Vital Farms Q2 2026 Earnings Call Transcript

Key Takeaways

  • Negative Sentiment: Q2 results deteriorated sharply: net revenue fell 10.1% to $166 million and adjusted EBITDA was a $26.6 million loss, driven by excess egg supply, $19.5 million in breaker-sale impacts, and other discrete costs.
  • Positive Sentiment: Management said the turnaround is gaining traction, citing price-gap reductions, a more than 200-basis-point year-over-year increase in retail dollar share, and a 12.5% sequential rise in shell-egg units per store per week by mid-July.
  • Positive Sentiment: Distribution expansion remains a major growth driver, with 2026 average TDPs expected at 150–160 and fourth-quarter TDPs projected at 170–175, supported by new placements across mass, grocery, and natural channels.
  • Positive Sentiment: Vital Farms reaffirmed full-year guidance of $775 million–$800 million in net revenue and $0 million–$10 million in adjusted EBITDA, expecting second-half improvement from lower breaker costs, increased retail volume, and $6 million–$7 million in annualized SG&A savings.
  • Neutral Sentiment: The company strengthened liquidity with a new $125 million term loan and $60 million asset-based lending facility, but terminated its share-repurchase program and paused Vital Crossroads construction to prioritize cash preservation.
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Earnings Conference Call
Vital Farms Q2 2026
00:00 / 00:00

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Operator

Good day. Thank you for standing by. Welcome to Vital Farms' Second Quarter 2026 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I would now like to hand your call over to Brian Shipman, Vice President of Investor Relations. Keep in mind today's conference is being recorded. Brian, please go ahead.

Brian Shipman
Brian Shipman
VP of Investor Relations at Vital Farms

Good morning. 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.

Brian Shipman
Brian Shipman
VP of Investor Relations at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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 $1-$2 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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

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

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

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.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Excluding these items, the underlying gross margin is meaningfully more favorable. We expect the gross margin profile to improve as we move into the second half of the year. We continue to anticipate exiting the fourth quarter at a gross margin run rate of approximately 30%. SG&A was $40.4 million. While up slightly year-over-year, this includes $3.3 million of restructuring and severance costs and $3 million in one-time professional services costs related to our fee cost savings program, for a total of $6.3 million in discrete expenses. Going forward, the combination of our May and July efficiency gains will reduce our annualized SG&A run rate by approximately $6 million-$7 million. Shipping and distribution expenses increased to 6.4% of net revenue in the second quarter of 2026, up from 4.9% a year ago, reflecting the inclusion of $1.5 million of expenses for shipping excess eggs to breaker plants.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Adjusted EBITDA was a loss of $26.6 million. This includes an add back of $7.8 million for butter exit costs and $3.3 million for restructuring and severance costs. The loss for the quarter is a result of the peak intensity supply management costs in Q2, totaling $21.8 million for the quarter, and it also includes $3 million of professional fees incurred during the quarter related to our fee cost savings program, for a total of $24.8 million of discrete expenses that we are not adding back to adjusted EBITDA. Regarding butter exit costs, when we announced the wind down of our butter business last quarter, we expected to convert our remaining bulk butter inventory into retail product before fully exiting the category. Since then, we have concluded that operational constraints and meaningfully elevated costs make this approach uneconomical, so we will instead sell the remaining inventory to the melter.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

This is a change in how we're executing the exit, not in the decision itself. Looking ahead, full year supply management costs are now modeled in the mid $30 million range versus our initial $32 million estimate, representing a modest increase in breaker sales due to two primary factors. First, slightly lighter second quarter sales meant that we had more surplus volume that we routed to the breaker and wholesale channels. Second, we took a methodical approach to the farmer contract amendments to ensure we preserve upside potential if demand turns more quickly than anticipated. Relying slightly more on the breaker channel gives us the short-term flexibility to react to potentially higher retail demand as price gap adjustments take hold. Importantly, I want to underscore that the contract amendments that are needed for the year are in place. Turning to capital allocation and our balance sheet.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

We have taken aggressive, proactive steps to ensure our liquidity profile remains strong as we emerge from this period of oversupply. We ended the quarter with $21.2 million in cash and had drawn $30 million against our previous revolving credit line. To strengthen our cash position, after quarter end, we put in place a new $125 million term loan and a new $60 million asset-based lending facility, replacing our previous revolving facility. Both new facilities have a three-year tenure. We have drawn the entire $125 million term loan, repaying the previous revolver. We now have significant financial runway to fund the business for the foreseeable future. More details on these facilities can be found in the current report on Form 8-K that we filed this morning. At the very beginning of the second quarter, we executed $50 million of share repurchases at an average price of $13.29 per share.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

After the end of the quarter, our board of directors terminated the 2026 stock repurchase plan, consistent with the terms of the new lending facilities. As we told you last quarter, we are halting construction of Vital Crossroads as we prioritize liquidity. We are focused on enclosing the building, which we expect to be completed by the end of fiscal 2026, so that the facility is fully protected against Indiana winter weather while the indoor build-out is halted. This approach is reflected in our reaffirmed full-year CapEx guidance of $70 million-$75 million. Looking ahead to the rest of the year, we are reaffirming our previous guidance, which calls for net revenue of $775 million-$800 million and adjusted EBITDA of $0-$10 million.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

We expect the distribution gains we are making to contribute to improving revenue performance over the course of the second half of 2026 and into 2027. We would note that Q3 is lapping a strong third quarter in 2025, while Q4 is the easier year-over-year comparison from a net revenue perspective. Currently, we expect Q3 of this year to show a sequential improvement in absolute net revenue, while Q4 net revenue growth should reflect the full benefit of the distribution gains we have mentioned during the call today. It is typically our largest quarter of the year due to the seasonality of the business. Additionally, as the majority of our supply management measures are now driven by the contract amendments, the high impact from breaker sales that we experienced in Q2 will be very significantly reduced in the second half.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

This will directly support our bottom line, we believe it will position us to deliver improved adjusted EBITDA in the second half of the year. The improvement in adjusted EBITDA from the first half to the second half is driven by three building blocks. First, in the second quarter, we successfully right-sized our supply via the contract amendments, resulting in much lower supply management costs. Second, increased distribution should benefit retail volume as the second half progresses, resulting in scale benefits. Finally, the structural cost reductions from the organizational streamlining that we conducted in May and July have reduced our annualized SG&A run rate by approximately $6 million-$7 million. As for the phasing of the recovery, we expect the second half performance to build sequentially.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Q3 should mark a sequential improvement in revenue and adjusted EBITDA as breaker volume is at eight, then we anticipate Q4 will reflect the full operational leverage of improved retail volumes running through our streamlined SG&A cost structure. With that, I will turn the call back over to the operator, Russell and I are happy to take your questions.

Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Scott Marks with Jefferies. Scott, your line is open.

Scott Marks
Scott Marks
Analyst at Jefferies

Hey, good morning, Russell, Thilo. Thanks very much for taking our questions. First thing I wanted to ask about is this price gap journey you're on, let's say. Just curious if you can give us a sense of where you are in that journey. How far do you think you have to go? How deep do you think you have to go?

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

Good morning. Thanks for that. I think as we discussed in our Q1 call, changing prices at retail is sometimes a little bit complicated, sometimes can take a little bit of time, and very much has to work for the retailer, as you can imagine, as well as for us. The other thing is that we want to be really judicious with how we deploy our capital. Where we are right now is very much on track, we believe, to deliver our full year guidance based on the efforts we've got with specific retailers during specific time periods. We continue to drive the gap between us and branded competitors on an average basis closer and closer to that range we said we wanted to achieve.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

I don't know that on an overall basis for the entire market, we'll get exactly where we want to be this year, but it reflects the right balance of speed, cost, and seeing a return to positive volume growth as we head into the back half of the year. I think we're in a good position again to return to growth with the right cost structure, especially investments in pricing. We'll continue to look at what that right balance looks like as we head into 2027.

Scott Marks
Scott Marks
Analyst at Jefferies

Appreciate the thoughts there. Just as a follow-up, wondering if you can give us a little more insight into some of these distribution wins that you've been speaking to. Where is it being realized? Is it in new doors? Is it more items on shelf? Is it kind of the core four SKUs that you're expanding? Just any other color you can provide would be great. Thanks.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

Yeah. We have talked, I think for a few years now, about the very clear opportunity to expand our core four items into largely existing doors. While we've certainly had gains in other items, for example, we launched a new SKU, which is a 24 count at Whole Foods, then a few other retailers to come. A 24 count is actually proving to be really welcomed by the marketplace. We've seen some really neat social media response to the 24 count. People are thrilled with that option. But we're also seeing early evidence of velocities that exceed our initial expectations. There are some new products hitting the shelves, that one in particular I would call out.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

In general, it's the core four in existing doors and really running that same playbook, which to us demonstrates that we have lots of opportunity with our existing portfolio. It doesn't require new innovation. It simply requires, as we set out to do this year, having plenty of supply and the conviction to bring that to our retail partners.

Scott Marks
Scott Marks
Analyst at Jefferies

Appreciate it. I'll pass it on.

Operator

Our next question comes from the line of Matt Smith with Stifel. Matt, your line is open.

Matt Smith
Matt Smith
Analyst at Stifel

Hi, good morning, Russell and Thilo. Just following up on the price gap evolution. As you think ahead and the exit rate of this year, could you give a little more color on what your expectation is in terms of volume growth versus the pricing headwind associated with the price gap management taking hold?

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

We have a healthy amount of volume growth in the back half of the year. Thilo may want to add some detail around the composition of our sales growth and sales expectations for the rest of the year. It's really volume driven from my perspective. As we end the year, I believe we'll be in a much healthier place in terms of volume-driven growth. We'll continue to both test and learn and experiment with where we want to lean in more in the portfolio with pricing versus less, where we're getting the best paybacks, and where we're seeing the best benefits for our retail partners.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Matt, as well as that, as we get into the back end of the year, especially into the fourth quarter and as prices come down to the targets that we have, together with the discipline that we just talked about, volume, what should we pick up? The headwinds that we're seeing year-to-date in terms of volume, but also in terms of retail sales pricing, both headwinds will become much easier to manage. In Q4, we're dealing with a much easier lap than what we have experienced in the third quarter.

Matt Smith
Matt Smith
Analyst at Stifel

Thank you for that. A question for you on the feed cost program that you had some professional fees for in the quarter. Can you give a little more detail regarding if you're looking at changing the way feed costs work through the supply chain and the evolution of potential more professional costs as we move through the second half of the year?

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

The primary mechanism will actually be around consolidating the buying of feed across our network of family farms, across a smaller number of feed mills that have agreed to specific price frameworks for all of them. The savings opportunities don't lie in a change to how we actually procure feed. It'll continue to be the farmers themselves that buy the feed. It doesn't rely on a change in the formula, the ingredients that provide the right nutrition for the birds. It simply takes advantage of the scale we've achieved to get some better economics from the overall buy and to make sure that the feed formulas don't have anything in them that we haven't approved that aren't required by the birds. I think it's a pretty straightforward exercise in just being better at procurement.

Matt Smith
Matt Smith
Analyst at Stifel

Appreciate that, Russell.

Operator

The next question comes from the line of Ben Klieve with BMO Capital Markets. Ben, your line is open.

Ben Klieve
Ben Klieve
Analyst at BMO Capital Markets

Hi. Good morning, guys. I just wanted to ask a question around the new credit facilities and just the space and the buffer that that provides you, especially over the next year as you work to rightsize your supply levels and re-accelerate profit. If you could just add a little more context about what that does for your model over the next year?

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Yeah. What the new credit facilities allow us to do is to make the right decisions for the business in the long term, managing through the current oversupply across the industry, and not constantly having to watch our cash balance. That's not to say that we're not watching costs right now or not watching cash right now. We very much are. With $185 million in debt capacity compared to the $60 million that we had before, and being relatively free of financial covenants, it allows us to operate with the flexibility that we need right now to manage through this oversupply across the industry. We think the $185 million is more than what we need. It gives us an insurance policy to make sure that we can operate and make the right decisions for the health of the brands and for managing long-term growth opportunities with short-term headwinds.

Ben Klieve
Ben Klieve
Analyst at BMO Capital Markets

Thank you for that. My follow-up question has to do with the voluntary farmer contract amendments. I was just wondering if you could add a little context and describe the downstream impact of how these are going to work? What's the pace at which you expect these actions to rightsize your internal supplies? I believe you mentioned that the eggs to the breaker market are going to decelerate quite materially starting in the third quarter. If you could just expand upon that and just let us know how this is going to play out. Thanks.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Yeah. As we put in the press release and in the earnings deck, total profit impact from the breaker market in the second quarter was over $20 million. We had a hit to gross profit. We had an additional hit from actually paying for the distribution to the breaker plants. As we said in the prepared remarks, we're going to manage the oversupply going forward. Not by sending expensive eggs to the breaker, where we get literally pennies on the dollar by reducing the supply of eggs coming to the cold storage facility in the first place.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

We still anticipate having some breaker expenses in Q3, potentially in Q4. That is to ensure that we maintain a bit of flexibility should demand pick up faster than what we're currently modeling. We certainly want to avoid a situation like we had at the beginning of 2025, when we had sold out our nest run egg inventory and couldn't react to accelerations in the market. There will still be breaker expenses in Q3, potentially Q4. We're talking a much lower range than what we had in Q2, potentially a lower range than what we had in Q1.

Ben Klieve
Ben Klieve
Analyst at BMO Capital Markets

Great. Thank you.

Operator

Our next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital. Eric, your line is open.

Eric Des Lauriers
Eric Des Lauriers
Analyst at Craig-Hallum Capital

Great. Thank you for taking my questions. Nice job on all the stabilization work thus far. One more question from me on price gap dynamics. Just wondering if you can give us some color on what you're seeing from potential retail pricing stabilization from your competitors in the category broadly. Overall, looks like a bounce in commodity egg prices on the wholesale level in recent weeks. Are you seeing any of that extend to the pasture category as well?

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

Thanks for that, Eric. As we have mentioned on prior quarter calls, we look at specialty eggs in relation to our brand as those eggs with outdoor access for the birds. That would be both pasture-raised and free-range, for example. There we've seen overall a fair bit of stabilization for pricing for our competitors, especially the branded competitors over the last 4-13 weeks. You see occasional blips where prices may come up or down on average as certain brands come off of a really hot promotion or maybe implement one. Some of those are planned well in advance. Some of those may be reactions to more temporary supply-demand imbalances.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

The contrast I would draw to how we're managing through the oversupply we've seen this year is we shifted from sending most of those excess eggs to the breaker to now working with farmers to reduce our supply. I'm not sure how other producers are handling their oversupply situations, but one hypothesis is that when you see really variable promotional activity, pricing on average coming up and then sometimes coming back down for a certain brand. It may indicate supply-demand imbalances that are occurring, that are being managed on the shelf instead of through the breaker channel. I'm not seeing any particular brand showing a real change in trend other than stable at this point. We are seeing signs of stabilization for commodity eggs as well.

Eric Des Lauriers
Eric Des Lauriers
Analyst at Craig-Hallum Capital

All right. That's really great color. I appreciate that. Then just follow-up question, retailer order patterns, one of the things that were disrupted as this oversupply became evident. Could you just give a comment on what you're seeing from retail order patterns? Have those stabilized or volatility come down along with the more stabilized prices?

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

Yeah, that's actually been an area of extreme focus for us. Over the last few years, during an extended period of tight supply in the market, we haven't invested as much time as we might have in a more normalized environment of working closely with retailers on a week-by-week basis to examine their order quantities and to help ensure that they're not over or under ordering relative to the plans we've got with them to grow. What we did see earlier this year when in some retailers you saw velocities below maybe where we expected them to be or perhaps where the retailer or distributor expected them to be. Sometimes there was a gap between when the sell-through at retail started to come down and the orders supporting that, those sales came down and you started to see some inventory expansion and then contraction.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

Those bullwhip effect in the supply chain, as I think they called it in business school. We're working much more closely and really focused on making sure that we don't see a resumption of those disruptive patterns. We're feeling much better about the right levels of inventories at our top customers and our ability to work with them to make sure that we don't see any big swings one way or the other.

Eric Des Lauriers
Eric Des Lauriers
Analyst at Craig-Hallum Capital

All right. Very helpful color. Thank you for taking my questions.

Operator

Our next question comes from the line of Glenn West with William Blair. Glenn, your line is open.

Glenn West
Glenn West
Analyst at William Blair

Hi, guys. This is Glenn West stepping in for Jon Andersen. Just one question. Last quarter, I think we're thinking or talking about 2Q, even though negative mid to high teens, and it came in a little higher this quarter. I know you laid out the three building blocks to get to the guide that you obviously reaffirmed, but maybe just some more color on what gives you confidence that swing is going to work and how much of that is already locked in versus dependent on things playing out? Thank you.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

I think as it comes to relative to what expectations were, volume to retailers in Q2 was maybe a smidge lighter than what we expected. There was one retailer in particular, where we're switching from shipping through distributor to selling directly to the retailer. That transition took a bit longer than we thought, and because of that, promotions got pushed back by a few weeks. That certainly had an impact on the quarter. Given the oversupply situation that we're in, that is really a double whammy for us then, right? On one hand, we are not getting the revenue from that promotion during the quarter that we expected, and therefore not the gross profit that we expected. The extra we didn't sell to the retailer, we now have to send to the breaker and incur additional costs for that.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

That's a bit of the variation there. I think the other piece that probably wasn't in most models for second quarter was the one-time expense that we had for the professional service for the feed project. That's a $3 million expense that we all experienced in Q2. That's not a repeating expense going forward. When I now think about what are the building blocks that we need to deliver the guidance, it really comes down to the things that we talk about in the prepared remarks, right? We keep bringing price gaps down. That will accelerate velocity. We are getting the distribution gains. They're sold in. We have the visibility to them. The TDPs of 170-175 points by Q4. That is something that we have clear line of sight to because the sell-in has already happened. We're taking cost out of the system.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

We talked about the $6 million-$7 million of SG&A reduction. That's 10% of our feed-related costs in SG&A. That's 5.5% of last year's SG&A. That's not an insignificant reduction for us. Those are then the drivers to get to the guidance. It really comes down to can we accelerate volume enough to make sure that we get the leverage in the P&L? That is where we have confidence that with the price gap measures that we're taking and the distribution gains that we know are coming, that we will get that leverage to get margins back up again.

Glenn West
Glenn West
Analyst at William Blair

Super helpful color. I'll pass it on. Thank you, guys.

Operator

Our next question comes from the line of Sarang Vora with Tag. Sarang, your line is open.

Sarang Vora
Sarang Vora
Analyst at Telsey Advisory Group

Great. Thank you. Good to see stabilization in the back half of the year. My question is around price gaps. As you narrow this price gap to $1-$2 in general, and kind of keep it over there given how the competition has changed in this space, do you think this has an impact on the structural gross margin level of the company? I know it is coming back to 30% exit towards the fourth quarter, but in the past year, been talking mid-30s. I am curious to know if the lowering of the prices or competitive landscape has an impact on the structural gross margin, or are there any offsets like feed cost and stuff that can help it go even higher from north of 30? Curious to hear your thought on that.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Yeah, Sarang, thanks for the question. Let me be very clear. I do not think we expect anything north of 30, if you are implying that we should be planning for a four handle on our gross margin. What we said in the prepared remarks was that we think we will have an exit rate in Q4, meaning at the end of Q4, of gross margin that starts with a three again. Volume leverage across ECS and customer sold certainly plays into that, and that is assuming that we are bringing the price gaps down. What will then help us next year is the savings from the feed project that we have talked about. If you recall on the first quarter call, we said that last year, feed costs were about $125 million.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

We expect to save a decent enough amount of that, more than $1 million or $2 million, in order to make it worth our while. Now, with increasing fertilizer costs, we expect that feed cost will increase for us as we go into the end of the year and then next year. The feed cost savings that we are getting from this project are at a minimum offsetting these higher input costs because of fertilizer. We think there is a structural cost reduction that we can accomplish with this project that ultimately will help us pay for the price gap reductions.

Sarang Vora
Sarang Vora
Analyst at Telsey Advisory Group

That's helpful. I had a quick follow-up on the TDP growth. Can you help us understand the TDP growth by channels? It's a significant growth, so I'm just curious if you can share there is an opportunity or volume expansion happening in grocery, mass, natural. Just curious if you can share any more color where you are seeing the TDP growth.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Yeah. The distribution gains that we've been talking about that are coming, they're really across the board. I think we have the biggest opportunity in the mass channel. There are certainly doors that we are not in today, and our average items carried in the mass channel is lower than in the food channel or natural. Even in natural, where we already have very healthy distribution with the 24 count that Russell had mentioned earlier, there's another opportunity for us to get another SKU on the shelf. We expect to get TDP gains across all channels that we're in today, maybe with a bit more focus on mass, because that's where we still have the lowest distribution today.

Sarang Vora
Sarang Vora
Analyst at Telsey Advisory Group

Helpful. Thank you, and good luck ahead.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Thanks, Sarang.

Operator

Our next question comes from the line of Jack Siedow with Needham & Company. Jack, your line is open.

Jack Siedow
Jack Siedow
Analyst at Needham & Company

Hi, guys. This is Jack on for Gerald. I guess, how are you thinking about long-term CapEx post 2026? Not looking for guidance or anything, but just trying to understand how flexible you are with growth spend versus maintenance once the foundation of VXR is completed and insulated. Thanks.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Yeah. VXR, as we said first quarter call then repeated again today, VXR, the plan is to halt construction once the outside of the building is basically completed. We will then need about more than 12 months lead time between deciding that we need the capacity from VXR and actually getting eggs out of the new facility. We're modeling potential demand for the coming years very frequently to make sure that we find the right time to restart construction of VXR. Based on how we've talked about CapEx guidance before and how we talked about it today, you can do the math that there's about $80 million or $90 million more that we need to spend on VXR once we restart construction. We will only do that once we have a very clear signal that we will actually need the capacity.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Once VXR construction is done, we'll go back to a time of just maintenance CapEx. In the past, we've spent, let's call it $10 million-$15 million a year on CapEx. That was a combination of maintenance and some smaller projects that we have been doing at ECS. Once we are through this intense CapEx phase with VXR, expect that CapEx spending will fall back down to somewhere of that range what we've seen prior to starting spending on VXR.

Jack Siedow
Jack Siedow
Analyst at Needham & Company

Okay, that's helpful. As a result of the new deal, can you kind of talk about any updated capital allocation priorities? You obviously announced the termination of the repurchase program, any more color there would be great. Thanks.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

Yeah, the capital allocation priorities really haven't changed from how we've talked about it in the past. First one is keeping lights on. Second one is making sure the brand can grow and we have the capacity. Third one is that we gain efficiencies. The fourth one would be to return monies to shareholders. Right now, given the new loans that we have, the ability to return money to shareholders is constrained. That's simply part of the loan agreements that we signed. That doesn't take it away for us into perpetuity. For the time being, that is simply not something that we can focus on. That then makes us focus on the first three priorities for capital allocation and ensuring that the brand can continue to grow, that we have the capacity in place, that we have the support for the brands in place.

Thilo Wrede
Thilo Wrede
CFO at Vital Farms

That's probably the biggest priority that we have right now.

Jack Siedow
Jack Siedow
Analyst at Needham & Company

Okay. Thank you.

Operator

Our next question comes from the line of Robert Moskow with TD Cowen. Robert, your line is open.

Robert Moskow
Robert Moskow
Analyst at TD Cowen

Hey, thanks. You said that it's taking some time to get the price gaps back to where you think they should be with retailers. I was wondering, what's more difficult? Is it getting them to adjust unit pricing, or is it keeping track of what the competition is doing?

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

Hey, Rob. Thanks for the question. Competition shows up just as we do in the scan data every week. It's relatively straightforward to keep an eye on that and make some fact-based decisions based on that kind of information. I think, again, we feel confident that the work we're doing and have already done, both on narrowing price gaps and expanding distribution this year, should deliver the guidance that we've outlined and reaffirmed today. The pace at which we continue to invest in price and how far we go has a lot to do with balancing, making sure that we are at a relevant price gap for consumers, especially those who might be trying us for the first time, and also continuing to invest in and protect a really premium brand we've built.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

That's why, for example, we have favored the breaker channel in the short run to manage through oversupply as opposed to kind of race to the bottom hot promotions as one example. We have a brand that we need to invest in for the long haul as well. It's really a balancing act across a period of time in working with retailers, but also making sure that we're sending the right signals to consumers about the fundamentally different value proposition we offer and making sure we get credit for that.

Robert Moskow
Robert Moskow
Analyst at TD Cowen

Great. Thank you.

Russell Diez-Canseco
Russell Diez-Canseco
Executive Chairperson, President, and CEO at Vital Farms

Thanks, Rob.

Operator

We have reached the end of the Q&A session. I will now turn the call back to Brian Shipman for closing remarks.

Brian Shipman
Brian Shipman
VP of Investor Relations at Vital Farms

Thank you everyone for joining us today. Feel free to reach out directly if you have follow-up questions, and we'll talk to you next quarter. Have a great day.

Operator

This concludes today's call. Thank you for joining. You may now disconnect.

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