Simply Good Foods Co
NASDAQ:SMPL
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Earnings Call Analysis
Q4-2024 Analysis
Simply Good Foods Co
Simply Good Foods Company reported impressive results for the fiscal fourth quarter of 2024, with net sales soaring by 17.2% to reach $375.7 million. A significant portion of this growth was attributable to the recent acquisition of OWYN, contributing approximately 9 percentage points. On a comparable basis, net sales for the legacy North America Quest brand grew by about 5%, while Atkins experienced a 5% decline. The overall strong performance was supported by an adjusted EBITDA increase of 15%, totaling $77.5 million, highlighting the company's ability to control costs and profit margins despite challenges.
While the company faced temporary supply chain constraints, particularly for its Quest products, it remains committed to overcoming these hurdles. It is anticipated that Quest will recover and return to a stronger performance by the end of October. The management has noted that despite current challenges with Atkins' sales, they expect the broader nutritional snacking category to maintain robust growth driven by increasing consumer trends towards healthier options, positioning Simply Good Foods favorably for sustained business development.
Looking forward, management has provided guidance for fiscal 2025 indicating expected net sales growth in the range of 4% to 6%, with adjusted EBITDA growth slightly surpassing sales growth. This projection indicates a steady trajectory for the company despite external pressures, including cost inflation and inventory adjustments. Specifically, OWYN is expected to achieve net sales between $135 million and $145 million, representing a 20-30% increase compared to the previous period. Overall, the guidance reflects confidence in overall business operations, especially as OWYN's integration progresses.
In the fourth quarter, gross profit rose to $146 million, aided by a drop in ingredient and packaging costs. The company improved its gross margin to 38.8%, despite a non-cash impact from the OWYN acquisition. The effective management of operational costs, including G&A expenses rising partly due to the acquisition, indicates a strategic focus on maintaining profitability. Moving ahead, Simply Good Foods anticipates gross margin compression in fiscal 2025 due to ongoing input cost inflation, though it is optimistic about offsetting these challenges through product cost savings initiatives.
Innovation remains a central theme for Simply Good Foods as it seeks to diversify its product offerings and capture wider market share. The company is introducing new products, such as the Quest Bake Shop line and an array of innovative snacks. Early performance feedback is promising, and the company is optimizing underperforming SKUs to enhance sales. This innovative approach is crucial for both the Quest and Atkins brands as management seeks to align product offerings with consumer preferences for health-oriented snacks.
Simply Good Foods positions itself as a leader in the $1.4 billion nutritional snacking category, capitalizing on evolving consumer habits away from high-carb and high-sugar diets. The management is enthusiastic about the long-term growth prospects within this segment, believing that both consumer trust in their brands and a commitment to health and wellness will drive demand. With strategic plans in place, the company is well-prepared to leverage its strengths for enhanced shareholder value over the coming years.
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Ladies and gentlemen, good morning, and welcome to the Simply Good Foods Company Fiscal Fourth Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pogharian, Vice President of Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning. I'm pleased to welcome you to the Simply Good Foods Company Fourth Quarter Earnings Call. Note that fiscal Q4 and full year amounts reflect results for the 14 and 53 weeks ended August 31, 2024. Geoff Tanner, President and CEO; and Shaun Mara, CFO, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7:00 a.m. Eastern Time.
A copy of the release and presentation slides are available under the Investors section of the website at www.thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements 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. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide these full information for investors.
Due to the company's asset-light strong cash flow 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 a reconciliation of the historical non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. The acquisition of OWYN was completed on June 13, 2024, therefore, the company's fourth quarter and full year 2024 results include about 11 weeks of owned performance.
The reference to legacy Simply Good Foods encompasses Simply Good Foods business, excluding OWYN. I'll now turn the call over to Jeff Tanner, President and CEO.
Thank you, Mark. Good morning. Thank you for joining us. Today, I'll recap Simply Good Foods' financial results and the performance of our brands. Then Shaun will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2025 outlook and your questions.
We're pleased with our fiscal fourth quarter financial results with net sales increasing 17.2%. The acquisition of OWYN in the 53rd week are a 9 and 8 percentage point contributor to growth. On a like-for-like basis, North America Quest net sales increased about 5% and Atkins declined about 5%. Quest performance was less than expected due to temporary chip supply constraints seconds was in line with our estimate.
Our gross margin improvement continued in the fourth quarter and resulted in adjusted EBITDA of $77.5 million, an increase of 15% compared to the year ago period. Total Simply Good Foods retail takeaway including OWYN and the combined measured and unmeasured channels was about 8% for both the Q4 and full fiscal year 2024 periods.
Quest and OWYN full year POS was about 13% and 80%. And Atkins was off 5%. Importantly, nutritional snacking category growth remained strong, driven by volume. Key cup segments of the category, including bars, shakes and chips, all increased in both Q4 and full year fiscal 2024.
We are category adviser at most retailers and will continue to work with our customers to develop and support initiatives in the aisle to further accelerate category growth. Given the twin tailwinds of snacking and health and wellness as well as low household penetration, the category is expected to maintain its momentum and its multiyear growth trajectory.
As we look to fiscal 2025, we're excited about the prospects for our category and our business, and we believe we are well positioned to deliver on our objectives. We'll execute against our strategic initiatives, focusing on innovation, marketing and increased physical availability that we expect will drive trial and increased household penetration.
The OWYN acquisition closed early in Q4, and the integration work is progressing as planned. We continue to be very pleased with this brand and believe the combination of our 2 businesses will create future significant shareholder value through revenue growth, margin expansion and cost synergies.
Shaun will provide you with the details of our fiscal 2025 outlook, but assuming a comparable full year of ON results are included in fiscal 2024 as well as the exclusion of the 53rd week in fiscal 2024. Fiscal 2025 is expected to be in line with the company's long-term algorithm.
Specifically, net sales growth in the 4% to 6% range and adjusted EBITDA growth slightly greater than the net sales increase. The next slide provides you with a perspective of nutritional snacking category growth as well as our retail takeaway performance within the IRI, MULO plus C-store universe and in the combined measured and unmeasured channels. Nutritional snacking category, Q4 growth in the measured channels was 7.3%, driven primarily by volume.
The category continues to be a standout performance and is increasingly a focus of our retail partners as they look for growth opportunities. Quest and OWYN retail takeaway in measured channels increased about 9% and 12%, and outpace the category. Atkins performance down about 8% in measured channels was similar to last quarter. Our e-commerce business continues to do well.
As a result, retail takeaway and unmatched channels is nearly 2 percentage points additive to total Simply Good Foods measured channel POS. Let me now turn to Quest. In Q4, retail takeaway growth in measured and combined measured and unmeasured channels was 9% and 10%. Consumption slowed versus Q3, primarily due to temporary chips capacity constraints that resulted in stock outs at retailers.
Additionally, we saw some increased competitive distribution and promotions in the bar category. In Q4, we estimate total unmeasured channel retail takeaway increased about 16% and driven by strong e-commerce growth of 21%, that was nearly 450 basis points greater than Q3. E-commerce strength was partially offset by softness in specialty channels.
Quest snacks and bars retail takeaway in the combined measured and unmeasured channels increased about 17% and 1%, respectively. Despite the chip supply challenges, we continue to be pleased with our salty snacks POS growth of 34%, which is a standout in the category and represents about 25% of Quest retail sales.
Temp's retail takeaway slowed during the quarter due to temporary capacity constraints that impacted our ability to keep retail shelves fully stocked. We brought on a second chips manufacturing line during the quarter, and it took some time to get up the learning curve.
As we exit the first quarter in November, we anticipate supply will be back to normal with now 2 chips production lines. This positions us well for the upcoming new year, new use season and any new distribution wins. Bar segment competition increased, driven by distribution of some new entrants into the measured channel universe. In response, we will increase promotional activity at select retailers starting in Q1 of fiscal 2025. And we have accelerated the launch of the Quest overload bar platform to February.
These bars are loaded with inclusion and have a unique texture and mouth feel that will bring variety, news and excitement to the bar segment. Therefore, in fiscal 2025, we expect that Quest will have another strong year, driven by volume that should result in retail takeaway growth of 9% to 10%. As I mentioned earlier, CHIP's recovery has already begun.
With 2 production lines, we have the flexibility to meet increased demand for this fast-growing business. In the fourth quarter of fiscal 2024, we partnered with a large club customer on a small regional trial of Quest chips. Due to the success, in the second half of fiscal 2025, we'll have a broader nationwide test with this retailer that could lead to an expanded presence.
At the bottom of this slide, you'll note images of the key innovation items in fiscal year 2025 that I just discussed. Additionally [Audio Gap] nicely and in line with our estimates.
Importantly, Quest core products and innovation will be supported with a full year marketing campaign. Recall the successful, it's basically cheating advertising debuted in mid-March and drove an almost immediate lift in consumption, particularly chips as this is where a large portion of the advertising was focused.
In fiscal 2025, we will have a full year benefit of the campaign at even higher media weights, which we expect will drive greater awareness and household penetration of all Quest products.
Turning to action. Q4 retail takeaway in measured and combined measured and unmeasured channels was off 8% and 5%. Strong e-commerce growth continued, driven by Amazon whose POS growth was 15%. In Q4, Atkin's retail dollar sales were relatively consistent.
Specifically, during the last 11 weeks of Q4, average weekly dollars in measured channels was $10.6 million and very similar on a week-to-week basis. This was partially due to RTD shakes where retail takeaway improved and was about the same as the year ago period in the combined measured and unmeasured channels.
We continue to believe in the long-term vitality of the brand, given the renewed cultural relevance and conversation on weight and we are confident we have the right plans in place to bring Acton back to growth. I'm pleased with the execution of the Atkins revitalization plan that is progressing as scheduled.
Some elements of the plan are in market now, and we expect all elements to be in the market as we exit fiscal year 2025. While early, the innovation rolling out in the marketplace in conjunction with the fall shelf resets is tracking to our estimates. We have a full suite of innovation across forms including the Atkins Strong ready-to-drink 30-gram protein shake, a new wafer bar and Atkins and Dodge confectionery gummy bears and truffles.
Our innovation enabled us to maintain distribution at key food and mass customers. However, we do anticipate that some items in the more space-constrained club channel could be at risk in the spring shelf resets. Product upgrades or reformulation work is progressing as well as new packaging. The Atkins strong shake packaging is an indication of what you'll see.
Note the fresh new look, including a bold A in the middle as our new more modern logo, more to come here soon. As we exited fiscal 2024, new Atkin's advertising was on air and the atkins.com website was refreshed. If you haven't seen it, the revised advertising, one, more clearly communicates and owns the benefit of weight management; two, more strongly communicates the brand's unique macro nutrient profile focused on weight and three, emphasizes Atkins as a sustainable and diet free eating each to weight wellness.
We believe this messaging links better to the evolving consumer views and conversation on weight wellness. Notably, one of the spots specifically positioned Atkins as a diet free and sustainable way for GLP-1 users or anyone who has lost weight to hold on to their games.
The refreshed Atkins.com website has been contemporized and is user-friendly. As has always been the case, it is loaded with customizable tools to help consumers achieve their weight wellness goals. While we work on revitalizing brands, we also recognize the need to ensure Atkins is a long-term sustainable business.
As such, beginning in fiscal 2025, we will work to optimize ROI and investment levels, specifically eliminating trade and marketing investments that don't meet specific ROI hurdles. This will impact fiscal 2025 sales growth as we expect some volume declines due to the reduction in spending as well as some distribution losses. We'll also discontinue our breakeven Canada export business.
As such, we anticipate Atkin's full year fiscal 2025 retail takeaway to decline high single digits, half of which is due to the aforementioned planned lower spend. To conclude, we're making progress and positioning the brand to succeed in the future. However, as we have previously stated, it will take some time to get there.
Turning to OWYN. This brand continues to deliver on the potential we envisioned. Retail takeaway in the measured and unmeasured channels is strong with both distribution and velocity growth. Assuming a full year of OWYN operations, Q4 and full fiscal year 2024 net sales and retail takeaway are relatively in line with each other. And it's not one customer or channel.
OWYN growth has significantly accelerated across all major retail customers. In the measured channel universe, OWYN is the third largest sports nutrition multipack brand in the U.S. and growing the fastest in dollar sales. We remain confident in our ability to effectively integrate OWYN into our business and deliver on the acquisition model commitments.
In 2024, OWYN benefited from increased distribution into new customers. With solid ACV in fiscal 2025, we expect POS growth of 20% to 30% driven by higher velocities and increased items or SKUs at select retailers. As such, in fiscal 2025, we expect OWYN net sales to be in the $135 million to $145 million range also a 20% to 30% increase versus the last year.
The integration work is underway and progressing as planned. As a reminder, to align with our fiscal year-end 2025, we will achieve the majority of the synergies, about 80% at the onset or first day of fiscal 2026. This should result in -- on fiscal 2026 adjusted EBITDA margin of high to mid-teens.
To summarize, Simply Good Foods is uniquely positioned as a $1.4 billion net sales leader in the nutritional snacking category with a diversified portfolio across brands and product forms. The relevance of the category and demand for our products only continues to increase as more and more consumers turn away from high carb, high-sugar food seeking high-protein, low-sugar, low-carb options.
We believe our category and our brands represent the future of food and beverage, and we have 3 uniquely positioned brands that are aligned around these consumer mega trends. Consumers trust our brands to help them achieve their wellness goals. As such, we're focused on our innovation and marketing plans to provide consumers with products to help them in their journey.
We will continue to execute our strategic priorities that we expect will enable us to deliver on our long-term growth objectives that ultimately drive increased shareholder value. The work we're doing in fiscal 2025 positions us well for fiscal '26, which should enable us to achieve results at the high end of our long-term algorithm. Now I will turn the call over to Shaun, who will provide you with some greater financial details.
Thank you, Jeff, and good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods fourth quarter net sales of $375.7 million increased 17.2% versus the year ago period. The primary drivers of growth were the OWYN acquisition and the 53rd week that were about a 9 and 8 percentage point benefit, respectively, the net sales growth. Legacy net sales growth, excluding the extra week, increased about 1%. Full year net sales of $1.33 billion increased 7.1% versus the year ago period.
OWYN was a 2.4 percentage point contribution to net sales growth. Legacy net sales increased 4.8%, including the benefit of the 53rd week that was slightly less than a 2 percentage point benefit. As we exited fiscal 2024, retail inventory returned to normal levels, but slightly below the fiscal 2023.
The reduction in retail inventory levels, combined with additional incremental trade investments resulted in full year legacy retail takeaway, slightly greater than net sales. Moving on to other P&L items for the quarter. Gross profit was $146 million, an increase of $25.5 million from the year ago period, driven by lower legacy business ingredient and packaging costs, partially offset by a noncash inventory purchase accounting step-up adjustment related to the OWYN acquisition.
As a result, gross margin was 38.8%, a 120 basis point increase versus last year. The noncash inventory purchase accounting step-up adversely affected gross margin by 90 basis points. Adjusted EBITDA was $77.5 million, an increase of $10.2 million from the year ago period. Selling and marketing expenses increased $10 million to $40.8 million, primarily due to increased investments in marketing growth initiatives and the inclusion of OWYN.
GAAP G&A expenses were $41.3 million, an increase of $11.8 million versus last year. The increase was primarily due to higher employee-related costs, the inclusion of OWYN, stock-based compensation, as well as executive transition and integration costs. Excluding stock-based compensation as well as executive transition and integration costs, Q4 G&A increased $8.7 million of $32.1 million.
Additionally, in the fourth quarter of fiscal 2024, the company incurred costs related to the OWYN acquisition of $11.8 million. Finally, Net interest income and interest expense was $8 million, an increase of $1.6 million versus the fourth quarter of fiscal 2023.
The increase versus the year ago period is primarily driven by a higher debt balance due to the OWYN acquisition. And our Q4 effective tax rate was about 28.3%, slightly higher than the year ago period due to the OWYN acquisition. As a result, net income was $29.3 million versus $36.6 million last year.
Moving on to full year results. Gross profit was $511.6 million, an increase of $58.1 million compared to the year ago period. The increase was driven by the LSI business due to lower ingredient and packaging costs, partially offset by a noncash $3.2 million inventory purchase accounting step-up adjustment related to the OWYN acquisition. As a result, gross margin was 38.4% and a 190 basis point increase versus last year.
The noncash inventory purchase accounting step-up adversely affected gross margin by 20 basis points. We're pleased with our gross margin progress in fiscal 2024. However, in fiscal 2025, we anticipate that input cost inflation will be a headwind and result in gross margin contraction of about 2 basis points.
Note, this includes OWYN has about a 50 basis point headwind to total company gross margin. Adjusted EBITDA was $269.1 million, an increase of 9.6% versus last year. In addition, for the full fiscal year 2024, the company incurred costs related to the OWYN acquisition of $14.5 million.
Net interest income and interest expense was $21.7 million, a decline of $7.2 million versus last year. The interest expense component decline was due to a lower term loan debt balance prior to the OWYN acquisition versus the year ago period. Our fiscal 2024 tax rate was about 5% and we anticipate fiscal 2025 to be similar.
As a result, net income was $139.3 million versus $133.6 million last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. Fourth quarter reported EPS was $0.29 per share diluted compared to $0.36 per share diluted in 2023. Adjusted diluted EPS was $0.50 per share compared to $0.45 in the year-ago period.
Note that we calculate adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense and income taxes. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.
Moving to the balance sheet and cash flow. Fourth quarter and full year cash provided by operating activities was about $49 million and $216 million. Strong cash flow is a hallmark of the company. As a result, at August 31, 2024, the company had cash of $132.5 million.
In fiscal 2024, the company repaid $135 million of its term loan. And at the end of the year, the outstanding principal balance was $400 million, resulting in a trailing 12-month net debt to adjusted EBITDA ratio of 1x. Capital expenditures in 2024 were $5.7 million. In fiscal 2025, CapEx is expected to be in the $10 million to $15 million range.
In fiscal 2025, we anticipate net interest expense to be around $25 million to $27 million, including noncash amortization expense related to the deferred financing fees. We currently anticipate our net debt to adjusted EBITDA ratio to be about 0.5 turn or better by year-end fiscal 2025.
Now to wrap up. While early, retail takeaway is off to a good start, and we believe we're on track to deliver our fiscal year 2025 plans. We continue to execute against our strategic initiatives and are making investments in the business that we expect will strengthen our brands in the marketplace.
Our integration work is well underway and progressing as planned. We expect strong Quest in OWYN net sales and retail takeover growth in fiscal 2025, driven by greater velocity, increased distribution, innovation and marketing investments. As Jeff discussed earlier, in fiscal 2025, we're focusing on optimizing Akins ROIs related to brand investments.
This will affect Atkins net sales and retail takeaway in fiscal 2025, but we believe this is necessary to ensure Atkins remains a sustainable and profitable business over the long term. In fiscal 2025, the company continues to expect input cost inflation. Solid product and cost savings initiatives are in place that partially offset these higher costs.
However, given the unprecedented increase in the cost of select imports, we anticipate gross margin compression in fiscal 2025. Therefore, in fiscal 2025, total company reported net sales are expected to increase 8.5% to 10.5%. Embedded in that, we anticipate OWYN full fiscal year 2025 net sales to be in the $135 million to $145 million range.
Total company reported adjusted EBITDA is expected to increase 4% to 6%. Note that the 53rd week in fiscal 2024 comparison year is about a 2 percentage point headwind to both net sales and adjusted EBITDA growth in full year fiscal 2025.
Lastly, assuming a comparable full year OWYN results are included in fiscal 2024 as well as the exclusion of the 53rd week in fiscal 2024. Fiscal 2025 is expected to be in line with the company's long-term algorithm.
Specifically, net sales growth in the 4% to 6% range and adjusted EBITDA growth slightly greater than the net sales increase. Just as importantly, we believe the work we're doing in fiscal 2025 positions us very well for fiscal 2026, which should enable us to achieve top and bottom line results at the high end of our long-term overlook. We appreciate everybody's interest in our company, and we're now available to take your questions.
[Operator Instructions] Our first question comes from the line of Brian Holland with D.A. Davidson.
Maybe just starting with some of the recent innovation, specifically looking at bake shop and some of the coffee drinks, we seem to be performing quite well. You've talked before about some of the struggles from an innovation standpoint and then having gone quiet for a little while any perspective that you can provide about the incrementality of these launches, what you're seeing so far vis-a-vis previous innovation cycles at the company?
Yes. Let me start with innovation on Quest and specifically bank shop. So it's a big platform launch for us. We're encouraged by the early read. If you recall, this is a motor and a brownie, 10 grams of protein, that's 1 gram sugar. Where it's in distribution performance is on power or even better in some of our best-performing innovation. Certainly, feedback on retailers is very encouraging.
That platform is -- it hits on flavor, taste, checked all the boxes a protein low-carb sugar. It's also targeting a sizable addressable market, which is sweet bakers. So in the early innings, still building distribution, but very encouraging. Chips, which I'm sure we'll probably talk about on the call. As we recover supply, we continue to drive that.
We've got new flavors coming out. It's about a $300 million business today. historically growing at 25% to 30%. Again -- and it's a massive addressable market, where we see the largest source of volume from mainstream salty tax. So at a high level, very encouraged by what we're seeing on Quest innovation. What Quest does is it flips the macros on large addressable stacks. And the inroads we've made into salty snacks now with based.
You can believe we're looking around the store identifying other spaces where we can disrupt. And then just to close out on Quest, we have accelerated the launch of the overload bar, which is the chockful of inclusion, it's delicious. And so we're also innovating on our core. On Atkins, innovation is a key driver of this business performance.
And as I've stated on previous calls, when I joined the organization, the state of the pipeline on actions was not where it needed to be, had contributed to the slowdown we've seen in the business.
Credit to the team. We did jump-start efforts there. The recent slate of innovation in the marketplace is performing well. In the case of Atkins, what we're doing is replacing underperforming SKUs, say, a Walmart or a large customer, 1, 1.5 units per week and replacing it with items that these new innovation items that are doing 2 to 2.5.
So whether that be the Arkanstrong, the gummies, the troubles, there rule of thumb kind of doubled the velocity performance of the items that they're replacing, and it just underscores how critical innovation is on Atkins.
And so we have made sure that we're filling that pipeline so we can continue to bring items to market on actions, we're largely looking to replace underperforming items with better items, but it is now a key focus for the business.
Just kind of maybe time pro -- Just on the Atkins piece, I'd say just as an example, if you look at Walmart, I think we -- they took out 17 SKUs for the fall reset. They replaced them with about 18 or 19 SKUs of innovation. That innovation to dimensionalize what Geoff was saying, is turning about 2 times a week as opposed to 1 times a week for the stuff they replace. So it's been a good early, early read on innovation for Atkins.
No, great color. Appreciate that. And then just looking into new and maybe this follows on to the innovation point. I know historically, that period can be volatile in both directions. You called out earlier the 24 resolution season. impacted by another category participant and who didn't have adequate supply in '23, had adequate supply in '24.
As you look at the setup into 2025, any sense whether we're kind of in a more stable backdrop or if there are any heightened competitive issues or somebody out of stock in stock, whatever. I know some of that we may not know until early '25. But as we look at fall shelf sets, do we feel like we're a more stable place than we have been in the past couple of years?
As I look at the fall shell shelf sets, I'm very pleased with how we performed on both businesses and OWYN as well. To your point, last year, it was somewhat of an anomaly because we were lapping -- and you made this point, we were lapping a period where we had received outsized support due to a large competitor being out of stock. So that was a difficult lap for us.
Looking forward to this upcoming New Year, New Year, I'm encouraged by the plans we have in place. We have strong merchandising plans at every customer. To your point, it's a competitive category. We don't know what the competition is going to do at this point. But I'm very pleased with how our teams built the plans customer by customer, which should put us in a strong position. But again, you set up we'll know much more in February, March.
The next question is from the line of Matt Smith with Stifel.
I wanted to dig in a little bit around the underlying growth outlook for the legacy business in fiscal '25. I think guidance implies like 3% underlying growth on a like-for-like basis. But there's a few moving parts here, including the Quest capacity improving in the first quarter, you get some new distribution in the second half of the year.
And on Atkins, you have lower -- or you're optimizing or optimizing trade spend there. So can you help with the phasing of growth for each one of those brands due to the year given the moving parts there?
Phasing in terms of quarterly growth.
Just if there's any unique consideration we should take into account when we think about Atkins pulling back on trade and merchandising support, is that changing the shape of the decline through the year that we should be considering?
Yes. I mean I think if you take a step back and look at the kind of quarters, just in general, I'll just kind of -- depending on where your guidance range is, net sales on a reported basis reported should be somewhat similar in Q1 to Q3, up low double digits to maybe low mid-teens. Q4 will be flattish because the year-ago period included the 50 per week and 11 weeks of OWYN.
And then EBITDA, depending on where you're on guidance should be up mid- to high single digits on a reported basis, the first 3 quarters and then down slightly in Q4. From a gross margin standpoint, we're going to benefit from lower input costs earlier in the year so close to flat in the first quarter and then down about 2.25 basis points the rest of the way.
That excludes the impact of the onetime step-up that we talked about on the call. So I don't know if that's what you're looking for, that...
No, that's great. I appreciate that. And the -- the added color I would just give you is on Quest chips, which we talked about in the scripted remarks, we had been trending -- just to give you an idea of how this should flow. We've been trending in the $4.75 million to $5 million per week range in measured channels. because of the dock outs, we ended up closer to $4 million.
And we expect to get that business back in the $5 million per week range starting the end of October. We've got a great comment partner, but 2 sites operational. We've got a test with a large club customer coming in. So if you look at the consumption trends and you think how is that going to flow into the new year, you should probably look at that as adding 2, perhaps 3 points to Quest growth versus what you're seeing right now.
The other thing, Matt, I'd say is related to Atkins' POS, I think you were kind of poking around there. I think you're going to see that a little softer in January through August and where it's trending for the first 6 weeks of the fiscal year. We have not seen the cuts in the underlying investments really starts in kind of October-ish, and then it kind of continues through fiscal year. So you'll see softer as we go through the year versus where it is today.
The next question is from Jon Anderson from William Blair.
I wanted to ask about the point-of-sale assumptions for fiscal '25 by brand. It looks like the assumptions that you communicated for both Quest and Atkins are kind of in line with recent scans, but quite a bit lower for OWYN. It looks to us like OWYN has been running up closer to triple digits. And I know you've kind of communicated 20% to 30%. Can you just talk a little bit about the dynamic there for OWYN in 2025? Is it more challenging comparisons or is there a certain element of conservatism baked in? Is it a new brand for your business?
Yes. No, I appreciate the question. We continue to be excited about this acquisition expands our presence in the fast-growing shake category, fastest-growing multipack protein shake and measured channels, like 13 and 26. And we purchased this business because it reaches a new consumer, both looking for plant and clean label and clear and obvious cost synergies.
To your point, if you look at current performance, it's exceptionally strong. It's up around 80% all outlet. Sam's Club is a big driver. You're seeing significant growth in every customer. So it's not just one customer. Our focus right now on this business is driving the core.
So expanding the number of doors, perhaps adding a larger pack and then integrating the business, delivering on the synergies, which will hit in '26. In terms of why we have a lower growth number, the -- in fiscal '20 and our fiscal '24, we saw a significant growth in distribution as they go into new stores and channels.
In fiscal '25, there's still distribution opportunities. But as I said, it's more out filling voids, pack sizes and we're lapping some pipes. So the recent growth is very much driven by a significant distribution push we'll continue to look to fill voids, look to drive increased pack sizes, but it won't be at the same level that we have currently seeing the benefit.
And I think in the first half of the year, you're going to see OWYN consumption trends higher than they are for the full year. We really lapped that stuff in the second half of the year.
That's helpful. Just a follow-up on marketing. I know you've tweaked I think, the messaging around some of the marketing campaigns for Atkins. And then you have some, I guess, in market data on Quest and it's basically cheating messaging.
Can you talk about the kind of the state of the marketing programs today and your sense of the ROI you're getting there? And then your overall level of marketing spending, are you at the right level now by brand?
Yes. Let me start with Quest. In fiscal 2025, we will have a full year of -- it's basically cheating campaign. I've been through a market for over 20 years, and it's very rare to see a campaign drive a significant short and long-term increase in sales. That's exactly what happened with the Quest campaign. And where we really saw that was on chips and almost instant significant lift in consumption.
Candidly, that's what causes us to have to revisit the second site on chips. And so we're excited to see a full year benefit of that. And in fiscal 2025, you'll see it over an increase of 20% increase in advertising on Quest. Getting the Quest advertising levels up that 8-ish range, with probably a good zip code. On Atkins, we've recently dropped new advertising into the market. It's still early that advertising didn't really start until September.
The advertising more squarely positions Atkins as a wait brand and emphasizes our unique macronutrient profile to support that. What I will say is our testing, euro testing, it was one of the top boring ads that Nielsen has seen and particularly the spot that referenced the new weight loss drugs. So I'm encouraged and optimistic. It's a little early to tell.
But I think what we're learning from this advertising is going back to the core promise of the brand, which is weight wellness putting it in a cultural relevant context. For example, the new weight loss drugs and being very clear that we are the solution to consumers, the 60% of consumers who want to lose weight. So now I'll close by saying one of the areas that we are throttling back on actions is the level of marketing, which had gotten ahead of where we wanted it to be.
Most of those cuts have come in nonworking but there will be some impact, probably mid-single-digit impact to the actual media impact.
Yes. And just in terms of level of spend. I think if you look at '24 results, we're probably low 9s as a percentage of sales will probably be mid- to low 8s overall as a company. But as Jeff said, a big chunk of that is actually nonworking media that we are marketing that we cut back. So I think the level of spend we think is right for the business as of right now.
We'll continue to evaluate that, and we'll probably look at that further as we get into '26. I just want to go back on the OWYN thing in terms of where we are for next year for growth rates, it's a 20% to 30% growth rate, just to dimensionalize it a little bit. If we grow 20% to 30% over the next 3 years, we've kind of doubled the business. So it's not like it's an insignificant growth on the overall business.
The next question is from Alexia Howard from Bernstein.
So just sticking with Atkins. It sounds to me as though given the top line headwinds that you've mentioned, the pullback in promotion, a bit of a pullback in marketing the possibility of distribution losses. Are we basically saying at this point, we shouldn't expect an election and back to positive sales growth organically until fiscal '26?
I mean, I think that's fair. So we've made these difficult, but they're the right decisions to rightsize investments. The focus has been on very low ROI spend on marketing, the predominance of the cuts have come in nonworking, but there will be a small impact to media. And more space-constrained channel like club, we certainly expect to lose a slight or 2.
That will have a volume impact in fiscal 2023. And that is despite the positive signals we're seeing from the revitalization plan, whether it be the new innovation that is performing well, new advertising, it's early, but I'm encouraged, it's got new packaging coming. But the net effect of that, Alexia, is that we should expect -- we are expecting a negative accelerated decline on Atkins.
But you have to remember that most of that choices we've made, including getting out of our breakeven Canada business. Looking forward, our thinking is just to continue see we'd like to see sequential improvement, but we have to address these issues, and we've decided to do it now.
Yes. And I can just take -- just to mention a little bit. I think if you look at the guidance we gave on consumption, kind of high single-digit decline on Atkins, basically, we break it down. We think base velocity declines are going to improve versus Q4.
Effectively, innovation is going to offset distribution losses effectively in the club channel. We're at the next phase we'll reassess the investment levels. We're eliminating, as Jeff said, on profitable investments, discontinuing our breakeven business in Canada and half of the expected decline is basically going to be decisions we make overall.
I'd also point out that all elements of the plan are not in the market until the end of fiscal '25. So as we continue to get more innovation, like we said for Walmart as an example for this fall, we're going to replace lower-performing SKUs, which should help the business overall. So I think it sets ourselves up nicely for '26 but there will be some impact in '20...
Yes. the goal on Atkins is a relevant, modern, contemporary brands that is sustainable and profitable and one that we can bid on for the long term.
Perfect. And then as a follow-up, on Quest, are you able to quantify the potential benefit from the club customer rollout. I think you said that was probably in the second half of the fiscal year. Any views as to how much distribution you'll gain as a percentage or how many percentage points on sales that might give you on the Quest brand?
Yes. Like a little reluctant to share specific growth numbers or dollar numbers by customer. With this -- we had a small, very regional test with this customer, most on the West Coast, and we're very pleased with the performance.
Based on our performance, we have now a way nationwide test. Now it's a significant customer. So it's not an insignificant amount, but I still view it as a test and we still have to prove it out. But I'm sure you can appreciate if we perform in this test, the upside potential to our business, starting with chips is significant.
The next question is from the line of John Baumgartner with Mizu Securities.
This is Isabella on for John. So in terms of the Quest bars business, it looks like the brand has recently faced some elevated competition from increased distribution and discounting from some smaller brands in the category.
So from this competition, what have you learned about Quest bars? Has it given you any reason to think maybe differently about the relative demand drivers for the brand. And what are your expectations for Quest Bar's revenue in fiscal year '25? For example, is it reasonable to think like mid-single-digit growth for the full year is achievable?
Yes. As we look at Quest bars, obviously, it's a significant part of the business. It is a more mature business versus, say, chip or baked goods. But if you look -- take a step back and look at the overall protein bar category, that category has increased around 4% to 5% in Q4. Quest bars were up, not quite at that level. And recall that when we think about the bar category, we're focused on protein bars, not the better for you, bars, but high protein bars.
So the overall by category is pretty healthy, up 4% or 5%. We're not quite keeping pace with that as the leader in the category that is unacceptable to me. It's unacceptable to TeamQuest. In response, we have, firstly, we are accelerating the launch of the overload platform, as I mentioned earlier, pulling that forward to February. This is a category that responds to new news, and this is an incredibly delicious platform, chockful of inclusions and we'll strongly support it with -- it's basically cheating marketing campaign.
We are, and we acknowledge that we have seen competition in the space. That's not new in the context of global bar category, but we have seen some competitor come in. And we are going to also respond to that. As you would expect, as the leader by sharpening some price points and key channels. And I would contest also that we expect and probably are seeing some cannibalization for no cannibalization as we launch bars, as we launch chips, highly, highly incremental to the business, but likely not 100% incremental.
But rest assured, [indiscernible] is a big part of the Quest business. We're the market leader, and we're going to act that way. We are going to defend our house, and we're going to do what Quest does best, which is bring world-class innovation and just step up our game there.
Yes. I think just as you think about the year, I think 25%, the plan for bar right now is sort of low single digit to flattish overall for Quest as we kind of get into the year. I would say this, the headwind we're going to have in the first quarter would be the spend we're having on these sharpening the price points. However, when I look at consumption quarter-to-date in the first 6 weeks of the quarter, including all out, we're up 3% in bars overall for Quest. So we're making some progress there.
As Jeff said, not exactly where we want to be yet, but I feel like we're kind of bouncing back from where we were in Q4.
Great. And then for the OWYN business, what are you learning about the business? Is it taking an appreciable amount of sales from a few other plant-based shakes in the category? Or is it sourcing more volume from dairy protein? And how do you think about OWYN's ability to bring incremental consumers to the category once you bring to market? Is there anything you can take away from the experience of other plant-based shakes brands that have already begun to scale ahead of OWYN?
Yes. So as I said earlier, we continue to be really excited about this acquisition. It's delivering on everything we saw in the business. As we said when we announced the acquisition, Obviously, this gets us into the plant's Clean Label segment, which is growing about double the rate of the total Shapes category, which is a very healthy category. What really excited us about this acquisition though, was OWYN is increasingly pulling in consumption from more mainstream consumers.
And when we dig underneath that, we did our own research that showed that on PURA taste study, we did a comprehensive taste study that OWYN has separated from plant-based shapes and it's gotten much closer to dairy-based checks. And this explains why they're pulling in consumption from consumers who want to add a cleanout based option into the rotation. That total addressable market, obviously, is significant.
And that we see as upside. So become a clear leader in plant and increasingly grow through attracting consumption from more mainstream consumers. So that's what we saw in our research, and we continue to see it in the results. That's why they're up to 80%. What I will say is you should expect us to -- right now, we're focused on driving the core, but.
You should assume that we're going to look at the Quest playbook on this business and how can we extend -- on outside of shakes. We've started work on that, combining our R&D organizations creates a very powerful and very, very talented team. And so you should assume that we want to continue to grow this brand beyond just core shakes. More to come, but that's our thesis, and I'd look to the Quest playbook and say, yes, it's some high derivative on how we're going to run on.
Ladies and gentlemen, we take the last question from the line of Jim Salera from Stephens inc.
Appreciate all detail on OWYN. I wanted to ask a follow-up there. If you continue to see household adoption and higher velocities, can you just give us a sense of what the capacity is for 2025, especially in light of some of the success you saw with the Quest ships leading to capacity constraints there. Is there kind of an upper bound for OWYN, for what you guys can do for 2025?
Yes. I mean short answer is no, we don't -- there are no -- there are no capacity issues near term or even medium long term for OWYN. We'll say one of the benefits of bringing them into simply network as we have significantly help them expand their capacity. And in this industry, yes, capacity was constrained, but a lot of new capacities either come online or coming online. So capacity is not an issue at all.
And I'd also say, as we look at it, we think there's an opportunity, and we're working on it right now as we optimize that network for RTDs for the overall business for Quest Atkins and OWYN. I think there's an opportunity from a cost saving standpoint, we wouldn't see that in fiscal '25, but we are looking hard at that, and that could be a meaningful synergy for us.
Great. And then one final question. Given that you guys have already levered the balance sheet back down to just 1x, just any thoughts on capital allocation into FY '25 given that it sounds like you guys have a pretty detailed plan on marketing, but I would expect there's going to be some cash left over. So any thoughts on buybacks or anything there?
I mean, let's take a step back. I think cash generation is a hallmark of the company. I mean, I think we had a fantastic year last year. Cash from operating activities, $215 million should be strong again this year. We have over $100 million in cash on the balance sheet right now. So we continue to evaluate what the best way to return cash to our shareholders is that look at that pay down, we look at share repurchases, we look at M&A.
So we'll continue to evaluate that, and we'll look at opportunities to buy back shares and really finalize and continue to fine-tune our capital application strategy as we get into the year.
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now hand the conference over to the management for closing comments.
Thank you so much for joining us today. I'll be available for any follow-up calls you may have, and we'll be -- look forward to updating you on our first quarter results in January.
Thank you. The conference of Simply Good Foods Company has now concluded. Thank you for your participation. You may now disconnect your lines. Thanks.