The Simply Good Foods Company (NASDAQ:SMPL) easily surpassed its own top-line expectations in the first quarter of fiscal 2019. Earnings results released on Thursday showed momentum in the company's plan to rebrand its Atkins diet line as a wellness label, while introducing U.S.-based consumers to its Canadian SimplyProtein snack bar products.
Let's review headline numbers, then delve into the factors behind the company's impressive first-quarter growth. Note that all comparative numbers in this article are presented against the prior-year quarter (the fiscal first quarter of 2018).
Simply Good Foods: The raw numbers
|Metric||Q1 2019||Q1 2018||Year-Over-Year Growth|
|Revenue||$120.9 million||$106.6 million||13.4%|
|Net income||$15.3 million||$10.2 million||50%|
|Diluted earnings per share||$0.18||$0.14||28.6%|
What happened with Simply Good Foods this quarter?
As I discussed in my earnings preview, management had forecast full-year revenue growth of 4% to 6% for fiscal 2019. With one quarter already booked, Simply Good Foods is well ahead of that pace after its 13.4% revenue improvement. The top line also represents a sequential increase of 11.6% against the fourth quarter of fiscal 2018.
The company attributed the solid growth to higher volume, which was slightly offset by the effect of trade promotions.
U.S. retail takeaway (the rate at which customers purchase the company's products in grocery stores and other retail locations) continued within a strong growth trend, expanding by 23.5%.
Gross margin edged down 0.6 percentage points to 48.9%. Management attributed the slight decline to higher supply-chain costs and the reclassification of certain items from selling expenses to cost of goods sold.
Operating margin also declined by 0.6 percentage points, as Simply Good Foods continued to step up marketing expense in order to increase volume and capture additional market share. The company boosted its marketing expenditure by more than 16% to $11.5 million over the last three months, with most of this increase allocated to television advertising and the company's e-commerce channel.
The company reported that it is still having some issues with keeping its Atkins products stocked at the retail level. Simply Good Foods contracts its manufacturing, and thus is subject to some variance in its production and supply chain. Management signaled that it would curtail a portion of its promotional activity in the second quarter as it worked on retail supply.
Simply Good Foods didn't initiate any share repurchases during the quarter, although management reaffirmed its intention to buy back shares following the exercise of 9.9 million public warrants in the fall of 2018, which resulted in a near-doubling of the company's cash balances to $210.8 million at the end of the first quarter of 2019.
What management had to say
In the earnings conference call, CEO Joe Scalzo provided some context around both current results and expectations for the rest of the fiscal year (which we'll discuss below):
...[O]ur Q1 results were strong with sales and profitability greater than our long-term target. The solid start to the year gives us confidence in delivering on our financial commitments during fiscal year 2019. This is driven by our strategy of targeting both core programmatic weight-loss consumers and self-directed low carbers. With new buyer growth increasing, we're excited about this momentum and executing against our plans. We will point out the beginning in our fiscal third quarter, the year-over-year comps are more challenging; therefore, we would expect some moderation at that time on our top-line growth.
Management increased the company's fiscal 2019 revenue guidance in a subtle manner alongside its earnings release. Previously, executives had told investors to expect 2019 revenue to slightly exceed the organization's long-term growth expectation of 4% to 6%. Now, Simply Good Foods has dropped the "slightly," and advises shareholders that current-year revenue expansion will "exceed" the long-term target. While this may seem like qualitative hairsplitting, it's informed both by caution around the company's Atkins retail-supply issues, and Scalzo's comments above, which refer to upcoming tougher prior-year comparisons as 2019 progresses.