Vital Farms: A Leading Brand In Natural Eggs Industry (NASDAQ:VITL)

Thesis highlight

Vital Farms, Inc. (NASDAQ:VITL) has a 21% upside. The consumption of natural food is increasingly becoming a norm, and VITL has strategized its brand to take advantage of this trend. I believe this “first-mover” advantage has provided VITL with a big lead as compared to other smaller players. Given the huge total addressable market (“TAM”) and unique supply chain competitive advantage, VITL should be able to continue growing as guided.

Company overview

Vital Farms, Inc. is a producer of pasture-raised eggs that offers shoppers a high-quality alternative to mass-produced factory eggs from a collection of local, independent family farms.

More people eating eggs and demanding natural food

In the natural food market in the United States, where VITL operates, its core TAM is around $10 billion. Egg consumption lies beneath this, and it’s true that Americans’ egg consumption has increased significantly over the past two decades.

The interest in organic food and drinks is also on the rise, and I believe that this will continue for the foreseeable future. The growing demand for ethically produced food can be traced back to an increase in consumer awareness of the detrimental effects of highly processed and factory farming practices on people’s health, the environment, and agriculture. I think this movement has significantly impacted the demand for natural food, which is gradually making its way into the mainstream market as conventional retailers adapt to the changing preference. I also believe that rising interest in organic foods and consumers’ eagerness to pay more for labels that emphasize openness, responsibility, and ethics will contribute to Vital Farms, Inc.’s expansion.

VITL brand is aligned with consumers’ beliefs

Using a network of small family farms, Vital Farms, Inc. is the leading producer of pasture-raised eggs in the United States, giving customers an alternate solution to mass-produced eggs from factories. In response to rising consumer demand for products that are humanely produced, organic, traceable, and nutritious, the company has strategized its marketing strategy around its dedication to sustainable farming practices.

As a result of the brand’s consistent principles and openness, I believe Vital Farms, Inc. has earned the trust of its target audience. Indeed, VITL has aligned its brand to take advantage of the rising demand for all-natural, transparent, socially acceptable, delicious, and wholesome foods. The moral goals of VITL align closely with the rising consciousness of the general public concerning the major problems associated with animal agriculture. Human health, climate change, and resource conservation are all examples of such problems.

Consumers, as I’ve already mentioned, seem to be getting more interested in knowing exactly where their food comes from, and they are prepared to spend more on companies that reflect their values.

VITL brand has strategic value to retailers

The proof, as they say, is in the pudding. Based on their track record, it’s clear that Vital Farms, Inc. is rapidly becoming an important partner to retailers. With the help of its many retail partners, VITL has built a robust distribution channel through which it can reach a sizable customer base. Since the beginning of the third quarter of 2018, VITL has signed contracts with over 22,000 stores (up from 5,000 just 6 years ago). Recent demand for VITL has been so robust that it has outpaced the market as a whole by at least 500 basis points.

Consumers clearly want high-quality goods, as evidenced by the popularity of the VITL brand. I believe VITL products are increasingly becoming more appealing to retailers because they contribute to expansion, increase gross margins, and boost traffic.

Strong supply chain is a key competitive advantage

Supply chain decisions made by Vital Farms, Inc. were the foundation for the company’s ability to stage its offerings so that they maximized value. They are very particular about the family farms they work with, making sure that they are located in areas where pasture-raised eggs can be produced all through the year. In addition to offering farmers good rates for the eggs, VITL also offers education that transfers crucial best practice knowledge. I think this dedication helps farmers in the long run and reduces churn in the number of farmers – which is the key. We are able to bring the finest pasture-raised premium products to market thanks to VITL’s network of small family farms, which gives us a competitive edge that is hard to replicate. For new players to replicate, they have to go to each of these small farmers (which probably already is part of VITL family) and convince them.

Unlike the majority of the United States’ egg supply, which comes from factory farms, VITL’s unique supply chain gives customers the option of purchasing eggs from family farms, which is both environmentally and socially preferable.

Continue to penetrate the retail channel and expand across Foodservice channels

I think there is a good chance of increasing volume with existing retailers by capitalizing on increased brand awareness and demand. In the retail categories where it competes, Vital Farms products generate higher velocity and, by the nature of it, should result in higher profitability per unit. I also believe growth could be further juiced as a result of increasing the number of available SKUs, capturing more shelf space, and driving higher product velocities. In addition to the current retail footprint, I think there is a sizable chance of gaining additional share of store from the current client base and gaining new retail customers. Further, I believe there are substantial opportunities in non-traditional channels of distribution, such as convenience stores, pharmacies, etc., over the long term.

Aside from the retail sector, the food service sector also presents a sizable market opportunity. The VITL brand offers a unique value proposition to customers, who are increasingly picky about the origins of their food when dining out. More diners will seek out VITL items at restaurants with food service partners whose ethics are consistent with VITL’s, in my opinion. For foodservice providers, I believe branding VITL products on menus as ingredients in trendy dishes and dishes that are sure to be crowd-pleasers is a strategic way of showing end consumers of their brand alignment. Overall, I expect that the retail sales of VITL products and the brand’s overall visibility will increase as a result of penetrating the foodservice industry.

Valuation

According to my model, VITL is worth $20.78 in FY23. The core of my thesis is that Vital Farms, Inc. can maintain its competitive advantage (i.e., branding and a unique supply chain) in order to capture market share and grow faster than the industry. I believe the natural/organic food movement is real and growing. Rather than dismissing this as a passing fad, I believe what VITL is doing now will result in significant branding “first-mover advantage” when eating natural food becomes the norm.

My model is based on Vital Farms, Inc.’s long-term growth guidance of 25%, which appears plausible given historical growth and the large TAM. If management is successful, VITL should be able to generate $544 million in revenue in FY24. Adding the current forward revenue multiple here suggests a 21% upside.

Risks

Supply chain could be a hurdle to faster growth

The ability of Vital Farms, Inc. to sustain and grow its network of family farms, as well as its processing capacity, remains a risk to achieving faster growth, in my opinion. While increasing supply capacity by contracting with a large-scale producer can give a competitive edge, doing so is not without its challenges. It is possible that expansion will be slowed if Vital Farms, Inc. is unable to find or train enough new farmers to meet demand.

Attractive market attracts competition

As Vital Farms, Inc. continues to demonstrate the viability of this industry, I believe it will entice more players to enter this space. This is especially true as the demand for natural and organic food continues to rise. If VITL does not establish a large-enough presence to deter new entrants by then, the company’s long-term growth and terminal value will suffer.

Conclusion

Vital Farms, Inc. has positioned its brand to take advantage of the rising popularity of organic and natural foods. With such a large TAM and a clear competitive edge thanks to its innovative supply chain, Vital Farms, Inc. should be able to keep expanding over the long term as what management guided.