Simply Good Foods: Simply Consistent Growth – The Simply Good Foods Company (NASDAQ:SMPL)

The Simply Good Foods Company (SMPL) released their 2018 Q3 earnings results on Tuesday, July 10, 2018, beating guidance on both the top line (sales +11.1% YoY) and bottom line (net income +63% YoY). After closing the previous day at a price of $15.15, the stock opened at $16.96, and in the 3 days since it has drifted higher to close at a price of $17.32, a gain of 14.32%. After spending all of the last year in an $11-14 range, it has now broken through to all-time highs and ongoing sales growth is set to continue driving share price appreciation for the foreseeable future.

Company Profile

The Simply Good Foods Company is the current incarnation of the Atkins brand, the popular diet that advocates eating low-carbohydrate, low-sugar, and high protein as the means to achieve a healthy lifestyle. The company operates in the healthy snacks segment of the US consumer packaged goods industry. They offer nutrition bars, ready-to-drink shakes, snacks, and other confectionery products to consumers primarily interested in losing weight.

Simply Good Foods only began trading on the Nasdaq on July 13, 2017, as the result of a merger with (SPAC) Conyers Park Acquisition Corp. but has been operating for more than a decade. They operate an asset-light, entirely outsourced manufacturing production model. This requires minimal amounts of CapEx spending and results in greater profitability and free cash flows. Their greatest strength is their Atkins brand recognition (85%), synonymous with low-carb/high-protein, which drives market share and allows them to sell products at premium prices, resulting in higher margins. In 2017, SMPL acquired Canadian company Wellness Foods, which sells Simply Protein branded protein bars, chips, and other crunchy snacks. The business model is to continue to search for other strong brands in the healthy snacks segment.

Growing Healthy Snack Foods Industry

Diet fads are well known to be very short-lived phenomenon with a new craze every few years capturing public attention and food budgets. Atkins certainly has its own chapter in this history after being extremely popular around the turn of the millennium before fading into relative obscurity shortly afterwards. But recent trends in nutritional advice have come around to favour the Atkins method again, though more indirectly. Popular current trends are more focused on low-carbohydrate diets with no added sugars. Programs such as the Paleo diet and the Ketogenic diet guide followers towards eating more healthy fats and proteins and significantly reduced carbohydrates. They are not seen as crash diets but a permanent way to maintain health. This has helped drive sales growth (5.1% CAGR 2014-2025) in the healthy snacks segment as emphasis is placed on a more balanced approach to weight through healthier snacking.

Source: Conyers Park Acquisition Corp. – Investor Presentation (Slide 18)

A recent transition at Simply Good Foods has been to broaden the marketing focus. Initially, the company advertised to customers looking to lose weight that had shown interest in the Atkins or other branded diet programs. But they have since expanded that to include people trying to lose weight through a self-directed diet program as well as those not trying to lose weight but to maintain a healthy lifestyle through a limited carbohydrate diet. This has widened the potential market base 4x.

Source: Conyers Park Acquisition Corp. – Investor Presentation (Slide 21)

Future growth could also be realized through the increased use of e-commerce channels. The most recent quarter showed online sales growth of +70% YoY but that still accounts for less than 4% of overall company sales. There is lots of potential to tap into growing online shopping trends.

Recent Q3 Results and Guidance

Source: Simply Good Foods Corp. – Q3 2018 Earnings Presentation (Slide 13)

As highlighted in the slide above, numbers taken from the most recent 2018 Q3 earnings presentation were strong across the board. Net sales were $107.2M, up 11.1% YoY. Gross margins improved 270bps to 47.8%. Adj-EBITDA up 21.4% YoY. Net income was $7.1M, up from $4.35M in Q32017. EPS was $0.10 beating estimates by $0.01.

Management has guided for FY2018 net sales to be consistent with their current YTD growth rates, which are at 8.2% after the first 3 quarters. They have also guided FY adjusted-EBITDA growth rates to be mid-single digits as the company plans to increase spending incrementally in Q4 on advertising as well as in exploring ongoing efficiencies in procurement and distribution cost savings.

Long term, the company has guided towards mid-single digit rates (4-6%) of topline growth in net sales as well as high single-digit rates (7-9%) of Adj-EBITDA growth. They aim to improve margins by 20 bps to 40 bps every year.

Balance Sheet

The company has $88.4M in cash and current liabilities of $29M. Long-term debt is in the form of a $199M term loan, with the associated interest rate at LIBOR + 350bps. Net debt to LTM adj-EBITDA is about 1.4x. As mentioned above, the company outsources production and so has little need for ongoing CapEx and is therefore highly profitable and able to return large amounts of cash into the business. There has been no mention of capital return in the form of dividends or stock repurchases. Future strategy seems to be focused on supporting growth and future acquisitions if a strategic fit can be found for a reasonable price.

Valuation

Cash/Share = 88.4/73 = $1.21

Book Value/Share = 961M/73M = $13.16

Price/Book = 17.32/13.16 = 1.32x

Price/Sales (’18) = 17.32/5.85 = 2.96x

Forward P/E* = $17.32/$0.60* = 28.86x (*avg. 2019 estimate taken from Yahoo Finance)

Enterprise Value/EBITDA = 17.22x

Enterprise Value/Sales = 2.88x

Shares aren’t cheap at current levels, especially after the recent price move from $14 to above $17. But they are not expensive either. The multiples are based on current estimates of future earnings growth. Simply Good Foods has been able to grow sales consistently and are currently growing above trend in a growing industry. They have potential to continue to grow market share domestically as well as expand internationally. They have also improved their profit margins and forecast to continue to do so. If they can continue at current rates into the future, then a buy and hold investment could produce meaningful capital appreciation over the long term.

Recent Insider Buying

Purchased

Insider

Title

Shares

Price/Share

Value

02/09/2018

Brian K. Ratzan

Director

40,710

$12.40

$504,804.00

04/18/2018

Todd E. Cunfer

Chief Financial Officer

10,000

$13.19

$131,936.68

04/23/2018

Hanno E. Holm

VP & Chief Operations Officer

4,000

$12.78

$51,112.90

The saying goes that insiders may sell for a variety of reasons, but there is only one reason they buy. It shows management has confidence in the growth prospects of the company and aligns interests with shareholders.

Recent Analyst Upgrades

  • July 11, 2018 – SunTrust Banks price target raised to $20.00.
  • July 11, 2018 – Stifel Nicolaus lifted PT from $16 to $18. Buy rating.
  • July 2, 2018 – Consumer Edge began coverage. Issued outperform rating.
  • April 14, 2018 – Zacks Investment Research – Sell to hold.
  • April 11, 2018 – Deutsche Bank – lowered price from $16 to $15 and set buy rating.

Risks

The company’s strong balance sheet and asset-light production model alleviate much of the financial risk to the company. But some factors that may affect the stock price include:

  • Change in current diet trends. If new nutrition science were to come out that showed harmful effects caused by diets with high protein, or low carbohydrates, or snacking between meals, it would reduce sales.
  • Loss of branding power. If the company reputation were to diminish, perhaps due do a tainted food product recall or if a new company were to enter the market and gain popularity through better promotion, lower price, better ingredients etc., the company would lose market share.
  • Input price inflation. The company does not control its production internally and so does not have as much flexibility to control manufacturing costs if inputs could not be substituted. This would eat into margins. Freight costs have been rising lately due to government regulation and driver shortages, but this seems to affect competition proportionately.

Conclusion

Simply Good Foods Company has shown very strong growth in sales, earnings, and margins and they could continue to do so as their industry continues to expand. The company has a very strong brand and a consumer staple should continue to perform well in the event of a market cycle downturn. This could be a good way to diversify risk in a portfolio. And if the company continues to grow at currently projected rates, capital appreciation will follow.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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