Simply Good Foods Company — Fiscal 2019 First Quarter
Reporting period: Thirteen weeks ended November 24, 2018; comparisons are with the thirteen weeks ended November 25, 2017. The company sells branded nutritional snacks, primarily under Atkins and SimplyProtein, and reports one operating segment.
Financial performance and liquidity
| Metric | Q1 FY2019 | Prior-year period | Change |
|---|---|---|---|
| Net sales | $120.9 million | $106.6 million | +13.5% |
| Gross profit | $59.1 million | $52.8 million | +12.0% |
| Gross margin | 48.9% | 49.5% | Down 60 basis points |
| Operating income | $21.2 million | $19.3 million | +9.8% |
| Net income | $15.3 million | $10.2 million | +49.3% |
| Diluted EPS | $0.18 | $0.14 | Up |
| Adjusted EBITDA (non-GAAP) | $26.7 million | $23.7 million | +12.6% |
| Operating cash flow | $12.9 million | $8.8 million | + $4.1 million |
Gross margin declined amid non-price-related customer promotions and slightly higher supply-chain costs. Marketing spending rose 16.4%, and general and administrative expense rose 14.8%, including organizational investment, professional fees and distribution-center expansion.
At November 24, 2018, cash and cash equivalents were $210.8 million. Debt was $198.0 million principal ($191.4 million net of deferred financing fees); no amounts were drawn on the $75 million revolving facility. The company reported covenant compliance and stated liquidity was sufficient for at least the next twelve months. Financing cash flow included $113.5 million from cash warrant exercises, offset in part by a $26.5 million TRA settlement and $0.5 million of debt principal payments.
Material changes and unusual items
- U.S. retail takeaway increased 23.5%, while net sales grew 13.5%; management attributed the gap partly to efforts to secure supply amid strong demand.
- Public warrant exercises generated $113.5 million in cash and contributed to common shares outstanding increasing from 70.6 million at August 25 to 81.9 million at November 24. Further public warrants were exercised cashlessly; 6.7 million private warrants remained outstanding.
- The company paid $26.5 million to terminate its Tax Receivable Agreement, recognizing a $1.5 million gain on settlement after recording a $0.5 million fair-value loss. The settlement also involved payments to certain related parties who were former Atkins shareholders.
- The effective tax rate fell to 23.3% from 38.8%, primarily reflecting the lower federal corporate tax rate under the Tax Act and the one-time TRA settlement impact. The company said its accounting for some Tax Act effects remained incomplete and provisional.
Outlook, commentary and risks
Management cited strong core-product velocity and retail momentum, and expressed confidence in delivering full-year net sales and Adjusted EBITDA. No numerical full-year targets were provided. Management also expected supply issues to persist despite progress securing additional manufacturing supply.
Sales are seasonal: historically strongest in the second fiscal quarter around post-holiday resolutions and lowest in the fourth quarter. Other disclosed considerations include sensitivity to product demand and manufacturing supply, variable promotional activity, foreign-currency movements and debt covenants. The company reported no material litigation, no material changes to its previously disclosed risk factors, and no material off-balance-sheet arrangements. It announced a $50 million stock repurchase program but repurchased no shares during the quarter.
Key facts for investors to verify
- Whether manufacturing capacity and supply keep pace with retail demand, and how any constraints affect sales and margins.
- The extent of dilution from warrant exercises and remaining private warrants, and the implications of the $50 million repurchase authorization.
- Final tax accounting under the Tax Act and the effects of the completed TRA settlement.
- Debt service, interest-rate exposure, covenant headroom and availability under the undrawn revolving facility.
- Whether full-year performance meets management’s stated expectations; the filing provides no numerical guidance.