The healthy snack bar company
Simply Good Foods was formed with the merger of the Atkins brand with the Canadian SimplyProtein brand in 2017 and brought public through a SPAC. In November 2019, the company purchased Quest Nutrition, a high protein, low sugar, snack manufacturer for $1B. Snack bars are the largest product category for the company, as seen in the following chart.
Pandemic’s impact on snacking
Increased snacking is one of the changes in consumer behavior we have seen during the pandemic. Snack bars are convenient meal substitutes for people on the go. According to the company, on-the-go usage occasions (40% of sales for Atkins) declined 17-18% for the category in the most recent quarter. The pandemic has grounded the majority of people and given them more time to prepare meals at home. Shopping visits have also declined to the important specialty and convenience stores, while grocery and large format stores have seen the shoppers’ time spent in the store reduced.
Diets are constantly evolving
The stay at home restrictions during the pandemic has been a headwind to the consumption of snack bars, but the consumers’ resultant weight gain has increased demand for dieting. Diets are notoriously faddish, with a large number of consumers quitting or moving on to another one. There is a rather large industry built upon finding the next diet or exercise regimen. Dietary supplements are extremely competitive, and the need to constantly innovate creates fleeting brand loyalty. Interest in the Atkins diet has been downtrending over the last two and five years with peaks around January resolutions, as seen in the following chart.
Quest Nutrition is a much younger brand (10 years) than the Atkins diet, which was developed in the 1960s, but it too has had a higher interest in the past, as seen in the following chart. Quest Nutrition is also well distributed in the drugstore, grocery, and mass-market channel limiting distribution growth as a driver.
Reduced marketing spend
Non-GAAP EBITDA margins have expanded 100bps over the past three years, but leveraging selling and marketing expense has been the driver. Selling and marketing expense is 600bps lower than F2017. In a category that is very vulnerable to competitive product innovation, reducing marketing expenses could have negative long-term implications. The dollar increase in selling and marketing expenses in the last three quarters is likely due to the Quest acquisition.
Leverage limits another acquisition
EBITDA growth this year, excluding the Quest Nutrition contribution, is expected to be roughly flat. Legacy Atkins sales decreased by 8.3% in the most recent quarter. The company’s balance sheet is levered at 3.7x debt to EBITDA, which limits another acquisition. Low FCF generation is also a concern. Shares are trading at 22x F2021 EPS and 15x EV/EBITDA, which we believe is expensive relative to the visibility of future growth and inherent brand volatility in the category.
