The Simply Good Foods Company — Q2 FY2019 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended February 23, 2019. Amounts below are in millions of dollars except per-share data. Simply Good Foods sells nutrition bars, shakes, snacks and related products, primarily under the Atkins brand; it reports one operating segment. Sales are seasonal, historically strongest in Q2 due to post-holiday demand.
Financial performance
- Q2 revenue: $123.8, up 13.2% year over year. Management attributed growth to volume, strong U.S. retail takeaway and favorable price-related trade, partly offset by a shift in non-price customer activity. U.S. retail takeaway measured by IRI rose 22.1%.
- Q2 profitability: Gross profit was $57.6, up 14.7%; gross margin expanded 60 basis points to 46.6%, mainly due to lower in-store promotions. Operating income was $19.0, up from $16.8, with operating margin at 15.3%. Adjusted EBITDA, a non-GAAP measure, was $23.0, up 22.1%, and its margin increased to 18.6% from 17.2%.
- Q2 net income and EPS: Net income was $12.7 versus $41.4; diluted EPS was $0.15 versus $0.56. The prior-year comparison benefited from a substantial one-time tax-law-related gain, so reported net income growth is not directly comparable.
- First half: Revenue was $244.7, up 13.3%; gross profit was $116.7, with gross margin flat at 47.7%. Operating income rose to $40.2 from $36.1. Adjusted EBITDA increased 16.8% to $49.7, with margin of 20.3% versus 19.7%. Net income declined to $28.0 from $51.6, primarily reflecting the prior-year tax benefit; diluted EPS was $0.33 versus $0.71.
- Geography: Q2 North American sales were $117.9, up from $102.6; international sales were $5.9, down from $6.7.
Cash flow, balance sheet and capital
- Cash flow, first half: Operating cash flow was $21.8 versus $25.4 a year earlier, with management citing working-capital changes. Inventory increased $15.9 in the period. Capital expenditures were $0.9.
- Cash and liquidity: Cash and equivalents were $218.9 at February 23, 2019, compared with $112.0 at August 25, 2018. Current assets were $319.1 and current liabilities $34.8. Management said liquidity should support operations and planned growth for at least the next twelve months.
- Debt: Term-loan principal was $197.5; reported debt net of financing fees was $191.3. The company had no revolver borrowings and was in compliance with financial covenants. Required principal payments over the next twelve months were $2.0.
- Capital actions: Cash warrant exercises generated $113.5 in the first half; the company paid $26.5 to settle its tax receivable agreement (TRA) and made $1.0 of debt principal payments. The TRA settlement also generated a $1.5 accounting gain. A $50.0 stock-repurchase authorization was in place; 6,729 shares had been repurchased for $0.1, leaving approximately $49.9 available.
Changes, outlook and risks
- Marketing expense rose 21.3% in Q2, reflecting increased television and e-commerce investment. General and administrative expense increased 24.7%, including higher incentive compensation and investments in organizational capabilities. Selling expense fell 49.1%, primarily due to the shift in non-price customer activity.
- Management described Q2 and first-half results as strong, citing double-digit sales, gross-profit and Adjusted EBITDA growth. The filing provides no specific numerical full-year revenue or earnings guidance.
- Management identified product sales and execution as forward-looking uncertainties. The company uses third-party contract manufacturers and faces seasonal sales patterns. It reported no material changes to the risk factors in its prior annual report, no material litigation known to it, and no material off-balance-sheet arrangements.
- The company expects adoption of the new lease standard in fiscal 2020 to materially increase lease-related assets and liabilities. It also expects to cease being an emerging growth company at the end of fiscal 2019.
Key facts for investors to verify
- Whether the reported 22.1% U.S. retail takeaway growth and revenue gains persist, and how much future growth depends on promotional and trade-spend trends.
- Whether marketing and organizational investments translate into sustained sales and Adjusted EBITDA growth; review the company’s non-GAAP definition and reconciliation.
- Underlying earnings after separating the prior-year tax-law benefit from current-period results, and the sustainability of the current tax rate.
- Working-capital requirements, especially the inventory build, and the durability of operating cash flow.
- Potential dilution: common shares outstanding rose to approximately 81.9 million from 70.6 million at fiscal year-end following warrant exercises, and 6.7 million private warrants remained outstanding.
- Debt-service capacity, covenant headroom and the use of remaining repurchase authorization relative to cash and growth needs.