Simply Good Foods (NASDAQ:SMPL) reported fourth-quarter financial results on Tuesday. The transcript from the company’s fourth-quarter earnings call has been provided below.
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Summary
The Simply Good Foods Company reported a 9.7% decline in net sales to $333.3 million for Q4 2026, with adjusted EBITDA down 13.2% to $57.5 million.
The company undertook a decisive turnaround in fiscal ’26, resetting priorities and overhauling marketing strategies across its brands: Quest, Atkins, and OWYN.
For fiscal ’27, Simply Good Foods expects net sales to decline by 13% to 17% with improved performance in the second half, driven by pricing strategies and increased marketing investments.
Quest’s new marketing campaign targets ‘Performance Maxers,’ with a focus on core bars and salty products. Atkins aims to recruit lapsed GLP-1 users with a new campaign featuring Rob Lowe.
Management emphasized the importance of understanding consumer needs and aligning brand strategies accordingly, while also focusing on improving gross margins and operational efficiencies.
Full Transcript
OPERATOR
Greetings, and welcome to The Simply Good Foods Company Fiscal Fourth Quarter 2026 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star-0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Seiler, Vice President, Investor Relations and Treasury.
Thank you. You may begin.
Matt Seiler (Vice President, Investor Relations and Treasury)
Thank you, operator. Good morning, and welcome to The Simply Good Foods Company’s fourth quarter and fiscal year 2026 earnings call for the period ended August 29, 2026. I’m joined this morning by President and CEO Joe Scalzo and Chris Bealer, Chief Financial Officer. A copy of our earnings release and accompanying presentation is available on the Investors section of the Company’s website at thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today’s remarks will be made available.
During today’s call, management will make forward-looking statements, which are subject to various risks and uncertainties that may cause actual results to differ materially. The Company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today’s press release and the Company’s SEC filings. On today’s call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the Company’s asset-light business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today’s press release for a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP.
Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Circana’s MULO+C measured retail channel data and Company estimates for unmeasured channels for the 13 and 52 weeks ended August 29, 2026, as compared to the prior year. I will now turn the call over to Joe Scalzo.
Geoff Tanner (Chief Executive Officer)
Thanks, Matt. Good morning, everyone, and thank you for joining us today. This morning I will explain how the actions we took in fiscal ’26 have positioned Simply Good Foods to restore the economics of the business, rebuild consumers’ connection with our brands, and improve performance as fiscal ’27 progresses. I will then review our fourth quarter results and update you on the actions underway across our brands. Chris will then provide more detail on our financial performance and our fiscal year 2027 outlook before we open the call to your questions.
Before I summarize our quarterly financial results, let me step back and provide some perspective on our turnaround journey so far. Fiscal ’26 was a year of taking decisive action to reset the business. By the end of our second quarter, we finished a thorough assessment of our business and concluded that our performance was simply not where we needed it to be. As we have said previously, our brands were not performing to their potential, consumer fundamentals had weakened, our margins were under pressure, and our financial results were falling short of our expectations.
We were candid with our employees, our board, and our shareholders. We made it clear that we were unhappy with the performance of the business and that a meaningful turnaround was necessary. Rather than making incremental changes, we chose to act decisively. We reset our outlook, aligned the organization around a focused set of priorities, accelerated and implemented new projects to improve our cost structure, enhanced our financial flexibility, and fundamentally overhauled the marketing approach across Quest, Atkins and OWYN. And while the financial commitments for the year we established following our second quarter reset were modest, we delivered them.
At the same time, we completed much of the foundational work to improve the long-term trajectory of the business. As we enter fiscal ’27, we are a leaner, more focused and financially stronger company. Our priorities now are to restore the economics of the business, rebuild consumers’ connection with our brands, and create a healthier foundation for sustainable growth. The actions we took in FY26 are expected to materially improve the economics of our business through stronger gross margins, lower selling costs, G&A, and improved cash generation. Rather than maximizing near-term earnings, we are deliberately reinvesting a meaningful portion of those improvements back into our brands.
Let me provide some perspective on how we arrived at that decision. During fiscal ’26 we completed a comprehensive overhaul of our brand strategies and marketing plans. Our recently completed marketing mix analysis confirmed that our past 18-month brand-building investments generated returns well below industry benchmarks and our own expectations. That reinforced the need for meaningful change. We redesigned our strategy and plans across all three brands and launched new marketing programs in September.
I will speak to those in more detail in just a moment. These programs are grounded in a deep understanding of our consumers and designed to strengthen brand connection, improve marketing effectiveness, and build consumer fundamentals over time. Given our confidence in these changes, we decided to increase investment behind our brands in fiscal ’27. We believe this investment will strengthen household penetration, deepen consumer engagement, and improve brand relevance and, in doing so, create greater long-term value for shareholders rather than maximizing near-term profit.
Based on this investment, we expect fiscal ’27 net sales and adjusted EBITDA performance to improve as the year progresses, with the second half materially better than the first half. Please note that our first-half performance will be challenging from a consumer demand viewpoint. For perspective, we’re entering the year with weaker underlying consumer trends than we would like. In addition, our planned pricing actions are expected to create a meaningful near-term volume headwind as we absorb consumer response from a close to a double-digit price increase.
That said, these dynamics are well understood, embedded in our plan, and do not change our conviction in the actions we’re taking. Margin and cost benefits we expect from our turnaround initiatives are embedded in our fiscal ’27 plan. While it’s still too early to assess the impact of our new commercial initiatives on top-line performance, we see several encouraging early indicators that give us confidence we are on the right track in our turnaround. First, we successfully executed price increases approaching double digits across much of our portfolio. While it remains early and we are closely monitoring consumer response, we expect pricing elasticities to be well above 1, weighted more heavily to the first half of the year.
That said, the pricing action is expected to materially improve the economics of the business, moving gross margins closer to our historic level of 40% and providing the financial firepower to reinvest in our brands. Second, we have validated the need for change through rigorous analysis and successfully launched new marketing programs across all three brands. The work is now in the marketplace and no longer in development. We are cautiously optimistic about the top-line impact we believe these programs can have on our business.
Third, we have renewed our focus on grounding new product innovation in a deeper understanding of consumer needs. We are prioritizing fewer, bigger opportunities that translate those insights into more relevant products. While innovation takes time to develop and bring to the market, we are encouraged by the potential of the pipeline we expect to launch as we close fiscal ’27 and move into fiscal ’28. Finally, we have simplified our operating model, strengthened organizational alignment, and improved accountability across the business. The organization today has greater clarity around our priorities and greater focus on the actions we are taking to improve performance. Evidence of this increased focus is our delivery against our financial commitments over the last two quarters. We expect these actions to translate into consistent priorities and high-quality execution.
Our focus is now delivering the financial improvements embedded in our plan and translating our commercial initiatives into stronger consumer fundamentals and improved top-line performance. We expect performance to improve over the course of the year as our marketing investments take hold, the volume impact of pricing eases, and year-over-year comparisons become more favorable. Our objective for FY27 is straightforward: restore the economics of the business, rebuild consumer connections with our brands, improve brand fundamentals while exiting FY27 with better momentum, stronger profitability, and a healthier foundation for long-term growth.
With that context, let me turn to our fourth quarter FY26 results. Our fourth quarter results were modestly ahead of our expectations, reflecting consistent execution against a difficult operating backdrop. Retail consumption remained pressured, and our performance was well below our long-term expectations for this business. Fourth quarter net sales declined 9.7% to $333.3 million. Gross margins were 34%, a decline of 30 basis points, and adjusted EBITDA declined 13.2% to $57.5 million.
Total company retail consumption, which we believe is the best indicator of the overall health of our business, declined 8.4% in the fourth quarter compared with the prior year. Before turning to our brands, let me emphasize a company-wide strategic priority. Since rejoining the company, I’ve become convinced that deepening our understanding of our target consumers, their needs, and their motivations must guide decisions across every brand and function. That priority underpins the brand strategies I’ll discuss next.
Turning first to Quest, our largest and most important brand, Quest’s fourth quarter retail takeaway declined 2.1%, but performance across the portfolio was mixed. Salty continues to perform well, with consumption growth of approximately 13% in the quarter, helped by the launch of Dill Pickle original chips. This launch exceeded our expectations, bringing new consumers into Quest and generating encouraging cross-purchase across the portfolio, especially on bars.
Our ability to identify new and interesting flavor trends continues to be a core strength for Quest, especially in our salty snack portfolio. Household penetration on the brand increased approximately 50 basis points to 20.2%, demonstrating the brand continues to recruit new consumers. The overall decline in retail takeaway was driven primarily by softness in bars, which were down approximately 6%, including an incremental club rotation and the performance of non-core innovation, including baked snacks within bars.
Performance was also affected by a lack of compelling innovation at a time when newer competitive offerings were generating consumer interest in the category. Our diagnosis is that Quest’s near-term issue is less about relevance and more about buy rate, the effectiveness of support behind the core, and an innovation mix that was too broad and lacking consumer insight. In fiscal ’27, we are addressing that diagnosis directly by focusing the Quest portfolio on its core bars and salty businesses, which represent approximately 80% of the portfolio. We are concentrating resources behind those priorities and advancing fewer, bigger, and more differentiated new product innovation. At the center of that strategy is a clear understanding of our target consumer, a group we call Performance Maxers. These consumers see health and wellness as a path to becoming their best selves.
They actively seek the best nutrition to fuel their progress and are unwilling to compromise on taste. For them, performance is about personal progress, not just athletic achievement. Our new Feed Your Athlete campaign brings that consumer mindset to life. The campaign began airing in September and is designed to sharpen the Quest brand message while creating a more consistent platform across bars and salty. Supported by influencer and social campaigns, it reinforces Quest’s differentiated combination of athlete-worthy nutrition and craveable taste and puts more marketing weight behind the two businesses at the center of our growth priorities.
As an example of how this campaign comes to life in influencer marketing, consider our partnership with physician and creator Dr. Mike, who brings our nutrition message to consumers as part of a broader expert-led campaign supporting our core bars. Early testing indicates that this creative is materially stronger than our prior two campaigns, which gives us confidence in the direction of this new strategy. While it’s too soon to draw conclusions from in-market performance, we will continuously optimize investment across media, influencer, and social channels against household penetration, buy rate, and core product velocities.
Turning to Atkins, fourth quarter retail takeaway declined 22.6%, roughly in line with the last quarter and our own expectations. Household penetration was 8.3%, down approximately 210 basis points year over year. Declining household penetration and the resulting distribution losses continue to be the primary drivers of the brand’s performance. While we’re clearly not satisfied with these results, our assessment is that Atkins’ challenges are not the result of a broken consumer proposition.
Atkins remains a highly recognized brand in weight management with significant consumer awareness and equity built over decades. Our diagnosis is straightforward: over several years, Atkins did not receive the level of marketing support required to drive sufficient consumer recruitment. Our message became less consistent and moved away from the brand’s core weight management proposition, and our ability to attract new consumers weakened as household penetration declined, velocity slowed, and distribution losses followed.
Importantly, we believe the primary challenge is attracting new consumers to Atkins rather than the fundamental loss of relevance of the brand’s weight management proposition. The brand continues to have a large and loyal consumer base that purchases Atkins products at consistently high rates. In fact, buy rate has remained relatively stable over the past year despite the significant decline in household penetration. To us, that suggests the challenge is bringing new consumers into the franchise at an accelerated rate.
We recognize that rebuilding household penetration will take time. However, improving consumer recruitment is exactly what our FY27 plans are designed to address. The emergence of GLP-1 therapies has reignited interest in weight loss, which is good news for the Atkins brand. As more consumers focus on weight management and metabolic health, we see a meaningful opportunity for Atkins among lapsed GLP-1 users—people who have stopped taking these medications and want to maintain their weight loss.
Research estimates that approximately 23 million U.S. adults are lapsed users or are cycling on and off treatment. With decades of experience helping consumers manage their weight through nutrition, we believe Atkins is well positioned to serve this group. That insight is reflected in our new campaign, Atkins Metabolism Changing Nutrition, which launched in September. The campaign features Rob Lowe as Atkins spokesperson, promises to help lapsed GLP-1 users keep the weight off, and speaks directly to the anxiety many consumers feel about maintaining weight loss success over time.
Atkins’ scientifically proven ability to change metabolism through a nutritional approach that provides consumers the right balance of carbs, protein, and fiber is meaningful to this target. To support that strategy, we have overhauled our consumer communications, redesigned the Atkins website to provide more science-based content and education, and expanded investment across streaming, digital, social, and influencers like Tori Spelling. In addition, we increased marketing support in the first half to improve household recruitment. We are aligning innovation behind this opportunity. New products, including our Whip bars, are designed to better serve consumers focused on long-term weight management and healthy nutrition.
Consumer response to this idea was overwhelmingly favorable in our research. It is simply too early to draw conclusions from the new campaign’s in-market performance. We will measure its effectiveness over time through household recruitment, buy rate, and core product velocities. Separately, we’re seeing some encouraging early signs in the Atkins bar business, including early evidence with key retailers that we are getting our core bar assortment right with a better balance of entry price points and value sizes that reward loyal consumers, alongside more consumer-relevant innovation such as our whipped and filled bars.
These improvements will not immediately offset the distribution losses already embedded in the business, but they do provide some early evidence that we can improve the underlying fundamentals as we execute our fiscal ’27 plans. Our objective is straightforward: improve recruitment, stabilize household penetration, and restore velocity in the core business. We believe our fiscal ’27 plans give us a stronger foundation to improve those fundamentals over time.
Moving next to OWYN, as expected, fourth quarter retail takeaway declined 7% compared to a decline of 1.3% last quarter. Household penetration was 4%, down approximately 30 basis points year over year. Importantly, our core ready-to-drink and powder chocolate and vanilla products outperformed the total brand, growing high single digits during the quarter. While overall brand performance was impacted by distribution pressures from non-core item velocities, we believe the performance of our core business reinforces the strength and relevance of the underlying consumer proposition.
Our confidence in OWYN is based on that proposition and the specific consumer segment we are targeting. Through our recent segmentation work, we have identified what we call Passionate Architects—consumers actively building a healthier lifestyle through deliberate choices around nutrition, ingredients, and wellness. These consumers place a premium on clean-label products, plant-based protein, and allergy-friendly nutrition, and represent a sizable opportunity for the brand.
Our research indicates that approximately 18% of U.S. households actively seek functional benefits such as plant-based protein and clean-label ingredients. That is a substantial addressable consumer group relative to OWYN’s current household penetration. Having said that, we expect distribution-driven losses on underperforming non-core items over the next six to nine months, which is incorporated in the guidance we provided this morning. Our go-forward focus is the core ready-to-drink and powder chocolate and vanilla products. We see opportunities to expand availability of core items in more stores, with future distribution growth paced with household growth and supported by evidence of sustainable velocities.
Marketing will be central to the OWYN growth plan. Our new creative platform, Every Ingredient Earns Its Place, was developed specifically for these Passionate Architects. These consumers care deeply about what goes into the products they consume and are looking for brands that share their commitment to transparency, quality, ingredients, and purposeful nutrition. Fresh creative is now in market reinforcing the brand’s clean DNA refresh. TV spots, retailer website content, and digital banner ads are live, complemented by an expanded streaming TV investment against our targeted consumer group.
We have also reengaged influencers with a new tiered strategy, including increased paid social advertising. Before I turn the call over to Chris, I’d like to leave you with why I remain confident in the future of Simply Good Foods despite our current performance challenges. I believe our category remains attractive, our brands remain relevant, and our challenges are fixable. First, we operate in an attractive category supported by long-term consumer trends around health, wellness, and convenient nutrition. These trends remain highly relevant, and retailers continue to view purposeful nutrition as an important source of growth.
In the food and beverage sectors, where any type of growth is at a premium, this category continues to outperform. Second, we have built a company with strong capabilities in marketing, sales, R&D, and managing an outsourced supply chain, which we believe remain important competitive advantages that can support future growth and value creation. Third, our asset-light operating model remains a competitive advantage. It provides flexibility, supports strong cash flow generation, and allows us to direct resources towards the areas where we see the greatest opportunities to create value, regardless of the consumer backdrop or economic environment.
Finally, we have a portfolio of strong brands that connect with distinct consumer segments, and we are confident that we can grow these brands long term. Quest remains one of the leading brands in the category, catering to consumers who see health and wellness as a path to becoming their better selves. Atkins has a loyal consumer base and a long history in weight management, giving us a strong foundation to reach lapsed GLP-1 users looking to maintain their weight loss.
OWYN gives us access to the growing plant-based and clean-label protein segment. While the turnaround will take time, our focus is clear: restore the economics of the business, rebuild consumer connection with our brands, and improve performance as the year progresses. Thank you for your time today. I’ll now turn the call over to Chris to discuss our fourth quarter results and fiscal ’27 outlook.
Chris Bealer ACA, CPA (Chief Financial Officer)
Thanks, Joe. Good morning, everyone. As Joe noted, fourth quarter performance was modestly ahead of our plan, although the results remained below the level we expect from the business. Net sales were $333.3 million, a decline of 9.7% versus the prior year, primarily reflecting weaker consumption and velocity-related distribution pressure. GAAP gross profit was $113.3 million compared with $126.6 million in the prior year. GAAP gross margin was 34.0%, a decline of 30 basis points year over year.
As expected, this was the strongest gross margin of the fiscal year and reflects the benefit of productivity actions despite ongoing inflation. Adjusted EBITDA was $57.5 million, a decline of 13.2%, and adjusted EBITDA margin was 17.2% compared with 17.9% last year. Selling and marketing expenses were $32.4 million, unchanged versus the prior year. G&A expenses of $30.6 million, which contains $1.9 million in restructuring cost, decreased 24.8% versus the prior year period, which contained $8.7 million of integration expense.
Net income was $30.5 million, or 9.1% of net sales, compared with a net loss of $12.4 million, or negative 3.4% of net sales, in the prior year period. Turning to our balance sheet and capital allocation priorities, at the end of fiscal 26 we had cash of $138.4 million versus $98.5 million at the end of fiscal 25. Cash flow from operations for the year was about $181 million versus $178.5 million in the prior year, despite the net sales declines, thanks to strong working capital management. Moving to capital allocation, we reduced debt by approximately $50 million during the fourth quarter. Net debt to trailing twelve month adjusted EBITDA was approximately 0.9 times at year end, providing meaningful financial flexibility in a dynamic consumer environment.
In fiscal 26, we repurchased 11.7 million shares for roughly $213 million. As of October 26, 2026, approximately $141 million was left under our current share repurchase authorization. Our priority for capital remains investing in the operational needs and long-term growth of the business. This includes the innovation and marketing support needed to strengthen consumption across all three brands. Looking ahead, we expect fiscal 2017 capital expenditures of $15 million to $20 million. In addition, we expect the business to continue to provide strong cash flow conversion, and we will balance investment in the business with the best use of excess cash, such as debt reduction and opportunistic share repurchases, while preserving flexibility for long-term strategic.
Moving to our fiscal year 2027 outlook, we expect net sales to decline between 13% to 17%. The outlook reflects several current consumption trends, negative in-year volume impact from our recent price increase, and distribution losses, including lower club rotational volume. As we think about the cadence of fiscal 27, we expect to see stronger top-line performance in the second half of the year than the first half. Specifically, we expect the first quarter will be the weakest quarter from a top-line perspective, but we expect improvement in the rate of net sales in the second half of the year compared to the first half.
This will be driven by a couple of factors: lessening volume impact of our September price increase, easier year-over-year comparisons, and the incremental marketing investment, which we expect will drive improved consumption trends. Led by Quest, we expect GAAP gross margin to improve by 250 to 300 basis points, driven by pricing, productivity initiatives, and lower one-time costs. We expect gross margin performance in the second half to be stronger than in the first half of the year.
We expect adjusted EBITDA to decline between 9% and 14%, which reflects our intention to increase our investment behind our brands. As Joe said earlier, we believe this will create greater long-term value for shareholders rather than maximizing near-term profit. Finally, we expect adjusted EBITDA and adjusted EBITDA margin to be stronger in the second half of the year as a result of better gross margin performance and an improvement in net sales trends.
Our adjusted EBITDA guidance assumes selling and marketing expenses to increase by approximately 80 basis points. Within that is an increase in the marketing investment of approximately 90 basis points, offset by slightly lower selling expense. This moves our total marketing investment closer to our aspiration of 10% of net sales. As it relates to G&A, recall that during our Q2 fiscal 26 earnings call, we discussed a major initiative to reduce fixed costs.
We expect this initiative to generate approximately $8 million of annualized savings in employee costs. We recognized approximately 40% of these savings in fiscal 26 and expect to realize the remainder in fiscal 27. These savings are embedded within the guidance we have provided this morning. We expect interest expense of approximately $18 to $20 million and capital expenditures between $15 to $20 million. As to the first quarter of 2027, we expect net sales to decline between 19% and 22%, driven by current sales momentum and the impact of our price increase. As Joe noted earlier, we expect this will represent our most challenging quarter of the year. We expect Q1 2027 GAAP gross margins to increase by approximately 100 basis points. We expect Q1 2027 adjusted EBITDA to decline between 28% and 33% as we invest behind our new marketing programs.
Before we close, I would like to take a moment to address the most critical driver of Simply Good Foods: our people. Thank you for your incredible hard work, resilience, and dedication throughout this past year. With that, Joe and I will now take your questions.
OPERATOR
Thank you. We will now 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 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions.
The first question is from Matt Smith from Stifel. Please go ahead.
Matt Smith (Analyst)
Hi, good morning, and thank you for taking my question. Wanted to talk about your expectations for the top line. You outlined the full-year expectations improvement in the rate of decline in the second half. But if you could provide a little more color on your expectations by brand, and if you believe the improvement in the second half pertains to each of the brands in the portfolio, or if it’s more focused on some of the individual brands.
Geoff Tanner (Chief Executive Officer)
Thanks, Matt. Yes, we’ll take that question. So as we said on the call, the first quarter is going to be the toughest quarter, and we’re going to have progressive improvement through the year with the second half being much stronger than the first half. That improved strength is across all three brands. But I would say that the strongest improvement in the net sales decline rate is going to be on Quest. It’s going to have the strongest inflection, if you will, as we go into the second half of the year.
And that’s really reflecting the very strong investment that we’re putting behind all three brands with new creative, new marketing campaigns that we launched in September. I’m really looking at Quest, like I said, as a place where we’re really focusing some of that increased investment.
Joseph E. Scalzo (Member Board of Directors)
Yes, Matt, it’s also helpful just perspective, kind of macro on all three brands. Right. We’re carrying a little bit of negative momentum as we begin the year on each brand from a POS standpoint. Factor on top of that, we’re taking close to a double-digit price increase on a large portion of that portfolio, which is now just hitting the marketplace. So you have that negative volume impact based on the elasticities, and so you get that double whammy that’s early in the year.
And then we’ve changed the marketing on all three brands, hit the marketplace in September. That takes time to kind of build from a communication standpoint and ability to influence consumers. So it just sets up for, from a macro standpoint, all three brands having a tough first quarter, first half, and starting to move in a positive direction as we move into the second half of the year. So, you know, macro-wise all three brands are affecting that.
We’re, from an investment standpoint, leaning in heavier on our most important brand, Quest. You know, we believe from a household standpoint it’s in a better position, and we think we can affect that brand from a turnaround standpoint quicker. So we’re going to lean in more on Quest as the year moves forward. So I’d say all three brands have that curve. Quest probably has a sharper slope.
Matt Smith (Analyst)
Thanks, Joe. And a follow-up on the step-up in marketing. This is a business where we’ve seen marketing move higher, but historically it’s been more self-funded from a position of strength. So what’s changed in your view of the business to have the confidence in the new marketing to step that level of investment up preemptively this year, as that marketing is going into in front of the consumer today?
Geoff Tanner (Chief Executive Officer)
Yeah. Let me first step back a little bit. Investing heavier in marketing hasn’t been the profile over the last, call it 24 months. We’ve been reluctant to price to cover inflation, so we’ve seen gross margins move from where we historically have been—high 30s, approaching 40s—with marketing as a percent of sales close to 10%. Those numbers have come down appreciably and have led to marketing reductions, which we believe have resulted in weaker consumer fundamentals: household penetration slowing or actually declining, buy rates down just from marketing pressure declining.
You know, fundamentally we were moving in the wrong direction. Right. So what we’re doing now—taking pricing to get gross margins back and reinvesting in our brands—is back to the future. Right. We’re actually going back to a profile that we used very successfully for over a decade to grow this business. So the question that you ask, with that as background, is what confidence do I have? Well, judgment first. First judgment was our positioning on our brands lacked consumer insight, lacked an understanding of the brands and the consumer targets, and needed to get sharper. That would be the first observation—my observation when landing in the second quarter and looking at what we’d been doing—that caused us to exit our advertising agencies, bring new people in, and really go do our homework on our consumer target, our brand positioning, and our communication plan.
That led to new creative on all three brands, which hit the market in September. One of the other things I did when I arrived was identify the fact that we hadn’t done any marketing mix analysis. Marketing mix is a mathematical tool that you can use to understand the returns—return on sales, return on gross margins—of your investments. So we placed that study. It takes a while to happen. So that was happening as we were changing the marketing. The results of that started to trickle into our organization in July and August and kind of finished in early September.
There was one big conclusion and three sub-conclusions from that, all of which supported the changes that we had made. At the highest level, the return we were experiencing for our marketing was well below the midpoint of benchmarks for consumer packaged goods. So our returns weren’t good. They pointed to three drivers of lack of performance. The first one was our creative wasn’t particularly compelling, reinforcing the insight that we had back in the second quarter: this needed to change. The second insight: where we were allocating our dollars produced a lower return. We were spending money much closer to the point of purchase—retailer, online word search, banner ads—and not enough money at the top of the funnel: streaming, social, influencer.
Meaning, we weren’t talking to consumers in the targets about the brand, creating brand awareness and consideration at the levels that we should be. So that was the second indication. And the third, and most important, is we weren’t spending enough money. The returns are a function of marketing pressure. There was not enough marketing pressure. So that’s why we’re leaning in. Judgment is that the creative—and we have some qualitative/quantitative on the creative on each of the three brands—is better than we’ve experienced in the past, and the fact that marketing pressure will increase returns. So knowing that the turnaround is going to require not only better P&L but growing top line, we’re leaning in to make investments on the brand to accelerate the top-line turnaround of the business.
And we believe that’s a better return for shareholders than pocketing the gross margin improvement in EBITDA. Thank you. Thanks.
OPERATOR
The next question is from John Anderson, from William Blair. Please go ahead.
John Anderson (Analyst)
Oh, good morning. Thanks for the question. I was hoping you could talk a little bit more about the price increase, the level and effective date, and more important, your assumptions around elasticity and how those were kind of derived. That would be helpful. Thanks.
Geoff Tanner (Chief Executive Officer)
Yeah. So good question and I appreciate it. First, we understood that the path that we were on of trying to keep our pricing constant—right, so less consumer impact due to pricing—and pulling back on marketing pressure, marketing investment, we understood that path was not working. It is producing the results we’re experiencing in the marketplace right now. I think all of you understand performance in the marketplace has a delay for decisions that were made.
So we’re living with trying to hold pricing, eat inflation, cut marketing support, and hope our business performs off the shelf. Well, that hasn’t been the case. So when we got to the reset back in the second quarter, we understood we needed gross margins; we needed to improve our bottom-line performance. But equally important, we needed gross margins as fuel back into our brands. So we took a look at the inflation that we were experiencing in the last fiscal year, the inflation that we expect to see in this fiscal year, and that led us to a series of decisions around the level of pricing. And it is, you know, approaching double digits.
It’s pretty significant. But it moves us back to a gross margin structure that we believe is necessary for us to have the fuel for back on our brands. So net pricing was necessary. You can’t eat inflation as a branded consumer packaged goods company. And we believe that the short-term impact of the pricing was worth the long-term impact of the gross margins, the ability that it provides us to invest back in our brands, and the decision that we’ve made in this fiscal year to invest.
So coming to your question of elasticities, you know, it’s one of the probably bigger unknowns or risks we have going into our plan—to really understand pricing elasticity. You know, the analytics of it is kind of by channel. You need to have price points to predict it accurately; you need to have price points that actually already exist so you can model off of store-level data. Well, we’re at price points we’ve never been at. So we’re using our best estimate of what we believe elasticities are.
The price increases that we’ve taken over the last 24 months, although not substantial, had indicated we were somewhere in the range of 1 to 1.2 times elasticity. This is, you know, the price increase that we just took, much more substantial than those. On some of our brands we’re crossing key dollar thresholds, so we expect the elasticities to be higher than what we most recently expected. That’s what we’ve built in—I think appropriately conservative.
And we’ve built a bigger impact in the first half of the year than the second half of the year. And as you can expect, as consumers purchase free—you know, as they buy during the year—they can start getting used to the elevated pricing, and you start seeing a little degradation of price elasticity over time. So that’s how we got to the decision. We’ve been, I think, appropriately conservative in estimating that, embedded in our plan. But it’s one of the factors that we’re going to be closely monitoring as the first and second quarter play out.
John Anderson (Analyst)
Thanks. Helpful. I’ll pass it.
OPERATOR
The next question is from Jim Solera from Stephens Inc. Please go ahead.
Jim Solera (Analyst)
Hey guys, good morning. Thanks for taking our question. I wanted to ask about the bars and RTD shakes’ kind of competitive position relative to other alternatives in the store, given this kind of elasticity dynamic. You mentioned you’re at price levels you haven’t seen before. Obviously we’ve seen a lot of macro headwinds across the consumer. Can you just walk us through some of the conversations you’re having with retailers and how that might impact, you know, end cap placements and kind of more visible displays that in the past have brought people into the category?
Geoff Tanner (Chief Executive Officer)
Yeah, ask that again. I just want to make sure I understand the essence of the question.
Jim Solera (Analyst)
Essentially, do the price points that we’re at now limit your ability to have very visible in-store placements that previously brought people into the category?
Geoff Tanner (Chief Executive Officer)
Well, yeah, I think that’s yet to play out. The context I would provide you: we’re not alone in this inflationary pricing world. So there are already, happening around us, significant competitive pricing, and we’re going to see elevated levels of base price and elevated levels of temporary price reduction from all competitors. Right. So I think it’s, frankly, less about the price points and more about the compelling consumer propositions that retailers allocate merchandising to.
Let me give you the best example. Our most compelling brand-product proposition is our salty business. It’s over half a billion dollars in retail sales. It’s been growing double digit now for a number of years. Our recent innovation has resonated. We seem to continue to be able to attract households to it as well as drive buy rates. That’s compelling to a retailer. Right. They’re going to want to merchandise that. Now, is it for a four-pack of salty single serve on Quest, as that price point drifts over 10 bucks at mass and over 11 bucks at grocery—does that challenge consumer offtake?
Well, we’re about to better understand that. Is it driving retailers to want to display it? Yes. You know, I have more confidence in my selling organization and our ability to work retailers through that discussion, knowing the uniqueness of the proposition. So, you know, I would say it’s more about the brand proposition, the brand-product proposition, than it is the fact that we’re taking pricing. Right. And, oh by the way, everybody else has taken pricing too.
Jim Solera (Analyst)
Got it. One follow-up question. Could you give some thoughts around OWYN in particular? I know when you guys bought this brand, obviously it was very incremental in terms of the kind of the pace of growth relative to the portfolio. And as of recent, as you kind of worked through some of the quality issues, do you find that there’s evidence from retailers to bring that back into the fold? And I recognize the stepped-up marketing campaign hopefully helps with visibility, but can you just help us kind of maybe size up or have a sort of a glide path to earning a spot back on shelf for retailers that maybe tried it and then took it out during the quality issue period?
Geoff Tanner (Chief Executive Officer)
Yeah, we had, I would say first and foremost, no, we’re not experiencing retailers believing that the brand does not have a compelling consumer proposition. And the reason for that is there’s a large consumer group seeking the benefits that OWYN offers. Right. So I think they see the reality for what it is. We got overassorted, got a little bit enthusiastic about our ability to innovate kind of outside the core and drive household penetration and buy rate by doing that.
And frankly that just wasn’t the case. So, you know, we’re going to have a reset on OWYN. I think it’s a short-term reset. Things that got launched over the last 12-plus months didn’t perform, actually weren’t particularly incremental. They’re coming out of the assortment. Retailers saw that, are acting on it. We’re obviously helping point out where that weakness is, but we’re also at the same time pointing out, hey, the core business is pretty solid. It’s growing high single digits. Let’s get back to the core.
Let’s focus on recruiting households that are interested in kind of this space. It’s a substantial opportunity. Right. We sit at around 4% household penetration. We think that universe of passionate architects is somewhere around 3 to 4x that. Let’s recruit them with core items, and as we innovate, innovate close to the core. Right. We’re in the business of increasing household penetration, not necessarily driving a bunch of TDPs that don’t bring people to your brand.
So that’s the reset that’s happening, and we’re pretty enthusiastic about the brand. We see this brand returning to growth and we think retailers see it too. Yeah, you’re welcome. Have a good day.
OPERATOR
The next question is from Rob Dickerson from US Bancorp. Please, go ahead.
Rob Dickerson (Analyst)
Great, thanks so much. Kind of like a—it’s going to sound like an overly basic question, but I just got to ask it. So, you know, Joe, obviously heard everything you’ve already said, all makes logical sense, but I think we think about 27 as we get through 27. Clearly it does take some time. It takes some time for influencers to get to the core and to kind of be more upstream. How do you—or I guess I’ll put it this way, very simplistically—when do you hope to maybe have a better idea if it’s working?
Right. And I’m kind of just talking broadly across all three brands, but more so, I guess, Quest. And then let’s just say it’s like it’s not working as well as you would have hoped for, whatever macro reason. Or maybe it’s, you know, part of the marketing plan or what have you. Do you kind of have, like, plans B, C, and D in place to say, hey, if it’s not working by this time, you know, maybe we’ll shift that way and you’re working with each of your individual influencers?
Because kind of what I’m hearing a lot is, you know, innovate to the core, you know, get more, you know, or focus more on that core consumer with the marketing strategy, which clearly you’ve done a lot of work on. But I’m not hearing, like, what the actual, like, new innovation will be or how we actually get that person to care more. And maybe, you know, there need to be tweaks kind of along the way. So just trying to understand the timing a little bit more and kind of how you try to hedge it if maybe things aren’t working so well.
Thanks so much.
Geoff Tanner (Chief Executive Officer)
Yeah. Rob, good morning. Look, first, I think it’s not as much about innovation as it is about understanding who your consumer target is, understanding what your brand proposition is, and marketing to it. So let’s talk about Quest, because that’s what you wanted to talk about as the best example. Quest’s core positioning around these performance maxers has two pieces that are really important. One is world-class nutrition and craveable taste. So you got to get back to, on the brand, the core brand DNA.
This is a brand that’s about great, uncompromising nutrition and craveable taste. That’s reflected in the new advertising and all the social digital that we’re doing. Back to the basics on the brand. So that’s the first thing on Quest. The second thing on Quest is we kind of fell in love with some non-core areas. We launched a milkshake product, which has done pretty well. We launched a bunch of baked items—not so well. Right. Get back to the core. It’s a salty bar business. Make sure a lion’s share of your investment and in your innovation and your communication is back to those products and to that brand promise. That’s the core of our ability to recruit consumers to the brand.
That’s what’s been missing in the marketing over the last, call it, 18 to 24 months. That started in September. Right. Innovation on our salty business—the innovation’s been pretty good and we’ve continued to drive that business. I know the pipeline, I know what’s coming. The innovation that’s coming on our salty business—excellent. So I’m not concerned about our ability to establish momentum from a brand standpoint on Quest and continue momentum on our salty business.
Bars, I think, is a slightly different story. We’ve got a little bit of negative momentum. It’s because we weren’t focusing in on it. It’s because our innovation wasn’t as good as it needed to be. And it’s because our positioning didn’t reinforce nutrition and taste. So all those things are happening as we speak, and an innovation pipeline on bars has become much more consumer insight–oriented. And as we bring those things to the marketplace, I’ll be happy to talk to you about those.
My belief in Quest is we’ll see a significant inflection point on the brand as we move through the second half of the year. As we move from third quarter to fourth quarter, I expect it to improve. And as we get to the fourth quarter and move into early ’28, we’re going to be burning off a price increase, hopefully with no further pricing, but that yet remains to be seen. And then we will have lapsed the number of rotations that we’re not repeating in clubs.
So there’s probably another few points—call it two to three points—of headwind that’ll burn off. As we move into 1Q28, I feel pretty good about our ability to get Quest moving in the right direction. Second half better than first. First quarter ’28 better than fourth quarter.
Rob Dickerson (Analyst)
Okay, great. And then just—thank you for that. Just another simple question. Is this Rob Lowe? I know you mentioned Rob Lowe. Rob’s coming back. Rob’s kind of, quite frankly, at least in my day, it’s kind of where the brand started and really, you know, did well with Rob. So just curious, any other incremental color as to, you know, what part he will be playing over the next 12 months at the company? That’s it. Thanks.
Geoff Tanner (Chief Executive Officer)
Yeah. So, you know, Atkins was very clearly an issue. On Atkins, it was how do we start recruiting again? So we got to where we are because we didn’t price, we had gross margin erosion, we cut marketing support, we stopped recruiting. I think, secondarily, for a while we were kind of lost as to where the brand lives. So I initiated work back in January: let’s get this brand back on track. GLP-1s have changed the world of weight management. What’s Atkins’ role in that?
We’ve come to what I think is a pretty compelling strategy. These GLP-1 users are using the medications to lose weight. So Atkins’ role in helping people lose weight has fundamentally changed because of GLP-1s. That said, there are a lot of people cycling off these medications as they achieve their weight loss, and they have a lot of anxiety about maintaining that weight loss. That’s where Atkins is going to live. And Rob Lowe has incredible, incredible credibility with these people.
So we brought him back quite simply because people trust him, believe him, and see him as an expert in nutrition. So we’re going to target those people, and we’re going to see over the next four or five months, with this positioning—the creative, the website, social, digital, influencer—whether we can get Atkins back in the people recruiting business. I like the insight, I like the positioning, and I love Rob Lowe. So we’ve got our fingers crossed, and we’re quietly confident that this is going to work.
Rob Dickerson (Analyst)
All right, great. I like it.
Geoff Tanner (Chief Executive Officer)
Thank you. All right, have a good day.
OPERATOR
The next question is from Alexia Howard from Bernstein. Please go ahead.
Alexia Howard (Analyst)
Good morning, everyone. Can I ask about the ingredient list? You talked about the importance of clean label, particularly to the OWYN consumers. But as you think about the core propositions and the ingredient lists on Atkins and Quest as well, is there any reformulation or renovation of the ingredient list that you’re working through as well to make sure that those performance maxers are given exactly what nutrition—the nutrition criteria that they’re looking for?
Geoff Tanner (Chief Executive Officer)
Yeah. Alexia, let me point out, I think the strength of our portfolio is we have three brands against unique consumer targets who want, frankly, different things. So the OWYN passionate architects—they’re all about ingredients, they’re all about wellness, they’re all about ingredients. They know what they are—less of them. Every ingredient earns its place, and that brand is well positioned from a label standpoint, from a trust standpoint, to target those people. Maxers are in a completely different place. Maxers are looking, in the choices they make in food, to be their very best selves, and that’s both kind of athletically and in life.
They don’t flip a label over to see that there’s six ingredients and they understand each one. That’s not what they’re about. They’re about getting the best nutrition they can get in a product—in this case, it’s the highest level of protein, most effective level of protein, low carbs, decent amount of fiber—to fuel their lives day to day. Very different groups. So I wouldn’t take the passionate architect mindset and then take those ideas and put it on a performance maxer.
They’re very, very different people looking for fundamentally different things in products. And it’s the strength of our portfolio—we have different brands that appeal to different consumer targets looking for different things. Did I answer your question, Alexia?
Alexia Howard (Analyst)
Yes, I think so. I guess I’m just thinking about people worrying a bit more. But I hear your point. Hope you have a good day.
OPERATOR
Thank you. There are no further questions at this time. I would like to turn the floor back over to Joe Scalzo for closing comments.
Joseph E. Scalzo (Member Board of Directors)
Yeah. Thank you very much for your interest in our business. We look forward to talking to you in the next quarter. Have a good day.
OPERATOR
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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