Last month, I identified newly-formed The Simply Good Foods Company (SMPL 2.73%) as a "sticky note investment candidate" -- in other words, a company worth keeping on your investment watch list. Simply Good Foods released its fiscal fourth-quarter 2018 earnings on Wednesday. The consumer packaged goods company was formed via the July 2018 merger of Canadian wellness organization SimplyProtein and NCP-ATK Holdings, parent company of the Atkins weight-loss business, which is also revitalizing itself as a wellness brand.
Let's review the company's fiscal fourth quarter, as well as management's outlook for the fiscal 2019 year. The following table presents the prior-year quarter on a pro forma (combined) basis, as if the two companies were already merged, for comparative purposes.
Simply Good Foods: The raw numbers
| Metric | Q4 2018 | Q4 2017 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $108.3 million | $97.6 million | 10.9% |
| Net income | $11.7 million | $7.8 million | 50% |
| Diluted earnings per share | $0.15 | $0.11 | 36.3% |
Data source: The Simply Good Foods Company.
What happened with Simply Good Foods this quarter?
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Revenue increased on the strength of several marketing initiatives, including a new advertising campaign targeting lifestyle consumers, a continuing lift from the enlistment of actor Rob Lowe as celebrity spokesperson, revitalized packaging graphics, and cleaner-label products (those free from harmful ingredients).
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Across product lines, volumes increased 13.2% during the quarter. A 1% revenue decrease in Canadian wellness products and a product recall reimbursement charge reduced the quarter's total revenue expansion to roughly 11%.
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Gross margin improved by 0.6 percentage points to 49.2%, offset in part by the recall reimbursement charge mentioned above.
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Operating margin dipped by nearly two percentage points to 13.7%. Management attributed the lower profitability to a 33% spike in general and administrative expenses. The higher overhead resulted from several factors, including higher costs as a public company, higher incentive compensation expenses, investments in organizational structure to meet future compliance requirements, and costs associated with a new strategic sourcing initiative.
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Nearly all of the net income improvement shown in the table above was due to a lower corporate tax rate, coupled with income tax benefits related to the valuation of deferred tax liabilities.
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Simply Good Foods realized double-digit growth in its point-of-sale (POS) channel for Atkins products. This follows the company's shift in message targeting earlier this year, from 8 million potential weight-loss customers to a broader group of 32 million self-directed low-carb-lifestyle customers.
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E-commerce sales expanded by 63% during the full-fiscal year. While online sales still represent just 4% of total revenue, the company is investing in a broad range of digital tools to strengthen this direct-to-consumer channel.
- The organization ended fiscal 2018 with new product launches in SimplyProtein snack bars, and a new Atkins wafer snack.
Image source: Getty Images.
What management had to say
In Simply Good Food's earnings press release, CEO Joseph Scalzo noted that strong recorded sales are supplemented by continuing evidence of high customer retail takeaway (that is, the measured sale of products through grocery and drugstore channels), providing optimism around fiscal 2019's prospects:
I'm pleased with the finish to our 2018 fiscal year that culminated with solid net sales growth and strong retail takeaway that enabled us to deliver on our operating profit objectives while making key investments in our business ... Consumer response to [marketing] initiatives was very encouraging as evidenced by our accelerated retail takeaway and total buyer growth in the second half of the year.
Looking forward
For fiscal 2019, Simply Good Food's management expects revenue to increase "slightly above" the company's long-term annual growth target of 4% to 6%. The company is expecting vigorous volume growth, which is anticipated to be offset by short-term supply issues and a tough growth comparison in the second half of the year versus fiscal 2018. While the organization hasn't provided a net income or earnings-per-share target, executives expect growth in adjusted EBITDA to slightly outpace sales expansion next year, after factoring in the effects of anticipated inflation.
