Release Date: June 27, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Simply Good Foods Co (SMPL, Financial) reported fiscal third-quarter financial results that were slightly better than estimates.
- Quest brand showed strong growth, particularly in salty snacks, with retail takeaway increasing by 13.5%.
- Gross margin improved to 39.9%, a 320-basis-point increase from the previous year, primarily due to lower ingredient and packaging costs.
- The OWYN acquisition is tracking well, with expected net sales for Q4 in the $25 million to $30 million range.
- E-commerce growth for both Quest and Atkins brands continued to be solid, contributing positively to overall performance.
Negative Points
- Atkins brand performance was down, with retail takeaway in the IRI MULO + C-store universe and combined measured and unmeasured channels off by 9% and 5%, respectively.
- International net sales declined by 2.4% compared to the previous year.
- Input cost inflation, particularly in cocoa, is expected to be a headwind in fiscal 2025, potentially leading to gross margin compression.
- The company anticipates a short-term sales impact from reducing low ROI trade and marketing investments in the Atkins brand.
- Adjusted EBITDA growth for Q4 is expected to be negligible due to the OWYN acquisition.
Q & A Highlights
Q: The category growth profile remains a standout for food at home and you've talked about a successful shelf reset for Atkins. Can you provide more detail on why you're lowering investment spend behind the brand, despite the strong category and scale Atkins has? And how are you thinking about the growth potential of Atkins next year, given the lower investment spend?
A: (Geoff Tanner, President and CEO) The nutritional snacking category continues to be a standout, especially versus the rest of the store, with recent trends showing plus six, plus seven, and almost all of that volume fueled by more consumers seeking the macro profile that our products offer. As leaders and category captains at most retailers, we believe we're uniquely positioned to continue to lead that growth. Regarding Atkins, we evaluated investment through a portfolio lens and identified some low-performing ROI trade events and marketing events. We believe that taking a harder look at these investments is necessary to build Atkins into a long-term sustainable business. We still believe in Atkins and are committed to the revitalization plan, but we do expect a one-time impact from reevaluating these investments.
Q: Shaun, you called out some gross margin pressure in fiscal '25 due to inflation. Is that for the legacy business or are you including the headwind from the mix of OWYN acquisition? And how are you thinking about the pricing dynamic in the category?
A: (Shaun Mara, CFO) The bigger impact will be the inflation we see on ingredients, particularly cocoa. Spot prices for cocoa have increased significantly, and our suppliers indicate that pricing will be higher in the second half of fiscal '25. We typically cover about five to six months, so we have good visibility into the end of our calendar year or through the first half of fiscal '25. Inflation will be an issue, particularly in the second half of the year. We will look at all levers, including productivity and pricing, to manage this inflation.
Q: Can you discuss the latest thoughts regarding the immediate growth plans for OWYN? How are you thinking about building distribution out of the gate, and are there any specific channels that are a focus for you?
A: (Geoff Tanner, President and CEO) OWYN is strategically and financially compelling, increasing our exposure in the shake segment by about 400 basis points to 23% of our total sales. It reaches a new consumer segment and is starting to appeal to mainstream consumers. Our focus for the first year is on driving distribution of existing products and letting OWYN run somewhat independently while we work on integration. We expect OWYN to at least double in the next four years, driven by distribution expansion and appealing to mainstream consumers.
Q: Could you comment on the Quest brand's performance in the cracker vertical and the initial reception from retailers for the bake shop launch?
A: (Geoff Tanner, President and CEO) Quest chips have been particularly strong, with a run rate just crossing $300 million in retail sales and growing at about 50%. Crackers faced some supply challenges, but we have moved to a new co-packer, which will free up capacity to support this product. For the bake shop platform, we have received tremendous support from customers, and we expect strong merchandising support and modular decisions from all channels. The bake shop launch will be part of the "It's Basically Cheating" campaign, and we are excited for its launch in the fall.
Q: Should we expect Atkins to be down in fiscal '25 year-on-year, given the consumption trends and the pullback on some A&P investments?
A: (Geoff Tanner, President and CEO) Yes, our expectation is that Atkins will continue to be down in fiscal '25, driven by a harder look at lower ROI trade and marketing investments. However, we remain confident in the long-term trajectory of the business, particularly given the increased conversation and cultural relevance around weight management driven by new weight loss drugs.
Q: How do you balance the investment between Quest, Atkins, and OWYN, especially with OWYN growing faster than Quest?
A: (Geoff Tanner, President and CEO) At this stage, OWYN will largely run independently for the first year while we focus on integration. OWYN has a significant distribution runway that we will get after, similar to what we did with Quest. We will focus on driving distribution for OWYN and then fuel marketing when we have a broader distribution footprint. For now, we are not reallocating significant marketing investment from Quest or Atkins to OWYN.
Q: Can you share the timing and materiality of the selling for the bake shop launch under Quest?
A: (Geoff Tanner, President and CEO) The bake shop platform, which includes high-protein muffins and brownies, has received tremendous support from customers. We expect strong merchandising support and are very pleased with the sell-in and modular decisions made by all customers and channels. The launch will be significant and is scheduled for the fall.
Q: What is the right cadence for introducing new platforms under Quest, considering the success of chips and the upcoming bake shop launch?
A: (Geoff Tanner, President and CEO) We aim to introduce new platforms every two to three years to ensure we have sufficient investment behind each platform. We are excited about the performance of chips and the upcoming bake shop launch. We will continue to invest significantly in advertising and other support for Quest to ensure the success of these platforms.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
