Simply Good Foods: Navigating Growth and Margins in a Challenging Market

The Simply Good Foods Company (NASDAQ: SMPL) reported robust third-quarter 2025 results, driven by the acquisition of premium kitchenware brand OWYN and strong performance from its Quest protein bar line. However, margin pressures from inflation, integration costs, and a struggling Atkins brand raise questions about the sustainability of its growth trajectory. This analysis evaluates whether the company's Q3 results and updated guidance justify a long-term investment, comparing its performance to peers like Hershey (HSY) to contextualize industry dynamics and valuation.

The Impact of the OWYN Acquisition

SMPL's Q3 net sales rose 13.8% to $381 million, with OWYN contributing 10% of growth and Quest delivering 11% retail takeaway gains. The OWYN acquisition, completed in June 2024, has been a key driver of top-line expansion, adding $33.6 million in Q3 alone. However, the lower-margin OWYN business compressed gross margins by 350 basis points to 36.4%, a critical challenge for profitability.

While OWYN's 24% retail growth signals strong demand, the integration's financial drag highlights execution risks. Management aims to offset these costs through synergies and cost discipline, but investors must assess whether these savings will materialize.

Margin Pressures: Inflation and Integration Costs

Inflation and tariffs remain a double-edged sword. SMPL's gross margins have declined by 350 basis points year-over-year, with non-cash inventory step-up adjustments and rising protein ingredient costs compounding the pain. The company projects an additional 200 basis point decline in gross margins for 2025.

Comparatively, Hershey (HSY) faces similar margin headwinds, with Q1 2025 gross margins contracting 1,780 basis points due to tariffs and commodity costs. However, HSY's broader portfolio and cost-cutting initiatives (e.g., $125 million Agility & Automation program) offer more diversified resilience. SMPL's narrower focus on health snacks leaves it more exposed to ingredient price swings.

Sustainability of EPS Guidance

Despite margin pressures, SMPL's adjusted EPS rose to $0.51 in Q3, up from $0.50 in 2024. The company reaffirmed full-year guidance for 8.5-9.5% net sales growth and 4-5% EBITDA expansion. However, sustaining this growth hinges on three factors:
1. Revitalizing Atkins: The brand's 13% retail takeaway decline in Q3 underscores the need for aggressive innovation (e.g., the new Atkins Endulge line).
2. Cost Management: CFO Chris Bealer's focus on operational efficiencies and debt reduction ($240 million repaid since the OWYN deal) has lowered net debt to EBITDA to 0.5x, a manageable level.
3. Market Share Gains: Quest and OWYN's combined 17% retail takeaway growth suggests strong demand for protein-rich snacks, a category projected to grow as consumers prioritize wellness.

Valuation and Peer Comparison

SMPL trades at a forward P/E of 16.5x, below its five-year average of 18x and cheaper than HSY's 23x multiple. While HSY's broader portfolio and stable cash flows justify its premium, SMPL's higher growth rate (projected 9% sales growth vs. HSY's 2%) offers potential upside.

However, margin risks temper optimism. HSY's Q2 2025 results, which will be reported on July 30, could provide clues on whether its margin recovery strategies (e.g., pricing, cost-cutting) are working—lessons SMPL may need to adopt.

Investment Recommendation

Buy with Caution: SMPL's Q3 results and debt reduction are positives, and its focus on high-margin health snacks aligns with secular wellness trends. The OWYN acquisition, while margin-heavy, opens new growth avenues. However, near-term margin pressures and Atkins' struggles warrant caution.

Hold if Margins Stabilize: If SMPL can offset gross margin declines through operational efficiencies and Atkins revitalization, its 16.5x P/E becomes compelling. Monitor Q4 results for signs of margin stabilization and top-line resilience.

Historically, SMPL's stock has shown a tendency to rise following earnings releases, averaging a 1.45% return around such events since 2022, with a peak gain of 2.84% in July 2024. This suggests that earnings announcements have often acted as positive catalysts, which could bode well for investors awaiting the upcoming Q4 results.

Avoid if Margin Woes Persist: Persistent inflation, protein cost volatility, or further Atkins declines could derail growth. Competitors like PepsiCo and Nestlé are aggressively entering the health-snack space, adding execution risks.

Conclusion

Simply Good Foods is at a crossroads. Its Q3 results validate the strategic value of the OWYN acquisition and Quest's dominance, but margin pressures demand aggressive cost management and innovation. Investors should consider SMPL a Hold for now, with a Buy rating contingent on margin stabilization and Q4 outperformance. The stock's valuation offers upside potential if management can deliver on its long-term growth narrative.