Simply Good Foods Balances Margin Pain With Brand Growth

The Simply Good Foods Company ((SMPL)) has held its Q1 earnings call. Read on for the main highlights of the call.

Simply Good Foods Strikes Cautiously Constructive Tone Amid Margin Squeeze

The Simply Good Foods Company’s latest earnings call painted a mixed but ultimately constructive picture: powerful growth engines in Quest and OWYN, a healthy balance sheet, and an ambitious buyback program on one side, set against sharp gross margin compression, lower earnings, and significant weakness in the Atkins franchise on the other. Management leaned on evidence of strong consumer demand in key brands, tangible productivity gains, and more favorable cocoa costs to argue that profit trends will recover in the second half of the year, while acknowledging that the near term—especially the second quarter—will be the toughest stretch of fiscal 2026.

Reaffirmed Outlook Despite a Tough First Half

Management reaffirmed its fiscal 2026 guidance, targeting net sales growth between -2% and +2% and adjusted EBITDA between -4% and +1% year over year, signaling confidence despite early headwinds. The company expects a clearly back‑half‑weighted year, with Q2 singled out as the trough for sales and margins and Q4 projected to deliver profit expansion. That stance suggests Simply Good Foods sees current pressure as cyclical and execution-driven rather than structural, and it is telling investors to look through near‑term volatility toward a stronger exit rate in the fourth quarter.

Growth Concentrated in Quest and OWYN

Total consumption across the portfolio grew 2% in the first quarter, but that growth is increasingly concentrated in Quest and OWYN, which together now account for 71% of net sales. This concentration highlights a strategic pivot toward higher‑growth, better‑positioned brands in the broader better‑for‑you snacking and performance nutrition space, even as legacy brands like Atkins drag on the headline numbers. For investors, the portfolio is becoming more “barbell-shaped”: strong, modern brands pulling harder while older assets are managed for cash and repositioned.

Quest Brand Momentum Driven by Salty Snacks

Quest continues to be the standout performer, with consumption up 12% and net sales nearly 10% in Q1, driven by both new households and stronger engagement. Household penetration reached about 20%, up 200 basis points year over year, showing the brand is still gaining relevance with shoppers. The real breakout is in salty snacks: Quest’s salty portfolio saw consumption surge 40%, with household penetration surpassing 10% and up 220 basis points year on year, while all‑commodity volume (ACV) rose roughly 5 points and average items per store jumped 34%. That combination of distribution gains and shelf presence underscores how retailers are leaning into Quest as a traffic‑driving, premium better‑for‑you snack brand.

OWYN’s Rapid Growth and White-Space Potential

OWYN remains a high‑growth asset with meaningful white space. Consumption increased 18%, household penetration climbed about 100 basis points to roughly 4.5%, and brand awareness sits near 20%, underscoring how under‑penetrated the brand still is relative to its opportunity. Powders grew around 50%, while both ready‑to‑drink and powders benefited from distribution‑led gains. Management plans to invest at double‑digit rates in marketing behind OWYN to lift awareness and penetration, signaling its conviction that OWYN can be a long‑term growth engine in plant‑based performance nutrition.

Productivity Program Underpins Margin Recovery Plans

A key pillar of the company’s recovery thesis is its 18‑month‑old productivity program, which is designed to reduce structural costs and support margin rebuild. General and administrative expenses, excluding specified items, declined about 4.4% to $28.3 million in the quarter, driven by OWYN‑related cost synergies and disciplined cost management. Management repeatedly tied second‑half margin improvement to these productivity actions, suggesting that the internal cost base is becoming leaner and more scalable even while gross margins are currently pressured by commodities and tariffs.

Cocoa Supply Actions Set Up Future Tailwinds

Simply Good Foods has moved aggressively to secure incremental cocoa supply at sequentially more favorable prices, a particularly important move for a bar‑heavy portfolio. These contracts are not an immediate fix; management expects the benefit to start flowing into the profit and loss statement late in the fourth quarter and more meaningfully into fiscal 2027. Still, this creates a visible path to a modest margin tailwind in the coming years, and it demonstrates proactive commodity risk management at a time when other inputs remain volatile.

Cash Generation, Deleveraging, and an Aggressive Buyback

The company’s balance sheet and cash generation are standout positives. Cash stood at $194.1 million, with net debt at about 0.8 times trailing 12‑month adjusted EBITDA, providing ample financial flexibility. Cash flow from operations rose to $50.1 million from roughly $32 million a year ago, highlighting improved cash conversion even as earnings declined. Management is putting that capacity to work: it repurchased about 5 million shares for $100 million in Q1, and more than 7% of the share base year‑to‑date for around $150 million, with the board authorizing an additional $200 million in buybacks. For equity holders, this signals confidence in intrinsic value and supports EPS over time.

Innovation Pipeline Aims to Reignite Core Bars

Innovation remains central to the growth story, particularly as legacy bar performance softens. New platforms such as Quest Overload and the Quest Taste Forward Crispy line are designed to broaden the brand’s appeal and modernize its flavor and texture offering. The 45g Protein Milkshake is gaining traction, with ACV rising 8 points in the quarter, while a new high‑protein donut and expanded Atkins 4‑pack and meal bar SKUs are intended to refresh shelf presence. Management expects these launches to help reaccelerate the core bar business and extend OWYN’s footprint, supporting both category growth and share gains.

Sharp Gross Margin Compression and Cost Inflation

The quarter’s biggest negative surprise was gross margin compression. Gross profit fell 15.8% to $109.9 million, with GAAP gross margin down 590 basis points to 32.3%, and adjusted gross margin at about 33.1%, down roughly 540 basis points year over year. Management now expects full‑year gross margins to decline 100–150 basis points, with Q2 margins down around 300 basis points before stabilizing in the back half. The margin squeeze reflects higher input costs, tariffs, and mix pressures, and it is the main financial drag in an otherwise growing consumption environment.

Profitability Hit: EBITDA, Net Income, and EPS Down

Those margin pressures flowed directly through to earnings. Adjusted EBITDA dropped 20.6% to $55.6 million, while net income declined 34% to $25.3 million. Diluted EPS was $0.26 versus $0.38 a year ago, with adjusted diluted EPS at $0.39, down from $0.49. For investors, the message is clear: even with solid top‑line performance in key brands, the current cost environment is compressing profitability, and earnings recovery is dependent on both productivity gains and normalization in input and tariff costs.

Atkins Weakness and Distribution Losses Weigh on the Portfolio

Atkins, once the company’s flagship, is now a clear drag. Brand consumption fell 19% in Q1, and management expects roughly a 20% decline for the full year, with lost distribution at several major retailers responsible for about two‑thirds of the headwind. In response, Simply Good Foods is rationalizing the Atkins assortment and reallocating shelf space toward faster‑growing Quest and OWYN products. While this strategy makes sense strategically, it will likely keep Atkins under pressure and dampen overall top‑line growth until the portfolio reset is complete.

OWYN Destocking and Quality Issues Distort Near-Term Results

Despite strong consumer demand, OWYN’s reported net sales lagged sharply behind its 18% consumption growth due to lingering product quality issues and elevated retailer inventory levels. The company’s ERP systems cutover and prior quality challenges led retailers to destock, reducing shipments in the quarter even as consumption trends remained positive. Management framed these issues as transitory, but they are still weighing on reported results and muddying the otherwise strong growth narrative around OWYN.

Near-Term Q2 Weakness and Modest Full-Year Growth

Management was explicit that Q2 will be the low point of the year, guiding to a net sales decline of about 3.5–4.5% as the combination of Atkins declines, OWYN destocking, and margin pressure peaks. For the full year, the reaffirmed net sales guidance of -2% to +2% implies only modest top‑line growth at best, even with a second‑half uplift. That cautious range reflects both confidence in Quest and OWYN and realism about Atkins and macro cost pressures, suggesting that 2026 is more of a reset and reallocation year than a strong growth year.

Tariffs and Commodity Volatility Still a Risk

Tariffs and commodity costs remain a key external risk factor. Tariffs alone contributed roughly a $4 million headwind in Q1, and management flagged ongoing pressure from whey and other inputs, even as cocoa costs turn more favorable. These factors played a major role in the first quarter’s margin compression and remain a swing factor for the rest of the year. While cocoa tailwinds are now locked in for later periods, the broader commodity and trade backdrop remains uncertain and will be critical to watch for investors focusing on margin recovery.

Core Quest Bars Underperform Legacy Strength

Under the surface of Quest’s strong brand performance, the core bar business is showing signs of fatigue. Quest Bars were flat in Q1, meaning the legacy bar franchise is not currently growing even as salty snacks and other formats surge. Management was candid that Quest bars need to reaccelerate and highlighted upcoming innovation, merchandising efforts, and increased marketing as levers to reinvigorate the segment. Success here is important, as bars remain the brand’s foundation and a key earnings contributor.

One-Time and Integration Costs Add Noise to Results

The quarter’s figures were further complicated by several one‑time items. OWYN integration expenses of about $2.6 million and prior‑year noncash purchase accounting step‑up of roughly $1 million affected year‑over‑year comparisons, while refinancing‑related costs of around $2.8 million were included in G&A. These items weighed on adjusted results and obscure some of the underlying trend lines, but they are not expected to be recurring and therefore should fade as a drag on reported performance.

Guidance Points to a Second-Half Rebound

Looking ahead, Simply Good Foods reiterated its fiscal 2026 guidance, projecting net sales between -2% and +2%, full‑year gross margin down around 100–150 basis points, and adjusted EBITDA ranging from down 4% to up 1% versus last year. Management expects Q2 to be the weakest quarter, with net sales down roughly 3.5–4.5%, gross margin down about 300 basis points, and adjusted EBITDA down double digits. From there, they anticipate a gradual recovery: Q3 gross margin roughly flat year over year, and Q4 gross margin up about 200 basis points with double‑digit EBITDA growth. Below the operating line, updated assumptions include net interest expense of $19–21 million, a diluted share count near 96 million, an effective tax rate of 25%, and capital expenditures of $30–40 million. Commodity and tariff headwinds are expected to begin easing in the second half, with cocoa turning into a tailwind by Q4 and beyond.

Overall, the earnings call presented a company in transition: Quest and OWYN are gaining scale and strengthening their competitive positions, supported by a strong balance sheet, robust cash flow, and shareholder‑friendly buybacks, while Atkins declines, margin pressure, and near‑term operational issues weigh on reported results. Management’s reaffirmed outlook and detailed path to second‑half improvement offer a cautiously optimistic roadmap, but execution on productivity, innovation, and commodity management will be critical. For investors, Simply Good Foods is a story of short‑term earnings pressure offset by long‑term brand and portfolio upgrades that could set the stage for healthier, more profitable growth beyond fiscal 2026.