The Simply Good Foods Company (NASDAQ:SMPL), a provider of Atkins brand wellness products and healthy protein snacks, reported fiscal third-quarter 2019 earnings on Tuesday before the markets opened for trading. After growing at a year-over-year rate of 13% last quarter, this small consumer goods upstart revealed that sales have raced ahead even faster over the last three months. Let's review the company's performance and also discuss management's slight tweak to full-year guidance below. Note that all comparative numbers in this article are presented against those of the prior year's quarter.

Simply Good Foods: The raw numbers

Metric Q3 2019 Q3 2018 YOY Growth
Revenue $139.5 million $107.2 million 30.1%
Net income $13.5 million $7.1 million 90.1%
Diluted earnings per share $0.16 $0.10 60%

Data source: The Simply Good Foods Company. YOY = year-over-year. 

What happened with Simply Good Foods this quarter?

Apricot and apple cereal bars in a bowl.

Image source: Getty Images.

  • Management attributed Simply Good Foods' revenue leap primarily to volume growth. The company relayed to investors that its supply chain issues, which have affected product distribution to stores this year, are improving, and that it's catching up to consumer demand. 
  • In a sign that supply and demand are indeed normalizing, year-to-date sales and retail takeaway (i.e., the rate at which customers purchase the company's products off store shelves) are now "relatively in line" with each other.
  • Gross margin slipped by 100 basis points to 46.8%, which management blamed on a shift in non-price-related customer activity (i.e., a change in the mix of products sold). A strategic sourcing initiative over the last three months offset the impact of inflation.
  • The company continued to allocate more resources to TV and e-commerce marketing. Marketing expense jumped 34% to $14.8 million. However, selling expense dropped by 44% to $2.8 million, a benefit of the shift in customer buying activity mentioned above.
  • Distribution costs rose as the organization improved its supply chain fluidity. Total distribution expense increased $1.6 million to $6.2 million.
  • General and administrative (G&A) expenses climbed due to higher incentive costs. The combination of greater marketing, distribution, and G&A expense pushed operating margin south by 450 basis points, to 68.6%. Nonetheless, thanks to the higher sales level, the company still markedly increased net earnings and earnings per share during the quarter, as seen in the table above.

What management had to say

The Simply Good Foods Company is benefiting from management's decision to transition the Atkins brand from a weight-loss focus to the larger and faster-growing wellness category, while greatly expanding distribution of Simply Good protein snack bars. In the company's earnings press release, CEO Joe Scalzo discussed the financial impact of this shift in strategy:

We delivered double-digit sales growth in both the third quarter and year-to-date periods driven by our successful marketing strategy that positions Atkins as the brand of choice for consumers seeking nutritious and delicious snacking and meal replacement products for low carb lifestyles. U.S. retail takeaway [continued] to be strong and was up 19.5% versus the prior year. Gross profit and adjusted EBITDA growth also increased double-digits in both the third quarter and year-to-date periods reflecting the strong sales growth as well as investments in marketing and capabilities that we believe will benefit the Company in the near and long term.

Looking forward

Simply Good Foods raised its revenue and earnings guidances last quarter and advised shareholders to expect double-digit net sales and adjusted EBITDA growth for the full fiscal year. Given the sales acceleration in the third quarter, and continued customer uptake of new products within both the Atkins and Simply Good labels, management fine-tuned guidance on Tuesday. The company now expects that both net sales and adjusted EBITDA will expand for the full year in line with year-to-date performance.

Based on the first three quarters of 2019, this suggests year-over-year growth rates of roughly 19% and 23% for net sales and adjusted EBITDA, respectively. These numbers rest on an extra (53rd) week in fiscal 2019. They also incorporate the expectation that expansion in retail takeaway will slow in the fourth quarter, at least in comparison to the aggressive growth achieved in the last quarter of fiscal 2018.

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