Greetings. Welcome to The Simply Good Foods Company Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Mark Pogharian, Vice President, Investor Relations. Thank you. You may begin.
Thank you, Sherry. Good morning. I am pleased to welcome you to The Simply Good Foods Company earnings call for the third quarter ended May 25th, 2019. Joe Scalzo, President and CEO, and Todd Cunfer, CFO, will provide you with an overview of our results, which will then be followed by a Q&A session. The company issued an earnings press release this morning at approximately 7:00 A.M. Eastern Time. A copy of the release and accompanying presentation are available under the investor section of the company's website at www.thesimplygoodfoodcompany.com. The call is being webcast live on the website, and an archive of today's remarks will also be available for 30 days. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause 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. In addition, management will make references to adjusted EBITDA, a non-GAAP financial measure that it believes provides investors with useful information with which to evaluate the company's operating performance. Today's earnings release includes a reconciliation of the most directly comparable GAAP financial measures to non-GAAP measures. With that out of the way, it's my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.
Thank you, Mark. Good morning, and thank you for joining us. Today, I'll recap our third quarter highlights and provide an update on our business. Todd will discuss a summary of our third quarter and our year-to-date financial results, and after that, we'll open the call to your questions. We delivered another strong quarter with both financial and point-of-sale results exceeding our expectations. Net sales and gross profit increased double digits on a percentage basis versus last year. This is our fifth consecutive quarter of double-digit growth across both of these metrics. We're delivering on our commitments while also investing in our business and our capabilities, especially marketing, which has increased 24% over the first nine months of the year. Our retail takeaway growth, as measured by IRI, continued to be strong across all forms, all channels, and all major customers.
Total Atkins U.S. retail takeaway in Q3 was up 19.5%, exceeding our expectations, even as we began overlapping stronger year-ago comps. Our e-commerce business continues to do well, with sales up meaningfully in Q3. Importantly, the nutritional snacking category continues to grow and outperforms most center-of-store packaged good foods category, driven by healthy snacking and meal replacement megatrend. For both the third quarter and year-to-date periods, category growth continues to be in the mid to high single digits. Our marketing and advertising complements the consumer megatrend and secular tailwinds driving this category growth. With nutritional snacking household penetration only around 50%, we believe there's a lot more room for growth. Turning to the third quarter, net sales increased 30.1% and as expected, outpaced POS growth as customer inventories normalized from first half levels.
In line with our long-term algorithm, adjusted EBITDA was up greater than sales growth and increased 38.8%. Our business continued to be driven by strong base velocity gains on core products. The increase in our top line underscores the strength and resilience of our brand against our large consumer targets that includes both core programmatic weight loss consumers as well as lifestyle-oriented low carbers. Our successful marketing campaign is resonating with both groups of consumers, and we're driving consumers to the category and to our brand. Volume was the biggest contributor to growth in Q3, up 32%. As expected, net sales growth outpaced retail takeaway, driven by the timing of inventory movements at key retailers. Our promotions resumed in the third quarter, although slightly below prior year. Net price realization was a 100 basis point benefit in the quarter.
This was offset by the non-price related trade promotion accounting shift from G&A that we discussed in the last couple of quarters. The increase in adjusted EBITDA is a direct result of the sales growth. These gains were partially offset by higher direct media investments and an increase in G&A. Measured channel U.S. POS growth continues to be robust across all time periods in fiscal 2019, 13, 26, and 39 weeks, POS growth has been around 20%. This gives us confidence in the effectiveness of our marketing and message, as well as we continue to drive consumption and grow buyers. Although we do anticipate that POS growth will slow in the fourth quarter as we lap aggressive year-ago growth rates. More on this in just a bit. I'm very pleased that our growth continues to be well-balanced across all product forms, that's bars, shakes, and confections.
Our marketing strategy for the brand is unique among traditional food brands. We are the only major nutritious snacking brand that is well developed across bars, shakes, and confections, and achieving balanced growth across all these forms. Our messaging is focused on the distinctive Atkins nutritional philosophy, whose benefits are supported by over 100 independent peer-reviewed clinical studies. The brand stands distinctively for low carb, low sugar, protein-rich nutrition designed to avoid blood sugar spikes and help the body burn stored fat. Our marketing strategy focuses on communicating the benefits of this nutritional philosophy while offering delicious convenience snacks for consumers seeking those benefits and looking for a snack or a meal replacement. Our strong retail performance continues to come almost entirely from base velocity growth. Distribution is up in fiscal 2019, driven by our new 30 gram protein shake and some confection items.
As planned, overall promotional volume was down slightly versus a year ago as we dial back on the frequency of bar activity given supply constraints. Our strong results have given us the financial flexibility to invest in the business. As such, we are committed to increasing advertising and marketing at least in line with sales growth. During fiscal 2019, we've invested well beyond that target, given the effectiveness of our marketing executions and our strong financial performance. Building on the three advertising spots that began airing in Q2, the third quarter featured a new spot called Rob Lowe's Secret's Out. The ad focuses on our bar products and flavors, as well as the benefits of Atkins. Specifically, that our products are an excellent source of protein, low in carbs, and contain no added sugars. Our advertising is resonating with consumers and having the desired effect.
POS growth continues to be strong, and total buyers continue to grow while maintaining loyalty and buy rate consistent with historic levels. New products are an important element of our strategy. Our 2019 innovation, such as the Atkins Protein Wafer Crisps bar and our new 30-gram protein shake, are both doing well. The Wafer bar distribution is on track with ACB of about 55%. Trial and repeat has been solid and similar to other successful Atkins items. Our 30-gram protein product offers consumers a higher protein, meal replacement shake and is performing in line with our expectations. We estimate at this point that it's over 80% incremental to Atkins and over 40% incremental to the category. Overall, I'm satisfied with our performance.
Third quarter and year-to-date results were strong, and we're on pace to deliver another year of meaningful sales and EBITDA growth that will significantly exceed our long-term targets. In the fourth quarter, year-over-year comps are more challenging. Looking at the POS data on this slide, you'll note that the year-over-year growth rates in fiscal 2019 have been sequentially slowing as we make our way throughout the year. However, we're encouraged by the growth in total buyers we continue to see coming to the brand, and we feel good about the quality of our fourth quarter on-air advertising, which will be up significantly versus last year.
Our strategy of educating consumers on low carb, low sugar nutrition is working. We are confident in the continued effectiveness of our marketing, our improved supply situation, and our financial flexibility to invest in proven growth initiatives. We are focused on driving top-line growth, especially with new lifestyle, self-directed low carbers. Additionally, the investments we've made position us nicely to deliver solid growth in 2020 and over our strategic planning cycle. Now I'll turn the call over to Todd to provide you with some greater financial details.
Thank you, Joe, and good morning, everyone. Let me start with two points as it relates to the numbers you see on the slides that follow. First, for comparative purposes, we will review financial statements for quarters ended May 25th, 2019, and May 26th, 2018. Second, we evaluate our performance on an adjusted EBITDA basis based on our asset-light strong cash flow model. We have included a detailed reconciliation from GAAP net income to adjusted EBITDA in today's press release. We believe this measure is a key indicator of the true underlying performance of the business. Now for a review of third quarter results across major metrics. Let me start with net sales. Core volume growth has been solid over the last year and continues to be the primary driver of our sales increase. Specifically, in the third quarter, volume increased 32%.
As expected, net sales growth outpaced retail takeaway, driven by the timing of inventory movements at key retailers. Note that year-to-date net sales growth and retail takeaway are now relatively in line, and we are well-positioned to meet consumer demand. Bar trade promotions resumed in the quarter, although frequency was slightly lower than last year, resulting in modest price realization of 1%. These gains were partially offset by the change in how we account for services provided by some of our customers. As we discussed during the last two quarterly calls, in the year-ago period, this cost was recorded in selling expenses. Turning to the rest of the P&L, gross profit increased 27.3% to $65.3 million. Gross margin declined 100 basis points to 46.8%, primarily due to the non-price related customer activity that is a shift from selling expense.
This change in methodology only impacts fiscal 2019 amounts, therefore affecting comparability versus the year-ago period by negatively impacting the third quarter of 2019 by about 120 basis points. Additionally, the company incurred slightly higher supply chain costs due to modest inflation, but this was offset by savings from the strategic sourcing initiative, which was in line with our expectations. Adjusted EBITDA was up 38.8% to $24.9 million, driven by the increase in gross profit, partially offset by a 34.1% increase in marketing driven by increased media and e-commerce investment, as well as a 29.1% increase in G&A, due primarily to greater incentive compensation as well as slightly higher distribution center costs due to greater volume. Note that selling expense was lower than last year due to the previously discussed shift of non-price related customer activity.
Income tax expense in Q3 was $4.6 million vs. $2.8 million in the prior year. Our effective tax rate in Q3 was 25.4% vs. 28.5% in the year-ago period. Our year-to-date tax rate of 24.2% brackets our targeted full-year anticipated tax rate of 24%-25%. As a result, reported net income in the third quarter was $13.5 million vs. $7.1 million last year. Year-to-date net sales were up 18.9% to $384.2 million. As I mentioned earlier, the year-to-date net sales increase was driven primarily by organic core volume growth. Year-to-date gross profit increased 18% to $182 million with gross margin down 30 basis points versus prior year. The shift in non-price related customer activity from selling expense to trade resulted in an unfavorable impact on 2019 gross margin of about 90 basis points.
Year-to-date adjusted EBITDA increased 23.3% to $74.6 million, driven by the increase in gross profit, partially offset by other expenses, including a 24.3% increase in marketing and a 23.2% increase in G&A due to higher incentive compensation, costs associated with the strategic sourcing initiative, and annualization of second half fiscal 2018 investments to enhance organizational capability. Year-to-date income tax expense was $13.2 million versus a benefit of $17.5 million in the prior year. Recall nine months year-to-date 2018 amounts include a $29 million one-time gain related to the remeasurement of deferred tax liabilities and a $4.7 million gain on the fair value of the tax receivable agreement that were recorded in the second quarter of 2018. As a result, year-to-date reported net income was $41.4 million vs. $58.7 million last year. Moving on to the balance sheet and cash flow.
The company's solid balance sheet and cash flow provides us with continued financial flexibility to support future organic growth and participate in value enhancing M&A. Year-to-date cash generated by operating activities was $52.6 million, driven by strong earnings growth, partially offset by higher inventory. Although note that inventory is down nearly 10% versus last quarter as we get back towards our desired level. Year-to-date CapEx was $0.8 million, and net cash provided by financing activities was $84.3 million, primarily driven by the cash received from the warrant exercise.
Additionally, note that full-year CapEx is forecasted to be less than $2 million. In Q3, we acquired $1.5 million of our shares in the open market. Year-to-date, we have acquired $1.7 million against the $50 million authorization approved in November. As of May 25th, the company had cash of $247.6 million. There is $197 million remaining on the outstanding term loan, resulting in a net cash position of $50.6 million. I would now like to turn the call back to Joe for brief closing remarks.
Thank you, Todd. In summary, we expect that we'll end the year strong with full-year net sales and adjusted EBITDA growth up meaningfully versus last year. Given our momentum, we anticipate full-year fiscal 2019 sales and EBITDA growth to be in line with the year-to-date percentage increase trend. The full-year outlook reflects, first, significantly more challenging POS comps in the fourth quarter and our expectation that retail takeaway will continue to sequentially slow. Second, incremental strategic investments in marketing that should continue to drive buyer growth. Finally, we anticipate that Q4 net sales will outperform POS growth due to the fourth quarter benefits of the 53rd week and the year-over-year positive impact of sales in transit that we previously discussed.
We are highly confident in our long-term opportunities that are focused on driving top-line growth and total buyers to the brand. The marketing investments we've made in the business, as well as the investments in enhanced capability, position us to deliver solid growth in 2020. As we have shared with you over the last year, we're confident in our business as we execute against our strategies. We're delivering on our financial objectives while investing in the business, a path that we believe will continue to create value for our shareholders. We appreciate everyone's interest in the company. Now we're available to take your questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants who think speaker equipment may be necessary, pick up your handset before pressing the star keys. Our first question is from Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning, folks. Congrats on a strong quarter. I've got a couple of quick questions. First, the fourth quarter guidance, if our math is right, implies organic sales growth, kind of underlying x some of the transitory benefits of around 5%. First, is that about right? Second, what we see in retail scanner data suggests momentum sustaining well above that. Are we missing anything happening maybe outside Nielsen-track channels?
This is Todd. A couple things to consider. Two continued drags through the entire year, as you know, is that accounting shift impacts us by approximately two points a quarter. That, we'll get the last piece of that in Q4. Then we'll start lapping that as we get into next fiscal year. International has been about a two-point drag on our top line as well. I mean, you're correct. Obviously, we have two favorable tailwinds from the 53rd week and revenue recognition impact from last year. Also have always potentially a little bit of noise about where retailer inventories land and do we have the potential to do slightly better than that? Of course. Those are kind of the bridges. Hopefully, that makes sense.
It does. Is my 5% number roughly right? I think we were contemplating all those factors when we derived our POS.
No, look, do we think we're going to outdo 5% POS growth in Q4? Certainly. Do we think we can do a little bit better than the numbers you're kind of implying? Yes, there's always uncertainty around where retailer inventory is going to land. That's always the wild card.
Got it. That's helpful. A quick question on innovation. It sounds like the 30-gram protein shake's off to a strong start. It looks like in the POS data that you're building some momentum behind powder shakes as well. Can you give us an update on where they stand? It looks like pretty light distribution. Do you see more opportunity there, and what are you seeing in terms of cannibalization of your ready-to-drink shakes?
Hey, good morning, Jason. This is Joe. Look, I think the 30-gram shake is going to be a nice addition to our portfolio given its incrementality. Powders have been slower in the build and frankly not as incremental as we anticipated. Unclear to me at this point how well powders will do over the next, call it, six to 12 months.
Got it. Thanks a lot, guys. I'll pass it on.
Thank you.
Thanks, Jason.
Our next question is from Chris Growe with Stifel. Please proceed with your question.
Hi, good morning.
Hey, Chris Growe.
I just had a couple questions for you as well. If I could start first just to understand that your consumption and shipments are now in line for the year, if retail inventory levels were depleted entering the year. I'm just trying to understand from an inventory standpoint at retail, do you expect it to continue to build a bit, like in the fourth quarter? Are we at the right level now for inventory levels overall?
No, we feel very good about the inventory levels we are at retailers. I think from this point forward, there should be not a big swing. That should not be a big issue going forward.
Okay. Just a question on the savings coming through from your supply chain program. You talked about those savings, which I think really kind of kicked in here in Q3, offsetting cost against doing an increase in cost. I just want to get, hopefully, a little better sense around the size of each of those. Do you have an idea, like just get an idea of how much the costs are up and then how those synergies kind of phase as those are the first quarter from here in Q3? Do they pick up sequentially as we go forward, like Q4 into 2020? Just trying to get a better sense there.
Yeah. I won't get into a deep level of specificity on it, but we are seeing some modest inflation, low single digits on our ingredients and other supply chain costs. We are offsetting those beginning in Q3 by strategic sourcing. It's behaving exactly the way we had hoped. It's doing really well. That will continue in Q4 and as we go into fiscal year 2020. We are starting to see some inflation in milk proteins and whey and things of that nature. Nothing that we can't overcome, obviously, by our strategic sourcing and other projects we have on that we're working on right now. The project is doing very, very well. We are seeing a little bit of inflation out there.
Okay. Thank you for the time this morning.
Our next question is from Brian Holland with D.A. Davidson. Please proceed with your question.
Thanks. Good morning. I guess a couple of high-level questions. As we think about the improved inventory situation, I think about some of the long-term opportunities you've spoken to in the past, channel-specific, whether that's club where you're under-penetrated, convenience in the single-serve as well. I appreciate they may not be near-term initiatives or focus points, but to what extent with an improved inventory situation can you revisit those opportunities and more maybe aggressively attack those? Does that change at all with the improved inventory situation? Are there other dynamics that maybe I'm just not considering here?
Hey, Brian, this is Joe. We never slowed down on those initiatives because they tend to be more strategic in nature, you got to keep pressure on those. Our desire to want to build out in white space, we kept pressure on those initiatives. I think over time, we'll start to see some of the positive impacts of those things, but we didn't slow those down for our supply situation.
Okay.
You can't stop and start those initiatives because you're having conversations with customers over a sustained period of time to build distribution. Those didn't shut off.
Okay, that's helpful. Can you help us understand, if we go back a few years ago, you sort of talked about 6 million buyers, maybe 62 servings per buyer. That may be specific to a product line, bars, et cetera, but even just directionally, what is the kind of quantify, the growth in the number of buyers that you have? Maybe how, at least directionally, how servings per buyer, I know you said servings per buyer are going up, that's certainly encouraging.
Just trying to get a sense of what the tail looks like here at this point based on the progress you've had here in the past couple of years and maybe, I think you know the chart that I'm thinking about that you've presented a few years ago. Just what kind of progress have we made? Is there any change in view on what that looks like given the success of the initiatives you've had in place here?
Yeah. I don't Again, the chart we showed you was a incident study. That's a strategic study that you do once every multiple years. I can't tie back to those numbers on a quarterly basis or even an annual basis. Here's what I know. From that chart, we knew we were under-penetrated among these lifestyle consumers, and there were about four times as many of those as the programmatic weight loss folks. I'm trying to remember the numbers, but I think the programmatic were about 8 million, and the lifestyle low carbers were about, call it 30 million. As we've tracked our progress over the last year, we've grown our buyers significantly behind the lifestyle consumers. We've kind of held our ground with programmatic weight loss consumers. I can't tell you what's the penetration among that 30 million.
I just know a lot of my new buyers, a meaningful percentage of those buyers are coming in as lifestyle buyers. The one concern that we had going into this is that their loyalty would be different than a programmatic weight loss person, i.e., lower. Either I don't hold them as long or they don't buy as much. I can't see the specifics by the buyer group, but overall, the loyalty of the buyer group hasn't changed. Knowing that I've grown meaningfully among lifestylers, we can infer that the loyalty of the lifestyle consumers is fundamentally the same as the programmatic weight loss consumer. If you remember, our branded buy rate is category leading. On average, I think our number is close to 50 servings per year on average of our average buy.
It changes meaningfully from year one to year two. It's about 30 purchases to 35 purchases in the first year and over 100 purchases in the second. That seems to be holding up, which is a nice surprise for our business. That is probably the biggest single driver of the growth exceeding our expectations. Buy rate and loyalty remain consistent even though we're bringing in a different, and therefore we expected, different purchase behavior consumer. That has not been the case.
Great. That's very helpful context.
That can totally confuse you or it doesn't do exactly.
No, that was very helpful. Thank you for the context. That's all I was looking for.
Unfortunately, I wish I had a digital instrument that told me how many buyers and who they were and what they were buying. I don't have that tool. Right?
Okay.
I can infer from different types of studies what's going on. What's going on is it's exceeding our expectations because we're bringing lifestyle people in and they're buying at a rate pretty consistently with the programmatic weight loss people.
Got it. Perfect. Thank you.
Yep. You're welcome.
Our next question is from Rob Dickerson with Deutsche Bank. Please proceed with your question.
Great. Thank you so much. I guess just to follow up from Brian's question is, I guess then if lifestyle consumers, buyers are exceeding expectations and obviously driving kind of crazy, let's call it, volume growth, while the programmatic is holding steady, where do you stand today relative to where you stood two years ago? Would you say there's obviously a lot of incremental learning, how you've watched a lot occur with the brand and how you've innovated around the brand. Now what? Is this obviously just keep doing exactly what we've been doing?
There's no need to change anything to our marketing program. We definitely are keeping Rob Lowe. We definitely will have new adjacencies, flavors, marketing programs, what have you, because obviously, you're doing extremely well on the top line. Given that lifestyle consumer seems like it's bought in, you continue to try to increase your household penetration, and you've also learned a number of things. As you think forward even to next year, there's no guidance, but just what do you do differently to sustain the growth rate? Or maybe you do nothing differently.
Rob, great question. It's the one that keeps me up at night. What should we keep doing and what should we change? The answer is, I think there's some things that are working that we continue to do, but we also keep testing different ideas. A wise man once told me all trees don't grow to the sky, you can't believe that doing the same thing consistently year after year is going to continue to drive the same results. You're always looking for new insights and new avenues to grow. I'll give you an example of something that we began during the year that we're getting learning from. We went into a market, and we significantly changed the level of marketing support and the composition of the marketing support.
Trying to get broader reach in the marketing efforts, we're getting learning out of that every day. If you're going to spend more, how do you deploy it? We're consistently looking for new insights. You do copy testing, you do in-market U&A, you understand what consumers are taking away. You have a pretty good idea of what you're trying to communicate in the next round of executions. You're always trying to do a little bit better. I'll give you an example there. We would like the weight component of our messaging as we move into the next year to be a little bit stronger.
If you remember the first year executions with Rob, he talked a little bit about when you're feeling better, you start looking a little bit better. We kind of lost that this year, we think we need to get that back. That will help us with programmatic weight loss concerns. We're always looking for it. You should plan on us continuing to do it. What else can we do to help us improve the efficiency and the effectiveness of the marketing investment? We're always out there looking for those items.
Okay.
No stasis, we're not throwing the good stuff away, we're never at stasis. We're always looking for new opportunities.
Yeah. I mean, it's obviously just a balance of how much you really need to spend, right? Whether it's in trade promo, which you can put up a little bit quarter, you're obviously spending a lot, which is keeping the distribution and the velocities up. The question is, do you need to be growing 20% for the stock to work? That I'm always worried about, keeps me up at night.
Yeah.
The other question, just strategically, obviously, it's always a question, especially for your company and the board of management team is just cash on the balance sheet, net cash is still high, leverage strong position, $2 million CapEx. How is the deal pipeline? Is there a sense of, let's say, more immediate timing now relative to where we sat a year ago? We haven't really seen anything come through yet. I know you're always focused on it, but just trying to get a sense as to sense of urgency, what's in the marketplace, how the pipeline looks, et cetera.
Yeah, the pipeline is full, and we're very active, as you can tell from some of the deal costs that are flowing through our financials. Very active. As you know, when you're dealing with fast-growing, typically privately owned, nutritious snacking company, expectations on valuations are high. The job is to do your diligence, understand what value you think you bring to the asset, and how you can move those and can you find the right intersection between seller expectations and what we believe we can do with the business. So far, we've not been able to find that despite a lot of activity.
Okay, great.
I wish I could tell you, are we going to get something done in the short term? But I can't tell you that because I don't know.
I get it. We're all waiting. Thank you, guys. Great quarter.
Thank you.
Our next question is from Eric Larson with The Buckingham Research Group. Please proceed.
Yeah, good morning, everyone. Really nice quarter. By my calculations, Joe and Todd, I'm not sure if this is correct. It looks like Simply Good is providing about 35, maybe a third of the total category growth right now. That might be an inaccurate number. It's the best that I have with the data I have. First of all, is that accurate? What are you seeing from your competitors? It seems like you're looking over your shoulder yet. Obviously, you have to be careful as you do that, but can you stack up what you're seeing in the marketplace today relative to maybe what you've had over the last three to six months?
Yeah, I think, this is Joe. Look, we're obviously big and growing in big numbers, so we're a meaningful part of the category growth. We tend not to want to talk too much about how we view the category because we feel that's competitively sensitive, but we're a big player and we're growing fast, so we're a meaningful part of that. Our comments, I think, reflect how we view the category. The category relative to center of store is under-penetrated and it's got nice tailwinds. Snacking tailwinds, convenience tailwinds, meal replacement tailwinds.
There's a whole number of secular consumer trends that are going to continue to drive this category towards growth. The last six to 12-month growth rates kind of been the mid-single digits to the high single digits. We've been growing category share, but there are a number of players in the category that continue to grow nicely, continue to pick up market share. I think that's unchanged, quite frankly. We expect continued category growth. We think there'll be small guys come in and grow, and I think some of the bigger guys will continue to take market share.
Okay.
We tend not to focus too much also on competition. For us, it's what do we believe about our opportunities to growth? What are the initiatives to do, and how well are we executing it against those? Those are more important than what the competition is doing right now for in my view.
Okay.
It's much more about understanding what you need to do and executing well against it.
Got it. Just a final question. It's kind of drilling down a little bit more into some of the questions that have already been asked. You brought Rob Lowe on, I believe, what, January of 2018 and January of this year was your second year with him. If your lifestyle users are as high of consumers and repeat purchasers as the traditional Atkins consumers, you're now kind of starting year two of maybe pretty significant consumption on the consumers you may have brought in in 2018, and that then in 2020 could even be a better, higher consumption number. Should that give us, just from what you've already built in the last 18 months with Rob Lowe, the confidence that we could still see continued strong POS numbers if those relative consumption numbers are about the same for your lifestyle versus your traditional Atkins user?
I think. Yeah. The unknowns obviously are does the buy rate hold, does the loyalty hold? Yeah, we've done a nice job of growing buyers. As you grow new buyers, they become year two into year three buyers, and they have a benefit to us. I would just say that prior performance on loyalty is not necessarily predictive of future performance. Yeah, we're optimistic because of the buyer growth, and we feel good about the fact that the loyalty has held so far, and if it continues to hold, we feel pretty good about our prospects 2020 view.
Okay.
We got to keep going. We got to keep recruiting new buyers, right? We got to keep doing it next year.
Yep. No, that's the engine to your company, frankly.
Yeah. Thank you.
Our next question is from Bill Chappell with SunTrust. Please proceed.
Thanks. Good morning.
Bill.
Do you mind, I think I'm right in saying that, I guess your founders, board members are raising a new SPAC or money for that. If that's correct, can you just kind of help us understand how that works with the new SPACs M&A priorities versus your priorities and how the board members work with you more or less going forward? Just to kind of clear that for me would be great.
First, I think the first question is, how active are they? They've been out with their SPAC for a few days, and they've been obviously behind the scenes, very active. I haven't noticed a decrease in number of calls that I've gotten from the Conyers Park guys. They continue to be robustly engaged in our business. As our business has accelerated, our M&A strategy has narrowed, and that has reduced the number of assets that we frankly would even consider looking at much closer to the nutritious snacking category.
That opened the avenue up for the Conyers guys to look at another vehicle that would be in all likelihood, more center of store as we take advantage of some of the assets that are out there, I think in some of the large cap guys and/or private assets out there that are more center store focused. The agreement that we have with the Conyers guys is we get first kick at the can at assets that look, we're pretty narrow. We're going to be looking at nutritious snacking assets mostly in our aisle, and that's where we're going to stay focused. They're going to be looking in other places, quite frankly.
Got it. Just second one, I know there have been several questions around gross margin outlook, and I know you're not giving 2020 guidance, but just trying to understand the puts and takes. It's tough for us to see how much strategic sourcing kicks in next year versus promotion kicks in back to more normal levels versus what you would refer to as some of the higher commodity costs. Do you see stabilization as a movement next year for gross margin, or would you expect it to be under pressure or at least down year-over-year just for kind of the normal course of business?
Yeah. Look, obviously our gross margin expansion is incredibly important to the long-term model of our business. Our expectations are over the long term, we need to grow at approximately 20-30 basis points per year. Excluding some of the accounting shifts, we've been able to do that or better the last couple of years. That continues to be incredibly important to our strategy. Yeah, there's some inflation out there. It's relatively modest. It's nothing.
We're terribly concerned about right now. It's out there, and the good news is we continue to have really robust projects to offset that inflation. We obviously pulled back on trade this year. We feel really good about the ability to still drive volume with pulling back on trade and/or having higher promotional price points out in the marketplace. We don't see a big shift in that strategy going into FY 2020. We feel good that we can maintain our very healthy gross margin.
20 to 30 basis points is still a good number?
Yeah. Long term. I'm not going to give specific guidance in a year, long term, that's the model. That's what we hope to achieve at a minimum.
Got it. Thanks so much.
Our final question comes from Chase West with Consumer Edge Research. Please proceed.
Good morning. Thanks for the question.
Hi, Chase.
Most of mine have been answered.
Hi.
Most of mine have been answered this morning, wanted to ask a quick question on SimplyProtein. In our data, we're seeing a slight uptick in distribution this spring, but it's still well below Atkins. Are there any changes to your plans around SimplyProtein? Maybe can we expect increased investment in the near or medium term?
Yeah. I would first highlight that pretty much every brand is well below Atkins in the category. I'm not sure that's the correct benchmark. I think we've said before that our view of, as we're going to incubate this brand, get it into some distribution, prove its success by driving velocity where it is before we expand further. That, we think, is a prudent approach, given the fact that if you grow distribution really quickly and you don't have the velocity, you lose distribution in food, drug, mass relatively quickly. We've taken a much more one day at a time approach with Simply. Kind of happy where we are right now from a distribution standpoint. I think the number is somewhere around 20%-25% of food, we're now focused on driving velocity and making sure the turns on the shelf are good before we expand further.
Got it. That's very helpful. Thank you.
Yep.
This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Yeah. Thanks again for your participation on the call today. We look forward to updating you on the fourth quarter results in October. We hope you all have a good day. Thank you.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.