Greetings, and welcome to The Simply Good Foods Company second quarter fiscal year 2026 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. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Matt Siler, Vice President, Investor Relations and Treasury. Thank you, sir. You may begin.
Thank you, Operator. Good morning, and welcome to The Simply Good Foods Company's second quarter fiscal year 2026 earnings call for the period ended February 28th, 2026. I'm happy to be here on my first earnings call and pleased to be joined this morning by President and CEO Joe Scalzo and Chris Bealer, Chief Financial Officer. A copy of our earnings release and accompanying presentation is available on the investors section of the company's website at thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements, which 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. On today's call, we refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset light business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Circana's MULO++C measured retail channel data and company estimates for unmeasured channels for the 13 weeks ending February 28th, 2026, as compared to the prior year. With that, I'll now turn the call over to Joe Scalzo.
Thanks, Matt, and welcome to the company. Good morning, everyone. Thank you for joining us today. For those of you that I know, it's nice to be back, and I look forward to getting to know all the new faces. I wanted to begin this morning's call by providing a framing for where Simply Good Foods is today. It's been 12 weeks since I rejoined the company, and we are not pleased with our performance. We've experienced executional challenges against a dynamic and highly competitive marketplace. Our second quarter net sales of $326 million and adjusted EBITDA of $55.5 million were both well below our expectations. Our fiscal year 2026 guidance now calls for net sales in the range of $1.31 billion-$1.35 billion and adjusted EBITDA of $217 billion-$225 million. The good news is that we believe we are well positioned to fix this.
We know what we need to do, and we are acting with urgency. Our brands each speak to unique consumer segments within the category, addressing relevant consumer benefits with differentiated positioning. I believe Simply Good Foods can return to delivering the durable long-term growth that you would expect from a leading nutrition company. With that perspective, I'll turn the call over to Chris, who will provide more details on this quarter's results and our updated outlook for the year. After Chris is finished, I'll return to discuss how we plan to get our performance back on track. Chris?
Thanks, Joe. Good morning, everyone. As Joe mentioned, we are disappointed with our Q2 performance as our retail takeaway slowed significantly compared to Q1, especially in the second half of the quarter as we entered the New Year, New You promotional period, declining 6.4% year-over-year. Quest consumption grew 2.4% as bars were impacted by softer baseline velocities. Salty grew 14% in the quarter, although this represented a deceleration from Q1. OWYN consumption was down 2.4%, below our expectations due to a lapping of heavy promotional period in the prior year and poor base velocities, including our newly expanded distribution. This poor performance will result in lost distribution in the coming months. Atkins consumption declined by 23.4%, driven by known distribution losses and related trade inventory reductions, both of which were roughly in line with our expectations.
Specifically, we reported second quarter net sales of $326 million, which declined 9.4% versus the prior year, mainly due to weaker consumption. Adjusted EBITDA was $55.5 million, a decline of 18.4% year-over-year. Gross profit of $103 million decreased 20.8% versus the prior year, driven by inflationary costs, most notably cocoa, whey, and tariffs. Gross margin was 31.6%, a decline of 460 basis points versus prior year, largely reflecting higher input costs and some one-time effects from actions taken to mitigate OWYN product quality issues. Excluding $3.9 million of one-time OWYN integration expenses in the current year period and a $0.4 million non-cash inventory purchase accounting step-up adjustment expense related to the OWYN acquisition that occurred in the same period last year. Gross margin was 32.8%, a 350 basis point decline versus the same period last year.
Selling and marketing expenses of $28.2 million were down 19.7% versus prior year, primarily the result of the previously planned pullback in Atkins marketing. G&A expenses of $34.9 million decreased 3.2% versus the prior year period. Excluding for the current period, $4.5 million in restructuring costs, integration expenses of $0.8 million and term loan transaction fees of $0.2 million for the prior year period, integration expenses of $2 million and term loan transaction fees of $0.7 million, G&A declined 12% to $29.3 million, mainly due to a reduction in our short-term incentive accrual. It is worth noting that given the management transition, we increased our focus on controlling G&A costs earlier this quarter. I will speak to this in more detail in a moment.
On a GAAP basis, we had an operating loss of $213.3 million compared to income from operations of $54.7 million last year due to a non-cash loss on impairment of $249 million related to the OWYN and Atkins brand assets. Net interest expense was $5 million, while the effective tax rate was 26.8%. Net loss was $159.7 million, down from net income of $36.7 million last year, primarily due to the impairment I noted a moment ago. Moving to the balance sheet and cash flows, as of the end of Q2, the company had cash of $107.4 million and an outstanding principal balance on its term loan of $400 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 1.2x . The company bought back almost 5 million shares in the second quarter.
We have spent approximately $240 million repurchasing over 10% of our outstanding common stock over the past 12 months, including approximately $190 million this fiscal year. As of April 9th, 2026, the company has approximately $182 million remaining under its current share repurchase authorization. Year-to-date cash flow from operations was $58.2 million, compared to $63.3 million last year. Capital expenditure was $7.6 million, reflecting the investment to support additional capacity in our salty snacks business that we've previously discussed. This month, we kicked off a major initiative to reduce total fixed costs in our company. The objective of this work is to restructure by reducing staffing while increasing functional excellence in key areas, realigning our use of external agencies and brokers, and increasing efficiency in our manufacturing and logistics approaches.
As a result of this effort, we will improve the shape of our P&L to provide improved profitability and generate fuel for increased brand investment. We expect the total one-time cost of these initiatives will be approximately $15 million, which includes costs already incurred in the CEO transition. Finally, moving to our updated outlook, we now expect the following. Fiscal year 2026 net sales are now expected in the range of $1.31 billion-$1.35 billion, representing a decline of between 10% and 7%, respectively. This assumes weaker consumption trends and expected distribution losses. GAAP gross margins are now expected to decline in the range of 300 - 350 basis points. This is a result of slightly higher input costs, especially whey, cost of mitigating the OWYN product quality issue, and a slight delay in realized cost savings due to lower volumes.
We continue to expect sequential improvement in the rate of year-over-year gross margin change, including Q4 margin expansion. We plan to hold marketing spend at planned levels to strengthen our brand equities and drive consumption. Our expectations for G&A include the partial year benefit from the major initiative previously noted to reduce fixed cost in the company. Fiscal year 2026 adjusted EBITDA is now expected in the range of $217 million-$225 million, representing a year-over-year decline of 22% to 19%, respectively. We continue to expect our full year effective tax rate to be roughly 25%. Our expectations on interest expense and capital expenditures remain unchanged. Given shares repurchased year-to-date, the company expects a weighted average diluted share count of approximately 92 million shares outstanding.
As it relates to the third quarter, we expect net sales in the range of $328 million-$339 million, which represents a decline of 14% to 11% versus prior year. This incorporates consumption levels similar to what we experienced in the second quarter. We expect adjusted EBITDA in the range of $46 million-$50 million, representing a year-over-year decline of 38% to 32% as we hold marketing investment in line with plan. Finally, I would note that our outlook assumes current economic conditions, consumer purchasing behavior, and prevailing tariff rates will remain generally consistent across the company's fiscal year. I will now pass the call back to Joe.
Thanks, Chris. Let me reiterate where I began today's call. We are not satisfied with our current performance, and we see a clear opportunity to improve our choices and our execution across the business. While we believe the long-term fundamentals of our category, our portfolio, and our company capabilities are compelling, our recent results have not met our expectations, and we are taking immediate and fundamental actions to turn around both our financial and in-market performance. Before I talk about our plans, let me step back and tell you why I remain optimistic and energized about the growth opportunities for our business. First, we compete in a trend-right consumer category that continues to show solid growth even as much of the broader food and beverage industry has experienced pressure. From a U.S. household perspective, the purposeful nutrition category still has significant room to expand, with meaningful runway for continued growth.
The category also continues to benefit from powerful consumer tailwinds, health, wellness, the use of protein, and the increasing role of convenient snacking and meal replacement in consumers' daily routines. Importantly, it also remains a predominantly branded category with limited private label, which reflects the pace of innovation required to compete successfully. This category backdrop will always attract new entries, and we've seen some targeted directly at our business recently. With that said, we have competed effectively through this type of activity in the past and will do so again moving forward. At the same time, the broader food and beverage landscape is impacted by the growing adoption of GLP-1 medications.
While these therapies are changing how some consumers approach eating, they are also reinforcing the importance of nutrient-dense foods, particularly those high in protein and lower in carbs and sugar, as consumers focus on maintaining muscle mass and overall nutrition balance in a lower calorie environment. We believe these trends remain highly consistent with the nutritional principles that underpin our brands. From a customer perspective, both brick and mortar and online retailers continue to view our category as a growth category and remain committed to allocating space and resources to capture that growth. Second, we believe Simply Good Foods has a strong portfolio of consumer brands. Each brand speaks to a unique consumer segment, addresses different benefits with differentiated positioning and preferred products. Third, we've built a best-in-class company. We have developed strong capabilities in marketing, sales, and R&D that enable us to drive innovation and profitable growth.
In addition, our asset-light manufacturing and distribution network remains an enviable operating model that provides flexibility, scale, and high free cash flow for investment. Importantly, we also have significant retail scale within the category aisle and serve as a category advisor to many of our largest retail customers. However, it's clear that our performance has not reflected the strength of our company or the potential of our brands. Strategy shifted, priorities were not always clear, and execution did not consistently meet the standard required to compete at a time when competitive activity was increasing, particularly on bars. As a result, we made some strategic choices that ultimately weakened our performance and limited our ability to fully capitalize on the opportunities in front of us.
Since returning to the role, I have focused on taking a clear-eyed assessment of the business to ensure that we have the discipline, the consistency, and the operational excellence required to compete and win. This work is already well underway and we are acting with a sense of urgency. Before moving to our portfolio, I believe it's worth stepping back and highlighting a few structural issues within the business that have contributed to our recent performance. Over the past several years, we've experienced erosion in overall household fundamentals across the portfolio. In a category like ours, growth ultimately depends on continually recruiting new consumers into our brands while growing loyalty and buy rate. Consumer recruitment requires the proper economic structure in the business. For us, this was characterized by gross margins approaching 40%, with sustained marketing investment around 10% of sales and adjusted EBITDA margins approaching 20%.
The shape of our P&L has moved far from this ideal structure, with gross margins in the mid-30s, reductions in marketing spend as a percent of sales, and G&A dollars growing faster than our underlying business. As a result, our ability to consistently invest behind our brands has been constrained, which has ultimately led to slower household penetration growth, declining buy rate, and pressure on brand performance. To succeed, we will address these structural issues. Our turnaround beliefs moving forward are clear. We will relentlessly attack inefficiency in our supply chain. We will use pricing action as necessary to help offset cost inflation over time. We will be less reliant on price promotion. We will lower our fixed overhead structure while improving key areas of functional expertise. We will restore more consistent investment behind our brands.
We'll focus more of our brand innovation on the core business with bigger consumer-driven ideas. We will use ROI to evaluate the effectiveness of every marketing investment. We believe turning these concepts into actionable plans will lead to improvement in our economic structure. The good news here is that we've already started that work. We have built capacity in our supply chain and R&D organizations to systematically improve efficiency, attack cost, and lower our total cost of delivered goods. You will see that play out as we close out this fiscal year and move through fiscal year 2027. We have already identified low returning customer spend and are targeting its elimination in fiscal 2027 to reduce our reliance in that area and rebalance our consumer and customer investments. We will assess the use of pricing to regain the gross margin we lost to inflation over time.
Lastly, as Chris mentioned earlier, we have a major initiative underway to immediately reduce our fixed cost structure. Specifically, we're taking aggressive actions to lower our G&A investments. When completed by the end of this fiscal year, we will have an organization that is the right size with the right capabilities to compete and win. With that broader context in mind, let me now turn to our brand portfolio and the role we believe each brand plays in our strategy moving forward. I'll start with Quest, a billion-dollar retail brand, the most important brand in our portfolio, and the primary driver of our long-term growth. We believe Quest remains one of the most differentiated brands in the entire category, with significant growth runway ahead. We bought Quest in 2020, confident that it would become a huge success given the strength of its core promise.
Quest has built its position by delivering a unique combination of great taste and highly differentiated nutritional profile. Since its founding, the brand has focused on using high-quality, dairy-based proteins that provide the full spectrum of essential amino acids while avoiding ingredients that can cause blood sugar spikes. That positioning has resonated with a broad range of consumers that has helped Quest build strong loyalty and equity. Solid growth and household penetration has continued for Quest. However, recently, we've experienced a slowdown in buy rate, partially due to elevated competitive activity, which has resulted in slowing consumption on the brand. At the core of the Quest franchise are two key product platforms, bars and chips. Together, these products represent the foundation of the brand and approximately 80% of sales. They continue to resonate strongly with consumers seeking convenient, high-protein snacks.
Quest Chips remains an important and growing part of the brand, continuing to perform well as consumers increasingly look for better-for-you alternatives to traditional salty snacks. Chips continue to drive household penetration rates for Quest, which are now over 19% of U.S. households. Going forward, we'll continue to innovate products and invest in marketing to drive chip awareness, consideration, and trial. While the performance of chips has remained strong, consumption of Quest Bars has weakened in recent periods, resulting in a slowing of the brand's overall buy rate. A significant factor in the slowdown is the result of our focused investments in other parts of our portfolio beyond chips, which haven't met our expectations at a time when competitive activity in core categories has increased.
Given the scale and strategic importance of Quest to our company, re-accelerating growth in the bar business will be one of our highest priorities moving forward. Our focus will be on strengthening core bar velocities, ensuring our innovation pipeline is aligned with consumer preferences, and supporting bars through more competitive communication driven by continuing the level of marketing investment required to recruit new consumers and drive buy rate. Re-accelerating growth in Quest Bars while continuing to scale the momentum we are experiencing Quest Chips is central to unlocking the full growth potential of the brand. Turning to Atkins, the brand has played a foundational role in the history of Simply Good Foods and in many ways represents the origin of the company.
This brand traces its roots back to Dr. Robert Atkins, whose work decades ago helped introduce millions of consumers to the concept of managing carbohydrates to support healthier eating and weight management. His philosophy ultimately formed the foundation of the Atkins brand and the broader low-carb nutritional health movement that many consumers continue to follow today. For many years, Atkins was the primary engine of growth for the business. During my previous tenure, we worked to reposition the brand from a programmatic diet into a broader weight management lifestyle brand, focused on helping consumers manage carbohydrates while still enjoying great-tasting foods. During that time, Atkins grew for over a decade by recruiting consumers to the low-carb lifestyle. Over time, however, a combination of factors contributed to the brand's recent decline. As gross margins came under pressure, the level of marketing support behind the brand declined.
It is worth noting that marketing investment in Atkins historically generated among the highest returns in the company. Reducing investment negatively affected net sales and consumer recruitment. In addition, consumer messaging around the brand became less consistent and strayed from the core weight management proposition that historically resonated so strongly with consumers. As marketing support declined and consumer messaging became less focused, our ability to consistently recruit new users into the brand weakened, which ultimately led to slower velocities and pressure on retail distribution. Given these factors, we expect Atkins will continue to decline in the near term, largely due to anticipated retail distribution losses as shelf sets continue to evolve in the category. Moving forward, our focus is on resetting the retail baseline of the business to a viable core assortment.
Encouragingly, several of our important retail partners continue to view Atkins as a highly relevant brand with a substantial loyal group of heavy buyers. We also believe there is a meaningful role for Atkins with consumers who increasingly choose GLP-1s to lose weight. While the baseline is resetting at retail, we'll take a thoughtful, fact-based approach to repositioning the brand and evaluating future investments to drive profitable growth, and we'll assess our ability to grow the consumer base once again. Let me now turn to OWYN. OWYN was founded in 2017 by former professional athletes Kathryn Moos and Jeff Mroz, who set out to create a plant-based shake brand focused on clean, allergen-friendly nutrition with transparent ingredient sourcing. The brand quickly developed a strong following among consumers seeking plant-based alternatives with simple, recognizable ingredients.
We acquired the brand in June of 2024, believing it provided an attractive entry point into the rapidly expanding plant-based and clean label protein segment. Importantly, the acquisition allowed us to expand our reach to a new consumer segment within our category while adding a third differentiated brand to the portfolio. OWYN's product lineup today consists of plant-based, ready-to-drink protein shakes and powders designed to deliver functional nutrition with clean label ingredients. OWYN's household penetration remains relatively small at 4.4%, which highlights the runway for future growth among existing plant protein consumers. Our recent segmentation work indicates that approximately 18% of U.S. households are actively seeking functional nutritional benefits, such as plant-based protein and clean label ingredients, and are willing to compromise somewhat on taste to obtain those benefits. This represents a large and growing consumer segment that aligns closely with OWYN's positioning and products.
While the growth opportunity with OWYN is compelling, we did not meet our own expectations with the integration of the brand into our company. As a result, we lost some important brand expertise, our marketplace execution was poor, and our brand performance fell well short of our plans. During the past year, we significantly expanded the distribution of OWYN's Pro Elite 32 g Protein Shake, which was our entry into the high protein segment of ready-to-drink. Our belief was that we could accelerate the recruitment of plant-based interested consumers with a higher protein product, and in doing so, accelerate the brand's growth. However, a combination of a product quality issue on that product that impacted taste, texture, and consumer acceptance, and poor marketing execution negatively impacted performance during the critical expansion window.
While the product quality issue's been addressed, the retail performance of Pro Elite, as well as of a number of line extensions, did not meet retail velocity expectations, and we expect some near-term distribution losses over the next year. Given the interest in plant-based protein and the strong brand equity in OWYN, we believe that we will restore growth to OWYN once the near-term reset is behind us. Looking ahead, we'll refocus on the OWYN winning playbook, which includes marketing to drive awareness, consideration, and trial and pacing distribution expansion of our core products in a disciplined manner to ensure strong velocities and sustainable growth for the brand over time. In summary, the role of each brand in our portfolio is as follows. Quest is our growth engine and our largest, most important brand.
We will invest for growth and refocus on its unique protein-forward brand promise of athlete-worthy nutrition behind its core products of bars and chips. Atkins is the leading weight management brand and our second largest business. We will reset its retail product assortment with customers in line with its smaller yet loyal consumer base as we investigate our ability to profitably invest to grow its consumer households in the future. Lastly, OWYN is our entry into clean, plant-based protein. After distribution reset, we will restart its marketing engine targeting plant-based protein seekers and our great tasting ready-to-drink shakes and powders. We will pace our distribution growth in line with household growth. As I look ahead, it's clear to me that our mindset must be on turning around company performance.
The category remains strong, our brands retain meaningful consumer equity, and we are acting with urgency to unlock their full potential. In summary, my focus going forward will be on three turnaround priorities. First, we must strengthen the economic model of the business through pricing and cost reduction. Second, ensuring consistency and discipline in our choices, working on fewer, bigger initiatives so that the organization can execute with clarity, focus, and urgency, driving the portfolio strategy I just discussed.
Third, rebuilding investment in our brands behind superior consumer insights and marketing execution to expand household penetration while ensuring we allocate investments with the strongest return. I rejoined the company because I strongly believe in the prospects of this business. I'm fortunate to have a motivated organization and an active, engaged board that is supportive of the steps I'm taking. We collectively believe Simply Good Foods has a very bright future. With that, we're open to answering your questions. Operator?
Thank you. At this time, we'll be conducting a question-and-answer session. If you'd 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Matt Smith with Stifel. Please proceed with your question.
Hi, good morning, and thank you for taking my question. Joe, you outlined the strategic priorities, including addressing the cost structure. When you look at the business today, are there structural reasons why the aspirational financial structure is no longer the right benchmark? You called out previously looking for gross margins approaching 40%. There's been inflation that likely tamps that down a bit, but is the goal to drive gross margins higher to fund the marketing investment into that upper 30s range?
Yes, Matt, just in the prepared remarks I just made, I think part of our fundamental issue on our business is that all the household metrics on all of our brands are moving in the wrong direction. I believe that's based upon some of the strategic choices that we've made and the decline in investments that we've made, as a total company and within each of the brands. I think rebuilding the financial structure of the business is paramount to getting back to investing in our brands to improve our household metrics. Yes.
As a follow-up, when you think about the phasing of the cost structure opportunity, are you expecting to make progress into heading into fiscal 2027? Or does addressing the non-marketing SG&A opportunity? Is that pushed out further and required to fund the marketing investment you're seeking to restart that household penetration growth? Thank you.
Yeah. It's a great question. It would be my intent to make progress in 2027 on gross margins, and we've already talked about the improvements that we'll make in our fixed overhead structure. I think it'll have a lot to do with the size of inflation that's coming at us for 2027. Obviously, if it's more muted, we'll have an opportunity to make better progress. If it's significant, then obviously less progress. We'll have to balance that. Also, we hinted in our prepared comments, we've also increased the amount of price promotion in our business, which we believe has poor return and sends a poor message to consumers about our brand. Part of our ability to make improvements there is reducing our reliance on that price promotion, which frees up dollars for us, gets us rebalanced from a customer investment consumer investment back in the right direction.
Expect us to use all the levers. Exactly how it plays out in 2027 will have a lot to do with what's coming at us from an inflation standpoint. As you know, that environment just is pretty uncertain at this point. We'll be doing a lot of work between now and the end of this fiscal year to better understand that and build plans around it. Thanks for the question.
Appreciate it, Joe. Thank you. I'll pass it on.
Thank you. Our next question comes from the line of Megan Clapp with Morgan Stanley. Please proceed with your question.
Hi, good morning. Thanks so much. Maybe just a couple follow-ups there. Maybe getting a little bit more into the details. In the slides, you did reiterate that long-term goal of 4%-6% top line growth and EBITDA margins approaching 20%. This is even as you called out in your remarks, just a more competitive environment. Then you took an impairment charge in the quarter, again on Atkins and now one on OWYN. Just trying to kind of reconcile all of that and maybe, Joe, you can just spend a little bit more unpacking what specifically underpins your confidence in kind of getting back to that level of growth at that margin structure and how we should be thinking about the contribution from each brand within that framework going forward, understanding, as you mentioned, it'll take time.
That is a loaded question. Let me see if I can unpack it a little bit. Why am I confident in our ability to rebuild our financials and grow the business? As I said on the outset, first, we compete in a really good category. While center of store is struggling for growth, we're in a category that's growing, continues to grow, has a history of growth, and is branded. I feel like we're in a good category, and part of the challenge is the choices that we make going forward are important. I would say, first of all, good category. Second, I inherited just a terrific company. We have capability broadly and deeply in this organization, pretty much in every function. In my earliest days here, they are driven to work well together, to cross-functionally execute well, and they're committed to excellence.
For us, it then just comes down to our choices, the choices that we make, and how well we execute against those choices. I like the portfolio of brands that we have. I like Quest as our key brand and key growth driver. I think Atkins, while we've made some mistakes with it, is uniquely positioned to capture growth around the emerging use of GLP-1s. OWYN, I think the acquisition of OWYN was a smart one. I love the plant-based protein space. I love the brand. I love the runway. We just got to execute better. I'm relatively confident that we've got the right portfolio, we've got the right company, and we're in a good category. It's about the choices that we make, fewer, bigger ideas that we work on, get focused back on the fundamentals and start executing better. That's why I'm confident.
What I would say is we're confident in our ability to improve there. Exactly how that plays out, what growth I can get from each of the brands over time, that's still work that we've got to do, and we got to figure out over time. I'm confident we'll get to the financial profile we talked about, and we'll get back to that algorithm. It's just there's going to be some resetting that's going to take place just based upon some of the decisions we've made in the past. Once we get that behind us, we'll get this company back on track.
Okay. Thanks, Joe. As maybe a follow-up for Chris. The back half, I think 3Q implies kind of mid-teens EBITDA margins and then stepping up to closer to high teens in the fourth quarter. Two-part, can you just walk us through kind of the primary drivers of that step up, part one? And then secondly, is that 4Q level kind of a reasonable run rate to think about as we look ahead? Just again, trying to reconcile with some of the comments that the turnaround will take time. You've got some investments you clearly want to make. You also have expectations for cost savings and efficiency coming in 2027 and hopefully some cocoa recovery too. Just trying to understand the puts and takes. Thanks.
Yeah, thanks. First of all, as we've talked about on previous calls, we have a relatively back-loaded year on several aspects, right? One, we took a price increase in Q1. That's flowing through, obviously, in Q2. That's going to continue flowing through the rest of the year. We have a pretty aggressive productivity program, which again, we just started. That's been ramping all year. That gets into full swing by Q4. One of the elements that we did talk about in the prepared remarks is the slight reduction on total productivity driven by the lower volumes. That's really driven by the fact that the inventory flow through is just not going to come through as much as we expected, but still significantly driving savings year-over-year.
Finally, we have, as we talked about again on the prepared remarks, the fixed cost reduction program Joe just mentioned is already underway, and we will have the first quarter of savings on G&A coming through in Q4. That's also helping on the EBITDA level.
Okay.
Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.
Hey, thanks, Chris. I wanted to dive into some of those tailwinds a little bit more. I think we all thought there was a pretty substantial cocoa cost deflation benefit that was coming your way, maybe as soon as fourth quarter and then into fiscal 2027. Can we kind of isolate that? It must be even bigger than you thought. And then the second question would be, the G&A in fourth quarter. What percent of sales do you think is the right number for us to plug in here? It's been as low as 9%, I think, in the past, and now it's above 11%. Where's the right level for us?
Yeah. Thanks, Rob. Let me go through the first question on cocoa. Cocoa hasn't appreciably changed since the last call, so we're still expecting cocoa savings to start flowing through in Q4. One of our biggest commodity increases that we've seen since the last quarter is the cost of whey has gone up significantly. That's actually partially offsetting the cocoa savings. I'm not sure if I fully understood your question on gross margin, but cocoa's not really that much changed. Again, just a reminder, we do lock cocoa forward, so to some extent, the best savings on cocoa are going to come in 2027. Whey is something we aren't able to lock forward just because of the nature of that commodity. That commodity has been running up, frankly, all fiscal year, but especially in Q2.
That one's actually driving a little bit of adversity on cost. From a G&A perspective, we are going to have the first quarter of savings on G&A. There's obviously some puts and takes, but somewhere in the 10% range is probably a reasonable go forward assumption, and we'll give a lot more detail on that when we get into 2027. When you see the Q4 P&L, that'll be a pretty good baseline just as a starting point.
Yeah, Rob, just to follow up on that. Whey as a market right now, we use whey protein isolate, whey protein concentrate, and milk isolate. They're at historic highs right now, and there's a lot of pressure in that marketplace. As we move through the second half of this year and into fiscal 2027, we're expecting a fair amount of pressure on our protein structure, at least over the foreseeable future. Now, will that market stay at those historic highs? Really hard to know at this point. What does 2027 total inflation look like? We're still forming that picture. Clearly, cocoa relative year-on-year is going to be in a favorability, but there's some other things coming at us that are frankly headwinds. We'll be working on those as we figure out our plans for next year.
Okay. Joe, this kind of leads to the follow-up here is you talked about price increases being part of the strategy, but you also talked a lot about weaker velocities, losing some distribution with retail and then competition. Are the brands healthy enough for more price increases at this time? Where do you see the bigger opportunities to do it?
Yeah, I believe a lot of our performances are the choices that we've made, and the quality of the execution that we've delivered has a lot to do with our performance. I've always been, Rob, a believer that 10% of this is what happens to you and 90% of it is what you do about it. I think I'm going to focus on the 90%. I do believe our brands are valuable. I do believe that we will have to price and can price and have that ability. Our most recent price increases, elasticities have been kind of what we expected. If we continue to see inflation, you would expect us to use all the levers available to us to more than cover that inflation, and use marketing to invest back in the business. If you look at the fundamental metrics around brand health, that's households.
Are we growing households? Are we growing buy rate? All those metrics on our brands have been deteriorating as we've moved through the last 26 weeks, which is not a good place to be, which says we need to make better choices, we need to make better investments, and we need to execute better, and that's what we intend to do.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Hey, great. Thank you and good morning. Joe, I wanted to focus on the slowing base velocity within Quest Chips and Bars and maybe get a better sense for your root cause diagnosis on each, because my sense is there may be a little bit of nuance and differential between the two. Just kind of what you're seeing as the main driver or drivers and how that informs your plans to re-accelerate that?
Yeah, I think it first starts with at the highest level for the brand, right? Are we focused on the right things for Quest? 80% of the business is chips and bars. Is our marketing investment against those formats, I think that's the first place to be, and my assessment would be no, not. You're going to see a refocusing of our efforts against the core of the business. The second thing is, I think you then start looking at every element of the marketing mix. You look at the positioning of the brand overall. How we've been positioning the brand, is it best positioned to compete in the category? We've talked a little bit about bar competition. I don't think the positioning of our brand right now best positions us to compete.
We have a belief that our brand has the best nutritionals in the category. It was characterized by athlete-worthy nutrition. These are products that athletes would use. They're that good, and you don't have to compromise with taste. You will see us go back to that positioning, which I believe is harder hitting than where we've been before. Lastly, expect innovation. Fewer, bigger ideas in innovation on the core, right? I think we've been focused more on distribution growth, quantity of ideas over quality of ideas, and we're going to get back to fewer, better consumer insight, execute well against it, and deliver better household metrics as part of that. Focus there is it starts with the fundamentals. Where is our business? It's in chips and bars. Where are we competitively advantaged? Are we talking about that?
Is our innovation and execution good enough, on target enough, competitive enough to compete? You should expect that from us, from Quest. This is a brand, if you just step back, this is really the only brand in the category other than Atkins that's multi-formed. Right? We're in a salty snack business and we're in a bar business. Those brands don't exist. The reason that it exists for Quest is because the brand promise is bigger than a particular form. Right? If you take a look at most bars, they're just bars. If you take a look at shakes, they're just shakes. Right? Quest is a promise that transcends form, which means we have something if we just start leveraging it stronger going forward. I intend to do that.
Okay, makes sense. Maybe as a follow-up to Rob's question on pricing. You had also alluded earlier to maybe an overreliance on promotional intensity. I guess, to what extent do you see sort of the first wave of a pricing opportunity to be actual sort of justified price taking versus just a toggle on normalized promotional intensity?
Look, I think we've been absorbing pricing net of cost in our business. We've been absorbing costs now for a while without covering it in pricing. A branded business can't stay in that position. We have justification to take price in front of us right now. The question for me is, what's going to come at us next year? If I think between reducing price promotion, increasing pricing, how much of that can I do in any one year just based upon the current situation? Expect us to use every lever here, right? We can't sit in the mid-30s in gross margin and believe we've got a branded business that we can differentiate and drive household metrics, positive household metrics on. Expect us to be more aggressive in that area.
Exactly how the plans play out will have a lot to do with the external environment and what's going to happen from a cost inflation standpoint. Look, we also live in a time now, last 2.5, three years, that there's constant inflation, right? Pricing has to be a core capability of your organization, your ability to get pricing, hold pricing, and then manage elasticities. This organization has that ability. It had that ability when I was here last time. It does have that ability. We just have to leverage that muscle.
Okay, very good. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Jim Salera with Stephens Inc. Please proceed with your question.
Hi, Joe and Chris, good morning. Thanks for taking our question.
Morning.
Joe, I wanted to start with maybe a little bit of a high-level takeaway since you're coming back to the company but have a lot of experience with these brands. I think the view previously from investors is that Quest and OWYN would bolster results while you got Atkins back into fighting shape. Based on some of the commentary today, it seems like there's more work to be done really across the whole portfolio. How do you think about allocating resources across the different brands, and do you have the bandwidth to go deep with multiple brands at the same time? Or should we expect fix Quest, then fix OWYN, then kind of like a rolling effort?
Yeah, that's a good question. It's one of those questions you don't know until you get into it and you start actually doing it. What I would tell you is we've got a reset happening on OWYN. We talked in our prepared remarks about executional issues over the last, call it 6+ months. There's a reset coming on OWYN. But as I look at OWYN, it's well-positioned. I think plant-based protein is a really strong consumer-centric idea. I think once we get through their distribution reset on OWYN, we got to rebuild some margins in that business and we need to invest and grow. I feel pretty comfortable that we can do that. It's our smallest brand, so it's probably not going to contribute the same to what we can get out of Quest.
Quest is a business that I think just requires focus. I think we spread our attention too broadly. I think in Quest, you get back into, we've always believed about Quest, you got to be growing bars. That has to be the core of the business. You have to grow bars. Once you grow bars, everything else you do is incremental. We got to get back. We lost a little of that. We got to get back to that mindset, and I'm very confident. Look, we have the best nutritional bars in the category. We just have to be passionate about talking about that.
Mm-hmm.
I think we can get Quest on the right track just based on the choices that we're making. Atkins, I probably understand that brand better than anyone. We've seen eroding gross margin, which has led to less marketing investment, and this is a business that has been all about marketing investment to grow the size of the brand franchise, more people in it. As gross margins eroded, we cut marketing support and shrunk the household size, which has led to lower velocities on the shelf, which we're now having to sort through. I do believe this is a brand that's ideally positioned to address GLP-1 users. We'll come back and talk to you about that, but we got to prove our way there. We got to get to a core assortment. There's still a decent size number of consumers buying Atkins.
We said in the prepared remarks, major retailers believe this is an important brand. Once we get it resized at retail, we're then going to go start testing our way to what's the insight around GLP-1s. Is there a difference in the product characteristics based upon what we see? Are there different products that we might launch in that area? Can we prove our way to growing household penetration again? I tend to be optimistic there, but I'm also show me. We're going to go figure that out. The simplest metric is I'm a big believer in return on investment. I'm a big believer in measuring it. The business, the brand, the ideas that give us the best return is where I'm going to put the money first, and then we'll go from there.
As a follow-up to some of your commentary on the marketing component in particular, in the prepared remarks, you guys talked about ideally marketing around 10% of sales. But since it's stepped below that and there's a lot of noise in the space with other competitors and upstart brands, should we think about marketing spend in the near term, however you want to define that, six months, 18 months, whatever, as stepping up above that 10% of sales level, given the sales declines and the need to maybe boost the relevancy? Or should we think of that 10% as a ceiling on the spend?
I think you should be thinking about 10% at this point as the ceiling until we prove that there's ROI justifying more. Then again, I believe that it's more about our choices than it is about competition. I would tell you in this category, if I've learned anything, there is a large percentage of variety-seeking protein eaters, and these brands come and go. I've seen probably three cycles of them. I'm worried less about the individual brands, more about the choices that we make in those environments and making sure we're supporting our brands in the right way. I think it's, again, more about how we think about our brands in that context than it is what the competition's doing.
Great. I appreciate the thoughts. I'll hop back in the queue.
Yeah. Have a good day.
Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Great. Good morning, everybody. Can we start by just asking about the guidance for the second half and what it implies for sales growth by brand? If we assume that Atkins is still down mid-20s, then the guidance you provided suggests that both Quest and OWYN could be down mid- to high-single digits. Is that the way we should think about this? And if so, what's driving that? Because both brands had retail takeaways that were comfortably double-digit last quarter. I know that you've got the distribution losses at OWYN. Maybe that's a big piece of it. Is it extra competition from Pepsi's Doritos Protein Chips launch that's maybe causing some more pressure on the Quest side? Just trying to understand what's going on with the sales outlook and what that implies for fiscal 2027 and beyond.
Thanks for the question, Alexia. As we said in the prepared remarks, we've taken a really strong look at the Q2 consumption, the drivers, the details by brand, and we've reflected those trends into our second half outlook. The one piece I would add on top of that, which you mentioned, is we are expecting some OWYN distribution losses, primarily some that we've recently gained where the velocities didn't meet the hurdle rates. Those are the main drivers within the second half. It's really updating based on Q2 results and the trends that we're expecting on distribution for OWYN.
Thank you. Are you able to quantify how much brand investment you're adding into the second half investment versus what the previous management team was initially expecting?
What we said again on the prepared remarks is that we were holding the full year to the original planned amount. That on a full year basis, it's the same as we'd originally planned, even despite the sales declines that we've seen.
Thank you. I'll pass it on.
Thanks, Alexia.
Thank you. Our next question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.
Good morning. Thanks for the question. Maybe first off, for Joe, just coming back to Atkins and your reset of the fundamentals. You touched on the alignment with GLP-1, and I'm curious, based on what you see now, internally looking at external competition, how would you compare and contrast making this alignment with GLP-1 with the prior repositioning of the brand from weight management to low carb, low sugar 15 years ago?
Well, it's a good question, John. Look, it's clear the category has changed. In fact, food has changed from these GLP-1 medications, right? So how you think about your brands, how you think about position, how you think about innovation has to change. I think, as we said in our prepared remarks, there are people that are on these medications, in particular, the people that are on them for weight management. You have to be very thoughtful about the products that you offer folks who are on these medications, because frankly, they don't eat that many calories, call it 1,100-1,200 calories a day. So nutrient-dense becomes an important quality for the things that people need to eat, and that's well-positioned for our portfolio. So I think ideally, relative to the rest of food and beverage, our category is well-positioned for GLP-1s.
I think the work ahead is, in particular in a brand like Atkins, which is all about weight management, the presence of GLP-1s are a positive because people are thinking about weight management. One of the behaviors that we're seeing on the GLP-1s is the cycling on and off the medications. There's points where people are thinking about going on the medication, coming off the medication, and then going back on, and each one of those is a moment where they're open to our message. Our message has to be relevant at that point. We're still doing some work around it. We did some primary research around the medications. On our last call, we talked a little bit about some of the claims that we can actually make on the clinical that we've done.
We're still doing a little bit of work as it pertains to Atkins as that work progresses. We'll come back to you and talk to you a little bit more about that. The work right now on Atkins is get the shelf reset appropriate for the size of the business today, rebuild gross margins, and investigate positionings relative to the GLP-1s. By the time we're ready to test some ideas, we'll be able to talk to you about some of the insights.
Thanks, Joe.
I think it's an exciting time, quite frankly. It comes down to ideas and positioning, and I think that's an area of strength of this organization. I can't wait to talk about it in the future.
Great. Thanks for that. Chris, just going back to the staffing reductions in SG&A, just to get a better sense, was there excessive hiring to support revenue that didn't materialize and that now leads to rationalization? Was hiring reasonable, but now you have new technology to let you run leaner versus history? Or is this more of a function of having the same tools but reducing silos and leveraging folks across all three brands?
Yeah, let me address that. I think that as I've come back to the organization, the company built some interesting capabilities across all the functions. I think so there's not one area, quite frankly, where I say we made a mistake. I think the pacing of the investment was unfortunate and poorly timed. I would say we need to get back to and getting to the structure that we want to be at right now, we made some choices on where we had to be excellent from a functional standpoint.
We prioritize those choices and deprioritize other areas to get to the right size organization for the size of our revenue today. I would say going forward, we're in an environment of no overhead growth until we restore revenue and growth back in the business. Once we get to that position, we'll talk about investment in organization and capability going forward. Did I answer your question? That makes sense?
Yeah. Perfect.
Okay.
Thank you, Joe.
Okay. Thanks.
Thank you. Our final question this morning comes from the line of Jon Andersen with William Blair. Please proceed with your question.
Hey, good morning. Thanks for the question. Two quick ones. It sounds like you've talked about these baseline resets for Atkins and now OWYN. Sounds like there may be a little bit of one with Quest, even if you're refocusing on the core. I don't know what that means for Bake Shop, some of the other items. Could you give us a sense for how long you think it takes for the reset to play out, this core assortment reset at retail for each of these brands? We get a little bit of a sense for how that might affect the consumption for them going forward. Then a second question, maybe more for Chris, you've been buying back stock, and I'm just kind of wondering how you're thinking about capital allocation going forward from here. Thank you.
Yeah. Well, great question. I've been asking that timing question to myself, and my crystal ball's kind of cloudy. I would tell you this, obviously this fiscal year is going to be a reset year, right? We're going to continue walking back the distribution on Atkins and we're going to lose some distribution on OWYN as we go forward. As we get closer to 2027, I'll be able to give you a better view of how that plays out. Right now, I don't have a strong enough sense of how long the reset's going to take, because those are a series of individual retailer decisions that we still have to work through with our sales organization. Obviously, I want that to happen as quick as it can happen, but they tend to have their own pacing and their own timing.
The good news is we're moving forward on all the strategies that I talked about, choices, execution, focus, effective now. Right? We're already on the path to turning their business around and moving in the right direction as a company. The timing, I think, we'll have a better sense as we talk to you about fiscal 2027, which I believe will be in which call? October?
Yes.
October's call. I'll have a better sense in October of kind of what the pacing looks like for 2027.
Then in terms of the buyback question, as you know, we use a structured framework to assess uses of excess cash. We have leverage just over [a ton] at the moment, so we still have plenty of capacity. From an excess cash standpoint, once we've used cash for operational needs, we are going to look at excess cash and uses of that. We continue to see buybacks as a good option for uses of excess cash. I would just say, the level of cash, if you look at our balance sheet at the end of Q2, our level of cash has obviously come down significantly versus where it was at the end of Q1, given the refinancing we did last year. Think about the magnitude that we probably do, but buying back stock is still interesting at these prices, this valuation.
Thank you.
Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Scalzo for any final comments.
Yeah, I just want to say thank you for your participation today, for your questions, and I look forward to talking to you all real soon. Have a good day.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.