Nutritional bars stall (SMPL)
Simply Good Foods reported FQ4 EPS of $.20 vs. consensus of $.16. Legacy Atkins declined 8%, but adjusted for the extra week was down 1%. Brick and mortar revenue decreased by 9.2%, while e-commerce increased by 55%. Atkins Q4 retail takeaway decreased 4.9%, with bars down 11.1%, and RTD shakes down 8.3%. Quest retail takeaway increased by 28.4%. Snack bars continued to be challenged by fewer occasions away from home, and the entire category declined 12% in the quarter. An improving trend stalled in mid-July, as shown in the following chart. Gross margins contracted 290bps primarily due to Quest's acquisition and partly due to a 90bps inventory step up. EBITDA margins contracted by 60bps.
Management guided the first half of 2021 EBITDA to be $77-82M vs. consensus of $88M and revenue to be $425-435M vs. consensus of $463M. The lower guidance was based on current trends to continue. Management sees some modest inflation but expects it to be manageable. Leverage stood at 3.3x at the end of the year, which likely limits another acquisition. SMPL is on our short bias list.
Craft beer’s shift during the pandemic (SAM)
According to the Brewers Association, on-premise sales of craft beer declined 22% in Q3, improving from a 45% decline in Q2. In a survey of its craft beer members, breweries reported an average volume decline of 25% (median -28%), while brewpubs reported food volume declined 25% (median -14%). Distributed draft volumes declined 38% according to the survey, while BeerBoard (which tracks draft sales across bars and restaurants) reported a 35% decline. The median increase of beer to go sales has increased by 42% YOY and has been an important offset for the draft's weakness. Not all breweries sell through distributors. Distributed packaged good sales had a median increase of 42% and a weighted average increase of 34%. According to IRI, craft beer sales grew 11% in the 12 weeks ended October 4 in the off-premise channel. The overall picture for craft breweries is higher sales from to-go and packaged goods but lower profits due to the lower mix. Only 15% of respondents thought they would be in business for longer than six months in April. In October, 90% of respondents felt confident or very confident that they would last until the end of 2020, and 78% felt confident or very confident that they would last another year.
Smucker’s sells Crisco to B&G Foods (SJM)
After the close last night, J.M. Smucker agreed to sell the Crisco business to B&G Foods for $550M. J.M. Smucker had previously stated its intention to exit the U.S. baking category to focus on pet food, coffee, and snacks. The Crisco business had $270M in sales and apparently had high margins or substantial dis-synergies. The transaction is expected to be dilutive to EPS in the range of $.45-.55 on a full-year basis before considering the sale's cash proceeds. Using the proceeds to pay down debt should reduce the dilution by a third. Smuckers’ leverage is reduced only slightly from 2.7x TTM by the sale, so it is difficult to see multiple debt paydown benefits.
B&G Foods projects the purchase price multiple to be 8.1x 2021 adjusted EBITDA and 7.0x when including expected tax benefits. Crisco will join B&G Foods’ Baker’s Joy nonstick baking spray and Clabber Girl baking powder. We’ve written about the divestment trend and how we expect to see more, but in this case, one company’s divestment is another company’s accretive acquisition. SJM is on our short bias list.