SMPL - The Simply Good Foods: Healthy And Yummier Carbs And Proteins

Summary

• The Simply Good Foods Q1 23 results show 7% sales growth amidst headwinds and beat EPS expectations by $0.01 to reach $0.42 per share.
• We see solid fundamentals and healthy cash flow from operations. Quest and snack offerings are driving this company forward through sales and delivering continued product innovations.
• Cautious of recessionary climate, decreasing margins, and continued headwinds.

Medium-cap nutritional snacking stock, The Simply Good Foods Company ( SMPL ), has beat EPS expectations for the last four consecutive quarters. While we can see reduced margins through increasing ingredients, packaging and supply chain costs from industry-wide headwinds, the company continues to deliver profitable results and positive cash flow and invests in innovation. Over the last five years, it has rewarded long-term investors with returns of 157.55%.

Its two premium brands, Atkins and Quest, lead the pack in the low-carb foods and nutritional bar markets, which are both growing billion-dollar industries as customers continue to search for healthy and easy-to-grab food offerings. While cautious of the recessionary market and its impact on consumer spending, there is more upside potential as its 2019 acquisition, Quest continues to grow through sales and innovations. Investors may want to take a bullish stance on this company.

Overview

SMPL came to life after a merger between acquisition company Conyers Park Acquisition Corp. and nutritional food company Atkins Nutritionals, Inc. in 2017 . In 2019 it acquired Quest Nutrition for $1 billion, which has given it a portfolio of two powerful brands to focus on selling packaged nutritious snacks such as health bars, pizzas, dietary meals, shakes, and even pizzas. Atkins, initially founded in 1989 by Robert Atkins, saw worldwide popularity through low-carb diet plans in 2003 and 2004 and has been a strong brand in the health sector ever since. Quest Nutrition was founded in 2010 as a health company primarily known for its protein bars . Products are sold through various brick and mortars and famous through e-commerce channels. It sells domestically and internationally, and although sales have been increasing overall, for FY22 international sales dropped by 23.8% YoY.

The global low-carb diet market is expected to grow by a CAGR of 6.9% over the following years to reach $18.65 billion by 2029.

The industry is hugely competitive, with lots of large and smaller players. SMPL benefits from its wide range of distribution channels, which target mass stores, brick and mortars and e-commerce. SMPL competes by frequently innovating its products, set on making "yummier" offerings and products that fall into the snacking category, such as cookies and chips. It has two R&D labs in which prototypes are developed and tested. Celebrity endorsements are a big part of the company's promotion strategy, seeing the likes of Jennifer Aniston and Rob Lowe to the Kardashians promote products on their social media platforms. We can see the company using its strong brand reputation to benefit from health, wealth and snacking trends.

Financials and Valuation

SMPL recently released its 2023 Q1 results. Overall the company is showing strong fundamentals, increasing revenue, profitability, and positive cash flow, major growth, especially from Quest and the US market. Internationally the company has seen ongoing decreased results. In Q1 2022 we saw net sales increase by 7% and net income grew YoY by 69.5% to reach $35.9 million. The gross margin was reduced by a worryingly high 4.8% to 36.9%, the decrease was due to cost inflations and higher logistic expenses. The Adjusted EBITDA decreased YoY by 7.4% to $60.8 million.

If we look at the long-term data we can see revenue has been increasing annually since 2017, the acquisition of Quest in 2019 has increased the revenue and impacted its profitability in 2019 due to the hefty $1 billion price tag. Net income was above $100 million for the first time in FY22 and positive cash flow has been above $70 million for the last two financial years.

Below we can see the capital structure. Its enterprise value is $3.99 billion, with a total debt intake of $446.95 million. The company has reduced its long-term debt from $596.2 million to $402.92 million over the last three years.

On the balance sheet and cash flow front the company had $8.7 million in cash flow from operations, with a cash balance of $54.1 million. It does not have dividends, however, there is a stock repurchase program. This first quarter it has repurchased $16.4 million and $71.5 million remains available under the program. The company has healthy liquidity, with a high current ratio of 4.42 and a quick ratio of 2.63. The Capital expenditure was $1.2 million

I have compared SMPL to some of its peers in the nutritional food and snack industry.

The stock trades at a forward price-to-earnings ratio of 22.57 which is relatively high if we compare it to Seeking Alpha's consumer staples sector median of 19.79, however, compared to [[LANC]] and [[TWNK]], the company could be perceived as undervalued. The price to book is currently high at 2.46 indicating that investors are paying a premium at the current stock price.

Below we can see that the price return for SMPL over the last three years has been attractive at 58.11%, higher than [[NOMD]] and LANC, although TWNK comes out on top with 73.09%.

Risks

Although the company is growing, it is not immune to the ongoing headwinds and recessionary economic loom, which have and will continue to impact its performance. We saw the gross margin decrease YoY by 4.8%, a significant jump in a competitive market. The Inflationary demand has increased the company's upward performance, increasing ingredient and packaging costs and pushing supply chain expenses. Interest rate hikes have heavily impacted the company due to the number of variable loan terms. We have seen expenses increase from $700,000 to $7.1 million, which could remain high for the 2023 rise as the Fed indicates an estimated 5.1% in 2023.

Final thoughts

Quest Nutrition has been the wonderchild for SMPL. It came with an R&D of new products and had been growing the company's top-line performance. If we look at the company's growth in the snacking market, there is still a lot of upside potential for this profitable company, with solid cash flow that can be reinvested into its business. Investors may want to take a bullish stance on this company.

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