Simply Good Foods Co annual report, FY2023

Business context and reporting period

The Simply Good Foods Company sells nutritious snacks and meal replacements, primarily under the Quest and Atkins brands. Its products include protein bars, shakes, cookies, salty snacks and confections. The company operates as one reportable segment and relies on contract manufacturers and third-party logistics providers.

This Form 10-K covers the 52 weeks ended August 26, 2023, compared with the 52 weeks ended August 27, 2022. It is an annual report; the supplied filing text does not provide a clear standalone fiscal fourth-quarter income statement.

Key financial metrics

Sales growth was principally driven by North America and the price increase implemented in FY2022. North America sales were $1,209.6 million versus $1,134.3 million. Quest North America sales rose to $682.8 million from $593.9 million, while Atkins North America sales declined to $526.8 million from $540.3 million. International sales were $33.1 million, down from $34.4 million.

Cost of goods sold rose 9.1% to $789.3 million, faster than sales, reflecting raw material, packaging, logistics and co-manufacturing costs. Selling and marketing expense declined 1.8% to $119.5 million; general and administrative expense increased 7.4% to $111.6 million. Interest expense increased to $30.1 million from $21.9 million; the term loan’s reported effective rate was 7.9% at year-end, versus 6.2% a year earlier.

Liquidity, debt and capital allocation

Cash was $87.7 million at August 26, 2023, versus $67.5 million a year earlier. Current assets were $371.7 million and current liabilities $89.9 million. Operating cash flow was $171.1 million; investing cash outflow was $12.2 million, including $11.6 million of property and equipment purchases; financing cash outflow was $138.5 million, including $121.5 million of term-loan principal payments and $16.4 million of share repurchases.

Term-loan principal was $285.0 million, with no revolving-credit-facility borrowings against a $75.0 million commitment; $3.5 million of letters of credit reduced availability. The term loan matures in March 2027, with no required term-loan principal payments in the following 12 months. The company reported compliance with its financial covenants and stated that liquidity was sufficient for operations and expected needs for at least 12 months. It repurchased 546,346 shares for $16.4 million during FY2023; $71.5 million remained authorized. The company does not expect to pay cash dividends in the foreseeable future.

Changes, outlook and notable items

• Management expects supply-chain conditions and the overall cost environment to improve in FY2024, with gross margin expected to improve. This is qualitative outlook, not quantified guidance; the company also cautions that cost pressures and supply-chain challenges may persist.
• FY2023 net income benefited from the absence of the prior-year $30.1 million non-cash warrant-liability fair-value loss. The private warrants were exercised cashlessly in January 2022; the prior-year item should not be read as a recurring operating cost.
• FY2023 general and administrative costs included $3.4 million of executive transition costs and $2.4 million of term-loan transaction fees. The company also capitalized $2.7 million of lender fees in connection with the April 2023 repricing and maturity extension.
• Management cited price increases and cost-saving initiatives as partial offsets to inflation and supply-chain costs. The company plans to pursue product innovation, broader distribution, consumer outreach and potential acquisitions; no numerical sales or earnings targets were provided.
• Key risks include changing consumer preferences and discretionary spending, competition and pricing pressure, inflation and input-cost volatility, dependence on a limited number of suppliers, contract manufacturers and logistics providers, and retailer concentration. Walmart accounted for about 31% and Amazon about 16% of FY2023 sales; retailer agreements generally do not guarantee minimum purchases.
• Management also identifies potential demand effects from the growing use of weight-management medications, variable-rate debt exposure, food-safety and labeling regulation, cybersecurity, and climate or geopolitical disruption. A 1 percentage-point interest-rate increase would add approximately $2.9 million to annual interest expense based on year-end term debt.
• The company reported no litigation it considered material. The financial-statement and internal-control audits received unqualified opinions; management and the auditor concluded internal control over financial reporting was effective at year-end. The auditor identified trade-promotion allowances as a critical audit matter; the recorded allowance was $28.8 million.

Important facts for investors to verify

1. Whether FY2024 gross-margin improvement materializes, and how much depends on input costs, supply-chain recovery, pricing and volume.
2. Underlying brand and volume trends, particularly Quest growth, Atkins sales declines, and the contribution of price versus units sold.
3. Customer concentration and exposure to Walmart, Amazon, and nonbinding retailer purchase patterns.
4. Debt repayment capacity, variable interest costs, covenant headroom and the March 2027 maturity.
5. The assumptions and subsequent settlement experience behind the $28.8 million trade-promotion allowance, the filing’s critical audit matter.
6. Whether acquisition plans, product innovation and marketing generate durable growth without eroding margins or increasing leverage.