Quest Snacks And OWYN Retail Will Strengthen Market Position

Key Takeaways

• Shifting focus from underperforming Atkins to higher-margin Quest and OWYN products can improve net margins and optimize shelf space.
  
• Expansion of OWYN’s distribution channels and SKUs offers a substantial opportunity for revenue growth and doubled net sales potential.
  
• Leadership transition, brand declines, and integration uncertainties pose risks to Simply Good Foods' growth, margins, and profitability amid persistent external pressures.

Catalysts

A consumer-packaged food and beverage company, engages in the development, marketing, and sale of snacks and meal replacements, and other products in North America and internationally.

• The successful launch and scaling of Quest's salty snacks platform, which has grown to a $300 million business, suggests a long runway for further penetration and growth. This could drive future revenue growth for Simply Good Foods.
  
• OWYN's strong retail takeaway growth and plans to expand distribution channels and SKUs signal a substantial opportunity to double its net sales in the coming years. This expansion is poised to significantly impact revenue growth.
  
• The continued success and expansion of Quest's innovation, including the launch of Overload Bars and ready-to-drink Milkshakes, are likely to enhance brand awareness and revenue, particularly as household penetration increases.
  
• Shifting underperforming Atkins SKUs to higher-margin Quest and OWYN products indicates potential for margin improvement and higher net margins due to more efficient use of shelf space with better-performing products.
  
• Productivity initiatives and synergy captures from the OWYN acquisition, expected to materialize in fiscal '26, are likely to improve gross margins and adjusted EBITDA, enhancing overall earnings growth potential.

Simply Good Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Simply Good Foods's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 12.7% in 3 years time.
• Analysts expect earnings to reach $212.6 million (and earnings per share of $2.09) by about April 2028, up from $145.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.9x on those 2028 earnings, down from 24.9x today. This future PE is greater than the current PE for the US Food industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Simply Good Foods Future Earnings Per Share Growth

Risks

• The retirement of CFO Shaun Mara could introduce leadership transition risks, potentially affecting financial stability and strategic decision-making in the short term, impacting earnings.
  
• Persistent declines in the Atkins brand, which represents 30% of net sales, could continue to drag on overall company growth and margins despite attempts at repositioning and innovation, affecting revenue and profitability.
  
• The integration and future performance of OWYN remain uncertain, with the need to achieve synergy capture starting in fiscal 2026, posing a potential risk to earnings if delays or integration challenges arise.
  
• Potential tariff and input cost increases could pressure gross margins, despite mitigation efforts, leading to reduced profitability if costs are not offset by price increases or productivity gains.
  
• The company's reliance on expanding the physical availability of Quest products into new channels carries execution risk, which, if not successful, may prevent anticipated sales and margin improvements, impacting future revenue growth.

Valuation

• The analysts have a consensus price target of $41.25 for Simply Good Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $47.0, and the most bearish reporting a price target of just $36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $212.6 million, and it would be trading on a PE ratio of 23.9x, assuming you use a discount rate of 6.2%.
• Given the current share price of $35.8, the analyst price target of $41.25 is 13.2% 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.