Simply Good Foods Co. (SMPL) — Q2 FY2022 Form 10-Q
Reporting period: Quarter ended February 26, 2022 (13 weeks); year-to-date period ended February 26, 2022 (26 weeks). Amounts below are in millions except per-share data.
Business context
The company sells nutritious snacks and meal replacements under Atkins, Atkins Endulge and Quest, primarily through North American retail and e-commerce channels. Management attributed improved results partly to recovering consumer mobility and retail traffic.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | 26 weeks FY2022 | 26 weeks FY2021 |
|---|---|---|---|---|
| Net sales | $296.7 | $230.6 | $578.0 | $461.8 |
| Gross profit | $108.5 | $90.3 | $225.1 | $184.3 |
| Gross margin | 36.6% | 39.1% | 38.9% | 39.9% |
| Operating income | $46.0 | $33.3 | $104.0 | $72.5 |
| Net income (loss) | $18.5 | $(26.2) | $39.6 | $16.7 |
| Diluted EPS | $0.18 | $(0.27) | $0.40 | $0.17 |
| Adjusted EBITDA | $54.2 | $42.6 | $119.8 | $91.3 |
Quarterly sales rose 28.7%; year-to-date sales rose 25.2%. North American sales growth reflected higher Atkins and Quest volume and the September 2021 price increase; international sales declined following the European exit. Q2 operating margin was 15.5%, versus 14.5% a year earlier. Adjusted EBITDA is a non-GAAP measure.
Gross margin declined 250 basis points in Q2 and 100 basis points year to date, as higher raw-material, freight and logistics costs and supply-chain challenges more than offset pricing benefits. Selling and marketing spending increased, primarily for brand-building initiatives. Lower interest expense supported earnings. GAAP net income comparisons were also affected by non-cash warrant remeasurement losses: $12.7 million in Q2 FY2022 versus $45.3 million in Q2 FY2021; year-to-date losses were $30.1 million versus $24.9 million.
Cash flow, liquidity and debt
- Cash was $51.5 million at February 26, 2022, down from $75.3 million at fiscal year-end.
- Year-to-date operating cash flow was $30.3 million, compared with $39.8 million a year earlier. Working capital used $38.8 million of cash, and cash taxes paid were $33.2 million.
- Investing activities used $6.0 million, including $4.3 million of capital expenditures and a $1.5 million note receivable. Financing activities used $47.9 million, including $25.0 million of term-loan principal payments and $20.4 million of share repurchases.
- Term-facility principal was $431.5 million; reported total debt, net of deferred financing fees and including finance leases, was $427.2 million. No term-loan principal payments were required over the next 12 months; the term facility matures in July 2024. No revolver borrowings were outstanding, with $75 million of commitments less $3.5 million of letters of credit.
- In January 2022, the company repriced its term loans, reduced the applicable interest rate, and transitioned the reference rate from LIBOR to SOFR. The revolving-facility maturity was also extended. The company reported compliance with financial covenants.
- Management stated that available liquidity should be sufficient for operations, growth and expected expenses for at least 12 months.
Outlook, risks and notable items
- No quantified full-year sales or earnings guidance is provided in the filing. Management expects elevated input, freight, logistics and other supply-chain pressures through FY2022 and into FY2023; labor and ingredient shortages have contributed to out-of-stocks, delayed sales and higher-than-historical inventory.
- A further price increase was announced in April 2022, planned for late in fiscal Q4. Management also cited productivity and cost-saving initiatives to help offset inflation and fund growth investments.
- Management described the consumer-mobility recovery as fragile and noted uncertainty from COVID-19 effects and the war in Ukraine, including potential impacts on raw-material availability and cost. It said it expected to fulfill customer orders on a timely basis based on information then available.
- Private warrants were cashlessly exercised on January 7, 2022, issuing 4.83 million shares and eliminating the warrant liability. The non-cash fair-value losses affected reported earnings before exercise.
- The company repurchased 571,521 shares for $20.4 million at an average $35.68 per share; approximately $27.5 million remained under its repurchase authorization. Restructuring costs were $0.1 million for the quarter, with no restructuring liability at period-end.
- The company reported no litigation it considered material and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective as of period-end.
Investor verification points
- Assess whether price increases can offset persistent cost inflation without weakening volume or consumer demand.
- Track supply availability, out-of-stocks, inventory levels and working-capital cash use.
- Review the July 2024 term-loan maturity, refinancing options, interest-rate exposure and covenant headroom.
- Separate underlying operating performance from non-cash warrant remeasurement effects and consider dilution from the 4.83 million shares issued.
- Monitor cash generation alongside continued debt repayments and share repurchases; management’s liquidity statement is not a guarantee of future funding availability.