Simply Good Foods Co. — Q1 FY2024 Form 10-Q
Reporting period: 13 weeks ended November 25, 2023; compared with the 13 weeks ended November 26, 2022. Financial amounts below are in millions unless noted.
Business context
The company sells nutritious snacks and meal replacements, primarily under the Quest and Atkins brands, through retail and other channels. Quest focuses on protein-rich, lower-sugar products; Atkins targets low-carb consumers.
Financial results and liquidity
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $308.7 | $300.9 | +2.6% |
| Gross profit / margin | $115.1 / 37.3% | $111.0 / 36.9% | +3.7%; +40 bps |
| Operating income / margin | $51.8 / 16.8% | $52.5 / 17.4% | -1.3% |
| Net income | $35.6 | $35.9 | -0.8% |
| Diluted EPS | $0.35 | $0.36 | Down $0.01 |
| Adjusted EBITDA | $62.0 / 20.1% | $60.8 / 20.2% | +2.0% |
| Operating cash flow | $47.5 | $8.7 | Up $38.8 |
- Cash was $121.4 at November 25, versus $87.7 at fiscal year-end. Operating cash flow benefited principally from less cash absorbed by working capital: $7.7 versus $47.6 in the prior-year quarter.
- Capital expenditures were $0.7; investing cash outflow was $0.8. Financing cash outflow was $13.1, including $10.0 of term-loan principal payments.
- Term-loan principal was $275.0, with a stated effective rate of 8.0% and maturity in March 2027. No revolving-credit borrowings were outstanding; the facility commitment is $75.0, partly offset by $3.5 of letters of credit. The company reported covenant compliance.
- Current assets were $396.5 and current liabilities $79.0. Total liabilities were $507.9 and stockholders’ equity $1,607.2.
Changes and management commentary
- Quest sales rose to $181.5 from $161.5, while Atkins sales declined to $119.5 from $131.7. North America sales increased 2.6%; international sales increased 0.7%.
- Management attributed sales growth to strong Quest volume, which offset Atkins softness. Gross-margin improvement reflected higher sales volume and lower ingredient and packaging costs.
- Operating expenses rose 8.2%, faster than sales, including higher selling and marketing costs tied to growth initiatives. G&A growth included stock-based compensation, executive transition costs and organizational investments.
- Net income was nearly flat: higher gross profit and interest income, and lower interest expense, were offset by higher marketing, compensation and tax expense. The effective tax rate rose to 24.5% from 21.3%, primarily due to permanent differences.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management said it expects liquidity to be sufficient for operations, growth strategy and expected expenses for at least the next 12 months.
- The company is monitoring supply-chain conditions, consumer purchasing behavior, inflation, potential recession, ingredient and packaging costs, logistics costs, and geopolitical disruption. Management noted ongoing discussions with contract manufacturers and logistics providers to reflect lower market costs.
- Adjusted EBITDA is a non-GAAP measure; the company cautions that its calculation may not be comparable with similarly titled measures at other companies.
- Adjusted EBITDA included $0.4 of executive transition costs. Litigation and claims were described as ordinary-course matters, with no material litigation identified. Endorsement-contract payments of $2.9 were expected over the next year.
- There was a $1.0 expected-credit-loss reserve on a $3.0 note receivable related to the 2021 sale of the SimplyProtein brand and assets. No goodwill or intangible-asset impairment was recorded in the quarter.
Important facts for investors to verify
- Whether Quest’s volume growth can continue and Atkins sales softness stabilizes.
- Whether gross-margin gains from lower ingredient and packaging costs persist, and how operating-expense growth affects margins.
- How much of the operating-cash-flow increase reflects working-capital timing and seasonal inventory movements.
- Debt repayment, floating-rate exposure and the March 2027 term-loan maturity, alongside the company’s liquidity and covenant headroom.
- Potential collection of the reserved note receivable and the timing or amount of endorsement-related payments.