8-K: Simply Good Foods Reports Solid Q2 Growth but Adjusts Full-Year Outlook

Simply Good Foods reported a 5.3% increase in second-quarter net sales and a 280 basis point improvement in gross margin, but lowered its full-year sales growth outlook due to weaker than expected Atkins performance.

Summary

• The Simply Good Foods Company reported its financial results for the second quarter of fiscal year 2024, which ended on February 24, 2024.
• Net sales for the quarter increased by 5.3% to $312.2 million, driven primarily by volume growth in the Quest brand.
• The company's gross margin improved significantly, increasing by 280 basis points to 37.4%, due to lower ingredient and packaging costs.
• Net income for the quarter was $33.1 million, compared to $25.6 million in the same period last year.
• Adjusted EBITDA for the quarter was $57.8 million, up from $50.9 million in the prior year.
• Earnings per diluted share (EPS) were $0.33, compared to $0.25 last year, and adjusted diluted EPS was $0.40, compared to $0.32 last year.
• The company has updated its full-year fiscal 2024 outlook, now expecting net sales to increase around the mid-point of its long-term algorithm of 4-6%, down from the high-end of the range, and adjusted EBITDA to increase 6-8%.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to strong gross margin improvement and Quest growth, but tempered by the reduced full-year outlook and weaker Atkins performance. The company is taking steps to address the issues, but the outlook is not as strong as previously anticipated.

Positives

• Quest brand continues to show strong growth, driving overall sales.
• Gross margin improved significantly due to lower input costs.
• The company is investing in growth initiatives and advertising.
• The company is launching new Atkins products by the end of fiscal 2024, including a high-protein shake called Atkins Strong.
• The company has a strong cash position of $135.9 million.
• Cash provided by operating activities increased 76% year-over-year to $94.0 million.
• The company repaid $35.0 million of its term loan debt, reducing the outstanding balance to $240.0 million.

Negatives

• Atkins brand performance was below estimates due to increased competitive activity.
• The company lowered its full-year net sales growth outlook from the high-end to the mid-point of its 4-6% long-term algorithm.
• Operating expenses increased by $8.6 million in the second quarter compared to the same period last year.
• Net interest income and interest expense declined by $3.6 million versus the second quarter of fiscal 2023.

Risks

• The company's performance is dependent on changes in consumer preferences and purchasing habits.
• The company faces risks related to the global supply chain, including constraints and inflationary pressures.
• The company's ability to maintain profitability and margins is subject to various factors.
• Pandemics or other global disruptions could negatively impact the business.
• The company faces competition and changes in the economy, including inflation and increasing costs.
• The company's ability to maintain adequate product inventory levels is a risk.
• The company is subject to changes in taxes, tariffs, duties, and governmental laws and regulations.
• The company faces risks related to unauthorized access of its information technology systems.

Future Outlook

The company expects full-year net sales to increase around the mid-point of its long-term algorithm of 4-6%, including the benefit of a fifty-third week, and adjusted EBITDA to increase 6-8%.

Management Comments

• Simply Good Foods second quarter results were led by continued Quest growth, as well as strong gross margin performance.
• Second quarter net sales increased 5.3% driven by volume and, due to the timing of shipments last quarter, outpaced retail takeaway of about 3%.
• I am very pleased with our gross margin improvement in the quarter, a 280 basis points increase versus last year, which enabled investments in our business and strong Adjusted EBITDA growth.
• We remain confident in the long-term potential of both of our brands.
• Quest has a long runway of growth that will continue to be driven by advertising, innovation and distribution gains which should result in higher household penetration and increased buy rate.
• Work is progressing on the Atkins revitalization plan and, as previously discussed, all elements of the plan should be in the marketplace in fiscal 2025.
• We have accelerated some elements of the plan, specifically innovation, and by the end of fiscal 2024 expect to have new products in the marketplace across all product forms.
• Simply Good Foods is uniquely positioned as a U.S. leader in nutritional snacking.

Industry Context

The nutritional snacking industry is experiencing increased competition, particularly in the 'New Year, New You' season, which impacted Atkins' performance. The company is focusing on innovation and strategic initiatives to maintain its position in the market.

Comparison to Industry Standards

• Simply Good Foods' gross margin improvement of 280 basis points is a strong performance compared to many peers in the packaged food industry, which often see smaller margin changes.
• The company's focus on the Quest brand, which saw a 12% retail takeaway increase, aligns with the trend of consumers seeking healthier snacking options, similar to the growth seen by companies like RXBAR and KIND in the past.
• The Atkins brand's 8% decline in retail takeaway highlights the competitive pressures in the weight management category, where brands like Weight Watchers and Nutrisystem also face challenges.
• The company's adjusted EBITDA growth of 6-8% is a solid performance, but it is important to compare this to other companies in the sector, such as Mondelez or Hershey, to see how it stacks up against industry leaders.

Stakeholder Impact

• Shareholders may be concerned about the reduced full-year sales outlook.
• Employees may be impacted by the company's strategic shifts and cost management efforts.
• Customers will benefit from new product launches and continued innovation.
• Suppliers may see changes in demand based on the company's brand performance.
• Creditors will be reassured by the company's strong cash position and debt repayment.

Next Steps

• The company will continue to execute its strategic priorities focused on doing the right thing for our customers and consumers.
• The company will continue to invest in advertising, marketing, and innovation.
• The company will launch new Atkins products by the end of fiscal 2024.
• The company will continue to work on the Atkins revitalization plan.

Key Dates

Keywords

nutritional snacking, Simply Good Foods, Quest, Atkins, net sales, EBITDA, gross margin, financial results, consumer packaged goods, protein bars