The Simply Good Foods Company reported a fiscal third quarter of 2026 (ended May 30) that beat its own expectations but declined meaningfully year over year, as its execution-driven turnaround under returning CEO Joe Scalzo remains in early stages. Net sales fell 6.3% to $357 million and adjusted EBITDA dropped 22.5% to $57.2 million, while a GAAP operating loss of $49.9 million and a net loss of $52 million (diluted EPS of -$0.58, -14.0% operating margin) were driven by an $82 million non-cash impairment of goodwill and the Atkins and OWYN brand intangibles. Beneath the loss, the picture was mixed: Quest (+1.1% net sales, household penetration up 120 bps to 20.5%) and OWYN (+3.6%) grew slightly better than expected, with Quest chips up 17% and milkshakes up ~50%, but Quest bars fell ~5% and Atkins collapsed 24.6% on years of under-marketing. Reported gross margin fell 390 basis points to 32.5% (34.3% ex-restructuring, beating forecast on productivity). Management's three-part turnaround — strengthening economics, sharpening strategic focus, and rebuilding ROI-based brand investment — includes a high-single-digit September price increase to offset persistent protein/packaging/freight inflation (whey up sharply, offsetting cocoa deflation), accepting an elasticity-driven volume hit as short-term pain. The company reset guidance: full-year net sales to $1.345-1.355 billion (down 6-7%), adjusted EBITDA to $220-225 million, and Q4 net sales to $322-332 million with undershipping to right-size inventories. The balance sheet is healthy (net debt ~1.2x, ~$240 million of buybacks over twelve months), capex was trimmed to $25-30 million, and leadership emphasized refocusing Quest on its core bars/chips DNA of superior nutrition and taste, resetting Atkins to a disciplined baseline with a GLP-1 weight-management angle, and cleaning up OWYN's non-core SKUs while investing behind a new marketing agency and higher-ROI top-of-funnel media.
Thank you, operator. Good morning and welcome to The Simply Good Foods Company's third quarter fiscal year 2026 earnings call for the period ended May 30th, 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 in 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 plus +C measured retail channel data and company estimates for unmeasured channels for the 13 weeks ended May 31st, 2026, as compared to the prior year. I will now turn the call over to Joe Scalzo.
Thanks, Matt. Good morning, everyone. Thank you for joining us today. This morning, I'll recap our third quarter results and then provide you with some perspective on the performance of our brands, as well as an update on our progress toward our turnaround objectives. Then, I'll turn the call over to Chris, who will discuss our financial results and our updated outlook in a bit more detail before we open it up to take your questions. In the third quarter, our results came in ahead of our expectations. While we're not satisfied with our overall performance, the quarter reinforced our belief that the actions we are taking are the right ones. We are ensuring organizational focus, improving execution, and strengthening the economic foundation of the business.
As we discussed on our last earnings call, our overall performance remains well below where we believe this business should perform, with each key financial metric declining meaningfully versus the prior year. Importantly, we remain in the early stages of our turnaround and have significant work ahead. Net sales declined 6.3% to $357 million. Gross margin declined 390 basis points to 32.5%, and adjusted EBITDA declined 22.5% to $57.2 million. Quest and OWYN net sales grew 1.1% and 3.6% versus prior year respectively, and both brands performed slightly better than we expected. We continue to see encouraging momentum in some parts of the portfolio, particularly Quest chips and milkshakes. Atkins net sales declined 24.6% in the quarter, reflecting continued pressure from declining household penetration as a result of insufficient marketing support behind the brand. Our retail takeaway declined 6.7% during the quarter, essentially unchanged from the second quarter.
The purposeful nutrition category grew 10% during the same timeframe. As I have spent more time inside the business, it's becoming increasingly clear to me that our challenges are largely execution-driven rather than category-driven. Purposeful nutrition remains an attractive category supported by favorable long-term consumer trends, and retailers continue to view the category as an important source of growth. Importantly, these execution challenges are within our control to fix, and the actions we are taking are designed to address each of them directly. Against that backdrop, we remain focused on three priorities that will determine the success of our turnaround: one, strengthening the economics of our business; two, ensuring consistency and discipline in strategic choices, driving organizational clarity, focus, and efficiency; and three, rebuilding brand investment behind superior consumer insights and marketing execution.
We are making progress on each, although we are still in the early stages of the work. First, we are strengthening the economics of the business by improving our cost structure and rebuilding margins. We remain disciplined in managing our cost base and are executing against the structural actions we previously outlined. On pricing, we are taking the actions needed to offset inflation and other cost pressures. In addition, our productivity initiatives are gaining traction and are expected to provide benefits as we move forward. Given the significant cost inflation we are experiencing this fiscal year and believe will continue into the next year, we recently announced a high single-digit price increase across most of our portfolio that will become effective in September. This increase is necessary to offset inflation we are experiencing across proteins, packaging, and other key cost inputs.
While we remain focused on productivity initiatives and cost reduction efforts, rebuilding margins requires decisive action on pricing, and we believe this increase is appropriate. Second, while still early, we are beginning to see signs that the organization is operating with greater focus and accountability. Decisions are being made faster, priorities are clearer, and resources are increasingly concentrated behind fewer, higher return opportunities. We believe our better-than-expected financial performance in the quarter is early evidence of our progress. Third, we are revamping our brand-building capabilities through stronger consumer insights, more effective marketing, and using ROI as our key metric in making future investment decisions. As an example of the progress in this area, we were already shifting investments towards top of the funnel streaming and connected brand media investments to drive higher returns and strengthen our brand metrics.
Additionally, we just completed a thorough assessment of GLP-1 therapies and their impact on consumption behaviors that provided us invaluable consumer insights to guide our marketing and innovation efforts moving forward. With that, let me turn to an update on each of our brands. Turning first to Quest. Quest remains our largest brand and most important growth engine of the company. In the third quarter, Quest retail takeaway grew 1.4% compared to 2.4% growth last quarter. Importantly, household penetration increased 120 basis points year-over-year to 20.5%. The most important takeaway is that Quest continues to recruit consumers, demonstrating that the brand remains highly relevant. Our challenge today is to refocus on our core bar and chip segments that represent 80% of the brand while improving buy rate, particularly within bars. Within Quest, chips continue to perform well as consumers increasingly seek better for you salty snack alternatives.
Quest chips consumption grew by over 17% in the quarter, and household penetration for Quest chips is now approximately 11%. This remains a strong example of where the brand is aligned with consumer demand and where focused investment can continue to drive growth. We see encouraging signs across pockets of our recent innovation. We're seeing strong growth in our milkshake segment, which was up almost 50% in the period, albeit from a small base. This is another example of our ability to grow the brand when closely aligned with evolving consumer demand. At the same time, we're not satisfied with the recent performance of our bar business. Despite an incremental club rotation that began during the quarter, bar consumption declined by roughly 5%, which impacted total brand buy rate. Re-accelerating growth in Quest bars is our highest priority.
Our work is focused on improving top of the funnel communication, ensuring our innovation pipeline reflects evolving consumer preferences, and supporting the bar segment with an appropriate level of marketing investment. During the quarter, we hired a new marketing agency on Quest with a single-minded objective of improving brand message to our key target consumer group by reasserting our superior nutritionals and taste across the entire brand portfolio, and most importantly, in our key bar segment. Moving to Atkins. Atkins retail takeaway declined 23.9% in the quarter compared to a decline of 23.4% last quarter. Declining household penetration leading to distribution losses continue to be the main drivers of the decline. Total brand household penetration currently stands at 8.5%, down 220 basis points from last year.
Consistent with what we said last quarter, there are also broad brand factors we are addressing: Atkins has not received the proper level of marketing support; messaging was less consistent and moved away from the brand's core weight management proposition; and the ability to recruit new consumers weakened, which led to slower velocities. Our focus now is on resetting the retail baseline and managing Atkins in a more disciplined, fact-based manner. Many of our retail partners continue to view Atkins as a relevant brand with a meaningful base of loyal heavy buyers. Importantly, we do not believe Atkins needs to be a different brand. Rather, it needs to become a better executed version of the brand consumers have trusted for decades. We believe that Atkins can play a meaningful role in a GLP-1 world with consumers seeking weight management benefits.
Of note, Atkins consumption was more consistent during the quarter on a weekly run rate basis. As we move into the fourth quarter and into next year, Atkins comparisons become more favorable as we lap household and distribution losses during the prior year. This is very consistent with our second turnaround priority, remaining consistent in our strategic choices. For Atkins, that means restoring clarity around the consumer proposition, being disciplined about where we invest, and rebuilding the brand from a stronger, more focused foundation. Turning to OWYN. OWYN retail takeaway declined 1.3% in the third quarter compared to a decline of 2.4% last quarter. Total brand household penetration currently stands at 4.3%, flat year-over-year.
As we reported last quarter, the combination of a product quality issue and ineffective marketing execution negatively impacted performance on a number of OWYN products. We have addressed the product issue but do expect distribution losses over the next 6-12 months because of poor marketplace performance. With that said, we continue to believe OWYN has meaningful long-term potential. Importantly, our confidence in OWYN is based on the underlying consumer proposition, not on recent execution. We believe the challenges we are addressing stem primarily from integration and execution issues rather than a lack of consumer demand for clean label plant-based nutrition. Our consumer research continues to indicate there is a significant and growing audience seeking functional nutrition benefits such as plant-based protein and clean label ingredients. Looking ahead, our priority is to complete the distribution reset and refocus OWYN growth on core ready-to-drink and powder business.
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. Simply put, I believe our category remains attractive and 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 a portfolio of strong brands that connect with distinct consumer segments, and we are confident we can grow these brands longer term.
Thanks, Joe. Good morning, everyone. As Joe mentioned, our Q3 performance was ahead of our expectations. Specifically, we reported third quarter net sales of $357 million, which declined 6.3% versus the prior year, mainly due to weaker consumption. Adjusted EBITDA was $57.2 million, a decline of 22.5% year-over-year. Gross profit of $116.1 million decreased 16.2% versus last year, largely driven by volume declines, higher input costs, and one-time restructuring costs to streamline our operations. Gross margin was 32.5%, a decline of 390 basis points versus prior year due to the higher input and restructuring costs. Excluding $6.2 million in restructuring costs, gross margin was 34.3%, a 210 basis point decline versus the prior year period, exceeding our forecast driven by productivity initiatives.
Selling and marketing expenses of $39.2 million increased 15.9% versus the comparable year-ago period, driven by investments in our selling capability and increased spend to support longer-term brand growth. Excluding $1.1 million in one-time expenses due to a marketing agency change, selling and marketing expenses increased 12.7%. A portion of this marketing investment allows us to complete a key marketing mix study, which will improve the effectiveness of our future marketing spend. G&A expenses of $40.5 million decreased 1.9% versus the comparable year-ago period. Excluding $6.2 million in restructuring costs in the current period and $5.2 million of integration expenses from the prior period, G&A declined 5% to $34.2 million, principally due to the impact of lower employee costs.
On a GAAP basis, we had an operating loss of $49.9 million compared to income from operations of $59.3 million last year, primarily due to the non-cash loss on impairment of $82 million related to goodwill and the Atkins and OWYN brand intangible assets. Net interest expense was $5.1 million, while the effective tax rate was 5.4%. Net loss was $52 million, down from net income of $41.1 million last year, primarily due to the impairment I noted a moment ago. Moving to the balance sheet and cash flows, as of the end of Q3, the company had cash of $123.9 million and an outstanding principal balance on its term loan of $400 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 1.2x. The company bought back about 2 million shares in the third quarter.
We have spent approximately $240 million buying back our outstanding common stock over the past 12 months, including approximately $213 million this fiscal year. As of July 9th, 2026, the company has approximately $158 million remaining under its current share repurchase authorization. Year-to-date cash flow from operations was $102.2 million, compared to $133.1 million last year. Capital expenditure was $10.1 million, mainly reflecting the investment to support additional capacity in our salty snacks business that we previously discussed. Finally, moving to our updated outlook, we now expect the following. Fiscal year 2026 net sales are now expected in the range of $1.345 billion-$1.355 billion, representing a decline of 7%-6%. This assumes current consumption trends continue and includes the impact of expected distribution losses. GAAP gross margins are now expected to decline roughly 375 basis points.
This is a result of slightly higher input costs, especially proteins, restructuring costs within our supply chain, and the cost of mitigating the OWYN product quality issue earlier this year. Fiscal year 2026 adjusted EBITDA is now expected in the range of $220 million-$225 million, representing a year-over-year decline of 21%-19% respectively. We expect our Q4 effective tax rate to be roughly 25%. Our expectations on interest expense remain unchanged, and we now expect capital expenditures to be in the range of $25 million-$30 million. Given shares repurchased year-to-date, the company expects a weighted average diluted share count of approximately 90 million shares outstanding. As it relates to the fourth quarter, we expect net sales in the range of $322 million-$332 million, which represents a decline of 13%-10% versus prior year.
This incorporates a similar consumption trend as we've been experiencing, plus our belief that we will undership consumption. We expect our Q4 GAAP gross margin performance will be our strongest of the year as productivity initiatives provide some relief against sustained inflationary pressure. We expect adjusted EBITDA in the range of $52 million-$57 million, representing a year-over-year decline of 22%-14%. With that, Joe and I will now take your questions.