Simply Good Foods Co Q2 2026 earnings call

Thank you, Operator. Good morning, and welcome to The Simply Good Foods Company's second quarter fiscal year 2026 earnings call for the period ended February 28th, 2026. I'm happy to be here on my first earnings call and pleased to be joined this morning by President and CEO Joe Scalzo and Chris Bealer, Chief Financial Officer. A copy of our earnings release and accompanying presentation is available on the investors section of the company's website at thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements, which are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events.

A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. On today's call, we refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset light business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Circana's MULO++C measured retail channel data and company estimates for unmeasured channels for the 13 weeks ending February 28th, 2026, as compared to the prior year. With that, I'll now turn the call over to Joe Scalzo.

Thanks, Matt, and welcome to the company. Good morning, everyone. Thank you for joining us today. For those of you that I know, it's nice to be back, and I look forward to getting to know all the new faces. I wanted to begin this morning's call by providing a framing for where Simply Good Foods is today. It's been 12 weeks since I rejoined the company, and we are not pleased with our performance. We've experienced executional challenges against a dynamic and highly competitive marketplace. Our second quarter net sales of $326 million and adjusted EBITDA of $55.5 million were both well below our expectations. Our fiscal year 2026 guidance now calls for net sales in the range of $1.31 billion-$1.35 billion and adjusted EBITDA of $217 billion-$225 million. The good news is that we believe we are well positioned to fix this.

We know what we need to do, and we are acting with urgency. Our brands each speak to unique consumer segments within the category, addressing relevant consumer benefits with differentiated positioning. I believe Simply Good Foods can return to delivering the durable long-term growth that you would expect from a leading nutrition company. With that perspective, I'll turn the call over to Chris, who will provide more details on this quarter's results and our updated outlook for the year. After Chris is finished, I'll return to discuss how we plan to get our performance back on track. Chris?

Thanks, Joe. Good morning, everyone. As Joe mentioned, we are disappointed with our Q2 performance as our retail takeaway slowed significantly compared to Q1, especially in the second half of the quarter as we entered the New Year, New You promotional period, declining 6.4% year-over-year. Quest consumption grew 2.4% as bars were impacted by softer baseline velocities. Salty grew 14% in the quarter, although this represented a deceleration from Q1. OWYN consumption was down 2.4%, below our expectations due to a lapping of heavy promotional period in the prior year and poor base velocities, including our newly expanded distribution. This poor performance will result in lost distribution in the coming months. Atkins consumption declined by 23.4%, driven by known distribution losses and related trade inventory reductions, both of which were roughly in line with our expectations.

Specifically, we reported second quarter net sales of $326 million, which declined 9.4% versus the prior year, mainly due to weaker consumption. Adjusted EBITDA was $55.5 million, a decline of 18.4% year-over-year. Gross profit of $103 million decreased 20.8% versus the prior year, driven by inflationary costs, most notably cocoa, whey, and tariffs. Gross margin was 31.6%, a decline of 460 basis points versus prior year, largely reflecting higher input costs and some one-time effects from actions taken to mitigate OWYN product quality issues. Excluding $3.9 million of one-time OWYN integration expenses in the current year period and a $0.4 million non-cash inventory purchase accounting step-up adjustment expense related to the OWYN acquisition that occurred in the same period last year. Gross margin was 32.8%, a 350 basis point decline versus the same period last year.

Selling and marketing expenses of $28.2 million were down 19.7% versus prior year, primarily the result of the previously planned pullback in Atkins marketing. G&A expenses of $34.9 million decreased 3.2% versus the prior year period. Excluding for the current period, $4.5 million in restructuring costs, integration expenses of $0.8 million and term loan transaction fees of $0.2 million for the prior year period, integration expenses of $2 million and term loan transaction fees of $0.7 million, G&A declined 12% to $29.3 million, mainly due to a reduction in our short-term incentive accrual. It is worth noting that given the management transition, we increased our focus on controlling G&A costs earlier this quarter. I will speak to this in more detail in a moment.

On a GAAP basis, we had an operating loss of $213.3 million compared to income from operations of $54.7 million last year due to a non-cash loss on impairment of $249 million related to the OWYN and Atkins brand assets. Net interest expense was $5 million, while the effective tax rate was 26.8%. Net loss was $159.7 million, down from net income of $36.7 million last year, primarily due to the impairment I noted a moment ago. Moving to the balance sheet and cash flows, as of the end of Q2, the company had cash of $107.4 million and an outstanding principal balance on its term loan of $400 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 1.2x. The company bought back almost 5 million shares in the second quarter.

We have spent approximately $240 million repurchasing over 10% of our outstanding common stock over the past 12 months, including approximately $190 million this fiscal year. As of April 9th, 2026, the company has approximately $182 million remaining under its current share repurchase authorization. Year-to-date cash flow from operations was $58.2 million, compared to $63.3 million last year. Capital expenditure was $7.6 million, reflecting the investment to support additional capacity in our salty snacks business that we've previously discussed. This month, we kicked off a major initiative to reduce total fixed costs in our company. The objective of this work is to restructure by reducing staffing while increasing functional excellence in key areas, realigning our use of external agencies and brokers, and increasing efficiency in our manufacturing and logistics approaches.

As a result of this effort, we will improve the shape of our P&L to provide improved profitability and generate fuel for increased brand investment. We expect the total one-time cost of these initiatives will be approximately $15 million, which includes costs already incurred in the CEO transition. Finally, moving to our updated outlook, we now expect the following. Fiscal year 2026 net sales are now expected in the range of $1.31 billion-$1.35 billion, representing a decline of between 10% and 7%, respectively. This assumes weaker consumption trends and expected distribution losses. GAAP gross margins are now expected to decline in the range of 300-350 basis points. This is a result of slightly higher input costs, especially whey, cost of mitigating the OWYN product quality issue, and a slight delay in realized cost savings due to lower volumes.

We continue to expect sequential improvement in the rate of year-over-year gross margin change, including Q4 margin expansion. We plan to hold marketing spend at planned levels to strengthen our brand equities and drive consumption. Our expectations for G&A include the partial year benefit from the major initiative previously noted to reduce fixed cost in the company. Fiscal year 2026 adjusted EBITDA is now expected in the range of $217 million-$225 million, representing a year-over-year decline of 22% to 19%, respectively. We continue to expect our full year effective tax rate to be roughly 25%. Our expectations on interest expense and capital expenditures remain unchanged. Given shares repurchased year-to-date, the company expects a weighted average diluted share count of approximately 92 million shares outstanding.

As it relates to the third quarter, we expect net sales in the range of $328 million-$339 million, which represents a decline of 14% to 11% versus prior year. This incorporates consumption levels similar to what we experienced in the second quarter. We expect adjusted EBITDA in the range of $46 million-$50 million, representing a year-over-year decline of 38% to 32% as we hold marketing investment in line with plan. Finally, I would note that our outlook assumes current economic conditions, consumer purchasing behavior, and prevailing tariff rates will remain generally consistent across the company's fiscal year. I will now pass the call back to Joe.

Thanks, Chris. Let me reiterate where I began today's call. We are not satisfied with our current performance, and we see a clear opportunity to improve our choices and our execution across the business. While we believe the long-term fundamentals of our category, our portfolio, and our company capabilities are compelling, our recent results have not met our expectations, and we are taking immediate and fundamental actions to turn around both our financial and in-market performance. Before I talk about our plans, let me step back and tell you why I remain optimistic and energized about the growth opportunities for our business. First, we compete in a trend-right consumer category that continues to show solid growth even as much of the broader food and beverage industry has experienced pressure. From a U.S. household perspective, the purposeful nutrition category still has significant room to expand, with meaningful runway for continued growth.

The category also continues to benefit from powerful consumer tailwinds, health, wellness, the use of protein, and the increasing role of convenient snacking and meal replacement in consumers' daily routines. Importantly, it also remains a predominantly branded category with limited private label, which reflects the pace of innovation required to compete successfully. This category backdrop will always attract new entries, and we've seen some targeted directly at our business recently. With that said, we have competed effectively through this type of activity in the past and will do so again moving forward. At the same time, the broader food and beverage landscape is impacted by the growing adoption of GLP-1 medications.

While these therapies are changing how some consumers approach eating, they are also reinforcing the importance of nutrient-dense foods, particularly those high in protein and lower in carbs and sugar, as consumers focus on maintaining muscle mass and overall nutrition balance in a lower calorie environment. We believe these trends remain highly consistent with the nutritional principles that underpin our brands. From a customer perspective, both brick and mortar and online retailers continue to view our category as a growth category and remain committed to allocating space and resources to capture that growth. Second, we believe Simply Good Foods has a strong portfolio of consumer brands. Each brand speaks to a unique consumer segment, addresses different benefits with differentiated positioning and preferred products. Third, we've built a best-in-class company. We have developed strong capabilities in marketing, sales, and R&D that enable us to drive innovation and profitable growth.

In addition, our asset-light manufacturing and distribution network remains an enviable operating model that provides flexibility, scale, and high free cash flow for investment. Importantly, we also have significant retail scale within the category aisle and serve as a category advisor to many of our largest retail customers. However, it's clear that our performance has not reflected the strength of our company or the potential of our brands. Strategy shifted, priorities were not always clear, and execution did not consistently meet the standard required to compete at a time when competitive activity was increasing, particularly on bars. As a result, we made some strategic choices that ultimately weakened our performance and limited our ability to fully capitalize on the opportunities in front of us.

Since returning to the role, I have focused on taking a clear-eyed assessment of the business to ensure that we have the discipline, the consistency, and the operational excellence required to compete and win. This work is already well underway and we are acting with a sense of urgency. Before moving to our portfolio, I believe it's worth stepping back and highlighting a few structural issues within the business that have contributed to our recent performance. Over the past several years, we've experienced erosion in overall household fundamentals across the portfolio. In a category like ours, growth ultimately depends on continually recruiting new consumers into our brands while growing loyalty and buy rate. Consumer recruitment requires the proper economic structure in the business. For us, this was characterized by gross margins approaching 40%, with sustained marketing investment around 10% of sales and adjusted EBITDA margins approaching 20%.

The shape of our P&L has moved far from this ideal structure, with gross margins in the mid-30s, reductions in marketing spend as a percent of sales, and G&A dollars growing faster than our underlying business. As a result, our ability to consistently invest behind our brands has been constrained, which has ultimately led to slower household penetration growth, declining buy rate, and pressure on brand performance. To succeed, we will address these structural issues. Our turnaround beliefs moving forward are clear. We will relentlessly attack inefficiency in our supply chain. We will use pricing action as necessary to help offset cost inflation over time. We will be less reliant on price promotion. We will lower our fixed overhead structure while improving key areas of functional expertise. We will restore more consistent investment behind our brands.

We'll focus more of our brand innovation on the core business with bigger consumer-driven ideas. We will use ROI to evaluate the effectiveness of every marketing investment. We believe turning these concepts into actionable plans will lead to improvement in our economic structure. The good news here is that we've already started that work. We have built capacity in our supply chain and R&D organizations to systematically improve efficiency, attack cost, and lower our total cost of delivered goods. You will see that play out as we close out this fiscal year and move through fiscal year 2027. We have already identified low returning customer spend and are targeting its elimination in fiscal 2027 to reduce our reliance in that area and rebalance our consumer and customer investments. We will assess the use of pricing to regain the gross margin we lost to inflation over time.

Lastly, as Chris mentioned earlier, we have a major initiative underway to immediately reduce our fixed cost structure. Specifically, we're taking aggressive actions to lower our G&A investments. When completed by the end of this fiscal year, we will have an organization that is the right size with the right capabilities to compete and win. With that broader context in mind, let me now turn to our brand portfolio and the role we believe each brand plays in our strategy moving forward. I'll start with Quest, a billion-dollar retail brand, the most important brand in our portfolio, and the primary driver of our long-term growth. We believe Quest remains one of the most differentiated brands in the entire category, with significant growth runway ahead. We bought Quest in 2020, confident that it would become a huge success given the strength of its core promise.

Quest has built its position by delivering a unique combination of great taste and highly differentiated nutritional profile. Since its founding, the brand has focused on using high-quality, dairy-based proteins that provide the full spectrum of essential amino acids while avoiding ingredients that can cause blood sugar spikes. That positioning has resonated with a broad range of consumers that has helped Quest build strong loyalty and equity. Solid growth and household penetration has continued for Quest. However, recently, we've experienced a slowdown in buy rate, partially due to elevated competitive activity, which has resulted in slowing consumption on the brand. At the core of the Quest franchise are two key product platforms, bars and chips. Together, these products represent the foundation of the brand and approximately 80% of sales. They continue to resonate strongly with consumers seeking convenient, high-protein snacks.

Quest Chips remains an important and growing part of the brand, continuing to perform well as consumers increasingly look for better-for-you alternatives to traditional salty snacks. Chips continue to drive household penetration rates for Quest, which are now over 19% of U.S. households. Going forward, we'll continue to innovate products and invest in marketing to drive chip awareness, consideration, and trial. While the performance of chips has remained strong, consumption of Quest Bars has weakened in recent periods, resulting in a slowing of the brand's overall buy rate. A significant factor in the slowdown is the result of our focused investments in other parts of our portfolio beyond chips, which haven't met our expectations at a time when competitive activity in core categories has increased.

Given the scale and strategic importance of Quest to our company, re-accelerating growth in the bar business will be one of our highest priorities moving forward. Our focus will be on strengthening core bar velocities, ensuring our innovation pipeline is aligned with consumer preferences, and supporting bars through more competitive communication driven by continuing the level of marketing investment required to recruit new consumers and drive buy rate. Re-accelerating growth in Quest Bars while continuing to scale the momentum we are experiencing Quest Chips is central to unlocking the full growth potential of the brand. Turning to Atkins, the brand has played a foundational role in the history of Simply Good Foods and in many ways represents the origin of the company.

This brand traces its roots back to Dr. Robert Atkins, whose work decades ago helped introduce millions of consumers to the concept of managing carbohydrates to support healthier eating and weight management. His philosophy ultimately formed the foundation of the Atkins brand and the broader low-carb nutritional health movement that many consumers continue to follow today. For many years, Atkins was the primary engine of growth for the business. During my previous tenure, we worked to reposition the brand from a programmatic diet into a broader weight management lifestyle brand, focused on helping consumers manage carbohydrates while still enjoying great-tasting foods. During that time, Atkins grew for over a decade by recruiting consumers to the low-carb lifestyle. Over time, however, a combination of factors contributed to the brand's recent decline. As gross margins came under pressure, the level of marketing support behind the brand declined.