Greetings, and welcome to the Simply Good Foods Company First Quarter 2019 Earnings As a reminder, this conference is being recorded. I'd now like to turn the conference over to Mark Polgarion, Vice President of Investor Relations. Mark, you may now begin.
Thank you, Rob. Good morning. I am pleased to welcome you to the Simply Good Foods Company earnings call for the Q1 ended November 24, 2018. Joe Scalzo, President and Chief Executive Officer and Todd Comfort, Chief Financial Officer will provide you with an overview of results, which will then be followed by a Q and A session. The company issued its earnings press release this morning at approximately 7 am Eastern Time.
A copy of the release and the accompanying presentation are available under the Investors section of the company's website at www.thesimplygoodfoodscompany.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 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.
In addition, management will make references to adjusted EBITDA and 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, it is now 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 will recap our Q1 highlights and provide an update on our business. Then Todd will discuss a summary of our Q1 results and after that, we will open the call to questions. Overall, I am pleased with our financial and marketplace results.
Our Q1 continued the strong business momentum we experienced from the second half of fiscal year twenty eighteen. Net sales, gross profit and adjusted EBITDA growth all increased double digits on a percentage basis versus last year. Our point of sale growth continued to be strong across all forms, that's bars, ready to drink shakes and confections, and across all channels and all major customers. As we expected, during the quarter, due to continued strong demand for Atkins products, our customer service levels were below expectations. And while we made significant progress in increasing supply during the quarter, it still resulted in some product out of stocks at retail.
Despite attaining additional manufacturing capacity, we expect that select service issues could persist into the new calendar year. Accordingly, as we did in the Q1, we have curtailed some retail promotion activity in the Q2 to enable us to better service our strong non promoted product demand. While early, our fiscal second quarter is off to a strong start. Our advertising and marketing continues to drive strong volume growth and our increased supply has resulted in steadily improving customer service and retail in stock levels as we head into stronger consumption months. Turning to the 1st quarter, net sales grew 13 0.5% year over year and adjusted EBITDA grew 12.6%.
Similar to last quarter, our business continues to be driven by strong base velocity gains on our core products. The increase in our top line continues to underscore the strength and the resilience of our brand with both core programmatic weight loss consumers and the lifestyle oriented consumer that we call self directed low carbers. Our successful marketing campaign is resonating with both sets of consumers who are focused on nutritious snacking, convenience, meal replacement and low carb, low sugar, protein rich products. Volume was the biggest contributor to growth in Q1, up 14.3%. This was partially offset by non price related trade promotions due to a change in how we account for services provided by some of our customers.
The increase in adjusted EBITDA is a direct result of the sales growth. These gains were partially offset by higher marketing and an increase in G and A. Todd will have some additional details on this in a bit. Measured channel U. S.
POS growth continues to be strong. As this slide depicts, the solid 4 13 weeks ended November 24 POS gives us confidence as we begin the new fiscal year that our message continues to resonate with consumers and that we are in the early innings of our strategy to attract our 4x larger lifestyle consumer target. During November December, due to typically slower seasonal demand and the previously mentioned supply capacity increases, we have improved retail inventory positions as we enter the new calendar year. Also, as I mentioned earlier, given expected strong non promoted product demand, we have curtailed some seasonal promotion activity to ensure our customer service levels remain acceptable. Similar to the last few quarters, our strong retail performance is coming entirely from base velocity growth.
Distribution was up slightly, primarily driven by RTD shakes, including the new 30 gram protein shake offering. These gains were partially offset by a slight decline in feature and display activity. And I am very pleased that our growth continues to be well balanced across bars, ready to drink shakes and confections. This is driven by our approach to brand building. We drive new buyers to the Atkins franchise and once they get to the shelf, the form they choose is typically predicated on individual preference.
Our strong results gives us the financial flexibility to invest in the business. As such, we are committed to our advertising and marketing strategy. The centerpiece of our strategy focuses on educating consumers, so you'll see new ad copy around our Choose Wisely campaign. And we couldn't ask for a better brand spokesperson than Rob Lowe, who is passionate and engaged. New ad copy with Rob will begin airing this month.
And we are continuously making improvements to our website and have a collaborative cost functional approach as we work with our e commerce retail partners. Our digital marketing team provides support related to search to ensure we achieve our ROI targets. These combined initiatives give us a complete integrated marketing campaign. Furthermore, we have a solid pipeline of new products that brings the right level of variety, news and excitement to the brand and the category. Here you see some of our new products such as the 30 gram RTD shakes and the Atkins Protein Wafer Crisp Bars that began to launch in Q1.
In summary, our Q1 results were strong, with sales and profitability greater than our long term target. The solid start to the year gives us confidence in delivering on our financial commitments during fiscal year 2019. This is driven by our strategy of targeting both core programmatic weight loss consumers and self directed low carbers. With new buyer growth increasing, we are excited about this momentum and executing against our plans. We will point out that beginning in our fiscal Q3, the year over year comps are more challenging.
Therefore, we would expect some moderation at that time on our top line growth. With that, I will turn the call over to Tom.
Thank you, Joe, and good morning, everyone. Let me start with 2 points as it relates to the numbers you see on the slides that follow. First, for comparative purposes, we will review financial statements for the quarters ended November 24, 2018 November 25, 2017. 2nd, 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. Let me start with a review of our Q1 net sales drivers. Core volume growth has been solid over the last year and continues to be the primary driver of our sales in the Q1, volume increased 14.3%. Trade promotion or price realization was slightly favorable in the Q1 due to how we're managing through some of the capacity constraints. These gains were partially offset by the change in how we account for services provided by some of our customers.
In the year ago period, this cost was recorded in selling expense. We expect the dollar impact over the remaining three quarters of the year to be about the same. As we implied last quarter, point of sales growth in Q1 was greater than the increase in net sales. With POS consumption growth remaining in the 20% to 25% range, we are having some challenges keeping up with demand. Now for a review of the Q1 results across major metrics.
As I mentioned earlier, 1st quarter net sales increased 13.5%. Turning to the rest of the P and L, gross profit increased 12 percent to $59,100,000 with gross margin down 60 basis points to 48.9%. The decline in gross margin was primarily due to the non price related customer activity that is a reclassification from selling expense. This change in methodology only impacts fiscal 2019 amounts, therefore affecting comparability versus the year ago period. Additionally, the company incurred slightly higher supply chain costs due to modest inflation and product mix.
The increase in gross profit was partially offset by a 17.1% increase in marketing driven by the timing of increased media investments, as well as an 11.5% increase in G and A due primarily to costs associated with the strategic sourcing initiative and annualization of fiscal 2018 investments to enhance organizational capabilities and key functions. Note that selling expense was slightly lower than last year due to the aforementioned reclassification. Due to the Tax Reform Act and accounting treatment of the gain on our tax receivable agreement, our effective tax rate in the Q1 was 23.3% versus 38.8% in the year ago period. We anticipate that the full year tax rate will be in the 24% to 26% range. As a result, reported net income in the Q1 was $15,300,000 an increase of 49.3% versus last year.
Moving on to the balance sheet and cash flows. As of November 24, 2018, the company had cash of 210.8 $1,000,000 $198,000,000 remaining on the outstanding term loan, resulting in a net cash position of $12,800,000 On November 16, we issued an 8 ks stating that we entered into an agreement with Work Capital to buy out the TRA for $26,500,000 resulting in a gain of $1,500,000 Final payment to Roark was made prior to the close of the Q1. The company did not buy back any common stock in the Q1 against the $50,000,000 authorization announced on November 13. The primary goal of the repurchase program is to allow the company to repurchase its shares to reduce its outstanding share count, which recently increased due to the exercise of a significant portion of the company's public warrants prior to their call for redemption by the company. As a reminder, the company remains focused on organic growth and value enhancing M and A opportunities and intend to continue to prioritize use of its cash for these purposes.
The stock repurchase program and TRA buyout reflects our confidence in our business, marketplace position and long term growth potential. We have a solid balance sheet, strong cash flow and financial flexibility to invest in our business and participate in M and A opportunities that should result in long term shareholder value. I would now like to turn the call back to Joe for brief closing remarks.
Thanks, Todd. In summary, the year is off to a good start and we are very confident in our ability to execute and capture the growth opportunities during the fiscal year. We expect FY 2019 net sales growth to exceed our long term target of an annual increase of 4% to 6%. This compares to our previous view that call for net sales growth to slightly exceed our long term target. This outlook reflects expected strong POS growth in the first half of the year, moderating in the second half of the year as we lap the double digit increases from prior year and a benefit in the fiscal Q4 from the previously mentioned revenue recognition and a 53rd week.
We expect adjusted EBITDA will grow at a slightly higher rate in sales and while we expect modest and within the category. We are focused on profitable organic growth and attracting new buyers to the brand as a path of increasing shareholder value. We appreciate everyone's interest in our company and we are now available to take your questions.
Thank you. At this time, we will be conducting a question and answer session. Our first question will be coming from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks. Good afternoon. Happy New Year. Thank you for letting me ask a question or a couple. First on your consumption offtake, the point of sale data you guys show what we see in Nielsen.
What we don't see is e commerce. I know you guys had strong momentum. Can you give us an update on what your e commerce momentum looks like now? And if you have it, any estimate of what all channel consumption growth looks like?
Yes. So e commerce continues to perform very well, not as obviously we are lapping huge growth from last year. So it's been in the 20% plus in the Q1. So that's actually fairly consistent with our overall POS growth in measured channels, but it continues to do very well. We are feeling really good about e commerce.
And then turning to the supply chain tightness and the shipment disparity versus consumption. I understand the dynamic of having those net sales drag as you're not able to replicate the same type of pipeline fill that you usually have this past quarter. We're just looking at the seasonality of consumption versus your seasonality of shipments. And the gap this quarter is clear. It looks like it's maybe an 8 to 9 point net sales drag this quarter.
Would love it if you have any estimates estimation of what that is. And then the second question is, as I think about the forward path, Joe, you flagged risk of some deceleration against the tough comps and point of sales. We get to the back half of the year, totally get it, understood. Usually, as we look at shipment versus consumption, you ship ahead of consumption this the quarter we just finished, the quarter we're in now, but then we get to a period where it looks like you're depleting inventory in the system. So you shift below consumption, particularly in the Q3.
Is there any reason to believe that because we're not keeping that pipeline till now that we are not going to get that depletion on the back end, so we could actually get a net sales tailwind beginning in the Q3?
Well, you can answer all the supply and demand questions that are going to come up on the call. Yes, I think you have it about right. We feel good, as I mentioned in the comments, we've built our inventories November, December is seasonally less strong. So that gives us an opportunity with our supply to build inventory, both our own and customers that did happen. It's not at the same levels as we would normally would have it at, but it's at acceptable levels.
So if you build less inventory, you would expect at some point the takeout is less extreme.
Okay. And then roughly the timing sorry, go ahead.
I said simple macro terms, that's the high level math. Obviously, there's a lot of micro things that go on within that. But yes, if you put less inventory in, you deplete less later. And you've got the timing about right after sort of March, April, we start slowly drawing total system inventory down until we reach the summer. And then the cycle begins again in September October.
You build it and then you deplete it in the following Q3.
Yes. So I'd say the only thing I would add to that, Jason, is that I think that curve because of what's happened here in Q1 will be a little bit different. And as we've pointed out, we have cut back on some promotional activity in the second quarter, potentially Q3 as well. So that may have an impact on the timing of shipments in that typical curve that you pointed out as well. But I think big picture, your hypothesis is correct.
Great. And one more question.
I was going to answer your first question regarding the net sales GAAP versus POS. So, 13.5% is what was reported net sales as we talked about. There's a point of it was the geography change from selling expense between gross and net. The other impact was international was actually a decline year over year that cost us almost a point in the half. So, the North America net sales was about 16%.
Got it. Okay. That's helpful. I've eaten up enough time. I'll pass it on.
Thanks guys.
Thanks Chase.
The next question is from the line of Chris Growe with Stifel.
Hey, Vince.
Hi. Just a follow-up on Jason's question there. You did have a larger inventory build sequentially this quarter. And so I guess I just want to understand, I guess the magnitude of that and then I guess the degree to which you also mentioned that your retail inventory is in a better position as well. So you've built more inventory than you built a year ago at this time.
And you mentioned retail inventory is building as well. Obviously, there's still that gap though in consumption versus shipments. So are you you mentioned inventory being in a good place. Is that where you want it to be or would that be a higher level overall if you had the appropriate capacity available, guess the question?
Yes. So, Chris, it really primarily has to do with the adoption of revenue recognition. So, if you remember, so this time last year, end of Q1, it was under the old methodology where we shifted out, in that last week of the quarter, for example, it counted as sales and that inventory got depleted from our balance sheet. This year, it's obviously different with our new policy. So those shipments remained in inventory.
So if you look at year over year AR and inventory, they kind of offset each other. That's really the big driver is the revenue recognition accounting.
Okay. That makes sense.
The second part of your question is, if we could have inventory right now, what we like it, the answer to that is yes.
Okay. Are you able to give more color then, Joe, around you talked about having some more constructive dialogue with your 3rd party processors, just the degree to which you can further narrow that gap between takeaway and shipments. Are you giving any color around the next three quarters, in particular Q2, where you have obviously a seasonal spike in sales?
Yes. So we're really pleased with the response by the our co manufacturers to getting additional supply. So we brought that on relatively quickly and up as much as we would like. So we feel like we've got a reasonable amount of supply to support a reasonable amount of demand. If demand gets superheated, if we don't see the slowdown in demand as we expect in the second half of the year, we'll probably have to take some actions.
At this point, we feel pretty good going into January, February from our inventory positions. It's never ideal, but it's better than what we would have expected. I would say to characterize it, we came into the Q1 concerned about this issue. We leave the Q1 feeling better about how we weathered that storm and with our position right now.
That's great. Okay. And just one follow-up if I could and that's in relation, you mentioned that distribution was a benefit to sales growth. Is that new doors or just more products on shelf? I'm just curious if any color behind that incremental distribution that you
know? It's mainly more items in existing ACV percentage.
Okay.
So more and it's in ready to drink and it's principally the incremental sell in of our 30 gram product.
Okay. Got you. That makes sense. Okay. Thanks so much.
Thank you.
The next question is from the line of Michael Gallo with C. L. King. Please proceed with your question.
Hi, good morning. Just a broader question around what your plans are for capacity given you're still fairly early in kind of the mainstreaming of the brands. I guess if trends don't flow as you get to the back half of the year, how do you ensure that you don't end up again behind on having enough capacity like you did this year? And then the second part of that question is, well, demand, obviously, you'll cycle harder compares in the second half of the year. Will the trade promotions come back at some point, perhaps in the Q4 as you have more supply?
And would you expect kind of the sales versus takeaway to kind of flip in the second half?
So moderate term on the supply, we are bringing on, we're getting more of the available capacity of our contract manufacturers. We expect that to continue. We are bringing more lines on within existing contract manufacturers. We expect that to continue and we are looking to expand our supplier base and add suppliers in particular on bars. All those actions are taking place.
And what I would tell you is, when given enough time to plan for increased demand, we are able to do that. So the issue that we faced in the Q1 was one of we expected our business not to be as strong as it was and we were not prepared for 25% to 30% demand growth. So now that we have gone into planting season for this fiscal year, we are assuming a strong business and going out to get the supply that we're going to need for our business. It's not as straightforward as that, but we feel relatively confident that we're able to do that with enough lead time. If our business continues to if we are surprised in the second half of the year, it doesn't moderate, we will take actions necessary to moderate demand if we need to.
Yes. And regarding your question on potential, do we get more aggressive in Q4 if we're in a healthier position? Q4 is a very light promotional quarter for us. There's not a lot of activity, even in a typical year. So I don't see a big shift in Q4.
We'll have to assess where we are in a couple months from now, whether we even want to maintain that Q4 activity. But again, it's a small quarter from a promotional activity. Q1 and Q4 are the lightest. Q2 and Q3 are the strongest promotional windows for us. So probably won't be a big impact either way.
Okay, great. And then can you update us
from the standpoint of just what you see in terms
of potential M and A activity out there with kind of market volatility and etcetera, have kind of multiple expectations come down? Do you still see attractive targets, I would think, for financial buyers, perhaps financing is getting a little tougher and I would think that would put you in a better position. So any color you have on that would be helpful.
Yes. High level, our pipeline of M and A opportunity continues to be robust. It's keeping us pretty busy. Do you want to address the market?
Yes. I think so. I mean, look, I think for good assets, assets that are growing nicely, they are profitable, multiples remain pretty high. They might have come off a little bit off their peak in the last year or 2, but they're still it's very competitive for the good assets. For the assets that aren't as strong, I think prices have probably come back and they're probably a little bit more reasonable, but it's still a very competitive market out there because there's just not a lot of huge strong assets in this category.
So when they come to market, there's a lot of people looking for it. But as Joe pointed out, we're very active and hopefully we can get something done.
Thank you.
The next question is from the line of Rob Dickerson with Deutsche Bank. Please proceed with your question.
Hi, good morning. It's Matt Fishbein on for Rob. Thanks for the question. Happy New Year.
Just wanted
to follow-up regarding the progress made on securing more supply and the levers that you have to pull to manage demand and customer service levels. Can list price increases even be on the table at this point? Or is the pullback in promotional activity really the only way to go here, if something like this were to crop up again or even now? Or is this a shorter term issue at this point? Customer service level should be back to business as usual in the second half of the year?
Yes. I think the question to answer your first question, would we consider price changes? And the answer is, we already have. By pulling back on promotional support, you essentially raise average net price and that's one of the triggers that we have pulled. And we will continue to pull if necessary as we go forward.
I think to answer your second question, we continue to believe we continue to go out and plan for a business that's going to be stronger than what we think it's going to be, right. So our objective here is, we are going to have the available supply if we need the available supply. It just takes time for us to get that.
Yes. So, I mean, to your question on pricing, the most efficient short term way to get price realization is to pull back on promotional activity, which we have done. List price increases, it's something we're constantly looking at depending on what the inflationary outlook is, what's going on in the competitive landscape. So that's certainly on the table in the future. But right now, the lever on promotional activity is having some success for us.
And again, in the short term, it's the most efficient way to get net price realization through.
Okay, great. And I wanted to also thank you for the color on the company's cash utilization priorities in your prepared remarks. And obviously, I don't want to go into all the hypotheticals, but given the importance of M and A to the company's future and Atkins' purpose as the foundation of an M and A platform. Just wanted to understand what the, I guess, potential levers you have to use that cash and create earnings power with that cash outside of M and A would be given that it's been a while that you have had a full M and A pipeline and lots of things are in the works, but you're not the only company in the market looking for acquisitions. And I think investors would definitely appreciate that you haven't pulled the trigger on something that wasn't perfect at the right price, like could be argued that some others have.
But longer term, if this situation were to continue where nothing just kind of fits, what would be the plan down the road? And again, just because of the importance of Atkins as the base asset here. Thanks.
The priorities are organic growth for a second, M and A third, and we talked about this. We have the ability to buy back shares. We put that in place earlier and we would use that at the right prices.
Yes. So, like you said, it is a hypothetical. We are going to we have a lot of cash on our balance sheet right now, kind of unattended because of the redemption of the warrant. We do have the buyback in place. We can utilize that.
But just to be very, very clear, our 1st and foremost use of that cash is to drive the existing business and then M and A. Could there potentially be a point in time where we would do something different if that cash keeps piling up and we're not able to do a M and A. Of course, that is the case. But right now, it is not half of the $50,000,000 share buyback. We have no intention to move off our strategy.
Okay. Cool.
Thank you very much.
Thank you.
Your next question is from the line of Brian Holland with Consumer Edge Research. Please proceed with your question. Yes, thanks. Good morning.
Most of my questions have been answered. So maybe just a quick question on the guidance. You've obviously you struck a modestly more bullish tone 1 quarter in, which is encouraging. Just curious if you could maybe flesh out for us to what extent that Q1 coming in ahead of your internal plan versus maybe incrementally positive about the supply backdrop and the capacity and how that would evolve over the next 9 months relative to maybe where we were
last quarter? I think it's equally weighted. So we went into the quarter with some concerns around supply. We went into the quarter with some concerns around inflation. We executed in the quarter better than our expectations.
We reemerged in a better position from a supply standpoint. A quarter is gone. We have a better view on inflation. POS continues to be remain robust. So all those factors make us more optimistic.
So we're optimistic based on the performance in the quarter and we have got a better view of what's the second half of the year is going to look like. So I think equally weighted.
Okay. That's helpful. Last one for me. Just thinking about the competitive landscape, there's been a lot of noise or activity in
the past few months.
It's hard to sort of separate whether it's acquisitions or rebranding from your success and folks seemingly inspired and motivated by that. Some of that I acknowledge is certainly maybe in the branded programmatic diet side that you might have less overlap with at least with where your growth intentions are going forward. But just wondering as far as your engagement with consumers, what you're seeing them respond to from a traffic standpoint? Are you seeing any noise, any disruptions? And then also given that capacity is still relatively tight and as I understand it to be an industry wide problem, I suppose we wouldn't see as much of this.
But obviously, you guys are always staying mindful of the promotional environment. I would imagine that still curtailed
at a category level at
this point given the capacity? But figured I'd ask.
I think first if you look
at the I'm assuming your first question, Brian, was regarding weight management and weight management competitors. I think as we have moved to messaging more appropriate for lifestyle consumers, but still appealing to programmatic weight loss. The messaging and the positioning of the brand around that is much more about sustainability, living it as a life as opposed to a diet which is sort of episodic deprivation. So you're seeing Weight Watchers, you're seeing a number of the programmatic branded weight loss people move to a more sustainable lifestyle message. And I think that resonates with consumers.
They in general, we saw this 18 months ago to 24 months ago, this idea of quick weight loss through dramatic changes in how you eat is non sustainable. So our move away from that messaging, our move to a more lifestyle messaging is clearly resonating. And I think you're seeing the competitors we have in that space are pretty smart people too. So not surprising they're picking that up from their consumer basis and they're obviously messaging appropriately. So, I would say that the other the component that we do have that seems to be a catalyst for what we are doing is Rob Lowe's appeal to both consumer groups.
So Rob is the guy that just comes across as first, he's a lifestyle guy, never had to lose weight, and he comes across as incredibly genuine because that's kind of who he is. And he believes in this approach. He's been a Atkins guy for a long time and I think that just resonates. It comes across in film. It comes across when he is interviewed.
I think that is working for us too. Now your second question was around promotion intensity. I just want to remind folks that 85% of our volume is baseline volume, product off the shelf every day. Only about 15% of our volume is incremental volume. So this is not a heavily promoted category like some categories that I've been in.
So this is it's important in your business. It's why during the period of strong demand and somewhat limited supply, we focused on replenishing on the shelf, because that's predominantly what our business is. So we give up some display activity. We give up some feature activity. We do that knowing that 85% of our business is running off the shelf every day.
So we are not as promotion dependent as maybe some other categories and some other brands. Did that answer your question, Brian?
Yes. No, and I did understand about I certainly understand what you guys are doing at the point of sale. I guess I was just asking if you would see it from a competitive standpoint at all. I guess the category level, you're still you're not seeing anyone get kind of super aggressive, a smaller player. And maybe I'm thinking about that more from an M and A standpoint, right?
I think we've talked about this. You've talked about both online and off about sometimes these guys are focused on driving growth to get acquired, less concerned about profit. I'm imagining that the capacity constraints are such that it's difficult to do that right now, but
I was just curious at
a high level if you were seeing anything noteworthy. Yes.
I mean, I would say, look, it continues to be an uber competitive category, but we have not seen anything materially different than the last few years.
Yes. The heavy promotion activity in the industry kind of starts right now and kind of goes through the end of kind of March, early April. So we will see how the key competitors behave during the season. There is this concept of lifestyle change, New Year's resolution. So it will be interesting to see how the season takes shape.
We will keep our eye on it. But there is a lot of competitors. There is a lot of small competitors. They're fighting for promotion visibility. So we'll see how it plays out.
We tend to Thanks, guys.
Yeah. Thank you.
The next question is from the line of Bill Chappell with SunTrust. Please proceed with your question.
Thanks. Good morning.
Good morning. Happy New Year, Bill.
Happy New Year. First question, just going back on the supply issue, help us understand what changed from the suppliers or the co manufacturer standpoint, because I think 3, 4 months ago, you thought it would be a challenge, they would have to change their production schedules. You might have to enter into long term agreements, but it seemed to happen fairly quickly. And so I'm just trying to understand, did you have to enter into long term agreements? Did you were the price concessions, was there anything necessary or was there more capacity out there than you had realized?
A little of all that. So I would say mostly it was
suppliers skewing more of their available capacity to us. So as you can imagine, we are a big business and we are growing strong. So as they set priorities for their available capacity based on conversations we have had with them, they have skewed more of that capacity to us. Secondly, we've taken some actions that help to make that capacity more effective. So we put priority focus on highest velocity SKUs.
So we deprioritized lower velocity SKUs because most of your business runs through just a handful of items. So that improves their available capacity because they don't have to do line changeovers to shift to smaller SKUs. So all of that has been true. We've been able to we've been pleasantly surprised by the supply our partners' ability to step up and give us more supply and do it relatively consistent. So that's been a big game changer for us.
Got it. And in terms of the long term agreements, I mean, is there anything that if you don't grow, I mean, or things start to slow, go back to more normalized levels that puts you at a disadvantage?
Yes. I think that's
I would say that's more of a long term question for us. So what do you want to protect in the way of available supply in the future, right? So as you enter into agreements, there is a minimum take that if you don't take it, you have got to pay some penalties, right? So for us, it's about what do we expect our business to do more long term, so more than just 6 months out and do you want to secure additional capacity. If you don't then deliver on that from a demand standpoint, you have some penalties.
So we have a pretty analytical view of what we think our business is going to do and then we have some surge capacity available to us based upon that view.
If we
are rolling and business is softer than that, then obviously there would be some consequences to that. But we feel pretty confident that we are in a pretty good range. Okay. And frankly, we want to thank our suppliers. They have been just terrific partners over the last 3 months and my supply chain team has done a phenomenal job of dealing with the demand and getting us more supply.
No clue. Switching to gross margin and trade promotions, just trying to understand with you pulling back on trade promotions to kind of slow the sales, what kind of impact that had on gross margin this quarter? And then I guess longer term, does it change your thinking on how much to spend on trade promotion versus how much to spend on advertising? Maybe you don't need to spend as much on trade promotion to get the volume. Just trying to understand both the impact this quarter and then kind of how that looks going forward.
Yes, sure. So again, there's 2 pieces that impact the gross margin this quarter. So, obviously, there was this geography change, about a point move from selling expense up to trade. So that negatively artificially impacted the gross margin. And that will continue until we lap it for the full year.
So the next 3 quarters will have a similar impact because of that geography change. We had a slight decrease in trade expense year over year in Q1. So, we did have a marginal benefit in the gross margin line by pulling back on the promotional activities. Again, Q1 not a heavily promoted quarter for us, so the impact is not that big. We should see, again, outside of the geography shift, we should see some favorability in Q2 and Q3 as well, less so in Q4.
Just to point out, if you remember, we did a really nice job last year of pulling back on trade promotion activity. So we had some strong efficiencies last year. Hopefully, it's something we continue to look at, but we should see a slight improvement on top of that as well.
Got it. And then in terms of just go forward, do you think about spending more on advertising? And is there a chance of or is a thought at one point of bringing a second ambassador per se other than Rob Lowe or are you kind of comfortable with the plans of it?
No intention of 2nd ambassador right now. Look, this is something we continue to evaluate all the time. We are constantly looking at the returns of trade. We're constantly looking at the returns of our media investments. We're really pleased with both right now.
And just because of capacity, obviously, we're just kind of it's just smart to pull back on promotional activity. We'll continue to assess that. We're going to lean into both if they both have great returns. And if those start to not pay out, then we'll pull back and shift the money. But we're feeling good about both right now, to be honest.
Yes, Bill, typically too with celebrities historically in weight management, there's a story of weight loss, right? So there's a half life to their heavy, they heavy, they lost weight, you are interested in how they did it and at some point that story gets dated. With Rob, obviously never really had a weight loss story. So this is about lifestyle. So we're really interested in seeing how long the partnership how effective this could be for how long and how long a partnership this could be.
Kind of our working theory right now is this might have legs for a sustained period of time and he likes the relationship, we like the relationship and right now all of our metrics are telling us to invest more, to spend more behind him. So we are always looking for who is the next person. So that's always in the hopper. But right now, we are going to stick with Rob. He is working and you will start seeing this right now, in fact, new executions with Rob that we shot back in the Q1.
Great. Thanks so much. Thank you.
Thank you. Our final question is from the line of Eric Larson with Buckingham Research. Please proceed with your questions.
Okay. Thanks. Good morning, everybody. Happy New Year. Good morning.
Yes. Most of my questions have been answered as well. And my real question was just related to what Bill just asked. So when you look at Q1 marketing spend, I think or you look at your marketing line in your P and L, it was up 16%, almost 16.5%, so at a rate that's greater than sales. And now obviously you've got Rob back on for a second year, Rob Lowe.
I think you have new copy. I think that just started it probably started this week. I'm not sure exactly the timing on that. So is this the rate of increase in marketing spend that we should see for the year? Or would it be even higher in Q2 as you go into your seasonal pull?
I mean, how does should we look at the total marketing spend the way you have got it kind of planned now?
Yes. So, we don't give specific guidance in a quarter or even a year on marketing spend. But as we probably heard us talk before, long term, the plan is to grow our marketing investment fairly in line with revenue growth. So that's kind of our philosophy. And look, if the returns are continue to be really robust and we have the financial flexibility to spend more like we did last year, we will do that.
What you're seeing in Q1, the way our accounting works for marketing is we peg to a full year estimate. And because we as we continue to invest more and more in the second half of last year, we're kind of we're lapping a slightly lower base in Q1. So it's a little bit just the way the accounting methodology works, what's showing up in the P and L in Q1. But like Joe just pointed out, we're thrilled with the marketing that we have today. The returns continue to be really robust.
And if we have the ability to invest more and we think the returns are there, we will do that for sure.
Okay. Then just a couple of really small follow on questions. It was a year ago when you brought Rob Lowe on and included us when we saw the close tie of consumption growth to bringing Rob on, is there and this would not be a risk, it'd be a great thing, but it's just hard to balance with your supply. Is there a possibility of getting another reasonably large boost in consumption again this year given that it's kind of year 2, you've got even probably even better copy. How do you look at the impact of that?
Yes, we
tend to look at it from a buyer flow standpoint. So last year, we grew our business. We grew the number of new buyers. So a lot of in the year that we are in, we are looking at what's the on loyalty of the buyers that we brought in last year and what's their buy rate. So for us, new buyers are a proxy for growth in kind of in future years if loyalty holds up.
So we'll be paying attention to loyalty. And we look at advertising as it drives volume, brings in increases penetration of our brand, more households buying the brand. And so that's what we're looking at right now. Does that help?
Okay. Okay. Then the final question and I think I know the answer to this. Obviously, you used some capital to close out your TRA. Are there any other arrangements in the company?
Does this kind of conclude any kind of special deals like this with any use of cash?
Yes. There is nothing else similar to that. That is it.
Okay. Thank you.
Thank you.
Thank you. At this time, I will turn the floor back to management for closing remarks.
Well, great. Thank you very much for joining us for today's conference call. We look forward to updating you on our Q2 results in April.
Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.