The Simply Good Foods Company (NASDAQ:SMPL) is a leading consumer packaged food and beverage company that aims to capitalize on the growing nutritious snacking trend. With its portfolio of trusted brands, including Quest®, Atkins®, and the recently acquired OWYN™, the company is well-positioned to deliver sustainable growth and shareholder value.

The company's history dates back to 2017 when Conyers Park Acquisition Corp. and NCP-ATK Holdings, Inc. merged to form The Simply Good Foods Company. Since then, the company has strategically expanded its portfolio through the acquisition of Quest Nutrition in 2019 and the more recent addition of OWYN in 2024. These acquisitions have strengthened the company's presence in the nutritious snacking space and diversified its product offerings.

Business Overview

The Simply Good Foods Company develops, markets, and sells a variety of convenient, innovative, and better-for-you snacks and meal replacements under its flagship brands. The Quest® brand caters to consumers seeking protein-rich foods and beverages that limit sugars and simple carbs, while the Atkins® brand targets those following a low-carb lifestyle. The newly acquired OWYN™ brand further expands the company's presence in the plant-based, allergy-free protein shake segment, appealing to a growing consumer base.

The company's products are distributed across major retail channels, primarily in North America, including grocery, club, mass merchandise, e-commerce, convenience, and specialty stores. This diversified distribution network allows the company to reach a wide range of health-conscious consumers and capitalize on the increasing demand for nutritious snacking options.

Financials

The Simply Good Foods Company has demonstrated strong financial performance in recent years. In the fiscal year ended August 26, 2023, the company reported annual net income of $133.6 million, annual revenue of $1,242.7 million, annual operating cash flow of $171.1 million, and annual free cash flow of $158.9 million.

In the third quarter of fiscal 2024, which ended on May 25, 2024, the company reported net sales of $334.8 million, up 3.1% year-over-year. Gross profit for the quarter was $133.6 million, resulting in a gross margin of 39.9%, a 320 basis point improvement compared to the prior-year period. Adjusted EBITDA for the quarter was $71.9 million, an increase of 7.9% year-over-year.

The company's North America net sales increased 3.2% in the third quarter, while international net sales declined 2.4% compared to the same period last year. The strong performance in North America was driven by continued growth in the Quest brand, which offset softness in the Atkins brand.

Outlook

For the full fiscal year 2024, the company expects net sales for the legacy business to increase around the midpoint of its long-term algorithm of 4% to 6%, including the benefit of a 53rd week. The recently acquired OWYN brand is expected to contribute $25 million to $30 million in net sales in the fourth quarter of fiscal 2024.

The company has narrowed its total adjusted EBITDA outlook for fiscal 2024, now expecting an increase of approximately 8% compared to the prior year, up from the previous estimate of 6% to 8% growth.

Liquidity

As of May 25, 2024, the company had $208.7 million in cash on its balance sheet. The company's term loan debt stood at $240 million, and it has access to a $75 million revolving credit facility. Subsequent to the third quarter, the company completed the acquisition of OWYN, funded through a combination of cash on hand and an additional $250 million in term loan borrowings.

The company expects to pay down a portion of the $490 million in total term loan debt during the remainder of fiscal 2024 and is targeting a net debt to adjusted EBITDA ratio of around 1.25 times by the end of the fiscal year.

Operational Highlights

During the third quarter, the company continued to execute on its strategic priorities, driving strong performance in its key brands:

Quest:

The Quest brand maintained its momentum, with retail takeaway in measured channels increasing 13.5% in the quarter, driven by volume growth. The company's investment in advertising, which debuted in March, had an immediate positive impact on sales. The company sees significant upside potential in the Quest salty snacks business, which now represents approximately 25% of the brand's measured channel retail sales.

Atkins:

The Atkins brand's revitalization plan is progressing as scheduled, with the company introducing 17 new products that will largely hold distribution flat, excluding the club channel. While the brand's retail takeaway declined in the quarter, the company is confident in its ability to stabilize the business through innovation and targeted marketing investments.

OWYN:

The acquisition of OWYN closed in June 2024, and the company is excited about the strategic and financial benefits of this transaction. OWYN increases the company's exposure in the high-growth protein shake segment and provides access to a new consumer base seeking plant-based, allergy-free options. The company expects OWYN to benefit from its scaled go-to-market capabilities and continue its strong growth trajectory.

Risks and Challenges

While The Simply Good Foods Company has demonstrated impressive growth and execution, the company faces several risks and challenges that investors should consider:

1. Inflationary pressures: The company has highlighted the potential for input cost inflation, particularly in the area of cocoa, to impact gross margins in fiscal 2025.

2. Integration of OWYN: The successful integration of the OWYN brand and the realization of anticipated synergies will be crucial for the company's long-term success.

3. Atkins brand revitalization: The company's ability to stabilize and revitalize the Atkins brand remains a key focus, and any missteps in this process could impact the company's overall performance.

4. Competitive landscape: The nutritious snacking category is highly competitive, and the company must continue to innovate and differentiate its products to maintain its market leadership.

Conclusion

The Simply Good Foods Company is well-positioned to capitalize on the growing demand for nutritious snacking options. With its diversified portfolio of trusted brands, the company is poised to deliver sustainable growth and shareholder value. The company's strong financial performance, strategic acquisitions, and operational execution position it as a leader in the nutritious snacking space. While the company faces some near-term challenges, its long-term growth prospects remain promising.