Denver, Colorado-based Simply Good Foods (NASDAQ:SMPL) reported fiscal third-quarter 2020 performance before the market open on July 8th.
Sales at the maker of nutritional foods and snacks advanced 54% to $215.1 million for the three-month period ended May 30th. This figure includes sales from the company's acquisition of health foods manufacturer Quest Nutrition that was completed in November of last year.
Simply Goods Foods is better known as the company behind the popular Atkins brand, but its product lineup includes nutrition bars, ready-to-drink shakes, and snacks under the Simply Protein and Quest names.
Adjusted earnings per share (EPS) came in at $0.26 which was 30% higher than the same period a year ago primarily due to inclusion of the Quest results as well as an expanded gross profit margin of 41.2%.
Established e-Commerce Business a Competitive Advantage
President and CEO Joseph Scalzo referred to the impact of COVID-19 on the quarter as "unprecedented". Yet despite the challenges around remote workforce operation and supply chain execution the company delivered exceptional performance.
Changing consumer behaviors played a large role. At the onset of the pandemic, Americans abruptly shifted from normal shopping patterns into stockpiling-mode. As shelter-in-place restrictions were implemented they increasingly leaned on the Internet to obtain foods and other essentials via pick-up or delivery service. Both shifts were mostly favorable for the company.
Simply Good Foods already had a strong online presence before the pandemic. This meant people yearning to stick with diets or eat healthier were able to get their shakes and other nutritional products through the company's website channels. Online sales surged 125% in the third quarter.
From an investment standpoint, a major appeal of Simply Good Foods is its exposure to e-commerce. Approximately 17% of sales are derived from online orders. This gives it a leg up against competitors who have less established online footprints and are now playing catch-up.
In the third quarter, however, strong online sales were not enough to offset the decline in traditional retail channel sales. Overall sales decreased 8% meaning the robust top-line performance was largely driven by the addition of Quest which accounted for 62.5% of the sales growth. Compared to the prior-year quarter sales at Quest fell modestly.
Recent Sales Results Support Healthy Outlook
Management noted that as weary-eyed consumers have begun to emerge from their homes, traditional retail channel sales trends have improved. Simply Good Foods' U.S. retail takeaway was up 2.2% for the four weeks ended June 28th. This was above the growth of the overall nutritional snacking category.
The early signs of recovery prompted the company to issue an optimistic outlook for the remainder of the fiscal year. It is forecasting full-year 2020 sales to be $790 million to $800 million. At the midpoint, this represents sales growth of 52%.
Again, the Quest acquisition has much to do with this, but it would also mark the third straight year of top-line growth and build off the solid 21% sales growth recorded in fiscal 2019.
It expects 2020 adjusted EPS to be $0.86 to $0.90 which at the midpoint suggests 14% profit growth.
Potential Beneficiary of Increasing Health Awareness
Although a nationwide trend towards more active, healthy lifestyles was well underway prior to the COVID-19 outbreak, its reasonable to think that personal experiences tied to the pandemic will lead to a sharp increase in the number of health-conscious consumers.
In the post-pandemic world, people are likely to have greater appreciation for exercise and healthy eating as means to a stronger immune system and overall wellness. Instead of reaching for a Snickers they may be more likely to purchase low carb, low sugar Atkins or Quest bars If this is the case, it would bode well for Simply Good Foods given its leadership position in the fast-growing nutritional foods market.
Granted, the company's bars, chips, and cookies are on average more expensive than other snack products. And therefore, an improved economic backdrop of lower unemployment and higher personal spending will be a contributing factor of near-term performance.
But with Simply Good Foods becoming more relevant in the marketplace, its long-term growth outlook looks as healthy as ever. Far from a passing diet fad, its nutritious meal replacement and snack products appear to have staying power.
The company also has opportunities to crossover into the broader food category which could drive incremental growth. Bars and RTD shakes together account for roughly three-fourths of total sales so a more diversified product portfolio would improve its risk profile. The added scale provided by Quest should help in this regard.
Simply Good Foods' stock is simply not cheap at 77-times trailing earnings. However, given the strength of its brands and growth opportunities across multiple categories, it may be a company for investors to nibble on.
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