Good day, and welcome to the Vital Farms, Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this call may be recorded. I will now like to turn the call over to Matt Siler, Vice President of Investor Relations. You may begin.

Thank you. Good morning, and welcome to the Vital Farms fourth quarter and fiscal year 2021 earnings conference call and webcast. I am pleased to be joined on today's call by Russell Diez-Canseco, President and Chief Executive Officer; and Bo Meissner, Chief Financial Officer. By now, everyone should have access to the company's fourth quarter and fiscal year 2021 earnings press release issued this morning. This is available on the Investor Relations section of Vital Farms' website at investors.vitalfarms.com. Through 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 today's press release and to the company's annual report on Form 10-K for the fiscal quarter ended December 26, 2021, which was filed with the SEC earlier today, and other filings with the SEC 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 that on today's call, management will refer to adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures. 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 our earnings release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP. And now, I'd like to turn the call over to Russell Diez-Canseco, President and Chief Executive Officer of Vital Farms.

Thanks, Matt. Good morning, everyone, and thanks for joining today. I hope everyone has had a healthy and positive start to the year. We have a lot to cover on today's call. I'm going to begin by briefly reviewing our fourth quarter financial results, and then share updates related to, first, the exceptionally strong demand we saw in our egg and butter products during the fourth quarter. Second, how we are proactively managing the business during this climate of sustained inflation. And third, our long-term growth opportunities. I'll also touch on the highlights from our inaugural Sustainability Report, which we published this morning, that details our environmental, social and governance progress across each of our stakeholder groups. Bo will then provide a more detailed look at our fourth quarter and full-year 2021 financial highlights, as well as our initial 2022 outlook. We then look forward to your questions. In the fourth quarter, we delivered record net revenue, at $77.4 million, a 43.4% increase from the same quarter in the prior year, which represents our fifth quarter in a row of sequential revenue improvement, as well as our 12th quarter in a row of year-on-year revenue improvement. And we continue to manage our margins despite inflation and supply chain disruptions impacting the global economy. We grew our net worth of family farms to over 275. And our products are now in over 20,999 stores, which is a 27.4% increase from the prior year. Finally, household penetration increased to over 6.4 million households, representing a 15% sequential increase relative to the over 5.5 million households in the third quarter of 2021. Looking ahead to 2022, we are providing full fiscal year guidance for net revenue growth of more than 30% to $340 million, and adjusted EBITDA growth of more than 62%, to $13 million, which reflects our confidence in continuing the momentum we're seeing across the business. Bo will elaborate more on our 2021 financial results and initial 2022 guidance in a few minutes. Turning now to updates throughout the business, as I mentioned earlier, we saw robust demand for our egg and butter products in the fourth quarter, as reflected in double-digit growth across net revenue, household penetration, and retail distribution. We saw significant distribution gains across natural and multi-outlet (MULO), including gains at Albertsons and Ahold. Among the top 10 egg SKUs by retail dollar sales in the category, Vital Farms has the top two highest performing egg SKUs in terms of dollar velocities over the past 52 weeks. In addition, among the top 10 egg brands by retail dollar sales in the category, Vital Farms is the highest performing egg brand in terms of dollar velocities over the past 12 weeks. We are seeing the results of our disciplined, purposeful, and nimble approach to marketing. We think creatively about every step of the consumer journey while maintaining the transparent, fun, and refreshingly honest tone that customers and consumers love about our brand. As part of this strategy, in the fourth quarter, leading up to and during the holiday season, we invested more ad spend in paid media, highlighting our shell egg products across a variety of digital channels. This includes the Hens Behind the Lens campaign we shared with you last quarter, which launched in the fourth quarter and had a positive impact on driving brand awareness and purchase intent. To keep pace with demand, we continue to add capacity by steadily expanding our network of family farmers, which currently stands at over 275 farms, and through our continued expansion of Egg Central Station, which we anticipate will be operational by mid-2022. This expansion will double the plant's capacity to over $600 million in annual revenue. Concurrent with the positive growth we saw across the top line of our business, we are dealing with inflation and global supply chain complexity. We're proactively managing these external factors, which include strengthening our supply chain, as I mentioned earlier, implementing a new system to manage our trade and marketing spend, and increasing efficiencies at Egg Central Station through further technology investment. Once our additional capacity becomes operational, we will have doubled the number of robots to almost 20 across the entire facility. The automation improves the lives of our crew members as it eliminates physically taxing work while increasing overall productivity. We also decided to take a portfolio-wide price increase. We've always said we would be pragmatic about pricing, and have taken a methodical approach to these decisions, beginning with a modest increase to our second and third-largest product lines, organic pasture-raised eggs and stick butter, that went into effect in January. Based on what we anticipate for the year ahead, we're taking a price increase across our entire egg and butter portfolio that will go into effect in May. Increases to organic pasture-raised eggs and stick butter will be incremental to what was recently implemented, in January, to maintain our appropriate product pricing structure. In total, the price increase represents a low double-digit percentage of net revenue. Our brand has always been priced at a premium, and we've seen a growing number of households vote for this premium because they want high-quality products that reflect their values. We believe the trust we've cultivated with our customers and consumers gives us permission to take this action to continue investing in our business and brand, empowering us to continue to produce the quality products that consumers have come to expect from Vital Farms. Turning now to our long-term growth opportunities, as many of you know, every day when we practice our stakeholder model, we take actions that prioritize what's sustainable for our business and all of our stakeholders. With this mindset, we conducted a strategic review, in recent months, of the business, and have aligned our entire organization around four strategic pillars of our growth strategy: first, compete to win in our current categories; second, strengthen our brand; third, expand our product portfolio; and fourth, scale a world-class organization. As part of this organization-wide alignment, we have defined specific and measurable initiatives that will drive us toward our long-term growth targets.

Thank you, Russell. Hi, everyone, and thank you for joining us today. I will review our financial results for the fourth quarter and fiscal year ended December 26, 2021, and provide more context around our initial guidance for fiscal year 2022. As Russell mentioned, we achieved another record quarter with net revenue of $77.4 million, an increase of 43.4% compared to the prior year period. Growth in net revenue in the fourth quarter was due to continued growth in egg-related sales from strong volume increases at our customers as well as distribution gains at both new and existing retail partners. We also saw over 40% growth in butter-related sales driven by incremental promotional efforts, which were successful in generating consumer trial. Gross profit for the fourth quarter was $19.8 million or 25.6% of net revenue compared to $17.6 million or 32.6% of net revenue for the fourth quarter of 2020. The change in gross profit was primarily driven by higher sales. On gross margin, as expected, we experienced an increase in input costs across both egg and butter and continued inbound trade inflation. In addition, we experienced a couple of one-time items in the period, the largest related to our butter business, which involved the write-down of both inventory and butter packaging. We also paid a one-time bonus and hired additional temporary workers at Egg Central Station to ensure we had adequate staffing during the peak of Omicron to support the exceptional demand we saw in the period. SG&A for the fourth quarter was $15.8 million compared to $15.6 million in the fourth quarter last year. The increase in SG&A was primarily driven by higher employee-related costs as we grew headcount to support our continued growth and a planned increase in our marketing spending. Shipping and distribution increased 95% to $8.2 million or 10.6% of net revenue relative to $4.2 million or 7.8% of net revenue in the fourth quarter of 2020, driven primarily by higher third-party freight rates and, to a lesser extent, higher levels of sales volume. Adjusted EBITDA for the fourth quarter was a loss of $2 million compared to a loss of $0.1 million for the fourth quarter of 2020. Now, turning to our full-year results, for fiscal year 2021, net revenue was $260.9 million, up 21.8% compared to $214.3 million in net revenue in 2020. Growth in net revenue for 2021 was due to continued growth in egg-related sales driven by volume increases at our customers as well as distribution gains at both new and existing retail partners, as well as an increase in our butter-related sales. Gross profit was $82.9 million or 31.8% of net revenue for fiscal year 2021, compared to $74.5 million or 34.8% of net revenue for fiscal year 2020. The $8.4 million increase in gross profit was primarily attributable to an increase in sales. The 300 basis point change in gross margin was primarily attributable to an increase in input costs across eggs and butter. Total operating expenses were $82.8 million or 31.8% of net revenue, compared to $62.3 million or 29.1% of net revenue last year. This includes SG&A expenses of $57.9 million, a $10.5 million increase compared to 2020, and shipping and distribution expenses of $25 million, which increased $10.1 million year-over-year. The increase in SG&A was driven by higher employee-related costs due to larger overall headcount to support our operations, planned higher marketing spend and, to a lesser extent, public company costs. The higher level of spending on shipping and distribution expenses was primarily due to higher third-party freight rates associated with distribution of our products and, to a lesser extent, higher volume. Total income from operations was $52,000 this year, compared to $12.2 million a year ago. Net income was $2.4 million or $0.06 per diluted share, compared to $8.8 million or $0.27 per diluted share in 2020. Our adjusted EBITDA was $8 million for fiscal year 2021, compared to $16.8 million for fiscal year 2020. The change in adjusted EBITDA was due to increases in input costs, higher shipping and distribution expenses, as well as costs due to additional headcount to support growth across the business. Now, an update on our capital structure, as of December 26, 2021, we had a total balance of cash and cash equivalents and investment securities of $99.6 million, and we have no long-term debt outstanding. Looking ahead to 2022, we are providing guidance of net revenues of more than $340 million, representing growth of 30% over 2021. Turning to our guidance for adjusted EBITDA, we expect adjusted EBITDA of more than $13 million in fiscal year 2022, excluding estimated costs of $1.9 million related to our exit of the convenient breakfast product line.

Thanks for your time and interest in Vital Farms. Before we move to taking questions, I want to reiterate our confidence in the current state of our business. The demand for our products remains robust, as does our level of excitement for the years to come. With that, Russell and I will now take your questions.

Our first question comes from Chris Growe with Stifel. Your line is open.

Hi, good morning.

Morning, Chris.

Good morning. Thank you for the time. I would like to understand the upcoming price increase, specifically the second pricing adjustment you plan to implement. Do you believe this will counteract inflation in the year ahead? If possible, could you provide some insight into the level of inflation you anticipate? I understand it's prevalent throughout the industry, as is the case with many food companies. Additionally, how much do you think this double-digit price increase will help mitigate that?

Yes, as we look at our inputs for 2022, we're projecting about a 10% increase in inflation compared to 2021, in addition to the mid single-digit inflation we experienced last year, which includes commodities and freight costs. We're monitoring corn and soybean meal in light of ongoing global events, but we believe our guidance appropriately addresses the current outlook for grains based on what we know. Regarding the price increase, we implemented a price increase in January for about 35% of our product portfolio. Our next increase will take effect in May, and we will be applying increases across our entire portfolio. Overall, the price increase accounts for a low double-digit percentage of our net revenue. We have also considered mid-to-high single-digit elasticity once this is reflected on the shelves starting in May or June.

Okay, thank you for the update.

Yes.

Sorry if I cut you off there. Sorry.

I was going to mention that if you look back at our growth strategy, we still expect the core business to grow by over 25%. We've implemented some pricing increases in the low double digits, and we have accounted for some volume elasticity, which aligns with our long-term growth strategy, pushing growth to over 30% for at least 2022.

Yes, that makes sense. Thank you for that. I have a follow-up question regarding the growth in household penetration. The increase in the number of doors has been impressive and is clearly contributing to the stronger top line growth rate. I know you are nearing capacity at ECS, so I am wondering if, in order for sales to really accelerate, you need the 2.0 version to come online and be fully operational to boost revenue growth. Is the volume growth expected to be more heavily weighted towards the second half of the year due to these capacity constraints?

So, it's Russell. I appreciate the question, Chris. First, our existing plant supports a $300 million annual run rate. We also have access to other processing plants operated by different companies that we can utilize if we exceed our capacity at Egg Central Station. We believe our internal capacity and Egg Central Station will not limit the forecast we've provided. We're genuinely excited about achieving 30% year-on-year growth. There's definitely potential for additional growth beyond that, but we consider this to be a significant acceleration.

Yes, I agree. Thank you so much for your time.

Thanks.

Our next question comes from Rob Dickerson with Jefferies. Your line is open.

Great, thanks so much.

Hey, Rob.

Hello, I have two questions. First, regarding the discontinuation of pre-made breakfast offerings in relation to your comments about scaling the portfolio. I'm curious about the decision to stop those products. It seems like you're doing well with the egg segment, and gaining distribution appears to be becoming easier. Is it that the current organizational structure makes it simpler to scale that side of the business while the profitability of the other segment might take longer? Did you decide to cut back now for that reason? Any further insight into your decision would be appreciated. Thank you.

I appreciate that. We take pride in our strong focus on profitable and sustainable growth across our portfolio. When we commit to something, we do it to the best of our ability. We are unafraid to confront harsh realities and continuously reevaluate everything in our portfolio. In 2021, we conducted a comprehensive review of our business and portfolio, focusing on our growth strategy for the long term. Breakfast bars and bites provided us with valuable insights. We developed great products that received positive feedback from both retailers and consumers. In 2021, we also challenged ourselves to look to the future and consider growth through larger platforms and bigger investments, with greater potential for revenue and profitability in areas and product lines that we are excited about. However, after assessing all the criteria for our decisions, we concluded that bars and bites did not meet our high standards for the businesses and products we want to pursue. We are eager to reallocate our resources toward larger opportunities ahead and feel confident in our choice to discontinue those products to support the long-term growth of our brand and company.

Okay, that's fair. For my second question, you mentioned your marketing strategy aimed at reaching a wider demographic of consumers. In the presentation, there's a slide showing where you've been and the potential for growth. It seems to be focused more on an older segment of the population, with a significant number of lower-income individuals and possibly a higher percentage of women. I'm curious about what led you to that conclusion and why you believe you can successfully engage with this broader demographic. That's all. Thank you.

Yes, thanks for that. So, first of all, when we look at our existing sort of portfolio of households that have bought into our brand, that are on a part of our raving fan base, we find a pretty broad set of demographics, much broader than the relatively tightly defined target consumers that we market to. We have to be focused in terms of our marketing efforts, but we certainly attract a much broader group of consumers than just the ones we target. As we continue to add more and more households and we continue to review those households for whom our brand resonates, we find that we are broadening our appeal. And thankfully, as we scale we're able to do more. We're able to invest in marketing to additional groups of consumers, to households, and with additional messages. So, again, this broadening of the demographic simply reflects where we think the puck is headed, which is how we've always played.

All right.

Super.

Thank you, appreciate it.

Thank you.

Thanks.

Our next question comes from Robert Moskow with Credit Suisse. Your line is open.

Hi, thank you.

Hey, Rob.

I wanted to know what's next for these big platforms. If handheld and egg bites are not the idea, then what will you show us regarding your big bets? Will they be as incremental as those two, or do you think you'll focus more closely on your main portfolio right now? I also have a follow-up.

Yes, appreciate that, Rob. So, first of all, I would say that as I think you would describe us in other areas of our business, we're thoughtful, we're deliberate. And just like the way that our brand connects with consumers and retailers, in the sense that we're transparent and we do what we say and say what we do, the same is true for the businesses that we go into. When we go into something we want to make sure it meets a whole bunch of really important criteria, including growth opportunity and long-term sustainability and profitability. So, we are doing the work we feel like we need to do in order to make sure that when we launch another category we've got our story straight, and we've got a very clear line of sight to success. That work to look beyond simple product portfolio expansion, and to really think about this as a new business that we will add one or more in the future, began in the middle of 2021. And we have a team dedicated to evaluating the opportunities that we are focusing on, and in addition, to think about how we'll enter those categories, whether it's organic growth or potentially through acquisitions or other means. So, that work is ongoing. I think we'll have more clarity on where we're headed, beyond eggs and butter, this year. But I'm not going to give you a date because, frankly, I want to make sure we get it right.

Okay. And kind of broader question about EBITDA margins and cash flow. I mean, I think it's no secret that early-stage growth companies like yourself, with high growth rates but, I guess, immature margin structure and cash flow have been valued lower by the market. I wanted to know if that has factored into your thinking at all about where your margin structure needs to be, when do you think you need to demonstrate a stronger cash flow outlook? And whether you've taken a look at your long-term financials that you had at the IPO, and do you feel like you're still on track with those or do you think that, because of the higher cost environment where you are a year or two behind?

Rob, Bo is going to answer this more fully, but I want to take a quick turn on your question, which is fair. The thing I want to call out is if you look at us against the backdrop of other, as you said, smaller faster-growing companies with, as you said, immature P&Ls or cost structures; we're cash flow positive. We're making money; we're hitting our growth targets. And so, there's a lot of variability and uncertainty amongst a whole lot of companies in our space. Amongst the things that we control, we are knocking it out of the park, frankly. So, I would call out that despite the fact that we're relatively small and growing fast, we're cash flow positive. And I think that's an important distinction for us in our peer set. Beyond that, I would say that there's certainly a lot of fixed cost leverage to be had in the years to come, which Bo can articulate better. I think that our long-term growth algorithm has us at the low-to-mid 30s in terms of gross margin, which is absolutely a function of the very strong brand we've built, and beyond short-term fluctuations in commodity input costs, this has been achievable for many years, and we believe we'll continue to be so. So, personally, I don't think there's any change to what we said at the IPO. What's changed is short-term events, and we're focused on the long-term success of the company. But with that, I'll ask Bo to fill in the details.

I'm not sure there's much to add to that. We’ve discussed pricing in recent calls and have mentioned our pragmatic approach. Given the ongoing inflationary pressures that are expected to persist, we believe that adjusting prices will help counteract the commodity inflation we’re experiencing and help us realign with the margins we had when we didn’t have pricing in place. By the end of the year, I expect we will be back on track with our margins and remain committed to achieving the mid-30s gross margin and low double-digit EBITDA margins that we outlined during the IPO.

Okay, understood. Bo, can you provide an update on whether you expect to return to breakeven in the first quarter for EBITDA, or will it take longer for the pricing adjustments to take effect?

We will only see a portion of the pricing impact in the first quarter that we've already implemented. Additionally, we will incur exit costs from the breakfast convenience business, totaling around $1.9 million. As a result, we will not achieve positive EBITDA in the first quarter.

Okay. All right, thank you.

Thank you.

Our next question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Yes, thank you. Good morning, everyone.

Hey, Adam, good morning.

Hi. I wanted to revisit the idea of expanding the platform. You mentioned some competencies in poultry and dairy, and I'm considering how these relate to your targeted gross margin and EBITDA margin structures. If we are talking about making larger investments, how should we adjust for changes in your capital intensity? It seems like achieving this could be challenging with co-manufacturers. How should we look at the decision between acquiring processing plants versus building them, and whether to focus solely on the Vital Farms brand or include other brands? I'm trying to understand how these changes might affect investment levels in the company if and when you pursue this direction.

Yes, that's a great question, and there’s a lot to consider. Our team is currently focused on understanding the growth path and how to achieve it efficiently with capital. If you look at what we've done with eggs and our current position with butter, there’s a clear strategy we are following, which is crucial to our growth approach. We begin by identifying unmet consumer needs, and there's significant potential for disruption in fruit, dairy, and poultry categories in this country. We have the advantage of narrowing down which needs we want to address and where we see opportunities for disruption. In the initial stages, we plan to collaborate with companies that have more experience in the specific markets we choose to enter. This allows us to manage risk and control capital investment as our brand or product line grows. Over time, as demonstrated with eggs, we have become more involved in the actual operations and manufacturing of our products. Our Egg Central Station in Springfield, Missouri, exemplifies our approach to scaling a business effectively when the timing is appropriate. This aligns with our expectations at the IPO, where we will maintain a diverse portfolio of mature, rapidly growing products with higher gross margins, which will support the rollout of new products that may initially have lower gross margins but will improve over time. When we launch a new product, we will have a strategy in place to ensure capital efficiency and strong gross margins.

Okay. That's helpful. And then just in the near term, just surprised, going to the K, just how we think about risk on avian flu is just the nature of your production practice where there is outdoor access and it's mostly spread by migratory birds, it would seem like that's not something you could have kind of airtight biosecurity protocols. It's in areas where you do have grower relationships, how do we think about, how you mitigate avian flu with its present in some of those pasture built areas?

Sure, very fair question. Avian influenza is a thing, and the last time it hit the United States with any impact on the business was in the 2015-2016 timeframe, where there was about 44 million birds were depopulated in this country related to avian influenza. None of them were ours. All of them were in highly intensive farming operations where the birds were kept indoors. So, I'll say a couple of things about mitigation. One is our 275 small family farms are a distributed network. And when avian influenza hits a farm, it tends to hit a farm in an area, not all the farms in an area and so we can look back to 2015 and 2016 and say actually, our farming model, even with outdoor access, wasn't prone to any avian influenza. But even if one of our farms were prone to it, as you can do the simple math, it's less than 1%. It's less than half a percent of our productive capacity. So, we have resilience simply in our model of not having a small number of very concentrated farm sites, which once affected impacts all of the hens on that site. Beyond that, we follow the very best biosecurity standards in the business, always do that, and have ramped them up just like we did back in 2016 to ensure that we're taking every possible precaution to prevent any impact to our business and to our network of small family farmers about whom we care deeply. Finally, what I'd say is that again, the concern in the popular press and certainly from the big players in the space is that outdoor access is the big risk here, but we've always believed that outdoor access is an important part of the health and welfare of the birds. You can imagine, just like with a human virus being confined indoors in a small space without masks might actually lend itself to a higher transmission rate. Being outdoors, in sunshine, with a salad bar in front of you might actually improve the health of a human or an animal life and so we're confident in our model, we're confident in how we're managing it. And if past results are any indicator, we'll be in good shape this year.

Okay. If I could ask a clarifying question regarding Rob's inquiry about the guidance, you mentioned $1.9 million in costs for the first quarter due to the shutdown of the convenient breakfast items. Is that included in the $13 million adjusted EBITDA guidance? It seems the length of the question suggests an implication, but it's not clear.

Correct, it is not in the guidance. So, the $13 million excludes the $1.9 million in expenses related to the breakfast bar exit.

Got it. Okay, perfect. Thank you.

Thanks.

Our next question comes from Ken Zaslow with Bank of Montreal. Your line is open.

Hey, good morning, guys.

Good morning Ken.

Hi, Ken. Good morning.

So, a couple of tight follow-up with anything else, can you talk about elasticity with the price increases. I guess the sense that you have not had a lot to see, but I wanted to confirm that and are you seeing any sort of elasticity or easing in your pricing?

Thanks, Ken. That's certainly a question many companies in our industry are facing as several are implementing price increases. So far, among the products that have undergone price hikes, we haven't observed any elasticity; in fact, our growth continues to accelerate and we're gaining market share in our categories. However, that doesn't mean we're completely immune, and the guidance we've provided is based on extensive modeling of potential elasticities concerning volume reductions. We can provide specifics on that, but it's already factored into our guidance. So, while we can never rule anything out, we haven't seen any negative impact from the price increases that have already taken effect.

And as I said earlier, we factored in mid to high single-digit elasticities once the pricing is reflected on the shelf and remain in June across the portfolio.

Great. You mentioned in your Egg Center that you had to labor, that you had to bring in extra labor. Are you done with that? You have that, are you now working efficiently and not bringing any labor or was there more labor constraints? And how long do you think that'll last?

I think, Ken, we try to be prudent to protect the business. And that's why we took the step of actually bringing in additional labor in Q4 during the peak of Omicron. So, I think now that Omicron is behind us. We started to pare that back, so that we're getting back to a more normal level of operation and not feeling the same thing that we did, but we wanted to ensure that we were doing everything in our power that Omicron would not impact our ability to produce to the strong demand we are seeing in the quarter.

And let me just build on that a little bit. And I appreciate the question very much, us doing that is one more example of why our company hasn't had challenges on the supply side, hasn't had challenges with COVID affecting our ability to have people work and deliver our products on time or expand our capacity. We've been operating uninterrupted for our entire history. But certainly throughout this period of COVID and some incremental labor is just part of the recipe that delivers that uninterrupted growth and our ability to execute at a very high level.

Great. My last question is about the breakfast segment. I apologize for not fully understanding it. What insights did you gain from this segment, and how will you apply them moving forward? Was it an issue with execution, a consumer response, timing, or insufficient funds to support it? How do you assess this and decide on changes for future success? I know you covered this briefly, but I'm trying to get a clearer picture. I think it's commendable that you made quick decisions instead of prolonging the process. I apologize again, but I'm really interested in learning what steps you'll take based on these insights.

Thank you for your question, Ken. I appreciate your acknowledgment. We did not let the situation linger, and we approach things analytically. At Vital Farms, we have fostered a culture where we examine our business thoroughly and address issues collaboratively without assigning blame. There were many lessons learned that contributed to our recent decision, making it challenging to highlight just one or two. However, I will outline our future approach. We want to ensure that whatever we pursue is meaningful for all stakeholders, particularly from a financial perspective. For instance, our egg bites and breakfast bars were always considered an incremental addition to our egg portfolio. As mentioned earlier in the call, we plan to introduce a few new egg products this year, including True Blues and a regenerative SKU, which are also incremental extensions to our egg offerings. As we explore opportunities in new categories, we are not simply extending our portfolio; we are taking a more comprehensive approach to entering new business areas. This strategy is driven by both our strategic and financial functions, alongside marketing and sales. In the past, we relied mostly on our marketing team for consumer insights, which would lead us to launch new products excitedly. Now, we are adopting a more holistic view, thinking much further ahead, and aiming significantly higher.

Great. I really appreciate it. Thank you, guys.

Thank you, Ken.

Thanks, Ken.

Our next question comes from Brian Holland with Cowen. Your line is open.

Yes, thanks. Good morning. Most of my questions have been answered. Just a couple quick ones here, on the store expansion, obviously a nice year-over-year and sequential uptick in the number of stores, I'm just curious, what's the catalyst for that? Is that coming from sort of a pipeline through COVID that more maybe it was harder to get products into new stores? Or what other factors maybe and then also what was the composition of these stores of these? Are these conventional grocery stores, natural channels or some other?

Thanks for the great questions. I'll do my best to address them. I wouldn't attribute our ongoing distribution growth to pent-up demand from COVID. Instead, this reflects the natural evolution of our growth strategy, which focuses on building a strong brand that resonates with more households and developing an exceptional sales team to foster long-term relationships with retailers. Our products perform excellently for our retail partners and create strong consumer demand. Consequently, selling our products isn't particularly difficult. It's not just a couple of items that are successful; it's multiple products performing well. There's a natural momentum built from starting with a few SKUs at a retailer, leading to discussions about expanding their offerings. Regarding the types of stores, we are adding a diverse range of retailers, but we're further along in the natural channel where our market share exceeds 35%. This growth is primarily occurring in new lower or conventional grocery stores, where our market share is about 3.5% to 4%. In the natural segment, we have a strong presence and often rank as the top brand. Over time, we expect similar results in the lower segment, where we are already among the top brands at many retailers nationwide. Thus, our growth is not due to pent-up demand or a temporary trend. We have consistently expanded our distribution, and this momentum is simply accelerating because our approach is effective.

I appreciate the color, Russell. Quickly on household penetration, I mean, you're growing at least as much in 2021 after an uptick COVID-driven in 2020, but you're growing as much post-COVID as you were pre-COVID, which I presume is a factor of your marketing spend. So, I'm curious, if it's possible, either quantitatively or qualitatively to help us understand to what extent you're seeing maybe consumer acquisition costs come down, i.e. as you build awareness for that brand, and as you get more distribution, it's actually getting a little bit easier right now to bring in new households.

I appreciate that. I understand that for fast-growing brands like ours, it's important to clarify whether COVID helped or hurt us, and if our brand can sustain growth without significant changes in consumer behavior. We were experiencing hyper growth before, during, and after COVID, and the acceleration of our market share gains post-Omicron, particularly after the shift to remote work, shows that our success is not solely a result of the pandemic. Our growth has been consistent regardless of the conditions in the larger economy. You asked about consumer acquisition costs; we don't currently share our marketing spend, but that might change in the future because, based on our benchmarks, we are among the most efficient users of advertising dollars. Our acquisition costs are quite low, and we excel at attracting consumers with a modest budget. We are skilled at allocating capital effectively to drive our growth while maintaining positive EBITDA. I'm also eager about the opportunity to increase our marketing investment to further accelerate our growth, as we effectively convert marketing dollars into new households.

Thanks, Russell. Last one from me. Long-term financial goals revenue growth of over 25%, I'm curious within the construct of that, given sort of the conversation today about line extensions, do you have anything that is embedded in that number for future new product extensions, or is this algorithm comprised just of sort of solely off of what we've got and what we know today?

Consistent with our transparent and I would argue, conservative approach to what we commit to and then what we deliver on. There's not frothiness and irrational exuberance in the numbers we offer at the IPO. And today, that guidance around long-term growth algorithm only consists of things that we have actively happening in the business. There's no future acquisition built into that. There's no future, moonshot in there, that all comes on top. And the fact is, despite being the number two egg brand in America, and despite having the fastest share gain of anybody in the space, we're still only in the mid-single digits in terms of market share. And there's so much whitespace just in the stuff that we've really nailed. So, there's a lot more to come. But when we offer that sort of 25% plus growth guidance, it's not just on the stuff we know.

I appreciate it. Thanks, best of luck.

Yes, thank you. Thanks.

Thanks.

Our next question is a follow-up from Robert Moskow with Credit Suisse. Your line is open.

Just quickly, is the gross margin pressure in the fourth quarter a result of packaging, labor, or grain? I may not have fully understood it during the call.

Yes, in Q4 we saw a couple of hundred basis points of pressure from input costs both from commodities and other input costs in butter and egg. We saw 50 to 100 basis points due to higher inbound freight, continued pressure on inbound freight. And then, we had two discrete items. We had some write-offs related to the butter business in terms of some inventory. It's around 150 basis points. And then finally, the COVID bonus and the additional temporary workers that we brought in to make sure we could sustain the supply was about 50 basis points. So, some other small positives and negatives, but those account for the majority of the change that we saw.

There are no further questions. I will turn the call back over to Matt Siler for closing remarks.

Thanks again everybody for your time today. Have a good one.

Thank you.

This concludes the program. You may now disconnect. Everyone have a great day.