The Simply Good Foods Company (NASDAQ:SMPL) is a leading consumer packaged food and beverage company that has been at the forefront of the nutritional snacking movement. With its portfolio of trusted brands, including Quest, Atkins, and the recently acquired OWYN, the company has carved out a dominant position in the fast-growing better-for-you snacking category.

Business Overview and History The Simply Good Foods Company was formed in 2017 through the business combination of Conyers Park Acquisition Corp. and NCP-ATK Holdings, Inc. The company's origins, however, trace back to 1989 with the founding of Atkins Nutritionals, a pioneer in the low-carb, high-protein dietary movement. Over the years, Atkins has remained a core part of the company's business, catering to consumers seeking a sustainable approach to weight management.

Simply Good Foods aims to lead the nutritious snacking movement with trusted brands that offer a variety of convenient, innovative, great-tasting, better-for-you snacks and meal replacements. The company's product portfolio consists primarily of protein bars, ready-to-drink shakes, sweet and salty snacks, and confectionery products marketed under the Quest and Atkins brand names. These products are distributed primarily in North America through grocery, club, and mass merchandise channels, as well as e-commerce, convenience, specialty, and other channels.

In November 2019, Simply Good Foods executed the Incremental Facility Amendment to its existing Credit Agreement, increasing the principal borrowed on its term facility by $460 million. This incremental borrowing was used to partially finance the acquisition of Quest Nutrition, LLC, which expanded the company's presence in the active nutrition category.

During fiscal 2023, the company faced challenges related to higher raw material costs, higher co-manufacturing costs, and supply chain disruptions. To address these headwinds, Simply Good Foods engaged with its contract manufacturers and logistics providers to adjust its cost structure in line with lower market prices, demonstrating its resilience and ability to adapt to market conditions.

More recently, on June 13, 2024, the company further expanded its portfolio with the acquisition of Only What You Need, Inc. (OWYN), a plant-based protein shake brand, for approximately $280 million. This addition has allowed Simply Good Foods to tap into the fast-growing plant-based nutrition segment, diversifying its product offerings and consumer reach. The acquisition was financed through a $250 million incremental term loan facility, in addition to its existing credit agreement.

Financial Performance and Ratios Over the past three fiscal years, Simply Good Foods has demonstrated consistent financial growth and strong operational performance. In fiscal year 2024, the company reported total revenue of $1.33 billion, up from $1.24 billion in the prior year, representing a 7.1% increase. Net income for fiscal 2024 was $139.31 million, compared to $133.57 million in fiscal 2023. The company's operating cash flow (OCF) for fiscal 2024 was $215.70 million, with free cash flow (FCF) of $209.23 million.

In the fourth quarter of fiscal 2024, Simply Good Foods reported revenue of $375.69 million, a 17.2% increase year-over-year. This growth was primarily driven by the acquisition of OWYN and the extra 53rd week in the fiscal year, contributing 9 and 8 percentage points respectively. Net income for the quarter was $29.29 million, with OCF of $48.95 million and FCF of $44.82 million. Gross profit and gross margin improved during this period, driven by higher sales volumes and lower ingredient and packaging costs.

The company's financial ratios paint a picture of a well-capitalized and efficiently run organization. As of the end of fiscal 2024, the company had a current ratio of 4.05 and a quick ratio of 2.75, indicating a strong ability to meet short-term obligations. The debt-to-equity ratio stood at 0.23, suggesting a conservative capital structure. Additionally, the company's return on equity was a healthy 8.35%, reflecting the effective deployment of shareholder capital.

Liquidity Simply Good Foods maintains a strong liquidity position, which provides financial flexibility and stability. As of August 31, 2024, the company had $132.53 million in cash. The company also has a $75 million revolving credit facility, with no amounts drawn as of May 25, 2024. This robust cash flow generation, combined with its conservative capital structure, ensures that it has ample resources to fund its operations, invest in growth initiatives, and pursue strategic acquisitions when opportunities arise.

Operational Highlights and Segment Performance The strength of Simply Good Foods' portfolio is evident in the performance of its two main segments: Nutrition Snacking and Plant-Based Protein.

The Nutrition Snacking segment, which includes the Quest and Atkins brands, has been the primary driver of the company's financial performance. In the thirteen weeks ended May 25, 2024, North America net sales for this segment increased by 3.2% compared to the prior year period. This growth was primarily driven by strong volume growth in the Quest brand, which offset softness in the Atkins brand.

Quest, the company's flagship brand, has continued to drive growth, with retail takeaway in measured and combined channels increasing by 9% and 10%, respectively, in the fourth quarter of fiscal 2024. The brand's salty snacks category, particularly its chips, has been a standout performer, growing 34% year-over-year. To support this momentum, the company has invested in expanding production capacity and executing a successful marketing campaign.

The Atkins brand, while facing some headwinds, is undergoing a strategic revitalization plan. The company has introduced new product innovations, updated the brand's packaging and advertising, and is working to optimize its marketing investments. While these initiatives are expected to take time to fully materialize, the company remains confident in the long-term potential of the Atkins brand.

The Plant-Based Protein segment, represented by the newly acquired OWYN brand, has been a significant growth driver for Simply Good Foods. In the fourth quarter of fiscal 2024, OWYN's retail takeaway in measured and combined channels grew by 112% and 80%, respectively. The company is focused on driving further distribution and velocity growth for the OWYN brand, while also exploring opportunities to extend the brand beyond its core ready-to-drink shake offerings.

Outlook and Future Prospects Looking ahead, Simply Good Foods remains well-positioned to capitalize on the growing consumer demand for nutritional snacking and better-for-you food and beverage options. The company's strategic initiatives, including innovation, marketing investments, and selective acquisitions, are expected to drive continued growth across its portfolio.

For fiscal year 2025, the company anticipates total reported net sales growth of 8.5% to 10.5%, with OWYN contributing $135 million to $145 million in net sales. Adjusted EBITDA is expected to increase by 4% to 6%, despite some near-term headwinds from input cost inflation. Gross margin is expected to contract by about 200 basis points in fiscal 2025 due to input cost inflation, including a 50 basis point headwind from OWYN.

Quest and OWYN are expected to have strong net sales and retail takeaway growth in fiscal 2025, driven by increased velocity, distribution, innovation, and marketing investments. However, Atkins' full-year fiscal 2025 retail takeaway is expected to decline high single digits, with half of the decline due to reduced trade and marketing investments to optimize ROI.

The company's long-term outlook remains promising, with a goal of delivering net sales growth in the 4% to 6% range and adjusted EBITDA growth slightly greater than net sales. The successful integration of OWYN, coupled with continued innovation and brand-building efforts across the portfolio, is expected to enable Simply Good Foods to achieve results at the high end of its long-term algorithm in fiscal 2026 and beyond.

Risks and Challenges While Simply Good Foods has demonstrated resilience and adaptability, the company faces several risks and challenges that investors should consider.

The highly competitive nature of the nutritional snacking and better-for-you food and beverage industries presents ongoing challenges. The company must continue to innovate and differentiate its products to maintain its market share and brand loyalty.

Input cost inflation and supply chain disruptions are also areas of concern, as they can impact the company's gross margins and operational efficiency. The company's ability to effectively manage these headwinds through pricing actions, productivity improvements, and cost-saving initiatives will be crucial.

The successful integration of OWYN and the realization of expected synergies and growth opportunities also pose execution risks that the company must navigate effectively.

Conclusion The Simply Good Foods Company has firmly established itself as a leader in the nutritional snacking revolution. With its diversified portfolio of trusted brands, strategic acquisitions, and focus on innovation, the company is well-positioned to capitalize on the growing consumer demand for healthier, better-for-you snacking options.

While the company faces some near-term challenges, its strong financial position, operational expertise, and long-term growth strategies suggest that it is poised to continue delivering value for shareholders in the years ahead. The nutritional snacking category has seen strong growth, driven by volume, with key sub-segments like bars, shakes, and chips all increasing in both Q4 and full-year fiscal 2024. The company expects the category to maintain its momentum and multi-year growth trajectory, providing a favorable backdrop for Simply Good Foods' continued expansion and success.