some of our investor materials earlier this year, where if you lost your job or you had a significant reduction to your pay, what would you do? And what we're finding is that -- really aren't seeing a whole lot of people who are trading down. I've actually heard some retailers talking about people who are trading up, and I think that does happen, too.

We do have a wide range of price points. If you want to buy Freshpet at the lowest cost, you buy a larger size roll and you buy it in a grocery or mass outlet, and you can get the price per pound or the price -- cost of feed at a very attractive level all the way up to more premium items. But if you look across our lineup, the things that are growing the fastest are the most premium per pound item. So it's really not -- we aren't seeing any evidence yet today that consumers are trading down for value.

The next question is from Robert Moskow of Crédit Suisse.

I guess people have already asked my pet adoption questions, which is top of mind for me. But Slide 16, I was surprised to see your data showing that the wet and dry dog food category is down without Freshpet for the last 12 -- 13 weeks and 4 weeks. Obviously, your business is doing great, so this is all separate from your business. But are you surprised that the sales for the rest of the category is weak given the fact that everyone is spending more time at home and presumably doting on their dogs' what -- health?

Yes. Rob, what you're seeing there is the business that moved online because that's in measured channels, it doesn't include the online. And people moved online and it didn't come back.

The next question is from Jason English of Goldman Sachs.

Dick, a very sincere congratulations for everything you've accomplished here and your prior career path. We'll certainly miss working with you on a regular basis. Hopefully, our paths cross once again.

Thanks.

On to my questions. You guys just mentioned the work you did in analyzing the past recession. I've done the same work and reached the same conclusion. But I appreciate that, that data has a lot of noise in it because it followed on the wake of the melamine crisis, which I think caused like a hypersensitivity with consumers and really sparked a pretty aggressive trade up right into the recession. Have you been able to look at any other periods in time where perhaps we didn't have the same type of distortion? And if so, what have you found in that analysis?

Unfortunately, I -- and Scott might have a point of view on this. I haven't seen another period of time that you could look at like that. But the one thing that I would comment on that particular analysis, if you look at the number of dogs in households during that same period, it also went up fairly considerably over that time period. So it's not like people were cutting back on paying for -- feeding dogs or having dogs in their household and choosing not to replace the dog. There actually were more dogs in the household. So I understand the point about the melamine, but you put the 2 facts together and it says that people are still interested in feeding their dogs.

That's interesting angle. Scott, anything to add?

Yes. I mean I think what you're seeing here is kind of rooted in a really fundamental trend in how people think about food and how they eat. And I mean you've probably heard me say this before, but if you decided to buy organic milk for your kids, it's probably the last thing that goes. And so I think people will kind of stay tight, not only the current people, but I think people that are concerned about kind of eating healthier. I think food is going to be really the last thing that will kind of be impacted. So I think that's kind of the core thing to keep in mind when you're looking at this.

Yes. My intuition is the same. And I didn't ask to create skepticism, just more out of curiosity if you thought some of the data points. Where I do have a degree of skepticism, however, is back to the buy rate, which you've obviously gotten quite a few questions on, and the ability to grow it by 50% from 2019 to 2025. And I think some of my skepticism has only been enhanced recently by the stay-at-home duration, where I realize, me, as a loyal Freshpet consumer with 3 dogs, I'm capped out on capacity. I can't buy more Freshpet because I don't have more room in my fridge. And while I'm staying at home, my fridge capacity has become incredibly scarce and incredibly precious. So we've talked a lot about your manufacturing capacity. We've talked about how you expand that. We've talked about how you expand the in-store capacity with fridge network. But is there a real at-home capacity issue that we should contemplate as a potential gating factor of how big this business can be over time?

I don't know, Scott, do you have a point...

Look, I think -- yes. So I think that there's -- there are some people -- like if you have 2 large dogs and you're trying to freeze Freshpet, I can understand that it can be a challenge. As you know, people shop up to 2 times a week, maybe up to 3 times a week, depending on who you are and where you're shopping. And as we're available in more places, there's obviously more options to buy Freshpet. But if you do kind of look at the buy rate, it's pretty interesting. We're $130. We're excited about that. But if you fed even a 30-pound dog just Freshpet over the course of the year or even the majority Freshpet, you'd be in the $500, $600, $700 range. So with kind of smaller and medium dogs, it's very easy to kind of see a path on the buy rates.

Now the other thing that Billy touched on earlier, which I think is an important point, is if you look at the products that are growing the fastest and we've had the most capacity constrained on, for the most part, are our higher-end, more expensive products. And those are the ones where -- now there's a ceiling on this, like there's not infinity. But we do -- from what we're able to see, there is kind of more kind of top end room for us from a price point standpoint. And it's not just we're charging more, we're offering different features and benefits and different types of convenience, different product offerings, et cetera. And you'll continue to see us bring those items. And you'll look at them over time, and I think you'll walk away feeling pretty good about the additional values that we'll be offering in some of these new -- the new innovation that's coming over the past -- the next 12 to 18 months.

Okay. Interesting. Last question for me, I'll pass it on.

Scott, you guys -- you've consistently shown the relationship between sales and advertising, which is -- clearly it's a tight relationship and it's a very scarce relationship in terms of what we see across the industry overall. You're approaching media budget levels that are pretty full for a single brand business. At what point should we begin to become concerned about the diminishing returns or a decay on the efficacy of that advertising spend as you continue to scale it further?

Yes. It is actually -- it's a really good question, and our -- both our media planning agency and our marketing team have done tremendous work around this. We've actually done media plans all the way to north of $100 million, and we looked at the different things that we'd be adding over time and how we continue to expand.

And if you look at all the offerings out there today, not only across TV, but different types of -- different day parts, different types of networks that we participate in, digital advertising, expanding our target towards not just -- we have certain women targets, but expanding out into other like real opportune targets and even into men, we feel like the biggest threshold that we crossed was actually the $30 million threshold, which we're crossing this year, and we were worried about diminishing returns.

Now it is a unique year, but we were seeing great returns at higher media levels prior to COVID. So the testing that we had done really demonstrated that we can do that. And the goal with what we've done, from a media standpoint, is we want to be at least 12 months out on what we're testing in media. And we want to have 12 months of creative, and we also want to have 12 months of media plan tested forward. So we've tested kind of -- what we're doing now should -- the test that we've done should apply into the media levels that will run next year. I think as we get kind of north of, I guess, $70 million would probably be another big threshold for us, and that's where we've kind of looked at expanding the target into a couple of different new arenas.

The next question comes from Ashley Helgans of Jefferies.

Congrats on the quarter. I'll just do a quick one for me. Any update on the international business? And where are you in your marketing efforts in those regions?

Thanks, Ashley. As we said last quarter, the COVID crisis hit Canada and the U.K., our 2 international markets, pretty much in a similar fashion to the U.S. in terms of it arrived, people flocked to the stores, they ransacked the stores, the stores go to -- people go and shelter in place. So there's not a lot of changing. And unlike in the U.S. where we are a fairly robust brand with very, very broad distribution and then we could sit out the period and then come back on with the advertising, we were in a position where we really weren't going to get the benefit we expected to get from the advertising investments we're making. Prior to then, we were doing really well. We had put the ads on the air. It was driving the business at exactly the rate we thought we would. But when people went to shelter in place, they're not reconsidering and trying new brands. They're just quoting whatever it is that they already buy. So I think we've got to do a little bit of a readjustment and reset and start again next year with what we are trying to accomplish this year.

The good news is that we can meet all of our goals off of our U.S.-based dog food business, and that's the way we've laid it out. The bad news is it means we're going to have to reset and restart next year to accomplish, not all of what we did want to do this year because we did make some pretty good progress, but to make as much progress as we would have liked. It -- frankly, it got completely interrupted, and we're going to have to try again.

Okay. Great. And congrats again.

The next question is from Bryan Spillane of Bank of America.

I just have one question, and it's related to -- I think you referenced in the pivot that one of the actions you took to fix stores was -- you took on some incremental retail coverage. And so I guess my question is twofold. One is, is that a more permanent change? And second, putting aside the immediate of just having to kind of fix the stores, is there a benefit that you get now from having incremental coverage? And I guess, would that actually sort of enhance what you're building out in terms of the cooler placement and sort of the moat you're putting around that business? So I'm trying to understand if that can be more permanent. And if so, does it really create a competitive advantage for you at the point of sale?

Scott, do you want to take that?

Yes, sure. So the -- when we saw what was going on with COVID in that labor was -- the labor in the stores was literally just not able to actually get the shelves into the right condition. We needed to kind of jump in, help out and get our business corrected quickly, and then that's where we followed on with the media.

Now your question is a really good one, and we've tested all different levels of retail coverage. We've tested it with different cadences with different partners. We've tested like trying to get returns. The one thing I will tell you is what we have found is we now -- we currently have a system where we get tons and tons of visuals, every series of retail coverage that we have. And then what we do is things that are continuing to have problems, we actually put more effort on to correct those and make sure those stores get trained. Where we're moving to in the long term is to actually have digital pictures that are sent -- uploaded to a cloud every single night using artificial intelligence to evaluate what the stock conditions of that fridge are, which is really, really interesting. We're into a test. It's going well and it's working.

There's things to fix as always, but we're actually progressing really well. And we think that's the end state for us. And the really nice thing about where we are and where we're going is as we grow and there's more and more sales per store, it changes the ROI on a lot of the different things that we might do at retail. So whether it's labor or whether it's technology, if we're selling -- years ago, we sell $75 a store and now we're $150 a store, and it really changes the economics of looking at -- and that's dollars per store per week. It really changes the economics on looking at putting resources behind it.

So I think it's a good question. I don't think we have a final answer, but we do want to make sure that we are in the best possible position we can at retail at all times. And then if we can get a return on something, we want to continue to invest in it.

So Scott, in that instance, the fridge would take a picture of itself? It's like a selfie that gets uploaded to the cloud?

Yes. We've actually been able to develop technology that would take a picture of the inside of the fridge. And think the rearview mirrors on your car that -- the backup mirror -- the backup camera or the mirrors that are -- or the cameras that are on your rearview mirrors or your side mirrors or whatever that can take incredible angles. So we've been able to be able to take pictures of the inside of the fridge, and that's the technology that we're working on. And then we're actually using artificial intelligence and facial recognition type software to identify which product is actually out of stock. So we'll be -- we're going to get really smart on this over time.

There are no additional questions at this time. I'd like to turn the call back to Billy Cyr for closing remarks.

Yes. Thank you, everyone, for your interest. Obviously, congratulations to Dick for delivering a heck of a quarter and a heck of a business over time. I'll leave you with one final thought and this is from Dean Koontz, who says, "Once you've had a wonderful dog, a life without one is a life diminished." To which I would add, reward that wonderful dog with Freshpet and some love, and you can call it even. Thanks, everybody.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.