Wellness-oriented consumer packaged goods distributor The Simply Good Foods Company (NASDAQ:SMPL) outperformed its revenue projections in the first three months of its 2020 fiscal year. Results issued Thursday before the market opened revealed healthy core growth, as well as a revenue bump from the company's $1 billion acquisition of Quest Nutrition in November.

However, transaction costs and new overhead from the acquired operations pushed the bottom line into the red. In response to those numbers, investors sold off Simply Good Foods' shares. The stock price was down roughly 8.5% just after 1 p.m. on Thursday. As we break down the report below, note that all comparative numbers are presented against those of the prior year's quarter.

Simply Good Foods: The headline numbers

Metric Q1 Fiscal 2020 Q1 Fiscal 2019 Change
Revenue $152.2 million $120.9 million 25.9%
Net income ($4.8 million) $15.3 million N/A
Diluted earnings per share ($0.05) $0.18 N/A

Data source: The Simply Good Foods Company. N/A=not applicable due to current-period loss. 

Essential details from the report

A stack of three healthy granola bars.

Image source: Getty Images.

  • The company attributed 14.1 percentage points of its revenue growth to the Quest acquisition. The remaining 11.8 percentage points of core growth exceeded management's full-year forecast range of 4% to 6%.
  • Retail takeaway (i.e. measured consumer purchasing) of the company's flagship Atkins wellness brand improved by 10.7% over the comparable quarter.
  • Gross margin decreased by 200 basis points to 40.9%. An inventory purchase accounting step-up adjustment related to the Quest acquisition was responsible for 160 basis points of the decline. Lower-margin revenue contributed by increased trade promotion activity during the quarter accounted for the rest. 
  • Selling and marketing expenses increased by 20.3% due both to the inclusion of Quest and a ramp-up in advertising spending (which, as I discussed in my earnings preview, management had signaled last quarter). 
  • General and administrative expenses rose 51.2% from the inclusion of Quest and higher incentive compensation related to the Atkins brand. 
  • The company identified $26.2 million in business transaction costs incurred in the Quest deal, as well as $1.1 million in higher interest expenses stemming from long-term debt it took on to finance it.
  • While merger-related costs produced an operating loss this quarter, Simply Good Foods' adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) rose 19.1% to $38.1 million, while adjusted diluted earnings per share of $0.22 equaled the adjusted EPS posted in the prior-year period.

Management's comments

After completing a merger that has significantly enlarged both Simply Good Foods' revenue and its distribution footprint, management is focused on ensuring a relatively smooth integration of the two clean-ingredient snacking enterprises. CEO Joe Scalzo addressed post-merger priorities in the earnings press release:

We are pleased with our start to the year and the progress we are making against our strategic initiatives that build on our existing capabilities and strengthen our brands. Of course, one of our key goals in 2020 is the integration of Quest. I'm pleased to report that this work is well under way and progressing as planned. Collaboration of both leadership teams is excellent and gives us confidence that we will deliver on our integration plans. We have good marketplace momentum across the business and are confident in achieving our fiscal 2020 financial commitments.

Updates to the fiscal 2020 outlook

On Thursday, Simply Good Foods reiterated goals for its legacy brands, Atkins and SimplyProtein. These include year-over-year revenue growth at or near the top of the company's long-term 4% to 6% target range, and an expectation that adjusted EBITDA will improve at a rate slightly ahead of revenue growth in 2020. These benchmarks factor in the headwind of a 52-week fiscal 2020 against 2019's 53-week year.

The consumer staples company also issued guidance inclusive of Quest, saying that it anticipates total revenue of $850 million to $870 million in 2020. At the midpoint of this range, the combined company will outpace Simply Good Foods' fiscal 2019 revenue of $523 million by 64%. On the earnings front, combined adjusted EBITDA is expected to land between $154 million and $158 million. This would exceed last year's adjusted EBITDA of nearly $99 million by a healthy 58%.

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