High Protein Snacking Competition Will Pressure Margins Yet Long-Term Demand Should Still Support Returns

Catalysts

About Simply Good Foods

Simply Good Foods develops and markets high protein, low sugar and low carb snacks and beverages across its Quest, Atkins and OWYN brands.

What are the underlying business or industry changes driving this perspective?

• Although Quest continues to gain household penetration and lead innovation in high protein snacks, rising competition as the trend mainstreams across large food manufacturers could cap pricing power and slow revenue growth over time, which may pressure earnings if marketing and R&D need to rise faster than sales.
• Despite strong consumer interest in plant-based and clean label nutrition supporting OWYN’s double-digit growth, any lingering impact from prior product quality issues and the need for heavy trade and brand investment may delay scale benefits, which could limit near-term margin expansion and EPS growth.
• While long-term demand for high protein, low sugar, low carb products appears durable, category mainstreaming into more aisles and channels raises execution risk in distribution and assortment. Missteps on placement or mix could mute expected revenue uplift and keep gross margins volatile.
• Although cocoa and tariff headwinds are expected to ease in the back half of fiscal 2026 and into 2027, the company’s prior decision to lock in high-cost coverage and ongoing exposure to commodity volatility may constrain gross margin recovery versus expectations and weigh on net income.
• While expanding salty snack capacity and asset-light partnerships should support Quest’s chips platform, any slowdown in velocity or overestimation of demand for new lines could dilute returns on elevated CapEx and temper the anticipated positive impact on EBITDA.

Assumptions

This narrative explores a more pessimistic perspective on Simply Good Foods compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Simply Good Foods's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.1% today to 12.5% in 3 years time.
• The bearish analysts expect earnings to reach $198.4 million (and earnings per share of $1.93) by about December 2028, up from $103.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, down from 18.2x today. This future PE is lower than the current PE for the US Food industry at 20.2x.
• The bearish analysts expect the number of shares outstanding to decline by 1.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The deliberate rationalization of low velocity Atkins SKUs and continued shelf space losses in club and mass channels signal a structurally shrinking brand footprint, and with management guiding to approximately 20% consumption declines for Atkins in fiscal 2026, prolonged weakness in this legacy business could offset growth from Quest and OWYN and drag on total company revenue and operating leverage over several years, pressuring net margins.
• Management is intentionally stepping up marketing, trade spend and innovation across Quest and OWYN just as inflation, historically high cocoa costs and new tariffs compress gross margins. If price elasticities prove worse than expected or productivity initiatives underdeliver, the combination of higher brand investment and elevated input costs could result in structurally lower gross margin and slower earnings growth.
• The nutritional snacking and high protein, low sugar, low carb segments are rapidly mainstreaming into larger snacking categories, attracting scaled food manufacturers and insurgent brands. If Simply Good Foods fails to sustain product differentiation, speed of innovation and distribution gains outside the traditional aisle, intensifying competition could erode Quest and OWYN category share, limiting long term revenue growth and EBITDA expansion.
• OWYN’s positioning depends on leading clean label and allergen free credentials, yet the recent pea protein sourcing issue that hurt taste, texture and consumer reviews shows how quality missteps can quickly undermine brand equity. If future formulation or supply chain errors recur as the brand scales, Simply Good Foods may be forced into heavy, margin dilutive trade and marketing support to rebuild trust, restraining net income growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Simply Good Foods is $22.0, which represents up to two standard deviations below the consensus price target of $29.7. This valuation is based on what can be assumed as the expectations of Simply Good Foods's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $22.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $198.4 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $18.87, the analyst price target of $22.0 is 14.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.