In closing out its fiscal 2019 year, The Simply Good Foods Company (SMPL -0.80%) recorded another quarter of double-digit top-line growth and looked ahead to the pending close of an acquisition that will considerably boost its sales and adjusted EBITDA going forward. Results released Tuesday reveal that the small-cap dynamo, which sells the Atkins line of wellness packaged foods as well as its "Simply"-branded snacks and confections, also ramped up its marketing efforts -- which contributed to a weaker bottom line. As we discuss the quarter's details below, note that all comparative numbers are presented against those of the prior year's quarter.

A bird's-eye view of the quarter

Metric Q4 2019 Q4 2018 Change
Revenue $139.2 million $108.3 million 28.5%
Net income $6.1 million $11.7 million (47.9%)
Diluted earnings per share $0.07 $0.15 (53.3%)

Data source: The Simply Good Foods Company.  

Key highlights from the report

Chocolate squares filled with fruits and nuts stacked on a wooden table.

Image source: Getty Images.

  • Management attributed 16 percentage points of Simply's revenue advance to an extra week in the quarter and the impact of a deferred recognition of sales in transit in the prior-year period. The rest of the organization's growth was due primarily to higher volume driven by retail takeaway (i.e., consumers' store purchases).
  • Gross margin inched down by 20 basis points to 42.5%.
  • Selling and marketing expenses soared 38% to $19.9 million from higher TV ad spending and investments in e-commerce. Management believes that elevated marketing expense will help expand the company's customer base over the long term, even as sales are projected to slow in the near term.
  • General and administrative (G&A) expense jumped 32% to $20.3 million. Yet after adjusting for reserves allocated to a potential litigation settlement, G&A expense increased 9.6%. 
  • The company announced during the quarter that it intends to acquire privately held, active lifestyle snack maker Quest Nutrition, LLC, in an all-cash, $1 billion deal. The merger will have a significant impact on Simply Goods' financials: Quest's annual sales of $345 million equal two-thirds of Simply Goods' $523 in yearly sales. Similarly, Quest's annual adjusted EBITDA of $50 million is roughly half of Simply Good's own annual adjusted EBITDA of $99 million.
  • Simply Good Foods will fund the transaction via $225 billion of its own cash, $350 million in proceeds from an offering of 13.4 million shares of its common stock completed on Oct. 7, and debt financing. Management expects to close the acquisition in November 2019.
  • Expenses related to the equity and debt offerings in preparation for the Quest deal added $5 million in transaction costs to the company's books this quarter.
  • These transaction costs, coupled with the higher marketing and G&A expenses mentioned above, deflated operating margin by 500 basis points to 8.7%. 

Management's thoughts on the quarter

Even as Simply Good Foods expands its Canadian "Simply Protein" snack bar line into the U.S., and prepares for the Quest merger, management observed during Tuesday's earnings conference call that Atkins-branded bars, shakes, treats, meal kits, and frozen meals still form the core of the business and, moreover, enjoyed a stellar year. CEO Joe Scalzo provided the following detail:

The category has benefited from powerful consumer mega trends, such as meal replacement convenience, on-the-go consumption and health and wellness. Atkins has benefited from the category trends as well as our strategy over the last few years of appealing to lifestyle consumers.

And while our consumer proposition is sound and our marketing efforts are on target, the magnitude of growth rate of our initiatives frankly surprised us and exceeded our best case scenarios. For perspective, fiscal 2019 was the strongest year of total retail growth for Atkins in over a decade, with over $100 million in retail growth.

Guidance for fiscal 2020

Looking ahead to the new fiscal year, Simply Good Foods provided a broad outline of earnings expectations on Tuesday. The company anticipates top-line growth near the high end of its long-term 4%-6% expansion target. This expectation includes the headwind of a 52-week fiscal 2020 versus 2019's 53 weeks. However, the outlook is exclusive of any contribution from the organization's pending acquisition of Quest Nutrition.

As for earnings, Simply Good Foods doesn't issue formal earnings-per-share guidance. But management did relay its expectation that adjusted EBITDA will grow faster than the rate of sales next year. Thus, Simply Good Foods should be able to net adjusted EBITDA of at least $105 million in fiscal 2020.