Vital Farms, Inc. Common Stock 2026 Q2 Earnings Call

Welcome to Vital Farms' second quarter 2026 earnings conference call and webcast. Joining me today are Russell Diez-Canseco, Vital Farms' Executive Chairperson, President and Chief Executive Officer, and Thilo Wrede, the company's Chief Financial Officer. By now, everyone should have access to the company's second quarter 2026 earnings press release issued this morning. During today's call, management may make forward-looking statements within the meaning of 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. Such risks and uncertainties are described in today's press release and our SEC filings, including the Form 10-Q for the quarter ended June 28, 2026, that we filed earlier today. During today's call, management will also reference certain non-GAAP measures, including adjusted EBITDA and adjusted EBITDA margin.

Please refer to today's press release and presentation, each available on the investor relations section of our website for a reconciliation to the most directly comparable GAAP measures. The presentation of these non-GAAP measures is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. After our prepared remarks, we'll open the line up for questions. As a reminder, please limit yourself to one question plus one follow-up so that we can hear from as many participants as possible. I'll turn the call over to Russell.

Thank you, Brian. Good morning, everyone. I'd like to start, as I always do, by thanking our crew and farmers. I believe they're the best in the business. It's my privilege to work alongside them in our effort to improve the lives of people, animals, and the planet through food. I want to emphasize three key messages on today's call. First, while 2026 presented supply dynamics we did not fully anticipate entering the year, we executed decisively to address them. The early results give us confidence our operational calibration plan is taking hold. Last quarter, we outlined an aggressive plan to fix our price gaps, rightsize our supply, and reduce structural costs. I'll walk through each of these workstreams in more detail shortly. The key point is each of them is progressing in the direction we intended.

As a result, we delivered a more than 200 basis point year-over-year gain in retail dollar share of the shell egg category during the second quarter. Second, as we noted last quarter, we believe the second quarter was our financial trough. Our net sales declined 10.1%, but the revenue decline and margin compression we're reporting this quarter are consistent with what we told you to expect on our first quarter call when we said the greatest impact of the industry's oversupply and our own price gap challenges would be concentrated in the second quarter. That impact was primarily driven by non-structural issues within the broader industry, the price gaps to branded competitors we discussed on last quarter's call, and the identified second quarter supply management and other discrete costs of managing our excess egg supply.

Despite the decline in net revenue during the second quarter, the quarter's performance highlights the strength and resilience of our premium brand relative to the severe volatility impacting the broader commodity egg market. Third, we believe we have clear operational momentum as we enter the second half of 2026. Our farmer contract amendments are now live, and our corporate overhead is structurally lower following difficult but necessary cost realignment actions we took during the quarter. We took additional actions in mid-July to streamline our processes and strongly believe we're on a path to improve operating results in the second half of 2026. Distribution is expanding, and we believe our momentum should continue, while velocity is also starting to show improvement sequentially as we're reducing price gaps to our branded competitors.

To understand why we have such high conviction that the turnaround is working despite the expected challenging second quarter, I'd like to share some of the direct operational evidence of our execution. First, we said we needed to narrow price gaps to branded competitors, and we've made strong progress. Since the last earnings calls, our price gaps have come down from an average of approximately $2.51 to branded competitors in the first quarter to an average of $2.36 in the second. As we mentioned last quarter, we believe the most effective gap range tends to be in the one-to-two dollar gap to branded competitors. In the markets where these gaps narrowed, retail volume responded with improved velocity. Additionally, in those same markets where we successfully adjusted our price gaps, household acquisition ticked up as well.

For example, we studied our price gap impact at one of our top 10 retailers. Where we got our price gaps down to an appropriate level, we saw both velocity and incremental new households improve 27% since mid-April. Efforts such as these led to a more than 200 basis point year-over-year gain in Vital Farms' retail dollar share of the shell egg category in MULO+ during the second quarter, according to Circana, even as category pricing fell sharply amid industry-wide oversupply. Additionally, and more broadly, by mid-July, shell egg units per store per week per item were up 12.5% since our first quarter call and as of mid-July, reached their highest level since February of 2026, which we believe indicates that our strategy is working. We will continue to broaden these efforts to lower price gaps, which we expect will continue to drive improved results going forward.

Second, as we told you last quarter, we've secured several significant distribution gains that should bolster our volume growth throughout the second half of the year and into 2027. As we highlighted on the first quarter earnings call, we anticipate average Total Distribution Points or TDPs between 150-160 in 2026, up from 130 in 2025, which would represent our largest yearly gain since our IPO in 2020. We anticipate the majority of these gains will become visible in scanner data throughout the third quarter. In Circana data for MULO+, we were already at 148.7 TDPs year to date through the end of the second quarter. We continue to believe we are on track to deliver an average of between 170-175 TDPs in the fourth quarter of 2026 given the visibility we already have to commitments for new placements.

Third, we found ourselves in an oversupply situation earlier this year. We said we needed to amend our farmer contracts to give us flexibility to manage our supply. These contract amendments are now in place. As we previewed last quarter, we believe the oversupply peaked in the second quarter. That means we're now managing the temporary supply-demand imbalance by reducing egg production instead of sending expensive eggs to the low-revenue breaker channel. To be clear, we may still see some excess breaker sales in the coming quarters, but at a much reduced level than what we experienced in the second quarter. A low level of excess breaker sales reflects our intentionally balanced strategy, executing the right number of farmer contract amendments to manage the current supply reduction while maintaining flexibility to meet future expected demand increases. Thilo will provide more details in a few minutes.

Fourth, we told you in May we would reduce our cost structure to support our price actions. Since last quarter, we've made significant progress. We completed our planned operational staffing changes at Egg Central Station. In mid-July, we further optimized our organizational structure to improve decision-making speed and reduce overhead, aligning our headcount directly with our core operational priorities. The result is that we've reduced our annualized SG&A run rate by approximately $6 million-$7 million. Furthermore, we intend to pause construction on Vital Crossroads by the end of 2026. We believe CapEx is tightly controlled. In short, we expect the second half of 2026 to look fundamentally different than the first half of the year.

We believe our strategic actions provide a clear line of sight to improved operating results in the second half and heading into 2027. Thilo will walk through the specific building blocks behind that view in a moment. The expected progression is straightforward. Our narrowed price gaps should continue to accelerate velocity over the coming months and quarters. Our TDPs are on track this year to expand at the fastest rate since our IPO in 2020. We expect to improve cost of goods sold as we are shifting our supply management strategy to farmer contract amendments and away from breaker sales. We will benefit from the actions we've taken to lower SG&A. In conclusion, we believe our turnaround plan is working. Given our successful execution in navigating the challenges of the second quarter, we are reaffirming our full year guidance today.

With that, I will turn the call over to Thilo to take you through the details of our second quarter results.

Thank you, Russell. Let me go through the financial results for the second quarter. Net revenue in the second quarter declined 10.1% to $166 million due to a volume-driven decline of $19.8 million in retail channel sales. That is excluding excess breaker and wholesale channel sales, partially offset by price mix benefit of $1.1 million. Excess sales to breaker and wholesale channels contributed only $0.1 million to net revenue growth as the large volume increase was almost entirely offset by a price decline. Gross profit was $10.9 million, or 6.6% of net revenue. Gross profit includes a $19.5 million impact from excess breaker sales, $0.8 million from the amortization of farmer contract amendments, and $7.8 million in extra costs associated with our butter wind down, for a total of $28.1 million of what we see as supply management and other discrete expenses.