The Simply Good Foods Company (NASDAQ:SMPL) Third Quarter 2022 Earnings Conference Call June 30, 2022 8:30 a. m. m. ET
Participating companies
Mark Pogharian – Vice President of Investor Relations
Joe Scalzo – President and Chief Executive Officer
Todd Cunfer – Chief Financial Officer
Conference Call Participants
Chris Growe – Stifel Nicholas
Jason English – Goldman Sachs
Jack Hardin-Stephens
Alexia Howard – Bernstein
John Baumgartner – Mizuho Values
Cody Ross – UBS
Steve Powers – Deutsche Bank
Eric Larson – Port Research Partners
John Anderson-William Blair
Pamela Kaufman – Morgan Stanley
Operator
Greetings and welcome to the call of The Simply Good Foods Company’s third quarter 2022 earnings convention. Right now, all participants are in listen-only mode. A question-and-answer consultation will be the official presentation. As a reminder, this convention is taking place lately. engraving.
I am now pleased to speak with Mark Pogharian, Vice President of Investor Relations. Marc, go ahead.
marc pogharian
Thank you, Operador. Hola. Me pleased to welcome The Simply Good Foods Company’s earnings call for the third quarter ended May 28, 2022. Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, Chief Financial Officer, will give you a review of the effects that will then be followed through a Q&A session. The company posted its effects this morning around 7:00 a. m. m. , Eastern Time. The release and incorporation filing can be found in the Investors segment of the Company’s online page in www. thesimplygoodfoodscorporate. com. This call is streamed over the Internet and an archive of today’s comments will also be found.
During today’s call, control will make forward-looking statements that are subject to various hazards and uncertainties that may cause actual effects to differ materially. The Company assumes no legal responsibility to update those statements discovered at upcoming events. A detailed list of those dangers and uncertainties can be discovered in today’s press release and in the Company’s filings with the SEC. Please note that in today’s call, we will refer to certain non-GAAP monetary measures that we will provide useful data to investors. Smooth cash flow business model, we are comparing our functionality on an adjusted basis for EBITDA and diluted EPS.
In addition, adjusted effects from the beginning of fiscal 2022 exclude the market-price valuation effect of the resolution of the Company’s personal warrants before such warrants are fully exercised in January 2022. We have included a detailed reconciliation of GAAP with the adjusted pieces in today’s press release. These adjusted measures are a key indicator of the company’s underlying performance. The presentation of such data should not be considered in isolation or as a replacement for monetary data submitted in accordance with GAAP. See today’s press release for a reconciliation of non-GAAP monetary measures with prepared maximum comparable GAAP measures.
With that, I will now give the floor to Joe Scalzo, president and chief executive officer.
joe scalzo
Thank you, Marc. Hello and thank you for joining us. Today I’m going to summarize our third quarter effects and give you a review of the functionality of our brands. Next, I’ll pass the floor to Todd, who will talk about our monetary effects in a little more detail before concluding with a talk about our perspective and answering your questions.
In the third quarter, we achieved solid net sales and slightly above expectations due to higher visitor numbers not shrinking as expected in the quarter. effects of the exit from Europe and the Quest frozen pizza license agreement. As expected, equity realization represented a strong single-digit percentage point contribution to net sales expansion due to the accumulation of value we implemented in the first quarter of fiscal 2022, and the elasticity was relatively in line with our estimates.
Net sales expansion in the third quarter in North America, excluding the effect of the frozen pizza license transaction, was approximately 15%, consistent with combined measured and unmeasured retail sales. As expected, gross margin of 37. 5% was in line with estimates and advanced sequentially from gross margin of 36. 6% in the second quarter. The low of 510 basis points compared to the same was last year was due to higher supply chain costs, partially offset through prices. It should be noted that a year ago, gross margin of 42. 6% was the highest since the acquisition of Quest.
We have intelligent visibility into our charge design for the remainder of fiscal 2022, and there is no replacement in our gross margin outlook. We expect 2022 gross margin to decline to approximately 250 core issues compared to last year. Customer service was strong in the quarter as our supply chain team performed well in a very challenging environment.
As expected, adjusted EBITDA in the third quarter was $63. 3 million compared to $67. 5 million a year ago, due to the aforementioned reduction in gross margin. We executed our priorities well during the quarter and remain committed to doing the right thing for our brands, consumers and consumers. We are confident in the strength of our business and the diversification of our portfolio through forums, consumers and retail channels that offer us multiple tactics to win in the market and create price for shareholders.
Simply Good Foods’ measured and takeaway retail channels grew by 14. 4% and, as has been the case during the pandemic, our two brands outperformed their respective weight management and active nutrition sub-segments. In the third quarter, the weight control segment decreased by 4. 7%. Atkins outperformed the segment with a 3. 4% increase over the same period. It is critical to note that Atkins functionality and unmetered channels outweigh the measured measures; More on that in a moment.
Quest’s overall measured and take-out retail channels in the third quarter increased 30. 6% and exceeded the active nutrition segment expansion of 18. 9%. We estimate that U. S. retail sales and unmeasured channels will be in the U. S. % compared to last year. As expected, the expansion of e-commerce was more than offset by declines in the specialized channel. Atkins, the third quarter of the U. S. USA Retail sales in the IRI MULO and C-store universes increased by 3. 4%. Shopper trips tended to decrease the fourth and maximum maximum was likely a drag on overall brand expansion across the measured channels.
Atkins’ third-quarter results at Amazon rose 39%, driven by strong expansion. We estimate that unmeasured general retail sales from distribution channels increased by approximately 22% and constitute approximately 12% of Atkins’ overall retail sales. Given Amazon’s strong expansion, Atkins’ third-quarter retail sales in the combined measured and unmetered channel increased about 6% year-over-year, as the decline in shopper trips to physical outlets was offset by a strong expansion in e-commerce. Atkins’ overall buyer expansion in the quarter remained strong, with a double-digit increase as a percentage of last year’s period. However, the acquisition rate is still average in individual digits under old grades and, in the future, it is still an opportunity for the brand.
In the third quarter, retail sales measured through the Atkins network for our core bar and smoothie business increased 3. 5%, driven by a forged 14. 1% expansion in shakes, partially offset by a 4. 2% decline in bars. affected by fewer intake opportunities at work, as well as superior substitution with Atkins shakes. Atkins measured retail sales in other ways, adding candy, cookies and chips, in the third quarter, which rose 3. 2%. Growth was driven by biscuits, which continues to do well and contributed approximately 2. 7 numbers to overall consumer expansion, measured through the retail channel with the Atkins logo.
We’re excited about the prospect of our newly introduced protein chips. However, the functionality is too early to read with a distribution in the early stages of construction. the launch of our dessert bars, decrease customer interest and Keto confectionery products. Atkins, all other treats, cookies and chips account for about 30% of the channel’s total retail sales as measured by Atkins. We have a strong portfolio of logo inventions that allows us to supply customers with new products, variety and novelties to drive growth.
Let me now turn to Quest, where retail takeout in the third quarter grew 30. 6% in the measured universe of IRI MULO and C-store, and outpaced the active nutrition segment. , a strong incorporation into all the primary bureaucracy and the good fortune of new products. During the quarter, Quest’s core bar business grew 14. 1%, with expansion forged across all major channels. to perform well, with a 65% increase in retail sales measured in the third quarter.
Growth has been strong throughout the bureaucracy and has been driven through the expansion of that bureaucracy’s family penetration, distribution profits, and marketing investments to drive expansion. Retail sales of measured channels, we will continue to generate an expansion forged over the next year and in the long term. We moved up strong quarterly features across all major retail channels, with similar expansion across all major retail categories.
Quest’s third-quarter retail results at Amazon grew 23 percent. Unsurprisingly, e-commerce expansion more than offset declines in the specialty network, resulting in an unmeasured overall retail entry of around 12% in the third quarter. We estimate that unmetered channels account for approximately 25% of Quest’s overall retail sales. In summary, we are satisfied with the results of the third quarter, which exceeded our expectations. Based on our previous estimate, we expect low double-digit retail sales at this time. part of the year, with fourth-quarter retail sales estimated to be a percentage higher than last year.
We entered the fourth quarter with higher levels of visitor inventory, while we are ahead of the way in for the era since the beginning of the year. As a result, in the fourth quarter, we expect retail consumption expansion to outweigh net sales functionality as consumers. adjust stocks to more general grades at the end of the year. We have intelligent visibility into our charge design and our pricing is largely covered for the rest of the year. 2022 remains unchanged.
The implementation of the value accumulation announced in April is basically a merit for fiscal year 2023 and is progressing as expected. We are executing on our plans and can achieve another year of strong net sales and adjusted EBITDA expansion as a path. to generate value for shareholders.
With that, I will now call Todd to provide you with more financial information.
todd cufer
Thank you, Joe, and good morning, everyone. I’ll start with a review of our net sales. Simply Good Foods’ overall net sales in the 3. er quarter increased 11. 5% to $316. 5 million due to strong retail earnings in the quarter. Net sales in North America increased by 12. 9% thanks to digit prices, which benefited the expansion in net sales. The March agreement to license the Frozen Pizza Business Quest to Bellisio Foods was a 1. 8 percentage point obstacle to expanding net sales in North America. As expected, international business fell by 25. 1% due to the exit of Europa Business. The expansion of international net sales was 8. 1%. The combined exit from the European industry and frozen Pizza’s advertising license transaction had an impact of 2. 9 percentage points on the company’s overall net sales growth.
Moving on to the other of P
Please note that we now expect marketing spending for fiscal 2022 for the entire fiscal 2022 to increase in individual digits compared to last year, compared to our previous direction of an accumulation in the middle and upper digits. General and administrative cost integration and restructuring costs, as well as stock-based compensation, increasing 2. 2% to $23. 6 million. The reduction in costs similar to the exit of European activity was offset by the increase in costs at the head office.
Moving on to other sources of income, interest expense decreased from $3. 1 million to $4. 9 million due to the value revision in the current quarter and the repayment of the term loan. Our effective tax rate in the third quarter was approximately 23%, down slightly from 27% a year ago due to the timing of inventory offsetting.
Year-to-date effects are as follows: Net sales increased 19. 9% to $894. 5 million. Gross profit was $343. 7 million, an increase of 12. 6%. EBITDA increased 15. 3% to $183. 1 million due to higher gross profit and leverage G
Moving on to other sources of income, interest expense decreased from $7. 8 million to $16. 5 million due to value revisions and repayment of the term loan. , compared to $60. 7 million in the same era last year.
Our year-to-date effective tax rate, liability guarantee expense, was approximately 24%. We expect tax rates for fiscal year 2022 to be between 25% and 26%. The net source of revenue was $78. 4 million compared to $22. 6 million in the same was last year. The accumulation of $55. 8 million is largely due to the revaluation of personal guarantee liabilities.
According to the EPS reported in the third quarter, EPS $0. 38 consistent with the diluted consistent percentage, compared to $0. 06 consistent with the diluted consistent percentage for the comparable consistent period of 2021. In the third quarter of fiscal 2022, depreciation and amortization expenses $4. 8 million and similar to last year consistent with the stock-based reimbursement of $3 million higher at $0. 8 million compared to last year, and the charge related to the integration of Quest $0. 2 million.
Adjusted diluted EPS, with all items, $0. 44, a build-up of $0. 01 compared to the same was last year. Please note that we calculate adjusted diluted EPS as adjusted EBITDA plus source of interest on income, interest expense and source of income tax. at the beginning of the year, the reported EPS was $0. 78 and the adjusted diluted EPS was $1. 23. Please refer to today’s press release for an explanation and reconciliation of non-GAAP monetary measures.
With respect to the balance sheet and year-to-date cash flows, net cash flows from operating activities were $67. 4 million. visitor service. As of May 2022, the company had $56. 7 million in money. In the third quarter, the Company paid $25 million during its term alone, and at the end of the quarter, the notable equity balance was $406. 5 million and the 12 Month Net Debt to Adjusted EBITDA ratio was 1. 5 times .
During the third quarter, the Company repurchased $8. 1 million of its non-unusual consistent percentages at an average charge of $37. 16 consistent with the consistent percentage. . As of May 28, 2022, approximately $69. 3 million remained available under the repurchase authorization consistent with the percentage. We expect GAAP interest expense to be approximately $22 million for the full year, adding amortization expenses that are not cash similar to deferred financing expenses. Capital expenditures in the third quarter and year-to-date were $0. 4 million and $4. 7 million, respectively. CapEx for the full year is expected to be around $6 million.
I would now like to call Joe back for final comments.
joe scalzo
Our strong effects since the beginning of the year also allow us to reach our goals for the total year. Looking at the key signs of our fiscal 2022 outlook, we expect net sales to increase by up to 14%. to 15% compared to last year, adding a two percentage point headwind similar to the exit of the European business and the licensing of the Frozen Pizza Business Quest, our previous guidance for a net sales expansion of 13% to 15%. There is no replacement for our gross margin outlook. As previously reported, we expect gross margin to be minimized through approximately 250 core issues compared to last year. Adjusted EBITDA is expected to increase less than the growth rate. of net sales.
Marketing is expected to grow by the highest single digit percentage over the past year, unlike our previous forecast of expansion from middle to high single digits. In addition, we anticipate significant leverage of G
Atkins and Quest will offer us two uniquely located brands that align with the trend of wellness, snacks, convenience and meal replacement megaclients. And customer feedback indicates that those megatrends will increasingly apply as customers return to more general post-pandemic routines. We are running our methods and expanding family penetration that deserves to continue driving sales expansion and profits in the short and long term. A strong balance sheet and money generation allow us to invest in our business, compare M&A opportunities, and buy back shares of our corporations to generate shareholder value. We appreciate everyone’s interest in our corporate.
And now we are ready to answer your questions. Operator?
Q&A session
Operator
Thank you. We will organize a session of inquiries and answers. [Operator Instructions] Thank you. Our first inquiry comes from Chris Growe from Stifel. Su online is now online.
chris grow
Thank you. Hello.
joe scalzo
Hi Chris.
chris grow
Hi, I only have a quick query if I can for you in relation to stock levels. And obviously, this quarter didn’t show much change in the reduction in retail stocks. I guess my query, Joe, is about your ability to control that. That is, at the end of the day, you have stores that opt for higher grades in general. Is this a topic of discussion, like negotiating with stores?To what extent can you influence that, if you will, here in the fourth quarter?
joe scalzo
Yeah, maybe a little background information would be helpful, Chris, to get a sense of how the category and our business are doing in a typical year. We commonly see early part stock build based on seasonal retail scheduling. And the quantity can vary, but traditionally it’s been pretty consistent that we load stock before the January, February and March merch guy. And then almost immediately after that we see stock start to burn so by the time we get to summer it sometimes goes back to pretty general stock levels so we have nothing to do other than build a service of visitors in help. scheduling So it’s a general cycle that we see in our business. We have noticed that stocks are most commonly accumulated in the current quarter of this year. We would have expected it to start coming out in the third trimester, but that didn’t happen. We start seeing it now in June. And we’re pretty sure it’ll behave pretty much the way it traditionally has. And I guess we’re going to see all of that and go back to more general stock until the end of the summer.
todd cufer
Yes, I’ll just add, Chris, just to give you an attitude too, I mean we regularly have an average of 4-5 weeks of stock at retailers. Now we have 5 to 6 weeks. Therefore, we are not talking about a large number of additional stocks. We are talking about a week. So, as Joe said, we’re starting to see him come out. There is no guarantee that it will come to light by the end of the year, but we are confident that we will succeed.
chris grow up
It is ok. And just a moment of consultation or follow-up on the development or development in marketing that you now expect for the year, I guess the undeniable consultation, where does it concentrate those investments?So I was inspired by the number of Atkins users. He added, however, the acquisition rate decreases slightly in this environment. Is that where you focus on cash, or where cash goes when you make those extra investments?I ended up there. Thank you.
joe scalzo
Go to any of the brands discovered in the return, and I think you discovered the right problem, we constantly focus on marketing that attracts new customers to our brands. And it’s been a pretty positive story for us this year and COVID. customer interest as we evolve awareness and testing. We feel good about our ability to recruit buyers for our brand. And that’s why we’re looking until the fourth quarter. Thanks for your questions, Chris.
chris grow
Oh thank you.
Operator
The next one comes from Jason English of Goldman Sachs. Your line is live.
English jason
Hello, hello, friends. Thank you for [squatting] [Ph]. Joe, his comments about the luxury company, the apparel company and perhaps less engaged consumers, less interested in keto manufacturing, that and combined with what we see in the retailer, so it’s a little concerning because we found that his apparel company is suffering a pretty significant drop in volume and that his bar business. Is it imaginable that we are at the beginning of a new diving cycle?How does keto fade?
joe scalzo
Guys, let me take a step back first. If I look at the Atkins, it helps me to have it from a general attitude rather than focusing on one component of the business. For the past 18 months, we have been controlling to attract new buyers to Atkins. Therefore, interest in the category, which I would sometimes describe as the most productive snack for other people who are involved in their weight in our brand, has been particularly good. And we have consistently surpassed the category.
Now when you research, we are increasing buyers, but the purchase rate has not reached historical levels. They were kind of two riders for this. The first as you already mentioned. In our bar business, there are fewer opportunities to grab a snack because other people are in the paints less than they were before COVID. And so our bar business has been the most affected by this. The timing was and is a more recent phenomenon that I will call September through October our apparel business has slowed and the rate of acquisition has slowed in our apparel business. And we can see two pilots of this. The first and probably the biggest pilot, we had a very successful launch of making dessert bars a year ago. We are celebrating the anniversary of those numbers. And we did a lot of consumer programming, a lot of communication around that. And we’re on the negative side of that, notably when tabulating unit numbers. The moment is that we know the COVID and even a little before, the confectionery was benefiting from the interest in keto.
And if you take a look at some of the competitive keto launches, those are all confectionery-like products. Keto interest has been partly reduced at this time. Obviously, we are seeing some have an effect on our confectionery business because of this drop in interest. And obviously, it will be anything that burns out over time. Do I think this is a long-term trend in the company?No, I don’t know. If we saw a drop in interest in the brand, we would see a drop in the number of buyers. And we don’t see that. In fact, we are seeing a double-digit expansion in the number of buyers. And we’re going to burn out. I’m pretty sure we’ll solve the bar and candy buying disorders over time and come back to more. General customer behaviors.
English jason
they gave it to me Okay, understood. Thank you. I’ll have a hard time.
joe scalzo
Right. Thank you Jason.
Operator
Merci. La next inquiry comes from Ben Bienvenu from Stephens. Su online is now online.
jack hardin
Yes, hello. Jack Hardin replaces Ben Bienvenu.
joe scalzo
Hi Jack.
jack hardin
Hello. A quick here, what does your product innovation pipeline look like lately?
joe scalzo
We don’t communicate, Jack, we don’t communicate a little bit, about what might happen in our business. We would like to communicate about what is happening. I would say we have a strong portfolio of new products. We feel quite confident. If you take a look at our ultimate recent history, much of our innovation is focused on another snack bureaucracy. So we take a look at our business and see bars and shakes as a core. As far as Atkins is concerned, we have a solid bar and smoothies. business.
As far as Quest is concerned, we have a very forged bar business. It is our heart. We are innovating in this because we want to bring novelties and variety to consumers. Beyond that, we focused on innovation in another bureaucracy, making a very strong salty snack with tortilla chips. We have a very strong production activity in both brands. build a cookie business in any of the brands over time. You’ll expect our channel to continue to explore those opportunities as we go along and also look at another snack bureaucracy to generate more buying opportunities.
jack hardin
Okay, amazing. Thank you so much. I will.
Operator
The next one comes from Alexia Howard of Bernstein. Your line is now online.
Alexia Howard
Hello everyone.
joe scalzo
Hi.
Alexia Howard
Hello. Can we ask about gross margin trends from here?It turns out that this may have been the lowest point with the kind of sharp decline in adjusted gross margin. Given its year-round orientation and the fact that it is down 250 basis points. Problems since the beginning of the year, it seems that this is a sequential improvement in the next quarter. Is it because the charges are going up?Is it because the charge scenario is improving?Is it working, probably not operating leverage because sales are slowing down in the next quarter?So, I’m curious to know what motivates this and whether we’re at a tipping point.
todd cufer
Of course. So some factors. First of all, last year’s gross margin was way, way higher than the highest we’ve ever had, because the Quest acquisition is kind of everything that touched last year, we had favorable conditions, we got the bars back, and, More importantly, it didn’t: Q3 was literally the last quarter where we didn’t see a huge buildup and where we started to see feedstock come through. So, that we recovered during the 3rd quarter of last year. In the fourth quarter of last year, we started to see an uptick in input costs. So the third quarter was a higher threshold, and as this year goes by, yes, we did have awards. But we’ve got a very high gross margin, a significant buildup in input costs, element costs, year-over-year element costs for the quarter that’s actually up over 20%, overhead cost sourcing chain a little bit more in the middle of adolescents, however, the significant year-over-year effect is based on when in the last year. So that’s the big driver, and yes, that’s going to be the low point of a year-over-year sequential change. Actual gross margin will be higher in the fourth quarter, and the year-over-year direction implies that we have about two hundred core issues in the fourth quarter.
Alexia Howard
So, as a follow-up, can you give us a color about the distribution of the load of the ingredients?We know that dairy products are vital to you, however, those are vital figures that we are talking about at 20% this time. , what is expanding so much?Is it basically dairy?Are there any other ingredients you’re exposed to?Is it also in the aspect of sweetness? I will pass it on Merci. Et.
todd cufer
Yes, it is usually a milk protein complex. So it’s our proteins, whether it’s dairy, soy, we’re seeing significant value increases over the last 12, 18 months in all proteins. Therefore, it is by far the largest engine.
joe scalzo
Yes, Alexia is Joe. No we sell sweeteners. We are anti-solvent. Therefore, we have a low carbohydrate and sugar content. So, we have proteins, coatings, and fibers that are our main ingredients, and they’re all in place.
Alexia Howard
Great, thank you very much. I will.
joe scalzo
Please.
Operator
The next Merci. La inquiry comes from John Baumgartner of Mizuho Securities. Your line is now online.
John Baumgartner
Hello, thanks for the question.
joe scalzo
Hi Jean.
John Baumgartner
Maybe first for Joe, going back to cookies, I mean, he’s been on the market for a year, and I would appreciate it if he thought about the next steps here, I guess what he considers me the most is that apple cider vinegar becomes stabilized around 50%. How do we think about the production capacity you will have to grow the business in the long run with new sets of shelves, and how do you see consumers engaging with Atkins compared to some of the other low-cost products?sugar, sugar-free products in this category?
joe scalzo
Yes, let me analyze your questions. First of all, I think we are still in our infancy when it comes to cookies. So, you mentioned, I think you were referring to Quest, Quest has been 3 years in its cookie launch. Therefore, traditional cookies have been introduced, protein cookies were introduced about 3 years ago, we continue to expand the distribution in them. We have iced cookies that have just been introduced, where I think at 40% LCA in those and still under construction, and so far they have worked very well in the store. And Atkins has just presented its cookie. So, I would say we’re in the early rounds of cookies with Quest for about 3 years, but we’re innovating on this platform. And look, I’m pretty positive about the format. I think there are a lot of opportunities for innovation in this area, whether it’s in the type of cookies, flavor, sizes and textures.
So I think it deserves to be expected to continue to innovate there and we’re not going to avoid distribution outbreaks until we start getting the most productive parts with only 70% retail LCA. Therefore, we are positive. And that’s why we’re excited about this, it’s an additional admission opportunity for our core bar business and our smoothie business. So if you get more, the way you think is that you can attract more people. . But you can also get an acquisition rate because other people will eat them at other times. So, we’re pretty positive about the segment, and we’re positive about our next product portfolio. So, we like it.
John Baumgartner
So, I guess more broadly and tracking the sales and marketing economics of this training, the demanding ROI situations are pretty solid, you are satisfied with the engagement of consumers and buyers based on Chris’s question. But to go further, can there be an argument for the promotional window, the increased investments in quality promotion, this will continue later in training as a standardized technique in the future?I mean, what have been the comments from the stores when they’re hunting?Do you look for seasonal products in those categories?Does it make sense to make this bigger more regularly?
joe scalzo
We’re already in – that’s a wonderful question, traditionally I’m going back seven, 8 years, the mindset of our business in the catepassry is to win January, February, March kind of a resolution season, you win the year. And we challenged that traditional wisdom a long time ago and said that we really believe that commercial seasonality is more skewed by how brands spend their money on marketing. And we started allocating our marketing dollars to media as well as consumer programming. So we have primary programming now, January, March, May and September, and our spending from a programming mindset is more balanced than ever. And we’ve noticed that our business becomes less seasonal because of that. From an attitude of investment in media, we are great advocates of making your spending round as productive as possible. So instead of looking to own January and March, we like to be on the air as long as we can be on the air with decent support ratings. And it’s been shown in our business, our businesses, any of our businesses is less dependent on the seasons than before. So, and it was all powered through smart returns, right?
So if you think about it, if you’re looking to earn in January and March, you’re spending all your cash in January and March, the next extra dollar brings you less because everyone is spending their cash during that time. . . And you have too many investments and you lose your potency when you start spreading that, your returns in other parts of the year are better. So, we handle it based on what we can see from an ROI perspective. And that told us that air weeks are the key measure at a decent weighting point, and that’s how we’ve been allocating our expenses for several years, based on the calculations we see from a marketing science perspective. Does that answer your question?
John Baumgartner
Thank you, yes, absolutely. Thank you, Jo. Very detailed, thank you.
joe scalzo
It’s okay, yes. have a day
Operator
Merci. La next one comes from Cody Ross of UBS. Your line is now online.
cody ross
Hello, hello, friends. Thank you for answering our question. In Nielsen’s scanner data, we can see the value it implemented every four weeks. However, volume has slowed, largely due to absolute declines over the past two weeks; Can you talk about the underlying call you’re seeing right now and then talk about the elasticity of your logo for customers more broadly?
joe scalzo
Yes, so we took an average of 7%, 8% price, we estimated that there would be a one-to-one relationship with volume. That’s pretty much what happened. So if your business grew by 7% in dollar terms, the volume would be solid and it would all depend on costs. At Atkins, we see, if you look at the channels measured at the point of sale, you’ll see 5% growth. Therefore, volumes are down by around 2% and the rest is prices. And that’s what we would have planned. So it’s nothing unusual from an elasticity standpoint, costs are coming out the way we expected and the impact on volume is what we expected.
todd cufer
Yeah I just need to stick to your point about the outlets and the brick and mortar has lightened up a bit especially on Atkins I’d say it’s kind of a doppelganger. The first is that we’re only getting one category and going back to more normalized expansion rates overall. Obviously this has been accelerated because we are past the COVID period. So we are going back to a more sustainable rate of expansion. Atkins, we’ve had a phenomenal expansion as grocery shopping trips with customer issues looming right now, grocery shopping trips are a little low, they’re starting to take place, girls and gentlemen. We’re seeing a lot of change, especially at Atkins through e-commerce. So you heard in Joe’s comments that our e-commerce business, that is, on Amazon with Atkins, has grown tremendously in the last two months and we see that continuing. So we are seeing a shift in volume from physical stores to online stores. Overall it is: we’re pleased with the performance, but yes, we’re torn between buying shopping trips and some kind of channel switching. There is a bit of an impact.
cody ross
OK thanks. And if I can slip one more in here, there’s been a lot of discussion about Quest’s ability to compete well in the snack category and I’ll up Atkins with that too, without cannibalizing his existing business. We have many examples of brands that have failed to jump into adjacent categories. What’s extra about your Quest and Atkins strategy that will allow you to be successful with snacking? And what are some investors missing? Thanks.
joe scalzo
Well, first of all, I think the track record is pretty clever proof that we can be successful in many ways. So if you take a look at the Atkins business about 20% to 25% of their candy is already so the main business is a barn shake we already have a very strong candy business we’ve run this game of e-books on Quest with candy, peanut butter cups. , groups. And Quest is already quite a built-in business even before our chip acquisition, which already has a retail business close to $200 million for Quest. So I would say that the traditional wisdom about the ability to innovate, I think, has been shown to be incorrect in those corporations and I think the component of that is that they are lifestyle brands, they are more than just the product that they sell. So in the case of Atkins, it’s a nutritional philosophy; in the case of Quest, a very similar active lifestyle with some kind of macronutrient philosophy to fuel that lifestyle, so the promises allow for more than one product. And as long as you stick to promises, I think you have the ability to innovate.
Now, I would say there are some differences in the execution we have, in the strength of the logo and in a logo block in the store and in the possession of the aisle we’re in. So you won’t see us betting for the maximum component on the portions of the store reserved for others. I think it’s hard to achieve, because you don’t have a ladder. You are not a main player in the hallway. There are other people who are and you have a hard time controlling your logo and other sections of the store.
So I would probably put in an appendix your opinion on innovation in other categories. And the appendix would be that if you start to scatter too much in the other parts of the store, you’re likely to find mess and I think that’s our food bowl business in Atkins, our pizza business in Quest, we have those legal products. We didn’t think we had competitive merit and hallways and put the logos in the hands of other people who do and we stay in our own hallway and continue in strong logo blocks where we exist.
And then, I would only say third, I think the logo promises, the products are exclusive and exceptional. If you take a look at our potato chip business, it gives other people the best in carbs, a very bad one for their snack and you give them a smart snack for you, no carbs, high in protein and that’s pretty smart. So, if there is almost no compromise. And I think what we stick to this platform, cups of peanut butter, what do I challenge you to take?Make your own comparison to the cup of peanut butter complete with sugar and tell me you can tell the difference. So, I think the product matters, right? So when we get a wonderful innovation that tastes smart. It contains the right macronutrients, we have shown that we can succeed, we hope that we will continue to do so.
cody ross
Super. Thanks for the detailed explanation. I’m grateful to you for that.
Operator
Our next inquiry comes from Steve Powers of Deutsche Bank. Your line is now online.
steve powers
Hi guys, hello. Thanks. Maybe more than one top point question. I guess, as he paints his situation making plans and modeling. I’m curious to know how it balances thinking around normalizing mobility trends arising from the pandemic as opposed to the threat. of restricted mobility in a recessionary situation. And I guess, more generally, how do you expect the company to or maybe move on to your previous comment?And can I get into e-commerce when economic pressures, potentially or I suppose, will probably be on the customer for the next six, 12 months?
joe scalzo
Yes, we’ve done a lot of work on the behavior of the recession. You have to look back 15 years to see the last recession. And there is very little information about our category because the category was really nascent. — we’re looking to build our IQ around this right now how — how do we think those corporations in this category and our brands are going to behave in a recession?At the top level, we have a tendency to have more socio-economic customers buying our brands, so for the most part, we don’t deal with the low-end of customer purchases, households. We have a tendency to deal with more, to deal with more prosperous customers. But if you take a step back and look at the last recession, here’s what we were able to put together. And start checking out how we think about it first.
During the last recession, dining out had a pretty strong impact compared to grocery stores and meals, so a bit of the COVID habit of other people dining more, so it’s probably good news for food, grocery stores, and retail stores, is it Rarely does it?Secondly, there was a significant replacement of the channel due to the last recession, so other people bought in fewer retail stores. We’re starting to see this habit right now, fewer shopping opportunities, other people have started restricting retail stores. they shop and generally tend to shop at more discount stores. So, further away from the grocery store, more towards mass merchants, dollar retail stores, and some of the other discounted formats, it’s true that this is a habit we’ve seen.
Snacks in general, I’m talking about broader snacks for you and more comprehensive snacks have less of an effect than core store food categories. So overall I think you rationalize with that and other people are going to have little indulgences. It’s a relatively inexpensive way to laugh in an economy where you don’t feel smart. And then, in the middle of the store, he saw that the personal label was beginning to win over the logo. So overall, it’s kind of a playbook that we start to build. How we think about our business, and frankly, I’m all for it: we’re taking a moment worth increasing, we’re going to be at levels of value that we’ve never seen before, combined with what turns out to be a pretty smart change. recession. So we’re going to be pretty cautious about what we think about volume growth, and we’re going to stay focused on the fact that we’re bringing consumers into the category, maybe you’ll see a slight drop in purchase rate because to this, however, stay focused on keeping our marketing focused on targeting the consumer. Keeping other people going into the logo and then we’re going to deal with the kind of effect on whether there’s an acquisition rate as we deal with like we say it happens over the next year but I’m concerned and I think anyone who runs a food business at this time deserves to be involved in what consumers face.
steve powers
It is ok. Thank you for this color. I’m grateful to you for that.
joe scalzo
I think our portfolio category, our brands, are well placed in relation to food in general. If a recession is coming. We are well positioned to get out of this. We have the highest levels of marketing support. We have smart product innovation, we have a dynamic on the shelf, I feel pretty smart in our hand. However, I am involved in what we are going to face in the next 12 or 18 months.
steve powers
I understand. Thank you.
joe scalzo
Please.
Operator
Merci. La next comes from Eric Larson of Seaport Research Partners. Your line is now online.
Eric Larson
Yes. Thanks for the question. So, two very quick elements, number one, I don’t think you’ve talked about this Joe metric, which is pretty must-have for the Atkins brand, a kind of return to paintings. In a way, the metric of going back to paintings and where we stand was that and I know it probably continued over the course of the quarter, however, you didn’t mention anything about that specifically. Where are we today?
joe scalzo
Yes, bigger than it has been, not as smart as it deserves to be. So part of that, I think part of that is that there’s less, there’s fewer opportunities to snack because not everyone has re-completed their works like before. recession. We also know that there are maximum degrees: at Atkins there are maximum degrees of change between our smoothies and bars, and especially our food bar, so we’re seeing a strong expansion in smoothies right now, a kind of expansion in the middle. of adolescence. It’s been pretty consistent over the last few years, call it three quarters and I think it has an effect on our bar business. Our smoothies have a tendency to be a slightly different gastronomic opportunity, they have a tendency to be more of a meal replacement than a snack, however, they are used as snacks. But I suspect we’re seeing this, we’re seeing a shift to shakes as a format.
So, and this is obviously in our history, we’ve noticed that bars and smoothies have superior interactions quite regularly. If it has a strong expansion in one form, it has an opposite effect in the other form. I think that’s what’s going down right now and our agitation activities have been very strong for an extended period of time. I know this has an impact on the business. So, look, I think. . . I believe that the advantages of obtaining for our company are still back to their full potential. We are attentive to our ability to recruit new consumers that turns out to exceed our expectations. rate to return. I hope we’ll start developing again at the pace as we go along. Therefore, I am cautiously positive about our ability to do so over the next 12 months.
Eric Larson
It is ok! Super. Thank you for that. And I just need to go back a little bit to Alexia’s consultation, about gross profits. So, I know he opposed a difficult Array festival this quarter. Its gross profit dropped by about $3 million, give or take. I don’t have the exact number at the end, but I think we’re at 121 last year, about 118 this year. So when you, and maybe it was a very difficult festival. this consultation in the past, when I was implementing a pricing strategy, set a value to protect, I think, the gross profit percentage margin, which would be a more competitive strategy than just protecting gross profit dollars. And given the rate of inflation, etc. , would it replace the way you could set long-term values given that inflation is so high?
todd cufer
As in the long run, we like our P
Prices continued to accelerate, noticeably, and then we lowered our forecast for the year, and then I had to take another value increase announced in April, which it will take. it will start to catch up from a shipping attitude in about a month. So yes, it was inflation that blatantly outpaced almost everyone else, our long-term goal is to maintain gross margins and eventually get back to 40%. Will it take place next year? Probably not, with time over our strategic planning horizon. Do we think we can go back to 40%? Yes. And it is and we’re going to do everything we can to get back there. But it’s vital for us to maintain gross margins this quarter obviously that was an anomaly last year just as we had commodity coverage and acceleration this year just a quarter of year over year that’s what knocks down a base of 500 point decrease. And as I said before, you can expect over two hundred as we enter the fourth quarter. Such strange times that we’re living in, but in the long run, the gross margin and the pricing that we’re doing and the efficiencies that we need to get out of the system. Getting back to 40% is imperative for us to drive long-term growth.
Eric Larson
Okay, thank you, Todd and Joe, your comments.
todd cufer
It's ok.
Operator
Merci. La next one comes from John Anderson of William Blair. Su line is now online.
jean anderson
Smart hello tomorrow. Thanks for the questions. A few rapids; one, spending, innovation, and growth, I guess, I’m curious to hear the fundamental categories, and then some of the extensions you’ve made to snack on, your portfolio amounts. It turns out that some amounts of the day are well covered. The part of the breakfast day, maybe not so much and so you’re thinking about innovation, more often, helping to increase the acquisition rate, is that anything that thinks Quest and Atkins can also play a role out there, I mean, in terms of overtime contribution?Thank you.
joe scalzo
Yes, I like your way of thinking, you need a job. No, I think you look, you think about it the same way we do, which is where the opportunities are today and what the other snack formats are, that’s okay. So if you take a look at all the parts of the day, what is our evolution?Where there may be some gaps, the fundamental bars tend to be earlier in the day than later in the day, chocolates and chips tend to be later in the day, don’t they?So it’s you thinking precisely the right way. And then I would say, if you walk into a grocery store and take a look at all the categories of snacks that are low and smart like fiber and protein and high and bad like carbs and sugars, where we think we can conceive of a product that doesn’t compromise on taste, that gives you a greater experience, you may be waiting for us to review to innovate in this space. And if we can get a product that we think is smart for consumers, I’d expect us to start thinking about trying to innovate there.
So, yes, we divide the global in part, how do you segment it?And then how you’re going to innovate it in front of one of them at every moment of the day. And then the other thing is all the categories out there, where there’s no low-carb, protein-rich substitute in the category that we think can design a product that tastes delicious. And I’m just saying I don’t like to talk about long-term innovation. The pipeline is exciting. We have a lot — we have an R team
jean anderson
It is ok. A summary, the recommendation, the recommendation for the whole year, I think could mean a mistake, but it implies a modest drop in sales in the fourth quarter, I think on a biological basis, excluding the Quest effect. Can you tell us about this and explain how this can also happen?I think expectations for the point of sale are expanding into single digits during the quarter. And then, if you can also cope with the next increase in value, it looks like it will come into effect from a shipping attitude in early August. I don’t know if he communicated about the magnitude or if he is willing to communicate about the magnitude of that. Thank you.
joe scalzo
So, your last question, first of all, very little has an effect on this year, it’s about 23 paintings. Very little has an effect in the fourth quarter of the fiscal year for value increases. Let me explain how the calculations painted in the fourth quarter. Therefore, at the higher end of the forecast, this implies an expansion of net sales of around 1%.
So, just for illustrative purposes here, with respect to the top singles digits, if we’re at 9% consumption in the fourth quarter, it subtracts one point from the pizza license, it’s at 8%. We built a stock value of approximately $35 million in the first nine months of the year. Part of it was that we were a little behind at the end of the year, but at most it exceeded that extra week of stocks, that is, 20-25 million dollars of additional stocks that recently appeared in our system. I was dating. So, $20 million to $25 million is about 7%. That’s how you get it, if you have a 9% intake, you take away a point for pizza. I mean, you eliminate 7% of that week’s stock, you get to the top end of 1%. Now, where do we end up in stock? It’s hard to know, we have other people who can move it back and forth. We are sure we can achieve it, but it is still a wild card.
todd cufer
The only thing we’d like to upload is that we saw a pretty heavy launch in June. So it’s already underway. So, I think we had some questions before, why is this going to happen?Are you going to force him in? No, it happens on its own, it starts to happen. So it turns out there’s been a bit of a delay. We’ll have a full week of release, hard to say, right?So, their calculations are quite correct. We expect insufficient consumption in the quarter based on a return to more general stock levels.
jean anderson
It is ok! Super. Et just the magnitude of the moment is worth increasing, I know it’s a credit for fiscal year 2023, but overall, and are we talking about the magnitude?
joe scalzo
Of course, to the first on average around 8%.
jean anderson
Great, useful. Thank you very much guys.
joe scalzo
Oh thank you.
Operator
Our latest inquiry comes from Pamela Kaufman of Morgan Stanley. Your line is now online.
Pamela Kaufmann
Hello tomorrow.
joe scalzo
Hi.
Pamela Kaufmann
I only keep track of the latest on pricing. So, I guess what’s your point of confidence about a slow accumulation of single-digit prices?Has the length of your conversations with stores changed over the past two years?months as you look to raise prices?
joe scalzo
We are proceeding as planned. We expect the costs on the list to change, call them overdue in July, early August. We didn’t expect it to be easy, and it’s not easy. How is it?
Pamela Kaufmann
And can you tell us what you think about the current M&A landscape and potential opportunities?Thank you.
joe scalzo
Yes, satisfied to do that. I think we were going to make a call to consult on mergers and acquisitions. So, there’s been a. . . there has been an adjustment of valuation expectations. And I think this market is on pause. Therefore, we don’t see as much activity. As a rule, the pipeline is quite complete. We are constantly looking for things. The pipe is not so complete at this time. And I think what’s going wrong is that with the IPO market, which has disappeared, there are actually a lot of opportunities for personal corporations to conduct transactions other than selling. So I think there are ongoing talks between traders and bankers right now to lower expectations about valuations. And it’s a kind of blockade that hits the market. That would be our reading. So we’re less busy than we’ve been quite a bit since we’re public right now.
todd cufer
Yes, I mean, look, we’re thinking long-term, it’s positive, we think valuations, especially for assets in the expansion year that possibly wouldn’t have the most productive return right now, are going backwards. I think that will create opportunities for us over the next six to 12 months, once the costs are on the market. But for Joe, I think dealers are trying to figure out what their actual price is right now compared to what they think was 12 months ago, and it’s going to take a little bit of time, but in the long run, we’re sure it will be a credit to us.
Pamela Kaufmann
They gave it to me. Thank you. It is useful.
Operator
Thank you. We have reached the end of our Q&A session. I would like to return to the floor for further final comments.
joe scalzo
Yes, thank you for participating in today’s call. We expect it to stay and look to the future to keep you updated on the effects of the fourth quarter in October. I hope everyone has a good day.
Operator
This concludes the webcast of today’s teleconference. You can disconnect your lines right now and have a glorious day. Thank you for your participation today.