Simply Good Foods' Dual Story: Atkins Hurdles vs. Quest's Solid Momentum

Needham analyst Matt McGinley reiterated a Buy rating on the shares of The Simply Good Foods Company SMPL with a price target of $42.

While the analyst expects strong topline growth in 4QF24 related primarily to inventory rebuild, Atkins sell-thru was soft in 2HFY23.

The analyst attributed the softness to three factors: Atkins bar sales were soft on distribution loss due to a lack of innovation, new Atkin's products failed to fill the gap left by bar distribution losses, and macro-related consumer trade-down and trade-up into larger pack sizes.

However, Quest’s health composition of 55% sales remains healthy, and the analyst expects its ability to sustain double-digit growth will be the primary driver of SMPL's 4-6% long-term topline growth algorithm.

The analyst warned that stabilizing Atkins by regaining distribution via innovation across the full portfolio isn't a quick fix and if Atkins' volume remains negative, it risks the 4-6% growth algo until these issues are remedied.

The analyst expects flat margins, but stronger cash flow generation in FY24 on minimal capex and inventory built with lower input costs.

Stabilizing Atkins will be a key FY24 focus, the analyst believes, with input deflation helping to bolster marketing and promo.

With expectations for mid-single-digit percentage topline and high-single-digit percentage EBITDA growth rates in FY24, SMPL's growth profile is one of the more attractive out of its food manufacturing peers, according to the analyst.

Price Action: SMPL shares are trading higher by 0.63% at $34.24 on the last check Tuesday.