Vital Farms, Inc. (VITL) Earnings

Management highlights

### Turnaround and Operational Restructuring - Completed planned operational staffing changes at Egg Central Station, and further optimized organizational structure in mid-July 2026 to speed up decision-making, reduce overhead, and align headcount with core priorities. This reduces the annualized SG&A run rate by approximately $6 to $7 million. - Construction on the Vital Crossroads (VXR) facility will be paused by the end of 2026, and capital expenditures are tightly controlled. Post-pause, construction will only restart once there is clear signal of needed production capacity, with a 9-12 month lead time to bring the facility online. ### Supply Chain and Supply Management - Shifted supply management strategy from excess sales to breaker channels to farmer contract amendments to right-size overall supply, which will reduce costly breaker sales expenses starting in the second half of 2026. All required 2026 contract amendments are already in place. - Updated execution of the butter business wind-down: remaining bulk butter inventory will be sold to a melter instead of being converted to retail product, as operational constraints and elevated costs made the original conversion plan uneconomical (the exit decision itself remains unchanged). - Initiated a feed cost savings program focused on consolidating feed buying across the company's network of family farms to a smaller group of mills with agreed price frameworks, leveraging existing scale to secure better procurement economics without changing feed formulations or farmer purchasing responsibility. ### Product and Distribution Growth - 2026 total distribution points (TDPs) are on track to expand at the fastest rate since the company's 2020 IPO, reaching 170 to 175 basis points by Q4 2026, with sell-in already completed for these gains. Growth is broad across all channels, with the largest opportunity in the mass channel, where current average item distribution is lower than other channels. A newly launched 24-count SKU has outperformed initial velocity expectations and gained positive market reception. ### Balance Sheet and Capital Allocation - After quarter-end, the company secured new financing: a $125 million three-year term loan (fully drawn) and a $60 million three-year asset-based lending facility, replacing the previous revolving credit facility. This provides significantly expanded liquidity and financial runway to operate through ongoing industry oversupply, with $185 million in total debt capacity (up from $60 million previously) and relatively flexible financial covenants. - Current capital allocation priorities are, in order: maintaining business operations, supporting brand growth and required capacity, capturing cost efficiencies, and returning capital to shareholders. Share repurchases have been terminated in the current phase to prioritize operational flexibility.

Guidance

- Management reaffirmed full-year 2026 guidance, calling for net revenue of $775 to $800 million and adjusted EBITDA of $0 to $10 million. - Full-year 2026 total supply management costs are now projected to be in the mid-$30 million range, a modest increase from the prior $32 million estimate, due to slightly higher planned breaker sales to maintain short-term flexibility for potential retail demand growth. - Management expects a sequential improvement in absolute net revenue in Q3 2026 (which lapps a strong Q3 2025), with full distribution gains reflected in Q4 2026 (the company's typical seasonally largest quarter, with an easier year-over-year comparison). - Management expects gross margin to exit Q4 2026 at an annualized run rate of approximately 30%, with gross margin profile improving substantially through the second half of 2026. - Adjusted EBITDA is expected to improve sequentially from the first half to the second half of 2026, driven by lower supply management costs, scale benefits from increased retail volume, and structural SG&A reductions from organizational streamlining. - Post-completion of VXR construction, annual CapEx is expected to return to the historical $10 to $15 million range for maintenance and small projects, down from the elevated level during the VXR construction phase.

Segment performance

Segment-specific financial data was not broken out in this transcript. Overall company consolidated results for Q2 2026: Net revenue declined 10.1% year-over-year to $166 million, driven by a $19.8 million volume decline in retail channel sales (excess breaker and wholesale sales), partially offset by a $1.1 million price mix benefit. Excess sales to breaker and wholesale channels contributed only $0.1 million to net revenue growth, as large volume gains were almost entirely offset by price declines. Reported gross profit was $10.9 million (6.6% of net revenue), including $28.1 million in discrete supply management and other costs ($19.5 million from excess breaker sales, $0.8 million from farmer contract amendment amortization, $7.8 million in butter business wind-down exit costs); adjusted underlying gross margin was substantially higher than the reported figure. SG&A was $40.4 million, including $6.3 million in one-time discrete costs ($3.3 million in restructuring/severance, $3 million in professional services for the feed cost savings program). Adjusted EBITDA was a loss of $26.6 million, driven by $24.8 million in non-recurring discrete supply management and program costs.

Risks & headwinds

- Ongoing industry-wide egg oversupply requires active supply management, with elevated short-term costs from excess breaker sales that pressure near-term profitability. - Input cost inflation, specifically rising fertilizer costs, is expected to push feed costs higher in late 2026 and 2027, offsetting some planned savings from the feed procurement program. - Retail distribution transitions can experience delays, as seen in Q2 2026 when a switch to direct shipping to a major retailer pushed planned promotions into the next quarter, reducing Q2 revenue and increasing excess supply that had to be sent to breaker channels at a loss. - Balancing competitive price gap narrowing with maintaining the company's premium brand positioning and long-term gross margin targets requires ongoing careful strategic balancing, creating uncertainty around long-term structural margin levels.

Analyst Q&A

• Q: The analyst asks for an update on progress narrowing price gaps with competitors, how much further adjustment is needed, and what the strategic tradeoffs are.

  A: Management says that adjusting retail prices takes time as changes must align with retailer needs, and the company is judicious with capital deployment for these adjustments. Current progress is on track to meet full-year guidance, and the company is continuing to narrow the average price gap to its target range, balancing consumer accessibility with protecting the premium brand positioning.

• Q: The analyst asks for details on the new financing facilities, what flexibility they provide the company as it works to right-size supply and restore profitability over the next year.

  A: Management explains that the expanded $185 million debt capacity (up from $60 million previously) with flexible covenants gives the company room to make long-term optimal business decisions while managing through industry oversupply, without being constrained by near-term cash concerns. The extra capacity acts as an insurance policy to support the brand and manage short-term headwinds while pursuing long-term growth.

• Q: The analyst asks how completed farmer contract amendments will right-size supply, and when costly excess breaker sales will decline materially.

  A: Management confirms that Q2 2026 saw over $20 million in profit impact from breaker sales, and going forward, oversupply will be managed by reducing incoming egg supply rather than selling excess to breakers at steep discounts. Some breaker activity will remain in Q3 and potentially Q4 to maintain flexibility for faster-than-expected demand growth, but volumes and associated costs will be far lower than Q2 2026 levels.

• Q: The analyst asks whether narrower price gaps will permanently lower the company's structural gross margin, even after supply management costs decline, and whether feed cost savings can offset this impact.

  A: Management confirms that the expected Q4 2026 exit gross margin run rate is 30%, not the mid-30% level previously discussed for the longer term. Feed cost savings from the procurement program will at minimum offset expected fertilizer-driven feed cost inflation, and will deliver a structural cost reduction that helps offset the impact of narrower price gaps on margins.

• Q: The analyst asks what the primary difficulty is in adjusting price gaps with retailers: getting retailer approval to change prices, or tracking competitor pricing changes.

  A: Management notes that tracking competitor pricing via weekly scan data is straightforward. The core challenge is balancing the need to narrow price gaps to attract new consumers with protecting the company's premium brand positioning long-term, which requires a gradual, balanced approach in partnership with retailers rather than aggressive discounting.