Greetings, and welcome to The Simply Good Foods Company Fiscal Third Quarter 2021 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 would now like to turn this conference over to your host, Mr. Mark Pogharian, Vice President of Investor Relations. Thank you, sir. You may begin.
Thank you, operator. Good morning. I am pleased to welcome you to The Simply Good Foods Company earnings call for the third quarter ended May 29, 2021. Joe Scalzo, President and Chief Executive Officer, and Todd Cunfer, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7:00 A.M. Eastern. A copy of the release and accompanying presentation are available under the investor section of the company's website at www.thesimplygoodfoodscompany.com. This call is being webcast and the archive of today's remarks will also be available. 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. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Additionally, adjusted results exclude the mark-to-market effect of the treatment of private warrants per the SEC's April 12th, 2021 statement related to accounting and reporting considerations for warrants by special purpose acquisition companies. We have included a detailed reconciliation from GAAP to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the underlying performance of the business.
The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measure prepared in accordance with GAAP. With that out of the way, I'll now turn it over to Joe Scalzo, President and Chief Executive Officer.
Thank you, Mark. Good morning, and thank you for joining us. Today, I'll recap Simply Good Foods' third quarter results and provide you with some details on the performance of our brands. I'll turn the call over to Todd, who will discuss financial results in a bit more detail, and we'll wrap up with a discussion of a revised outlook before opening it up to your questions. We had a strong third quarter with net sales up 32% as consumer mobility improved faster than our expectations. In addition to mobility improvements, shopper traffic within brick-and-mortar retailers improved, especially in the large mass channel, an important class of trade for our business and our category. Increasing on-the-go usage occasions resulted in nutrition bar consumption greater than our estimates. Adjusted EBITDA in the third quarter increased 55.6% due to the strong sales growth, G&A cost controls, and Quest acquisition synergies.
This more than offset higher marketing investments and incentive compensation. An improving bar performance as well as favorable consumer mix in brick-and-mortar channel resulted in solid gross margin expansion. Total Simply Good Foods Q3 retail takeaway increased 29.1% in the US measured channels of IRI, MULO, and C stores and outpaced the category. Our Atkins and Quest brand performance was solid across all forms, particularly bars due to increasing consumer mobility. Throughout the pandemic and now into the recovery, we've executed well and remain committed to do the right things over the long term for our business. In June, we notified customers of a price increase effective in September as we'll begin to experience higher raw material and distribution costs in this fourth quarter.
As we look to fiscal 2022, we believe pricing as well as productivity will enable us to maintain gross margins and continue to invest in initiatives to drive growth. In the first half of fiscal 2021, the nutritional snacking category declined low single digits due to COVID-19 driven movement restrictions. In the third quarter, the nutritional snacking category increased about 26% as the category lapped weaker year ago performance. Importantly, Simply Good Foods gains market share across all time frames as did each of our brands in their respective subsegments of weight management and active nutrition. We were also pleased with the performance in the mass channel, which rebounded during the quarter, driven by improved shopper traffic. E-commerce growth continued to be solid and was in line with total measured channel performance. The active nutrition segment of the category, which includes Quest, increased over 30% in the quarter.
As it has done all year, Quest outperformed the segment. Note that the IRI, MULO, and C Store universe represents about 70% of Quest total retail sales. The weight management segment, which includes Atkins, increased low teens in the third quarter on a percentage basis versus prior year. As been the case all year, Atkins continued to outpace the weight management segment. Atkins Q3 US retail takeaway measured channels increased 15.6%. Increasing mobility, improving shopper trips, particularly in the important large mass channel, and continued buyer growth resulted in solid retail takeaway across all forms. In Q3, bars and shakes increased about 5% and 20% respectively and improved sequentially versus the first half of the year. Atkins confection momentum continued and increased about 27% in the quarter. We're pleased with the performance of the confection products as well as the innovation we've launched over the last year.
Improving shopper traffic at the mass channel was strong and combined with increased levels of distribution and display resulted in Q3 POS growth of about 25% in this channel. We continue to be pleased by buyer flows on Atkins and growing consumer interest in weight management as the U.S. emerges from COVID-19 mobility restrictions. The strong growth in buyers has fueled consumption improvements for the brand during the fiscal year. Atkins buy rate remains the single biggest growth opportunity for the brand as it is currently below historic levels. You may recall Atkins bar consumption is highly correlated to return to work. Based on that, we believe as consumer mobility continues to improve, buy rate of Atkins bars will follow. We anticipate continued improvement in consumer mobility, although as we enter Q4, the POS growth rate is affected by more difficult year ago comparisons.
As such, we expect overall Q4 retail sales to be similar to Q3. We expect continued improvement in the mass channel and are pleased with the Atkins e-commerce business, although the growth rate is expected to moderate strong year-ago comparisons. In Q4, we have solid marketing, improved distribution, and new innovation that should enable us to continue to build on our year-to-date buyer trends. Now let me turn to Quest, where Q3 retail takeaway increased 56.2% in the measured IRI, MULO, and C store universe. Growth was driven by improving shopper traffic in the mass channel, an increase in consumer mobility, and greater on-the-go consumption as evidenced by the strong rebound of Quest bars. Quest Q3 bars retail takeaway increased 38%, more than double the segment growth rate. Recall, Quest bars are about 60% of total Quest retail sales.
The snackier portion of Quest products continued to do well and increased nearly 150% in Q3, driven by chips and the launch of new confection items earlier in the year. In addition to increased foot traffic in the mass channel, we are pleased with the performance in C stores. Combined, the mass and C store channels represent about 30% of Quest retail sales, and in Q3, growth in these two channels were over 60%. Quest e-commerce business, about 20% of total Quest US retail sales, continues to do well with retail takeaway up 43%. Our business at Amazon remains robust and growth was strong against all major forms. The specialty channel, while small as a total percentage of Quest sales, returned to growth in the quarter. In Q4, we anticipate trends by form will continue and will result in total Quest retail dollar sales similar to the third quarter.
We expect that the demand for Quest chips and confection items will remain strong and that supply will be pressured. As such, we have taken actions to ensure there are no disruptions at retail, and we'll be dialing back trade promotions and programming on these items. We'll continue to invest in marketing and innovation that drives greater levels of consumption and new consumers to our brands. In summary, we're pleased with our third quarter results that were better than our expectations due to improving mobility and increasing shopper traffic in the mass channel. In Q4, we anticipate retail dollar sales to be similar to Q3, Raw material and distribution inflation is expected to be a headwind in Q4 offset by continued improved product and channel mix. Price increase we announced a few weeks ago, as well as productivity, should offset fiscal 2022 supply chain inflation.
We believe pricing as well as productivity will enable us to maintain gross margins and continue to invest in initiatives that drive growth. We're executing well against our plan and delivering on our financial objectives with flexibility to invest in the business as a path to increasing shareholder value. I'll turn the call over to Todd to provide you with some greater financial details.
Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods third quarter net sales increased 32% to $284 million. The core North American business contributed 30.7% to total company growth, driven by strong Atkins and Quest volume across major forms and channels. Net price realization in Q3 was negligible. Q3 shipments benefited by about 2% from delays related to the winter storm disruption at the end of last quarter. Our core international business was a 2.3% benefit to sales growth, driven by strong gains in Australia for both Atkins and Quest. The SimplyProtein brand divestiture and the European business exit were a combined 0.9% headwind. Gross profit was $121 million, an increase of 36.5% versus last year.
Gross margin of 42.6%, increased 140 basis points versus the year ago period, driven by positive product form and favorable customer mix in the brick-and-mortar channel. In Q4, we anticipate supply chain costs to be higher. Specifically, raw materials inflation will be a headwind, as well as freight and warehouse expenses as we begin transitioning to our new distribution center. As Joe mentioned, given the inflationary pressure we're seeing in both Q4 and fiscal 2022, we recently announced a price increase. The pricing action is effective in September, and we expect it will enable us to maintain gross margins and continue to invest in initiatives that drive growth. Adjusted EBITDA, which excludes Quest integration costs, restructuring expenses, and stock-based compensation, among some other things, increased 55.6% to $67.5 million, primarily due to greater than anticipated sales, cost control measures, and Quest acquisition synergies. SG&A expenses were greater than our estimate.
Specifically, selling and marketing expense increased $6.3 million, driven by incremental brand-building investments on both Atkins and Quest. G&A expenses increased $1.5 million as higher incentive compensation was partially offset by cost control measures and Quest acquisition synergies. For the full year, the company continues to anticipate that marketing expense related to its core businesses will increase at least in line with organic sales growth. Moving to other items in the P&L, interest expense declined $0.3 million to $8 million due to the pay down of the term loan. Although, the additional debt pay down in the quarter resulted in greater non-cash amortization expense of deferred financing fees. Our statutory tax rate in the third quarter was 27.0% versus 26.9% last year. Net income in Q3 was $5.9 million versus $48.1 million in the year ago period.
The decline reflects a non-cash charge of $35.8 million related to the remeasurement of our private warrant liability. Year-to-date results are as follows. Net sales increased 25.5% to $745.8 million, driven by the acceleration of the business in the third quarter and the full 39-week impact of the Quest acquisition. Gross profit was $305.3 million, an increase of 29.2%. Gross profit in the prior year was affected by a non-cash $7.5 million inventory purchase accounting step-up adjustment related to the Quest acquisition. Recall, the non-cash inventory purchase accounting step-up impacted year-to-date 2020 gross margin by 130 basis points. Excluding this amount, gross profit was $243.6 million last year and gross margin was 41%. Year-to-date fiscal 2021 gross margin of 40.9% is essentially in line with the year ago period.
As I stated earlier, we expect supply chain inflation beginning in Q4 and anticipate gross margin for the quarter to be about the same as prior year. Adjusted EBITDA increased 35.9% to $158.8 million, primarily due to higher Q3 gross profit and the inclusion of 39 weeks of Quest results in the current year. Excluding Quest integration costs, restructuring expenses, and stock-based compensation, SG&A expenses increased $19.8 million. Specifically, selling and marketing expenses increased 18.4% to $82.1 million. The increase was driven by higher brand-building initiatives and the full year impact of Quest. G&A expenses increased about 12% or $7 million due to higher incentive compensation and the inclusion of Quest. Moving to other items in the P&L, the net impact of interest income and interest expense was an increase of $2 million due to the full nine months of acquisition-related debt.
Our year-to-date statutory income tax rate was about 27%. Net income was $22.6 million versus $104.9 million in the year ago period. The decline of $82.7 million is primarily due to the non-cash charge related to the remeasurement of the private warrant liability. Turning to EPS, third quarter reported EPS was $0.06 per share diluted compared with EPS of $0.17 per share diluted for the comparable period of 2020. In fiscal Q3 2021, we recorded a non-operating non-cash charge of $35.8 million due to the change in the fair value of the outstanding private warrants. Depreciation and amortization expense and stock-based compensation was $6.7 million, about the same as the year ago period. Costs associated with Quest integration and restructuring were $0.4 million, $5 million lower versus last year. We had a legal settlement gain of $5 million.
Adjusted diluted EPS, which excludes the items just mentioned, was $0.43, an increase of $0.17 versus the year-ago period. Note that we calculate adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense, and income taxes. Year-to-date reported EPS was $0.23, while year-to-date adjusted diluted EPS was $0.97 versus $0.71 in the year-ago period. Note that the calculation of adjusted diluted EPS in Q3 and year-to-date period assumes fully diluted shares outstanding of 101.9 million and 101.1 million shares respectively, versus 97.6 million and 97.2 million under GAAP. The difference versus GAAP is due to the exclusion of the private warrants in fully diluted shares outstanding under GAAP due to the private warrants being classified as a liability on our balance sheet. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.
Moving to the balance sheet and cash flow. In May 2021, the company paid down $50 million of its term loan, and at the end of the third quarter, the outstanding balance was $506.5 million. In the third quarter, the company generated about $52 million of cash, resulting in year-to-date cash flow from operations of $91.8 million. As of the end of Q3, the company had cash of $90.2 million, and the trailing 12-month net debt to adjusted EBITDA ratio was 2.1x . Capital expenditures for the year-to-date period were $3.2 million. We still expect $5 million-$6 million of CapEx in fiscal 2021, driven primarily by equipment for our new warehouse. We anticipate interest expense to be about $31 million, higher than our previous forecast of about $30 million.
The increase is the result of greater non-cash amortization expense of deferred financing fees due to incremental paydown of the term loan. I would like to now turn the call back to Joe for closing remarks.
Thanks, Todd. As consumer mobility increased in the third quarter, our business accelerated. As we emerge from the challenges of COVID-19, our business is stronger and our organization is more capable. As such, we remain confident in both our short and long-term growth prospects. Over the remainder of the year, assuming there are no significant COVID-19 related disruptions in the United States, the company anticipates full-year fiscal 2021 net sales of about $995 million to $1.05 billion and adjusted EBITDA of $200 million to $205 million. As previously stated, the divestiture of SimplyProtein and the European business exit is about a combined 1.5 points headwind to a full-year fiscal 2021 net sales growth. The company's previous outlook for full-year fiscal 2021 net sales and adjusted EBITDA was $930 million- $940 million and $180 million- $185 million respectively.
Apart from the inventory purchase accounting step-up in the year ago period, we expect full-year fiscal 2021 gross margins to be about the same as fiscal 2020. You may recall the company's previous outlook indicated full-year gross margins would be slightly lower compared to the previous fiscal year. As previously discussed, favorable product and channel mix in Q3 exceeded our expectations and resulted in solid gross margin expansion in the quarter. In Q4, we'll begin to see higher raw material and distribution costs and anticipate gross margins will be down versus Q3 and about the same as year ago period as inflation is offset by continued improved product mix. Due to solid cost control and acquisition synergies, the company continues to anticipate adjusted EBITDA margin expansion.
Additionally, the company anticipates 2021 adjusted diluted EPS to be in the range of $1.20-$1.25 versus $0.91 in the prior year. We have an advantage, asset-light, variable business model that enables strong cash flow from operations that provides us with the financial flexibility to invest in organic growth opportunities and participate in M&A. We continue to execute against our strategies that position us to deliver on our financial objectives with the ability to invest in the business as a path to increasing shareholder value over the long term. We appreciate everyone's interest in our company, and we are now available to take your questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Jason English with Goldman Sachs. You may proceed with your question.
Hey, good morning, folks. Thanks for slotting me in. Congrats on a strong quarter.
Thanks, Jason.
You're welcome. I want to make sure that I understood your comments on the retail sales expectations properly. I think you said quarter-on-quarter flat as we go into the fourth quarter, which on my quick back of the envelope math suggests that you may be expecting year-on-year growth to slow to something into the mid to high teens. Do I have it roughly right?
Yes.
That's still pretty darn robust relative to the comps, because I think it actually implies that off of the 2019 level, you're actually going to expect a degree of acceleration from what we saw last quarter. As I look at the model and the implied guidance for 4Q, you're suggesting a bit of a decel on two-year stack. I was hoping you could help me understand that, maybe unpack that. Was there a pull forward into this quarter? Clearly, there was a bit of a delta between retail sales. Anything else in the comparison from last year that we should make note of?
Yeah. Constantly Q3, as we stated, Jason, was held by the pull-in from Q2, the winter storms that inflated the Q3 numbers a little bit. The European shutdown is now fully in place, that's going to affect Q4 more, along with the SimplyProtein divestiture. That's been tracking about a one point headwind. That's now going to be a three point headwind in the quarter. From a shipment perspective, we just typically pull inventory out of the system late in the year. We're anticipating that's going to happen again.
Got it. I didn't appreciate the elevated SimplyProtein comp in the fourth quarter. That's helpful. Switching gears real quick, Joe, you kind of alluded to this, I think, with the consumer and the re-engagement with weight management. We hear from Weight Watchers an expectation and anticipation of an off-cycle resolution season, if you will, that they're anticipating to happen throughout the summer and particularly late fall. Are you beginning to see that take shape? Do you also expect to see something like that as we enter the fall and maybe a back to school, back to work period?
First, I would say we're really pleased with the growth of the Atkins business. The thing that's frankly surprised us throughout the fiscal year is that despite movement restrictions and people not being out and about, our buyer performance has been outstanding. We've seen strong buyer growth throughout the fiscal year, even in the midst of COVID-19. As we move through the summer and into the fall, I would tend to agree with Weight Watchers. There's going to be a catalyst as people get out and about more fully that I think will drive renewed interest in weight management. We're kind of gearing up. Todd mentioned that we've made incremental marketing investments. We'll continue to do that through the fourth quarter, and we're kind of gearing up for kids back to school, folks back to work as kind of that catalytic event.
You should expect us to be ready as we kind of move through August, September, October, expecting that and investing appropriately for it.
Yeah, makes sense. Thanks a lot, guys. I'll pass it on.
Our next question comes from the line of Chris Growe with Stifel. You may proceed with your question.
Hi, good morning. My congratulations for a nice quarter there and outlook. I had two questions. The first one, as you see this consumer coming back to the Atkins brand in particular in the mass channel, is it just the raw number of incremental users that are using the product that are coming back? Or are you seeing more heavy users engaging with the product, if I can say it that way? I'm just curious what you're seeing in particular in Atkins as sort of the consumer comes back to the mass channel.
Too early to call on a quarterly basis. We continue to see strong buyer participation. Both new buyers and retained buyers are strong on the brand. In the case of mass, foot traffic really improved. Now they're up against softer comps, but you're starting to see mass pick market share back up in both categories, in fact. Given our development in particular on Atkins and mass, that's helped our business. So far it's been a number of buyer dynamics. Buy rate continues to be kind of below historic levels just because the number of occasions aren't what they normally are. It'll be interesting, frankly, to see how the mass dynamic plays out in the fourth quarter and first quarter and how that might affect buy rate going forward.
Okay. Then I just had a question also on bars, if I heard right, I think you said maybe the bar category is up 15%. I think you said Atkins is up five and it sounds like Quest gained share in bars. Just want to make sure I was correct on those numbers, number one, and number two, kind of what's behind those? What's driving Quest growth to gain share and Atkins with some strong new product innovation? What's causing it to lag that category, if that number is correct?
Yeah, Atkins is more dependent upon being back at work and being in transit than even we expected. If you look at Quest's got a few dynamics that are helping it. One, it was down more this time last year, so it's comparables a little bit easier. C stores rebounded, which is an important component to its business, and we're even seeing specialty start to come back. Lastly, our sales team has done a really nice job of building distribution in key drug mass on bars. That kind of triple threat's really helped accelerate Quest as we've kind of moved through the third quarter.
Okay, that's great. Thanks so much for your time.
Our next question comes from the line of Faiza Alwy with Deutsche Bank. You may proceed with your question.
Yes. Hi, good morning. Thank you, and congratulations from me also. Sorry if I missed this in the prepared remarks, but I was hoping you could give us a breakdown of Atkins versus Quest sales in the quarter.
You'll see it in the Q. From a pure takeaway perspective, Atkins was up about 15%, Quest up about 56%. Do you have actually the shipments, Mark, handy on us? I'll get it to you. I don't have it in front of me right now. Let me get it.
Okay.
I apologize. I don't have it right in front of me. I'll get that to you.
Okay. That's fine. I guess my second question was just, as we look ahead to 2022, acknowledging that there's significant uncertainty, I'm curious sort of how you're thinking about the fall resets. You did mention that there is this anticipation that consumers will get back into the weight management category. I guess I'm wondering, are retailers thinking about it similarly? Do you expect the category to gain incremental shelf space and maybe how are retailers thinking about big brands versus smaller new brands sort of in this new normal?
Let me try to unpack that. There's a lot of questions in there. First, I would say that we like our product pipeline. We have a very talented R&D organization, terrific marketers. The pipeline that we had this spring and in the fall we think is pretty compelling. I suspect, we don't like to talk forward too much. I suspect we'll do really well in the resets. In general, COVID has taught retailers that big brands are important, that if you just think about the dynamic that was going on in COVID, you were fighting for shopper traffic. Big brands matter. We're seeing that in strategy with retailers. They are re-engaging with bigger brands. They understand they're important to the aisle and to the foot traffic, and obviously, we've got two of the bigger brands in the category.
We're in an [audio distortion] retailers right now, just from an importance standpoint. I would also add, we really focus on consumers, and we really focus on building penetration of our brands. That's a language that's really interesting to retailers because they then think about that as shopper conversion from the rest of the store. I think we're in a very good spot as we move through fiscal 2022, just from a brand, category, aisle standpoint. Your question around do I expect weight management to pick up space, those things are more stable than you would think. The allocation between adult nutrition, active nutrition, and weight management, there is not a lot of variability kind of reset to reset. You tend to be in a fixed set for more times than not, than they're thinking about the entire aisle and moving between the three sub-segments.
That's more rare. I think overall, I think we're in a really good position as we move through the summer and into the fall for the resets.
Terrific. Yeah.
Finally, Atkins was up low 20s% in the quarter, Quest in the 40s%, so strong performance from both brands.
Great. Thank you so much.
Welcome.
Our next question comes from the line of Wendy Nicholson with Citi. You may proceed with your question.
Thanks. Good morning. First question in terms of pricing, just order of magnitude, is there anything you can tell us in terms of how much pricing you'll take? Is it going to be on both Atkins and Quest? Is there any risk, given just how fragmented, particularly the bars category is, do you think there's any risk of sort of elasticity when those prices go into the marketplace?
First, I would say we calculate as we think about pricing and inflation, we calculate elasticity into our model. I'd be confident that we understand that dynamic pretty well. Pricing, we're executing a mid to upper single-digit price increase. It is on both brands. It's different as a percentage because the inflation hits the brands a little bit differently. From an execution standpoint, we're in the early stages with conversations with customers. Obviously, this is not a conversation that's in isolation, right? There are manufacturers across the board taking pricing as we speak, and with staring at inflation, significant changes inflation as we move into fiscal 2022. We're pretty confident that we'll work through this with customers and execute against the price increase as we move into September.
Terrific. Just sort of more broadly, on the Atkins sort of momentum, do you have a sense sort of for the demographics of the new customers that you're bringing into the brand? I know you've said it's an issue of mobility, but just in terms of demographics specifically on Atkins, I wonder where you're taking those customers from.
Yeah. Over the last year, it's been our target. I'll talk less demographic, more psychographic, right? The change that we made in Atkins, it's been four years now, was moving from fast weight loss on a program consumers, which were, if I remember right, about 8 million of those in the United States, to low carb lifestyle. There were about 33 million of those. If you just look at the eight and the 33, they tended to get younger, tended to get a little bit more active because you're moving away from fast weight loss.
You're moving directionally towards more lifestyle-oriented, directionally more healthier people, directionally with people that it's less about, "I got to lose weight right now," more about, "I want to live right, and I'm looking for solutions to do that." Those tend to be a little bit younger, a little bit more active than the original target. I haven't seen a breakout this last year on how our improvements in consumers look demographically, but we can take a look at that and get back to you separately.
Terrific. That's great. Thank you so much. Very helpful.
You're welcome. Have a good day.
Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Great. Thanks so much. Joe, just a follow-up, I guess, in the last comment, just in terms of the demographic makeup of that consumer, as you chip away at the original strategy of Simply. Atkins, obviously, a very large brand working well with retailers. mass traffic's coming up. Atkins does very well. It's very large in mass. As you think about those shelf resets, maybe it's not this fall, maybe it's next fall. Are there opportunities you think such that you might be even able to replace some of the shelf you have with Atkins, with some of the products from Quest, if Quest potentially seems to maybe be a broader base brand accepted by different types of demographics? Does that make sense?
Yeah. The question does make sense. They tend not to be in the same section of the aisle, in some cases, not even in the same aisle. No, we won't be swapping. For us, it's not a decision of what space do we allocate to Atkins versus Quest. It's how do we gain more space in each of the segments and how do we allocate it? As I think about Atkins and growth, I think about how do we develop our product portfolio beyond bars and shakes. What we've learned during COVID-19 is those consumption occasions, especially on bars, are highly dependent on the go and at work. We've also learned from our Quest business that the snackier portions of that portfolio and confections on Atkins are all the time consumption products, not dependent upon that.
You should expect us, and it's the way we're thinking, to develop our other forms to even a bigger portion of our portfolio. It insulates us to some degree on the back to work dynamic. Not surprising, confections on Atkins growing double digits. Our confection business in the earliest stages on Quest growing strong. Our chip business, just crazy strong. Expect us to continue to do that. It also leverages what we think is our competitive advantage, which is the best R&D organization in the category.
All right. Super. That makes sense. Then just coming back to Jason's original question, just on the top line as we go into Q4, and then while I respect you probably don't want to give guide for fiscal 2022, there's some commentary on price and gross margin. Take a shot on the sales side. If I look at the data set over the past four months, just even week by week, total dollar sales have been pretty consistent, right? It's been very strong, very impressive. If, just like you said on the Atkins piece, more correlated to work mobility, we're still in the summer. Some people are going back to work more, but not everybody, not yet. There's not as much critical mass and probably that improves into the fall. At the same time, as Jason pointed to, there could be an off-cycle resolution period.
If I'm just thinking about the retail data sets, it seems as if there is still potential upside, obviously, to the guide, because it would seem like the retail data sets wouldn't necessarily be decelerating that much in the U.S. if we're ignoring the Europe piece. The storm was a couple percent, but not that much. I'm just trying to gauge off the commentary, just to be clear, Q3 very strong, maybe Q4 decelerates a little bit. If we're all thinking about the 1st half of next year already, it would seem as if there could be increased momentum on an absolute dollar basis as we're coming out of Q4. Does that make sense?
Yeah, it does. Look, honestly, there's a couple of variables here. Q4, as we stated, sequentially the volume of retail should be pretty much the same. We're obviously lapping stronger numbers a year ago, particularly on Quest. The comps are getting a little bit harder. From a shipping perspective, as I mentioned, we do tend to pull inventory out, especially in Q4, so that's going to impact our sales. We'll see how it plays out and how mobility, if it continues to accelerate or not, that's still a little bit of an open question. We're not anticipating that it does. As we get into next year, obviously, we're still working through the price increase, so that's a big variable. We'll obviously get back to you at the next earnings call with much more detail on next year's plan.
As you said, first half, just big picture, first half should obviously be stronger than the second half because we are comping still a weak.
First half COVID-19 impact in this fiscal year. The first half should be relatively strong. Gross margins, as we said, our goal is to maintain the gross margins despite the inflation out there. Look, at the end of the day, we love the momentum of this business. We feel great about it, but we'll get back to you the next quarter with more specifics on next year.
Rob, I'd also say that I don't think we're going to see big shifts in consumer mobility Q4 to Q3. I think it feels more, just if you look at the U.S., it feels more the same. The big shift was in Q3, I think, where it changed very quickly, almost like a switch flipped. I think it's going to stay more the same. I think when kids go back to school, I think if there's a catalytic event in movement, it's going to be when they put kids on the bus and they go back to school. Just looking at how businesses are thinking about this, it feels more like post-Labor Day back to office. Some of it's happening now, I think you're going to see a big shift after Labor Day.
In fact, I'm pretty confident that that's when we're going to see an inflection point in people being out and about.
Okay. Fair enough. Just quickly, Joe, on the M&A side, I think Todd saw it in the numbers. You mentioned you paid down the term loan, leverage a little bit better, good for cash flow, great Q3. Just in terms of how you're thinking about the M&A pipeline, I'm not sure what you're seeing out there. Any candid answer or signs? Just trying to check the boxes I do usually on the acquisition front.
Yeah, we're active. There's a pretty good pipeline. We're looking at things as we speak. As I said before, we love this category. We'd love to continue to get more scale in the category, and we'll look at the assets that are in the space. Our screening process is pretty simple. We're looking for strong consumer brands with unique positionings and some pretty good understanding of who the user base is so we know how to recruit. I think our competitive advantages are we can build distribution in food, drug, mass, small format pretty quickly. We understand how to build household penetration, so understanding the consumer dynamic, who that consumer is, what the brand positioning is, we feel like we're pretty good at that. We're pretty good at innovation. We're looking where we can use those capabilities to accelerate growth of assets that are out there.
If there's an asset out there in our space of a decent size, you can bank on we're looking at it.
All right, super. Thank you.
Our next question comes from the line of Eric Larson with Seaport Research Partners. You may proceed with your question.
Thank you, and congratulations on the quarter, everyone. My first question revolves around a little bit more clarity on your gross profit margins. You're talking percentage gross margins, but I would assume that you're pricing more to protect your dollar gross profit margins and maybe a little bit more than that. In order to maintain percentage gross margins year over year next year, that would then require probably continued favorable product and channel mix. Is that the right way to look at how you're talking about your gross margins?
First of all, to clarify, it's on a percentage, not dollars. The goal is to maintain. We have some pretty significant inflation next year. Our objective is to price effectively enough to maintain that gross margin percentage to offset the inflation. We'll see. As you mentioned, we've had a nice benefit here in the second half as bars have rebounded, as brick and mortar has rebounded. I think we'll see some more of that in the first half of next year, then it'll kind of level out. Our objective here is to price to offset the input cost inflation that we're seeing, and to be clear, on a percentage basis.
Okay. Thank you for that. My follow-up question is really on your indulgent brands, i.e., things like peanut butter cups that were very strong, I think, for both Atkins and Quest in the quarter. Are you seeing different buyers for those products, or are they the same buyers? Are your buy rates actually better in your indulgent products? I'm curious just more of the consumer demographic dynamics on the indulgent line.
I apologize. I don't know that data by product form, we tend to think brand first. What I would tell you is why it's doing so well is it's a different use occasion. If you think of a bar and shake, tends to be afternoon to early morning. It tends to be a hold me over between meals or a meal replacement. The snackier portions of our portfolio are not that. They're indeed just a snack. They're kind of indulgent. Sometimes use can be after dinner. In the confections area, the peanut butter cups that you mentioned, the entire lineup in Atkins can be after-dinner kind of consumption occasions.
I think if we went in and looked at the data, I wouldn't guess we would see different consumer dynamics. Based upon that, I think you're just going to see different use occasions and different need states that consumers are purchasing those at.
All right. Thanks for the insight.
Our next question comes from the line of Jon Andersen with William Blair. You may proceed with your question.
Good morning. Thanks for the question, congratulations on the strong quarter. I wanted to ask, you talked a little bit about the success you've had acquiring new buyers, specifically, I think, relative to Atkins. Also the fact that the buy rate continues to lag historical levels, given the fact that we haven't fully returned pre-COVID on-the-go use cases. Could you talk a little bit more about the rate of new buyer acquisition and/or how far off the buy rate is today versus historical levels to give us a bit of a sense of the progress and opportunity that those two metrics represent?
Yeah. I can give you a high level of how the algorithm works. New buyers, first-year buyers on Atkins buy somewhere in the area of 30-35 servings. Year two and beyond buy three times that amount. If you think about it, we have multiple times weekly buyers in retain. Retain in any one year, the volume in your year is mostly driven by retained buyers. Your new buyers are a pretty good proxy for how you're going to perform in the next year because we retain a certain portion of those people. As you look at our buyers. Let me step back again, sorry. The buy rate becomes very sensitive to total volume, especially when you apply it against retained buyers.
At 100 servings, if my buy rate is off, that's a significant amount of servings against a big number of retained buyers. This year, our growth is being driven almost exclusively by the number of total buyers that we have, both retained and new. That's been driving our business. The buy rate has been a buffer against that. Buy rate is down as a percentage basis is kind of in the mid-single digits. It's a significant number, right? We've been more than offsetting that with the number of buyers. That's frankly the good news for Atkins because that means I've got good buyer flow going into fiscal 2022.
If I get any improvements in buy rate, historic buy rate, which we would expect to do it as people go back to work and bars improve, and as I get the portfolio more developed in other forms, I would expect buy rate to move back towards historical levels. Does it get there next year? Hard to say, but I would think we're going to continue to see improvement in that. Does that help?
That's super helpful. I appreciate the detail. One quick follow-up. You mentioned supply challenges for Quest, I think in the fourth quarter. Is this just a kind of transitory situation? How do we think about that impacting maybe sales in the quarter?
Yeah. All right. What I would say is in the chip business as well as the peanut butter cup business, our sales have approached what we would've considered best case scenario. Supply in this category takes time to build out. We're in a period of transitory, having to manage demand to supply until the new supply comes on board. We have pretty talented sales organization. They really like to sell stuff, but they've got experience in tamping down demand, managing programs and as well as promotions because we've had this situation before happen on Atkins. We know what we need to do. We will do it as we move into fiscal 2022. Supply chain's working hard to bring on more capacity, and we'll manage that well over the next few quarters.
Okay. Thank you very much.
You're welcome.
Our last question comes from the line of Pamela Kaufman with Morgan Stanley. You may proceed with your question.
Hi, good morning.
Good morning.
Congrats on the quarter. I wanted to understand how we should think about the degree of input cost inflation across the business and to what extent you hedge your inputs and what your hedging position is currently over the next year.
I'd say we hedge about half of our portfolio. Some of the major commodity inputs we buy directly. Some of them are just a direct pass-through with our co-mans. I'd say about half of our products where we have an active hedging program, and it's anywhere from three to nine months. Our team did a just incredible job this year buying early, locking in prices before we saw the spike in the last few months. We've been protected really nicely for the first three quarters. As we mentioned, we're going to start to see some of that come through in Q4 and obviously a bigger amount next year. We're going to see mid to high single-digit inflation for next year. We'll continue to be opportunistic and lock in prices with where we see value.
This is why we have to take a price increase of a similar magnitude to maintain those gross margins.
Okay, thanks. That's helpful. I was wondering if you can give an update on Quest distribution expansion. That was one of the rationales behind the acquisition. Just curious on where you are and where you see further opportunities for Quest.
Significant opportunities on Quest, if you think about our Atkins business, food, drug, mass, we're probably somewhere around 40 items in distribution. Quest is probably at half that. We're pretty experienced as a selling organization at building those out. As part of our sales team, we've inherited some pretty talented Quest folks, too, who are pretty good at that. I would expect you're going to continue to see improvements. I think the year-to-date number on Quest is.
Mid-teens.
Mid-teens, approaching 20% distribution gain. We're still in early innings, and the innovation pipeline's pretty good.
Thanks. Can you comment on some of the innovation that you have planned for Quest and Atkins, and visibility into gaining shelf space for the product?
No, I'd prefer not to do that. I'll talk to you about it once it's in the marketplace and performing.
Okay, sounds good. Thank you.
All right. You're welcome.
Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Joe Scalzo for closing remarks.
Thanks for your questions and thanks for your participation on today's call. We hope you'll continue to remain safe and look forward to updating you on our fourth quarter results in October. Have a good day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.