Simply Good Foods

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

The Simply Good Foods Company is a consumer packaged food and beverage company aiming to lead the “better-for-you” nutritional snacking movement, with popular brands like Atkins, Quest, and OWYN.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Simply Good Foods operates primarily in North America, offering a range of branded nutritional snacks, foods, and beverages with a focus on low-carb, low-sugar, and protein-enriched options. Their products are marketed primarily to consumers following specialized diets, such as keto, low-carb, and gluten-free. The company operates through various channels including e-commerce, retail, and convenience stores, with international sales limited mainly to Canada and New Zealand.

The company’s main objective is to provide convenient and nutritious snack foods and beverages that are delicious and satisfying.

Their core brands are:

Atkins: a leading brand in low-carb/keto nutritional snacking and meal replacements.
Quest: a brand of protein bars, cookies, chips, and powders that are positioned toward active and health-conscious consumers.
OWYN: a plant-based nutrition brand offering protein drinks and shakes, with a focus on food sensitivities.

Revenues Distribution:

The company has a vast distribution network across different channels and their net sales are recorded based on geographic locations and product categories. In the most recent quarter, for the North America region their net sales were $301.5 million, that includes sales in the U.S, Canada, and Mexico. International sales for the same quarter were 34.2 million that includes sales in the UK, Australia, New Zealand, and Asia. The majority of their net sales comes from North America, representing 89.9% of the total net sales for the most recent quarter and 90.7% in the prior year for the same quarter.

By brand type, their net sales for the most recent quarter for Core Quest products were $262 million, 76.8% of the total net sales, then comes core Atkins brand accounting for 21.8%, and core OWYN brand accounting for 1.4%. By product category, bars/powders/shakes were the biggest contributors with 64.1%, then comes confections, chips and snacks with 35.9%.

In terms of distribution channels, retail accounted for most of the revenue, followed by e-commerce, then followed by convenience and food service.

Industry Landscape and Trends:

The nutritional snacking industry is fragmented and highly competitive. The food and beverage sector has been undergoing rapid change due to evolving consumer preferences, mainly toward healthier options. This trend has given rise to functional food brands as well as plant-based and low-sugar diet options. Key drivers include a focus on health and wellness, a growing demand for protein-enriched products, and a desire for convenient and portable snacking. E-commerce sales are also becoming increasingly important. Companies in this space often pursue growth through acquisitions, and have high advertisement spending to capture consumer attention. Competition is driven primarily by brand recognition, product innovation, and effective distribution.

Margins & Financials The gross profit for the most recent quarter was $111.5 million that translates to 32.4% of the sales. This was driven by higher pricing and the change in product mix and lower supply costs. The increase in operating costs were mostly driven by higher marketing investments, and increased acquisition costs. Operating income was $54.6 million or 16.1% of the net sales, for the last quarter. The diluted EPS for the last quarter was $0.36 per share, an increase of 16.1%. Free cash flow for the last quarter was $102.7 million, up 271% from the prior year, driven by higher profits and a reduction in tax expenses. Net cash from operations for the last quarter is $135.5 million.

Moat Analysis:

SMPL’s moat rating is a 2/5 which indicates a weak moat. Here’s the detailed breakdown.

Brand Recognition: While the Atkins and Quest brands have recognition in the protein/keto/low carb space, they are still niche brands and require high ad spend to compete with general food brands. The OWYN brand is less established and does not carry significant pricing power or customer retention capabilities compared to bigger brands. The brand recognition alone cannot give it a long term advantage over other players in their space.
Customer Switching Costs: Switching costs in the snack and beverage industry are generally low, as consumers easily try different brands at different occasions or retailers. Although the company tries to increase customer loyalty through loyalty programs and targeted advertising it can’t retain customers from experimenting with other brands with similar offerings.
Network Effects: The company does not directly benefit from network effects. There are not increasing returns for the consumer as their products or services get used by more users. It operates in a regular market space of food and beverage.
Cost Advantages: The company does not have any cost advantage over other established players. In fact, they are more prone to supply chain related issues and higher operating costs, as their manufacturing process is complex.

Risks to the Moat and Business Resilience:

Changing consumer preferences: Shifts in dietary trends and consumer tastes, particularly away from low-carb or keto diets, could significantly impact demand for their products.
Competition: The nutritional snacking space is highly competitive. New entrants and established players could easily take away their market share.
Supply chain disruptions: The company relies on a complex supply chain of ingredients and contract manufacturers. Any disruptions here could lead to higher costs and limited product availability. This becomes more problematic in times of inflation and increased ingredient prices.
Concentrated Retail Channels: The sales of the Company are concentrated with a few large distributors and retail chains. If one of these partners was to stop their relationship or get into trouble, the company’s sales can severely get affected and might suffer.
Product Obsolescence: The lack of unique differentiation means the company is always at risk of their products becoming obsolete and easily substituted by other competing offerings.

Business Resilience: Despite risks, the business has shown some resilience and has been able to generate healthy cash flows. Furthermore, diversification across a few different brands may help in case one brand suffers a decline in popularity.

Understandability Rating: 2/5

The business model is easy to grasp, as the company produces, markets and distributes food products and beverages. Their focus on specific niches, such as protein bars, and low sugar snacks, and on different diet plans makes it relatively easy to understand the consumer base. However, understanding the complex accounting behind the acquisitions, goodwill and intangibles, makes it confusing for a normal investor. Also it is difficult to evaluate the financial statements that involve heavy leverage and complex interest expenses.

Balance Sheet Health: 4/5

The company’s balance sheet is healthy.

Cash Position: The company had $112.5 million in cash and cash equivalents as of August 31, 2022, which provide flexibility.
Debt levels: While they have a substantial amount of debt($938.6 million in long-term debt) relative to their equity the debt is manageable. The company also continues to pay it down as shown in the cash flow statement.
Financial obligations: They do have a huge amount of liabilities as well that are not related to debt and are also difficult to forecast and value.
Working capital: The company’s current assets are above their current liabilities, implying a sufficient level of working capital.

The Company seems to have a decent balance sheet, which makes it a reliable investment.

Recent News and Concerns:

Acquisition of OWYN: The acquisition of Only What You Need, Inc. (OWYN), was finalized during the quarter of their latest quarterly report for a $289 million consideration. This has made the financial statements more complex, and the management expects it to continue to be a driver for growth in new channels and product development.
Inflation and Supply Chain: The company is facing increased ingredient costs and supply chain bottlenecks due to inflation and global instability, which is causing a rise in their operating expenses. The management is trying to mitigate this with new strategies and by pricing their products accordingly.
Reorganization of business: In the recent report, management has stated that it is continuing to organize and consolidate their new acquisitions and they intend to create a more streamlined management team, which might add additional restructuring expenses to the business.
Growth: The company is trying to focus on the US market and also expand to international markets like Australia and New Zealand, which requires substantial investments. They are also trying to expand into new channels like E-commerce and food services.
Share Repurchase: The company’s share repurchase program, first established in 2021 was terminated, but was recently reinstated and is expected to have $500 million available to be repurchased.

These changes reflect an active approach by management to navigate new market realities and drive both revenue and profitability.