The Simply Good Foods Company (SMPL) — Form 10-Q
Reporting period: Fiscal second quarter and first half of fiscal 2023, ended February 25, 2023. The quarter covers 13 weeks; the first half covers 26 weeks. Comparisons are with periods ended February 26, 2022. Amounts below are in U.S. dollars.
Business context
Simply Good Foods sells nutrition-focused snacks and meal replacements, primarily under the Atkins and Quest brands, through retail and other channels, mainly in North America. Its portfolio includes protein bars, ready-to-drink shakes, snacks and confectionery products.
Financial performance
| Metric | 13 weeks ended Feb. 25, 2023 | 13 weeks ended Feb. 26, 2022 | 26 weeks ended Feb. 25, 2023 | 26 weeks ended Feb. 26, 2022 |
|---|---|---|---|---|
| Net sales | $296.6 million | $296.7 million | $597.5 million | $578.0 million |
| Gross profit / margin | $102.7 million / 34.6% | $108.5 million / 36.6% | $213.7 million / 35.8% | $225.1 million / 38.9% |
| Operating income / margin | $42.5 million / 14.3% | $46.0 million / 15.5% | $95.0 million / 15.9% | $104.0 million / 18.0% |
| Net income | $25.6 million | $18.5 million | $61.5 million | $39.6 million |
| Diluted EPS | $0.25 | $0.18 | $0.61 | $0.40 |
| Adjusted EBITDA | $50.9 million | $54.2 million | $111.7 million | $119.8 million |
For the quarter, sales were essentially flat. In North America, sales increased 0.3%, while international sales declined 10.8%; the shift from direct sales to licensing Quest frozen pizza also weighed on growth. For the first half, sales rose 3.4%, primarily reflecting price increases, partly offset by a 13.8% decline in international sales and the frozen-pizza licensing shift.
Higher raw-material, packaging and co-manufacturing costs, along with supply-chain challenges, reduced gross profit and margins. Adjusted EBITDA fell 6.1% for the quarter and 6.8% for the first half. Net income increased year over year, but comparisons benefited from prior-year non-cash warrant fair-value losses of $12.7 million for the quarter and $30.1 million for the first half. Operating income declined in both periods.
Cash flow, debt and liquidity
- First-half operating cash flow was $53.3 million, versus $30.3 million a year earlier. The filing attributes the improvement mainly to lower cash taxes and working-capital changes; working capital consumed $28.9 million.
- Investing cash outflow was $1.9 million; financing cash outflow was $55.7 million. Financing included $41.5 million of term-debt principal payments and $16.4 million of share repurchases.
- Cash was $63.2 million at February 25, 2023, compared with $67.5 million at August 27, 2022. Current assets were $359.6 million and current liabilities $80.4 million.
- Term Facility principal was $365.0 million; reported total debt, net of deferred financing fees and including finance leases, was $362.9 million. The term loan’s effective rate was 8.0%, up from 3.8% a year earlier. Interest expense for the first half increased to $15.6 million from $11.6 million.
- The term loan matures in July 2024; no principal payments were required over the 12 months following February 25, 2023. The $75 million revolving facility was undrawn, with $3.5 million of letters of credit reducing availability. The company said it was in covenant compliance and expected liquidity to cover operations and planned needs for at least 12 months.
Outlook, risks and notable items
- Management expects inflationary cost pressures and supply-chain challenges to continue for the remainder of fiscal 2023. It expects price increases and cost-saving initiatives to offset only part of the pressure; the filing gives no specific earnings or sales guidance.
- Management said it believed it could meet customer orders and expected products to remain available for the foreseeable future, while continuing to monitor demand and supply capabilities.
- Risks include higher ingredient, packaging, co-manufacturing and logistics costs; labor and ingredient disruptions; inflation and a possible recession affecting costs and consumer demand; and the conflict in Ukraine and potential related supply-chain effects. Management said the full impact on consumer purchasing and the business remained uncertain.
- The company repurchased 546,346 shares for $16.4 million during the first half; approximately $71.5 million remained authorized for repurchases. It reported $0.4 million of executive transition costs in the first half.
- Endorsement contracts are expected to require $3.3 million of payments over the next year. The company reported no litigation it believed material and no material changes to the risk factors in its prior annual report.
Important facts for investors to verify
- Whether pricing and cost-saving actions can recover the substantial gross-margin decline as elevated costs persist.
- Whether international sales stabilize and how the Quest frozen-pizza licensing transition affects reported growth.
- Debt repayment or refinancing plans ahead of the July 2024 term-loan maturity, including exposure to variable interest rates.
- Whether operating cash flow remains adequate given working-capital needs, share repurchases and debt service.
- The reconciliation and assumptions underlying non-GAAP Adjusted EBITDA, and the extent to which net-income growth reflects prior-year warrant losses rather than stronger operations.